<PAGE>
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED
PURSUANT TO RULE 901(d) OF REGULATION S-T.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission file number 0-11113
SANTA BARBARA BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 95-3673456
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1021 Anacapa Street, Santa Barbara, California 93101
(Address of principal executive offices) (Zip Code)
(805) 564-6300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE Securities
registered pursuant to Section 12(g) of the Act:
Title of Class Name of Each Exchange on Which Registered
Common Stock, no par value Not Listed
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 13, 1998, based on the sales prices reported to the
Company on that date of 49.375 per share:
Common Stock - $304,256,601*
*Based on reported beneficial ownership by all directors and executive officers
and the Company's Employee Stock Ownership Plan; however, this determination
does not constitute an admission of affiliate status for any of these
stockholders.
As of February 13, 1998, there were 7,618,339 shares of the issuer's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Proxy Statement
for the Annual Meeting of Shareholders on April 21, 1998 are incorporated by
reference into Parts I, II, and III.
<PAGE>
INDEX Page
PART I
Item 1. Business
(a) General Development of Business 3
(b) Financial Information about Industry Segments 3
(c) Narrative Description of Business 3
(d) Financial Information about Foreign and Domestic
Operations and Export Sales 3
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for the Registrant's Securities and Related
Stockholder Matters 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 8. Financial Statements and Supplementary Data 34
Item 9. Disagreements on Accounting and Financial
Disclosures 65
PART III
Item 10. Directors and Executive Officers of the Registrant 66
Item 11. Executive Compensation 66
Item 12. Security Ownership of Certain Beneficial Owners and
Management 66
Item 13. Certain Relationships and Related Transactions 66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 67
SIGNATURES 68
EXHIBIT INDEX 69
<PAGE>
PART I
ITEM 1 BUSINESS
(a) General Development of the Business
Operations commenced as Santa Barbara National Bank ("the Bank") with one office
and 18 employees in 1960. In 1979, the Bank switched to a state charter and
changed its name to Santa Barbara Bank & Trust. Santa Barbara Bancorp ("the
Company") was formed in 1982. Unless otherwise stated, "Company" refers to the
consolidated entity and to the Bank when the context indicates. "Bancorp" refers
to the parent company only. The Bank became the principal subsidiary of the
Company, and has since grown to 25 banking offices with loan, trust and escrow
offices. Through 1988, banking activities were primarily centered in the
southern coastal region of Santa Barbara County. Two banking offices were added
in the merger with Community Bank of Santa Ynez Valley on March 31, 1989. In
1995, three banking offices were opened in western Ventura County, a fourth
office was added in 1996, and a fifth in 1997. Five offices in northern Santa
Barbara County were added with the acquisition of First Valley Bank on March 31,
1997, and three offices in the Santa Clara River Valley region of Ventura County
were added with the acquisition of Citizens State Bank on September 30, 1997.
A second subsidiary, Sanbarco Mortgage Corporation ("Sanbarco"), was formed in
1988. This subsidiary, which is now primarily involved in mortgage brokering
services and the servicing of brokered loans, was formerly known as SBBT Service
Corporation.
(b) Financial Information about Industry Segments
There are no identifiable industry segments.
(c) Narrative Description of Business
Bancorp is a bank holding company, which as described above, has one bank
subsidiary and one non-bank subsidiary. The Bancorp on its own has a few
operations, but these are very insignificant in comparison to those of its major
subsidiary, the Bank.
The Bank offers a full range of commercial banking services to households,
professionals, and small- to medium-sized businesses. These include various
commercial, real estate and consumer loan, leasing and deposit products. The
Bank offers other services like electronic fund transfers and safe deposit boxes
to both individuals and businesses. In addition, services like lockbox payment
servicing, foreign exchange, letters of credit, and cash management are offered
to business customers. The Bank also offers trust and investment services to
individuals and businesses. These include acting as trustee or agent for living
and testamentary trusts, employee benefit trusts, and profit sharing plans.
Investment management and advisory services are also provided.
Competition For most of its banking products, the Company faces competition in
its market area from branches of most of the major California money center
banks, some of the state-wide savings and loan associations, and other local
community banks and savings and loans. For some of its products, the Company
faces competition from other non-bank financial service companies, especially
securities firms.
Employees The Company's current workforce is approximately 680 full time
equivalent employees. Additional employees would be added if new opportunities
for geographic expansion should occur.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales
The Company does not have any foreign business operations or export sales of its
own. However, it does provide financial services including wire transfers,
currency exchange, letters of credit, and loans to other businesses involved in
foreign trade.
ITEM 2. PROPERTIES
The Company maintains executive and administrative offices at leased premises at
1021 Anacapa Street, Santa Barbara, California. Of the 25 branch banking
offices, all or a portion of 19 are leased. The building used by the Real
Estate, Consumer Lending and Escrow departments is owned, and commercial office
space is leased for Trust and Investment Services, Management Information
Services, Leasing, Loan Servicing, and other administrative offices.
In February 1998, one of the banking offices was severely damaged by flooding.
Insurance will cover a substantial portion of the carrying cost of the assets
lost, but the Company will need to replace the facility and equipment. While the
expenditures for replacement will likely occur in 1998 and 1999, the impact to
earnings in these years is expected to be immaterial as the charges to earnings
will occur through depreciation over the life of the assets.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Company's common stock is traded on The Nasdaq Stock Market under the symbol
SABB. At February 13, 1998, six independent brokerage firms were registered as
market makers in the Company's common stock. The following table presents the
high and low closing sales prices of the Company's common stock for each
quarterly period for the last two years as reported by The Nasdaq Stock Market:
<TABLE>
<CAPTION>
1997 Quarters 1996 Quarters
------------------------------- --------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Range of stock prices:
High $49.00 $48.38 $46.50 $32.00 $28.13 $27.88 $27.00 $25.33
Low $45.50 $39.25 $29.88 $27.63 $25.25 $25.25 $23.38 $19.75
</TABLE>
(b) Holders
There are approximately 1,549 holders of stock as of February 13, 1998. This
number includes brokerage firms and other financial institutions which hold
stock in their name actually owned by third parties. The Company is not provided
with the number or identities of these parties.
(c) Dividends
Dividends are currently declared four times a year, and the Company expects to
follow the same policy in the future. The following table presents cash
dividends declared per share for the last two years:
<TABLE>
<CAPTION>
1997 Quarters 1996 Quarters
------------------------------- --------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash dividends
declared $0.26 $0.26 $0.23 $0.23 $0.20 $0.18 $0.18 $0.15
</TABLE>
The dividends paid to shareholders of the Company are funded primarily from
dividends received by Bancorp from the Bank. Reference should be made to Note 17
of the Consolidated Financial Statements on page 60 for a description of
restrictions on the ability of the Bank to pay dividends to Bancorp.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Consolidated Financial Statements and the accompanying notes presented
in Item 8 herein.
<TABLE>
<CAPTION>
(amounts in thousands except Increase
per share amounts) 1997 (Decrease) (2) 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income $114,935 $25,357 $89,578 $82,188 $74,900 $68,433
Interest expense 43,205 8,156 35,049 33,583 24,967 22,362
Net interest income 71,730 17,201 54,529 48,605 49,933 46,071
Provision for credit losses 6,980 2,716 4,264 9,924 6,257 6,150
Other operating income 25,144 6,202 18,942 17,688 13,084 14,102
Non-interest expense:
Staff expense 31,825 5,673 26,152 22,655 21,149 19,641
Other operating expense 28,280 7,843 20,437 19,314 18,142 17,695
Income before income taxes and
effect of accounting change 29,789 7,171 22,618 14,400 17,469 16,687
Provision for income taxes 9,653 2,700 6,953 3,985 4,518 4,377
Income before effect of
accounting change 20,136 4,471 15,665 10,415 12,951 12,310
Effect of accounting change -- -- -- -- -- 620
Net income $20,136 $4,471 $15,665 $10,415 $12,951 $12,930
DILUTED PER SHARE DATA: (1)
Average shares outstanding 7,792 (14) 7,806 7,802 7,775 7,849
Net income $2.58 $0.57 $2.01 $1.33 $1.67 $1.65
Cash dividends declared $0.98 $0.27 $0.71 $0.55 $0.52 $0.47
FINANCIAL CONDITION:
Total assets $1,592,386 $291,066 $1,301,320 $1,212,361 $1,067,616 $979,143
Total deposits $1,404,155 $291,072 $1,113,083 $1,054,020 $956,717 $866,253
Long-term debt $38,000 -- $38,000 -- -- --
Total shareholders' equity $118,166 $10,573 $107,593 $100,997 $93,960 $85,991
OPERATING AND CAPITAL RATIOS:
Average total shareholders'
equity to average total assets 7.96% (0.87%) 8.83% 9.10% 8.86% 8.72%
Rate of return on average:
Total assets 1.40% 0.08% 1.32% 0.96% 1.27% 1.34%
Total shareholders' equity 17.56% 2.64% 14.92% 10.60% 14.33% 15.41%
<FN>
(1) Earnings per share are presented on a diluted basis.
(2) A substantial portion of the changes shown in this column relate to the
acquisitions discussed in Note 19 to the consolidated financial
statements.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Management's discussion and analysis of the financial condition and results of
operation begins on the following page.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following provides Management's comments on the financial condition and
results of operations of Santa Barbara Bancorp. This discussion should be read
in conjunction with the Consolidated Financial Statements and the Notes to the
Consolidated Financial Statements that are presented on pages 37 through 64 of
this Annual Report on Form 10-K. "Bancorp" refers to the parent company only.
The "Bank" refers to Santa Barbara Bank & Trust, the principal subsidiary of
Bancorp. Unless otherwise stated, the "Company" refers to the consolidated
entity and to the Bank when the context indicates. Terms with which the reader
may not be familiar are printed in bold and defined the first time they occur or
are defined in a note on page 33. The discussion provides insight into
Management's assessment of the operating trends over the last several years and
its expectations for 1998.
Such expressions of expectation are not historical in nature and are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to risks
and uncertainties that may cause actual future results to differ materially from
those expressed in any forward-looking statement. Such risks and uncertainties
with respect to the Company include those related to the economic environment,
particularly in the region in which the Company operates, the products and
pricing of competitive financial institutions, government regulation, government
monetary and fiscal policy, changes in prevailing interest rates, acquisitions
and the integration of acquired businesses, credit quality, asset/liability
management, and the availability of sources of liquidity at a reasonable cost.
The discussion is intended to assist readers of the accompanying financial
statements by providing information on the strategies adopted by the Company to
address these risks, and the results of these strategies. These elements are
addressed as they relate to the major asset and liability components of the
Company's balance sheets, and the major income and expense categories of the
Company's statements of income and to significant changes therein.
OVERVIEW OF THE EARNINGS PERFORMANCE
Santa Barbara Bancorp earned a record $20.1 million in 1997, 28% over the $15.7
million earned in 1996. Earnings per share were $2.58 compared with $2.01 for
1996. Among the reasons for the substantial increase were the integration of
eight new branch offices through the acquisition of First Valley Bank ("FVB") in
Lompoc and Citizens State Bank ("CSB") in Ventura County (described in Note 19
to the Consolidated Financial Statements), growth in the tax refund anticipation
loan ("RAL") and refund transfer ("RT") programs, and an 18% increase in Trust
fees due to the strong stock market and new customers.
In addition to the growth resulting from the acquisitions of FVB and CSB, the
Company's Santa Barbara and Ventura area loans and deposits also grew during the
last 12 months, generating additional net interest income. The loan categories
increased $197.4 million in the last 12 months, while deposits increased $291.1
million. Together with the net assets acquired in the two acquisitions and the
strong RAL program, this growth resulted in $17.2 million of additional net
interest income (the difference between interest income and interest expense) in
1997 compared to 1996.
Noninterest income increased $6.2 million compared to 1996, with Trust and
Investment Services fees up $1.5 million over the 1996 period and a variety of
other service fees accounting for the balance of the increase.
Although there were more noncurrent loans at the end of 1997 than a year ago
because of the new loan portfolios acquired in the FVB and CSB transactions, the
ratio of noncurrent loans to total loans has decreased. Because of recoveries of
previously charged off loans and improved credit quality, only $2.3 million was
provided in 1997 for credit losses other than RAL's, compared to $3.2 million of
such provision expense in 1996.
As would be expected with the growth in the Company's average assets and the
expansion into new market areas through acquisition in 1997, there has also been
an increase in noninterest expenses. These include salary costs, occupancy,
marketing, and the amortization of goodwill from the FVB and CSB acquisitions.
In addition, certain nonrecurring expenses such as legal, accounting and other
costs were incurred in 1997 relating to the two transactions. Even so, the
Company's operating efficiency ratio, which measures how many cents of expense
it takes to earn a dollar of operating income, declined favorably from
59.7(cent) in 1996 to 59.0(cent) in 1997, reflecting a faster rate of growth of
revenues as compared to expenses in 1997.
EXTERNAL FACTORS IMPACTING THE COMPANY
The major external factors impacting the Company include economic conditions,
regulatory considerations, and trends in the banking and financial services
industries.
Economic Conditions
From a national perspective, the most significant economic factors impacting the
Company in the last three years have been the steady growth in the economy and
the actions of the Federal Reserve Board ("the Fed") to manage the pace of that
growth--raising short-term interest rates to slow the pace and forestall
inflation, lowering rates to spur growth and avoid recession. These changes
impact the Company as market rates for loans, investments and deposits respond
to the Fed's actions.
The local economy is also experiencing growth similar to the trends occurring
elsewhere. New companies are establishing their headquarters in the area and the
business climate in general is on the upswing. Tourism, which has long been
important to the communities in the Company's market area, remains strong. In
the last few years, medical manufacturing and other "hi-tech" businesses have
been growing. The Company's expanded market areas now encompass communities more
oriented to agricultural enterprises. This has helped to diversify the Company's
customer base. These factors should be favorable to the Company's future
financial performance.
Regulatory Considerations
The Company is impacted by changes in the regulatory environment. Bancorp, as a
bank holding company, the Bank, as a member of the Federal Reserve Bank (the
"FRB"), and Sanbarco, as a non-bank subsidiary of a bank holding company, are
all regulated by the FRB. As a state-chartered commercial bank, the Bank is also
regulated by the California Department of Financial Institutions.
Changes in regulation impact the Company in different ways. The FRB requires
that the Company maintain cash reserves equal to a percentage of the Company's
transaction deposits. The FRB may increase or decrease the percentage of
deposits that must be held at the FRB to impact the amount of funds available to
commercial banks to lend to their customers as a means of stimulating or slowing
economic activity.
Areas of regulatory concern are discussed below in the section entitled
"Regulation." The Company is also impacted by minimum capital requirements.
These rules are discussed below in the section entitled "Capital Adequacy." The
actions which the various banking agencies can take with respect to financial
institutions which fail to maintain adequate capital and comply with other
requirements are discussed below in the section titled "Regulation."
Competition
The Company faces competition from other financial institutions and from
businesses in other industries which have developed financial products. Banks
once had an almost exclusive franchise for deposit products and provided the
majority of business financing. With deregulation in the 1980's, other kinds of
financial institutions began to offer competing products. Also, increased
competition in consumer financial products has come from companies not typically
associated with the banking and financial services industry, such as AT&T,
General Motors and various software developers. Community banks, including the
Company, are working to offset this trend by developing new products that
capitalize on the service quality that a local institution can offer. Among
these are new loan and investment products. The latter are offered to retail
customers through the Company's Trust & Investment Management Services Division.
