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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
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SANTA BARBARA BANCORP
(Name of issuer)
SANTA BARBARA BANCORP
(Name of person(s) filing statement)
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COMMON STOCK, NO PAR VALUE, $1.00 STATED VALUE PER SHARE
(Title of class of securities)
801233107
(CUSIP number of class of securities)
JAY D. SMITH
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY
SANTA BARBARA BANCORP
1021 ANACAPA STREET
SANTA BARBARA, CALIFORNIA 93102
(805) 564-6310
(Name, address and telephone number of person authorized to receive notices and
communications on behalf of the person(s) filing statement)
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Copy To:
CHARLES E. GREEF AND PETER G. WEINSTOCK
JENKENS & GILCHRIST, A PROFESSIONAL CORPORATION
SUITE 3200
1445 ROSS AVENUE
DALLAS, TEXAS 75202
(214) 855-4500
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JANUARY 10, 1997
(Date tender offer first published, sent or given to security holders)
CALCULATION OF FILING FEE
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TRANSACTION VALUATION* AMOUNT OF FILING FEE
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$15,000,000 $3,000
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</TABLE>
* Calculated solely for purposes of determining the filing fee, based upon the
purchase of 500,000 shares at the maximum tender offer price per share of
$30.00.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form or
schedule and the date of its filing.
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Amount Previously Paid: N/A Filing Party: N/A
Form or Registration No.: N/A Date File: N/A
</TABLE>
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This Issuer Tender Offer Statement on Schedule 13E-4 (the "Statement")
relates to the tender offer by Santa Barbara Bancorp, a California corporation
(the "Company"), to purchase up to 500,000 shares of its common stock, no par
value, $1.00 stated value per share (the "Shares"), at a price, net to the
seller in cash, of $30.00 per Share, upon the terms and subject to the
conditions set forth in the Offer to Purchase, dated January 10, 1997 (the
"Offer to Purchase") and the related Letter of Transmittal (which, as they may
be amended from time to time, are herein collectively referred to as the
"Offer"). Copies of the Offer to Purchase and Letter of Transmittal are filed as
Exhibits (a)(1) and (a)(2), respectively, to this Statement.
ITEM 1. SECURITY AND ISSUER.
(a) The name of the issuer is Santa Barbara Bancorp, a California
corporation. The address of its principal executive offices is 1021 Anacapa
Street, Santa Barbara, California 93102.
(b) The information set forth in "Introduction," "Section 1. Number of
Shares; Proration; Extension of the Offer" and "Section 14. Transactions and
Arrangements Concerning the Common Stock" in the Offer to Purchase is
incorporated herein by reference. The Offer is being made to all holders of
Shares, including officers, directors and affiliates of the Company.
(c) The information set forth in "Introduction" and "Section 8. Price Range
of Common Stock; Dividends" in the Offer to Purchase is incorporated herein by
reference.
(d) This Statement is being filed by the issuer.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(b) The information set forth in "Section 11. Source and Amount of
Funds" in the Offer to Purchase is incorporated herein by reference.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER.
(a)-(j) The information set forth in "Introduction," "Section 9. Purposes
of the Offer," "Section 14. Transactions and Arrangements Concerning the Common
Stock," "Section 11. Source and Amount of Funds" and "Section 10. Effects of the
Offer" in the Offer to Purchase is incorporated herein by reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
The information set forth in "Section 14. Transactions and Arrangements
Concerning the Common Stock" in the Offer to Purchase is incorporated herein by
reference.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO
THE ISSUER'S SECURITIES.
The information set forth in "Introduction," "Section 9. Purposes of the
Offer" and "Section 14. Transactions and Arrangements Concerning the Common
Stock" in the Offer to Purchase is incorporated herein by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in "Introduction" and "Section 18. Fees and
Expenses" in the Offer to Purchase is incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION.
(a)-(b) The information set forth in "Section 12. Certain Information About
the Company" in the Offer to Purchase is incorporated herein by reference. The
information set forth (i) in Item 8 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, filed as exhibit (g)(1) hereto;
(ii) in Item 8 to the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1994, filed as exhibit (g)(2) hereto; (iii) Part I to the
Company's Quarterly Report on Form 10-Q for the
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quarter ended September 30, 1996, filed as exhibit (g)(3) hereto, in each case,
is incorporated herein by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) Not applicable.
(b) The information set forth in "Section 16. Government Regulation" in the
Offer to Purchase is incorporated herein by reference.
(c) The information set forth in "Section 10. Effects of the Offer" in the
Offer to Purchase is incorporated herein by reference.
(d) Not applicable.
(e) The information set forth in the Offer to Purchase and the related
Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1)
and (a)(2), respectively, is incorporated herein by reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
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99.(a)(1) -- Form of Offer to Purchase dated January 10, 1997.
99.(a)(2) -- Form of Letter of Transmittal.
99.(a)(3) -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees.
99.(a)(4) -- Form of Letter to Clients for use by Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees.
99.(a)(5) -- Form of Letter dated January 10, 1997 to shareholders from the
Company.
99.(a)(6) -- Form of Press Release issued by the Company dated January 9, 1997.
99.(b) -- Not applicable.
99.(c) -- Not applicable.
99.(d) -- Not applicable.
99.(e) -- Not applicable.
99.(f) -- Not applicable.
99.(g)(1) -- Item 8 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (incorporated by reference from the Company's
Form 10-K filed with the Commission on March 28, 1996).
99.(g)(2) -- Item 8 to the Company's Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1994 (incorporated by reference from the
Company's Form 10-K filed with the Commission on March 30, 1995).
99.(g)(3) -- Part I to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 (incorporated by reference from the Company's
Form 10-Q filed with the Commission on November 14, 1996).
</TABLE>
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
SANTA BARBARA BANCORP
By: /s/ JAY D. SMITH
------------------------------------
Name: Jay D. Smith
Title: Senior Vice President,
General Counsel and
Corporate Secretary
Dated: January 9, 1997
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INDEX TO EXHIBITS
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ITEM DESCRIPTION
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99.(a)(1) -- Form of Offer to Purchase dated January 10, 1997.
99.(a)(2) -- Form of Letter of Transmittal.
99.(a)(3) -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees.
99.(a)(4) -- Form of Letter to Clients for use by Brokers, Dealers, Commercial
Banks, Trust Companies and other Nominees.
99.(a)(5) -- Form of Letter dated January 10, 1997 to shareholders from the
Company.
99.(a)(6) -- Form of Press Release issued by the Company dated January 9, 1997.
99.(g)(1) -- Item 8 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 (incorporated by reference from the
Company's Form 10-K filed with the Commission on March 28, 1996).
99.(g)(2) -- Item 8 to the Company's Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1994 (incorporated by reference from the
Company's Form 10-K filed with the Commission on March 30, 1995).
99.(g)(3) -- Part I to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 (incorporated by reference from the
Company's Form 10-Q filed with the Commission on November 14, 1996).
</TABLE>
5
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Santa Barbara Bancorp Letterhead
OFFER TO PURCHASE FOR CASH UP TO 500,000 SHARES
OF ITS COMMON STOCK
AT $30.00 NET PER SHARE
THE OFFER PERIOD WILL EXPIRE ON FRIDAY, FEBRUARY 21, 1997,
AT 5:00 P.M., PACIFIC STANDARD TIME, UNLESS THE OFFER IS EXTENDED.
------------------------
TO THE HOLDERS OF SHARES OF COMMON STOCK OF SANTA BARBARA BANCORP:
Santa Barbara Bancorp, a California corporation (the "Company"), hereby
offers to purchase up to 500,000 shares (the "Shares") of its common stock, no
par value per share, $1.00 stated value per share (the "Common Stock"), at
$30.00 net per share to the seller in cash, upon the terms and conditions set
forth herein and in the attached Letter of Transmittal (which together
constitute the "Offer"). See Section 1, herein. Tendering shareholders will not
be obligated to pay brokerage commissions, solicitation fees or, subject to
Instruction 6 of the Letter of Transmittal, stock transfer taxes on the purchase
of Shares by the Company. However, any tendering shareholder or other payee who
fails to complete fully and sign the box captioned "Substitute Form W-9"
included in the Letter of Transmittal may be subject to a required tax
withholding of 31% of the gross proceeds paid to the shareholder or other payee
pursuant to the Offer. See Section 15, herein. The Company will pay all charges
and expenses of Norwest Bank Minnesota, N.A. (the "Depositary") incurred in
connection with the Offer.
THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING TENDERED.
THE OFFER, HOWEVER, IS SUBJECT TO CERTAIN OTHER CONDITIONS.
SEE SECTION 7, HEREIN.
At a meeting of the Board of Directors of the Company held on December 17,
1996, the Board of Directors declared a regular, quarterly cash dividend of
$0.20 per share on the Common Stock payable on February 11, 1997 to shareholders
of record on January 21, 1997. Since the Expiration Date (as defined herein)
will occur after February 11, 1997, holders of record on January 21, 1997 of
Shares tendered in the Offer will be entitled to receive such dividend to be
paid to shareholders of record as of such date regardless of whether such Shares
are tendered pursuant to the Offer prior to, on or after February 11, 1997.
Tenders pursuant to the Offer may be withdrawn (a) at any time prior to the
Expiration Date (including any extensions) and (b) if not yet accepted for
payment, after the expiration of 40 business days from the commencement of the
Offer (that is, March 11, 1997), until accepted for payment.
The Company's Common Stock is listed for quotation on the NASDAQ National
Market System under the symbol "SABB". As of January 8, 1997, the closing bid
price as reported on the NASDAQ National Market System was $28 5/8 per Share.
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT QUOTATIONS OF THE MARKET PRICE OF THE
SHARES.
THE DATE OF THIS OFFER TO PURCHASE IS JANUARY 10, 1997.
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THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE MAKING
OF THE OFFER. HOWEVER, SHAREHOLDERS MUST MAKE THEIR OWN DECISIONS WHETHER TO
TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. NEITHER THE COMPANY NOR ITS
BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY SHAREHOLDER WITH RESPECT TO
THE OFFER AND NO PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO MAKE ANY SUCH
RECOMMENDATION. SHAREHOLDERS SHOULD EVALUATE CAREFULLY ALL OF THE INFORMATION
CONTAINED OR REFERRED TO HEREIN AND MAKE THEIR OWN DECISION AS TO WHETHER OR NOT
TO TENDER SHARES PURSUANT TO THE OFFER. SHAREHOLDERS ARE URGED TO CONSULT A TAX
ADVISER CONCERNING THE FEDERAL AND ANY STATE, LOCAL OR FOREIGN TAX CONSEQUENCES
OF A SALE OF STOCK PURSUANT TO THE OFFER.
IMPORTANT
Any shareholder desiring to tender all or any portion of their Shares
should either (i) complete and sign the Letter of Transmittal or a facsimile
thereof in accordance with the instructions in the Letter of Transmittal, mail
or deliver it with any required signature guarantee and any other required
documents to the Depositary, and either mail or deliver the stock certificates
for such Shares to the Depositary (with all such other documents) or (ii)
request a broker, dealer, commercial bank, trust company or other nominee to
effect the transaction for such shareholder. A shareholder having Shares
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee must contact that broker, dealer commercial bank, trust company or
other nominee if such shareholder desires to tender such Shares. Shareholders
who desire to tender Shares and whose certificates for such are not immediately
available or whose other required documentation cannot be delivered to the
Depositary, in either case, by the expiration of the Offer should tender such
Shares by following the procedures for guaranteed delivery set forth in Section
3 herein. TO EFFECT A VALID TENDER OF SHARES, SHAREHOLDERS MUST VALIDLY COMPLETE
THE LETTER OF TRANSMITTAL.
Questions and requests for assistance or requests for additional copies of
this Offer to Purchase and the Letter of Transmittal, may be directed to Clare
McGivney, Assistant Corporate Secretary, Santa Barbara Bancorp, 1021 Anacapa
Street, Santa Barbara, California 93101, (805) 564-6298.
THE COMPANY HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON
BEHALF OF THE COMPANY AS TO WHETHER SHAREHOLDERS SHOULD TENDER OR REFRAIN FROM
TENDERING SHARES PURSUANT TO THE OFFER. THE COMPANY HAS NOT AUTHORIZED ANY
PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH
THE OFFER ON BEHALF OF THE COMPANY OTHER THAN THOSE CONTAINED IN THIS OFFER TO
PURCHASE OR IN THE LETTER OF TRANSMITTAL. DO NOT RELY ON ANY SUCH RECOMMENDATION
OR ANY SUCH INFORMATION OR REPRESENTATION, IF GIVEN OR MADE, AS HAVING BEEN
AUTHORIZED BY THE COMPANY.
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TABLE OF CONTENTS
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SECTION PAGE
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1. Number of Shares; Proration; Extension of the Offer.............................. 4
2. Tenders by Holders of Fewer than 100 Shares...................................... 5
3. Procedure for Tendering Shares................................................... 5
4. Withdrawal Rights................................................................ 6
5. Purchase of Shares and Payment of Purchase Price................................. 7
6. Conditional Tender of Shares..................................................... 7
7. Certain Conditions of the Offer.................................................. 7
8. Price Range of Common Stock; Dividends........................................... 8
9. Purposes of the Offer............................................................ 9
10. Effects of the Offer............................................................. 10
11. Source and Amount of Funds....................................................... 10
12. Certain Information about the Company............................................ 10
13. Certain Pro Forma Financial Information.......................................... 12
14. Transactions and Arrangements Concerning the Common Stock........................ 15
15. Federal Income Tax Consequences.................................................. 16
16. Government Regulation............................................................ 19
17. Extension of the Offer Period; Termination; Amendments........................... 19
18. Fees and Expenses................................................................ 20
19. Miscellaneous.................................................................... 20
</TABLE>
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THE OFFER
1. NUMBER OF SHARES; PRORATION; EXTENSION OF THE OFFER
Upon the terms and subject to the qualifications and conditions described
herein and in the Letter of Transmittal, the Company will purchase up to 500,000
shares of its Common Stock which are duly tendered prior to 5:00 P.M., Pacific
Standard Time, on Friday, February 21, 1997 (the "Expiration Date"). The Company
reserves the right, at any time and from time to time, to extend the period of
time during which the Offer is open by giving oral or written notice(s) of such
extension(s) to the Depositary, in which event the "Expiration Date" shall be
the latest time and date on which the Offer, as so extended, shall expire. See
Section 17 for a description of the Company's right to extend the time during
which the Offer is open and to terminate or amend the Offer.
Subject to the conditions of the Offer, if 500,000 or fewer Shares of
Common Stock are duly tendered prior to the Expiration Date, the Company will
purchase all Shares so tendered. The Offer is not conditioned on any minimum
number of shares being tendered. In the event of an oversubscription of the
Offer, Shares tendered shall be purchased on a pro-rata basis, disregarding
fractions, according to the number of Shares tendered by each shareholder prior
to the Expiration Date of the Offer, provided, however, that:
(a) All Shares tendered prior to the Expiration Date by any
shareholder who owned beneficially as of January 10, 1997, an aggregate of
fewer than 100 Shares and who tenders all of such Shares (partial tenders
will not qualify for this preference) and completes the box captioned "Odd
Lots" in the Letter of Transmittal shall be purchased in full, prior to
proration of Shares tendered by any other shareholder (except that if more
than the maximum number of Shares to be purchased are tendered by such "odd
lot" holders, Shares tendered by such holders shall be purchased pro rata,
with appropriate adjustments to avoid purchases of fractional Shares);
(b) The Company reserves the right to purchase, prior to purchasing
any Shares to be purchased on a pro-rata basis, all Shares tendered by any
shareholder who has tendered all Shares beneficially owned by him or her
and, as a result of the contemplated prorating, would then own an aggregate
of fewer than 100 Shares; and
(c) The Company reserves the right, in its sole discretion, to elect
to purchase any or all of the excess Shares tendered; and so long as this
excess number accepted by the Company does not exceed two percent (2%) of
the issued and outstanding Common Shares, no extension of the offer period
and no further notice to the shareholders will be required or given. If the
Company elects to purchase excess tendered Shares, but less than all of the
tendered Shares, then Shares tendered shall be purchased on a pro-rata
basis, as described above (subject to the exceptions noted in paragraphs
(a) and (b), above).
If (i) the Company increases or decreases the price to be paid for the
Shares, the Company increases the number of Shares being sought and such
increase in the number of Shares being sought exceeds 2% of the outstanding
Shares, or the Company decreases the number of Shares being sought and (ii) the
Offer is scheduled to expire at any time earlier than the expiration of a period
ending on the tenth business day from, and including, the date that notice of
such increase or decrease is first published, sent or given in the manner
specified in Section 17, the Offer will be extended until the expiration of such
period of ten business days. For purposes of the Offer, a "business day" means
any day other than a Saturday, Sunday or federal holiday and consists of the
time period from 12:01 a.m. through 12:00 midnight, Eastern Standard Time.
As of December 31, 1996, the Company had issued and outstanding 7,587,800
shares of Common Stock and there were 769,500 Shares issuable upon the exercise
of outstanding stock options ("Options") under the Company's 1986 Directors
Stock Option Plan, 1992 Restricted Stock Option Plan, 1983 Stock Option Plan and
1996 Directors Stock Option Plan. The 500,000 Shares that the Company is
offering to purchase represent approximately 6.6% of the outstanding Shares
(approximately 6.0% assuming the exercise of all outstanding Options). As of
such date, there were approximately 1,580 holders of record of Common Stock, of
which approximately fewer than 400 holders each held fewer than 100 shares of
Common Stock. Because certain
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shares are held in the names of brokers and nominees, the Company is unable to
determine the total number of beneficial holders of fewer than 100 shares or the
aggregate number of shares they own.
This Offer to Purchase and the related Letter of Transmittal will be mailed
to record holders of Shares as of January 10, 1997 and will be furnished to
brokers, banks and similar persons whose names, or the names of whose nominees
appear on the Company's shareholder list.
2. TENDERS BY HOLDERS OF FEWER THAN 100 SHARES
All Shares tendered for purchase by persons who beneficially held fewer
than 100 shares of Common Stock on January 10, 1997, and who properly tender all
of their Shares prior to the Expiration Date, will be accepted before proration,
if any, of the purchase of other tendered Shares, but only if the Shares so
tendered do not exceed the maximum number of Shares to be purchased (see Section
1). Partial tenders will not qualify for this preference, and it is not
available to holders who beneficially own 100 or more Shares on the Expiration
Date even though such holders have separate stock certificates for fewer than
100 Shares. Any shareholder owning fewer than 100 shares and who wishes to
tender all such Shares must complete the box captioned "Odd Lots" in the Letter
of Transmittal. As also indicated in Section 1, the Company has reserved the
right, but will not be obligated, to purchase all Shares properly tendered by
any shareholder who has tendered all Shares beneficially owned by him or her and
as a result of prorating would then own an aggregate of fewer than 100 Shares.
3. PROCEDURE FOR TENDERING SHARES
For a shareholder to tender Shares pursuant to the Offer, certificates for
such Shares, together with a properly completed and duly executed Letter of
Transmittal and any other documents required by the Letter of Transmittal, must
be actually received prior to the Expiration Date by the Depositary at the
appropriate address set forth in the Letter of Transmittal, except as otherwise
provided below in this Section 3. DEPOSIT OF THESE MATERIALS IN THE MAIL ON THE
EXPIRATION DATE DOES NOT CONSTITUTE A TIMELY TENDER.
No signature guarantee is required unless Special Payment Instructions or
Special Delivery Instructions are given on the Letter of Transmittal.
If a shareholder desires to tender Shares pursuant to the Offer and such
shareholder's certificates are not immediately available or time will not permit
the Letter of Transmittal and other required documents to reach the Depositary
by the Expiration Date, such Shares may nevertheless be tendered, provided that
all of the following conditions are satisfied:
(a) such tenders are made by or through a member firm of a registered
national securities exchange, a member of the National Association of
Securities Dealers ("NASD") or a commercial bank or trust company with
membership in an approved signature guarantee medallion program pursuant to
Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended (herein, an
"Eligible Institution");
(b) the Depositary receives (by hand, mail, telegram or acceptable
facsimile transmission), prior to the Expiration Date, a properly completed
and duly executed Guarantee of Delivery contained in the Letter of
Transmittal; and
(c) the certificates for all tendered Shares of Common Stock, together
with a properly completed and duly executed Letter of Transmittal and any
other documents required by the Letter of Transmittal, are received by the
Depositary within 10 business days after receipt by the Depositary of such
Guarantee of Delivery.
Payments for Shares of Common Stock tendered and purchased will be made
only after receipt by the Depositary of the certificate(s) therefor, a properly
completed and duly executed Letter of Transmittal and any other documents
required by the Letter of Transmittal.
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THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING SHARE CERTIFICATES, IS
AT THE ELECTION AND RISK OF THE TENDERING SHAREHOLDER. IF DELIVERY IS BY MAIL,
INSURED REGISTERED MAIL, RETURN RECEIPT REQUESTED, SHOULD BE CONSIDERED, AND
ENOUGH TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of any tender of Shares will be determined by the
Company, and its determination shall be final and binding. The Company reserves
the absolute right to reject any or all tenders determined by it not to be in
appropriate form or which would, in the opinion of the Company's counsel, be
unlawful. The Company also reserves the absolute right to waive any of the
conditions of the Offer or any defect or irregularity in any tender with respect
to any particular shares of Common Stock or any particular shareholder, and the
Company's interpretations of the terms and conditions of the Offer will be final
and binding. Tenders will not be deemed to have been made until any defects and
any irregularities have been cured or waived. Neither the Company, the
Depositary nor any other person shall be obligated to give any such notice nor
incur any liability for failure to give any such notice. A tender of Shares of
Common Stock made pursuant to any one of the procedures set forth above will
constitute an agreement between the tendering shareholder and the Company in
accordance with the terms and subject to the conditions of this Offer.
If any tendered Shares are not purchased, or if less than all Shares
evidenced by a shareholder's certificate are tendered, certificates for
unpurchased Shares will be returned as promptly as practicable after the
expiration or termination of the Offer.
CERTIFICATES FOR SHARES, TOGETHER WITH A PROPERLY COMPLETED LETTER OF
TRANSMITTAL AND ANY OTHER DOCUMENTS REQUIRED BY THE LETTER OF TRANSMITTAL, MUST
BE DELIVERED TO THE DEPOSITARY AND NOT THE COMPANY. ANY SUCH SHARES DELIVERED TO
THE COMPANY WILL NOT BE DEEMED TO BE VALIDLY TENDERED.
4. WITHDRAWAL RIGHTS
In accordance with applicable regulations of the Securities and Exchange
Commission (the "Commission"), tenders made pursuant to the Offer are revocable
and may be withdrawn (a) at any time prior to the Expiration Date (including any
extension of the Offer period), and (b) if not yet accepted for payment, after
the expiration of 40 business days from the commencement of the Offer (that is,
any time after March 11, 1997), until the tender is accepted for payment.
To be effective, a notice of withdrawal in written, telegraphic or
facsimile form must be received in a timely manner by the Depositary at the
appropriate address set forth in the Letter of Transmittal. Any notice of
withdrawal must specify the name of the person having tendered the Shares to be
withdrawn, the number of Shares tendered, the number of Shares to be withdrawn
and, if certificates representing such Shares have been delivered to the
Depositary, the name of the registered holder(s) of such Shares, as set forth in
such certificates. If the certificates have been delivered to the Depositary,
the tendering shareholder must also submit the serial numbers of the particular
certificates for the Shares to be withdrawn and the signature on such
shareholder's notice of withdrawal must be guaranteed by an Eligible Institution
(as defined in Section 3).
All questions as to the form and validity (including the time of receipt)
of notices of withdrawal will be determined by the Company, in its sole
discretion, and its determination shall be final and binding on all parties.
Neither the Company nor the Depository or any other person is or will be
obligated to give notice of any defects or irregularities in any notice of
withdrawal, and none of them will incur any liability for failure to give any
such notice. Withdrawals may not be rescinded, and Shares properly withdrawn
shall not be deemed to be duly tendered for purposes of the Offer. Withdrawn
shares may, however, be re-tendered before the Expiration Date by again
following one of the procedures described in Section 3.
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5. PURCHASE OF SHARES AND PAYMENT OF PURCHASE PRICE
The Company shall be deemed to have purchased Shares of Common Stock
pursuant to the Offer when, as and if it gives oral or written notice to the
Depositary of its acceptance for payment of such Shares, which notice, subject
to the provisions of the Offer, may be given at any time after the Expiration
Date of the Offer. Payment for all Shares properly tendered prior to the
Expiration Date and purchased pursuant to the Offer will be made by the
Depositary by check as promptly as practicable after the Expiration Date.
However, in the event of proration, the Company does not expect to be able to
determine the final proration factor and pay for tendered Shares until
approximately ten business days after the Expiration Date. Certificates for all
tendered Shares not purchased (see Section 1) will be returned as soon as
practicable after the Expiration Date or termination of the Offer, without
expense to the tendering shareholder.
The Company will pay all stock transfer taxes, if any, payable on the
transfer to it of Shares purchased pursuant to the Offer. However, if payment of
the purchase price is to be made to, or (in the circumstances permitted by the
Offer) if unpurchased shares are to be registered in the name of any person
other than the registered holder, or if tendered certificates are registered in
the name of any person other than the person signing the Letter of Transmittal,
the amount of any stock transfer taxes (whether imposed on the registered holder
or such other person) payable on account of the transfer to such person will be
deducted from the purchase price unless satisfactory evidence of the payment of
such taxes, or exemption therefrom, is submitted.
The Depositary will act as agent for tendering shareholders for the purpose
of receiving payment from the Company and transmitting payment to tendering
shareholders. The Company will not pay interest on the purchase price.
ANY TENDERING SHAREHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE FULLY AND
SIGN THE BOX CAPTIONED "SUBSTITUTE FORM W-9" IN THE LETTER OF TRANSMITTAL MAY BE
SUBJECT TO REQUIRED BACKUP FEDERAL INCOME TAX WITHHOLDING OF 31% OF THE GROSS
PROCEEDS PAID TO SUCH SHAREHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. SEE
SECTION 15, HEREIN.
6. CONDITIONAL TENDER OF SHARES
Under certain circumstances and subject to the exceptions set forth in
Section 1 above, the Company may prorate the number of Shares of Common Stock
purchased pursuant to the Offer. As discussed in Section 15, the number of
Shares to be purchased from a particular shareholder might affect the tax
consequences to such shareholder of such purchase and such shareholder's
decision whether to tender. Accordingly, a shareholder may tender Shares subject
to the condition that a specified minimum number must be purchased, if any are
purchased. Any shareholder desiring to make such a conditional tender should so
indicate in the box captioned "Conditional Tender" on the Letter of Transmittal.
It is the tendering shareholder's responsibility to calculate such minimum
number of Shares. If the effect of accepting tenders on a pro-rata basis is to
reduce the number of Shares to be purchased from any shareholder below the
minimum number so specified, such tender will automatically be regarded as
withdrawn, except as provided in the next paragraph, and all Shares tendered by
such shareholder will be returned as soon as practicable thereafter.
If so many conditional tenders are withdrawn that the total number of
Shares to be purchased falls below 500,000, then to the extent feasible the
Company will select enough of such conditional tenders, which would otherwise
have been withdrawn, to purchase such desired number of Shares. In selecting
among such conditional tenders, the Company will select by lot and will limit
its purchase in each case to the designated minimum number of Shares to be
purchased.
7. CERTAIN CONDITIONS OF THE OFFER
Notwithstanding any other term of the Offer, the Company may, at its
option, withdraw the Offer and shall not be required to accept for payment or
purchase or pay for any Shares of Common Stock tendered, if before termination
of the Offer, any of the following events shall have occurred (or shall have
been determined by the Company to have occurred that, in the Company's judgment
in any such case and regardless of the
7
<PAGE> 8
circumstances giving rise thereto (including any action or omission to act by
the Company), make it inadvisable to proceed with the Offer or with such
acceptance for payment or payment):
(a) there shall have been instituted or threatened any action or
proceeding before any court or administrative agency which (i) challenges
the acquisition of Shares pursuant to the Offer or otherwise relates in any
manner to the Offer or (ii) in the judgment of the Company could otherwise
materially and adversely affect the Company; or
(b) any action shall have been taken, or any statute, rule, regulation
or order shall have been proposed, enacted, enforced, or deemed to be
applicable to the Offer, by any government or governmental agency or other
regulatory administrative authority, domestic or foreign, which, in the
judgment of the Company would or might prohibit, restrict or delay
consummation of the Offer or materially impair the contemplated benefits of
the Offer to the Company; or
(c) there shall have occurred any commencement of armed hostilities
directly or indirectly involving the United States or there shall have
occurred any national emergency, banking moratorium or suspension of
payments by banks in the United States; or
(d) any change shall occur or be threatened in the business, condition
(financial or otherwise), operations, stock ownership, or prospects of the
Company or its subsidiary, Santa Barbara Bank & Trust (the "Bank"), which,
in the judgment of the Company, is or may be material to the Company or its
subsidiary, any of which, in the sole judgment of the Company, makes it
inadvisable to proceed with such acceptance, purchase or payment.
Any determination by the Company concerning any events described in this
Section 7 and any related judgment or decision by the Company regarding the
inadvisability of proceeding with the purchase of or payment for any Shares
tendered shall be final and binding upon all parties. The foregoing conditions
are for the sole benefit of the Company and may be asserted by the Company
regardless of the circumstances (including any action or inaction by the
Company) giving rise to any such condition or may be waived by the Company in
whole or in part. The Company's failure at any time to exercise any of the
foregoing rights shall not be deemed a waiver of any such right, and each such
right shall be deemed an ongoing right that may be asserted at any time and from
time to time.
8. PRICE RANGE OF COMMON STOCK; DIVIDENDS
The Common Stock of the Company is listed for quotation on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") National
Market System under the symbol "SABB".
8
<PAGE> 9
The following table sets forth the range of (i) the high and low sale
prices of the Company's Common Stock as reported by the NASDAQ National Market
System since listing of the Company's Common Stock for quotation on the NASDAQ
National Market System on May 13, 1996, and (ii), with respect to periods prior
to May 13, 1996, the high and low sale prices of the Company's Common Stock
either known to the Company or as reported to the Company by brokers trading in
the Company's Common Stock, and the per-share dividends declared on the Common
Stock for each of the quarters indicated. The quotations represent prices in the
over-the-counter market between dealers in securities and do not include retail
markup, markdown or commissions and may not necessarily represent actual
transactions. The following quotations have been adjusted to reflect stock
splits and dividends paid on outstanding shares during the relevant periods
stated in the table.