The Company's primary competitors are different for each specific product and
market area.
INTEREST RATE RISK MANAGEMENT
The Company sees the process of addressing the potential impacts of these
external factors as part of its management of risk. In addition to common
business risks such as disasters, theft, and loss of market share, the Company
is subject to special types of risk due to the nature of its business. New and
sophisticated financial products are continually appearing with different types
of risk which need to be defined. Also, the risks associated with existing
products must be reassessed periodically. The Company cannot operate risk-free
and make a profit. Instead, the process of risk definition and reassessment
allows the Company to select the appropriate level of risk for the anticipated
level of reward and then decide on the steps necessary to manage this risk. The
process of addressing these risks is led by the Company's Risk Management
Committee.
The special risks related to financial products are credit risk and interest
rate risk. Credit risk relates to the possibility that a debtor will not repay
according to the terms of the debt contract. Credit risk is discussed in the
sections related to loans. Interest rate risk relates to the adverse impacts of
changes in interest rates. The types of interest rate risk will be explained in
the next section. The effective management of these risks is the backbone of the
Company's business strategy.
INTEREST MARGIN AND CHANGES IN THE RELATIVE PROPORTIONS OF ASSETS AND
LIABILITIES
The Company earns income from two sources. The primary source is through the
management of its financial assets and liabilities and the second is by charging
fees for services provided. The first involves functioning as a financial
intermediary. The Company accepts funds from depositors or other creditors and
then either loans the funds to borrowers or invests those funds in securities or
other financial instruments. Fee income is discussed in other sections of this
analysis, specifically "Other Operating Income" and "Tax Refund Anticipation
Loans and Refund Transfers."
Net interest income is the difference between interest income and fees earned on
loans and investments and interest expense paid on deposits and other
liabilities. The amount by which interest income will exceed interest expense
depends on two factors: the volume or balance of earning assets compared to the
volume or balance of interest bearing deposits and liabilities, and the interest
rate earned on those interest earning assets compared with the interest rate
paid on those interest bearing deposits and liabilities. The Company's 1997 tax
equivalent (Note B) net interest income of $76.3 million was $17.9 million, or
30.7%, greater than 1996.
Net interest margin is net interest income expressed as a percentage of average
earning assets. To maintain its net interest margin, the Company must manage the
relationship between interest earned and paid. The Company's 1997 net interest
margin of 5.55% on a tax equivalent basis was considerably higher than 1996's
net interest margin of 5.16% as the Company realized higher average interest
rates on each of the major asset categories. The net interest margin is subject
to the following types of risks that are related to changes in interest rates.
Market Risk Relating to Fixed-Rate Instruments
Market risk results from the fact that the market values of assets or
liabilities on which the interest rate is fixed will increase or decrease with
changes in market interest rates. If the Company invests funds in a fixed-rate
long-term security and then interest rates rise, the security is worth less than
a comparable security just issued because the older security pays less interest
than the newly issued security. If the older security had to be sold before
maturity, the Company would have to recognize a loss. Conversely, if interest
rates decline after a fixed-rate security is purchased, its value increases.
Therefore, while the value changes regardless of which direction interest rates
move, the adverse exposure to market risk is primarily due to rising interest
rates. In general, for a given change in interest rates, the amount of the
change in value up or down is larger for instruments with longer remaining
maturities. Therefore, the exposure to market risk is lessened by managing the
amount of fixed-rate assets and by keeping maturities relatively short. However,
these steps must be balanced against the need for adequate interest income
because variable rate and shorter term fixed-rate securities generally earn less
interest than fixed-rate and longer term securities.
Note 14 to the financial statements discloses the carrying amounts and fair
values of the Company's financial assets and liabilities as of the end of 1997
and 1996. There is a relatively small difference due to credit quality issues
pertaining to loans. However, the difference between the carrying amount and the
fair value essentially is a measure of how much more or less valuable the
Company's financial assets were to it at December 31, 1997 and 1996 than when
acquired because of changes in interest rates. The excess of financial assets'
fair values over carrying amounts at the end of 1997 is $16.2 million compared
with $10.0 million at the end of 1996.
There is market risk relating to the Company's fixed-rate or term liabilities as
well as its assets. For financial liabilities, like certificates of deposit, the
adverse exposure to market risk is from lower rates because the Company must
continue to pay the higher rate until the end of the term of the certificate.
However, because the amount of fixed-rate liabilities is significantly less than
the fixed-rate assets, and because the average maturity is substantially less
than for the assets, the market risk is not as great. The difference between the
carrying amount and the fair value in the table in Note 14 shows the impact of
changing rates on the term deposits. They are worth $1.9 million more to
customers at December 31, 1997 than they were when issued because, on a weighted
average basis, they are paying higher than current market rates. However, this
is much less than the $16.2 million by which the fair value of the Company's
assets exceeds their carrying amounts because the assets also are paying higher
rates than currently are available for comparable assets.
Mismatch Risk
The second interest-related risk, mismatch risk, arises from the fact that when
interest rates change, the changes do not occur equally in the rates of interest
earned and paid because of differences in the contractual terms of the assets
and liabilities held. A difference in the contractual terms, a mismatch, can
cause adverse impacts on net interest income.
<TABLE>
TABLE 1 -- Interest Rate
Sensitivity As of December 31, 1998
<CAPTION>
After three After six After one Noninterest
(in thousands) Within months months year but bearing or
three but within but within within After five nonrepricing
months six months one year five years years items Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans (Note E) $ 355,086 $ 110,041 $ 72,256 $ 252,390 $ 80,461 $ (9,834) $ 860,400
Cash and due from banks -- -- -- -- -- 67,799 67,799
Federal funds sold 48,000 -- -- -- -- -- 48,000
Securities * 53,985 19,011 44,842 284,842 97,711 8,957 509,348
Bankers' acceptances 26,622 22,778 -- -- -- -- 49,400
Other assets -- -- -- -- -- 57,439 57,439
------------------------------------------------------------------------------------ --------------
Total assets 483,693 151,830 117,098 537,232 178,172 124,361 1,592,386
------------------------------------------------------------------------------------ --------------
Liabilities and
shareholders' equity:
Borrowed funds:
Repurchase agreements
and Federal funds
purchased 21,293 -- -- -- -- -- 21,293
Long-term debt and
other borrowings 3,500 2,500 5,000 28,000 -- -- 39,000
Interest-bearing deposits:
Savings and interest-
bearing transaction
accounts 316,174 57,440 127,823 -- 220,155 -- 721,592
Time deposits 139,982 89,852 97,118 89,282 578 -- 416,812
Demand deposits -- -- -- -- -- 265,751 265,751
Other liabilities 5,862 -- -- -- -- 3,910 9,772
Net shareholders' equity -- -- -- -- -- 118,166 118,166
------------------------------------------------------------------------------------ --------------
Total liabilities and
shareholders' equity 486,811 149,792 229,941 117,282 220,733 387,827 $ 1,592,386
------------------------------------------------------------------------------------ ==============
Interest rate-
sensitivity gap $ (3,118) $ 2,038 $ (112,843) $ 419,950 $ (42,561) $ (263,466)
====================================================================================
Gap as a percentage of
total assets (0.20%) 0.13% (7.09%) 26.37% (2.67%) (16.55%)
Cumulative interest
rate-sensitivity gap $ (3,118) $ (1,080) $ (113,923) $ 306,027 $ 263,466
Cumulative gap as a per-
centage of total assets (0.20%) (0.07%) (7.15%) 19.22% 16.55%
<FN>
* Includes both Held-to-Maturity and Available-for-Sale securities
</FN>
</TABLE>
The Company has a large portion of its loan portfolio tied to its base lending
rate or to the national prime rate. If these rates are lowered because of
general market conditions, e.g., other banks are lowering their lending rates,
these loans will be repriced. If the Company were at the same time to have a
large proportion of its deposits in long-term fixed-rate certificates, interest
earned on loans would decline while interest expense would remain at higher
levels for a period of time. Therefore net interest income would decrease
immediately. A decrease in net interest income could also occur with rising
interest rates if the Company had a large portfolio of fixed-rate loans and
securities funded by deposit accounts on which the rate is steadily rising.
This exposure to mismatch risk is managed by matching the maturities and
repricing opportunities of assets and liabilities. This may be done by varying
the terms and conditions of the products that are offered to depositors and
borrowers. For example, if many depositors want longer-term certificates while
most borrowers are requesting loans with floating interest rates, the Company
will adjust the interest rates on the certificates and loans to try to match up
demand for similar maturities. The Company can then partially fill in mismatches
by purchasing securities or borrowing funds from the Federal Home Loan Bank with
the appropriate maturity or repricing characteristics.
One of the means of monitoring this matching process is by use of a table like
Table 1, entitled "Interest Rate Sensitivity." The table shows the extent to
which the maturities or repricing opportunities of the major categories of
assets and liabilities are matched. This table is sometimes called a gap report,
because it shows the gap between assets and liabilities repricing or maturing in
each of a number of periods. The gap is stated in both dollars and as a percent
of total assets and is stated for both each individual period separately and
cumulatively as of the end of each period.
The first measuring period shown in the table covers assets and liabilities that
mature or reprice within the three months following December 31, 1997. This is
the most critical period because there is little time to correct a mismatch that
is having an adverse impact on income. For example, if the Company had a
significant negative gap--liabilities significantly exceeded assets--and
interest rates rose suddenly, the Company would have to wait for more than three
months before enough assets could be repriced to offset the higher expense on
the deposits.
As of year-end 1997, the Company had a very small negative gap in this first
period. Liabilities exceeded assets by 0.20% of total assets. There is some
arbitrariness in the assignment to specific time periods of deposit accounts
that reprice at the option of the Company. For the purposes of this table, the
Company has made the assumption that some of the money market accounts will
reprice within three months, but this will be governed by market conditions
rather than contractual terms.
In the next period, after three months but within six months, there was a very
small excess of assets over liabilities, representing only 0.13% of total
assets.
For the third period, after six months but within one year, liabilities exceeded
assets by 7.09% of total assets, reflecting the current customer preference for
non-term or short-term deposits. The cumulative gap within one year of (7.15%)
of total assets is well within the Company's acceptable limits.
The periods of over one year are less critical because more steps can be taken
to mitigate the adverse effects of any interest rate changes.
A gap report is a first step in monitoring and managing interest rate risk by
showing mismatches in the maturities of assets and liabilities, but it is not
sufficient because it does not adequately address market risk and a third type
of interest rate risk.
Basis Risk
The third interest-related risk, basis risk, arises from the fact that interest
rates rarely change in a parallel or equal manner. The interest rates associated
with the various assets and liabilities differ in how often they change, the
extent to which they change, and whether they change sooner or later than other
interest rates. For example, while the repricing of a specific asset and a
specific liability may fall in the same period of the gap report, the interest
rate on the liability may rise one percent in response to rising market rates
while the asset increases only one-half percent. While evenly matched in the gap
report, the Company would suffer a decrease in net interest income. This
exposure to basis risk is the type of interest risk least able to be managed,
but is also the least dramatic. Avoiding concentration in only a few types of
assets or liabilities is the best means of increasing the chance that the
average interest received and paid will move in tandem. The wider
diversification means that many different rates, each with their own volatility
characteristics, will come into play.
Net Interest Income and Net Economic Value Simulations
To quantify the extent of all of these risks both in its current position and in
transactions it might take in the future, the Company uses computer modeling to
simulate the impact of different interest rate scenarios on net interest income
and on net economic value. Net economic value or the market value of portfolio
equity is defined as the difference between the market value of financial assets
and liabilities. These hypothetical scenarios include both sudden and gradual
interest rate changes, and interest rate changes in both directions.
The Company relies more on this modeling in reaching interest rate risk
management decisions than on gap reports. The most recent modeling confirms that
the Company's interest rate risk profile is balanced, and the results are within
normal expectations.
The hypothetical impacts of sudden interest rate shocks applied to the Company's
asset and liability balances are modeled quarterly. The resulting shock reports
indicate how much of the Company's net interest income and net economic value
are "at risk" (deviation from the base level) from various rate changes.
Although interest rates normally would not change suddenly in this manner, this
exercise is valuable in identifying exposures. The shock reports for the
Company's December 31, 1997 balances indicate that the Company's net interest
income at risk over a one year period and net economic value at risk from 2%
shocks are within normal expectations for such sudden changes:
Shocked by -2% Shocked by +2%
Net interest income +1.42% (1.04%)
Net economic value +14.29% (14.08%)
Net interest income simulations are prepared at least twice a year using three
interest rate projections provided by an outside economics data resource firm.
The interest rate projections selected are for most likely, declining and rising
interest rate scenarios. The three interest rate scenarios are applied to
expected asset and liability balances over the next year, and the resulting
changes indicate the amount of net interest income at risk. The most recent
interest rate simulations indicate that the Company's net interest income at
risk in 1998 is well within normal expectations for such interest rate
scenarios:
Declining Rates Rising Rates
Net interest income +.59% (1.19%)
Average Fed Funds rate (1.29%) +.67%
For the shock reports, the Company has made certain assumptions about the
duration of its non-maturity deposits that are important to determining net
economic value at risk. The Company engaged an outside consultant to gather and
study data on its non-maturity deposits, and the results of that study have been
incorporated into these latest models. The interest rate simulation reports are
dependent upon the shape and volatility of the interest rate scenarios selected
and upon the assumptions of the rates that would be paid on the Company's
administered rate deposits as external yields change. The most recent interest
rate scenarios selected reflect lower rates and flatter yield curves (Note F),
and neither the declining nor rising interest rate scenarios reflect abrupt,
significant deviations from the most likely interest rate scenario.
Asset/Liability Management
The Company monitors asset and deposit levels, developments and trends in
interest rates, liquidity, capital adequacy and marketplace opportunities. It
responds to all of these to protect and enhance net interest income while
managing risks within policy at acceptable levels. In addition, alternative
business plans and contemplated transactions are analyzed for their impact. This
process, known as asset/liability management, is carried out by changing the
maturities and relative proportions of the various types of loans, investments,
deposits and other borrowings in the ways described above. The Asset/Liability
Committee has overall responsibility for the Company's asset/liability
management.
As an example of this asset/liability management process, the Company determined
early in 1997 that it would need to take actions to manage the additional
interest rate risk that would result from the FVB acquisition. A plan was
approved and executed that involved obtaining new CD funds and selling Treasury
Notes, thereby managing the additional interest rate risk from the FVB
acquisition. Of the $58.6 million of term Treasury Notes sold, $30 million were
first reclassified as available-for-sale. This is permitted to maintain the
Company's interest rate risk position in the event of a major business
combination.
Table 2, "Distribution of Average Assets, Liabilities and Shareholders' Equity
and Related Interest Income, Expense and Rates," sets forth the daily average
balances for the major asset and liability categories, the related income or
expense where applicable, and the resultant yield or cost attributable to the
average earning assets and interest-bearing liabilities. When comparing interest
yields and costs year to year, the use of average balances more accurately
reflects trends since these balances are not significantly impacted by
period-end transactions. The amount of interest earned or paid for the year is
also directly related to the average balances during the year and not to what
the balances happened to be on the last day of the year.
<TABLE>
TABLE 2 -- Distribution of Average Assets, Liabilities, and Shareholders' Equity and Related Interest Income,
Expense, and Rates
(dollars in thousands)
<CAPTION>
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans (Note C):
Commercial $ 237,276 $23,808 10.03 % $ 160,597 $ 15,129 9.42 % $ 152,149 $16,055 10.55 %
Real estate 432,883 37,129 8.58 345,351 30,126 8.72 306,288 26,226 8.56
Consumer 120,561 18,283 15.16 82,775 11,568 13.98 77,381 10,692 13.82
--------------------- ---------------------- ----------------------
Total loans 790,720 79,220 10.02 588,723 56,823 9.65 535,818 52,973 9.89
--------------------- ---------------------- ----------------------
Securities:
Taxable 315,979 18,900 5.98 328,964 19,198 5.84 290,950 16,127 5.54
Non-taxable 103,370 12,125 11.73 84,322 10,393 12.33 85,162 10,562 12.40
Equity 7,138 445 6.23 761 46 6.04 238 14 5.88
--------------------- ---------------------- ----------------------
Securities 426,487 31,470 7.38 414,047 29,637 7.16 376,350 26,703 7.10
--------------------- ---------------------- ----------------------
Money market instruments:
Bankers' acceptances 72,090 4,134 5.73 67,330 3,800 5.64 54,367 3,294 6.06
Federal funds sold 83,603 4,654 5.57 58,669 3,128 5.33 53,695 3,131 5.83
--------------------- ---------------------- ----------------------
Total money market
instruments 155,693 8,788 5.64 125,999 6,928 5.50 108,062 6,425 5.95
--------------------- ---------------------- ----------------------
Total earning assets 1,372,900 119,478 8.70 % 1,128,769 93,388 8.27 % 1,020,230 86,101 8.44 %
--------------------- ---------------------- ----------------------
Non-earning assets 67,246 60,315 59,998
------------ ------------- -------------
Total assets $ 1,440,146 $ 1,189,084 $ 1,080,228
============ ============= =============
Liabilities and shareholders' equity:
Borrowed funds:
Repurchase agreements and
Federal funds purchased $ 31,767 1,510 4.75 % $ 40,570 1,897 4.68 % $ 26,801 1,474 5.50 %
Other borrowings 40,343 2,469 6.12 2,604 146 5.61 1,450 74 5.10
--------------------- ---------------------- ----------------------
Total borrowed funds 72,110 3,979 5.52 43,174 2,043 4.73 28,251 1,548 5.48
--------------------- ---------------------- ----------------------
Interest bearing deposits:
Savings and interest bearing
transaction accounts 689,714 20,106 2.92 636,541 19,633 3.08 602,661 20,559 3.41
Time deposits 346,951 19,120 5.51 243,679 13,373 5.49 212,056 11,476 5.41
--------------------- ---------------------- ----------------------
Total interest bearing
deposits 1,036,665 39,226 3.78 880,220 33,006 3.75 814,717 32,035 3.93
--------------------- ---------------------- ----------------------
Total interest bearing
liabilities 1,108,775 43,205 3.90 % 923,394 35,049 3.80 % 842,968 33,583 3.98 %
--------- --------- ---------
Demand deposits 204,075 153,876 132,095
Other liabilities 12,647 6,787 6,892
Net shareholders' equity 114,649 105,027 98,273
------------ ------------- -------------
Total liabilities and
shareholders' equity $1,440,146 $ 1,189,084 $ 1,080,228
============ ============= =============
Interest income/earning assets 8.70 % 8.27 % 8.44 %
Interest expense/earning assets 3.15 3.11 3.29
--------- -------- --------
Net interest margin 76,273 5.55 58,339 5.16 52,518 5.15
Provision for credit losses
charged to operations/earning assets 6,980 0.51 4,264 0.38 9,924 0.97
------------------ ----------------- -----------------
Net interest margin after provision for
credit losses on tax equivalent basis 69,293 5.04 % 54,075 4.78 % 42,594 4.18 %
========== ========== ==========
Less: tax equivalent income
included in interest income from
non-taxable securities and loans 4,543 3,810 3,913
--------- --------- ---------
Net interest income $64,750 $ 50,265 $38,681
========= ========= =========
</TABLE>
Changes in the dollar amount of interest earned or paid will vary from one year
to the next because of changes in the average balances ("volume") of the various
earning assets and interest-bearing liability accounts and changes in the
interest rates applicable to each category. Because of overall growth of the
Company, interest income, interest expense and net interest income are all
generally higher each year. The Company's tax equivalent net interest income of
$76.3 million during 1997 was $17.9 million, or 30.7%, greater than during 1996.
Table 3, "Volume and Rate Variance Analysis of Net Interest Income," analyzes
the 1997 and 1996 increases in net interest income in terms of the impact of
volume and rate changes on the major categories of assets and liabilities from
one year to the next.
As each of the major categories of assets and liabilities is discussed below,
there will be a description of the reason for significant changes in the
balances, how the changes impacted the net interest income and margin, and how
the categories fit into the overall asset/liability strategy for managing risk.
Whether the net interest margin increases or decreases depends on market
opportunities, how well the Company has managed interest rate risks, product
pricing policy, product mix, and external trends and developments.
As shown in Table 2, the net interest margin of 5.55% in 1997 was considerably
higher than the 5.16% net interest margin in 1996. This primarily reflects the
increased proportion of higher yielding loans and a non-volatile interest rate
environment during 1997.
There are always steps that the Company can take to increase its net interest
margin. These steps may include to increase the average maturity of its
securities portfolios because longer term instruments normally earn a higher
rate; to emphasize fixed-rate loans because they earn more than variable rate
loans; to purchase lower rated securities; and to lend to less creditworthy
borrowers at a higher rate. However, as noted above, banking is a process of
balancing risks, and each of these alternative tactics involves more risk. The
first two involve more market risk, the second two more credit risk. Management
intends to continue to use a balanced approach. A fifth step as discussed on
page 26 is to limit the amount of non-earning assets.
<TABLE>
TABLE 3 -- Volume and Rate Variance Analysis of Net Interest Income (Taxable
equivalent basis -- Note D)
(in thousands)
<CAPTION>
1997 over 1996 1996 over 1995
--------------------------------- ----------------------------------
Volume Rate Total Volume Rate Total
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income on:
Loans
Commercial loans $ 7,642 $ 1,037 $ 8,679 $ 85 $ (1,784) $ (926)
Real estate loans 7,495 (492) 7,003 3,402 498 3,900
Consumer loans 5,667 1,048 6,715 751 125 876
--------------------------------- ----------------------------------
Total loans 20,804 1,593 22,397 5,011 (1,161) 3,850
--------------------------------- ----------------------------------
Securities:
Taxable (759) 461 (298) 2,171 900 3,071
Non-taxable 2,258 (526) 1,732 (107) (62) (169)
Equity securities 398 1 399 32 -- 32
--------------------------------- ----------------------------------
Total securities 1,897 (64) 1,833 2,096 838 2,934
--------------------------------- ----------------------------------
Money market instruments:
Bankers' acceptances 272 62 334 746 (240) 506
Federal funds sold 1,380 146 1,526 277 (280) (3)
--------------------------------- ----------------------------------
Total money market instruments 1,652 208 1,860 1,023 (520) 503
--------------------------------- ----------------------------------
Total interest income 24,353 1,737 26,090 8,130 (843) 7,287
--------------------------------- ----------------------------------
Interest expense on:
Repurchase agreements and
Federal funds purchased (415) 28 (387) 669 (246) 423
Other borrowings 2,309 14 2,323 64 8 72
--------------------------------- ----------------------------------
Total borrowed funds 1,894 42 1,936 733 (238) 495
--------------------------------- ----------------------------------
Interest bearing deposits:
Savings and interest bearing
transaction accounts 1,547 (1,074) 473 1,121 (2,047) (926)
Time certificates of deposit 5,698 49 5,747 1,726 171 1,897
--------------------------------- ----------------------------------
Total interest bearing deposits 7,245 (1,025) 6,220 2,847 (1,876) 971
--------------------------------- ----------------------------------
Total interest expense 9,139 (983) 8,156 3,580 (2,114) 1,466
================================= ==================================
Net interest margin $ 15,214 $ 2,720 $ 17,934 $ 4,550 $ 1,271 $ 5,821
================================= ==================================
</TABLE>
SECURITIES
The major components of the earning asset base for 1997 were the securities
portfolios, the loan portfolio and the Company's holdings of money market
instruments. The Investment Committee has overall responsibility for the
management of the securities portfolios and the money market instruments. The
structure and detail within these portfolios are very significant to an analysis
of the financial condition of the Company. The loan and money market instrument
portfolios will be covered in later sections of this discussion.
Securities Portfolios
The Company classifies its securities into three portfolios, the "Liquidity
Portfolio" (available-for-sale), the "Discretionary Portfolio"
(available-for-sale), and the "Earnings Portfolio" (held-to-maturity).
The Liquidity Portfolio's primary mission is to provide liquidity to meet cash
flow needs. The portfolio consists of U.S. Treasury and agency securities.
Maturities are spread in a "ladder" and are managed to an average maturity of
between one and two years.
The Discretionary Portfolio's primary missions are to provide income from
available funds, to hold earning assets that can be managed as part of overall
asset/liability management, and to support the development needs of communities
within the Bank's marketplace. The Discretionary Portfolio consists of U.S.
Treasury and agency securities, collateralized mortgage obligations,
asset-backed securities, and municipal securities.
The Earnings Portfolio's primary missions are to provide income from available
funds and to support the development needs of communities within the Bank's
marketplace. The Earnings Portfolio consists of long-term tax-exempt
obligations, and U.S. Treasury and agency securities. It is the Bank's current
intention to allow existing securities in the Earnings Portfolio to mature, then
reposition the matured proceeds into either of the two "available-for-sale"
portfolios. Accordingly, the balance of the Earnings Portfolio is expected to
decline.
Collateralized Mortgage Obligations ("CMO") Securities
In January 1996, the Company started purchasing some short-term, high-quality
CMO's. These securities are specialized portions of larger mortgage pools. The
objective is to achieve increased yields with high-quality, short-term
securities. These CMO securities, with the underlying mortgages guaranteed by
U.S.-sponsored agencies, currently yield 45 to 60 basis points more than U.S.
Treasury securities of the same maturity range. When acquired, they are
classified as available-for-sale and placed in the Discretionary Portfolio. As
of December 31, 1997, the Company held $78 million of CMO's.
Additional Purposes Served by the Securities Portfolios
The securities portfolios of the Company serve additional purposes: 1)
Collateral--the deposits of public agencies and trust customers must be secured
by certain securities owned by the Company; and 2) Community Development--the
Company actively searches for investments that support the development needs of
the communities within its marketplace.
Collateral: The legal requirements for securing specific deposits may only be
satisfied by pledging certain types of the Company's securities. A large
proportion of the deposits may be secured by state and municipal securities, but
some can only be secured by U.S. Treasury securities, so holding a minimum
amount of these securities will always be necessary.
Community Development: The Company searches actively for investments that
support the development needs of communities within its marketplace. During
1997, for example, the Company purchased the entire $1.2 million issue of Los
Olivos School District bonds, the entire $3.8 million issue of Goleta Union
School District bonds, the entire $4.0 million issue of Carpinteria Unified
School District bonds, and the entire $1.5 million issue of Cold Spring
Elementary School District bonds. As a result of the FVB acquisition, the
Company acquired bonds issued by the Simi Valley Unified School District and by
the Oxnard School District. The Company also holds on its books $6.0 million of
Santa Barbara Housing Project Mortgage Revenue Bonds; these bonds helped finance
two housing projects in the city of Santa Barbara that contain 610 units of
affordable housing.
Table 4 sets forth the amounts and maturity ranges of the securities at December
31, 1997. Because much of the income from the securities included in the
Earnings Portfolio has the additional advantage of being tax-exempt because of
investment in state and municipal bonds, the tax equivalent weighted average
yields of the securities are shown. The average yields on the taxable securities
(U.S. Treasury and agency securities) are significantly lower than the average
rates earned from loans as shown in Table 2. Because of this, securities are
purchased for earnings only when loan demand is weak.
<TABLE>
TABLE 4--Maturity Distribution and Yield Analysis of the Securities Portfolios
<CAPTION>
After one After five
As of December 31, 1997 One year year to years to Over Non-
(amounts in thousands) or less five years ten years ten years Maturity Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maturity distribution:
Available-for-sale:
U.S. Treasury obligations $ 41,046 $ 121,626 $ -- $ -- $ -- $ 162,672
U.S. agency obligations 1,000 24,954 -- -- -- 25,954
Collateralized mortgage
obligations 4,985 70,046 3,017 -- -- 78,048
Asset-backed securities -- 4,008 -- -- -- 4,008
State and municipal
securities 993 4,530 2,140 604 -- 8,267
Equity securities -- -- -- -- 8,049 8,049
----------------------------------------------------------------------------------------
Subtotal 48,024 225,164 5,157 604 8,049 286,998
----------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury obligations 22,448 58,266 -- -- -- 80,714
U.S. agency obligations 9,959 22,451 -- -- -- 32,410
State and municipal
securities 6,021 52,683 11,289 39,233 -- 109,226
----------------------------------------------------------------------------------------
Subtotal 38,428 133,400 11,289 39,233 -- 222,350
----------------------------------------------------------------------------------------
Total $ 86,452 $ 358,564 $ 16,446 $ 39,837 $ 8,049 $ 509,348
========================================================================================
Weighted average yield (Tax equivalent--Note B):
Available-for-sale:
U.S. Treasury obligations 5.98% 5.87% -- -- -- 5.90%
U.S. agency obligations 6.04% 5.91% -- -- -- 5.91%
Collateralized mortgage
obligations 6.06% 6.42% 6.35% -- -- 6.40%
Asset-backed securities -- 5.73% -- -- -- 5.73%
State and municipal
securities 7.41% 6.72% 7.17% 8.52% -- 7.06%
Equity securities -- -- -- -- 6.23% 6.23%
Weighted average 6.02% 6.06% 6.69% 8.52% 6.23% 6.08%
Held-to-maturity:
U.S. Treasury obligations 5.70% 5.90% -- -- -- 5.84%
U.S. agency obligations 5.26% 6.30% -- -- -- 5.98%
State and municipal
securities 10.95% 14.15% 13.20% 10.06% -- 11.89%
Weighted average 6.41% 9.22% 13.20% 10.06% -- 8.83%
Overall weighted average 6.22% 7.33% 11.94% 10.06% 6.23% 7.36%
</TABLE>
Portfolio Turnover, Unrealized Gains and Losses, and Securities Losses
As shown in the accompanying Consolidated Statements of Cash Flows on page 41,
there is a relatively large turnover in the securities portfolios. The purchase
of relatively short-term securities for asset/liability management purposes, as
explained above, is part of the reason for the high turnover in the Company's
securities portfolios. The increased amount sold in 1996 was also due to the
following one-time situation. In late 1995, the Financial Accounting Standards
Board ("FASB") permitted holders of debt securities to review their
classification of securities as held-to-maturity or available-for-sale and to
reclassify them. The Company reclassified a substantial amount of its
held-to-maturity securities and sold $94 million of them in early 1996.
The Company does not have a trading portfolio. That is, it does not purchase
securities on the speculation that interest rates will decrease and thereby
allow subsequent sale at a gain. Instead, if the purposes mentioned above are to
be met, purchases must be made throughout interest rate cycles. Rather than
anticipate the direction of changes in interest rates, the Company's investment
practice is that securities' maturities (other than for municipal securities) be
approximately equally spaced into quarterly maturity zones within the
portfolios.