<TABLE>
<CAPTION>
STOCK PRICES
----------------- DIVIDENDS
HIGH LOW PER SHARE
------ ------ ---------
<S> <C> <C> <C>
1994
1st Quarter............................................. $17.42 $14.00 $0.12
2nd Quarter............................................. $18.08 $14.00 $0.13
3rd Quarter............................................. $20.00 $15.75 $0.13
4th Quarter............................................. $19.50 $16.50 $0.13
1995
1st Quarter............................................. $17.67 $16.17 $0.13
2nd Quarter............................................. $18.50 $17.08 $0.13
3rd Quarter............................................. $22.33 $18.00 $0.13
4th Quarter............................................. $20.67 $19.42 $0.15
1996
1st Quarter............................................. $25.33 $19.75 $0.15
2nd Quarter............................................. $27.00 $23.38 $0.18
3rd Quarter............................................. $27.88 $25.25 $0.18
4th Quarter............................................. $28.13 $25.25 $0.20(1)
1997
1st Quarter (through January 8)......................... $29.00 $27.50
</TABLE>
- ---------------
(1) Dividend declared on December 17, 1996, payable on February 11, 1997, to
holders of record on January 21, 1997.
As of January 8, 1997, the closing bid price as reported on the NASDAQ
National Market System was $28 5/8 per Share. SHAREHOLDERS ARE URGED TO OBTAIN
CURRENT QUOTATIONS OF THE MARKET PRICE OF THE SHARES.
At a meeting of the Board of Directors of the Company held on December 17,
1996, the Board of Directors declared a regular, quarterly cash dividend of
$0.20 per share on the Common Stock payable on February 11, 1997 to shareholders
of record on January 21, 1997. Since the Expiration Date will occur after
February 11, 1997, holders of record on January 21, 1997 of Shares tendered in
the Offer will be entitled to receive such dividend to be paid to shareholders
of record as of such date regardless of whether such Shares are tendered
pursuant to the Offer prior to, on or after February 11, 1997. Shareholders
whose Shares are tendered pursuant to the Offer will receive this dividend.
9. PURPOSES OF THE OFFER
The purposes of this Offer are as follows:
First, the Company considers the repurchase of these Shares to be a good
investment of its capital, and therefore beneficial to the long-term interests
of the Company's remaining shareholders. The Company has experienced significant
earnings growth in recent years resulting in an accumulation of capital in
excess of current needs to support the continued growth of the Company. Purchase
of Shares by the Company will have the effect of reducing the current book value
per share; however, the purchase should have the effect of
9
<PAGE> 10
increasing future return on equity for the Company and increasing earnings per
share for those shareholders who elect to retain their shares.
Second, while trading in the Common Stock of the Company has been
significantly more active since being listed for quotation on the NASDAQ
National Market System on May 13, 1996, the Offer will provide a means of
disposing medium to larger size blocks of stock in a timely and orderly manner.
This Offer will give shareholders an opportunity to sell some or all of their
stock at a fair price, without having to pay brokerage commissions or other
transaction costs.
Third, the Company's main operating subsidiary, Santa Barbara Bank & Trust
(previously defined herein as the "Bank"), maintains an Employee Stock Ownership
Plan (the "ESOP") for the benefit of its employees. Up to 100,000 Shares
acquired in the Offer may be reissued and sold to the ESOP. Some of the Shares
sold to the ESOP in this manner would then be allocated to the Bank's employee
participants in the ESOP as part of their retirement plan contribution as of
December 31, 1997.
10. EFFECTS OF THE OFFER
The Company's purchase of Shares pursuant to the Offer will reduce the
number of Shares that might otherwise trade publicly and is likely to reduce the
number of shareholders. Nonetheless, the Company believes that there will still
be a sufficient number of Shares outstanding and publicly traded following the
Offer to ensure a continued trading market in the Shares. Based on the published
guidelines of the NASDAQ, the Company does not believe that its purchase of
Shares pursuant to the Offer will cause its remaining Shares to be delisted from
quotation on the NASDAQ National Market System.
The Shares are currently "margin securities" under the rules of the Federal
Reserve Board. This has the effect, among other things, of allowing brokers to
extend credit on the collateral of the Shares. The Company believes that,
following the purchase of Shares pursuant to the Offer, the Shares will continue
to be "margin securities" for purposes of the Federal Reserve Board's margin
regulations.
The Shares are registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which requires, among other things, that the
Company furnish certain information to its shareholders and to the Commission
and comply with the Commission's proxy rules in connection with meetings of the
Company's shareholders. The Company believes that its purchase of Shares
pursuant to the Offer will not result in the Shares becoming eligible for
deregistration under the Exchange Act.
See Section 13 herein for pro forma financial statements showing the
effects of the Company's purchase of Shares of Common Stock pursuant to the
Offer. To the extent that Shares of Common Stock are purchased in the Offer, the
proportionate interest of nontendering shareholders in the Company will be
increased.
Shares of Common Stock purchased pursuant to the Offer will have the status
of authorized but unissued shares.
11. SOURCE AND AMOUNT OF FUNDS
Assuming that the Company purchases 500,000 Shares in this Offer at a price
of $30.00 per share, the total amount required to purchase the Shares would
equal $15,000,000. The Company intends to pay for validly tendered Shares, as
well as for the costs and expenses of this Offer, from proceeds from the sale or
maturity of short-term investments or other liquid assets. The Company will not
incur any debt in connection with the Offer.
12. CERTAIN INFORMATION ABOUT THE COMPANY
General Information
The Company, incorporated under the laws of the State of California on
December 7, 1981, is a bank holding company organized under the Bank Holding
Company Act of 1956, as amended. The Company owns all of the outstanding shares
of the capital stock of Santa Barbara Bank & Trust (previously defined herein as
the "Bank"), which is the Company's principal asset and source of revenue. As a
bank holding company, the
10
<PAGE> 11
Company is subject to supervision and regulation by the Board of Governors of
the Federal Reserve System. The Bank is subject to regulation by the Board of
Governors of the Federal Reserve System and the California State Banking
Department.
The Company is authorized to issue up to 20,000,000 shares of Common Stock.
The principal executive offices of the Company are located at 1021 Anacapa
Street, Santa Barbara, California 93101, telephone number (805) 564-6300.
The Bank was incorporated under the laws of the State of California on
April 13, 1979, and was licensed by the California State Banking Department as a
California state-chartered bank in 1979. Prior to that, the Bank operated as
Santa Barbara National Bank, which commenced operation in 1960. The Bank
operates ten banking offices along the southern Santa Barbara County coastline,
two offices in the county's central Santa Ynez Valley, and three offices in
adjacent Ventura County; one in the City of Canarillo, one in the City of
Oxnard, and one in the City of Ventura.
The Bank is a full service commercial bank offering a comprehensive range
of commercial banking services to both the consumer and business sectors of
Santa Barbara County, California. Its operations include the acceptance of
checking and savings deposits, and the making of commercial, real estate, home
improvement, automobile and other vehicle loans, and other personal loans. The
Bank also offers many customary services, including, but not limited to, money
orders, cashier checks, banking-by-mail, automatic check deposit, travelers'
checks, Master Card accounts and trust and escrow services.
The banking business in California, and in the market serviced by the Bank,
is highly competitive. The Bank competes for loans and deposits with other
commercial banks (including many which are much larger), savings and loan
associations, finance companies, credit unions, and other financial
institutions. In addition, other entities (both governmental and private)
seeking to raise capital through the issuance and sale of debt or equity
securities also provide competition for the Bank in the acquisition of deposits.
Larger commercial banks have greater lending limits than the Bank and perform
certain other functions which the Bank does not offer directly.
The Company is also the sole owner of Sanbarco Mortgage Company (f/k/a SBBT
Service Corporation) which was formed in July, 1988, to engage in the business
of providing correspondent bank services, such as check processing and
management consulting services to unaffiliated depositary institutions
throughout the counties of Santa Barbara, San Luis Obispo and Ventura,
California. Sanbarco Mortgage Company also serves as a mortgage broker to the
Bank and for unrelated third parties.
On December 11, 1996, the Company entered into a Definitive Agreement and
Plan of Reorganization with First Valley Bank, Lompoc, California, pursuant to
which the Company will acquire all of the outstanding capital stock of First
Valley Bank for cash in the aggregate amount of $26.1 million, subject to
possible increase in the event the closing of the transaction occurs after March
31, 1997. In such event, the purchase price would increase approximately $4,950
per day until completion of the transaction. It is anticipated that the Company
would merge First Valley Bank with and into the Bank, and that the Bank would
thereafter operate all five offices of First Valley Bank as branches of the
Bank. At December 31, 1996, First Valley Bank had assets of approximately $130.8
million, shareholders' equity of approximately $14.8 million, and loans of
approximately $59.5 million. The Company's acquisition of First Valley Bank,
which is subject to receipt of regulatory and shareholder approval, is expected
to be completed on or about April 1, 1997; however, no assurances can be given
that the acquisition will be completed or that such timetable will be met.
Historical Financial Information
The following table sets forth certain summary historical consolidated
financial information of the Company and its subsidiaries. The historical
financial information for fiscal years 1994 and 1995 (other than the ratios of
earnings to fixed charges) has been derived from, and should be read in
conjunction with, the audited consolidated financial statements of the Company
as reported in the Company's Annual Reports on Form 10-K for the fiscal years
ended December 31, 1995 and December 31, 1994, which Reports are
11
<PAGE> 12
incorporated herein by this reference. In addition, the historical financial
information for the nine months ended September 30, 1996 is unaudited. Such
historical financial information for fiscal year 1996 is set forth in the
Company's Quarterly Report on Form 10-Q for the quarter and nine months ended
September 30, 1996, which Report is incorporated herein by this reference. The
summary historical financial information should be read in conjunction with, and
is qualified in its entirety by reference to, the audited and unaudited
financial statements and the related notes thereto from which it has been
derived. Copies of reports may be inspected or obtained from the Commission in
the manner specified in "-- Additional Information" below.
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
UNAUDITED NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------------ ------------------------
1996 1995 1995 1994
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues............................... $ 81,427 $ 74,683 $ 99,975 $ 89,175
Net (loss) income............................ 11,350 6,986 10,415 12,951
Net income per common share (fully
diluted)................................... 1.48 0.91 1.36 1.69
Weighted average number of common shares..... 7,644 7,679 7,677 7,647
Ratio of earnings to fixed charges........... 1.63 1.38 1.43 1.70
BALANCE SHEET DATA:
Total assets................................. $1,178,128 $1,118,118 $1,212,361 $1,067,616
Long-term debt............................... -- -- -- --
Stockholders' equity......................... 106,416 98,398 100,997 93,960
Book value per common share.................. 13.93 12.85 13.14 12.24
</TABLE>
Additional Information
Additional information concerning the Company is set forth in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995, in the
Company's Proxy Statement dated March 15, 1996, and in the Company's Quarterly
Report on Form 10-Q for the three (3)-month and nine (9)-month periods ended
September 30, 1996. Such Reports are available upon request from the Company.
The Company also has filed a Schedule 13E-4 with the Commission, which includes
certain additional information relating to the Offer. Forms 10-K and 10-Q as
well as other periodic reports, proxy statements and other information are
regularly filed by the Company with the Commission. Such material may be
inspected and copied at prescribed rates at the Commission's public reference
facilities at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the New York Regional Office of the Commission located at
Suite 1300, Seven World Trade Center, New York, New York 10048, and at the Los
Angeles Regional Office of the Commission located at Suite 500 East, 5757
Wilshire Boulevard, Los Angeles, California 90036, and at the Chicago Regional
Office of the Commission., Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661, and copies of such materials may be obtained by mail at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains an Internet Web site on the World Wide Web at http://www.sec.gov.,
containing reports, proxy and information statements and other information
regarding companies who file reports electronically with the Commission. In
addition, reports, proxy statements and other information concerning the Company
may be inspected at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
13. CERTAIN PRO FORMA FINANCIAL INFORMATION
The following summary unaudited consolidated pro forma balance sheets as of
December 31, 1995, and September 30, 1996, have been prepared on the assumption
that the Company acquired 500,000 shares of its Common Stock for $30.00 per
share pursuant to the Offer on December 31, 1995. The only pro forma effects on
the balance sheets of the Company are 1) to reduce assets and shareholders'
equity by the $15,000,000 for the retirement of the stock and 2) to show the
effect of the dividends that would not have been declared and paid if the stock
had been repurchased as of January 1, 1995 for the period ended December 31,
1995, and as of January 1, 1996 for the period ended September 30, 1996.
12
<PAGE> 13
PRO FORMA CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Cash and due from banks............................................... $ 59,704 $ 74,746
Federal funds sold.................................................... 35,165 64,659
---------- ----------
Cash and cash equivalents................................... 94,869 139,405
Investment securities................................................. 421,730 357,565
Bankers' acceptances.................................................. 29,085 124,294
Loans, net of unearned discount and fees.............................. 604,095 558,801
Less: allowance for loan losses..................................... 15,894 12,349
---------- ----------
Net loans................................................... 588,201 546,452
---------- ----------
Premises and equipment, net........................................... 7,094 8,149
Accrued interest receivable........................................... 7,840 7,981
Other assets.......................................................... 14,474 13,174
---------- ----------
Total assets........................................................ $ 1,162,198 $1,197,020
========== ==========
LIABILITIES:
Deposits:
Noninterest-bearing demand.......................................... $ 159,652 $ 158,122
Savings and time.................................................... 872,859 895,898
---------- ----------
Total deposits.............................................. 1,032,509 1,054,020
Securities sold under agreements to repurchase and Federal funds
purchased........................................................... 31,124 51,316
Other borrowed funds.................................................. 1,000 1,210
Accrued interest payable and other liabilities........................ 6,989 4,743
---------- ----------
Total liabilities........................................... 1,071,622 1,111,289
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock (no par value) $1.00 per share stated value; 20,000,000
authorized; 7,141,000 would have been outstanding at September 30,
1996 and 7,179,000 would have been outstanding at December 31,
1995)............................................................... 4,594 4,619
Surplus............................................................... 22,698 24,691
Unrealized loss on securities available for sale...................... (195) (179)
Undivided profits..................................................... 64,199 56,600
---------- ----------
Net shareholders' equity............................................ 91,296 85,731
---------- ----------
Total liabilities and shareholders' equity.................. $ 1,162,918 $1,197,020
========== ==========
</TABLE>
Set forth as Appendix A is a schedule of additional financial information,
consisting of the ratio of earnings to fixed charges and per-share book values
for each of the aforesaid periods on a pro forma basis with and without the
Company's pending acquisition of First Valley Bank.
The Company keeps no more cash on hand than is necessary to meet immediate
liquidity needs and the reserve requirements of the Federal Reserve Board. Had
the Company planned to repurchase the stock which is the subject of this Offer,
as of January 1, 1995 or January 1, 1996, it most likely would not have
reinvested the proceeds from some of its maturing bankers' acceptances in order
to provide the funds for the repurchase. Therefore, along with the reduction in
equity for the retirement of the stock, the pro forma balance sheets as of
December 31, 1995 and September 30, 1996, show a reduction in bankers'
acceptances of $15,000,000 compared to the actual balance sheets for those
dates. For the 500,000 shares that are assumed to have been repurchased on
January 1, 1995, the pro forma balance sheet for December 31, 1995, includes an
increase in undivided profits and Federal funds sold of $195,000 for the
dividends that would not have been declared in
13
<PAGE> 14
March, June, and September, 1995 and paid in May, August, and November 1995, on
the assumed repurchased Shares, and an increase in undivided profits and a
decrease in other liabilities of $75,000 for the dividends that would not have
been declared in December, 1995. These dividends were not yet paid as of
December 31, 1995.
For the 500,000 shares that are assumed to have been repurchased on January
1, 1996, the pro forma balance sheet for September 30, 1996, includes an
increase in undivided profits and Federal funds sold of $165,000 for the
dividends that would not have been declared in March and June, 1996 and paid in
May and August 1996, on the assumed repurchased Shares, and an increase in
undivided profits and a decrease in other liabilities of $90,000 for the
dividends that would not have been declared in September, 1996. These dividends
were not yet paid as of September 30, 1996.
The fees and expenses associated with this Offer are estimated to be
immaterial, with an effect on the Company's income statement equivalent to less
than $0.01 per share. Because there would have been but an immaterial effect on
the net income of the Company had the transaction occurred at the beginning of
1995 or 1996, the pro forma income statements would not be materially different
from the historical amounts included in the income statements for the year 1995
and the first nine months of 1996. Therefore, no pro forma income statements are
presented for the two periods, and there is no difference between the historical
and pro forma figures reported in Appendix A for the ratio of earnings to fixed
charges.
Pro forma earnings per share would be impacted by the assumed repurchase of
500,000 shares by both the immaterial effect on net income of the fees and
expenses associated with this offer and by the reduction of the number of shares
outstanding. The pro forma book value per share would also be impacted by the
reduction in capital and reduction in the number of shares outstanding.
The following table shows the historical and pro forma fully diluted shares
outstanding and earnings per share for the year ended December 31, 1995 and the
nine month period ended September 30, 1996 and the historical and pro forma book
value per share as of December 31, 1995 and September 30, 1996 as if the
repurchase had occurred on January 1, 1995 and January 1, 1996, respectively.
<TABLE>
<CAPTION>
AS OF OR FOR THE
AS OF OR FOR THE NINE MONTH PERIOD
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1995 1996
----------------- -----------------
<S> <C> <C>
Fully diluted weighted average shares outstanding:
Historical....................................... 7,677,000 7,644,000
Pro forma........................................ 7,177,000 7,144,000
Earnings per share:
Historical....................................... $ 1.36 $ 1.48
Pro forma........................................ $ 1.38 $ 1.54
Book value per share:
Historical....................................... $ 13.14 $ 13.93
Pro forma........................................ $ 11.93 $ 12.78
</TABLE>
The Company and the Bank are both subject to regulatory requirements
regarding maintaining minimum capital. The following table shows the historical
capital ratios of the Company and the Bank at December 31, 1995 and September
30, 1996 (with the pro forma ratios assuming that 500,000 shares had been
purchased by the Company at December 31, 1995) and the minimum required
regulatory ratios.
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1995 1996
----------------- -----------------
BANK COMPANY BANK COMPANY
------- ------- ------- -------
<S> <C> <C> <C> <C>
Risk-based capital ratio:
Historical................................... 17.79% 17.67% 18.80% 18.65%
Pro forma.................................... 15.41% 15.27% 16.41% 16.26%
Minimum required............................. 8.00% 8.00% 8.00% 8.00%
Leverage ratio:
Historical................................... 8.39% 8.33% 9.11% 9.03%
Pro forma.................................... 7.25% 7.18% 7.95% 7.87%
Minimum required............................. 5.00% 5.00% 5.00% 5.00%
</TABLE>
14
<PAGE> 15
THE COMPANY'S PRO FORMA FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION
WITH THE HISTORICAL CONSOLIDATED FINANCIAL INFORMATION INCORPORATED HEREIN BY
REFERENCE AND DO NOT PURPORT TO BE INDICATIVE OF FUTURE EARNINGS OR FINANCIAL
POSITIONS OR OF WHAT EARNINGS OR FINANCIAL POSITION WOULD HAVE BEEN HAD THE
OFFER BEEN CONSUMMATED AS OF THE DATES FOR WHICH PRO FORMA STATEMENTS ARE
PRESENTED.
14. TRANSACTIONS AND ARRANGEMENTS CONCERNING THE COMMON STOCK
The following table sets forth information concerning transactions in the
Company's Common Stock by the Company, its subsidiaries, its executive officers
and directors, and the Bank's ESOP, which, if any, occurred during the period of
40 business days prior to the date of this Offer:
<TABLE>
<CAPTION>
DATE OF NUMBER PRICE MEANS OF EFFECTING
IDENTITY OF PERSON TRANSACTION OF SHARES PER SHARE TRANSACTION
- ----------------------------------------------- ----------- --------- --------- -------------------------------
<S> <C> <C> <C> <C>
Santa Barbara Bancorp.......................... 11/1/96 6,100 $ 28.00 Acquisition -- Open market
purchase
11/22/96 50,000 $ 28.125 Acquisition -- Private purchase
Jay D. Smith, Sr. V.P. and General Counsel..... 12/6/96 200 $ 28.00 Disposition -- Gifts
David W. Spainhour, President, Chief Executive
Officer and Director......................... 11/18/96 20 $ 27.75 Disposition -- Gifts
12/11/96 171 $ 27.875 Disposition -- Gifts
12/13/96 17,686 $ 19.75 Acquisition -- Stock Option
Exercise
12/13/96 12,476 $ 28.00 Disposition -- Stock for Stock
Option Exercise
Kent M. Vining, Sr. Vice President............. 12/13/96 11,113 $12.9576 Acquisition -- Stock Option
Exercise
12/13/96 2,117 $ 28.00 Disposition -- Stock for Stock
Option Exercise
12/17/96 4,000 $ 27.875 Disposition -- Open Market Sale
12/17/96 4,996 $ 28.00 Disposition -- Open Market Sale
Tony Guntermann, Director...................... 12/13/96 7,500 $ 10.333 Acquisition -- Stock Option
Exercise
12/13/96 1,292 $ 28.00 Disposition -- Stock for Stock
Option Exercise
</TABLE>
Other than these transactions, neither the Company nor its subsidiaries
nor, to the Company's knowledge, any of its executive officers or directors or
any associate of any such executive officer or director of the Company or its
subsidiaries nor the Bank's ESOP has engaged in any transactions involving
shares of the Common Stock during the period of 40 business days prior to the
date hereof. Executive officers and directors of the Company and the Bank will
be eligible to tender Shares pursuant to this Offer.
Except as set forth herein, neither the Company nor, to the Company's
knowledge, any of its executive officers or directors, or any of the executive
officers or directors of any of its subsidiaries, is a party to any contract,
arrangement, understanding or relationship relating, directly or indirectly, to
this Offer with any other person with respect to Common Stock of the Company.
The Company may in the future purchase Shares in the open market, in
private transactions, through tender offers or otherwise. However, Rule 13e-4
under the Exchange Act prohibits the Company from making any purchases of Shares
until ten business days after the Expiration Date, other than pursuant to the
Offer. Thereafter, any purchases the Company may choose to make may be on the
same terms as, or on terms more or less favorable to shareholders than, the
terms of the Offer. Any possible future purchases by the Company will depend on
numerous factors, including the market price of the Shares, the results of the
Offer, the Company's business and financial condition and general economic and
market conditions.
Except as disclosed in this Offer to Purchase, the Company currently has no
plans or proposals that relate to or would result in (a) the acquisition by any
person of additional securities of the Company or the disposition of securities
of the Company; (b) an extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving the Company or any or all of its
subsidiaries; (c) a sale or transfer of a
15
<PAGE> 16
material amount of assets of the Company or any of its subsidiaries; (d) any
change in the present Board of Directors or management of the Company; (e) any
material change in the present dividend rate or policy, or indebtedness or
capitalization of the Company; (f) any other material change in the Company's
corporate structure or business; (g) any material change in the Company's
Articles of Incorporation or By-Laws or any actions which may impede the
acquisition of control of the Company by any person; (h) a class of equity
security of the Company becoming eligible for termination of registration
pursuant to Section 12(g)(4) of the Exchange Act; or (i) the suspension of the
Company's obligation to file reports pursuant to Section 15(d) of the Exchange
Act.
15. FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon information provided by the Company,
the Internal Revenue Code of 1986, as amended and in effect on the date hereof
(the "Code"), existing and proposed regulations thereunder, reports of
congressional committees, judicial decisions and current administrative rulings
and practices. Any of these authorities could be repealed, overruled or modified
at any time after the date hereof. Any such change could be retroactive and,
accordingly, could modify the tax consequences discussed herein. No ruling from
the Internal Revenue Service with respect to the matters discussed herein has
been requested and there is no assurance that the Internal Revenue Service would
agree with the conclusions set forth in this discussion.
This discussion is for general information only and does not address the
federal income tax consequences that may be relevant to particular shareholders
of the Company in light of their personal circumstances or to certain types of
shareholders of the Company (such as dealers in securities, insurance companies,
foreign individuals and entities, financial institutions and tax-exempt
entities) who may be subject to special treatment under the federal income tax
laws. This discussion also does not address any tax consequences under state,
local or foreign laws.
General Consequences
Sales of Common Stock by tendering shareholders pursuant to the Offer will
be taxable transactions for federal income tax purposes (and may be taxable
transactions under state, local or foreign tax laws as well). The federal income
tax consequences to a tendering shareholder may vary depending upon the
particular facts and circumstances of that individual. Accordingly, each
shareholder is urged to consult his own tax advisor with respect to the federal
income tax consequences to him of the sale of his Common Stock in connection
with the Offer, including the desirability of selling his shares of Common Stock
in the market instead of to the Company pursuant to the Offer, or of selling
some of his Common Stock pursuant to the Offer and simultaneously disposing in
the market of some or all of the other stock of the Company which he might own.
Under the Code, a shareholder whose Shares are purchased pursuant to the
Offer will generally recognize gain or loss in an amount equal to the difference
between the cash received and such shareholder's adjusted basis for his Shares
redeemed, if (i) as a result of the sale, his stock interest in the Company is
completely terminated, (ii) as a result of the sale there is a substantially
disproportionate redemption to the selling stockholder, or (iii) the receipt of
cash in exchange for his Shares is deemed to be not essentially equivalent to a
dividend. These tests are discussed in greater detail below. Such gain or loss
generally will be treated as a capital gain or loss if the Shares of Common
Stock are held as capital assets, and generally will be treated as a long-term
capital gain or loss if the shareholder's holding period for such Shares is more
than one year.
To determine whether the tests referred to above (and discussed herein) are
met, there must be taken into account both (a) any shares actually owned by such
shareholder and (b) any shares considered owned by such stockholder by reason of
certain constructive ownership rules set forth in Sections 318 and 302(c) of the
Code. Under Section 318, a shareholder generally will be treated as owning
shares which he has the right to acquire under options and shares owned (and, in
some cases, constructively owned) by members of the tendering shareholder's
family and by related entities (such as corporations, partnerships, trusts and
estates) in which such shareholder, a member of his family or a related entity
has an interest.
16
<PAGE> 17
IF NONE OF THE FOREGOING TESTS (DESCRIBED IN GREATER DETAIL BELOW) ARE
SATISFIED, THEN, WHETHER OR NOT A TENDERING SHAREHOLDER HOLDS HIS COMMON STOCK
AS A CAPITAL ASSET, THE ENTIRE AMOUNT OF THE CASH RECEIVED PURSUANT TO THE OFFER
WILL BE TREATED AS A DIVIDEND AND WILL BE TAXABLE AS ORDINARY INCOME TO THE
EXTENT OF THE CURRENT AND ACCUMULATED EARNINGS AND PROFITS OF THE COMPANY.
Complete Termination of Interest
A termination of the stock interest of a tendering shareholder will have
occurred if, pursuant to the Offer, the Company purchases all of his Common
Stock and such shareholder does not own directly and is not deemed to own, under
the constructive ownership rules described above, any other stock of the
Company. If the Offer is prorated, the Shares that are not purchased by reason
of such proration must be taken into account in determining whether a
shareholder has achieved a complete termination of his interest in the Company.
If a shareholder would otherwise satisfy the complete termination requirement,
but for his constructive ownership of Shares held by family members, under
certain circumstances such shareholder may be entitled to disregard such
constructive ownership. A shareholder who has a complete termination of his
interest generally will receive capital gain or loss treatment provided that he
holds his Shares of Common Stock as capital assets.
Substantially Disproportionate Redemption
A substantially disproportionate redemption occurs as to a particular
shareholder if the redemption results in the shareholder owning less than 80% of
the percentage of outstanding Common Stock that he owned immediately before the
redemption and less than 50% of all of the Company's outstanding Common Stock.
In applying these tests, the constructive ownership rules discussed above will
apply. A shareholder whose receipt of cash pursuant to the Offer qualifies as a
substantially disproportionate redemption generally will receive capital gain or
loss treatment provided that he holds his Shares of Common Stock as capital
assets.
Not Essentially Equivalent to a Dividend
Even if there is not a complete termination of the shareholder's interest
and the receipt of cash by such shareholder fails to satisfy the "substantially
disproportionate" test, it is possible that the receipt of cash by such
shareholder pursuant to the Offer may be treated as "not essentially equivalent
to a dividend". Application of this test depends on the individual shareholder's
circumstances. Under the applicable judicial authorities, the "not essentially
equivalent to a dividend" test generally will be satisfied if, as a result of
the sale of Common Stock pursuant to the Offer, a shareholder has realized a
"meaningful reduction" in his proportionate interest in the Company, taking into
account the constructive ownership rules. The Internal Revenue Service has
indicated in a published ruling that a redemption qualified as "not essentially
equivalent to a dividend" where (i) the shareholder's relative stock interest in
the company was minimal, (ii) the shareholder exercised no control over the
affairs of the company and (iii) as a result of the redemption, the shareholder
experienced a reduction of his voting rights, rights to participate in current
earnings and surplus and rights to share in assets on liquidation. However, the
Internal Revenue Service has also ruled that a redemption of shares of a
shareholder who held a minimal interest in the corporation failed to qualify as
"not essentially equivalent to a dividend" where the pro-rata stock interest of
the shareholder was not reduced as a result of the redemption. Shareholders
tendering Shares in this Offer should note that the change in their relative
stock interest in the Company may be affected by any proration of the Offer. A
shareholder who meets the requirements of the "not essentially equivalent to a
dividend" test generally will receive capital gain or loss treatment provided
that he holds his Shares of Common Stock as capital assets. ANY SHAREHOLDER
SEEKING TO RELY ON THE "NOT ESSENTIALLY EQUIVALENT TO A DIVIDEND" TEST SHOULD
CONSULT WITH HIS OWN TAX ADVISOR AS TO ITS APPLICATION IN HIS PARTICULAR
SITUATION.
17
<PAGE> 18
Determining Amount of Taxable Gain
If one or more of the three tests described above is satisfied, then the
tendering shareholder will recognize gain or loss in an amount equal to the
difference between the amount of cash received pursuant to the Offer for his
tendered Shares and his adjusted basis in such Shares. Numerous rules may apply
to the determination of the adjusted basis of shares of stock depending upon how
the Shares were acquired by the shareholder. Generally, the cost of shares
determines their basis. However, if the Shares were received in a tax-free
exchange, inherited, received by gift or received in numerous other ways,
special tax rules may apply. A significant number of the Company's outstanding
Shares of Common Stock originally were issued in exchange for shares of the Bank
in connection with the reorganization of the Bank into a holding company
structure. A private letter ruling was obtained from the Internal Revenue
Service to the effect that the holding company reorganization would be a
tax-free reorganization. Assuming that the holding company reorganization in
fact qualified as a tax-free reorganization, any shareholder who exchanged all
of his Bank shares solely for Shares of the Company's Common Stock in the
holding company reorganization generally would have an adjusted basis in his
Common Stock equal to his basis in this Bank shares exchanged therefor.