Hedges, Derivatives, and Other Disclosures
The Company established policies and procedures in 1996 to permit limited types
and amounts of off-balance sheet hedges to help manage interest rate risk.
Although the Company did not utilize any off-balance sheet hedges in 1996, it
did enter into an interest rate option contract in January 1997 to protect
against the possibility of rapidly rising rates. While Management was not
predicting that interest rates would rise, the asset/liability modeling
indicated at the time that net interest income at risk from a significant rise
would be more than desired. The notional amount of $50 million covers a fifteen
month period that began July 1, 1997. The contract would pay the Company the
rate by which the 3-month Libor index rate exceeds 7.0% up to a maximum of 1.5%.
Subsequently, interest rates have declined and the Company is simply amortizing
the $90,000 cost over the fifteen months.
The Company has not purchased any securities arising out of a highly leveraged
transaction, and its investment policy prohibits the purchase of any securities
of less than investment grade or so-called "junk bonds."
MARKET INSTRUMENTS--FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER AGREEMENTS
TO RESELL, AND BANKERS' ACCEPTANCES
Cash in excess of amounts immediately needed for operations is generally lent to
other financial institutions as Federal funds sold or securities purchased under
agreements to resell (for brevity termed "reverse repos"). Both transactions are
overnight loans. Federal funds sold are unsecured, reverse repos are secured.
Excess cash expected to be available for longer periods is generally used to
purchase short-term U.S. Treasury securities or bankers' acceptances (Note G).
The average amount of Federal funds sold, reverse repos and bankers' acceptances
as percentages of average earning assets tend to vary based on changes and
differences in short-term market rates.
While the acceptances of only highly rated financial institutions are utilized,
acceptances have some amount of risk above that of U.S. Treasury securities. The
Company therefore requires that there be a reasonable spread in the yields
between the bankers' acceptances and U.S. Treasury securities to justify the
assumption of that additional risk. All of the $49.4 million of acceptances held
by the Company at December 31, 1997 were issued by Japanese banks having prime
short-term credit quality ratings. The Company continues to monitor these
acceptances closely in light of the economic troubles in Asia.
LOAN PORTFOLIO
Table 5 sets forth the distribution of the Company's loans at the end of each of
the last five years.
<TABLE>
TABLE 5--Loan Portfolio Analysis by Category
<CAPTION>
(in thousands) December 31
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate:
Residential $ 246,283 $ 172,846 $ 142,143 $ 108,923 $ 54,395
Non-residential 249,725 199,203 179,272 145,928 123,534
Construction and development 16,127 10,245 20,846 26,695 41,030
Commercial, industrial,
and agricultural 184,374 154,162 144,011 148,396 168,227
Home equity lines 37,150 34,323 34,597 32,573 36,219
Consumer 75,151 43,944 28,494 27,319 27,331
Leases 61,108 58,526 -- -- --
Municipal tax-exempt obligations 7,931 8,658 7,573 7,831 11,888
Other 3,699 2,260 1,865 1,766 1,606
-----------------------------------------------------------------------
$ 881,548 $ 684,167 $ 558,801 $ 499,431 $ 464,230
=======================================================================
Net deferred fees $ 2,782 $ 2,362 $ 2,139 $ 2,038 $ 1,301
</TABLE>
The amounts shown in the table for each category are net of the deferred or
unamortized loan origination, extension, and commitment fees and origination
costs for loans in that category. The total amounts for these net fees are shown
at the bottom of the table. These deferred amounts are amortized over the lives
of the loans to which they relate.
The year-end balance for all loans had increased about $125 million from the end
of 1995 to the end of 1996 and increased about $197 million from the end of 1996
to the end of 1997. Economic recovery, the expansion into the Ventura County
market, the acquisition of a leasing portfolio, $106.9 million in loans acquired
in the FVB and CSB acquisitions, and new calling programs, were all reasons for
the growth.
Residential mortgages showed the largest dollar growth in the last several
years. The Company offers a wide variety of loan types and terms to customers
along with very competitive pricing and 24 hour pre-approvals. These factors
have resulted in the Company becoming the largest retail originator of
residential mortgages in the Santa Barbara market area. The Company funded
$106.9 million in residential mortgages in 1997. Most of the fixed-rate loans
are sold to investors in the secondary market, but the Company still increased
its portfolio by $73.4 million in 1997. These sold loans were approximately 40%
of all residential real estate loans funded in 1997. Most of the loans retained
by the Company are 1-4 family adjustable rate mortgage loans, which generally
have low initial "teaser" rates. While these loans have interest rate "caps,"
all are repriced to a market rate of interest within a reasonable time. A few
loans have payment caps which would result in negative amortization if interest
rates rise appreciably.
Strong growth also occurred in the consumer loan categories in 1997 and 1996.
Consumer loans grew $15.5 million or 54% in 1996 and $31.2 million or 72% in
1997. This growth reflects an expanded product line and continued efforts to
make auto loans through dealers. During the last three years, the Company has
entered into indirect financing agreements with a number of local automobile
dealers whereby the Company purchases loans dealers have made to customers.
While automobile dealers frequently provide financing to customers through
manufacturers' finance subsidiaries, some customers prefer loan terms that are
not included in the standard packages. Other customers are purchasing used cars
not covered by the manufacturers' programs. Based on parameters agreed to by the
Company, the dealer makes the loan to the customer and then sells the loan to
the Company. This program is neither a factoring nor a flooring arrangement. The
individual customers, not the dealers, are the borrowers and thus there is no
large concentration of credit risk. There were approximately $41.3 million of
such loans included in the consumer loan total above for December 31, 1997 as
compared with $15.8 million at December 31, 1996.
Commercial loan volumes experienced an increase of $30.2 million or 20% over the
prior year and nonresidential real estate loans increased $50.5 million or 25%.
Again in 1997 as in 1996, much of the new business was generated in the
Company's new market areas.
The same interest rate and liquidity risks that apply to securities are also
incurred in lending activity. Long-term fixed-rate loans are subject to market
risk. The table in Note 14 to the Consolidated Financial Statements shows a very
small difference between the carrying amount of loans and their market value.
This occurs because the majority of the loans held by the Company have floating
rates of interest. The floating rates are generally tied to the Company's base
lending rate or to another market rate indicator so that they may be repriced as
interest rates change. Loans that have fixed rates generally have relatively
short maturities or amortize monthly which effectively lessens the market risk.
Table 6 shows the maturity of selected loan types outstanding as of December 31,
1997, and shows the proportion of fixed and floating rate loans for each type.
Net deferred loan origination, extension, and commitment fees are not shown in
the table. There is no maturity or interest sensitivity associated with the fees
because they have been collected in advance.
<TABLE>
TABLE 6--Maturities and Sensitivities of Selected
Loan Types to Changes in Interest Rates
<CAPTION>
Due after
(in thousands) Due in one one year to Due after
year or less five years five years
--------------------------------------------
<S> <C> <C> <C>
Commercial, industrial, and agricultural
Floating rate $ 136,385 $ -- $ --
Fixed rate 24,306 13,850 5,817
Real estate--construction and development
Floating rate 19,531 -- --
Fixed rate 1,593 -- --
Municipal tax-exempt obligations 182 6,362 1,387
-----------------------------------------
$ 181,997 $ 20,212 $ 7,204
=========================================
</TABLE>
The amortization and short maturities also help to maintain the liquidity of the
portfolio and reduce credit risk, but they result in lower interest income if
rates are falling. At present, Management prefers to incur market risk from
longer maturities in the securities portfolios, and avoid such risk in the loan
portfolio.
TAX REFUND ANTICIPATION LOAN ("RAL") AND REFUND TRANSFER ("RT") PROGRAMS
As indicated in the overall summary at the beginning of this discussion, one of
the reasons for the upward trend in earnings has been the RAL and RT programs.
The Company is one of only three financial institutions to provide these
products on a national basis. RAL's are a loan product; RT's are strictly an
electronic transfer service.
The Company provides RAL's to taxpayers that file their returns electronically.
The taxpayer requests a loan through a tax preparer, with the expected refund as
the source of repayment. The application is subject to an automated credit
review. If it passes, the Company advances to the taxpayer the amount of the
refund due on the taxpayer's return up to specified amounts based on certain
criteria less the loan fee due to the Company. Each taxpayer signs an agreement
permitting the Internal Revenue Service (the "IRS") to remit their refund to the
Company to pay off the loan. Any amount due the taxpayer above the amount of the
RAL is sent by the Company to the taxpayer when received from the IRS. The
withheld fee is recognized as income only after the loan is collected from the
IRS payment. The Company does not earn interest based on the amount of the loan
or the length of time it is outstanding. Instead, the Company collects a fee for
each loan.
Losses are higher for RAL's than for most other loan types because the IRS may
reject or partially disallow the refund. The tax preparers participating in the
program are located across the country and few of the taxpayers have any
customer relationships with the Company other than these RAL's. Many taxpayers
make use of the service because they do not have a permanent mailing address at
which to receive their refund. Therefore, if there is a problem with the return,
collection efforts may be less effective than with local customers.
The Company has taken several steps to minimize losses from these loans.
Preparers are screened before they are allowed to submit their electronic
filings, procedures have been defined for the preparers to follow to ensure that
the agreement signed by the taxpayer is a valid loan, and the preparers' IRS
reject rates are monitored very carefully. If a preparer's rejects are above
normal, he or she may be dropped from the program. If rejects are below
expectations, the preparer may be paid an incentive fee.
In 1995, the program was severely impacted by some changes made by the IRS.
Approximately $75.5 million was lent to taxpayers in 1995. Fees earned on the
loans totaled $3.2 million, but net loan charge-offs through year-end totaled
$4.0 million (5.32% of total loans).
Until the 1995 filing season, the Company had only extended loans to taxpayers
after receiving an acknowledgment from the IRS that it had run several
preliminary computer checks on the taxpayer for such items as a valid Social
Security number and that there were no outstanding liens from the IRS against
the taxpayer. However, for the 1995 filing season, the IRS eliminated that
acknowledgment. To reduce the additional credit risk, the Company ran credit
checks on all taxpayers who were new to the program in the 1995 filing year.
While helpful, this step was not sufficient to mitigate the impact of
eliminating the acknowledgment.
In addition, another change was made in IRS procedures during the 1995 tax
filing season after the Company had made a large amount of loans. The IRS placed
a moratorium on electronic payment of refunds which had Earned Income Tax Credit
("EIC") amounts. Initial payments were received from the IRS for the non-EIC
portion of the refunds, but when the remainder of the refunds were eventually
paid, frequently they were sent to the taxpayer rather than the Company. Without
confirmation, and with significant uncertainty regarding whether the IRS would
reimburse the Company for loans related to EIC, the Company began to restrict
loans only to those taxpayers who met certain credit standards, and excluded the
EIC related portion of any refund from the amount which it would lend. However,
losses resulted from the loans the Company had already made.
The Company instituted substantial collection efforts with those taxpayers who
could be contacted as soon as the problems were recognized. In addition, the
Company entered into cooperative agreements with the other banks that would be
making RAL's in 1996. Under those agreements, if a taxpayer owing money to one
bank from a prior year applied for a loan from another bank, that second bank
repaid the delinquent amount to the first bank before remitting the refund to
the taxpayer. The Company's own collection efforts and these cooperative
agreements resulted in collection in 1996 of $1.4 million from the 1995 losses.
In 1996, the RAL Program continued to operate under the relatively restrictive
guidelines established by the Company in the middle of the 1995 season. In 1996,
the Company made a total of $55.8 million in RAL loans. Interest income for the
loans was $3.0 million. Gross charge-offs for 1996 were $1.1 million. Management
believes the guidelines established in 1995 established prudent risk parameters
which were reflected in the results of 1996 and 1997.
In 1997, the RAL Program extended approximately $223 million in loans. Total net
charge-offs were $4.4 million or 1.97% of loans made. A significant portion of
the charged-off loans are expected to be collected in 1998 under the continuing
cooperative agreement between the banks providing this product.
Many taxpayers not qualifying for loans still have their returns filed
electronically and wish to receive their refunds more quickly by having the
refund sent electronically by the IRS to the Company. The Company then prepares
a check or authorizes the tax preparer to issue a check to the taxpayer. The
Company earned approximately $2.9 million, $1.2 million, and $1.6 million in
fees for 1997, 1996, and 1995 respectively for this refund transfer service.
In 1997, the total pre-tax earnings for these programs was $3.6 million compared
with $2.1 million in 1996 and a pre-tax loss of about $683,000 in 1995.
The balances outstanding during each tax filing season are included in the
average balance for consumer loans shown in Table 2, but there are no such loans
included in the Consolidated Balance Sheets as of December 31, 1997 and 1996,
because all loans not collected from the IRS are charged-off before year-end.
The fees earned on the loans are included in the accompanying income statements
for 1997, 1996, and 1995 within interest and fees on loans. The fees earned on
the refund transfers are included in other service charges, commissions, and
fees.
ALLOWANCE FOR CREDIT LOSSES
Credit risk is inherent in the business of extending loans to individuals,
partnerships, and corporations. The Company sets aside an allowance or reserve
for credit losses through charges to earnings. The charges are shown in the
Consolidated Income Statements as provision for credit losses. All specifically
identifiable and quantifiable losses are immediately charged off against the
allowance. In this discussion, "loans" include the lease contracts purchased and
originated by the Company.
Determination of Adequacy and the Allocation Process
The Company formally assesses the adequacy of the allowance on a quarterly
basis. An important step in this assessment and in managing credit risk is to
periodically grade all of the larger loans, all of the delinquent loans, and
other loans for which there is a question of repayment. A significant portion of
all other loans are also graded. A portion of the allowance is then allocated to
the delinquent or otherwise questionable loans in an amount sufficient to cover
Management's estimate of the loss that might exist in them. A portion of the
allowance is also allocated to the remainder of the loans based on the latest
grading of their quality. Relatively more is allocated to those loans which,
while currently performing according to their terms, are in categories that have
characteristics which lead Management to conclude that there is inherently more
risk of problems in the future.
There are limitations to any grading process. The first is that it is
impracticable to grade every loan every quarter. Therefore, it is possible that
some of the smaller currently performing loans not recently graded will not be
as strong as their last grading and an insufficient portion of the allowance
will have been allocated to them. The second limitation is that grading must be
done without knowing whether all relevant facts are at hand. Delinquent
borrowers may deliberately or inadvertently omit important information from
reports or conversations with lenders regarding their financial condition and
the strength of repayment sources. The third limitation is that even for
experienced reviewers, grading loans and estimating possible losses involve
judgments about the present situation and the impact of potential future events.
Eventual losses therefore may differ from the most recent estimate. Because of
these limitations, the Company assumes that there are losses inherent in the
current portfolio which will be sustained, but which have not been specifically
identified to date. It therefore maintains the allowance at an amount larger
than the total that is allocated as described above.
To the extent that the allowance is insufficient to cover the amounts allocated
and its estimate of unidentified losses, Management records additional provision
for credit loss. If the allowance is greater than appears to be required, less
provision expense will be recorded.
The allowance allocation shown in Table 7, "Allocation of the Allowance for
Credit Losses," should not be interpreted as an indication of the specific
amounts or specific loan categories in which charge-offs did or may ultimately
occur. There is no allocation of allowance to RAL's at December 31 because all
loans unpaid are charged-off prior to year-end. At the bottom of the table is
the ratio of the allowance for credit losses to total loans for each year.
<TABLE>
TABLE 7--Allocation of the Allowance for Credit Losses
<CAPTION>
(amounts in thousands) December 31, 1997 December 31, 1996 December 31, 1995
---------------------------------------------------------------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, industrial,
and agricultural $ 2,827 20.9% $ 4,723 30.7% $ 6,048 25.2%
Real estate:
Residential 1,665 28.0 653 24.9 836 24.9
Non-residential 3,098 28.4 1,874 28.7 2,503 31.4
Construction
and development 477 1.8 282 1.5 526 3.6
Home equity lines 488 4.2 413 5.0 534 6.1
Consumer 1,282 8.5 535 6.3 447 5.0
Leases 1,246 6.9 -- -- -- --
Municipal tax-exempt
obligations -- 0.9 -- 1.2 -- 1.3
Other -- 0.4 92 1.7 126 2.5
Not specifically allocated 10,065 -- 8,000 -- 1,329 --
---------------------------------------------------------------------------
Total allowance $ 21,148 100.% $ 16,572 100.% $ 12,349 100.%
===========================================================================
Allowance for credit loss
as percentage of
year-end loans 2.40% 2.39% 2.21%
</TABLE>
Credit Losses
Table 8, "Summary of Credit Loss Experience," shows the additions to,
charge-offs against, and recoveries for the Company's allowance for credit
losses. Also shown is the ratio of charge-offs to average loans for each of the
last five years. This ratio was adversely impacted in the years prior to 1996 by
problems with two large loan relationships and with the higher charge-offs in
the RAL program. The low ratios in 1996 and 1997 show the positive impacts of
the collection efforts and of other stricter credit review and administration
procedures introduced in 1995. Declining levels of non-performing loans and
increased recoveries of previously charged-off loans reflect a steady pattern of
improvement in the credit quality of the Company's loan portfolio. The lower
amount of charge-offs and higher levels of recoveries in recent years are also
due to the improved economy. It is possible that 1997 represents the top of the
credit cycle. Management realizes that the ratios of net charge-offs to loans
seen in 1996 and 1997 are lower than may be experienced in future years.
<TABLE>
TABLE 8--Summary of Credit Loss Experience
<CAPTION>
(in thousands) Year ended December 31
1997 1996 1995 1994 1993
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance of the allowance for
credit loss at beginning of year $ 16,572 $ 12,349 $ 12,911 $ 10,067 $ 9,353
-------------------------------------------------------
Charge-offs:
Real estate:
Residential 332 822 1,086 -- --
Non-residential -- 935 4,847 48 --
Construction and development -- -- -- -- 3,380
Commercial, industrial, and agricultural 1,462 855 787 921 1,268
Home equity lines -- 264 86 200 --
Tax refund anticipation 5,946 1,123 4,402 3,030 650
Other consumer 665 269 394 345 570
Municipal tax-exempt obligations -- -- -- -- --
-------------------------------------------------------
Total charge-offs 8,405 4,268 11,602 4,544 5,868
-------------------------------------------------------
Recoveries:
Real estate:
Residential 235 155 22 -- --
Non-residential 1,836 2,330 12 -- --
Construction and development -- -- -- -- 2
Commercial, industrial, and agricultural 967 202 430 236 130
Home equity lines 326 28 34 50 --
Tax refund anticipation 1,524 1,437 383 672 62
Other consumer 319 75 235 173 238
Municipal tax-exempt obligations -- -- -- -- --
-------------------------------------------------------
Total recoveries 5,207 4,227 1,116 1,131 432
-------------------------------------------------------
Net charge-offs 3,198 41 10,486 3,413 5,436
Allowance for credit loss recorded
in acquisition transactions 794 -- -- -- --
Provision for credit losses charged to operations 6,980 4,264 9,924 6,257 6,150
-------------------------------------------------------
Balance at end of year $ 21,148 $ 16,572 $ 12,349 $ 12,911 $ 10,067
=======================================================
Ratio of net charge-offs to
average loans outstanding 0.40% 0.01% 1.96% 0.71% 1.15%
Ratio of net charge-offs to
average loans outstanding
exclusive of RAL's (0.16%) 0.06% 1.21% 0.22% 1.03%
</TABLE>
There are only two other banks in the country that have national RAL programs,
so the net charge-off ratios for the Company are not comparable with those of
other institutions unless the RAL net charge-offs are eliminated. The ratios of
the net charge-offs to average loans and losses exclusive of RAL's for the years
of 1993 through 1997 are also shown. The corresponding ratios for the Company's
FDIC peers are 1.03% for the first nine months of 1997, 0.89% for 1996, 0.69%
for 1995, 0.54% for 1994, and 0.92% for 1993 (Note A).
NONACCRUAL, PAST DUE, AND RESTRUCTURED LOANS
Table 9 summarizes the Company's nonaccrual and past due loans for the last five
years.
<TABLE>
TABLE 9--Nonaccrual and Past Due Loans
<CAPTION>
(dollars in thousands) Year ended December 31
1997 1996 1995 1994 1993
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual $ 9,095 $ 7,027 $ 8,972 $ 6,326 $ 3,126
90 days or more past due 812 1,420 395 1,290 862
-------------------------------------------------------------
Total noncurrent loans $ 9,907 $ 8,447 $ 9,367 $ 7,616 $ 3,988
=============================================================
Total noncurrent loans as per-
centage of the total loan portfolio 1.12% 1.23% 1.68% 1.52% 0.86%
Allowance for credit loss as a percentage
of noncurrent loans 213% 196% 132% 170% 252%
</TABLE>
Past Due Loans: Included in the amounts listed above as 90 days or more past
due are commercial and industrial, real estate, and a diversity of consumer
loans. These loans are well secured and in the process of collection. These
figures do not include loans in nonaccrual status.
Nonaccrual Loans: If there is reasonable doubt as to the collectibility of
principal or interest on a loan, the loan is placed in nonaccrual status, i.e.,
the Company stops accruing income from the interest on the loan and reverses any
uncollected interest that had been accrued but not collected. These loans may or
may not be collateralized. Collection efforts are being pursued on all
nonaccrual loans.
The trend from 1993 to mid-1995 was an increase in total noncurrent loans,
reaching a high of $15.4 million at the end of the second quarter. Charge-offs,
repayments by the borrowers, and strengthened credit administration, review, and
analysis functions account for the decrease to $8.4 million at year-end 1996.
The total is up slightly at the end of 1997 to $9.9 million because of
noncurrent loans acquired in the FVB and CSB transactions, but as a percentage
of total loans, noncurrent loans have continued to decrease. The Company's ratio
of noncurrent loans to total loans of 1.12% at the end of 1997 is the same as
its FDIC peers' ratio of 1.12%. The Company's allowance for credit loss as a
percentage of non-current loans is 213% at December 31, 1997 as compared to its
FDIC peer group ratio of 195% .
Table 10 sets forth interest income from nonaccrual loans in the portfolio at
year-end that was not recognized.
<TABLE>
TABLE 10--Foregone Interest
<CAPTION>
(in thousands) Year ended December 31
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Interest that would have been recorded under original terms $ 1,712 $ 1,354 $ 1,291
Gross interest recorded 930 885 753
-----------------------------------
Foregone interest $ 782 $ 469 $ 538
===================================
</TABLE>
Restructured Loans: The only restructured loans the Company has had at the
end of each of the last five years are reported above in the total of
nonaccrual loans.
Potential Problem Loans: Management has reason to believe that certain borrowers
may not be able to repay their loans within the parameters of the present
repayment terms, even though, in some cases, the loans are current at the time.
These loans are regarded as potential problem loans, and a portion of the
allowance is allocated as discussed above to cover the Company's exposure to
loss should the borrowers indeed fail to perform according to the terms of the
notes. This class of loans does not include loans in a nonaccrual status or 90
days or more delinquent but still accruing, which are shown in Table 9.
At year-end 1997, these loans amounted to $2.5 million or 0.2% of the portfolio.
The corresponding amounts for 1996 and 1995 were $9.1 million or 1.3% of the
portfolio and $13.8 million or 2.5% of the portfolio, respectively. The 1997
amount is comprised of loans of all types. At year-end 1997, approximately
$520,000 of the allowance for credit losses--approximately 21% of the
outstanding balance of potential problem loans--has been allocated to cover
potential losses from these loans.
OTHER LOAN PORTFOLIO INFORMATION
Other information about the loan portfolio that may be helpful to readers of the
financial statements follows.
Foreign Loans: The Company does not have nor has it ever had any foreign
loans in its loan portfolio.
Participations: Occasionally, the Company will sell or purchase a portion of a
loan to or from another bank. Banks usually sell a portion of a loan as a means
of staying within their maximum limit for loans to any one borrower. A portion
of another bank's loan may be purchased by the Company as an accommodation to
another bank unable to lend the whole amount under its regulatory lending limit
to its borrower. However, this would be done only if the loan also represents a
good investment for the Company. In these cases, the Company conducts its own
independent credit review prior to committing to purchase.
Loan to Value Ratio: The Company follows a policy of limiting the loan to
collateral value ratio for real estate construction and development loans.
Depending on the type of project, policy limits range from 60-90% of the
appraised value of the collateral. For permanent real estate loans, the policy
limits generally are 75% of the appraised value for commercial property loans
and 80% for residential real estate property loans. Mortgage insurance is
generally required on most residential real estate loans with a loan to value in
excess of 80%. Such loans, which can reach up to 90% loan to appraised value,
are strictly underwritten according to mortgage insurance standards. The above
policy limits are sometimes exceeded when the loan is being originated for sale
to another institution that does lend at higher ratios and the sale is
immediate, or when the exception is temporary, or when other special
circumstances apply. There are other specific loan to collateral limits for
commercial, industrial and agricultural loans which are secured by non-real
estate collateral. The adequacy of such limits is generally established based on
outside asset valuations and/or by an assessment of the financial condition and
cash flow of the borrower, and the purpose of the loan. Consumer loans which are
secured by collateral also have loan to collateral limits which are based on the
loan type and amount, the nature of the collateral, and other financial factors
on the borrower.
Loan Concentrations: The concentration profile of the Company's loans is
discussed in Note 18 to the accompanying Consolidated Financial Statements.
Loan Sales and Mortgage Servicing Rights: The Company sells or brokers most of
the fixed-rate single family mortgage loans it originates as well as other
selected portfolio loans. These loans are made to accommodate the borrower, but
are sold to mitigate the market risk inherent in fixed-rate assets. Most are
sold "servicing released" and the purchaser takes over the collection of the
payments. However, some are sold with "servicing retained" and the Company
continues to receive the payments from the borrower and forwards the funds to
the purchaser. The Company earns a fee for this service. The sales are made
without recourse, that is, the purchaser cannot look to the Company in the event
the borrower does not perform according to the terms of the note. In May, 1995,
the FASB issued Statement of Accounting Standards No. 122, Accounting for
Mortgage Servicing Rights. This statement requires companies engaged in mortgage
banking activities to recognize the rights to service mortgage loans for others
as separate assets. This statement is effective for fiscal years beginning after
December 15, 1995. The Company adopted this statement on January 1, 1996. For
loans originated for sale, the Statement requires that a portion of the
investment in the loan be ascribed to the right to receive this fee for
servicing and that this value be recorded as a separate asset.
DEPOSITS
An important component in analyzing net interest margin is the composition and
cost of the deposit base. Net interest margin is improved to the extent that
growth in deposits can be focused in the lower cost core deposit accounts:
demand deposits, NOW accounts, and savings. The average daily amount of deposits
by category and the average rates paid on such deposits is summarized for the
periods indicated in Table 11.
<TABLE>
TABLE 11--Detailed Deposit Summary
<CAPTION>
(dollars in thousands) Year ended December 31
1997 1996 1995
--------------------------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOW accounts $ 160,776 1.13 % $ 132,809 1.%3 $ 126,883 1.%6
Money market deposit accounts 420,482 3.76 % 412,350 4.03 375,227 4.44
Savings accounts 108,456 2.30 % 91,382 2.34 100,551 2.42
Time certificates of deposit for
less than $100,000 and IRA's 230,088 5.60 % 169,095 5.59 154,234 5.53
Time certificates of deposit for
$100,000 or more 116,863 5.33 % 74,584 5.25 57,822 5.09
-------------- -------------- -------------
Interest-bearing deposits 1,036,665 3.%8 % 880,220 3.%5 814,717 3.%3
Demand deposits 204,075 153,876 132,095
-------------- -------------- -------------
$ 1,240,740 $ 1,034,096 $ 946,812
============== ============== =============
</TABLE>
The average rate paid on all deposits, which had decreased from 3.93% in 1995 to
3.75% in 1996, remained virtually unchanged in 1997. The average rates that are
paid on deposits generally trail behind money market rates because financial
institutions do not try to change deposit rates with each small increase or
decrease in short-term rates. This trailing characteristic is stronger with time
deposits than with deposit types that have administered rates. Administered rate
deposit accounts like NOW, MMDA, and savings, are those products which the
institution can reprice at its option based on competitive pressure and need for
funds. This contrasts with deposits for which the rates are set by contract for
a term or are tied to an external index. Certificates of deposit are time or
term deposits. With these accounts, even when new offering rates are
established, the average rates paid during the quarter are a blend of the rates
paid on individual accounts. Only new accounts and those which mature and are
replaced will bear the new rate. There was some decline in market rates in the
latter part of 1997 and this is most reflected in the decline in MMDA.
Generally, the Company offers higher rates on certificates of deposit in amounts
over $100,000 than for lesser amounts. It would be expected, therefore, that the
average rate paid on these large time deposits would be higher than the average
rate paid on time deposits with smaller balances. As may be noted in Table 11,
however, this is not the case. There are two primary reasons for this anomaly.
First, loan demand has been low in the California economy. With less need for
funds to lend, the Company has been reluctant to offer premium rates to
encourage large deposits that are not the result of stable customer
relationships. If the deposits are short-term and will be kept by the depositor
with the Company only while premium rates are paid, the Company must invest the
funds in very short-term assets, such as Federal funds. Since Federal funds sold
earned less than 6% during almost all of the last three years, the spread
between the cost of premium rate CD's and the earnings on the potential uses of
the funds is very small. Second, a significant portion of the under $100,000
time deposits are IRA accounts. The Company pays a higher rate on these accounts
than on other CD's. These factors have served to maintain a higher average rate
paid on the smaller time deposits relative to the average rate paid on larger
deposits.
Table 12 discloses the distribution of maturities of CD's of $100,000 or more at
the end of each of the last three years. While the total balances of these
accounts have increased, there is an obvious shortening of maturities. For the
reasons discussed above, the Company has been unwilling to commit to the higher
rates necessary for customers to want to choose longer term instruments.
<TABLE>
TABLE 12--Maturity Distribution of Time
Certificates of Deposit of $100,000 or More
<CAPTION>
(in thousands) December 31
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Three months or less $ 64,663 $ 40,868 $ 21,938
Over three months through six months 36,010 21,446 17,364
Over six months through one year 41,954 17,118 24,179
Over one year 21,794 15,745 12,957
--------------------------------------------
$ 164,421 $ 95,177 $ 76,438
============================================
</TABLE>
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS PURCHASED
Securities sold under agreements to repurchase ("repos") are a form of borrowing
that is secured by some of the securities in the Company's portfolios. Some
banks use these agreements to borrow from other banks in order to provide
temporary liquidity. In contrast, the Company almost exclusively provides these
instruments in amounts over $100,000 to business customers for their cash
management. Most of the agreements are for terms of a few weeks to 90 days. Like
the rate paid on Federal funds purchased, the interest rate paid on repos is
tied to the Federal funds sold rate. Information about the balances and rates
paid is shown in Note 10 to the Consolidated Financial Statements. The average
rate paid in 1997 of 4.54% was slightly higher than the 4.40% for 1996. The
average balance for these arrangements varies with economic activity as these
customers have more or less cash to invest. The increased averages during 1997
and 1996 reflected the improved local economy and lower rates offered on deposit
products.