A capital gain or loss results from the sale or exchange of a capital
asset. Generally, capital stock is considered a capital asset. However, under
certain specific instances, capital stock may not be considered to be a capital
asset.
Assuming that the stock of a particular shareholder is a capital asset and
that the shareholder will recognize a capital gain on the repurchase of the
Shares by the Company in the Offer, a determination then must be made as to the
length of time during which the stock has been held by that particular
shareholder and as to whether the shareholder will be permitted to add ("tack")
any previous holding period of the stock. Currently, the required holding period
for long term capital gain and loss purposes is more than one year. For stock
acquired in a tax-free exchange (or received by gift or inheritance) the
shareholder may be entitled to tack the holding period of his exchanged shares
(or the holding period of a former owner) to his holding period for the acquired
shares.
Taxable Dividend Treatment
If none of the three tests described above is satisfied, then the
shareholder generally will be treated as having received a dividend in an amount
equal to the cash received by him pursuant to the Offer. Such a dividend will be
taxable as ordinary income to the extent of current and accumulated earnings and
profits of the Company. In addition, a shareholder also will recognize gain from
the sale or exchange of property to the extent the cash received by him pursuant
to the Offer exceeds the Company's earnings and profits and the shareholder's
adjusted basis in his Common Stock. Corporate shareholders may be entitled to
the dividends-received deduction, except that the amount of the deduction may be
reduced under certain special tax rules.
Backup Withholding Requirements
Under federal backup withholding rules, except in the case of certain
exempt taxpayers, the Depositary will be required to withhold and will withhold
31% of the gross proceeds paid to a shareholder or other payee pursuant to the
Offer unless the shareholder provides his tax identification number (employer
identification number or social security number), certifies that such number is
correct, and certifies that he is not subject to backup withholding under
Section 3406(a)(1)(C) of the Code. Each shareholder should fully complete and
sign the box captioned "Substitute Form W-9" included as part of the Letter of
Transmittal, so as to provide the information and certifications necessary to
avoid backup withholding. See the Letter of Transmittal and the Instructions
thereto for further details.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY. EACH SHAREHOLDER OF THE COMPANY IS URGED TO CONSULT HIS OWN
TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO HIM OF THE PURCHASE
OF HIS COMMON STOCK PURSUANT TO THE OFFER, INCLUDING THE APPLICABILITY OF THE
CONSTRUCTIVE OWNERSHIP RULES, THE AP-
18
<PAGE> 19
PLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, CHANGES IN APPLICABLE TAX
LAWS AND ANY PENDING OR PROPOSED LEGISLATION.
16. GOVERNMENT REGULATION
The Company is not aware of any license or regulatory permit material to
its business that might be adversely affected by its acquisition of Shares as
contemplated in the Offer or of any approval or other action by any government
or governmental, administrative or regulatory authority or agency, domestic or
foreign, that would be required for the Company's acquisition or ownership of
Shares as contemplated by the Offer.
Under regulations promulgated by the Federal Reserve Board under the Bank
Holding Company Act of 1956, a bank holding company must give written notice to
the Board of Governors before purchasing or redeeming its equity securities if
the gross consideration paid for the purchase or redemption equals or exceeds
10% of the company's consolidated net worth, unless, (i) both before and
following the redemption, the holding company meets the thresholds established
for "well capitalized" state member banks under applicable regulations and (ii)
the bank holding company received a composite "1" or "2" rating at its most
recent examination. Because the Company does and will meet these criteria before
and following the acquisition of Shares pursuant to the Offer (even assuming
completion of the Company's pending acquisition of First Valley Bank), the
Company will not be required to file this notice with the Federal Reserve
System. No approval of any other federal, state or local governmental body is
required with respect to the Offer.
Should any such approval or other action be required, the Company currently
contemplates that it will seek such approval or other action. The Company cannot
predict whether it may determine that it is required to delay the acceptance for
payment of, or payment for, Shares tendered pursuant to the Offer pending the
outcome of any such matter. There can be no assurance that any such approval or
other action, if needed, would be obtained or would be obtained without
substantial conditions or that the failure to obtain any such approval or other
action might not result in adverse consequences to the Company's business.
17. EXTENSION OF THE OFFER PERIOD; TERMINATION; AMENDMENTS
The Company reserves the right, in its sole discretion, at any time or from
time to time, and regardless of whether or not any of the events set forth in
Section 7 shall have occurred or shall be deemed by the Company to have
occurred, to extend the period of time during which the Offer is open (and
thereby delay acceptance for payment of, and payment for, any Shares) by giving
oral or written notice of extension to the Depositary and making a public
announcement thereof. The Company also reserves the right, in its sole
discretion, to terminate the Offer and not to purchase or pay for any Shares of
Common Stock not theretofore purchased or paid for upon the occurrence of any of
the conditions specified in Section 7 by giving oral or written notice of such
termination to the Depositary and making a public announcement thereof. The
Company further reserves the right, in its sole discretion, and regardless of
whether any of the events set forth in Section 7 shall have occurred or shall be
deemed by the Company to have occurred, to amend the Offer in any respect
(including, without limitation, by decreasing or increasing the consideration
offered in the Offer to holders of Shares or by decreasing or increasing the
number of Shares being sought in the Offer). Amendments to the Offer may be made
at any time and from time to time effected by public announcement thereof, such
announcement, in the case of an extension, to be issued no later than 9:00 A.M.,
Eastern Standard Time, on the next business day after the last previously
scheduled or announced Expiration Date. Any public announcement made pursuant to
the Offer will be disseminated promptly to shareholders in a manner reasonably
designated to inform shareholders of such change. Without limiting the manner in
which the Company may choose to make any public announcement, except as provided
by applicable law (including Rule 13e-4(e)(2) promulgated under the Exchange
Act), the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement other than by making a release to the
Business Wire.
If the Company makes a material change in the terms of the Offer or the
information concerning the Offer, or if it waives a material condition of the
Offer, the Company will extend the Offer to the extent required by Rules
13e-4(d)(2) and 13e-4(e)(2) promulgated under the Exchange Act, which require
that the minimum period during which an offer must remain open following
material changes in the terms of the
19
<PAGE> 20
offer or information concerning the offer (other than a change in price or a
change in percentage of securities sought) will depend upon the facts and
circumstances, including the relative materiality of such terms or information.
If (i) the Company increases or decreases the price to be paid for Shares, the
Company increases the number of Shares being sought and such increase in the
number of Shares being sought exceeds 2% of the outstanding Shares, or the
Company decreases the number of Shares being sought, and (ii) the Offer is
scheduled to expire at any time earlier than the expiration of a period ending
on the tenth business day from, and including, the date that notice of such
increase or decrease is first published, sent or given, the Offer will be
extended until the expiration of such period of ten business days.
18. FEES AND EXPENSES
The Depositary will receive reasonable and customary compensation for its
services, will be reimbursed for reasonable out-of-pocket expenses and will be
indemnified against certain liabilities in connection with the Offer, including
certain liabilities under the federal securities laws.
The Company will reimburse any broker or dealer, commercial bank or trust
company for customary handling and mailing expenses incurred in forwarding the
Offer. No such broker, dealer, commercial bank or trust company has been
authorized to act as an agent of the Company or the Depositary for purposes of
the Offer.
19. MISCELLANEOUS
The Company is not aware of any jurisdiction where the making of the Offer
is not in compliance with applicable law. If the Company becomes aware of any
jurisdiction where the making of the Offer is not in compliance with any valid
applicable law, the Company will make a good faith effort to comply with such
law. If, after such good faith effort, the Company cannot comply with such law,
the Offer will not be made to (nor will tenders be accepted from or on behalf
of) the holders of Shares residing in such jurisdiction.
Pursuant to Rule 13e-4 promulgated under the Exchange Act, the Company has
filed with the Commission an Issuer Tender Offer Statement on Schedule 13E-4
(the "Schedule 13E-4") which contains additional information with respect to the
Offer. The Schedule 13E-4, including the exhibits and any amendments thereto,
may be examined, and copies may be obtained, at the same places and in the same
manner as is set forth in Section 12 with respect to information concerning the
Company.
The Offer is being made to all shareholders of the Company.
SANTA BARBARA BANCORP
20
<PAGE> 21
APPENDIX A
TO OFFER TO PURCHASE
SANTA BARBARA BANCORP
SCHEDULE OF ADDITIONAL FINANCIAL INFORMATION
<PAGE> 22
SANTA BARBARA BANCORP
SCHEDULE OF ADDITIONAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
12/31/94 12/31/95 9/30/95 9/30/96
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges
Historical.......................................... 1.70 1.43 1.38 1.63
Pro Forma 1......................................... 1.67 1.40 1.36 1.61
Pro Forma 2......................................... 1.56 1.32 1.28 1.51
Book Value Per Share
Historical.......................................... $12.24 $13.14 $12.85 $13.93
Pro Forma 1......................................... $10.98 $11.93 $11.62 $12.78
Pro Forma 2......................................... $11.08 $12.04 $11.70 $12.89
</TABLE>
- ---------------
Pro Forma 1 assumes purchase of 500,000 Shares of Common Stock at $30.00 per
share, plus estimated fees and expenses during the periods indicated.
Pro Forma 2 assumes the purchase assumed in Pro Forma 1 and assumes the purchase
of the 450,000 outstanding shares of First Valley Bank, Lompoc, California, for
$58.00 per share.
A-1
<PAGE> 1
THE OFFER WILL EXPIRE AT 5:00 P.M.
PACIFIC STANDARD TIME
ON FEBRUARY 21, 1997
LETTER OF TRANSMITTAL
TO ACCOMPANY SHARES OF COMMON STOCK
OF
SANTA BARBARA BANCORP
(A CALIFORNIA CORPORATION)
TENDERED PURSUANT TO OFFER TO PURCHASE
DATED JANUARY 10, 1997
To: Norwest Bank Minnesota, N.A., Depositary
<TABLE>
<S> <C>
By Mail: In Person or by Courier:
Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
Shareowner Services Reorganization Department Shareowner Services
P.O. Box 64858 161 North Concord Exchange
St. Paul, Minnesota 55164-0858 South St. Paul, Minnesota 55075
</TABLE>
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
Gentlemen:
The undersigned shareholder ("Shareholder" or the "undersigned") of Santa
Barbara Bancorp, a California corporation (the "Company"), hereby agrees to sell
and tenders to the Company the number of shares of Common Stock the Company (the
"Shares") indicated in Box A below and evidenced by share certificate(s) either
enclosed herewith or guaranteed to be transmitted as indicated below, to be
purchased by the Company at a price of $30.00 net per Share, in cash, to the
Shareholder, subject to the terms and conditions set forth in the Offer to
Purchase dated January 10, 1997, and in this Letter of Transmittal (which
together constitute the "Offer"). Shareholder acknowledges receipt and review of
the Offer to Purchase.
The undersigned hereby sells, assigns and transfers to, or upon the order
of, the Company all shares that are being tendered hereby that are purchased
pursuant to the Offer. The undersigned represents that the undersigned has full
authority to sell the tendered shares and that such sale will convey to the
Company full legal and beneficial title thereto, free and clear of all liens,
charges and encumbrances and not subject to any adverse claim. Upon request, the
undersigned will execute any additional documents necessary to complete the
transfer.
The undersigned hereby irrevocably constitutes and appoints the Depositary
as attorney-in-fact of the undersigned, with full power of substitution (such
power of attorney being deemed to be an irrevocable power coupled with an
interest), (a) to deliver certificates for the tendered Shares, together with
all accompanying evidences of transfer and authenticity, to or upon the order of
the Company upon receipt of the purchase price by the Depositary, as the
undersigned's agent, (b) to present such certificates for cancellation and
transfer of the tendered Shares on the Company's books and (c) to receive all
benefits and otherwise exercise all rights of beneficial ownership of the
tendered Shares, all in accordance with the terms of the Offer.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned, and any obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assignees of the undersigned. This tender is revocable only to the extent
and during the period stated in the Offer to Purchase.
Unless otherwise indicated herein under Box B captioned "Special Payment
Instructions" or Box C captioned "Special Delivery Instructions", please issue
the check for the purchase price and the certificates for any unpurchased Shares
(and accompanying documents, as appropriate) in the name of the undersigned and
mail such check and any such certificates to the undersigned at the address
shown below the undersigned's signature. The undersigned recognizes that the
Company has no obligation, pursuant to the Special Payment Instructions, to
transfer any certificate for Shares from the name of the holder thereof if the
Company purchases none of the Shares represented by such certificate.
<PAGE> 2
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
BOX A
DESCRIPTION OF SHARES TENDERED
(See Instructions 4 and 5)
- --------------------------------------------------------------------------------------------------------
Certificates Tendered
Names and Addresses of Registered Holders (Attach signed Schedule if necessary)
- --------------------------------------------------------------------------------------------------------
Certificate No. of No. of Shares
No(s). Shares Tendered*
---------------------------------------------
---------------------------------------------
---------------------------------------------
---------------------------------------------
Total Shares Tendered
- --------------------------------------------------------------------------------------------------------
* If you desire to transfer fewer than all the shares evidenced by any certificate listed above, please
indicate in this column the number of shares from such certificate that you desire to tender.
Otherwise all shares evidenced by such certificate will be deemed to have been tendered.
- --------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: IF YOUR CERTIFICATES ARE LOST, PLEASE REFER TO INSTRUCTION 12 ON THE
REVERSE SIDE OF THIS LETTER OF TRANSMITTAL.
<PAGE> 3
- --------------------------------------------------------------------------------
BOX B
SPECIAL PAYMENT INSTRUCTIONS
(See Instructions 6 and 7)
- --------------------------------------------------------------------------------
To be completed ONLY if certificates for any unpurchased Shares and/or a check
are to be issued in the name of and sent to someone other than the undersigned.
Issue [ ] Check [ ] Certificate(s) to:
Name
--------------------------------------------------------------
Address
----------------------------------------------------------
- ------------------------------------------------------------------
(include Zip Code)
- ------------------------------------------------------------------
(Tax Identification or Social Security Number)
(See Instruction 1)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOX C
SPECIAL DELIVERY INSTRUCTIONS
(See Instruction 7)
- --------------------------------------------------------------------------------
To be completed ONLY if certificates for any unpurchased Shares and/or a
check, issued in the name of the undersigned, are to be sent to someone other
than the undersigned or are to be sent to the undersigned at an address other
than shown below the undersigned's signature.
Mail [ ] Check [ ] Certificate(s) to:
Name
--------------------------------------------------------------
Address
----------------------------------------------------------
- ------------------------------------------------------------------
(include Zip Code)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOX D
CONDITIONAL TENDER
(See Instruction 8)
- --------------------------------------------------------------------------------
Minimum number of Shares which must be purchased, if any are purchased:
____________ Shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOX E
ODD LOTS
(See Instruction 10)
- --------------------------------------------------------------------------------
This Section is to be completed ONLY if Shares are being tendered by
or on behalf of a person owning beneficially as of close of business on
January 10, 1997, an aggregate of fewer than 100 shares of Common Stock.
The undersigned either (check one):
[ ] Is the beneficial owner, as of the close of business on January
10, 1997, of an aggregate of fewer than 100 shares of Common
Stock, all of which are being tendered; or
[ ] Is a broker, dealer, commercial bank, trust company or other
nominee which (i) is tendering, for the beneficial owner(s)
thereof, shares of Common Stock with respect to which it is the
record owner, and (ii) believes, based upon representations made
to it by each such beneficial owner, that such beneficial owner
owned beneficially as of the close of business on January 10,
1997, an aggregate of fewer than 100 shares and is tendering all
of such shares.
- --------------------------------------------------------------------------------
<PAGE> 4
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
BOX F
PAYER'S NAME:
----------------------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE PART 1 -- PLEASE PROVIDE SOCIAL SECURITY NUMBER OR
FORM W-9 YOUR TIN IN THE BOX AT EMPLOYER IDENTIFICATION NUMBER
RIGHT AND CERTIFY BY
SIGNING AND DATING [ ] [ ] [ ] - [ ] [ ] - [ ] [ ] [ ] [ ]
BELOW
------------------------------------------------------------------------------
PART 2 -- [ ] Check the box if you are NOT subject to withholding under the
DEPARTMENT OF THE TREASURY provisions of section 3406 (a) (1) (C) of the Internal Revenue Code because
INTERNAL REVENUE SERVICE (1) you have not been notified that you are subject to backup withholding as
a result of failure to report all interest or dividends or (2) the Internal
Revenue Service has notified you that you are no longer subject to backup
withholding.
---------------------------------------------------------------------------
CERTIFICATION -- UNDER THE PENALTIES
OF PERJURY, I CERTIFY THAT THE
INFORMATION PROVIDED ON THIS FORM IS
TRUE, CORRECT AND COMPLETE.
PAYER'S REQUEST FOR
TAXPAYER SIGNATURE
IDENTIFICATION NUMBER ---------------------------------
(TIN) DATE , 1997 PART 3 --
-------------------------------- AWAITING TIN [ ]
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THE ABOVE FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER.
PLEASE REVIEW INSTRUCTION 9 AND GUIDELINES FOR COMPLETING
CERTIFICATION STATEMENTS IN BOX F FOR ADDITIONAL DETAILS.
<PAGE> 5
- --------------------------------------------------------------------------------
BOX G
GUARANTEE OF DELIVERY
(See Instruction 3)
- --------------------------------------------------------------------------------
To be used ONLY if certificates are not transmitted herewith. The
undersigned
[ ] a member of a registered national securities exchange,
[ ] a commercial bank or trust company having an office, branch or agency
in the United States,
[ ] a member of the National Association of Securities Dealers, Inc.,
guarantees delivery to the Depositary of certificates in proper form for
transfer for the shares tendered by this Letter within ten (10) New York
Stock Exchange trading days after the date of execution of this Letter.
----------------------------------------------------------------------------
(Firm Name -- Please Print)
----------------------------------------------------------------------------
(Authorized Signature)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Address)
----------------------------------------------------------------------------
(Area Code and Telephone Number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOX H
SHAREHOLDER SIGN HERE
(See Instruction 6)
- --------------------------------------------------------------------------------
IMPORTANT: Also complete Substitute Form W-9 (Box F), above
----------------------------------------------------------------------------
----------------------------------------------------------------------------
[Signature(s) of Owner(s)]
[Please refer to Instruction 1 to determine if your signature must be
guaranteed.]
Name(s):
--------------------------------------------------------------------
--------------------------------------------------------------------
(Please Print)
Address:
--------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Area Code and Telephone No.
-------------------------------------------------
Tax Identification or
Social Security Number
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Signature(s) Medallion
Guaranteed By*
(*If required, see Instruction 1)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 6
INSTRUCTIONS
FOR COMPLETION
OF
LETTER OF TRANSMITTAL
(Forming part of the Terms and Conditions of the Offer)
1. GUARANTEE OF SIGNATURES
No signature guarantee on the Letter of Transmittal (Box H) is required
unless special instructions have been given under Box B captioned "Special
Payment Instructions" or Box C captioned "Special Delivery Institutions." If
such special instructions have been given, signatures on this Letter of
Transmittal must be guaranteed by an institution, such as a commercial bank,
trust company, savings and loan association, credit union, or stockbroker or
other member of the NASD or of a national securities exchange, provided such
institution is a member of or a participant in a signature guarantee medallion
program pursuant to S.E.C. Rule 17Ad-15 ("Eligible Institution").
2. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES
The Letter of Transmittal is to be used only if certificates are forwarded
herewith, unless delivery of certificates is guaranteed as described under
Instruction 3. Certificates for all tendered Shares, together with a properly
completed and duly executed Letter of Transmittal or facsimile thereof, and any
other documents required by this Letter of Transmittal, should be mailed or
delivered to Norwest Bank Minnesota, N.A., as Depositary, at the appropriate
address set forth herein prior to the Expiration Date of the Offer as defined in
Section 1 of the Offer to Purchase. Actual delivery to and receipt by the
Depositary by the Expiration Date is an absolute requirement unless delivery is
properly guaranteed. DEPOSIT IN THE MAIL ON THE EXPIRATION DATE WILL NOT
CONSTITUTE A TIMELY TENDER.
3. GUARANTEE OF DELIVERY
Shares represented by certificates which are not immediately available may
be tendered by commercial banks or trust companies, by members of any national
securities exchange or by members of the NASD, acting on behalf of their
customers, if the commercial bank, trust company, exchange or NASD member will
execute this Letter of Transmittal in Box G above, provided the certificate
number(s) are set forth (if available). The adequacy of such Guarantee will be
determined solely in the discretion of the Company. Shares tendered pursuant to
such a Guarantee should be accompanied by a properly executed Letter of
Transmittal. The certificates for the tendered shares must be delivered to the
Depositary within 10 business days after the Depositary's receipt of the
Guarantee of Delivery.
4. INADEQUATE SPACE
If the space provided herein is inadequate, the certificate numbers and the
number of Shares should be listed on a separate schedule attached hereto.
5. PARTIAL TENDERS
If fewer than all the Shares evidenced by any certificate submitted are to
be tendered, fill in the number of Shares which are to be tendered in the column
entitled "Number of Shares Tendered." A new certificate for the remainder of the
Shares evidenced by your old certificate(s) will be sent to you, unless
otherwise provided in the appropriate section on this Letter of Transmittal, as
soon as practicable after the Expiration Date of the Offer. All Shares
represented by certificates listed are deemed to have been tendered unless
otherwise indicated.
6. SIGNATURES ON LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS
6.1 If this Letter of Transmittal is signed by the owner of the
certificates tendered hereby, the signature must correspond with the name as
written on the face of the certificates, without any change whatsoever. If the
names on tendered certificates are not identical, it will be necessary to
complete, sign and submit as many separate Letters of Transmittal as there are
certificates in different names.
6.2 If the certificates tendered hereby are owned of record by two or more
joint owners, all owners must sign this Letter of Transmittal.
6.3 If any tendered Shares are registered in different names, it will be
necessary to complete, sign and submit a separate Letter of Transmittal for each
different registration.
6.4 When this Letter of Transmittal is signed by the owner(s) of the
certificates listed and transmitted hereby, no endorsements of certificates or
separate stock powers are required. If, however, the certificates for
unpurchased Shares are to be issued to a person other than the registered owner,
then endorsement of certificates transmitted hereby or separate stock powers is
required. See also Instruction 1, above, in such a circumstance.
6.5 If this Letter of Transmittal or any certificates or stock powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of a corporation or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and must submit proper
evidence satisfactory to the Company of their authority to so act, if requested.
7. STOCK TRANSFER TAXES
The Company will pay all stock transfer taxes, if any, applicable to the
transfer to it of Shares purchased pursuant to the Offer. If, however, payment
of the purchase price is to be made to, or (in circumstances permitted by the
Offer) if unpurchased Shares are to be registered in the name of, any person
other than the registered owner, or if tendered certificates are registered in
the name of any person other than the person(s) signing this Letter of
Transmittal, the amount of any stock transfer taxes (whether imposed on the
registered holder or such other person) payable on account of
<PAGE> 7
the transfer to such person will be deducted from the purchase price, if
satisfactory evidence of the payment of such taxes, exemption therefrom, is not
submitted.
8. CONDITIONAL TENDERS
A tendering shareholder may condition his or her tender of Shares on the
purchase by the Company of a specified number of the Shares tendered hereby, all
as described in the Offer to Purchase, particularly Section 6 thereof. Unless
such specified minimum is purchased by the Company pursuant to the terms of the
Offer, none of the Shares tendered hereby will be purchased. It is the tendering
shareholder's responsibility to calculate such minimum number of Shares, and
such shareholder is urged to consult his or her own tax adviser. Unless Box D
has been completed and a minimum specified, the tender will be deemed
unconditional.
9. SUBSTITUTE FORM W-9
Under federal income tax law, a shareholder whose tendered Shares are
accepted for payment is required by law to provide the Depositary (as payer)
with his or her correct taxpayer identification number, which is accomplished by
completing and signing Box F captioned "Substitute Form W-9." In addition, if a
shareholder executes Box B captioned "Special Payment Instructions", a separate
Substitute Form W-9 should also be executed by the alternate payee. If the
Depositary is not provided with the correct taxpayer identification number, the
shareholder may be subject to a $50.00 penalty imposed by the Internal Revenue
Service. In addition, except in the case of certain exempt taxpayers, the
Depositary will be required to withhold, and will withhold, 31% of the gross
proceeds paid to that shareholder or other payee pursuant to the Offer, unless
the shareholder or other payee provides the Depositary with his taxpayer
identification number, certifies that such number is correct, and certifies that
he is not subject to backup withholding under Section 3406(a)(l)(C) of the
Internal Revenue Code of 1986, as amended (the "Code"). The taxpayer
identification number is the social security number or employer identification
number of the shareholder or other payee. For further instructions on
determining the proper identification number to give to the Depositary, see the
Guidelines for Completing Certification Statements in Box F at the end of this
Letter of Transmittal. Each tendering shareholder or other payee should fully
complete and sign Box F captioned "Substitute Form W-9" and check the box in
part 2 of Substitute Form W-9, if so eligible, so as to provide the information
and certifications necessary to avoid backup withholding.
You may be, or may have been, notified that you are subject to backup
withholding under Section 3406 (a)(1)(C) of the Code because you have
underreported interest or dividends or you were required to but failed to file a
return which would have included a reportable interest or dividend payment. IF
YOU HAVE BEEN SO NOTIFIED AND YOU HAVE NOT RECEIVED A SUBSEQUENT NOTICE FROM THE
INTERNAL REVENUE SERVICE ADVISING YOU THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED, YOU MUST STRIKE OUT THE LANGUAGE ON THE SUBSTITUTE FORM W-9
CERTIFYING THAT YOU ARE NOT SUBJECT TO BACKUP WITHHOLDING. If you are subject to
backup withholding and you strike out the language on the Substitute W-9
certifying that you are not subject to backup withholding, you should
nonetheless provide your correct taxpayer identification number to the
Depositary and certify that it is correct.
Exempt shareholders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements. (In order for a foreign individual to qualify as an exempt
recipient, that shareholder must submit a statement, signed under penalty of
perjury, attesting to that individual's exempt status. Such statements can be
obtained from the Depositary.)
If backup withholding applies, the Depositary is required to withhold 31%
of any such payments made to the shareholder. Backup withholding is not an
additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be requested.
10. ODD LOTS
As described in Section 1 of the Offer to Purchase, if less than all shares
tendered prior to the Expiration Date are to be purchased by the Company, the
shares purchased first will consist of all shares tendered by any shareholder
who owned beneficially as of January 10, 1997, an aggregate of fewer than 100
shares and who tenders all of such shares. This preference will not be available
unless Box E captioned "Odd Lots" is completed.
11. IRREGULARITIES
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of any tender of Shares will be determined by the
Company, which determination shall be final and binding. The Company reserves
the right to reject any tenders of Shares not in appropriate form or the
acceptance of or payment of which would, in the opinion of the Company's
counsel, be unlawful. The Company also reserves the right to waive any of the
conditions of the Offer or any defect in any tender, and the Company's
interpretations of the terms and conditions of the Offer (including these
instructions) shall be final and binding. The Company shall not be obligated to
give notice of any defects or irregularities in tenders and shall not incur any
liability for failure to give any such notice. Tenders will not be deemed to
have been made until all defects and irregularities have been cured or waived.
12. LOST CERTIFICATES
In the event that you are unable to deliver to the Depositary the
certificate(s) for your Shares of Common Stock due to the loss or destruction of
such certificate(s), such fact should be indicated on the face of the Letter of
Transmittal. In such event, the Depositary will forward additional documentation
which you must complete in order to effectively tender such lost or destroyed
certificate(s). There may be a fee to replace lost certificates. Tenders will be
processed after certificates are replaced.
<PAGE> 8
13. ADDITIONAL INFORMATION AND COPIES
Additional information, as well as additional copies of the Offer to
Purchase and this Letter of Transmittal, may be obtained from the Depositary at
the address set forth on the cover of this Letter of Transmittal, by calling the
Depositary at (800) 380-1372 or by contacting the Company at the following
address:
Clare McGivney
Assistant Corporate Secretary
Santa Barbara Bancorp
1021 Anacapa Street
Santa Barbara, California 93101
(805) 564-6298
IMPORTANT: IF YOU DESIRE TO TENDER ANY OR ALL OF YOUR SHARES, THE LETTER OF
TRANSMITTAL OR FACSIMILE THEREOF (TOGETHER WITH CERTIFICATES AND OTHER REQUIRED
DOCUMENTS) MUST BE RECEIVED BY THE DEPOSITARY ON OR PRIOR TO THE EXPIRATION DATE
OF THE OFFER. DEPOSIT OF SUCH MATERIALS IN THE MAIL ON THE EXPIRATION DATE WILL
NOT CONSTITUTE A TIMELY TENDER.
GUIDELINES FOR COMPLETING CERTIFICATION STATEMENTS IN BOX F
CERTIFICATION
After you have read these instructions, place your signature and the
current date in the space provided in Box F. If you are exempt from backup
withholding, you should complete Box F of this Letter of Transmittal to avoid
possible erroneous backup withholding. Enter your correct Taxpayer
Identification Number ("TIN") in Part I, check the box in Part II, and sign and
date the form.
BACKUP WITHHOLDING
Backup withholding will apply if:
1. You fail to furnish us with your taxpayer identification number; or
2. The Internal Revenue Services notifies us that you furnished an
incorrect taxpayer identification number; or
3. You are notified that you are subject to backup withholding because you
have underreported interest or dividend income to the Internal Revenue
Service, or you were required to but failed to file a return which would
have included a reportable interest or dividend payment; or
4. You fail to certify to us that you are not subject to backup withholding
or fail to certify your taxpayer identification number.
TAXPAYER IDENTIFICATION NUMBER
For individuals and sole proprietors, the TIN is the social security
number, which is a nine (9) digit number separated by two hyphens (i.e.
000-00-0000). For corporations, valid trusts, estates, pension trusts,
partnerships, associations, clubs and other organizations which are not
tax-exempt, the taxpayer number is the employer identification number, which is
a nine (9) digit number separated by only one hyphen (i.e. 00-0000000). The
following tables will help you determine the number to give us:
<TABLE>
<S> <C>
FOR THIS TYPE OF ACCOUNT GIVE THE SOCIAL SECURITY NUMBER OF:
1. An individual's account The individual
2. Two or more individuals (joint account) The individual whose name appears first on the
account caption
3. Husband and wife (joint account) The individual whose name appears first on the
account caption
4. Custodian account of a minor (Uniform Gift or The minor
Transfers to Minors Act)
5. Account in the name of a guardian or The ward, minor, or incompetent person
committee for a designated ward, minor, or
incompetent person
6. Sole proprietorship The owner
FOR THIS TYPE OF ACCOUNT GIVE THE EMPLOYER IDENTIFICATION NUMBER OF:
1. Corporate The corporation
2. Valid trusts, estates, or pension trusts The legal entity
3. Partnership account held in the name of the The partnership
business
4. Association, club, or other organization The organization
which is not tax-exempt
</TABLE>
<PAGE> 9
EXEMPTIONS FROM BACKUP WITHHOLDING
The following include some of the entities which are specifically exempt
from backup withholding on ALL payments:
- A corporation
- An organization exempt from tax under section 501(a), or an individual
retirement plan (IRA)
- All foreign governments and entities
- A dealer in securities or commodities required to register in the U.S.