Federal funds purchased are a form of overnight borrowing from other banks. The
Company purchases funds each day to accommodate other local community banks on
the Central Coast that have excess cash to invest overnight. The related
interest expense is tied to the rate that the Company receives for its excess
cash sold as Federal funds to larger financial institutions. Information on the
balances and rates paid for these funds is also disclosed in Note 10 to the
Consolidated Financial Statements. During the last three years, the Company has
occasionally purchased additional funds from money center banks to meet
liquidity needs, especially during the RAL season. Because these are overnight
borrowings, the average rate paid to various parties on any one day may vary
substantially from the average rate for the year. Typically, the Federal funds
rate is quite volatile on the last day of the year. This accounts for the high
rate paid on these funds the last day of both 1996 and 1997. The Company
received correspondingly higher interest on the Federal funds it sold those
days.
OTHER REAL ESTATE OWNED
Real property owned by the Company which was acquired in foreclosure proceedings
is termed Other Real Estate Owned or OREO. The amount of OREO held at year-end
in 1996 and 1995 was $1,629,000 and $1,785,000 respectively. The decrease from
1995 to 1996 resulted because additions due to foreclosures of $1,559,000 were
less than sales of $1,648,000 and valuation reduction of $67,000. As explained
in Note 1 to the Consolidated Financial Statements, the Company held some
properties at December 31, 1997, but had written their carrying value down to
zero to reflect the uncertainty of realizing any proceeds from their disposal.
As part of the loan application process, the Company reviews all real estate
collateral for possible problems from contamination by hazardous waste. This is
reviewed again before any foreclosure proceedings are initiated.
NON-EARNING ASSETS
For a bank, non-earning assets are those assets like cash reserves, equipment,
and premises which do not earn interest. This ratio is watched carefully by
Management because it represents the efficiency with which funds are used. Tying
up funds in non-earning assets lessens the amount of interest that may be earned
or requires investment of the smaller earning asset base in higher yielding but
riskier assets to achieve the same income level. Management believes that a low
level of non-earning assets is part of a prudent asset and liability management
strategy to reduce volatility in the earnings of the Company. Non-earning assets
have declined during the last three years from an average of 5.55% in 1995 and
5.07% in 1996 to an average of 4.67% in 1997. As a result of the two
acquisitions noted above, the Company recorded approximately $17 million in
goodwill and approximately $3 million in premises, equipment and other
non-earning assets. Since these additions of non-earning assets were included
for only part of 1997, it is expected that the ratio will be higher in 1998 than
in 1997. The lower ratio in 1997 is more pronounced due to the implementation in
December 1996 of a reclassification of a large proportion of the Company's
transaction accounts. This has reduced the amount of cash reserves which do not
earn interest that must be held against these accounts. This reclassification
will show benefit in future years and will therefore offset a portion of the
impact of the addition of goodwill to non-earning assets.
As of September 30, 1997, the average ratio of non-earning assets to total
assets for bank holding companies of comparable size was 7.06%. Using the
Company's average asset size and average rate of 5.64% earned in 1997 on money
market investments, having an extra 2.39% of assets earning interest meant the
Company had $34.4 million more in earning assets compared with its peers and
earned $1.9 million in pre-tax income on those assets. These additional earnings
are somewhat offset by higher lease expense, additional equipment cost, and
occasional losses taken on quick sales of foreclosed property. Overall, however,
Management believes that these steps give the Company an earnings advantage.
This efficient use of assets allows the Company to produce a given amount of
revenue with substantially less risk than its competition as additional deposits
or borrowings do not have to be obtained to fund the assets generating the
revenue.
OTHER OPERATING INCOME
Fees earned by the Trust and Investment Services Division remain the largest
component of other operating income, reaching $10.0 million in 1997. Fees
increased by $1,544,000 or 18% over 1996. The market value of assets under
administration--on which the majority of fees are based--increased from $1.6
billion at the end of 1996 to $1.8 billion at the end of 1997. Included within
total fees were $1,031,000 for trusteeship of employee benefit plans and
$350,000 from the sales of mutual funds and annuities. The Company provides
assistance to customers to determine what investments would best match their
financial goals and helps the customers allocate their funds according to the
customers' risk tolerance and need for diversification. The funds and annuities
are not operated by the Company, but instead are managed by registered
investment companies. The Division also provides investment management services
to individuals and organizations.
Included within other service charges, commissions and fees are service fees
arising from the processing of merchants' credit card deposits, escrow fees, and
a number of other fees charged for special services provided to customers. A
significant source of income in this category is tax refund transfer fee income
which totaled $2.9 million in 1997. As explained in the previous discussion on
RAL's, many of the taxpayers not qualifying for loans still had their refunds
sent by the IRS to the Company which then issued the refund check more quickly
than the IRS. The Company began earning substantial fees for this service in
1995. Management expects that this will continue to provide a significant source
of income in 1998 and beyond.
The Company continues to work on increasing other income and fees due to its
importance as a potential contributor to profitability.
OTHER OPERATING EXPENSE
Total other operating expenses have increased over the last three years as the
Company has grown. These expenses are often calculated as a proportion of total
assets as a means of comparing their level with other financial institutions. As
a percentage of average earning assets, these expenses have risen slightly in
1997 to 4.38% from 4.13% and 4.11% for 1996 and 1995, respectively. These ratios
are higher compared to the average ratio of 4.07% for its FDIC peer group for
the first nine months of 1997 for several reasons.
The first is that it is exceptional for a financial institution the size of the
Company to have such a large trust division. The expenses of this division
(approximately $5.2 million in 1997) are included in the general category of
other operating expenses (the numerator of the ratio), but the only earning
assets associated with the division (the denominator of the ratio) arise from
trust customer funds deposited with the Company, which averaged $62.3 million in
1997.
The second reason is the high proportion of premises leased rather than owned by
the Company. There is increased lease expense, but, as noted above, by not
committing funds to the purchase of premises, the Company is able to
substantially increase its net interest income.
The third reason is the nonrecurring expense incurred in connection with the
acquisitions of FVB and CSB. Most of these expenses were recognized in 1997
while the Company benefited for only three quarters from the assets obtained
from FVB and only one quarter from the assets obtained from CSB.
An alternative ratio to use in comparing the Company's expenses to those of
other financial institutions is the operating efficiency ratio. This ratio,
which takes into account the trust fee income and interest income available by
not owning premises, measures how much noninterest expense is spent in earning a
dollar of revenue. The Company spent 59.0 cents in 1997 for each dollar of
revenue compared to 56.3 cents for its FDIC peers. The acquisition expenses
account for just under 1 cent of the difference. Along with the generation of
noninterest income, expense control has been set as a priority for 1998.
Within the whole category of other operating expense, salary and benefit
expenses have increased 40.4% from 1995 to 1997 compared to a 34.6% increase in
average earning assets for the same period. In most years the rate of increase
in staff is less than the rate of growth in the Company's assets (if the growth
in off-balance sheet fiduciary assets is also considered). The number of staff
has increased for several reasons. In addition to the eight new offices acquired
in the FVB and CSB transactions, six new branch offices have been opened since
the start of 1993. It generally takes several years for new offices to attract
sufficient deposits to offset the personnel expense.
Net occupancy and equipment expense have increased from 1995 to 1997 by 29.1%
because of some branch office renovation, increases in lease rent, upgrading of
equipment to handle increased transaction volumes and to maintain technological
competitiveness, and the addition of new offices.
CAPITAL RESOURCES
Under current regulatory definitions, the Company is "well-capitalized," the
highest rating of the five categories defined under the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA").
Capital Adequacy Standards
The primary measure of capital adequacy for regulatory purposes is based on the
ratio of risk-based capital to risk weighted assets. This method of measuring
capital adequacy is meant to accomplish several ends: 1) to establish capital
requirements that are more sensitive to the differences in risk associated with
various assets; 2) to explicitly take into account off-balance sheet exposure in
assessing capital adequacy; and, 3) to minimize disincentives to holding liquid,
low-risk assets.
The Company, as a bank holding company, is required by the FRB to maintain a
risk-based capital ratio of at least 8.0%. At the end of 1997, the Company's
ratio was 11.3%. The minimum levels established by the FRB, the minimum levels
necessary to be considered well capitalized by regulatory definition and the
Company's ratios as of December 31, 1997 are presented in Note 17. It is
Management's intent to maintain capital in excess of the well capitalized
requirement. As of year-end all ratios exceed this threshold. The Bank is
required to maintain a risk-based capital ratio of 8.0%. The Bank's ratio is
slightly higher than the Company's, and at the end of 1997, its ratio was 11.4%.
Sanbarco has no minimum capital requirements.
The risk-based capital ratio is strongly impacted by the management of the
securities portfolios because the U.S. Treasury securities are assigned a zero
risk weighting and other instruments in which the Company has often placed a
significant amount of funds--U.S. agency securities, state and municipal
securities, Federal funds sold, and bankers' acceptances--have a 20% risk
weighting. The Company's ratio decreased from 18.0% for year-end 1995 to 16.5%
for year-end 1996 due mainly to growth in the balance sheet as a result of the
lease portfolio purchase of approximately $59 million. Lease assets are 100%
risk weighted and the resultant growth in risk weighted assets was at a greater
rate than the growth in risk based capital and therefore the ratio declined. The
decrease to 11.3% was the result of the two acquisitions and a continuation of
the shift in the securities portfolios to 20% risk weighted assets.
The FVB and CSB acquisitions were specifically structured so that only cash
consideration was paid to their shareholders in order that the earnings from the
additional net assets would not be diluted by the issuance of additional shares.
Although total capital did not change as a result of the purchase of FVB and CSB
since the consideration paid was cash only, Tier 1 capital and total
risked-based capital were reduced by the amount of goodwill recognized.
Future Sources and Uses of Capital and Expected Ratios
The Company is trying to increase loans as a percentage of total assets in order
to increase net interest income. Except for most 1-4 family residential loans,
loans are risk-weighted at 100%. If Management's projections for loan growth are
reached in 1998, the Company's risk-based capital ratio should decrease.
However, Management anticipates that the Company and the Bank will continue to
exceed the minimum standards for well capitalized institutions because of
sustained growth in capital resources.
Net income has provided $46.2 million in capital in the last three years. Of
this amount, $17.1 million, or 36.9% was distributed in dividends.
In addition to the capital generated from the operations of the Bank, over the
years a significant source of capital growth has been the exercise of employee
stock options. The extent of the growth from this source in any one year depends
on a number of factors, among them the current stock price in relation to the
price at the time options were granted and the number of options that would
expire if not exercised during the year.
The net increase to capital from the exercise of options is lessened by the
ability of employees to pay the exercise price of options by trading shares of
stock they already own, termed "swapping". In 1997, the increase to capital from
the exercise of options (net of shares surrendered as payment for exercises and
taxes) was $2,409,000 or 22.8% percent of the net growth in shareholders' equity
in that year. At December 31, 1997, there were approximately 319,000 options
outstanding and exercisable at less than the current market price, with an
average exercise price of $28.39. This represents a potential addition to
capital of $9.1 million, if all options were exercised with cash. Because many
options are likely to be exercised by swapping, some amount less than the $9.1
million in new capital will result from the exercise of options, and the options
are likely to be exercised over a number of years.
Tender Offer and Other Share Repurchases
As disclosed in Note 9 to the accompanying Consolidated Financial Statements, in
January 1997 the company offered to purchase up to 500,000 shares of common
stock duly tendered by February 21, 1997. The number of shares tendered on that
date were 65,247 or 0.9% of the then outstanding shares. The Company paid $30.00
per share or approximately $2.0 million for the stock tendered, which was
accounted for as a retirement of shares and reduction of capital in 1997. As
explained in the tender offer, this action was taken: 1) to provide shareholders
with larger holdings an opportunity to sell shares if they had not been able to
because the market was not able to absorb larger blocks; and 2) because the
significant earnings growth over the last several years had resulted in an
accumulation of capital in excess of current and anticipated needs.
The Company also repurchased shares of its common stock to offset the increased
number of shares issued as a result of the exercise of employee stock options.
In 1997, the Company repurchased approximately 135,000 shares to offset the
effect of the exercise of stock options of 168,000 shares.
There are no material commitments for capital expenditures or "off-balance
sheet" financing arrangements as of the end of 1997, except as reported in Note
19 to the Consolidated Financial Statements. Legal limitations on the ability of
the Bank to declare dividends to the Bancorp are discussed in Note 17.
REGULATION
The Company is strongly impacted by regulation. The Company and its subsidiaries
may engage only in lines of business that have been approved by their respective
regulators, and cannot open, close, or relocate offices without their approval.
Disclosure of the terms and conditions of loans made to customers and deposits
accepted from customers are both heavily regulated as to content. FDICIA became
effective in 1992. FDICIA required banks to meet new capitalization standards,
follow stringent outside audit rules, and establish stricter internal controls.
There were also new requirements to ensure that the Audit Committee of the Board
of Directors is independent.
The Bank is required by the provisions of the federal Community Reinvestment Act
("CRA"), to make significant efforts to ensure that access to banking services
is available to every segment of the community. The Bank is also required to
comply with the provision of various other consumer legislation and regulations.
The Company and the Bank must file periodic reports with the various regulators
to keep them informed of their financial condition and operations as well as
their compliance with all the various regulations.
The FRB and the California Department of Financial Institutions conduct periodic
examinations of the Company and the Bank to verify that the reporting is
accurate and to ascertain that the Company and the Bank are in compliance with
regulations.
The FRB may take action against a bank holding company or a bank should find
that the financial institution has failed to maintain adequate capital. This
action has usually taken the form of restrictions on the payment of dividends to
shareholders, requirements to obtain more capital from investors, and
restrictions on operations. The FDIC may also take action against a bank which
is not acting in a safe and sound manner. Given the strong capital position and
performance of the Company and the Bank, Management does not expect to be
impacted by these types of restrictions in the foreseeable future.
IMPACT OF INFLATION
Inflation has been minimal for the last several years and has had little or no
impact on the financial condition and results of operations of the Company
during the periods discussed here.
LIQUIDITY
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuations in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented in the market
place.
The Company's objective is to ensure adequate liquidity at all times by
maintaining liquid assets (asset liquidity), by being able to raise deposits and
liabilities (liability liquidity), and by having access to funds via capital
markets. Having too little liquidity can result in difficulties in meeting
commitments and lost opportunities. Having too much liquidity can result in less
income because liquid assets usually do not earn as high an interest rate as
less liquid assets.
As indicated in the Consolidated Statements of Cash Flows, the principal sources
of cash for the Company have been interest payments received on loans and
investments, proceeds from the maturity or sale of securities and bankers'
acceptances, and the growth in deposits.
To manage the Company's liquidity properly, however, it is not enough merely to
have large cash inflows; they must be timed to coincide with anticipated cash
outflows. Also, the available cash on hand or cash equivalents must be
sufficient to meet the exceptional demands that can be expected from time to
time relating to natural catastrophes such as flood, earthquakes, and fire.