- All federal, state and local government entities
- A real estate investment trust
- Nonresident aliens
NOTE: Nonresident aliens are required to sign a Form W-8 or Substitute W-8 Bank
form, Certificate of Foreign Status.
PENALTIES
Under certain circumstances, you may be subject to penalties imposed by the
Internal Revenue Service, as follows:
1. The penalty for failure to furnish your taxpayer identification number
to us will be $50.00 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
2. If you make a false statement with no reasonable basis which results in
no imposition of backup withholding, you are subject to a penalty of $500.00.
3. If you falsify certifications or affirmations you may be subject to
criminal penalties including fines and/or imprisonment.
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Card, or Form SS-4,
Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
<PAGE> 1
OFFER BY
SANTA BARBARA BANCORP
TO PURCHASE FOR CASH
UP TO
500,000 SHARES OF ITS COMMON STOCK
To Brokers, Dealers, Commercial Banks,
Trust Companies and Nominees: January 10, 1997
We are enclosing the material listed below relating to the offer by Santa
Barbara Bancorp, a California corporation (the "Company"), to purchase, upon the
terms and subject to the conditions of the Offer to Purchase dated January 10,
1997, and the related Letter of Transmittal (which together constitute the
"Offer"), up to a maximum of 500,000 shares of Common Stock (the "Shares") at a
price of $30.00 net per share to the selling shareholders.
Enclosed herewith are copies of the following documents:
1. Offer to Purchase dated January 10, 1997.
2. Letter of Transmittal (including Substitute Form W-9 Guidelines)
for your use and for the information of your clients;
3. Letter which may be sent to clients for whose account you hold
Shares in your name or the name of your nominee, with space provided for
obtaining such clients' instructions with regard to the Offer; and
4. Letter dated January 10, 1997, to the Company's shareholders.
Please advise us as to how many additional copies of the tender offer
documents you will require for distribution to your clients by contacting our
Depositary Agent, Norwest Bank Minnesota, N.A., Shareowner Services
Reorganization Department, P.O. Box 64858, Saint Paul, Minnesota 55164-0858.
No fees or commissions will be payable to brokers, dealers or persons for
soliciting tenders of Shares pursuant to the Offer. However, the Company will
reimburse brokers, dealers, commercial banks, trust companies and other nominees
for their reasonable and necessary costs incurred in forwarding the Offer to
Purchase and related documents to beneficial owners of Shares held by such
entities as nominee or in a fiduciary capacity. Please forward invoices for
reimbursement to Clare McGivney, the Company's Assistant Corporate Secretary,
1021 Anacapa Street, Santa Barbara, California, 93101. No such broker, dealer,
bank, trust company or other nominee has been authorized to act as the agent of
the Company or the Depositary.
We urge you to contact your clients promptly. Please note that the
withdrawal deadline, proration date and expiration date are all Friday, February
21, 1997, at 5:00 p.m. Pacific Standard Time (unless extended).
As described in Section 3 of the Offer to Purchase, tenders may be made
without the concurrent deposit of stock certificates and any other required
documents, if such tenders are made by or through a broker or dealer which is a
member firm of a registered national securities exchange, a member of the
National Association of Securities Dealers, Inc. or a commercial bank or trust
company having an office, branch or agency in the United States. Certificates
for shares so tendered and any other required documents must be received within
ten business days after the Depositary Agent has previously received a properly
completed and duly executed Notice of Guaranteed Delivery.
<PAGE> 2
Any questions or requests for assistance or additional copies of the Offer
to Purchase and the Letter of Transmittal may be directed to Clare McGivney,
Assistant Corporate Secretary, at (805) 564-6298.
Very truly yours,
SANTA BARBARA BANCORP
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY OTHER PERSON THE AGENT OF THE COMPANY OR THE DEPOSITARY, OR AUTHORIZE YOU OR
ANY OTHER PERSON TO USE ANY DOCUMENT OR TO MAKE ANY STATEMENTS ON THEIR BEHALF
IN CONNECTION WITH THE OFFER, OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE
STATEMENTS CONTAINED THEREIN.
<PAGE> 1
OFFER BY
SANTA BARBARA BANCORP
TO PURCHASE FOR CASH
UP TO
500,000 SHARES OF ITS COMMON STOCK
To Our Clients:
Enclosed for your consideration is the Offer to Purchase dated January 10,
1997, and a related Letter of Transmittal (which together constitute the
"Offer"), relating to the Offer by Santa Barbara Bancorp to purchase up to a
maximum of 500,000 shares of its Common Stock (the "Shares"). The Offer to
Purchase and the Letter of Transmittal are being forwarded to you as the
beneficial owner of Shares held by us in your account but not registered in your
name. A tender of such Shares can be made only by us, since we are the holder of
record, but only pursuant to your instructions.
We request your instructions as to whether you wish to tender any or all
Shares held by us for your account, pursuant to the terms and subject to the
conditions set forth in the Offer.
Your attention is called to the following:
1. Shareholders may tender Shares at a price of $30.00 net per share.
2. The Offer is not conditioned upon any minimum number of Shares
being tendered, but up to 500,000 shares may be purchased.
3. Tendering shareholders will not be obligated to pay brokerage
commissions, solicitation fees or (subject to Instruction 7 of the Letter
of Transmittal) stock transfer taxes on the purchase of Shares by the
Company pursuant to the Offer. However, backup withholding at a 31% rate
may be required (unless an exemption is proved or unless the required tax
identification information is provided). See Instruction 9 to the Letter of
Transmittal.
4. The withdrawal deadline, proration date and expiration date of the
Offer are all Friday, February 21, 1997, at 5:00 p.m., Pacific Standard
Time (unless extended).
5. Shares must be validly tendered prior to Friday, February 21, 1997,
at 5:00 p.m., Pacific Standard Time, to ensure that at least a portion of
such Shares tendered will be purchased by the Company.
YOUR INSTRUCTIONS TO US SHOULD BE FORWARDED IN AMPLE TIME TO PERMIT US TO
SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE OFFER.
If you wish to have us tender any or all of your Shares, please so instruct
us by completing, executing and returning to us the attached instruction form.
An envelope to return your instructions is enclosed. If you authorize us to
tender your Shares, all such Shares will be tendered unless otherwise specified.
The enclosed Letter of Transmittal is furnished to you for your information only
and cannot be used to tender Shares.
<PAGE> 2
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter enclosing the Offer
to Purchase dated January 10, 1997, and the related Letter of Transmittal (which
together constitute the "Offer"), relating to the Offer by Santa Barbara Bancorp
(the "Company") to purchase up to 500,000 shares of its Common Stock (the
"Shares").
This will instruct you to tender the number of Shares indicated (or, if no
number is indicated below, all Shares), which are held by you for the account of
the undersigned, pursuant to the terms and subject to the conditions set forth
in the Offer.
Aggregate number of Shares to be tendered* by us: ________________
*Unless otherwise indicated above, it will be assumed that all of your Shares
held by us are to be tendered.
ODD LOTS
[ ] By checking this box, the undersigned represents that the undersigned owned
beneficially or of record as of January 10, 1997, an aggregate of less than
100 Shares and is tendering all such Shares.
SIGN HERE
<TABLE>
<S> <C>
Signature: -----------------------------------------------------------------------
Name(s):
-----------------------------------------------------------------------
(Please Print or Type)
Address:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(City) (State) (Zip Code)
Area Code and
Telephone No.: ( _________)
Tax identification
or
Social Security
Number: -----------------------------------------------------------------------
Dated:
-----------------------------------------------------------------------
</TABLE>
<PAGE> 1
Santa Barbara Bancorp Letterhead
January 10, 1997
Dear Shareholder:
Santa Barbara Bancorp is offering to purchase up to 500,000 shares of its
common stock, and our records indicate that you are the owner of shares of this
class.
Enclosed for your consideration is an Offer to Purchase and a related
Letter of Transmittal. These enclosures contain detailed information concerning
the Offer, including its terms and conditions, the purpose of the Offer, the
procedures for tendering shares, and information relating to certain tax
consequences of selling shares pursuant to the Offer. We suggest that you read
the enclosed information carefully before deciding whether or not you wish to
tender your shares.
In reviewing the enclosed material, please bear in mind the following:
- The Offer expires at 5:00 P.M. Pacific Standard Time on Friday, February
21, 1997. The Depositary must receive the certificates representing your
shares and the accompanying Letter of Transmittal by that time.
- The sale of shares pursuant to the Offer is a taxable transaction under
present Federal income tax laws. You may wish to consult your tax advisor
regarding your own tax consequences of tendering shares, including the
application and effect of your state and local taxes.
- The Offer is not conditioned upon a minimum number of shares being
tendered.
- If more than 500,000 shares are tendered, the shares purchased by the
Company shall be prorated among tendering shareholders based upon the
total number of shares which have been tendered, unless the Company
elects to increase the number of shares accepted for tender, in
accordance with the terms of the Offer. The Company intends to purchase
all shares from holders owning fewer than 100 shares, to the extent such
shares are tendered.
Although the Company's Board of Directors has authorized the Offer, neither
the Board nor the Company makes any recommendation as to whether you should
tender all or any of your shares. You should make your own decision as to
whether to tender shares and, if so, how many shares to tender.
If after reviewing the information set forth in the Offer to Purchase and
Letter of Transmittal you wish to tender shares for purchase by the Company,
please either follow the instructions contained in the Offer to Purchase and
Letter of Transmittal or contact your broker, dealer, commercial bank, trust
company or other nominee to effect the tender for you.
If you should need additional information or assistance in connection with
this offer, please contact Clare McGivney, the Company's Assistant Corporate
Secretary, at (805) 654-6298.
Sincerely,
<TABLE>
<S> <C> <C>
Anderson Sig Spainhour Sig Thomas Sig
Donald M. Anderson David W. Spainhour William S. Thomas, Jr.
Chairman of the Board President and Chief Vice Chairman and
Santa Barbara Bancorp Executive Officer Chief Operating Officer
Santa Barbara Bancorp Santa Barbara Bancorp
</TABLE>
<PAGE> 1
NEWS RELEASE
SANTA BARBARA BANCORP
SANTA BARBARA BANCORP
1021 ANACAPA STREET
SANTA BARBARA, CA 93101
DATE: January 9, 1997
FOR IMMEDIATE RELEASE
SANTA BARBARA BANCORP ANNOUNCES TENDER OFFER
TO REPURCHASE UP TO 500,000 SHARES OF ITS COMMON STOCK
Santa Barbara, Ca . . . . Santa Barbara Bancorp (the "Company"), holding
company for Santa Barbara Bank & Trust (the "Bank"), has announced an offer to
purchase for cash up to 500,000 shares of its Common Stock at $30.00 net per
share (the "Offer"). The Offer will commence on Friday, January 10, 1997 and
will expire on Friday, February 21, 1997, at 5:00 p.m. Pacific Standard Time,
unless extended.
The stock is listed for quotation on the NASDAQ National Market System
under the symbol "SABB". The stock price closed on Wednesday, January 8, 1997,
at $28 5/8 bid. The Offer is for approximately 6.6% of the issued and
outstanding shares.
Tendering shareholders will not be obligated to pay brokerage commissions,
solicitation fees or stock transfer taxes (subject to the special provisions in
the Letter of Transmittal) on the shares purchased by the Company. The Company
will pay all charges and expenses of the transfer agent, Norwest Bank Minnesota,
N.A., who will act as the depositary in connection with the Offer.
The Company has chosen February 21, 1997, as the termination date of the
Offer in order to assure that tendering shareholders will receive the twenty
cent ($0.20) quarterly cash dividend payable February 11, 1997, to shareholders
of record January 21, 1997.
The purposes for making the Offer are as follows: first, the Company
considers the repurchase of these shares to be a good investment of its capital;
second, while the Company is enjoying a significantly more active market in its
stock since its listing for quotation on the NASDAQ National Market System in
May of 1996, this offer will provide a fair price as well as disposition in an
orderly manner of medium to larger size blocks of stock; and, third, up to
100,000 shares of the Offer may be reissued to the Bank's Employee Stock
Ownership Plan (the "ESOP"). Some of the shares reissued to the ESOP in this
manner would be allocated to the Bank's employee participants in the ESOP as
part of their retirement plan contribution as of December 31, 1997.
The Company intends to pay for tendered shares, as well as for the costs
and expenses of the Offer, from proceeds from the sale or maturity of short-term
investments or other liquid assets. The Company will not incur any debt in
connection with the Offer.
The terms of the Offer include the right of the Company to accept, without
proration, up to an additional two percent (2.0%) of the issued and outstanding
shares beyond the 500,000 shares, or, an additional 151,751 shares.
The official Offer to Purchase and Letter of Transmittal will be mailed to
existing shareholders, or to their brokers or nominees, on or about Friday,
January 10, 1997.
FOR INFORMATION CONTACT:
David W. Spainhour (805) 564-6345
William S. "Tom" Thomas, Jr. (805) 564-6216
<PAGE> 1
EXHIBIT 99.(g)(1)
Santa Barbara Bancorp and Subsidiaries
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the
Board of Directors
We have audited the accompanying consolidated balance sheets of SANTA
BARBARA BANCORP (a California corporation) and Subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial
statements are the responsibility of Santa Barbara Bancorp's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Santa
Barbara Bancorp and Subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and cash flows for each of the three
years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As explained in the Accompanying Notes to the consolidated financial
statements, the Company adopted Statement of Financial Accounting
Standards No. 109 effective January 1, 1993 and Statement of Financial
Accounting Standards No. 115 effective December 31, 1993.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Los Angeles, California
February 2, 1996
<PAGE> 2
Santa Barbara Bancorp
and Subsidiaries CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1995 1994
<S> <C> <C>
Assets:
Cash and due from banks (Note 5) $ 74,746 $ 69,630
Federal funds sold 65,000 15,000
Total cash and cash equivalents 139,746 84,630
Securities (approximate market value of $375,093
in 1995 and $382,090 in 1994) (Notes 1 and 2):
U.S. Treasury obligations 197,812 243,493
U.S. agency obligations 76,889 53,954
State and municipal securities 82,376 89,512
Equity securities 488 --
Total securities 357,565 386,959
Bankers' acceptances 139,294 80,594
Loans (Note 3) 558,801 499,431
Less: allowance for loan losses (Note 4) 12,349 12,911
Net loans 546,452 486,520
Premises and equipment, net (Note 6) 8,149 7,391
Accrued interest receivable 7,981 8,130
Other assets (Notes 1 and 8) 13,174 13,392
Total assets $1,212,361 $1,067,616
Liabilities:
Deposits (Note 7):
Noninterest bearing demand deposits $ 158,122 $ 147,085
Interest bearing deposits 895,898 809,632
Total deposits 1,054,020 956,717
Securities sold under agreements to repurchase
and Federal funds purchased (Note 10) 51,316 9,487
Other borrowings (Note 11) 1,210 1,000
Accrued interest payable and
other liabilities (Notes 8, 13, and 15) 4,818 6,452
Total liabilities 1,111,364 973,656
Commitments and contingencies (Note 16)
Shareholders' equity (Notes 9 and 13):
Common stock -- no par value, $0.67 stated value; shares
authorized: 20,000; shares issued and outstanding:
7,679 in 1995 and 7,689 in 1994 5,119 5,126
Surplus 39,191 39,683
Unrealized gain (loss) on securities
available-for-sale net of tax (Notes 1 and 2) (179) (1,496)
Retained earnings 56,866 50,647
Total shareholders' equity 100,997 93,960
Total liabilities and shareholders' equity $1,212,361 $1,067,616
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE> 3
CONSOLIDATED STATEMENTS
OF INCOME Santa Barbara Bancorp
and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 52,649 $ 46,816 $ 43,032
Interest on securities:
U.S. Treasury obligations 12,447 16,495 16,848
U.S. Agency obligations 3,680 2,085 226
State and municipal securities 6,973 7,232 6,772
Equity securities 14 -- --
Interest on Federal funds sold 3,131 772 795
Interest on bankers' acceptances 3,294 1,500 760
Total interest income 82,188 74,900 68,433
Interest expense:
Interest on deposits (Note 7) 32,035 24,008 21,566
Interest on securities sold under agreements to
repurchase and Federal funds purchased (Note 10) 1,474 878 728
Interest on other borrowings (Note 11) 74 81 68
Total interest expense 33,583 24,967 22,362
Net interest income 48,605 49,933 46,071
Provision for loan losses (Notes 1 and 4) 9,924 6,257 6,150
Net interest income after provision for loan losses 38,681 43,676 39,921
Other operating income (Note 12):
Service charges on deposit accounts 4,255 3,183 2,825
Trust fees (Note 1) 7,020 6,449 6,588
Other service charges, commissions and fees 5,959 4,077 3,793
Net loss on sales and calls of securities (Notes 1, 2 and 8) (99) (1,191) (47)
Other income 553 566 943
Total other operating income 17,688 13,084 14,102
Other operating expense:
Salaries and other compensation 18,402 16,300 15,332
Employee benefits (Note 13) 4,253 4,849 4,309
Net occupancy expense (Notes 6 and 16) 4,257 3,528 2,990
Equipment rental, depreciation and maintenance (Note 6) 2,611 2,247 1,816
Net cost of operating other real estate (Note 1) 31 (485) 1,151
Other operating expense (Note 12) 12,415 12,852 11,738
Total other operating expense 41,969 39,291 37,336
Income before provision for income taxes 14,400 17,469 16,687
Provision for income taxes (Note 8) 3,985 4,518 4,377
Net income before cumulative effect
of accounting changes 10,415 12,951 12,310
Cumulative effect of accounting changes (Notes 1 and 15) -- -- 620
Net income $ 10,415 $ 12,951 $ 12,930
Earnings per share before cumulative effect
of accounting changes $1.36 $1.69 $1.58
Cumulative effect of accounting changes -- -- 0.08
Earnings per share $1.36 $1.69 $1.66
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 4
Santa Barbara Bancorp
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY and Subsidiaries
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Securities
Surplus Available-
Common Stock Net of for-Sale Retained
Shares Amount ESOP Loan (Notes 1 & 2) Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1993 7,769 $ 5,179 $ 39,589 -- $ 32,377 $ 77,145
Exercise of employee
stock options 76 51 861 -- -- 912
Retirement of
common stock (248) (165) (3,293) -- -- (3,458)
Cash dividends declared
at $0.47 per share -- -- -- -- (3,621) (3,621)
Unrealized gain on securities
available-for-sale -- -- -- $ 683 -- 683
Reduction in
ESOP liability -- -- 1,400 -- -- 1,400
Net income -- -- -- -- 12,930 12,930
Balance,
December 31, 1993 7,597 5,065 38,557 683 41,686 85,991
Exercise of employee
stock options 150 100 2,116 -- -- 2,216
Retirement of
common stock (58) (39) (990) -- -- (1,029)
Cash dividends declared
at $0.52 per share -- -- -- -- (3,990) (3,990)
Changes in unrealized gain
on securities
available-for-sale -- -- -- (2,179) -- (2,179)
Net income -- -- -- -- 12,951 12,951
Balance,
December 31, 1994 7,689 5,126 39,683 (1,496) 50,647 93,960
Exercise of employee
stock options 87 58 1,220 -- -- 1,278
Retirement of
common stock (97) (65) (1,712) -- -- (1,777)
Cash dividends declared
at $0.55 per share -- -- -- -- (4,196) (4,196)
Changes in unrealized gain
(loss) on securities
available-for-sale -- -- -- 1,317 -- 1,317
Net income -- -- -- -- 10,415 10,415
Balance,
December 31, 1995 7,679 $ 5,119 $ 39,191 $ (179) $ 56,866 $ 100,997
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 5
CONSOLIDATED STATEMENTS OF Santa Barbara Bancorp
CASH FLOWS and Subsidiaries
<TABLE>
<CAPTION>
Increase (decrease) in cash and cash Year Ended December 31
equivalents (Note 1): 1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,415 $ 12,951 $ 12,930
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 2,041 1,614 1,143
Provision for loan losses 9,924 6,257 6,150
Provision (benefit) for deferred income taxes 795 (1,724) (122)
Net (recovery) writedown on other real estate owned (40) (821) 139
Net amortization of discounts and premiums for
securities and bankers' acceptances (1,038) (6,523) (4,165)
Net change in deferred loan origination fees and costs 102 736 139
(Increase) decrease in accrued interest receivable 149 (902) 664
Increase (decrease) in accrued interest payable 334 296 (101)
Net loss on sales and calls of securities 99 1,191 47
(Increase) decrease in service fees
and other income receivable 140 (23) (697)
Decrease in income taxes payable (181) (214) (74)
Other operating activities (1,113) 816 (524)
Net cash provided by operating activities 21,627 13,654 15,529
Cash flows from investing activities:
Proceeds from sales, calls, and maturities
of securities (Note 2) 168,731 307,256 128,818
Purchase of securities (Note 2) (136,320) (309,622) (119,904)
Proceeds from sale or maturity of bankers' acceptances 118,332 62,970 35,175
Purchase of bankers' acceptances (176,856) (79,380) (62,969)
Net increase in loans made to customers (72,520) (39,374) (7,541)
Disposition of property from defaulted loans 383 3,436 15,511
Purchase or investment in premises and equipment (2,799) (2,362) (2,699)
Net cash used in investing activities (101,049) (57,076) (13,609)
Cash flows from financing activities:
Net increase in deposits 97,303 90,464 16,878
Net increase (decrease) in borrowings
with maturities of 90 days or less 41,829 (10,668) (5,827)
Proceeds from issuance of common stock (Note 9) 454 1,187 728
Payments to retire common stock (Note 9) (953) -- (3,274)
Dividends paid (4,095) (3,877) (3,538)
Net cash provided by financing activities 134,538 77,106 4,967
Net increase in cash and cash equivalents 55,116 33,684 6,887
Cash and cash equivalents at beginning of period 84,630 50,946 44,059
Cash and cash equivalents at end of period $ 139,746 $ 84,630 $ 50,946
Supplemental disclosure:
Interest paid during the year $ 33,917 $ 24,671 $ 22,463
Income taxes paid during the year $ 3,110 $ 6,102 $ 4,355
Non-cash additions to other real estate owned (Note 1) $ 1,446 $ 265 $ 18,496
Non-cash transaction for net addition to (release from) senior
debt on OREO upon foreclosure (disposal) of properties $ 209 $ (327) (353)
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 6
1. SUMMARY OF SIGNIFICANT POLICIES
Nature of Operations
SANTA BARBARA BANCORP (the "Company") is a bank holding company
organized under the laws of California. Its principal subsidiary, Santa
Barbara Bank & Trust (the "Bank") provides a full range of commercial
banking and trust management services to individuals and business
enterprises. Its offices are located in Central and Southern Santa
Barbara County and in Western Ventura County. The banking services
include making commercial, consumer, and commercial and residential real
estate loans. Deposits are accepted for checking, interest-bearing
checking ("NOW"), money-market, savings, and time accounts. The bank
also offers safe deposit boxes; travelers checks, money orders, and
cashiers checks; and escrow services. A wide range of wealth management
services are offered through the Bank's Trust and Investment Services
division. The Company's other subsidiary, SBBT Service Corporation,
provides correspondent services to other local area financial
institutions.
Basis of Presentation
The accounting and reporting policies of the Company and its
subsidiaries are in accordance with generally accepted accounting
principles ("GAAP") and conform to practices within the banking
industry. The consolidated financial statements include the accounts of
the Company and its subsidiaries, after eliminating significant
intercompany balances and transactions.
The preparation of consolidated financial statements in accordance with
GAAP requires Management to make certain estimates and assumptions which
affect the amounts of reported assets and liabilities as well as
contingent assets and liabilities as of the date of these financial
statements. These estimates and assumptions also affect the reported
amounts of revenues and expenses during the reporting period(s).
Although Management believes these estimates and assumptions to be
reasonably accurate, actual results may differ.
Securities
Debt obligations of the U.S. Treasury, U.S. agencies, and of states and
municipalities are purchased with the intent to hold to maturity.
However, the Company occasionally sells securities prior to maturity in
order to limit losses if interest rates rise, or to restructure the
portfolio to better match the maturity and interest rate characteristics
of liabilities.
The Company implemented Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities
("SFAS 115"), as of December 31, 1993. This statement requires the
Company to classify its securities into one of three categories.
Securities for which the Company has the positive intent and ability to
hold until maturity are classified as held-to-maturity securities.
Securities which might be sold prior to maturity because of interest
rate changes, to meet liquidity needs, or to better match the repricing
characteristics of funding sources are classified as available-for-sale.
If the Company were to purchase securities principally for the purpose
of selling them in the near term for a gain, they would be classified as
trading securities. The Company holds no securities that should be
classified as trading securities.
<PAGE> 7
In accordance with the provisions of SFAS 115, the Company's securities
classified as held-to-maturity are carried at amortized historical cost.
This is the purchase price increased by the accretion of discounts or
decreased by the amortization of premiums using the effective interest
method. Discount is accreted and premium is amortized over the period to
maturity of the related securities, or to an earlier call date, if
appropriate.
The interest income from securities that are classified as available-
for-sale is recognized in the same manner as for securities that are
classified as held-to-maturity, including the accretion of discounts and
the amortization of premiums. However, unlike the securities that are
classified held-to-maturity, securities classified available-for-sale
are reported on the consolidated balance sheets for the years ended
December 31, 1995 and 1994 at their fair value. The net unrecognized
gain or loss for these securities is reported on the consolidated
balance sheets as a separate component of equity, net of the tax effect.
Loans, Fees, and Allowance for Loan Losses
Loans are carried at amounts advanced to the borrowers less principal
payments collected. Interest on loans is accrued on a simple interest
basis, except where serious doubt exists as to the collectibility of the
loan, in which case the accrual of income is discontinued and
uncollected income is subtracted from interest earned.
Loan origination and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life
of the loan as an adjustment to the interest earned. The net
unrecognized fees represent unearned revenue, and they are reported as
reductions of the loan principal outstanding, or additions to the loan
principal if the deferred costs are greater than deferred fees.
The Company implemented Statements of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan ("SFAS 114") and
No. 118, Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures ("SFAS 118") on January 1, 1995. The
pronouncements apply to certain types of loans made by the Company and
require the Company to establish a valuation allowance for any of those
loans which are impaired. A loan is to be identified as impaired when it
is probable that interest and principal will not be collected according
to the contractual terms of the loan agreement.
The 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) by the
loan's observable market price if it is of a kind for which there is a
secondary market; or (3) by valuing 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.
<PAGE> 8
The provisions of SFAS 114 permit the valuation allowance for impaired
loans to be determined on a loan-by-loan basis or by aggregating loans
with similar risk characteristics. Because the number of loans
classified as impaired is relatively small and because special factors
apply to each, the Company has determined the valuation allowance as of
December 31, 1995 on a loan-by-loan basis.
When a borrower is not making payments as contractually required by the
note, the Company must decide whether it is appropriate to continue to
accrue interest. The criteria used in making this decision are very
similar to the definition of impairment. Therefore, the Company expects
that most impaired loans will be on nonaccrual status. As with other
nonaccrual loans, any uncollected interest for impaired loans is written
off against interest income from other loans of the same type in the
current period and no further interest 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 that are classified as impaired because of doubt
regarding collectibility of interest and principal according to the
contractual terms, but which are both fully secured by collateral and
current in their interest and principal payments. These impaired loans
are not classified as nonaccrual.
The Company also provides an allowance for losses for (1) loans that are
not covered by SFAS 114 and SFAS 118; (2) loans which while covered by
the statements, are not identified as impaired; and (3) losses inherent
in loans of all types which have not been specifically identified as of
the period end. The valuation allowance determined in accordance with
SFAS 114 and the allowance for other loan losses are reported together
as Allowance for Loan Loss in the accompanying consolidated balance
sheet as of December 31, 1995 and in Note 4. The allowance for loan
losses is maintained at a level considered adequate to provide for
losses that can reasonably be anticipated. However, the allowance is
based on estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in earnings in the periods in which
they become known.
Implementing SFAS 114 and SFAS 118 has not had a material impact on the
financial statements of the Company. Under the procedures followed
before implementation, the loans that have been identified as impaired
during 1995 would have had a portion of the general allowance for loan
loss allocated to them in an amount approximately the same as that
established under the provisions of these statements.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is charged against income over the
estimated useful lives of the assets, usually by the use of accelerated
<PAGE> 9
methods in the early years, switching to the straight-line method in
later years. Leasehold improvements are amortized over the terms of the
leases or the estimated useful lives of the improvements, whichever is
shorter. Generally, the estimated useful lives of other items of
premises and equipment are as follows:
Buildings and improvements 10-25 years
Furniture and equipment 5-7 years
Income Taxes
The Company is required to use the accrual method of accounting for tax
return purposes as well as for financial reporting purposes. However,
there are several items of income and expense which are recognized in
different periods for tax return purposes than for financial reporting
purposes. Appropriate provisions have been made in the financial
statements for deferred taxes in recognition of these temporary
differences.
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109") as of the beginning of 1993.
The statement requires an asset and liability approach for financial
accounting and reporting for income taxes, a change from the prior
approach. The effect on income for the years prior to adoption had to be
recognized by either of two means. The first was by recognizing the
effect on all prior years as a cumulative effect from a change in
accounting principle in the year of adoption. The second was by
restating the financial statements for one or more prior years to
conform to the provisions of the statement, with the effect on earlier
years that were not restated being recognized as a cumulative effect in
the earliest year restated. The Company elected to implement the
statement by the first means, and consequently recognized a gain in 1993
of $620,000 as the cumulative effect of a change in accounting
principle.
Trust Fees
Trust fees for customary services are generally based on the market
value of customer assets, and an estimate of the fees is accrued
monthly. Fees for unusual or infrequent services are recognized when the
fee can be determined.
Earnings Per Share
Earnings per common share are based on the weighted average number of
shares outstanding during each year retroactively restated for stock
dividends and stock splits. Subsequent to December 31, 1995, but prior
to the publication of these statements, the Board of Directors of the
Company declared a 3-for-2 stock split. In situations such as this,
Securities and Exchange Commission rules require the restatement of the
numbers of shares and earnings per share in the annual report as if the
split had occurred before the end of the year. Consequently, restated
for the 3-for-2 stock split, the weighted average number of shares
outstanding used in computing earnings per share was 7,677,057 in 1995,
<PAGE> 10
7,646,839 in 1994, and 7,783,623 in 1993. The only potential common
stock equivalents for the Company are shares issuable on the exercise of
outstanding options. Even if all of the outstanding stock options had
been exercised, there would be no material dilutive effect for any of
the years presented and therefore they have been excluded from the
computation.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and Federal funds sold. Federal funds are sold
for only one day at a time.
Postretirement Health Benefits
The Company provides eligible retirees with postretirement health care
and dental benefit coverage. These benefits are also provided to the
spouses and dependents of retirees on a shared cost basis. Benefits for
retirees and spouses are subject to deductibles, copayment provisions,
and other limitations. The expected cost of such benefits is charged to
expense during the years that the employees render service.
Other Real Estate Owned
Other real estate owned ("OREO") represents real estate acquired through
foreclosure or deed in lieu of foreclosure. OREO is carried at the lower
of the outstanding balance of the loan before acquisition or its fair
value less estimated costs to sell. If the outstanding balance of the
loan is greater than the fair value less estimated disposal costs at the
time of the acquisition, the difference is charged-off against the
allowance for loan loss. Any senior debt to which other real estate
owned is subject is included in the carrying amount of the property and
an offsetting liability is reported along with other borrowings.
During the time the property is held, all related carrying costs are
expensed as incurred and additional decreases in the fair value are
charged to other operating expense in the period in which they become
known. Expenditures related to improvements are capitalized to the
extent that they are realizable through increases in the fair value of
the properties. Increases in the fair value may be recognized as
reductions of OREO operating expense to the extent that they represent
recoveries of amounts previously written-down. Gains in excess of the
fair value at the time of foreclosure are recognized only when the
property is sold.
OREO that has been acquired through foreclosure or deed in lieu was
$1,785,000 and $856,000 as of December 31, 1995 and 1994, respectively.
Reclassifications
Certain amounts in the 1994 and 1993 financial statements have been
reclassified to be comparable with classifications used in the 1995
financial statements.
<PAGE> 11
2. SECURITIES
A summary of debt securities at December 31, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
1995:
Held-to-maturity:
U.S. Treasury
obligations $ 97,528 $ 775 $ -- $ 98,303
U.S. agency
obligations 51,826 983 (143) 52,666
State and
municipal
securities 82,376 15,913 -- 98,289
231,730 17,671 (143) 249,258
Available-for-sale:
U.S. Treasury
obligations 100,090 316 (122) 100,284
U.S. agency
obligations 25,026 37 -- 25,063
Equity
securities 488 -- -- 488
125,604 353 (122) 125,835
$357,334 $ 18,024 $ (265) $375,093
1994:
Held-to-maturity:
U.S. Treasury
obligations $195,354 $ 69 $ (12,189) $183,234
U.S. agency
obligations 14,654 -- (999) 13,655
State and
municipal
securities 89,512 9,727 (1,477) 97,762
299,520 9,796 (14,665) 294,651
Available-for-sale:
U.S. Treasury
obligations 48,812 12 (685) 48,139
U.S. agency
obligations 41,024 -- (1,724) 39,300
89,836 12 (2,409) 87,439
$389,356 $ 9,808 $ (17,074) $382,090
</TABLE>
In November, 1995, the Financial Accounting Standards Board ("the FASB")
issued a guide to implementing SFAS 115. The guide permitted holders of
debt securities a onetime opportunity to transfer securities from their
held-to-maturity classification to available-for-sale without calling
<PAGE> 12
into question the holder's ability and intent to hold to maturity any
securities still classified as held-to-maturity. Under this "window-of-
opportunity," the Company transferred securities with an amortized cost
of $144 million, from the held-to-maturity classification to available-
for-sale. The unrealized gains and losses on these securities totaled
$683,000 and $986,000, respectively. $94 million of these reclassified
securities were sold prior to December 31, 1995.
The amortized cost and estimated fair value of debt securities at
December 31, 1995 and 1994, by contractual maturity, are shown in the
next table. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Held-to- Available-
Maturity for-Sale Total
(in thousands)
<S> <C> <C> <C>
1995:
Amortized cost:
In one year or less $ 32,414 $ 55,135 $ 87,549
After one year
through five years 151,560 69,981 221,541
After five years
through ten years 21,823 -- 21,823
After ten years 25,933 -- 25,933
Equity securities -- 488 488
$231,730 $125,604 $357,334
Estimated market value:
In one year or less $ 32,522 $ 55,172 $ 87,694
After one year
through five years 158,803 70,175 228,978
After five years
through ten years 27,978 -- 27,978
After ten years 29,955 -- 29,955
Equity securities -- 488 488
$249,258 $125,835 $375,093
1994:
Amortized cost:
In one year or less $ 17,220 $ 33,992 $ 51,212
After one year
through five years 225,648 55,844 281,492
After five years
through ten years 35,798 -- 35,798
After ten years 20,854 -- 20,854
$299,520 $ 89,836 $389,356
Estimated market value:
In one year or less $ 17,694 $ 33,816 $ 51,510
After one year
through five years 214,105 53,623 267,728
After five years
through ten years 43,063 -- 43,063
After ten years 19,789 -- 19,789
$294,651 $ 87,439 $382,090
</TABLE>
<PAGE> 13
During 1994 and 1995, the Company transferred four of its U.S. agency
securities from available-for-sale classification to held-to-maturity.
The securities, when purchased in 1993 and 1994, had one or more call
dates. The terms of the securities provided that if they were not
called, the interest rate on the securities would increase, or "step
up," consequently the bonds are termed "step bonds." At the time of
purchase, interest rates were such that Management expected that they
would be called. When interest rates increased during 1994, it would
have been more expensive for the issuer to refinance the debt at current
interest rates and none of the securities has been called. With
circumstances changed, Management decided to classify them as held-to-
maturity. The notes were transferred at their fair value. This was
$4,802,000 for the one transferred in 1994 and $29,296,000 for the ones
transferred in 1995. The unrealized loss on the first security at the
time of transfer was $187,000 and for the three later ones was $704,000.
Under the provisions of SFAS 115, the sum of these amounts (net of tax
effect) remained in the special component of equity for unrealized gains
and losses on securities available-for-sale to be amortized over the
remaining term of the securities. The tax effect is reported as a
portion of the deferred tax asset in Note 8.
As of December 31, 1995, two have reached their final steps at 4.50% and
6.61%. The first has one remaining call date. The other two notes,
currently earning 5.15% and 5.00%, each have two more call dates in
1996, with step-ups of 1.00% at each call date if they are not called.
Only the interest rate on these notes is contingent, all principal is
paid at maturity unless at a sooner call date. There is no circumstance
under which the interest rates paid on these notes will decline. At
current interest rate levels, the step-up rates are close to what would
appear to make it advantageous for the issuers to call the notes at the
next available call. However, such other considerations as costs of
refinancings and other circumstances unknown to the Company, may lead
the issuers to leave the notes outstanding.
The proceeds received from sales or calls of debt securities and the
gross gains and losses that were recognized for the years ended December
31, 1995 and 1994 are shown in the next table. Because the
identification of the securities as held-to-maturity or available-for-
sale under the provisions of SFAS 115 did not take place until December
31, 1993, it is not possible to distinguish to which portfolio the
proceeds, gains, and losses from sales or calls that occurred during the
year of 1993 relate. Consequently, the amounts for 1993 relate to the
whole portfolio. Similarly, in the Consolidated Statements of Cash Flow,
the proceeds from sales, maturities, and calls, and the purchases of
securities, are reported only for the entire securities portfolio.
<PAGE> 14
<TABLE>
<CAPTION>
Gross Gross
Proceeds Gains Losses
(in thousands)
<S> <C> <C> <C>
1995
Held-to-maturity:
Calls $ 13,071 -- --
Available-for-sale:
Sales $ 93,342 $ 683 $ 760
Calls $ 21,020 -- $ 22
1994
Held-to-maturity:
Calls $ 3,295 -- --
Available-for-sale:
Sales $138,799 $ 5 $ 1,196
1993
Total portfolio
Sales $ 9,975 $ 1 $ 48
Calls $ 8,283 -- --
</TABLE>
The Company was required in 1995 to purchase stock in the FRB as a
condition of becoming a member. The shares purchased are reported as
equity securities.
Securities with a book value of approximately $286,547,000 at December
31, 1995 and $161,050,000 at December 31, 1994 were pledged to secure
public funds, trust deposits and other borrowings as required or
permitted by law.
3. LOANS
The loan portfolio consists of the following:
<TABLE>
<CAPTION>
December 31
1995 1994
(in thousands)
<S> <C> <C>
Real estate loans:
Residential $142,143 $108,923
Non-residential 179,272 145,928
Construction 20,846 26,695
Commercial, industrial,
and agricultural 144,011 148,396
Home equity lines 34,597 32,573
Consumer 28,494 27,319
Municipal tax-exempt
obligations 7,573 7,831
Other 1,865 1,766
$558,801 $499,431
</TABLE>
The amounts above are shown net of deferred loan origination,
commitment, and extension fees of $2,139,000 for 1995 and of $2,038,000
for 1994.
<PAGE> 15
Refund Anticipation Loans
The Company makes tax refund anticipation loans. Taxpayers desiring to
receive their income tax refunds early borrow from the Company and the
Internal Revenue Service later sends the refund to the Company. The
funds advanced are generally paid within several weeks. Therefore, the
costs to process the loans are greater in comparison to the cost of
funds than they are for other types of loans. Consequently, the Company
has a set fee for this service which does not vary by the amount of
funds advanced or the length of time that the loan is outstanding.
Nonetheless, the fees are reported in the statements of income as
interest income, and totaled $3,253,000 for 1995, $4,791,000 for 1994,
and $1,048,000 for 1993. The loans are all made during the tax filing
season of January through April of each year. Any loans for which
repayment has not been received after 90 days from the expected payment
date are charged off. Consequently, there were no refund anticipation
loans included in the above table of outstanding loans at December 31,
1995 or 1994.
Impaired Loans
The following table discloses information about the loans classified as
impaired under the provisions of SFAS 114 and SFAS 118 and the valuation
allowance related to them as of and for the year ended December 31, 1995
(in thousands):
<TABLE>
<S> <C>
Loans identified as impaired $ 13,295
Impaired loans for which a valuation
allowance has been determined $ 13,295
Impaired loans for which no valuation
allowance has been determined $ --
Amount of valuation allowance $ 4,766
Average amount of recorded investment
in impaired loans for the year $ 22,149
Interest recognized during the period
for loans identified as impaired
at December 31, 1995 $ 246
Interest received in cash during the
period for loans identified as
impaired at December 31, 1995 $ 221
</TABLE>
The valuation allowance disclosed above is included in the allowance for
loan loss reported in the following note.
4. ALLOWANCE FOR LOAN LOSSES
The following summarizes the changes in the allowance for loan losses:
<PAGE> 16
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $12,911 $10,067 $ 9,353
Tax refund anticipation loans:
Provision for losses 2,863 2,890 118
Recoveries on
loans previously
charged-off 383 672 62
Loans charged-off (4,402) (3,030) (650)
All other loans:
Provision for losses 7,061 3,367 6,032
Recoveries on
loans previously
charged-off 733 458 370
Loans charged-off (7,200) (1,513) (5,218)
Balance, end of year $12,349 $12,911 $10,067
</TABLE>
The ratio of losses to total loans made from the tax refund anticipation
loans are higher than arise from other loans. For these loans, the
provision for loan loss, the loans charged-off, and the loans recovered
are reported separately from the corresponding amounts for all other
loans.
5. CASH AND DUE FROM BANKS
Included within cash and due from banks are the reserves that all
depository institutions are required by law to maintain on transaction
deposits. The average cash reserve balances required by the Federal
Reserve Bank to be maintained by the Bank were approximately $19.4
million in 1995 and $18.5 million in 1994.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
1995 1994
(in thousands)
<S> <C> <C>
Land $ 1,282 $ 1,282
Buildings and improvements 4,412 4,294
Leasehold improvements 6,340 5,369
Furniture and equipment 12,843 11,167
Total cost 24,877 22,112
Accumulated depreciation
and amortization (16,728) (14,721)
Net book value $ 8,149 $ 7,391
</TABLE>
Depreciation and amortization on fixed assets included in other
operating expenses totaled $2,041,000 in 1995, $1,614,000 in 1994, and
$1,143,000 in 1993.
<PAGE> 17
7. Deposits
Deposits consisted of the following:
<TABLE>
<CAPTION>
December 31
1995 1994
(in thousands)
<S> <C> <C>
Noninterest-
bearing deposits $ 158,122 $147,085
Interest bearing deposits:
NOW accounts 148,027 142,639
Money market 427,198 355,581
deposit accounts
Other savings deposits 94,124 113,074
Time certificates of
$100,000 or more 76,438 63,556
Other time deposits 150,111 134,782
Total deposits $1,054,020 $956,717
</TABLE>
Interest expense by deposit type consisted of:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
Interest on deposits:
NOW accounts $ 1,476 $ 1,294 $ 1,436
Money market 16,736 10,387 6,245
deposit accounts
Other savings deposits 2,347 3,033 3,812
Time certificates of
$100,000 or more 2,974 2,366 2,910
Other time deposits 8,502 6,928 7,163
Total $32,035 $24,008 $21,566
</TABLE>
8. INCOME TAXES
The provisions (benefits) for income taxes related to operations, the
tax benefit related to stock options that is credited directly to
shareholders' equity, and the change in the method of accounting for
taxes described in Note 1 are as follows:
The current provision for income taxes includes credits of $41,000,
$495,000, and $19,000 related to net securities losses for 1995, 1994,
and 1993, respectively.
Although not affecting the total provision, actual income tax payments
may differ from the amounts shown as current as a result of the final
determination as to the timing of certain deductions and credits.
<PAGE> 18
The total tax provision differs from the Federal statutory rate of 34
percent for the reasons shown in the table at the top of the next
column.
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
Tax provision at Federal
statutory rate 34.0% 34.0% 34.0%
Interest on securities exempt
from Federal taxation (16.4)% (14.4)% (14.5)%
State income taxes, net of
Federal income tax benefit 7.8% 7.1% 6.7%
ESOP dividends deductible as
an expense for tax purposes (1.0)% (0.8)% (0.8)%
Other, net 3.0% 0.0% 0.9%
Actual tax provision 27.7% 25.9% 26.3%
</TABLE>
Because certain items of income and expense are not recognized in the
same year in the financial statements of the Company as in its Federal
and California tax returns, deferred assets and liabilities are created.
As of December 31, 1995 and 1994, included within other assets on the
balance sheet are net deferred tax assets of $6,334,000 and $8,066,000,
respectively. The net deferred tax assets as of December 31, 1995 and
1994 and the change in the tax effect of the principal temporary
differences for the year ending that date are disclosed in the table at
the bottom of this page.
The tax effect of the unrealized loss on securities available for sale
is recorded directly to equity. Therefore, it is a component of the
deferred tax asset or liability, the change in which does not impact the
tax provision. Hence there is no entry in the columns labled "Tax
Effect" in the table below for the change.
<PAGE> 19
<TABLE>
<CAPTION>
Tax Tax
Components Effect Components Effect Components
1995 1995 1994 1994 1993
(in thousands)
<S> <C> <C> <C> <C> <C>
Deferred tax assets:
Allowance for loan loss $ 4,626 $ (740) $ 5,366 $ 1,375 $ 3,991
State taxes 450 (317) 767 114 653
Loan fees 444 (578) 1,022 403 619
Depreciation 956 265 691 386 305
Post retirement benefits 587 86 501 (84) 585
Other real estate owned -- -- -- (143) 143
Nonaccrual interest 220 191 29 15 14
Other 231 190 41 37 4
7,514 (903) 8,417 2,103 6,314
Valuation allowance -- -- -- -- --
Total deferred tax
assets 7,514 (903) 8,417 2,103 6,314
Deferred tax liabilities:
Loan costs 505 105 400 88 312
Accretion on securities 499 (64) 563 140 423
Federal effect of state
tax asset 281 (171) 452 152 300
Other 22 22 -- (1) 1
Total deferred
tax liabilities 1,307 (108) 1,415 379 1,036
Net deferred tax asset
before unrealized gains
and losses on
securities 6,207 (795) 7,002 1,724 5,278
Unrealized gain on
securities -- -- (481)
Unrealized loss on
securities 127 1,064 --
Net deferred tax asset $ 6,334 $ (795) $ 8,066 $ 1,724 $ 4,797
</TABLE>
Management believes a valuation allowance is not needed to reduce any
deferred tax asset because there is sufficient taxable income within the
carryback periods or expected to be generated from operations to realize
all material amounts.
9. SHAREHOLDERS' EQUITY
The Company has three stock option plans. These plans offer key
employees and directors an opportunity to purchase shares of the
Company's common stock. The first is the Directors Stock Option Plan,
established in 1986 for directors of the Company. Only non-qualified
options may be granted under this plan. The second is the Restricted
Stock Option Plan for employees established in January, 1992. Either
incentive or non-qualified options may be granted under this plan. Stock
acquired by the exercise of options granted under this plan may not be
sold for five years after the date of the grant or two years after the
date options are exercised, whichever is later. The third plan is the
Stock Option Plan for employees established in 1983. All options
approved under this plan have been granted and the plan is active now
only for the exercise of options held by employees.
The following information is presented concerning the stock option plans
as of December 31, 1995, 1994, and 1993 (adjusted for stock splits and
stock dividends):
<PAGE> 20
<TABLE>
<CAPTION>
Per Share
Options Price Ranges
<S> <C> <C>
1995
Granted 92,394 $16.33 to $19.83
Exercised 87,051 $9.52 to $17.00
Cancelled and expired 18,091 $10.33 to $16.67
Outstanding
at end of year 666,516 $9.21 to $19.83
Range of
expiration dates 7/02/96 to 5/20/2002
Exercisable
at end of year 411,883 $9.21 to $19.00
Shares available
for future grant 243,458
1994
Granted 84,702 $14.00 to $19.00
Exercised 149,839 $9.52 to $14.00
Cancelled and expired 67,095 $4.88 to $17.08
Outstanding
at end of year 679,263 $9.21 to $19.00
Exercisable
at end of year 358,677 $9.21 to $17.00
1993
Granted 243,903 $12.67 to $14.33
Exercised 76,310 $9.21 to $12.96
Cancelled and expired 9,808 $10.16 to $13.30
Outstanding
at end of year 811,496 $4.88 to $14.33
Exercisable
at end of year 403,033 $4.88 to $14.04
</TABLE>
All options outstanding were granted with an option price set at 100% of
the market value of the Company's common stock on the date of the grant.
The grants for most of the employee options specify that they are
exercisable in cumulative 20% annual installments and will expire 5
years from the date of grant. The Board has granted some options which
are exercisable in cumulative 10% annual installments and expire 10
years from the date of grant. The options granted under the directors'
plan are exercisable in 6 months.
The option plans permit employees and directors to pay the exercise
price of options they are exercising with shares of stock they already
own. The owned shares are surrendered to the Company at current market
value. Shares with a current market value of $824,000, $1,011,000, and
$184,000 were surrendered in the years ended December 31, 1995, 1994,
and 1993, respectively. These surrendered shares are included with other
retire shares in the Consolidated Statements of Changes in Shareholders'
Equity.
In October 1995, the FASB issued Statement of Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS 123"). Under the
accounting method that has been in effect prior to the effective date of
this statement, if options are granted at an exercise price equal to the
market value of the stock at the time of the grant, no compensation
expense is recognized. SFAS 123 establishes a second accounting method
for employee stock options under which issuers would record compensation
expense for the "fair value" of the options at the time of the grant.
This compensation expense is based on option models that attribute value
<PAGE> 21
to the options based on the length of their term, the volatility of the
stock price in past periods, and other factors. Under this method, the
Company would recognize compensation expense regardless of whether the
officer or director exercised the options. In SFAS 123, the FASB has
indicated its preference for the new method in SFAS, however, the
statement permits entities to retain the prior method. The Company
believes that the prior method better reflects the motivation for its
issuance of stock options--that they are incentives for future
performance rather than compensation for past performance. In adopting
SFAS 123 on January 1, 1996, the Company has chosen to continue to
account for its stock option plans in accordance with the prior method.
SFAS 123 requires entities that elect to retain the prior method to
present pro forma disclosures of net income and earnings per share as if
the new method had been applied. The Company will include these
disclosures with its financial statements for the year ending December
31, 1996.
In October 1993, the Company offered to purchase about 4.8% of the then
outstanding shares of common stock from its shareholders. Provision was
made in the offer to purchase additional tendered shares at the
Company's option. At the close of the offer on November 15, 1993, about
3.0% of the outstanding shares were purchased by the Company. The
purchase of $3.3 million was financed from operating funds paid by the
Bank to the Company as a dividend. These shares were outstanding for
most of 1993. This resulted in a higher balance of weighted average
shares outstanding for 1993 used in the computation of earnings per
share than in 1994 and 1995.
In March 1990, the Company's Employee Stock Ownership Plan ("ESOP")
purchased 289,406 shares (adjusted for stock dividends) from the
Company. The purchase of the shares by the ESOP was financed partially
by a loan from another commercial bank. This loan was guaranteed by the
Company. Generally accepted accounting principles require that the
outstanding amount of such a loan be shown on the Company's balance
sheet both among liabilities and as an offset to shareholders' equity.
Interest and principal payments were made by the ESOP from dividends
received on Company stock held for employees and from funds received
from the Company as part of its regular contribution to employee
retirement plans. The balance of the note at December 31, 1992 was
$1,400,000. This remaining balance was paid in January 1993, and this
transaction is reported in the Consolidated Statements of Changes in
Shareholders' Equity for the year ended December 31, 1993.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS
PURCHASED
The Company sells certain of its securities under agreements to
repurchase at a later date at a set price. The following information is
presented concerning these transactions:
<PAGE> 22
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C>
Weighted average interest
rate at year-end 4.53% 4.57% 2.68%
Weighted average interest
rate for the year 5.01% 3.26% 2.90%
Average outstanding
for the year $10,153 $ 9,355 $12,220
Maximum outstanding
at any month-end
during the year $21,900 $12,525 $16,274
Amount outstanding
at end of year $21,900 $ 3,461 $ 7,641
</TABLE>
The Bank purchased Federal funds from correspondent banks as detailed in
the next table:
<TABLE>
<CAPTION>
(dollars in thousands) Year ended December 31
1995 1994 1993
<S> <C> <C> <C>
Weighted average interest
rate at year-end 5.75 % 5.75 % 2.91 %
Weighted average interest
rate for the year 5.79 % 4.01 % 2.93 %
Average outstanding
for the year $16,649 $14,276 $12,732
Maximum outstanding
at any month-end
during the year $29,416 $21,206 $27,151
Amount outstanding
at end of year $29,416 $ 6,026 $12,514
</TABLE>
11. OTHER BORROWINGS
Included in other borrowings are Treasury Tax and Loan demand notes
issued to the U.S. Treasury and miscellaneous other borrowings such as
the senior debt on other real estate owned as explained in Note 1. There
was $210,000 in such senior debt at December 31, 1995, but none at
December 31, 1994.
During the course of 1995 and 1994, the Company borrowed funds for
liquidity purposes from the discount window at the Federal Reserve Bank,
but there were no such borrowings at December 31 of either year.
12. OTHER OPERATING INCOME AND EXPENSE
The largest items included in other service charges, commissions, and
fees, are listed in the table below. The gains on loan sales arise
primarily from the recognition of origination fees that have not been
amortized by the time of sale. The refund transfer fees are earned for
the electronic transmission of tax refunds to customers or to their tax
<PAGE> 23
preparer to facilitate earlier receipt of the refund. The credit card
rebate is a fee paid by the purchaser of the Company's credit card
portfolio for the continuing use of the cards by the Company's
customers.
Of the amounts included in other operating expense, the largest items in
1995 were credit card clearing fees and consultant expense. Consultants
include the Company's independent accountants, attorneys, and other
management consultants used for special projects. In 1993 and 1994, FDIC
deposit insurance premiums were the largest item. During 1995, however,
the FDIC Bank Insurance Fund reached the statutory maximum and the FDIC
reduced the premium expense for the second half of the year to a very
low rate and refunded the excess paid in the first half of the year.
The amounts for these income and expense categories included in the
statements of income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
Income items:
Draft processing $ 2,146 $ 2,011 $ 2,104
Gains on loan sales 53 126 548
Escrow fees 228 331 311
Refund transfer fees 1,629 24 8
Loan broker fees 300 -- --
Safe deposit fees 249 235 204
Credit card rebate 216 326 93
Expense items:
FDIC assessments $ 45 $ 1,982 $ 1,891
Credit card clearing fees 1,159 1,575 1,757
Consultant expense 803 702 730
</TABLE>
13. EMPLOYEE BENEFIT PLANS
The Company has two defined-contribution profit sharing plans. The first
is the Incentive and Investment and Salary Savings Plan. This plan has
two components. The first component, the Incentive and Investment Plan,
was established in 1966, and provides for contributions by the Company
in accordance with a formula. The formula defines the contribution as
10% of pre-tax profits prior to this employer contribution, reduced by
the matching contributions paid to the Salary Savings component of the
Plan and the contributions made to the ESOP. In 1993, the Company
contributed an extra amount to the ESOP for the purpose of paying off
the loan it incurred for the purchase of stock. Consequently, no
contribution was made to the Incentive and Investment portion of the
plan. In 1994 and 1995, all profit-sharing contributions in excess of
the 401(k) employer match were directed to the Incentive and Investment
Plan.
<PAGE> 24
The other component, the Salary Savings Plan, is authorized under
Section 401(k) of the Internal Revenue Code. An employee may defer up to
10% of pre-tax salary in the plan up to a maximum dollar amount set each
year by the Internal Revenue Service. Effective January 1, 1994, the
Company matches 100% of the first 3% of the employee's deferral and 50%
of the next 3%, but not more than 4.5% of the employee's total
compensation. Through 1993, the Company had matched 50% of the
employee's deferral up to 6% of the employee's compensation. This led to
a maximum match of 3%. In 1995, 1994, and 1993 the employer's matching
contributions were $597,000, $554,000, and $287,000, respectively.
The second plan is the ESOP, which was initiated in January 1985. As of
December 31, 1995, the ESOP held 782,265 shares at an average cost of
$9.09 per share.
In 1993, the Company made contributions to the ESOP of $1,404,000.
$1,400,000 of the contribution was used to pay off the remaining balance
of the note and $4,000 was used for the payment of interest.
Total contributions to the profit sharing plans were $1,294,000 in 1995,
$1,884,000 in 1994, and $1,691,000 in 1993.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments ("SFAS 107") requires companies to
disclose the fair value of those financial instruments for which it is
practicable to estimate that value and the methods and significant
assumptions used to estimate those fair values. This must be done
irrespective of whether or not the instruments are recognized on the
balance sheets of the Company. In the case of financial instruments for
which it is not practicable to estimate the fair value, the Company is
required to disclose information pertinent to estimating the fair value
such as interest rates and maturity, and also state the reasons why it
is not practicable to estimate fair value.
In SFAS 107, the FASB states that the "[f]air values of financial
instruments depict the market's assessment of the present value of net
future cash flows directly or indirectly embodied in them, discounted to
reflect both current interest rates and the market's assessment of the
risk that the cash flows will not occur." The information about fair
value is said to better enable "investors, creditors, and other users to
assess the consequences of an entity's investment and financing
strategies, that is, to assess its performance."
Nonetheless, there are several factors which users of these financial
statements should keep in mind regarding the fair values disclosed in
this note. First, the statement acknowledges that there are
uncertainties inherent in the process of estimating the fair value of
financial instruments. Secondly, the statement covers only financial
instruments, not other assets like premises, the fair value of which
might differ significantly from the amounts at which they are carried in
an entity's financial statements. Thirdly, the Company must exclude from
its estimate of the fair value of deposit liabilities any consideration
of its on-going customer relationships which provide stable sources of
<PAGE> 25
investable funds. Lastly, the statement does not address means of
evaluating an entity's performance in areas other than the management of
financial instruments, for example the ability to generate noninterest
income and the control of noninterest expense. For these reasons, users
are advised not to regard the disclosure of the fair market value of
financial instruments as in any way equivalent to a valuation of the
Company as a whole.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
Cash
The face value of cash is its fair value.
Securities and bankers' acceptances
For securities and bankers' acceptances, fair value equals quoted market
price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Because of the implementation of SFAS 115 as explained in Note 1, a
portion of the securities portfolio is carried at fair value.
Loans
The fair value of loans is estimated by discounting the future
contractual cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. These contractual cash flows are adjusted to
reflect estimates of uncollectible amounts.
Deposit liabilities
The fair value of demand deposits, money market accounts, and savings
accounts is the amount payable on demand as of December 31 of each year.
The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
Repurchase agreements, Federal funds purchased, and other borrowings
For these short-term instruments, the carrying amount is a reasonable
estimate of their fair value.
Commitments to extend credit, standby letters of credit, and financial
guarantees written
The fair value of guarantees and letters of credit is based on fees
currently charged for similar agreements. The Company seldom charges
fees for loan commitments. The Company does not believe that these
commitments have a fair value within the context of SFAS 107 because
generally fees are not being charged, the use of the commitment is at
the option of the potential borrower, and the commitments are being
<PAGE> 26
written at rates comparable to current market rates.
The Company has no financial instruments covered by the statement for
which it is not practicable to estimate a fair value.
The carrying amount and estimated fair values of the Company's financial
instruments as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Carrying
Amount Fair Value
(in thousands)
<S> <C> <C>
As of December 31, 1995:
Financial assets:
Cash and due from banks $ 74,746 $ 74,746
Federal funds sold 65,000 65,000
Securities available-for-sale 125,835 125,835
Securities held-to-maturity 231,730 249,258
Bankers' acceptances 139,294 139,302
Loans 546,452 549,640
Financial liabilities:
Deposits 1,054,020 1,057,495
Repurchase agreements,
Federal funds purchased,
and other borrowings 52,526 52,526
Unrecognized financial
instruments:
Commitments to
extend credit -- --
Standby letters of credit -- 167
As of December 31, 1994:
Financial assets:
Cash and due from banks $ 69,630 $ 69,630
Federal funds sold 15,000 15,000
Securities available-for-sale 87,439 87,439
Securities held-to-maturity 299,520 294,651
Bankers' acceptances 80,594 80,510
Loans 486,520 483,632
Financial liabilities:
Deposits 956,717 957,478
Repurchase agreements,
Federal funds purchased,
and other borrowings 10,487 10,487
Unrecognized financial
instruments:
Commitments to
extend credit -- --
Standby letters of credit -- 166
</TABLE>
<PAGE> 27
15. Other Postretirement Benefits
With the adoption of Statement of Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions
("SFAS 106") as of the beginning of 1992, the Company recognizes the net
present value of the estimated future cost of providing health insurance
benefits to retirees as those benefits are earned rather than when paid.