The Company manages its liquidity adequacy by monitoring and managing its
immediate liquidity, intermediate liquidity, and long term liquidity.
Immediate liquidity is the ability to raise funds today to meet today's cash
obligations. Sources of immediate liquidity include the prior day's Federal
funds sold position, unused Federal funds and repurchase agreement lines and
facilities extended by other banks and major brokers to the Company, access to
the Federal Home Loan Bank for short-term advances, and access to the Federal
Reserve Bank's Discount Window. The Company has established a target amount for
sources of available immediate liquidity. This amount is increased during
certain periods to accommodate any liquidity risks of special programs like
RAL's.
Intermediate liquidity is the ability to raise funds during the next few months
to meet cash obligations over those next few months. Sources of intermediate
liquidity include maturities or sales of bankers' acceptances and securities,
term repurchase agreements, and term advances from the Federal Home Loan Bank.
The Company monitors the cash flow needs of the next few months and determines
that the sources are adequate to provide for these cash needs.
Long term liquidity is the ability to raise funds over the entire planning
horizon to meet cash needs anticipated due to strategic balance sheet changes.
Long term liquidity sources include initiating special programs to increase core
deposits in expanded market areas, reducing the size of securities portfolios,
taking long-term advances from the Federal Home Loan Bank, securitizing loans,
and accessing capital markets. An example of coordinating a source of long term
liquidity with asset/liability management was the borrowing of $38 million from
the Federal Home Loan Bank in December 1996 to fund a portion of the lease
portfolio purchase. Had the Company used immediate or intermediate sources of
liquidity to fund the whole purchase, the negative gap for the next three months
would have been larger, subjecting the Company to greater exposure from rising
interest rates.
INCOME TAX EXPENSE
Income tax expense is the sum of two components, the current tax expense or
provision and the deferred expense or provision. Current tax expense is the
result of applying the current tax rate to taxable income.
The deferred tax provision is intended to account for the fact that income on
which the Company pays taxes with its returns differs from pre-tax income in the
accompanying Consolidated Income Statements. Some items of income and expense
are recognized in different years for income tax purposes than in the financial
statements. For example, the Company is only permitted to deduct from federal
taxable income actual net loan charge-offs, irrespective of the amount of
provision for credit loss (bad debt expense) recognized in its financial
statements. This causes what is termed a "temporary difference" because
eventually, as loans are charged-off, the Company will be able to deduct for
taxes what has already been recognized as an expense in the financial
statements. Another example is the accretion of discount on certain securities.
For its financial statements, the Company recognizes income as the discount is
accreted. For its tax return, however, the Company can defer the recognition of
income until the cash is received at the maturity of the security. The first
example causes a deferred tax asset to be created because the Company has
recognized as an expense for its current financial statements an item that it
will be able to deduct from its taxable income in a future year. The second
example causes a deferred tax liability, because the Company has been able to
delay until a subsequent year the paying of tax on an item of current year
financial statement income.
The Company measures all of its deferred tax assets and liabilities at the end
of each year. The difference between the net asset or liability at the beginning
of the year and the end of the year is the deferred tax provision for the year.
Most of the Company's temporary differences involve recognizing substantially
more expenses in its financial statements than it has been allowed to deduct for
taxes, which results in a net deferred tax asset. Deferred tax assets are
dependent for realization on past taxes paid, against which they may be carried
back, or on future taxable income, against which they may be offset. If there
were a question about the Company's ability to realize the benefit from the
asset, then it would have to record a valuation allowance against the asset to
reflect the uncertainty. Given the amount and nature of the Company's deferred
assets, the past taxes paid, and the likelihood of future taxable income,
realization is assured and no valuation allowance is needed.
The amounts of the current expense and deferred benefit, the amounts of the
various deferred tax assets and liabilities, and the tax effect of the principal
temporary differences between taxable income and pre-tax financial statement
income are shown in Note 8 to the accompanying Consolidated Financial
Statements.
To ensure that all corporations with substantial income for financial reporting
purposes ("book income") pay some Federal income tax, Congress established the
Alternative Minimum Tax ("AMT") as a second parallel tax system. Under AMT
provisions, there is a limitation on how great the difference may be between
book income and taxable income. If the difference is too great, a portion of the
book income not normally taxable is nonetheless added to taxable income and the
total is multiplied by the AMT tax rate for comparison with the regular tax
computation. The Company is required to pay the greater of the Federal tax
liability computed under the regular tax system or that computed using the
special rules of the AMT.
The Company has substantial differences between book income and taxable income
due to the temporary differences noted above and due to permanent differences
like the tax-exempt income from state and municipal securities. These
differences were not sufficient in 1996 or 1997 to trigger the AMT rate but it
did pay taxes under AMT in 1995. The extra tax paid under the AMT calculation
for 1995 was allowable as a credit against 1996 taxes. The lowest effective tax
rate for the Company occurs at the point that the regular tax computation and
the AMT computation result in the same tax amount. The Company therefore tries
to stay very close to this crossover point. In these circumstances, the Company
carefully considers the impact of new purchases of tax-exempt securities and
other transactions which might cause the AMT to come into effect.
COMMON STOCK PRICES AND DIVIDENDS
Stock prices and cash dividends declared for the last eight quarters are shown
on page 5. The Company's stock is listed on the NASDAQ National Market System.
The trading symbol is SABB. Stock prices represent trading activity through the
National Market System. Near the end of June 1997, the Company's stock was added
to the Russell 2000 stock index. As a number of index funds purchased the stock
to match the index, the volume and price increased rapidly for a short time.
The Board of Directors periodically increases the dividend rate in
acknowledgment that earnings have been increasing by a sufficient amount to
ensure adequate capital and also provide a higher return to shareholders. For
the years 1997, 1996, and 1995, the Company has declared dividends which were
37.0%, 34.6%, and 40.3%, respectively, of its net income. The most recent
information for the Company's peers shows an average payout ratio of 26.6%.
YEAR 2000
The Company is in the process of addressing the possible exposures related to
the impact of the Year 2000. Key financial, information and operational systems
have been assessed and detailed plans have been developed to ensure that Year
2000 systems modifications will be in place by December 1998. As most of the
critical software is purchased from vendors which have either already begun to
make the necessary changes or will be doing so over the next year, the Company
is concentrating its efforts on implementing and initial testing of "Year 2000
Compliant" systems in 1998. Full system testing will be performed in 1999.
Critical software that is not Year 2000 compliant will be replaced. The Company
has budgeted approximately $1.7 million in 1998 to address the Year 2000 issue.
Most of this cost first relates to the assignment of internal staff rather than
the hiring of outside consultants or additional staff and second to the purchase
of equipment and software, the cost of which will be amortized over a number of
years. Management therefore does not anticipate a material impact to the
Company's results of operations or financial position. A similar amount is
likely to be spent in 1999.
NOTES TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTE A
In various places throughout this discussion, comparisons will be made between
ratios for the Company and for its FDIC peers. For 1997, the peer group
generally is all FDIC banks with an asset size of $1 billion to $10 billion, and
the information set forth above is reported in or calculated from information
reported in the FDIC Quarterly Banking Profile, Third Quarter 1997, which is the
latest issue available. The publication does not report some of the statistics
cited in this report by the separate size-based peer groups. In these instances,
the figure cited is for all FDIC banks regardless of size.
The peer group information for the dividend payout ratio is reported in the Bank
Holding Company Performance Report received from the FRB for the 3rd Quarter of
1997.
NOTE B
For Tables 2 and 4, the yield on tax-exempt state and municipal securities has
been computed on a tax equivalent basis. To compute the tax equivalent yield for
these securities one must first add to the actual interest earned an amount such
that if the resulting total were fully taxed, the after-tax income would be
equivalent to the actual tax-exempt income. This tax equivalent income is then
divided by the average balance to obtain the tax equivalent yield. The dollar
amount of the adjustment is shown at the bottom of Table 2 as "Tax equivalent
income included in interest income from nontaxable securities and loans."
NOTE C
For purposes of Table 2, loans in a nonaccrual status are included in the
computation of average balances in their respective loan categories.
NOTE D
For purposes of the amounts in Table 3 relating to the volume and rate analysis
of net interest margin, the portion of the change in interest earned or paid
that is attributable to changes in rate is computed by multiplying the change in
interest rate by the prior year's average balance. The portion of the change in
interest earned or paid that is attributable to changes in volume is computed by
multiplying the change in average balances by the prior year's interest rate.
The portion of the change that is not attributable either solely to changes in
volume or changes in rate is prorated on a weighted basis between volume and
rate.
NOTE E
In Table 1, the net deferred loan origination, commitment, and extension fees
and the allowance for loan and lease losses are included in the column titled
"Noninterest bearing or non-repricing items."
NOTE F
A yield curve is a graphic representation of the relationship between the
interest rate and the maturity term of financial instruments. Generally,
interest rates on shorter maturity financial instruments are less than those for
longer term instruments. For example, at December 31, 1997, 1 year Treasury
notes sold at a price that yielded 5.48% while 30 year notes sold at a price
that yielded 5.92%. A line drawn that plots this relationship for a whole range
of maturities will be "steeper" when the rates on long-term maturities are
substantially higher than those on shorter term maturities. The curve is said to
be "flatter" when there is not as much of a difference.
NOTE G
While banker's acceptances generally result from the financing of a shipment of
goods between a particular purchaser and seller, in financial markets they
function as a negotiable short-term debt instrument.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following audited Consolidated Financial Statements and related documents
are included in this Annual Report on Form 10-K on the pages indicated:
Management's Responsibility for Financial Reporting 35
Report of Independent Public Accountants 36
Consolidated Balance Sheets as of December 31, 1997 and 1996 37
Consolidated Statements of Income for the years ended
December 31, 1997, 1996, and 1995 38
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996, and 1995 39
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995 40
Notes to Consolidated Financial Statements 41
The following unaudited supplementary data is included in this Annual Report on
Form 10-K on the page indicated:
Quarterly Financial Data 65
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The Management of Santa Barbara Bancorp is responsible for the preparation,
integrity, and fair presentation of the Company's annual financial statements
and related financial data contained in this report. With the exception that
some of the information in Management's Discussion and Analysis of Financial
Condition and Results of Operations is presented on a tax equivalent basis to
improve comparability, all information has been prepared in accordance with
generally accepted accounting principles and, as such, includes certain amounts
that are based on Management's best estimates and judgments. The consolidated
financial statements presented on pages 37 through 40 have been audited by
Arthur Andersen LLP, who have been given unrestricted access to all financial
records and related data, including minutes of all meetings of shareholders, the
Board of Directors, and committees of the Board. Management believes that all
representations made to Arthur Andersen LLP during the audit were valid and
appropriate.
Management is responsible for establishing and maintaining an internal control
structure over financial reporting. Two of the objectives of this internal
control structure are to provide reasonable assurance to Management and the
Board of Directors that transactions are properly authorized and recorded in our
financial records, and that the preparation of the Company's financial
statements and other financial reporting is done in accordance with generally
accepted accounting principles.
Management has made its own assessment of the effectiveness of the Company's
internal control structure over financial reporting as of December 31, 1997, in
relation to the criteria described in the report, Internal Control--Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
There are inherent limitations in the effectiveness of any internal control
structure, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to reliability of
financial statements. Furthermore, the effectiveness of any internal control
structure can vary with changes in circumstances. Nonetheless, based on its
assessment, Management believes that as of December 31, 1997, Santa Barbara
Bancorp's internal control structure was effective in achieving the objectives
stated above.
Management is also responsible for compliance with laws and regulations relating
to safety and soundness which were designated by the Federal Deposit Insurance
Corporation. These are federal and state laws and regulations concerning
dividend restrictions and loans to insiders. Management assessed the Company's
compliance with these laws and regulations. Based on this assessment, Management
believes that in all significant respects the Company complied with these
designated laws and regulations during the year ended December 31, 1997.
The Board of Directors is responsible for reviewing and monitoring the policies
and practices employed by Management in preparing the Company's financial
reporting. This is accomplished through its Audit Committee, which is comprised
of directors who are not officers or employees of the Company. The Committee
reviews accounting policies, control procedures, internal and independent audit
reports, and regulatory examination reports with Management, the Company's
internal auditors, and representatives of Arthur Andersen LLP. Both the
Company's internal auditors and the representatives of Arthur Andersen LLP have
full and free access to the Committee to discuss any issues which arise out of
their examinations without Management present.
David W. Spainhour William S. Thomas, Jr. Donald Lafler
President and President and Senior Vice President and
Chief Executive Officer Chief Executive Officer Chief Financial Officer
Santa Barbara Bancorp Santa Barbara Bank & Trust Santa Barbara Bancorp and
Santa Barbara Bank & Trust
<PAGE>
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, 1997 and
1996, 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, 1997. 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, 1997 and 1996, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 30, 1998
<PAGE>
<TABLE>
Santa Barbara Bancorp and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<CAPTION>
December 31
1997 1996
<S> <C> <C>
Assets:
Cash and due from banks (Note 5) $ 67,799 $ 51,181
Federal funds sold 48,000 70,000
Total cash and cash equivalents 115,799 121,181
Securities (approximate market value of $525,447
in 1997 and $431,109 in 1996) (Note 2):
Held-to-maturity 222,350 276,359
Available-for-sale 286,998 141,679
Total securities 509,348 418,038
Bankers' acceptances 49,400 64,732
Loans (Note 3) 881,548 684,167
Less: allowance for credit losses (Note 4) 21,148 16,572
Net loans 860,400 667,595
Premises and equipment, net (Note 6) 13,595 6,835
Accrued interest receivable 10,328 8,503
Other assets (Notes 8 & 19) 33,516 14,436
Total assets $ 1,592,386 $ 1,301,320
Liabilities:
Deposits (Note 7):
Noninterest bearing demand deposits $ 265,751 $ 178,511
Interest bearing deposits 1,138,404 1,934,572
Total deposits 1,404,155 1,113,083
Securities sold under agreements to repurchase
and Federal funds purchased (Note 10) 21,293 33,490
Long-term debt and other borrowings (Note 11) 39,000 39,000
Accrued interest payable and
other liabilities (Notes 8, 13, and 15) 9,772 8,154
Total liabilities 1,474,220 1,193,727
Commitments and contingencies (Note 18)
Shareholders' equity (Notes 9, 13 and 17):
Common stock -- no par value, $0.67 stated value; shares
authorized: 20,000; shares issued and outstanding
7,621 in 1997 and 7,588 in 1996. 5,081 5,059
Surplus 32,790 35,415
Unrealized gain on securities
available-for-sale, net of tax (Notes 1 and 2) 496 2
Retained earnings 79,799 67,117
Total shareholders' equity 118,166 107,593
Total liabilities and shareholders' equity $ 1,592,386 $ 1,301,320
<FN>
The accompanying notes are an integral part of these consolidated balance sheets.