To formalize the terms for the provision of these benefits, the Company
established the Retiree Health Plan.
Under the provisions of the Retiree Health Plan, all eligible retirees
may purchase health insurance coverage through the Company. The cost of
this coverage is that amount which the Company pays under the basic
coverage plan provided for current employees. Based on a formula
involving date of retirement, age at retirement, and years of service
prior to retirement, the Plan provides that the Company will contribute
a portion of the cost for the retiree, varying from 60% to 100% at the
time the employee retires, with the stipulation that the cost of the
portion paid by the Company shall not increase by more than 5% per year.
The statement defines the Company's accumulated postretirement benefit
obligation ("APBO"). This obligation is the actuarial net present value
of the obligation for fully eligible plan participants' expected
postretirement benefits plus the portion of the expected postretirement
benefit obligation for other active plan participants attributed to
service as an employee.
This obligation must be remeasured each year because it changes with
each of the following factors: 1) the number of employees working for
the Company; 2) the average age of the employees working for the
Company; 3) increases in expected health care costs; 4) the amount of
earnings anticipated on plan assets; and 5) prevailing interest rates.
In addition, because the obligation is measured on a net present value
basis, the passage of each year brings the eventual payment of benefits
closer, and therefore causes the obligation to increase. The following
table shows the amount of the APBO, the fair value of the plan assets
held by the Retiree Health Plan, and the accrued postretirement benefit
cost as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
December 31
1995 1994
(in thousands)
<S> <C> <C>
Retirees eligible for benefits $ (805) $ (512)
Dependents eligible for benefits (420) (274)
Active employees fully eligible (645) (368)
Active employees not fully
eligible (1,409) (1,009)
Accumulated postretirement
benefit obligation (3,279) (2,163)
Fair value of plan assets 2,560 2,162
Accumulated postretirement
benefit obligation in excess of
plan assets (719) (1)
Unrecognized prior service cost 6 8
Unrecognized net (gain) loss 278 (230)
Accrued postretirement benefit cost $ (435) $ (223)
</TABLE>
<PAGE> 28
The accrued postretirement benefit costs of $435,000 and $223,000 are
included within accrued interest payable and other liabilities in the
consolidated balance sheets for December 31, 1995 and 1994,
respectively.
Each year the Company is required to recognize a portion of the change
in the APBO. This portion is called the net periodic postretirement
benefit cost (the "NPPBC"). The NPPBC, included with the cost of other
benefits in the Consolidated Statements of Income is made up of several
components as shown in the next table.
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
Service cost $ 148 $ 252 $ 165
Interest cost 185 231 185
Return on assets (120) (149) (127)
Amortization cost -- 56 --
Net periodic post-
retirement cost $ 213 $ 390 $ 223
</TABLE>
The first component is service cost, which is the net present value of
the portion of the expected postretirement benefit obligation for active
plan participants attributed to service for that year. The second is
interest cost, which is the increase in the accumulated postretirement
benefit obligation that results from the passage of another year. That
is, because the benefit obligation for each employee is one more year
closer to being paid, the net present value increases. The third
component, return on assets, is the income earned on any investments
that have been set aside to fund the benefits. This return is an offset
to the other components.
The fourth component, amortization cost, arises because significant
estimates and assumptions about interest rates, trends in health care
costs, employee turnover, and earnings on assets are used in measuring
the APBO each year. Actual experience may differ from the estimates and
assumptions may change. Both of these cause increases or decreases in
the APBO or the value of plan assets. In the last several years, changes
in the discount rate used in measuring the APBO at one year-end and the
NPPBC for the next year have had significant impact. The following table
discloses the discount rates that have and will be used:
<PAGE> 29
For Determining
For Measuring the NPPBC for
Discount the APBO at the Year Ended
Rate Used December 31 December 31
8.90% 1992 1993
7.12% 1993 1994
8.73% 1994 1995
7.06% 1995 1996
The discount rate is selected each year by reference to the current
rates of investment grade corporate bonds. Higher discount rates lower
the APBO at the end of the year and the NPPBC to be recognized for the
following year, while lower rates raise both.
Rather than the whole amount of the change in the APBO being recognized
in the year after it arises, the statement provides for gains or losses
arising from these changes in experience and/or assumptions to be
recognized through amortization over the average remaining service lives
of the employees. Amortization over time is used because many of these
changes may be partially or fully reversed in subsequent years as
further changes in experience and/or assumptions occur.
At the time of implementing the statement, the Company fully recognized
the net present value of the benefits earned by employees for prior
service. Had the Company not recognized this amount, a portion of it
would be included in the NPPBC as a fifth component.
Among the significant estimates or assumptions used in determining the
APBO are the rate of earnings on assets which will be available to
offset the other components and the annual increase in medical insurance
premiums. While the discount rate used in the present value computation
of the APBO has fluctuated with market rates, the Company has continued
to use 7.0% as its estimate of the long-term rate of return on plan
assets. As noted above, the Retiree Health Plan provides for the
Company's contribution for insurance premiums to be limited to an annual
increase of 5%. Should insurance premiums increase at a higher rate, the
retirees will need to contribute a larger portion of the total premium
cost. Therefore, 5% has been set as the assumed cost trend rate for
health care. Because of this limitation, an increase in the actual cost
of health care will have no impact on the APBO.
Under the provisions of SFAS 106, employers are allowed wide discretion
as to whether and how they set aside funds to meet the obligation they
are recognizing. Under the provisions of the current Internal Revenue
Code, only a portion of this funding may be deducted by the employer.
The funded status of the plan is shown in the previous table as the
excess of the APBO over plan assets.
The Company established a Voluntary Employees' Beneficiary Association
("VEBA") to hold the assets that will be used to pay the benefits for
participants of the plan other than key executive officers. Most of the
plan assets have been invested in insurance policies on the lives of
various employees of the Company.
The current funding policy of the Company is to contribute assets to the
VEBA sufficient to pay the costs of current medical premiums of retirees
and the costs of the life insurance premiums. Proceeds from the life
policies payoffs will fund benefits and premiums in the future.
<PAGE> 30
As of December 31, 1995, the VEBA was underfunded by $420,000. The APBO
related to the key employees of $299,000 is totally unfunded.
16. COMMITMENTS AND CONTINGENCIES
The Company leases several office locations and substantially all of the
office leases contain multiple five-year renewal options and provisions
for increased rentals, principally for property taxes and maintenance.
As of December 31, 1995, the minimum rentals under non-cancelable leases
for the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
Year ended Non-cancelable
December 31 lease expense
(in thousands)
<S> <C>
1996 $ 2,318
1997 2,247
1998 2,244
1999 1,839
2000 1,445
Thereafter 5,040
$15,133
</TABLE>
Total net rentals for premises included in other operating expenses are
$2,127,000 in 1995, $1,801,000 in 1994, and $1,552,000 in 1993.
The Company is currently leasing space from a partnership in which a
director has an interest. The original terms of the lease were
negotiated with the assistance of two independent, outside appraisers,
and the lease was approved by the Board of Directors of the Company. The
Company exercised its option to renew the lease in 1989. In 1994, the
Company renegotiated the lease to receive other rights such as
additional lease option periods and a right of first refusal to purchase
the building if it is offered for sale. The nominal monthly rent
increased to obtain these benefits, but the actual outlay was reduced in
order for the Company to be reimbursed for advancing the partnership's
share of seismic improvements made to the leased property in 1994. The
above schedule of lease commitments includes the terms of the current
agreement. Management believes the terms of the revised lease are
comparable with terms which would be available with unaffiliated third
parties and the terms were also approved by the Company's Board of
Directors.
In the normal course of business to meet the financing needs of its
customers, the Company is a party to financial instruments with "off-
balance sheet" risk. These financial instruments consist of commitments
to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. The Company almost never charges fees in connection with loan
<PAGE> 31
commitments. Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a
third party. The Company charges a fee for these letters of credit.
The standby letters of credit involve, to varying degrees, exposure to
credit risk in excess of the amounts recognized in the statement of
financial position. This risk arises from the possibility of the failure
of the customer to perform according to the terms of a contract that
would cause a draw on a standby letter of credit by a third party. To
minimize the risk, the Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The decision as to whether collateral should be required is
based on the circumstances of each specific commitment or conditional
obligation. Because of these practices, Management does not anticipate
any significant losses will arise from such draws.
Changes in market rates of interest for those few commitments and
undisbursed loans which have fixed rates of interest represent a
possible cause of loss by the contractual requirement to lend money at a
rate that is no longer as great as the market rate at the time the loan
is funded. To minimize this risk, if rates are quoted in a commitment,
they are generally stated in relation to the Company's base lending rate
which varies with prevailing market interest rates. Fixed-rate loan
commitments are not usually made for more than 3 months.
The maximum exposure to credit risk is represented by the contractual
notional amount of those instruments. As of December 31, 1995 and 1994,
the contractual notional amount of these instruments are as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
(in thousands)
<S> <C> <C>
Standby letters of credit $ 12,623 $ 9,093
Loan commitments 46,996 25,941
Undisbursed loans 12,793 13,795
Unused consumer credit lines 53,759 45,866
Unused credit lines 73,779 69,384
$199,950 $164,079
</TABLE>
Since many of the commitments are expected to expire without being drawn
upon, the amounts above do not necessarily represent future cash
requirements.
The Company has concentrated its lending activity almost exclusively
with customers within Santa Barbara and Ventura Counties. The business
customers are in widely diversified industries, and there is a large
consumer component to the portfolio. The largest concentration of loans
is to real estate developers, but the nature of the properties is quite
varied: 1-4 family residential, multifamily residential, and commercial
buildings of various kinds. Continued increases in interest rates may
cause delay in the sale or lease of some of these properties, and the
<PAGE> 32
Company has considered this in evaluating the adequacy of the allowance
for loan loss.
The Company has a trust department that has fiduciary responsibility for
the assets that it holds on behalf of its trust customers. These assets
are not owned by the Company and accordingly are not reflected in the
accompanying consolidated balance sheets.
The Company is involved in various litigation of a routine nature which
is being handled and defended in the ordinary course of the Company's
business. In the opinion of management, the resolution of this
litigation will not have a material impact on the Company's financial
position.
17. SANTA BARBARA BANCORP
Santa Barbara Bancorp is the parent company and sole owner of the Bank.
However, there are legal limitations on the amount of dividends which
may be paid by the Bank to the Company. At December 31, 1995, the Bank
could have declared dividends of approximately $28.9 million to the
Company. Federal law also restricts the Bank from extending credit to
the Company by making any such extensions of credit subject to strict
collateral requirements. The condensed financial statements of the
parent company only are presented on this and the following page.
SANTA BARBARA BANCORP
(Parent Company Only)
INCOME STATEMENTS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
<S> <C> <C> <C>
Equity in earnings of subsidiaries:
Undistributed $ 5,680 $10,356 $ 7,102
Dividends 4,686 2,500 5,780
Interest income 6 7 7
Miscellaneous expenses (131) (153) (215)
Income tax benefit 174 241 256
Net income $10,415 $12,951 $12,930
</TABLE>
<PAGE> 33
SANTA BARBARA BANCORP
(Parent Company Only)
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31
1995 1994
<S> <C> <C>
Cash $ 346 $ 204
Investment in and advances to subsidiaries 101,723 94,726
Notes receivable 54 55
Other assets 5 1
Total assets $102,128 $ 94,986
Dividends payable $ 1,131 $ 1,025
Other liabilities -- 1
Total liabilities 1,131 1,026
Common stock 5,119 5,126
Surplus 39,191 39,683
Unrealized loss on securities available-for-sale (179) (1,496)
Retained earnings 56,866 50,647
Total shareholders' equity 100,997 93,960
Total liabilities and shareholders' equity $102,128 $ 93,986
</TABLE>
SANTA BARBARA BANCORP
(Parent Company Only)
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Interest received $ 6 $ 7 $ 8
Cash paid to suppliers and others (131) (153) (215)
Income tax benefit 174 241 256
Net cash provided by operating activities 49 95 49
Cash flows from investing activities:
Net decrease in loans made to customers 1 1 3
Proceeds from sale of OREO -- -- 400
Distributed earnings of subsidiaries 4,686 2,500 5,780
Net cash provided by investing activities 4,687 2,501 6,183
Cash flows from financing activities:
Proceeds from issuance of common stock 454 1,187 728
Payments to retire common stock (953) -- (3,274)
Dividends paid (4,095) (3,877) (3,538)
Net cash used in financing activities (4,594) (2,690) (6,084)
Net increase (decrease) in cash and cash equivalents 142 (94) 148
Cash and cash equivalents at beginning of period 204 298 150
Cash and cash equivalents at end of period $ 346 $ 204 $ 298
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 10,415 $ 12,951 $ 12,930
Adjustments to reconcile net
income to net cash provided by
operating activities:
Earnings from subsidiaries (10,366) (12,856) (12,882)
Accretion of discount related
to notes receivable -- (1) --
Decrease in interest receivable -- 1 1
Net cash provided by operating activities $ 49 $ 95 $ 49
</TABLE>
<PAGE> 1
EXHIBIT 99.(g)(2)
Santa Barbara Bancorp and Subsidiaries
Report of Independent Public Accountants
To the Shareholders and the
Board of Directors
We have audited the accompanying consolidated balance sheets of SANTA
BARBARA BANCORP (a California corporation) and Subsidiaries as of December
31, 1994 and 1993, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1994. These financial statements are the
responsibility of Santa Barbara Bancorp's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Santa Barbara Bancorp
and Subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting
principles.
As explained in Notes 1, 2, 7 and 14 to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards
No. 106 effective January 1, 1992, Statement of Financial Accounting
Standards No. 109 effective January 1, 1993, and Statement of Financial
Accounting Standards No. 115 effective December 31, 1993.
/s/ ARTHUR ANDERSEN & CO
Arthur Andersen & Co
Los Angeles, California
January 31, 1995
<PAGE> 2
CONSOLIDATED BALANCE SHEETS Santa Barbara Bancorp
and Subsidiaries
<TABLE>
<CAPTION>
December 31
1994 1993
(in thousands)
<S> <C> <C>
Assets:
Cash and due from banks (Note 5) $ 69,630 $ 50,946
Federal funds sold 15,000 0
Total cash and cash equivalents 84,630 50,946
Securities (approximate fair value of $382,090
in 1994 and $404,233 in 1993) (Notes 1 and 2):
U.S. Treasury obligations 243,493 289,520
U.S. agency obligations 53,954 15,800
State and municipal securities 89,512 78,198
Total securities 386,959 383,518
Bankers' acceptances 80,594 63,614
Loans (Note 3) 499,431 464,230
Less: allowance for loan losses (Note 4) 12,911 10,067
Net loans 486,520 454,163
Premises and equipment, net (Note 6) 7,391 6,657
Accrued interest receivable 8,130 7,228
Other assets (Notes 1 and 7) 13,392 13,017
Total assets $ 1,067,616 $ 979,143
Liabilities:
Deposits:
Noninterest bearing demand deposits $ 147,085 $ 114,557
Interest bearing deposits:
NOW accounts 142,639 127,296
Money market deposit accounts 355,581 247,772
Other savings deposits 113,074 148,719
Time certificates of $100,000 or more 63,556 83,380
Other time deposits 134,782 144,529
Total deposits 956,717 866,253
Securities sold under agreements to repurchase
and Federal funds purchased (Note 9) 9,487 20,155
Other borrowings (Note 10) 1,000 1,172
Accrued interest payable and
other liabilities (Notes 7, 12 and 14) 6,452 5,572
Total liabilities 973,656 893,152
Commitments and contingencies (Note 15)
Shareholders' equity (Notes 8 and 12):
Common stock-- no par value, $1.00 stated value; shares
authorized: 20,000; shares issued and outstanding:
5,126 in 1994 and 5,065 in 1993. 5,126 5,065
Surplus 39,683 38,557
Unrealized gain (loss) on securities
available-for-sale net of tax (Notes 1 and 2) (1,496) 683
Retained earnings 50,647 41,686
Total shareholders' equity 93,960 85,991
Total liabilities and shareholders' equity $ 1,067,616 $ 979,143
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE> 3
CONSOLIDATED STATEMENTS Santa Barbara Bancorp
OF INCOME and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992
(in thousands, except for per share data)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 46,816 $ 43,032 $ 46,667
Interest on securities:
U.S. Treasury obligations 16,495 16,848 19,556
U.S. Agency obligations 2,085 226 --
State and municipal securities 7,232 6,772 6,376
Interest on Federal funds sold 772 795 190
Interest on bankers' acceptances 1,500 760 127
Total interest income 74,900 68,433 72,916
Interest expense:
Interest on deposits:
NOW accounts 1,294 1,436 2,016
Money market deposit accounts 10,387 6,245 7,646
Other savings deposits 3,033 3,812 4,584
Time certificates of $100,000 or more 2,366 2,910 5,022
Other time deposits 6,928 7,163 8,315
Total interest on deposits 24,008 21,566 27,583
Interest on securities sold under agreements to
repurchase and Federal funds purchased (Note 9) 878 728 1,058
Interest on other borrowings (Note 10) 81 68 136
Total interest expense 24,967 22,362 28,777
Net interest income 49,933 46,071 44,139
Provision for loan losses (Notes 1 and 4) 6,257 6,150 4,650
Net interest income after provision for loan losses 43,676 39,921 39,489
Other operating income (Note 11):
Service charges on deposit accounts 3,183 2,825 2,722
Trust fees (Note 1) 6,449 6,588 6,124
Other service charges, commissions and fees 4,077 3,793 3,650
Net loss on sale of securities (Notes 1, 2 and 7) (1,191) (47) (408)
Other income 566 943 974
Total other operating income 13,084 14,102 13,062
Other operating expense:
Salaries and other compensation 16,300 15,332 14,060
Employee benefits (Note 12) 4,849 4,309 4,461
Net occupancy expense (Notes 6 and 15) 3,528 2,990 2,809
Equipment rental, depreciation and maintenance (Note 6) 2,247 1,816 1,442
Net cost of operating other real estate (Note 1) (485) 1,151 1,278
Other operating expense (Note 11) 12,852 11,738 11,031
Total other operating expense 39,291 37,336 35,081
Income before provision for income taxes 17,469 16,687 17,470
Provision for income taxes (Note 7) 4,518 4,377 4,912
Net income before cumulative effect
of accounting changes 12,951 12,310 12,558
Cumulative effect of accounting changes (Notes 1 and 14) -- 620 (858)
Net income $ 12,951 $ 12,930 $ 11,700
Earnings per share before cumulative effect
of accounting changes $2.54 $2.37 $2.42
Cumulative effect of accounting changes -- 0.12 (0.16)
Earnings per share $2.54 $2.49 $2.26
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 4
CONSOLIDATED STATEMENTS OF CHANGES Santa Barbara Bancorp
IN SHAREHOLDERS' EQUITY and Subsidiaries
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Securities
Surplus Available-
Common Stock Net of for-Sale Retained
Shares Amount ESOP Loan (Notes 1 & 2) Earnings Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1991 5,174 $ 5,174 $ 38,396 -- $ 23,645 $ 67,215
Exercise of employee
stock options 33 33 375 -- -- 408
Retirement of
common stock (28) (28) (382) -- -- (410)
Cash dividends declared
at $0.565 per share -- -- -- -- (2,968) (2,968)
Reduction in
ESOP Liability -- -- 1,200 -- -- 1,200
Net income -- -- -- -- 11,700 11,700
Balance,
December 31, 1992 5,179 5,179 39,589 -- 32,377 77,145
Exercise of employee
stock options 51 51 861 -- -- 912
Retirement of
common stock (165) (165) (3,293) -- -- (3,458)
Cash dividends declared
at $0.70 per share -- -- -- -- (3,621) (3,621)
Unrealized gain on securities
available-for-sale -- -- -- $ 683 -- 683
Reduction in
ESOP liability -- -- 1,400 -- -- 1,400
Net income -- -- -- -- 12,930 12,930
Balance,
December 31, 1993 5,065 5,065 38,557 683 41,686 85,991
Exercise of employee
stock options 100 100 2,116 -- -- 2,216
Retirement of
common stock (39) (39) (990) -- -- (1,029)
Cash dividends declared
at $0.78 per share -- -- -- -- (3,990) (3,990)
Changes in unrealized gain
(loss) on securities
available-for-sale -- -- -- (2,179) -- (2,179)
Net income -- -- -- -- 12,951 12,951
Balance,
December 31, 1994 5,126 $ 5,126 $ 39,683 $ (1,496) $ 50,647 $ 93,960
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 5
CONSOLIDATED STATEMENTS OF Santa Barbara Bancorp
CASH FLOWS and Subsidiaries
<TABLE>
<CAPTION>
Increase (decrease) in cash and cash Year Ended December 31
equivalents (Note 1): 1994 1993 1992
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,951 $ 12,930 $ 11,700
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,614 1,143 989
Provision for loan losses 6,257 6,150 4,650
Benefit for deferred income taxes (1,724) (122) (1,241)
Net (recovery) writedown on other real estate owned (821) 139 1,021
Net amortization of discounts and premiums for
securities and bankers' acceptances (6,523) (4,165) (4,067)
Net change in deferred loan origination fees and costs 736 139 (34)
(Increase) decrease in accrued interest receivable (902) 664 (439)
Increase (decrease) in accrued interest payable 296 (101) (662)
Net loss on sale of securities 1,191 47 408
Increase in service fees and other income receivable (23) (697) (20)
Increase (decrease) in income taxes payable (214) (74) 301
Other operating activities 816 (524) 410
Net cash provided by operating activities 13,654 15,529 13,016
Cash flows from investing activities:
Proceeds from sale of securities: (Note 2) 9,975 56,002
Available-for-sale 138,799
Proceeds from call or maturity of securities: (Note 2) 118,843 83,659
Available-for-sale 163,847
Held-to-maturity 4,610
Purchase of securities: (Note 2) (119,904) (200,213)
Available-for-sale (211,108)
Held-to-maturity (98,514)
Proceeds from sale or maturity of bankers' acceptances 62,970 35,175 --
Purchase of bankers' acceptances (79,380) (62,969) (35,174)
Net (increase) decrease in loans made to customers (39,374) (7,541) 15,230
Disposition of property from defaulted loans 3,436 15,511 3,564
Purchase or investment in premises and equipment (2,384) (2,714) (867)
Proceeds from sale of premises and equipment 22 15 2,307
Net cash used in investing activities (57,076) (13,609) (75,492)
Cash flows from financing activities:
Net increase in deposits 90,464 16,878 48,753
Net decrease in borrowings with maturities of 90 days or less (10,668) (5,827) (4,447)
Proceeds from issuance of common stock (Note 8) 1,187 728 180
Payments to retire common stock (Note 8) -- (3,274) (182)
Dividends paid (3,877) (3,538) (2,756)
Net cash provided by financing activities 77,106 4,967 41,548
Net increase (decrease) in cash and cash equivalents 33,684 6,887 (20,928)
Cash and cash equivalents at beginning of period 50,946 44,059 64,987
Cash and cash equivalents at end of period $ 84,630 $ 50,946 $ 44,059
Supplemental disclosure:
Cash paid during the year for:
Interest $ 24,671 $ 22,463 $ 29,439
Income taxes $ 6,102 $ 4,355 $ 5,096
Non-cash transactions:
Additions to other real estate owned
and in-substance foreclosures (Note 1) $ 265 $ 18,496 $ 4,370
Net release from senior debt on OREO upon sale $ 327 $ 353 0
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL Santa Barbara Bancorp
STATEMENTS and Subsidiaries
1. SUMMARY OF SIGNIFICANT POLICIES
General
SANTA BARBARA BANCORP (the "Company") is a bank holding company organized
under the laws of California. The Company and its principal subsidiary,
Santa Barbara Bank & Trust (the "Bank") are engaged in the general
commercial bank and trust business. The other subsidiary, SBBT Service
Corporation, provides correspondent services to other local area community
banks.
Basis of Presentation
The accounting and reporting policies of the Company and its subsidiaries
are in accordance with generally accepted accounting principles and conform
to practices within the banking industry. The consolidated financial
statements include the accounts of the Company and its subsidiaries, after
eliminating significant intercompany balances and transactions.
Securities
Debt obligations of the U.S. Treasury, U.S. agencies, and of states and
municipalities are purchased with the intent to hold to maturity. However,
the Company occasionally sells securities prior to maturity in order to
limit losses if interest rates rise, or to restructure the portfolio to
better match the maturity and interest rate characteristics of liabilities.
The Company implemented Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities
("SFAS 115"), as of December 31, 1993. This statement requires the Company
to classify its securities into one of three categories. Securities for
which the Company has the positive intent and ability to hold until
maturity are classified as held-to-maturity securities. Securities which
might be sold prior to maturity because of interest rate changes, to meet
liquidity needs, or to better match the repricing characteristics of
funding sources are classified as available-for-sale. If the Company were
to purchase securities principally for the purpose of selling them in the
near term for a gain, they would be classified as trading securities. The
Company holds no securities that should be classified as trading
securities.
In accordance with the provisions of SFAS 115, the Company's securities
classified as held-to-maturity are carried at amortized historical cost.
This is the purchase price increased by the accretion of discounts or
decreased by the amortization of premiums using the effective interest
method. Discount is accreted and premium is amortized over the period to
maturity of the related securities, or to an earlier call date, if
appropriate.
The interest income from securities that are classified as available-for-
sale is recognized in the same manner as for securities that are held-to-
maturity, including the accretion of discounts and the amortization of
premiums. However, unlike the securities that are held-to-maturity, these
securities are reported on the consolidated balance sheets for the years
ended December 31, 1994 and 1993 at their fair value. The net unrecognized
gain or loss for these securities is reported on the consolidated balance
sheets as a separate component of equity, net of the tax effect.
<PAGE> 7
Loans, Fees, and Allowance for Loan Losses
Loans are carried at amounts advanced to the borrowers less principal
payments collected. Interest on loans is accrued on a simple interest
basis, except where serious doubt exists as to the collectibility of the
loan, in which case the accrual of income is discontinued and uncollected
income is subtracted from interest earned.
Loan origination and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of
the loan as an adjustment to the interest earned. The net unrecognized fees
represent unearned revenue, and they are reported as reductions of the loan
principal outstanding, or additions to the loan principal if the deferred
costs are greater than deferred fees.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can reasonably be anticipated. The allowance is
based on estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in earnings in the periods in which
they become known.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to income over the estimated useful
lives of the assets, usually by the use of accelerated methods in the early
years, switching to the straight-line method in later years. Leasehold
improvements are amortized over the terms of the leases or the estimated
useful lives of the improvements, whichever is shorter. Generally, the
estimated useful lives of other items of premises and equipment are as
follows:
Buildings and improvements 10-25 years
Furniture and equipment 5-7 years
Income Taxes
The Company is required to use the accrual method for tax return purposes
as well as for financial reporting purposes. However, there are several
items of income and expense which are recognized in different periods for
tax return purposes than for financial reporting purposes. Appropriate
provisions have been made in the financial statements for deferred taxes in
recognition of these temporary differences.
In February, 1992, the FASB promulgated Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS 109"), which requires
an asset and liability approach for financial accounting and reporting for
income taxes. The Company adopted the pronouncement as of the beginning of
1993. The effect on income for the years prior to adoption must be
recognized. This had to be done by either of two means. The first is by
recognizing the effect on all prior years as a cumulative effect from a
change in accounting principle in the year of adoption. The second is by
restating the financial statements for one or more prior years to conform
to the provisions of the statement, with the effect on earlier years that
<PAGE> 8
were not restated being recognized as a cumulative effect in the earliest
year restated. The Company elected to implement the statement by the first
means, and consequently recognized a gain of $620,000 as the cumulative
effect of a change in accounting principle.
Trust Fees
Trust fees for customary services are generally based on the market value
of customer assets, and an estimate of the fees is accrued monthly. Fees
for unusual or infrequent services are recognized when the fee can be
determined.
Earnings Per Share
Earnings per common share are based on the weighted average number of
shares outstanding during each year retroactively restated for stock
dividends and stock splits. The weighted average number of shares
outstanding was 5,097,893 in 1994, 5,189,082 in 1993, and 5,182,168 in
1992. The only potential common stock equivalents for the Company are
shares issuable on the exercise of outstanding options. Even if all of the
outstanding stock options had been exercised, there would be no material
dilutive effect for any of the years presented and therefore they have been
excluded from the computation.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and Federal funds sold. Federal funds are sold for
only one day at a time.
Postretirement Health Benefits
The Company provides eligible retirees with postretirement health care and
dental benefit coverage. These benefits are also provided to the spouses
and dependents of retirees on a shared cost basis. Benefits for retirees
and spouses are subject to deductibles, copayment provisions, and other
limitations.
In December 1990, the FASB issued Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions ("SFAS 106"). Though permitted to wait until 1993 to
implement the statement, the Company elected to implement it in 1992. The
statement requires that the expected cost of any such benefits must be
charged to expense during the years that the employees render service. This
was a significant change from the Company's past practice of recognizing
these costs on the cash basis. In addition, the Company had to address the
cost of the benefits that were earned by retirees and employees prior to
1992. The Company adopted the statement effective January 1, 1992.
Under the provisions of the statement, at the effective date of adoption,
the employer has a liability which represents the net present value of that
portion of the estimated future cost of the eventual benefits that the
employees have earned by their service up to that date. An employer may
recognize this liability by one of two means. In the year of adoption it
<PAGE> 9
may record the whole amount of this liability through a charge to income as
a change in accounting method. The statement refers to this option as
"adoption by means of a cumulative catch-up adjustment." Alternatively, the
employer may instead record a pro-rata portion of the liability over a
period of up to twenty years. The statement refers to this method as
"adopting prospectively". The Company elected to adopt the statement by
means of a cumulative catch-up adjustment whereby it recognized the whole
liability in 1992. It is shown net of the tax effect as a cumulative effect
of an accounting change of $858,000 in the consolidated statement of income
for the year ended December 31, 1992.
Other Real Estate Owned and Collateral Foreclosed In Substance
Other real estate owned ("OREO") represents real estate acquired through
foreclosure or deed in lieu of foreclosure and real estate investments. In
addition, loans which meet certain criteria are not included in the amounts
reported for loans, but are instead reported along with other real estate
owned in other assets. The criteria are designed to identify loans which
are unlikely to be repaid except through eventual foreclosure and
subsequent sale of the collateral by the Company. The collateral for these
loans is said to be foreclosed "in substance." As provided in the Statement
of Position 92-3, Accounting for Foreclosed Assets, published by the
American Institute of Certified Public Accountants, OREO acquired through
foreclosure and collateral that is regarded as foreclosed in substance are
carried at the lower of cost or fair value less estimated costs to sell the
collateral. Cost is determined at the date of acquisition or classification
of the collateral as foreclosed in substance and is defined as the fair
value at that time. If the outstanding balance of the loan is greater than
the fair value less estimated disposal costs at the time of the acquisition
or reclassification, the difference is charged-off against the allowance
for loan loss. Any senior debt to which other real estate owned is subject
is reported along with other borrowings and is not deducted from the
carrying amount of the collateral.
During the time the property is held or while the collateral is classified
as foreclosed in substance, all related carrying costs are expensed as
incurred and additional decreases in the fair value are charged to other
operating expense in the period in which they become known. Expenditures
related to improvements are capitalized to the extent that they are
realizable through increases in the fair value of the properties. Increases
in the fair value may be recognized as reductions of OREO operating expense
to the extent that they represent recoveries of amounts previously written-
down. Gains in excess of the fair value at the time of foreclosure are
recognized only when the property is sold.
In May 1993, the FASB issued Statement of Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS 114"). This
pronouncement must be implemented by the Company in 1995. The statement
requires that when a borrower is expected to be unable to meet the
contractual payment terms of the note, the carrying amount of the loan must
be written down to the present value of the anticipated cash flows for
principal and interest. Federal banking regulators have indicated that they
would permit banks to classify as loans those notes for which the
collateral has not yet actually been foreclosed. The Company has elected to
<PAGE> 10
report those notes that had been already classified as foreclosed in
substance with other real estate owned, while reporting new situations that
arise in 1995 as loans carried at their discounted cash flows or at the
fair value of their collateral.
Management does not believe that there will be any material adverse impact
on the financial condition of the Company or on the results of operations
in the year of implementation.
OREO that has been acquired through foreclosure or deed in lieu was
$175,000 and $2,524,000 as of December 31, 1994 and 1993, respectively.
Collateral foreclosed in substance was $681,000 and $955,000 as of December
31, 1994 and 1993, respectively.
Reclassifications
Certain amounts in the 1993 and 1992 financial statements have been
reclassified to be comparable with classifications used in the 1994
financial statements.
2. SECURITIES
A summary of debt securities at December 31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
1994:
Held-to-maturity:
U.S. Treasury
obligations $ 195,354 $ 69 $ (12,189) $ 183,234
U.S. agency
obligations 14,654 -- (999) 13,655
State and
municipal
securities 89,512 9,727 (1,477) 97,762
299,520 9,796 (14,665) 294,651
Available-for-sale:
U.S. Treasury
obligations 48,812 12 (685) 48,139
U.S. agency
obligations 41,024 -- (1,724) 39,300
89,836 12 (2,409) 87,439
$ 389,356 $ 9,808 $ (17,074) $ 382,090
1993:
Held-to-maturity:
U.S. Treasury
obligations $ 106,491 $ 2,594 $ (512) $ 108,573
U.S. agency
obligations 9,786 -- (11) 9,775
State and
municipal
securities 78,197 18,644 -- 96,841
194,474 21,238 (523) 215,189
Available-for-sale:
U.S. Treasury
obligations 181,865 1,182 (17) 183,030
U.S. agency
obligations 6,015 -- (1) 6,014
187,880 1,182 (18) 189,044
$ 382,354 $ 22,420 $ (541) $ 404,233
</TABLE>
<PAGE> 11
During 1994, the Company transferred one of its U.S. agency securities from
its liquidity portfolio to its earnings portfolio. This entailed a change
in classification from "available-for-sale" to "held-to-maturity." The
security, purchased in 1993, was callable on the first anniversary of its
issuance. The terms of the security provided that if it was not called, the
interest rate on the security would increase, or "step up." At the time of
purchase, interest rates were such that Management expected that it would
be called. When interest rates increased during 1994, it became more
expensive for the issuer to refinance the debt at current interest rates
and the security was not called. With circumstances changed, Management
decided to transfer the security to the earnings portfolio and has
classified it as held-to-maturity. The note was transferred at its fair
value of $4,802,000. The unrealized loss on the security at the time of
transfer was $109,000 and this amount remained in the special component of
equity for unrealized gains and losses on securities available-for-sale to
be amortized over the remaining term of the security.
The amortized cost and estimated fair value of debt securities at December
31, 1994 and 1993, by contractual maturity, are shown in the next table.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Held-to- Available-
Maturity for-Sale Total
(in thousands)
<S> <C> <C> <C>
1994:
Amortized cost:
In one year or less $ 17,220 $ 33,992 $ 51,212
After one year
through five years 225,648 55,844 281,492
After five years
through ten years 35,798 -- 35,798
After ten years 20,854 -- 20,854
$ 299,520 $ 89,836 $ 389,356
Estimated market value:
In one year or less $ 17,694 $ 33,816 $ 51,510
After one year
through five years 214,105 53,623 267,728
</TABLE>
<PAGE> 12
<TABLE>
<S> <C> <C> <C>
After five years
through ten years 43,063 -- 43,063
After ten years 19,789 -- 19,789
$ 294,651 $ 87,439 $ 382,090
1993:
Amortized cost:
In one year or less $ 4,504 $ 144,965 $ 149,469
After one year
through five years 137,139 41,886 179,025
After five years
through ten years 36,463 1,029 37,492
After ten years 16,368 -- 16,368
$ 194,474 $ 187,880 $ 382,354
Estimated market value:
In one year or less $ 4,694 $ 145,650 $ 150,344
After one year
through five years 141,799 42,364 184,163
After five years
through ten years 48,229 1,030 49,259
After ten years 20,467 -- 20,467
$ 215,189 $ 189,044 $ 404,233
</TABLE>
The proceeds received from sales or calls of debt securities and the gross
gains and losses that were recognized for the years ended December 31, 1994
and 1993 are shown in the next table. Because the identification of the
securities as held-to-maturity or available-for-sale under the provisions
of SFAS 115 did not take place until December 31, 1993, it is not possible
to distinguish to which portfolio the proceeds, gains, and losses from
sales or calls that occurred during the year of 1993 relate. Consequently,
the amounts for 1993 relate to the whole portfolio. Similarly, in the
Consolidated Statements of Cash Flow, the proceeds from sales, maturities,
and calls, and the purchases of securities, are reported only for the whole
securities portfolio.
<TABLE>
<CAPTION>
Gross Gross
Proceeds Gains Losses
(in thousands)
<S> <C> <C> <C>
1994:
Held-to-maturity:
Calls $ 3,295 -- --
Available-for-sale:
Sales $ 138,799 $ 5 $ 1,196
1993 Total portfolio:
Sales $ 9,975 $ 1 $ 48
Calls $ 8,283 $ -- $ --
</TABLE>
Securities with a book value of approximately $161,050,000 at December 31,
1994 and $140,010,000 at December 31, 1993 were pledged to secure public
funds, trust deposits and other borrowings as required or permitted by law.
<PAGE> 13
3. LOANS
The loan portfolio consists of the following:
<TABLE>
<CAPTION>
December 31
1994 1993
(in thousands)
<S> <C> <C>
Real estate loans:
Residential $ 108,923 $ 54,395
Non-residential 145,928 123,534
Construction 26,695 41,030
Commercial, industrial,
and agricultural 148,396 168,227
Home equity line 32,573 36,219
Consumer 27,319 27,331
Municipal tax-exempt obligations 7,831 11,888
Other 1,766 1,606
$ 499,431 $ 464,230
</TABLE>
The amounts above are shown net of deferred loan origination, commitment,
and extension fees of $2,038,000 for 1994 and of $1,301,000 for 1993.
The Company has made tax refund anticipation loans during the last three
years. Taxpayers desiring to receive their income tax refunds early borrow
from the Company and the Internal Revenue Service later sends the refund to
the Company. The funds advanced are generally paid within several weeks.
Therefore, the costs to process the loans are greater in comparison to the
cost of funds than they are for other types of loans. Consequently, the
Company has a set fee for this service which does not vary by the amount of
funds advanced or the length of time that the loan is outstanding.
Nonetheless, the fees are reported in the statements of income as interest
income, and totaled $4,791,000 for 1994, $1,048,000 for 1993, and $473,000
for 1992. The loans are all made during the tax filing season of January
through April of each year. Any loans for which repayment has not been
received by June 30 are charged-off. Consequently, there were no refund
anticipation loans included in the above table of outstanding loans at
December 31, 1994 or 1993.
4. ALLOWANCE FOR LOAN LOSSES
The following summarizes the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Year ended December 31
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
Balance, beginning $ 10,067 9,353 7,611
Tax refund anticipation loans:
Provision for losses 2,890 118 300
Recoveries on
loans previously charged-off 672 62 77
Loans charged-off (3,030) (650) (404)
All other loans:
Provision for losses 3,367 6,032 4,350
Recoveries on loans
previously charged-off 458 370 212
Loans charged-off (1,513) (5,218) (2,793)
Balance, end of year $ 12,911 10,067 9,353
</TABLE>
<PAGE> 14
The ratio of losses to total loans made from the tax refund anticipation
loans are higher than arise from other loans. For these loans, the
provision for loan loss, the loans charged-off, and the loans recovered,
are reported separately from the corresponding amounts for all other loans.
5. CASH AND DUE FROM BANKS
Included within cash and due from banks are the reserves that all
depository institutions are required by law to maintain on transaction
deposits. The average cash reserve balances required by the Federal Reserve
Bank to be maintained by the Bank were approximately $18.5 million in 1994
and $16.4 million in 1993.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
1994 1993
(in thousands)
<S> <C> <C>
Land $ 1,282 $ 1,282
Buildings and improvements 4,294 4,331
Leasehold improvements 5,369 4,383
Furniture and equipment 11,167 10,004
Total cost 22,112 20,000
Accumulated depreciation
and amortization (14,721) (13,343)
Net book value $ 7,391 $ 6,657
</TABLE>
Depreciation and amortization on fixed assets included in other operating
expenses totaled $1,614,000 in 1994, $1,143,000 in 1993, and $989,000 in
1992.
7. INCOME TAXES
The provisions (benefits) for income taxes related to operations, the tax
benefit related to stock options that is credited directly to shareholders'
equity, and the tax effect of the accounting changes described in Notes 1,
2, and 14 are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
Federal:
Current $ 3,962 $ 2,547 $ 3,730
Deferred (1,312) 46 (694)
2,650 2,593 3,036
State:
Current 2,280 1,684 1,957
Deferred (412) 100 (81)
</TABLE>
<PAGE> 15
<TABLE>
<S> <C> <C> <C>
1,868 1,784 1,876
Total tax provision $ 4,518 $ 4,377 $ 4,912
Reduction in taxes payable
associated with exercises
of stock options $ (326) $ (82) $ (58)
Tax associated with
changes in accounting
principles -- $ (620) $ 602
Tax effect of unrealized gain
or loss on securities
available-for-sale $ 1,064 $ (481) $ --
</TABLE>
The current provision for income taxes includes credits of $495,000,
$19,000, and $167,000, related to net securities losses for 1994, 1993, and
1992, respectively.
Although not affecting the total provision, actual income tax payments may
differ from the amounts shown as current as a result of the final
determination as to the timing of certain deductions and credits.
The total tax provision differs from the Federal statutory rate of 34
percent for the reasons shown in the following table:
<TABLE>
<CAPTION>
Year ended December 31
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
Tax provision at Federal
statutory rate $ 5,939 $ 5,674 $ 6,045
Interest on securities exempt
from Federal taxation (2,507) (2,422) (2,195)
State income taxes, net of
Federal income tax benefit 1,233 1,112 1,141
ESOP dividends deductible as
an expense for tax purposes (148) (140) (113)
Other, net 1 153 34
Actual tax provision $ 4,518 $ 4,377 $ 4,912
</TABLE>
Because certain items of income and expense are not recognized in the same
year in the financial statements of the Company as in its Federal and
California tax returns, deferred assets and liabilities are created. As of
December 31, 1994 and 1993, included within other assets on the balance
sheet are net deferred tax assets of $8,066,000 and $4,797,000,
respectively. The net deferred tax assets as of December 31, 1994 and 1993
and the tax effect of the principal temporary differences for the year
ending that date are as follows:
<PAGE> 16
<TABLE>
<CAPTION>
Tax Tax
Components Effect Components Effect
1994 1994 1993 1993
(in thousands)
<S> <C> <C> <C> <C>
Deferred tax assets:
Allowance for
loan loss $ 5,366 $ 1,375 $ 3,991 $ 126
State taxes 767 114 653 5
Loan fees 1,022 403 619 117
Depreciation 691 386 305 (115)
Post retirement
benefits 501 (84) 585 1
Other real
estate owned -- (143) 143 (49)
Unrealized loss
on securities 1,064 -- -- --
Other 70 52 18 15
9,481 2,103 6,314 100
Valuation
allowance -- -- -- --
Total deferred
tax assets 9,481 2,103 6,314 100
Deferred tax liabilities:
Unrealized gain
on securities -- -- 481 --
Loan costs 400 88 312 33
Accretion on
securities 563 140 423 267
Federal effect
of state asset 452 152 300 (52)
Other -- (1) 1 (2)
Total deferred
tax liabilities 1,415 379 1,517 246
Net deferred
tax asset $ 8,066 $ 1,724 $ 4,797 $ (146)
</TABLE>
Management believes a valuation allowance is not needed to reduce any
deferred tax asset because there is no material amount that will not be
realized through sufficient taxable income within the carryback periods or
within one year from the taxable income generated by operations.
The principal timing differences with their tax effects for the year ended
December 31, 1992 were as follows:
<TABLE>
<CAPTION>
1992
(in thousands)
<S> <C>
Accrual and cash basis income $ 244
Lower provision for loan losses
for tax return (756)
Use of accelerated depreciation (71)
Valuation adjustments to OREO
not deductible for tax until sale
of property (192)
$ (775)
</TABLE>
<PAGE> 17
8. SHAREHOLDERS' EQUITY
The Company currently has three stock option plans. These plans offer key
employees and directors an opportunity to purchase shares of the Company's
common stock. The first is the Directors Stock Option Plan, established in
1986 for directors of the Company. Only non-qualified options may be
granted under this plan. The second is the Restricted Stock Option Plan for
employees established in January, 1992. Either incentive or non-qualified
options may be granted under this plan. Stock acquired by the exercise of
options granted under this plan may not be sold for five years after the
date of the grant or two years after the date options are exercised,
whichever is later. The third plan is the Stock Option Plan for employees
established in 1983. All options approved under this plan have been granted
and the plan is active now only for the exercise of options held by
employees.
All options outstanding were granted with an option price set at 100% of
the market value of the Company's common stock on the date of the grant.
The grants for most of the options specify that they are exercisable in
cumulative 20% annual installments and will expire 5 years from the date of
grant. The Board has granted some options which are exercisable in
cumulative 10% annual installments and expire 10 years from the date of
grant.
The following information is presented concerning the stock option plans as
of December 31, 1994, 1993, and 1992 (adjusted for stock splits and stock
dividends):
<TABLE>
<CAPTION>
Per Share
Options Price Ranges
<S> <C> <C>
1994
Granted 56,468 $21.00 to $28.50
Exercised 99,893 $21.75 to $28.50
Cancelled and expired 44,730 $7.33 to $ 25.63
Outstanding
at end of year 452,843 $13.81 to $28.50
Range of
expiration dates 5/01/95 to 5/01/2002
Exercisable
at end of year 239,118 $13.81 to $28.50
Shares available
for future grant 214,002
1993
Granted 162,602 $19.00 to $21.50
Exercised 50,874 $13.81 to $19.44
Cancelled and expired 6,539 $15.24 to $19.95
Outstanding
at end of year 540,998 $13.81 to $21.06
Exercisable
at end of year 268,689 $13.81 to $21.06
1992
Granted 215,859 $13.81 to $17.14
Exercised 33,684 $9.26 to $17.14
Cancelled and expired 22,734 $9.26 to $21.98
Outstanding
at end of year 435,809 $14.29 to $21.06
Exercisable
at end of year 217,468 $14.29 to $21.06
</TABLE>
<PAGE> 18
The option plans permit employees and directors to pay the exercise price
of options they are exercising with shares of stock they already own. The
owned shares are surrendered to the Company at current market value. Shares
with a current market value of $1,029,000, $184,000, and $229,000 were
surrendered in the years ended December 31, 1994, 1993, and 1992,
respectively.
In October 1993, the Company offered to purchase about 4.8% of the then
outstanding shares of common stock from its shareholders. Provision was
made in the offer to purchase additional tendered shares at the Company's
option. At the close of the offer on November 15, about 3.0% of the
outstanding shares were purchased by the Company. The purchase of $3.3
million was financed from operating funds paid by the Bank to the Company
as a dividend. The weighted average shares outstanding for the computation
of 1993 earnings per share reflects the reduction in shares from this
purchase.
In March 1990, the Company's Employee Stock Ownership Plan ("ESOP")
purchased 289,406 shares (adjusted for stock dividends) from the Company.
The purchase of the shares by the ESOP was financed partially by a loan
from another commercial bank. This loan was guaranteed by the Company.
Generally accepted accounting principles require that the outstanding
amount of such a loan be shown on the Company's balance sheet both among
liabilities and as an offset to shareholders' equity. Interest and
principal payments were made by the ESOP from dividends received on Company
stock held for employees and from funds received from the Company as part
of its regular contribution to employee retirement plans. The balance of
the note at December 31, 1992 was $1,400,000. The remaining balance of the
note was paid in January 1993, and this transaction is reported in the
Statement of Changes in Shareholders' Equity for the year ended December
31, 1993.
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS
PURCHASED
The Company sells certain of its securities under agreements to repurchase
at a later date at a set price. The following information is presented
concerning these transactions:
<TABLE>
<CAPTION>
Year ended December 31
1994 1993 1992
(dollars in thousands)
<S> <C> <C> <C>
Weighted average interest
rate at year-end 4.57 % 2.68 % 2.97 %
Weighted average interest
rate for the year 3.26 % 2.90 % 3.53 %
Average outstanding
for the year $ 9,355 $12,220 $10,722
Maximum outstanding at any
month-end during the year $12,525 $16,274 $20,910
Amount outstanding at
end of year $ 3,461 $ 7,641 $11,261
</TABLE>
<PAGE> 19
The Bank purchased Federal funds from correspondent banks as detailed
below:
<TABLE>
<CAPTION>
Year ended December 31
1994 1993 1992
(dollars in thousands)
<S> <C> <C> <C>
Weighted average interest
rate at year-end 5.75 % 2.91 % 3.04 %
Weighted average interest
rate for the year 4.01 % 2.93 % 3.50 %
Average outstanding
for the year $ 14,277 $ 12,732 $ 19,407
Maximum outstanding at any
month-end during the year $ 21,206 $ 27,151 $ 34,475
Amount outstanding at
end of year $ 6,026 $ 12,514 $ 14,722
</TABLE>
10. OTHER BORROWINGS
Included in other borrowings are Treasury Tax and Loan demand notes issued
to the U.S. Treasury and miscellaneous other borrowings including the
senior debt on other real estate owned as explained in Note 1. There was no
such senior debt at December 31, 1994, and at December 31, 1993, it totaled
$172,000. During the course of 1993 and 1994, the Company borrowed funds
for liquidity purposes from the discount window at the Federal Reserve
Bank, but there were no such borrowings at December 31 of either year.
11. OTHER OPERATING INCOME AND EXPENSE
Of the amounts included in other service charges, commissions, and fees,
the largest items are fees earned from the processing of credit card drafts
for merchant customers of the Company, gains from loan sales, and escrow
fees. The gains on loan sales arise primarily from the recognition of
origination fees that have not been amortized by the time of sale. Of the
amounts included in other operating expense, the largest items are FDIC
deposit insurance premiums, credit card clearing fees, and consultant
expense. Consultants include the Company's independent accountants,
attorneys, and other management consultants used for special projects. The
amounts for these income and expense categories included in the statements
of income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
Income items:
Draft processing $ 2,011 $ 2,104 $ 2,078
Gains on loan sales 126 548 623
Escrow fees 331 311 339
Expense items:
FDIC assessments $ 1,982 $ 1,891 $ 1,885
Credit card clearing fees 1,575 1,757 1,694
Consultant expense 702 730 590
</TABLE>
<PAGE> 20
12. EMPLOYEE BENEFIT PLANS
The Company has two defined-contribution profit sharing plans. The first is
the Incentive and Investment and Salary Savings Plan. This plan has two
components. The first is authorized under Section 401(k) of the Internal
Revenue Code. An employee may defer up to 10% of pre-tax salary in the plan
up to a maximum dollar amount set each year by the Internal Revenue
Service. Effective January 1, 1994, the Company matches 100% of the first
3% of the employee's deferral and 50% of the next 3%, but not more than
41/2% of the employee's total compensation. Through 1993, the Company had
matched 50% of the employee's deferral up to 6% of the employee's
compensation. This led to a maximum match of 3%. In 1994, 1993, and 1992
the employer's matching contributions were $554,000, $287,000, and
$277,000, respectively.
The other component, the Incentive and Investment Plan, was established in
1966, and provides for contributions computed by a formula of approximately
10% of pre-tax profits prior to employer contribution, reduced by the
matching contributions paid to the Salary Savings component of the Plan and
the contributions made to the ESOP. In 1992 the Company directed $631,000
of the total 1992 profit sharing contribution to the Incentive and
Investment Plan. In 1993, as mentioned in Note 8, the Company contributed
an extra amount to the ESOP for the purpose of paying off the loan it
incurred for the purchase of stock. Consequently, no contribution was made
to the Incentive and Investment portion of the plan. In 1994, all profit-
sharing contributions in excess of the 401(k) employer match were directed
to the Incentive and Investment Plan.
The second plan is the ESOP, which was initiated in January 1985. As of
December 31, 1994, the ESOP held 552,872 shares at an average cost of
$13.63 per share.
In 1993 and 1992, the Company made contributions to the ESOP of $1,404,000
and $942,000, respectively. In 1992, $467,000 of the annual contribution
was used for regularly scheduled payments of principal, and $142,000 was
used for payments of interest. In addition, $333,000 in dividends received
from the Company were used for principal payments and $400,000 in cash held
from prior year contributions was used for an extra principal payment. The
total principal reduction in 1992 was $1,200,000. In 1993, $1,400,000 of
the contribution was used to pay off the remaining balance of the note and
$4,000 was used for the payment of interest.
Total contributions to the profit sharing plans were $1,884,000 in 1994,
$1,691,000 in 1993, and $1,850,000 in 1992.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("SFAS 107") requires companies with $150
million or more in total assets to provide certain disclosures about most
financial instruments. For the types of financial instruments covered by
the statement, whether or not recognized in the balance sheet, the Company
<PAGE> 21
is required to disclose the fair value of financial instruments for which
it is practicable to estimate that value and the methods and significant
assumptions used to estimate those fair values. This must be done
irrespective of whether or not the instruments are recognized on the
balance sheets of the Company. In the case of financial instruments for
which it is not practicable to estimate the fair value, the Company is
required to disclose information pertinent to estimating the fair value
such as interest rates and maturity, and also state the reasons why it is
not practicable to estimate fair value.
In the statement, the FASB states that the "[f]air values of financial
instruments depict the market's assessment of the present value of net
future cash flows directly or indirectly embodied in them, discounted to
reflect both current interest rates and the market's assessment of the risk
that the cash flows will not occur." The information about fair value is
said to better enable "investors, creditors, and other users to assess the
consequences of an entity's investment and financing strategies, that is,
to assess its performance."
Nonetheless, there are several factors which users of these financial
statements should keep in mind regarding the fair values disclosed in this
note. First, the statement acknowledges that there are uncertainties
inherent in the process of estimating the fair value of financial
instruments. Secondly, the statement covers only financial instruments, not
other assets like premises, the fair value of which might differ
signficantly from the amounts at which they are carried in an entity's
financial statements. Thirdly, the Company must exclude from its estimate
of the fair value of deposit liabilities any consideration of its on-going
customer relationships which provide stable sources of investable funds.
Lastly, the statement does not address means of evaluating an entity's
performance in areas other than the management of financial instruments,
for example the ability to generate noninterest income and the control of
noninterest expense. For these reasons, users are advised not to regard the
disclosure of the fair market value of financial instruments as in any way
equivalent to a valuation of the Company as a whole.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash
The face value of cash is its fair value.
Securities and bankers' acceptances
For securities and bankers' acceptances, fair value equals quoted market
price, if available. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities. Because of
the implementation of SFAS 115 at December 31, 1993 as explained in Note 1,
a portion of the portfolio is carried at fair value.
<PAGE> 22
Loans
The fair value of loans is estimated by discounting the future contractual
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. These contractual cash flows are adjusted to reflect estimates
of uncollectible amounts.
Deposit liabilities
The fair value of demand deposits, money market accounts, and savings
accounts is the amount payable on demand as of December 31 of each year.
The fair value of fixed-maturity certificates of deposit is estimated using
the rates currently offered for deposits of similar remaining maturities.
Repurchase agreements, Federal funds purchased, and other borrowings
For these short-term instruments, the carrying amount is a reasonable
estimate of their fair value.
Commitments to extend credit, standby letters of credit, and financial
guarantees written
The fair value of guarantees and letters of credit is based on fees
currently charged for similar agreements. The Company seldom charges fees
for loan commitments. Since no fees are being collected, the use of the
commitment is at the option of the potential borrower, and the commitments
are being written at rates comparable to current market rates, the Company
does not believe that these commitments have a fair value within the
context of SFAS 107.
The Company has no financial instruments covered by the statement for which
it is not practicable to estimate a fair value.
The carrying amount and estimated fair values of the Company's financial
instruments as of December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
(in thousands)
<S> <C> <C>
As of December 31, 1994:
Financial assets:
Cash $ 69,630 $ 69,630
Federal funds sold 15,000 15,000
Securities available-for-sale 87,439 87,439
Securities held-to-maturity 299,520 294,651
Bankers' acceptances 80,594 80,510
Loans 486,520 483,632
Financial liabilities:
Deposits 956,717 957,478
Repurchase agreements,
Federal funds purchased,
and other borrowings 10,487 10,487
Unrecognized financial instruments:
Commitments to extend credit -- --
Standby letters of credit -- 166
As of December 31, 1993:
Financial assets:
Cash $ 50,946 $ 50,946
Securities available-for-sale 189,044 189,044
Securities held-to-maturity 194,474 215,189
Bankers' acceptances 63,614 63,614
Loans 454,163 456,677
Financial liabilities:
Deposits 866,253 870,346
Repurchase agreements,
Federal funds purchased,
and other borrowings 21,327 21,327
Unrecognized financial instruments:
Commitments to extend credit -- --
Standby letters of credit -- 134
</TABLE>
<PAGE> 23
14. OTHER POSTRETIREMENT BENEFITS
As explained in Note 1, the Company adopted SFAS 106 effective as of the
beginning of 1992. The statement requires the Company to recognize the net
present value of the estimated future cost of providing health insurance
benefits to retirees as those benefits are earned rather than when paid. To
provide for these benefits, the Company established the Retiree Health Plan
on December 29, 1992.
Under the provisions of the Retiree Health Plan, all eligible retirees may
purchase health insurance coverage through the Company. The cost of this
coverage is that amount which the Company pays under the basic coverage
plan provided for current employees. Based on a formula involving date of
retirement, age at retirement, and years of service prior to retirement,
the Plan provides that the Company will contribute a portion of the cost
for the retiree, varying from 60% to 100% at the time the employee retires,
with the stipulation that the cost of the portion paid by the Company shall
not increase by more than 5% per year.
As of the effective date of adoption, January 1, 1992, the Company's
accumulated postretirement benefit obligation ("APBO") totaled $1,735,000.
This obligation is the actuarial net present value of the obligation for
fully eligible plan participants' expected postretirement benefits plus the
portion of the expected postretirement benefit obligation for other active
plan participants attributed to service through December 31, 1991. In prior
years, the Company had recognized $275,000 of this cost. Therefore, the
APBO recognized effective January 1, 1992 was $1,460,000.
This obligation must be remeasured each year because it changes with each
of the following factors: 1) the number of employees working for the
Company; 2) the average age of the employees working for the Company; 3)
increases in expected health care costs; 4) the amount of earnings
anticipated on plan assets; and 5) prevailing interest rates. In addition,
because the obligation is measured on a net present value basis, the
passage of each year brings the eventual payment of benefits closer, and
therefore causes the obligation to increase. The following table shows the
<PAGE> 24
amount of the APBO, the fair value of the plan assets, and the accrued
postretirement benefit cost as of December 31, 1994 and 1993.
<TABLE>
<CAPTION>
December 31
1994 1993
(in thousands)
<S> <C> <C>
Retirees eligible for benefits (512) (686)
Dependents eligible for benefits (274) (313)
Active employees fully eligible (368) (630)
Active employees not fully eligible (1,009) (1,666)
Accumulated postretirement benefit obligation (2,163) (3,295)
Fair value of plan assets 2,162 2,015
Accumulated postretirement
benefit obligation in excess
of plan assets (1) (1,280)
Unrecognized prior service cost 8 10
Unrecognized net (gain) loss (230) 1,047
Accrued postretirement benefit cost (223) (223)
</TABLE>
The accrued postretirement benefit cost of $223,000 is included within
accrued interest payable and other liabilities in the consolidated balance
sheet for December 31, 1994.
Each year the Company is required to recognize a portion of the change in
the APBO. This portion is called the net periodic postretirement benefit
cost (the "NPPBC"). The NPPBC, included with the cost of other benefits in
the Consolidated Statements of Income is made up of several components as
shown in the next table.
<TABLE>
<CAPTION>
Year ended December 31
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
Service cost $ 252 $ 165 $ 142
Interest cost 231 185 156
Return on assets (149) (127) --
Amortization cost 56 -- --
Net cost $ 390 $ 223 $ 298
</TABLE>
The first component is service cost, which is the net present value of the
portion of the expected postretirement benefit obligation for active plan
participants attributed to service for that year. The second is interest
cost, which is the increase in the accumulated postretirement benefit
obligation that results from the passage of another year. That is, because
the benefit obligation for each employee is one more year closer to being
paid, the net present value increases. The third component, return on
assets, is the income earned on any investments that have been set aside to
fund the benefits. This return is an offset to the other components.
The fourth component, amortization cost, arises because significant
estimates and assumptions about interest rates, trends in health care
costs, employee turnover, and earnings on assets are used in measuring the
APBO each year. Actual experience may differ from the estimates and
<PAGE> 25
assumptions may change, both of which cause increases or decreases in the
APBO or the value of plan assets. For example, in measuring the APBO at
December 31, 1992, and determining the NPPBC for 1993, a discount rate of
8.9% was used in determining the net present value and a rate of 7.0% was
assumed to be the long-term rate of return on plan assets. In measuring the
APBO at December 31, 1993 and determining the NPPBC for 1994, the discount
rate was lowered to 7.12% because of the continuing decline in interest
rates during 1993. This reduction in discount rate caused the APBO to
increase by $750,000.
Rather than the whole amount of such a loss being recognized in the year it
arises, the statement provides for gains or losses arising from these
changes in experience and/or assumptions to be recognized through
amortization over the average remaining service lives of the employees.
Amortization over time is used because many of these changes may partially
or fully reversed in subsequent years. Amortization of this loss began in
1994 as a component of the Company's NPPBC. However, because of increasing
interest rates in 1994, a discount rate of 8.73% is used to measure the
APBO at December 31, 1994 and the NPPBC for 1995. With the partial
amortization in 1994, this higher discount rate has virtually eliminated
the remaining unrecognized experience/assumptions loss, and there will be
no amortization component included in the NPPBC of $213,000 for 1995.
At the time of implementing the statement, the Company fully recognized the
net present value of the benefits earned by employees for prior service.
Had the Company not recognized this amount, a portion of it would be
included in the NPPBC as a fifth component.
Among the significant estimates or assumptions used in determining the APBO
are the rate of earnings on assets which will be available to offset the
other components and the annual increase in medical insurance premiums.
While the discount rate used in the present value computation of the APBO
has fluctuated with market rates, the Company has continued to use 7.0% as
its estimate of the long-term rate of return on plan assets. As noted
above, the Retiree Health Plan provides for the Company's contribution for
insurance premiums to be limited to an annual increase of 5%. Should
insurance premiums increase at a higher rate, the retirees will need to
contribute a larger portion of the total premium cost. Therefore, 5% has
been set as the assumed cost trend rate for health care.
Under the provisions of SFAS 106, employers are allowed wide discretion as
to whether and how they set aside funds to meet the obligation they are
recognizing. Under the provisions of the current Internal Revenue Code,
only a portion of this funding may be deducted by the employer. The funded
status of the plan is shown in the previous table as the excess of the
APBO over plan assets.
On December 29, 1992, the Company established a Voluntary Employees'
Beneficiary Association ("VEBA") to hold the assets that will be used to
pay the benefits for participants of the plan other than key executive
officers. Most of the plan assets have been invested in insurance policies
on the lives of various employees of the Company.
The current funding policy of the Company is to contribute assets to the
<PAGE> 26
VEBA sufficient to pay the costs of current medical premiums of retirees
and the costs of the life insurance premiums. Proceeds from the life
policies payoffs will fund benefits and premiums in the future.
As of December 31, 1994, because of the reduction in the APBO caused by the
higher discount rate and changes in other assumptions, the VEBA was
underfunded by $1,000 compared to an underfunded status of $1,037,000 as of
December 31, 1993. The APBO related to the key employees of $173,000 is
totally unfunded.
15. COMMITMENTS AND CONTINGENCIES
The Company leases several office locations and substantially all of the
office leases contain multiple five-year renewal options and provisions for
increased rentals, principally for property taxes and maintenance. As of
December 31, 1994, the minimum rentals under non-cancelable leases for the
next five years and thereafter are as follows:
<TABLE>
<CAPTION>
Year ended Non-cancelable
December 31 lease expense
(in thousands)
<S> <C>
1995 $ 1,844
1996 1,825
1997 1,788
1998 1,773
1999 3,688
Thereafter 5,973
$ 16,891
</TABLE>
Total net rentals for premises included in other operating expenses are
$1,801,000 in 1994, $1,552,000 in 1993, and $1,409,000 in 1992.
The Company is currently leasing space from a partnership in which a
director has an interest. The original terms of the lease were negotiated
with the assistance of two independent, outside appraisers, and the lease
was approved by the Board of Directors of the Company. The Company
exercised its option to renew the lease in 1989. In 1994, the Company
renegotiated the lease to receive other rights such as additional lease
option periods and a right of first refusal to purchase the building if it
is offered for sale. The nominal monthly rent increased to obtain these
benefits, but the actual outlay was reduced in order for the Company to be
reimbursed for advancing the partnership's share of seismic improvements
made to the leased property in 1994. The above schedule of lease
commitments includes the terms of the current agreement. Management
believes the terms of the revised lease are comparable with terms which
would be available with unaffiliated third parties and the terms were also
approved by the Company's Board of Directors.
In the normal course of business to meet the financing needs of its
customers, the Company is a party to financial instruments with "off-
balance sheet" risk. These financial instruments consist of commitments to
extend credit and standby letters of credit.
<PAGE> 27
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. The
Company almost never charges fees in connection with loan commitments.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The Company
charges a fee for these letters of credit.
The Company does not enter into any interest rate swaps or caps, or forward
or futures contracts.
The standby letters of credit involve, to varying degrees, exposure to
credit risk in excess of the amounts recognized in the statement of
financial position. This risk arises from the possibility of the failure of
another party to perform according to the terms of a contract that would
cause a draw on a standby letter of credit. To minimize the first risk, the
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The decision as to
whether collateral should be required is based on the circumstances of each
specific commitment or conditional obligation.
Changes in market rates of interest for those few commitments and
undisbursed loans which have fixed rates of interest represent a possible
cause of loss by the contractual requirement to lend money at a rate that
is no longer as great as the market rate at the time the loan is funded. To
minimize this risk, if rates are quoted in a commitment, they are generally
stated in relation to the Company's base lending rate which varies with
prevailing market interest rates. Fixed-rate loan commitments are not
usually made for more than 3 months.
The maximum exposure to credit risk is represented by the contractual
notional amount of those instruments. As of December 31, 1994 and 1993, the
contractual notional amount of these instruments are as follows:
<TABLE>
<CAPTION>
December 31
1994 1993
(in thousands)
<S> <C> <C>
Standby letters of credit $ 9,093 $ 10,447
Loan commitments 25,941 13,237
Undisbursed loans 13,795 10,850
Unused consumer credit lines 45,866 34,242
Unused credit lines 69,384 82,069
$ 164,079 $ 150,845
</TABLE>
Since many of the commitments are expected to expire without being drawn
upon, the amounts above do not necessarily represent future cash
requirements.
The Company has concentrated its lending activity almost exclusively with
customers within Santa Barbara County. The business customers are in widely
diversified industries, and there is a large consumer component to the
portfolio. The largest concentration of loans is to real estate developers,
but the nature of the properties is quite varied: 1-4 family residential,
multi-family residential, and commercial buildings of various kinds.
<PAGE> 28
Continued increases in interest rates may cause delay in the sale or lease
of some of these properties, and the Company has considered this in
evaluating the adequacy of the allowance for loan loss.
The Company has a trust department that has fiduciary responsibility for
the assets that it holds on behalf of its trust customers. These assets are
not owned by the Company and accordingly are not reflected in the
accompanying consolidated balance sheets.
The Company is involved in various litigation of a routine nature which is
being handled and defended in the ordinary course of the Company's
business. In the opinion of management, the resolution of this litigation
will not have a material impact on the Company's financial position.
16. SANTA BARBARA BANCORP
Santa Barbara Bancorp is the parent company and sole owner of the Bank.
However, there are legal limitations on the amount of dividends which may
be paid by the Bank to the Company. At December 31, 1994, the Bank could
have declared dividends of approximately $26.1 million to the Company.
Federal law also restricts the Bank from extending credit to the Company by
making any such extensions of credit subject to strict collateral
requirements. The condensed financial statements of the parent company only
are presented on this and the following page.
SANTA BARBARA BANCORP
(Parent Company Only)
Balance Sheets
<TABLE>
<CAPTION>
December 31
1994 1993
(in thousands)
<S> <C> <C>
Cash $ 204 $ 298
Investment in and advances to subsidiaries 94,726 86,549
Notes receivable 55 56
Other assets 1 --
Total assets $ 94,986 $ 86,903
Dividends payable $ 1,025 $ 912
Other liabilities 1 --
Total liabilities 1,026 912
Common stock 5,126 5,065
Surplus 39,683 38,557
Unrealized gain (loss) on securities available-for-sale (1,496) 683
Retained earnings 50,647 41,686
Total shareholders' equity 93,960 85,991
Total liabilities and shareholders' equity $ 94,986 $ 86,903
</TABLE>
<PAGE> 29
SANTA BARBARA BANCORP
(Parent Company Only)
Income Statements
<TABLE>
<CAPTION>
Year ended December 31
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
Equity in earnings of subsidiaries:
Undistributed $ 10,356 $ 7,102 $ 8,609
Dividends 2,500 5,780 3,025
Interest income 7 7 7
Miscellaneous expenses (153) (215) (128)
Income tax benefit 241 256 187
Net income $ 12,951 $ 12,930 $ 11,700
</TABLE>
SANTA BARBARA BANCORP
(Parent Company Only)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Interest received $ 7 $ 8 $ 7
Cash paid to suppliers and others (153) (215) (128)
Income tax benefit 241 256 187
Net cash provided by operating activities 95 49 66
Cash flows from investing activities:
Net decrease in loans made to customers 1 3 6
Purchase of OREO from Bank -- -- (400)
Proceeds from sale of OREO -- 400 --
Distributed earnings of subsidiaries 2,500 5,780 3,025
Net cash provided by investing activities 2,501 6,183 2,631
Cash flows from financing activities:
Proceeds from issuance of common stock 1,187 728 180
Payments to retire common stock -- (3,274) (182)
Dividends paid (3,877) (3,538) (2,756)
Net cash used in financing activities (2,690) (6,084) (2,758)
Net increase (decrease) in cash and cash equivalents (94) 148 (61)
Cash and cash equivalents at beginning of period 298 150 211
Cash and cash equivalents at end of period $ 204 $ 298 $ 150
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 12,951 $ 12,930 $ 11,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Earnings from subsidiaries (12,856) (12,882) (11,634)
Accretion of discount related to notes receivable (1) -- --
Decrease in interest receivable 1 1 --
Net cash provided by operating activities $ 95 $ 49 $ 66
</TABLE>
<PAGE> 1
EXHIBIT 99.(g)(3)
PART 1
FINANCIAL INFORMATION
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands except per share amount)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Assets:
Cash and due from banks ...................... $ 59,704 $ 74,746
Federal funds sold ........................... 35,000 65,000
----------- -----------
Cash and cash equivalents .................... 94,704 139,746
----------- -----------
Securities (Note 4):
Held-to-maturity ............................. 283,827 231,730
Available-for-sale ........................... 137,903 125,835
Bankers' acceptances ......................... 44,085 139,294
Loans, net of allowance of $15,894 at
September 30, 1996 and $12,349 at
December 31, 1995 (Note 5) ................... 588,201 546,452
Premises and equipment, net (Note 6) ......... 7,094 8,149
Accrued interest receivable .................. 7,840 7,981
Other assets (Note 7) ........................ 14,474 13,174
----------- -----------
Total assets ................................. $ 1,178,128 $ 1,212,361
=========== ===========
Liabilities:
Deposits:
Demand deposits .............................. $ 159,652 $ 158,122
NOW deposit accounts ......................... 132,642 148,027
Money Market deposit accounts ................ 393,534 427,198
Savings deposits ............................. 92,688 94,124
Time deposits of $100,000 or more ............ 93,175 76,438
Other time deposits .......................... 160,818 150,111
----------- -----------
Total deposits ............................... 1,032,509 1,054,020
Securities sold under agreements
to repurchase and Federal funds purchased .... 31,124 51,316
Other borrowed funds ......................... 1,000 1,210
Accrued interest payable and other liabilities 7,079 4,818
----------- -----------
Total liabilities ............................ 1,071,712 1,111,364
----------- -----------
Shareholders' equity:
Common stock (no par value;
$.67 per share stated value;
20,000 authorized; 7,641
outstanding at September 30, 1996
and 7,679 at December 31 ................... 5,094 5,119
Surplus ...................................... 37,198 39,191
Unrealized loss on securities
available for sale ........................... (195) (179)
Retained earnings ............................ 64,319 56,866
----------- -----------
Total shareholders' equity ................... 106,416 100,997
----------- -----------
Total liabilities and shareholders ........... $ 1,178,128 $ 1,212,361
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements
<PAGE> 2
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Nine-Month For the Three-Month
Periods Ended Periods Ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans ..... $ 41,989 $ 40,018 $ 13,253 $ 12,566
Interest on securities ......... 19,214 17,375 6,899 5,948
Interest on Federal funds sold . 2,345 1,935 510 1,024
Interest on bankers' acceptances 3,018 2,041 550 553
-------- -------- -------- --------
Total interest income .......... 66,566 61,369 21,212 20,091
-------- -------- -------- --------
Interest expense:
Interest on deposits ........... 24,536 23,421 8,090 8,356
Interest on securities sold
under agreements to repurchase
and Federal funds purchased .. 1,512 961 349 391
Interest on other borrowed funds 41 61 12 13
-------- -------- -------- --------
Total interest expense ......... 26,089 24,443 8,451 8,760
-------- -------- -------- --------
Net interest income ............ 40,477 36,926 12,761 11,331
Provision for loan losses ...... 4,264 8,874 -- 3,910
-------- -------- -------- --------
Net interest income after
provision for loan loss ........ 36,213 28,052 12,761 7,421
-------- -------- -------- --------
Other income:
Service charges on deposits .... 3,395 3,172 1,144 1,056
Trust fees ..................... 6,296 5,042 2,050 1,686
Other service charges,
commissions and fees ......... 4,823 4,740 1,353 1,130
Net loss on securities transactions (759) (22) (104) --
Other income ................... 347 360 121 169
-------- -------- -------- --------
Total other income ............. 14,102 13,292 4,564 4,041
-------- -------- -------- --------
Other expense:
Salaries and benefits .......... 19,210 17,550 6,589 5,927
Net occupancy expense .......... 3,387 3,094 1,131 1,080
Equipment expense .............. 1,909 1,937 623 652
Net loss (gain) from operating
other real estate ............ 189 30 99 46
Other expense .................. 9,151 9,355 3,050 1,547
-------- -------- -------- --------
Total other expense ............ 33,846 31,966 11,492 9,252
-------- -------- -------- --------
Income before income taxes ..... 16,469 9,378 5,833 2,210
Applicable income taxes ........ 5,119 2,392 2,128 493
-------- -------- -------- --------
Net income ..................... $ 11,350 $ 6,986 $ 3,705 $ 1,717
======== ======== ======== ========
Earnings per share ............. $ 1.48 $ 0.91 $ 0.48 $ 0.22
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 3
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net Income ........................................... $ 11,350 $ 6,986
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization ........................ 1,528 1,408
Provision for loan losses ............................ 4,264 8,874
Provision (benefit) for deferred income taxes ........ (2,184) 1,329
Net amortization of investment securities
discounts and premiums ............................. (1,575) (428)
Net change in deferred loan origination and
extension fees and costs ........................... 475 87
Decrease in accrued interest receivable .............. 141 78
Increase (decrease) in accrued interest payable ...... (145) 196
Decrease (increase) in fee income receivable ......... 101 (2,242)
Decrease (increase) in prepaid expenses .............. (31) 170
Increase (decrease) in accrued expenses .............. 960 (1,739)
Net loss (gain) on sale of OREO ...................... 85 45
Net loss on securities transactions .................. 758 --
Other operating activities ........................... 1,811 1,590
--------- ---------
Net cash provided by operating activities ............ 17,538 16,354
--------- ---------
Cash flows from investing activities:
Proceeds from call or maturity of securities:
Available-for-sale ................................... 50,350 36,743
Held-to-maturity ..................................... 23,663 10,081
Purchase of securities:
Available-for-sale ................................... (185,171) (52,577)
Held-to-maturity ..................................... (72,445) (5,324)
Proceeds from sale of securities:
Available-for-sale ................................... 121,210 --
Proceeds from maturity of bankers' acceptances ....... 222,654 108,470
Purchase of bankers' acceptances ..................... (128,274) (77,440)
Net increase in loans made to customers .............. (48,070) (43,349)
Disposition of property from defaulted loans ......... 1,557 294
Purchase or investment in premises and equipment ..... (476) (2,369)
--------- ---------
Net cash used in investing activities ................ (15,002) (25,471)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits .................. (21,511) 21,410
Net increase (decrease) in borrowings with
maturities of 90 days or less ...................... (20,401) 24,995
Proceeds from issuance of common stock ............... 1,081 204
Payments to retire common stock ...................... (3,099) (866)
Dividends paid ....................................... (3,648) (3,072)
--------- ---------
Net cash provided by (used in) financing activities .. (47,578) 42,671
--------- ---------
Net increase (decrease) in cash and cash equivalents . (45,042) 33,554
Cash and cash equivalents at beginning of period ..... 139,746 84,630
========= =========
Cash and cash equivalents at end of period ........... $ 94,704 $ 118,184
========= =========
Supplemental disclosure:
Cash paid for the nine months ended:
Interest ............................................. $ 25,944 $ 24,248
Income taxes ......................................... $ 6,150 $ 3,110
</TABLE>
See accompanying notes to consolidated condensed financial statements
<PAGE> 4
Santa Barbara Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1996
(Unaudited)
1. Principles of Consolidation
The consolidated financial statements include the parent holding company, Santa
Barbara Bancorp ("Company"), and its wholly owned subsidiaries, Santa Barbara
Bank & Trust ("Bank") and Sanbarco Mortgage Company ("Mortgage Company").
Material intercompany balances and transactions have been eliminated.
2. Earnings Per Share
Net earnings per common and common equivalent share are computed based on the
weighted average number of shares outstanding during the period. There are no
common stock equivalents that cause dilution in earnings per share in excess of
3 percent. For the nine- and three-month periods ended September 30, 1996 and
1995, the weighted average shares outstanding were as follows:
<TABLE>
<CAPTION>
Nine-Month Periods Three-Month Periods
Ended September 30, Ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Weighted average
shares outstanding 7,643,664 7,678,858 7,640,472 7,657,950
</TABLE>
3. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in a condensed format, and therefore do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been reflected in the financial statements. However, the results of
operations for the nine months ended September 30, 1996 are not necessarily
indicative of the results to be expected for the full year. Certain amounts
reported for 1995 have been reclassified to be consistent with the reporting for
1996.
For the purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and Federal funds sold.
4. Securities
The Company's securities are classified as either "held-to-maturity" or
"available-for-sale." Only those securities for which the Company has the
ability and positive intent to hold to maturity may be classified as
held-to-maturity. Securities which meet these criteria are accounted for at
their amortized historical cost. That is, these securities are carried at their
purchase price adjusted for the amortization of any premium or discount
irrespective of later changes in their market value prior to maturity.
<PAGE> 5
Securities which might be sold for liquidity purposes, sold in response to
interest rate changes, or sold to restructure the maturities of the portfolio to
better match deposit maturities or complement the maturity characteristics of
the loan portfolio are considered available-for-sale. These securities are
reported in the financial statements at fair market value rather than at
amortized cost. The after-tax effect of unrealized gains or losses is reported
as a separate component of shareholders' equity. Changes in the unrealized gains
or losses are shown as increases or decreases in this component of equity, but
are not reported as gains or losses in the statements of income of the Company.
The Company has reclassified a few U.S. agency securities from
"available-for-sale" to "held-to-maturity." These securities have a current book
value of $34.6 million. As required by Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"), the securities were transferred at their then fair
value which was lower than their amortized cost. This unrealized loss, net of
tax, is included in the separate component of shareholders' capital, and is
being amortized against the interest income for the securities over the
respective lives of the securities. This amount, approximately $137,000 at
September 30, 1996 and $315,000 at December 31, 1995, is the reason that the
separate component of capital does not equal the net unrealized losses related
to the securities classified as "available-for-sale" times the combined Federal
and state tax rate of approximately 41%.
During the third quarter of 1995, the Bank became a member of the Federal
Reserve System. As a member, it is required to purchase stock in the Federal
Reserve Bank equal to a percentage of the Bank's capital. By regulation, this
stock is classified as available-for-sale, but it has no market value other than
its purchase price. Therefore, it is shown on a separate line in the next table.
Book and market values of securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
September 30, 1996:
Held-to-maturity:
U.S. Treasury obligations ......... $145,577 $ 103 $ (1,314) $144,366
U.S. agency obligations ........... 52,175 464 (658) 51,981
State and municipal securities .... 86,075 12,952 (4) 99,023
-------- -------- -------- --------
Total held-to-maturity ............ 283,827 13,519 (1,976) 295,370
-------- -------- -------- --------
Available-for-sale:
U.S. Treasury obligations ......... 107,956 220 (195) 107,981
U.S. agency obligations ........... -- -- -- --
Collateralized mortgage
obligations ..................... 29,559 67 (192) 29,434
Equity Securities ................. 488 -- -- 488
-------- -------- -------- --------
Total available-for-sale .......... 138,003 287 (387) 137,903
-------- -------- -------- --------
</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C> <C> <C>
Total Securities .................. $421,830 $ 13,806 $ (2,363) $433,273
======== ======== ======== ========
December 31, 1995:
Held-to-maturity:
U.S. Treasury obligations ......... $ 97,528 $ 775 $ -- $ 98,303
U.S. agency obligations ........... 51,826 983 (143) 52,666
State and municipal securities .... 82,376 15,913 -- 98,289
-------- -------- -------- --------
Total held-to-maturity ............ 231,730 17,671 (143) 249,258
-------- -------- -------- --------
Available-for-sale:
U.S. Treasury obligations ......... 100,090 316 (122) 100,284
U.S. agency obligations ........... 25,026 37 -- 25,063
Equity Securities ................. 488 -- -- 488
-------- -------- -------- --------
Total available-for-sale .......... 125,604 353 (122) 125,835
-------- -------- -------- --------
Total Securities .................. $357,334 $ 18,024 $ (265) $375,093
======== ======== ======== ========
</TABLE>
In November, 1995, the Financial Accounting Standards Board ("the FASB") issued
a guide to implementing SFAS 115. The guide permitted holders of debt securities
a one-time opportunity to transfer securities from their held-to-maturity
classification to available-for-sale without calling into question the holder's
ability and intent to hold to maturity any securities still classified as
held-to-maturity. Under this "window of opportunity," the Company transferred
securities with an amortized cost of $144 million from the held-to-maturity
classification to available-for-sale. The unrealized gains and losses on these
securities totaled $683,000 and $986,000, respectively. $94 million of these
reclassified securities were sold prior to December 31, 1995.
The Company does not expect to realize any significant amount of the unrealized
gains shown above for the held-to-maturity securities unless the securities are
called prior to maturity. The Company does not expect to realize any of the
unrealized losses related to the securities in the held-to-maturity portfolio
because, consistent with their classification under the provisions of SFAS 115,
it is the Company's intent to hold them to maturity. At that time the par value
will be received. Losses may be realized on securities in the available-for-sale
portfolio.
<TABLE>
<CAPTION>
Held-to- Available-
Maturity for-Sale Total
----------------------------------
(in thousands)
<S> <C> <C> <C>
September 30, 1996:
Amortized cost:
In one year or less ..................... $ 50,126 $ 35,023 $ 85,149
After one year through five years ....... 192,147 102,492 294,639
After five years through ten years ...... 14,384 -- 14,384
</TABLE>
<PAGE> 7
<TABLE>
<S> <C> <C> <C>
After ten years ......................... 27,170 -- 27,170
Equity Securities ....................... -- 488 488
-------- -------- --------
$283,827 $138,003 $421,830
======== ======== ========
Estimated market value:
In one year or less ..................... $ 50,486 $ 35,165 $ 85,651
After one year through five years ....... 196,563 102,250 298,812
After five years through ten years ...... 18,202 -- 18,202
After ten years ......................... 30,119 -- 30,119
Equity Securities ....................... -- 488 488
-------- -------- --------
$295,370 $137,903 $433,273
======== ======== ========
December 31, 1995:
Amortized cost:
In one year or less ..................... $ 32,414 $ 55,135 $ 87,549
After one year through five years ....... 151,560 69,981 221,541
After five years through ten years ...... 21,823 -- 21,823
After ten years ......................... 25,933 -- 25,933
Equity Securities ....................... -- 488 488
-------- -------- --------
$231,730 $125,604 $357,334
======== ======== ========
Estimated market value:
In one year or less ..................... $ 32,522 $ 55,172 $ 87,694
After one year through five years ....... 158,803 70,175 228,978
After five years through ten years ...... 27,978 -- 27,978
After ten years ......................... 29,955 -- 29,955
Equity Securities ....................... -- 488 488
-------- -------- --------
$249,258 $125,835 $375,093
======== ======== ========
</TABLE>
The book value and estimated market value of debt securities by contractual
maturity are shown above. Expected maturities may differ from contractual
maturities because certain issuers may have the right to call or prepay
obligations. Depending on the contractual terms of the security, the Company may
receive a call or prepayment penalty.
5. Loans
The balances in the various loan categories are as follows:
<PAGE> 8
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(in thousands)
<S> <C> <C>
Real estate:
Residential ......................... $171,617 $142,143
Non-residential ..................... 192,851 179,272
Construction ........................ 15,572 20,846
Commercial loans .................... 142,187 144,011
Home equity loans ................... 32,535 34,597
Consumer loans ...................... 39,556 28,494
Municipal tax-exempt obligations .... 7,222 7,573
Other loans ......................... 2,555 1,865
-------- --------
Total loans ......................... $604,095 $558,801
======== ========
</TABLE>
The loan balances at September 30, 1996 and December 31, 1995, are net of
approximately $2,614,000 and $1,990,000, respectively, in loan fees and
origination costs deferred under the provisions of Statement of Financial
Accounting Standards No. 91.
Statements of Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan, and No. 118, Accounting by Creditors for Impairment of
a Loan--Income Recognition and Disclosures were adopted on January 1, 1995. At
that date, a valuation allowance for credit losses related to impaired loans was
established. A loan is identified as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of the
loan agreement. Because this definition is very similar to that used by bank
regulators to determine on which loans interest should not be accrued, the
Company expects that most impaired loans will be on non-accrual status.
Therefore, in general, the accrual of interest on impaired loans is
discontinued, and any uncollected interest is written off against interest
income from other loans in the current period. No further income is recognized
until all recorded amounts of principal are recovered in full or until
circumstances have changed such that the loan is no longer regarded as impaired.
There are some loans about which there is doubt regarding the collectibility of
interest and principal according to the contractual terms, but which are both
fully secured by collateral and are current in their interest and principal
payments. These impaired loans are not classified as non-accrual. Not all types
of loans are covered by the provisions of these statements. Loans not covered by
the statements may be classified as non-accrual because of concern for
collectibility, but not be reported as impaired.
The amount of the valuation allowance for impaired loans is determined by
comparing the recorded investment in each loan with its value measured by one of
three methods: (1) the expected future cash flows are estimated and then
discounted at the effective interest rate; (2) the loan's observable market
price if it is of a kind for which there is a secondary market; or (3) a
valuation of the underlying collateral. A valuation allowance is that amount by
which the recorded investment exceeds the value of the impaired loan. If the
value of the loan as determined by one of the above methods exceeds the recorded
investment in the loan, no valuation allowance for that loan is established. The
following table discloses balance information about the impaired loans and the
allowance related to them ($ in thousands) as of September 30, 1996 and December
31, 1995:
<PAGE> 9
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Loans identified as impaired $8,430 $13,295
Impaired loans for which a valuation
allowance has been determined 4,957 13,295
Impaired loans for which no valuation
allowance was determined necessary 3,473 --
Amount of valuation allowance 2,166 4,766
</TABLE>
The provisions of SFAS Nos. 114 and 118 permit the valuation allowance reported
above to be determined on a loan-by-loan basis or by aggregating loans with
similar risk characteristics. Because the loans currently identified as impaired
have unique risk characteristics, the valuation allowance was determined on a
loan-by-loan basis.
The following table discloses additional information ($ in thousands) about
impaired loans for the three and nine-month periods ended September 30, 1996 and
1995:
<TABLE>
<CAPTION>
Three-Month Period Nine-Month Period
Ended September 30, Ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Average amount of
recorded investment
in impaired loans .............. $8,478 $23,832 $9,035 $25,100
Collections of interest
from impaired loans and
recognized as interest income .. -- $ 412 $ 249 $ 1,145
</TABLE>
The Company also provides an allowance for losses for: (1) loans that are not
covered by the provisions of SFAS Nos. 114 and 118; (2) loans which, while
covered by the statements, are not identified as impaired; and (3) losses
inherent in loans of all types which have not been specifically identified as of
the period end. This allowance is based on review of individual loans,
historical trends, current economic conditions, and other factors.
Loans that are deemed to be uncollectible, whether or not covered by the
provisions of the statements, are charged-off. Uncollectibility is determined
based on the individual circumstances of the loan and historical trends.
The valuation allowance for impaired loans of $2.2 million is included with the
general allowance for loan losses of $13.7 million to total the $15.9 million
reported on the balance sheet for September 30, 1996 which these notes accompany
and in the statement of changes in the allowance account for the first nine
months of 1996 shown below. The amounts related to tax refund anticipation loan
and to all other loans are shown separately.
<PAGE> 10
<TABLE>
<S> <C>
Balance, December 31, 1995 ........................... $12,349
Provision for tax refund anticipation loans .......... 1,100
Tax refund loan losses charged against allowance ..... (1,080)
Tax refund loan recoveries added to allowance ........ 1,359
Provision for other loan losses ...................... 3,164
Other loan losses charged against .................... (2,550)
Other loan recoveries added to all ................... 1,552
-------
Balance, September 30, 1996 ................. $15,894
=======
</TABLE>
6. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to income over the estimated useful lives
of the assets, generally by the use of an accelerated method in the early years,
switching to the straight line method in later years. Leasehold improvements are
amortized over the terms of the related lease or the estimated useful lives of
the improvements, whichever is shorter. Depreciation expense (in thousands) was
$615 and $525 for the three-month periods ended September 30, 1996 and 1995,
respectively, and $1,617 and $1,408 for the nine-month periods ended September
30, 1996 and 1995, respectively. The table below shows the balances by major
category of fixed assets: (in thousands)
<TABLE>
<CAPTION>
----------------------------------------
Accumulated Net Book
September 30, 1996 Cost Depreciation Value
----------------------------------------
<S> <C> <C> <C>
Land and buildings $ 5,614 $ 3,081 $ 2,533
Leasehold improvements 6,396 4,447 1,949
Furniture and equipment 13,273 10,661 2,612
----------------------------------------
Total $ 25,283 $ 18,189 $ 7,094
========================================
Accumulated Net Book
December 31, 1995 Cost Depreciation Value
----------------------------------------
Land and buildings $ 5,607 $ 2,967 $2,640
Leasehold improvements 6,427 3,996 2,431
Furniture and equipment 12,843 9,765 3,078
----------------------------------------
Total $ 24,877 $16,728 $8,149
========================================
</TABLE>
7. Property from Defaulted Loans Included in Other Assets
Property from defaulted loans is included within other assets on the balance
sheets. As of September 30, 1996 and December 31, 1995, the Company had
$1,583,000 and $1,785,000 respectively, in property from defaulted loans.
Property from defaulted loans is carried at the lower of the outstanding balance
of the related loan at the time of foreclosure or the estimate of the market
value of the assets less disposal costs.