</FN>
</TABLE>
<PAGE>
<TABLE>
Santa Barbara Bancorp and Subsidiaries
Consolidated Statements of Income
(in thousands, except for per share data)
<CAPTION>
Year Ended December 31
1997 1996 1995
<S> <C> <C> <C>
Interest income:
Interest and fees on loans (Note 3) $79,141 $56,791 $52,649
Interest on securities:
U.S. Treasury obligations 12,866 14,035 12,447
U.S. agency obligations 2,404 3,710 3,680
State and municipal securities 7,661 ,615 6,973
Collateralized mortgage obligations 3,449 1,453 --
Asset-backed securities 181 -- --
Equity securities 445 46 14
Interest on Federal funds sold and securities
purchased under agreement to resell 4,654 3,128 3,131
Interest on bankers' acceptances 4,134 3,800 3,294
Total interest income 114,935 89,578 82,188
Interest expense:
Interest on deposits (Note 7) 39,226 33,006 32,035
Interest on securities sold under agreements to
repurchase and Federal funds purchased (Note 10) 1,510 1,897 1,474
Interest on long-term debt and other borrowings (Note 11) 2,469 146 74
Total interest expense 43,205 35,049 33,583
Net interest income 71,730 54,529 48,605
Provision for credit losses (Notes 1 and 4) 6,980 4,264 9,924
Net interest income after provision for credit losses 64,750 50,265 38,681
Other operating income:
Service charges on deposit accounts 5,471 4,594 4,255
Trust fees (Note 1) 9,985 8,441 7,020
Other service charges, commissions and fees (Note 12) 9,192 6,107 5,959
Net loss on sales and calls of securities (Notes 1, 2, and 8) (406) (753) (99)
Other income 902 553 553
Total other operating income 25,144 18,942 17,688
Other operating expense:
Salaries and other compensation (Note 16) 25,215 20,706 18,402
Employee benefits (Notes 13 and 15) 6,610 5,446 4,253
Net occupancy expense (Notes 6 and 18) 5,241 4,550 4,257
Equipment rental, depreciation and maintenance (Note 6) 3,625 2,564 2,611
Other operating expense (Note 12) 19,414 13,323 12,446
Total other operating expense 60,105 46,589 41,969
Income before provision for income taxes 29,789 22,618 14,400
Provision for income taxes (Note 8) 9,653 6,953 3,985
Net income $20,136 $15,665 $10,415
Basic earnings per share $ 2.65 $ 2.05 $ 1.36
Diluted earnings per share $ 2.58 $ 2.01 $ 1.33
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Santa Barbara Bancorp and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(in thousands)
<CAPTION>
Unrealized
Gain (Loss) on
Securities
Common Stock Available- Retained
Shares Amount Surplus for-Sale Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 7,689 $5,126 $39,683 $(1,496) $50,647 $ 93,960
Activitiy for 1995:
Exercise of employee
stock options (Note 9) 48 29 425 -- -- 454
Retirement of
common stock (Note 9) (58) (36) (917) -- -- (953)
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
Activity for 1996:
Exercise of employee
stock options (Note 9) 97 65 1,081 -- -- 1,146
Retirement of
common stock (Note 9) (188) (125) (4,857) -- -- (4,982)
Cash dividends declared
at $0.71 per share -- -- -- -- (5,414) (5,414)
Changes in unrealized gain
(loss) on securities
available-for-sale -- -- -- 181 -- 181
Net income -- -- -- -- 15,665 15,665
Balance, December 31, 1996 7,588 5,059 35,415 2 67,117 107,593
Activity for 1997:
Exercise of employee
stock options (Note 9) 168 112 2,297 -- -- 2,409
Retirement of
common stock (Note 9) (135) (90) (4,922) -- -- (5,012)
Cash dividends declared
at $0.98 per share -- -- -- -- (7,454) (7,454)
Changes in unrealized gain
(loss) on securities
available-for-sale -- -- -- 494 -- 494
Net income -- -- -- -- 20,136 20,136
Balance, December 31, 1997 7,621 $5,081 $32,790 $ 496 $79,799 $118,166
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Santa Barbara Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
Year Ended December 31
Increase (decrease) in cash and cash equivalents (Note1): 1997 1996 1995
<S> <C> <C> <C>
Net income $ 20,136 $ 15,665 $ 10,415
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 3,718 2,067 2,041
Provision for loan and lease losses 6,980 4,264 9,924
(Benefit) provision for deferred income taxes (1,946) (2,508) 795
Net recovery on other real estate owned 87 (52) (40)
Net amortization of discounts and premiums for
securities and bankers' acceptances (4,449) (2,524) (1,038)
Net change in deferred loan origination fees and costs 420 223 102
(Increase) decrease in accrued interest receivable (48) (522) 149
(Decrease) increase in accrued interest payable (133) 103 334
Net loss on sales and calls of securities 417 753 99
Increase in service fees and other income receivable 123 796 140
(Increase) decrease in income taxes receivable (1,478) 94 (181)
Other operating activities 365 3,127 (1,113)
Net cash provided by operating activities 24,192 21,486 21,627
Cash flows from investing activities:
Purchase of common stock of First Valley
Bank and Citizens State Bank (Note 19) (42,270) -- --
Proceeds from sales, calls, and maturities
of securities (Note 2) 209,173 211,201 168,731
Purchase of securities (Note 2) (229,767) (268,757) (136,320)
Proceeds from sale or maturity of bankers' acceptances 170,415 256,025 118,332
Purchase of bankers' acceptances (155,084) (182,139) (176,856)
Net increase in loans made to customers (94,566) (127,260) (72,520)
Disposition of property from defaulted loans 1,799 1,670 383
Purchase or investment in premises and equipment (5,641) (752) (2,799)
Net cash used in investing activities (145,941) (110,012) (101,049)
Cash flows from financing activities:
Net increase in deposits 100,882 59,063 97,303
Net (decrease) increase in borrowings
with maturities of 90 days or less (14,167) (18,035) 41,829
Net increase in long-term debt -- 37,791 --
Proceeds from issuance of common stock (Note 9) 2,409 1,146 454
Payments to retire common stock (Note 9) (5,012) (4,982) (953)
Dividends paid (6,990) (5,022) (4,095)
Net cash provided by financing activities 77,122 69,961 134,538
Net (decrease) increase in cash and cash equivalents (44,627) (18,565) 55,116
Cash and cash equivalents at beginning of period 121,181 139,746 84,630
Cash and cash equivalents acquired in acquisitions 39,245 -- --
Cash and cash equivalents at end of period $ 115,799 $ 121,181 $ 139,746
<PAGE>
Supplemental disclosure:
Interest paid during the year $ 43,340 $ 34,946 $ 33,917
Income taxes paid during the year $ 10,229 $ 8,425 $ 3,110
Non-cash additions to other real estate owned (Note 1) $ 220 $ 1,774 $ 1,446
Non-cash transaction for net addition to (release from) senior
debt on OREO upon foreclosure (disposal) of properties $ -- $ -- $ 209
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
Santa Barbara Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting 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
Santa Barbara County and in western Ventura County. The banking services include
making commercial, leasing, 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 offers safe deposit boxes,
travelers checks, money orders, and cashiers checks. The Bank also provides
escrow and foreign exchange services to its customers. A wide range of wealth
management services are offered through the Bank's Trust and Investment Services
division. The Company's other subsidiary is Sanbarco Mortgage Company. Its
primary business activities are directed to brokering commercial real estate
loans and servicing those loans for a fee. While these activities are not
material in relation to the consolidated financial position or results, they
were organized into a separate company to limit possible exposure to the Bank.
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. All significant
intercompany balances and transactions are eliminated.
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
The Company's securities are classified as held-to-maturity or
available-for-sale. Securities for which the Company has the positive intent and
ability to hold until maturity are classified as held-to-maturity. 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.
The Company's securities which are 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 the excess of the face value of the security over
the cost. Premium is the excess of cost over the face value of the security.
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, 1997 and 1996 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 Credit Losses
Loans are carried at amounts advanced to the borrowers less principal payments
collected. Interest on loans is accrued on a simple interest basis. 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 has established a valuation allowance for those loans which are
impaired. A loan is identified as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the loan
agreement. The 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) by discounting estimated future cash flows
at the effective interest rate; (2) by observing the loan's 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.
Under GAAP, the Company is permitted to determine the valuation allowance for
impaired loans 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
determines the valuation allowance 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 are current in their interest and
principal payments. These impaired loans are not classified as nonaccrual.
In addition to the allowance for impaired loans, the Company also provides an
allowance for losses for loans that are not identified as impaired. This
allowance is intended to provide for losses that occur in large groups of
smaller balance loans, the individual credit quality of which is impracticable
to review at each period end, and for losses inherent in loans of all types but
which have not been specifically identified as of the period end. The allowances
for impaired loans and for other loans are reported together as allowance for
credit loss in the accompanying Consolidated Balance Sheets as of December 31,
1997 and 1996 and in Note 4. The allowance for credit 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.
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.
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 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
Electronic equipment 3 years
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
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128") became effective for the Company as of December 31, 1997. Earnings per
share for all periods presented in the Consolidated Statements of Income are
computed in accordance with the provisions of this statement, and are based on
the weighted average number of shares outstanding during each year retroactively
restated for stock dividends and stock splits. Diluted earnings per share
include the effect of common stock equivalents for the Company, which include
only shares issuable on the exercise of outstanding options. SFAS 128 requires
the restatement of earnings per share for all prior periods presented in the
Company's financial statements. A reconciliation of the computation of basic
earnings per share and diluted earnings per share is presented in Note 16.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, Federal funds sold, and securities purchased under agreements to
resell. Federal funds and securities purchased under agreements to resell are
one day transactions, after which the Company's funds are returned to it the
next day.
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 the fair value of the OREO
less estimated costs to sell. If the outstanding balance of the loan is greater
than the fair value of the OREO less estimated disposal costs at the time of the
acquisition, the difference is charged-off against the allowance for credit
losses. 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 operating or maintenance costs
are expensed as incurred and additional decreases in the fair value are charged
to other operating expense by establishing valuation allowances 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.
At December 31, 1997, the Company held real estate properties that had been
acquired through foreclosure, but the value of the property and the estimated
disposal costs were so uncertain that no amount is reported on the balance sheet
for that date. OREO that had been acquired through foreclosure or deed in lieu
was $1,629,000 as of December 31, 1996.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") became effective January 1, 1996. Under the accounting
method that has been in effect prior to the effective date of this statement, if
options were granted at an exercise price equal to the market value of the stock
at the time of the grant, no compensation expense was recognized. SFAS 123
establishes a second accounting method for employee stock options under which
issuers record compensation expense over the period they are expected to be
outstanding prior to exercise, expiration, or cancellation. The amount of
compensation expense to be recognized over this term is the "fair value" of the
options at the time of the grant as determined by an option pricing model. The
option pricing model attributes fair value 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. 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. Therefore, in adopting SFAS 123 on January 1,
1996, the Company chose 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 presents
these disclosures in Note 16.
Derivative Financial Instruments
Interest rate swaps and interest rate caps and floors may be used to manage the
Company's exposure to interest rate risks. These instruments are specifically
allocated to the assets or liabilities being managed and are recorded in the
financial statements at cost. Net interest income or expense, including premiums
paid or received, is recognized over the effective period of the contract and
reported as an adjustment to interest income or expense.
Goodwill
In connection with the acquisitions of First Valley Bank ("FVB") and Citizens
State Bank ("CSB") described in Note 19, the Company recognized the excess of
the purchase price over the estimated fair value of the assets received and
liabilities assumed as goodwill. The goodwill is being amortized on the
straight-line method over 15 years. The unamortized carrying amount of the
goodwill recorded for each acquisition is periodically reviewed by Management in
order to determine if facts and circumstances suggest that it is not
recoverable. This is determined based on expected undiscounted cash flows from
the net assets of the acquired entity, and consequently goodwill for the entity
would be reduced by the estimated cash flow deficiency.
Comprehensive Income
In June, 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS 130"). The provisions of this
statement, which become effective for the Company with the statements that will
be issued for 1998, will require the Company to disclose the components of
comprehensive income. Based on the Company's current activities, in addition to
net income, these components will include changes in the unrealized gains or
losses on securities that are classified as available-for-sale and the benefit
received from the inclusion as a deduction for income tax purposes of the
difference between the market value and the exercise price of stock options
exercised by its employees and directors.
Segment Reporting
In June, 1997 the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information. The
provision of the statement become effective for the Company with the statements
that will be issued for 1998. Under the definition of a "reportable segment" in
current GAAP, the Company has no reportable segments. The provisions of the new
statement changes the definition of a reportable segment in a manner in which
the Company's tax refund loan and refund transfer programs and its fiduciary
services will probably qualify as reportable segments. The information about
reportable segments that is required to be disclosed will include a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. In addition, for whichever operations are determined to be reportable
segments, the Company will disclose the considerations leading to that
determination and the products and services provided by the operating segments.
Reclassifications
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to be comparable with classifications used in the 1997 financial statements.
2. Securities
A summary of securities owned by the Company at December 31, 1997 and 1996, is
as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------------------------- ------------------------------------------
(in thousands) Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury obligations $ 80,714 $ 410 $ (85) $ 81,039 $ 137,988 $ 178 $ (680) $ 137,486
U.S. agency obligations 32,410 112 (106) 32,416 52,268 351 (391) 52,228
State and
municipal securities 109,226 15,847 (79) 124,994 86,103 13,613 -- 99,716
---------------------------------------- ------------------------------------------
222,350 16,369 (270) 238,449 276,359 14,142 (1,071) 289,430
---------------------------------------- ------------------------------------------
Available-for-sale:
U.S. Treasury obligations 62,190 482 -- 162,672 105,482 221 (60) 105,643
U.S. agency obligations 25,930 38 (14) 25,954 -- -- -- --
Collateralized
mortgage obligations 77,716 338 (6) 78,048 30,551 132 (135) 30,548
Asset-backed securities 4,000 8 -- 4,008 -- -- -- --
State and
municipal securities 8,205 62 -- 8,267 -- -- -- --
Equity securities 8,049 -- -- 8,049 5,488 -- -- 5,488
---------------------------------------- ------------------------------------------
286,090 928 (20) 286,998 141,521 353 (195) 141,679
---------------------------------------- ------------------------------------------
$ 508,440 $ 17,297 $ (290) $525,447 $ 417,880 $ 14,495 $ (1,266) $ 431,109
======================================== ==========================================
</TABLE>
The amortized cost and estimated fair value of debt securities at December 31,
1997 and 1996, 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>
December 31, 1997 December 31, 1996
------------------------------------- -------------------------------------
(in thousands) Held-to- Available- Held-to- Available-
Maturity for-Sale Total Maturity for-Sale Total
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amortized cost:
In one year or less $ 38,427 $ 47,936 $ 86,363 $ 49,070 $ 51,495 $ 100,565
After one year through five years 133,400 224,384 357,784 185,092 84,538 269,630
After five years through ten years 11,290 5,130 16,420 14,672 -- 14,672
After ten years 39,233 591 39,824 27,525 -- 27,525
Equity securities -- 8,049 8,049 -- 5,488 5,488
------------------------------------- -------------------------------------
$ 222,350 $ 286,090 $ 508,440 $ 276,359 $ 141,521 $ 417,880
===================================== =====================================
Estimated market value:
In one year or less $ 38,373 $ 48,025 $ 86,398 $ 48,825 $ 51,579 $ 100,404
After one year through five years 139,807 225,163 364,970 184,495 84,612 269,107
After five years through ten years 14,089 5,157 19,246 19,479 -- 19,479
After ten years 46,180 604 46,784 36,631 -- 36,631
Equity securities -- 8,049 8,049 -- 5,488 5,488
------------------------------------- -------------------------------------
$ 238,449 $ 286,998 $ 525,447 $ 289,430 $ 141,679 $ 431,109
===================================== =====================================
</TABLE>
During 1994 and 1995, the Company transferred some of its U.S. agency securities
from available-for-sale classification to held-to-maturity. The securities,
which were 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", and 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 were called. With
circumstances changed by the issuers' decision not to call, Management decided
to classify them as held-to-maturity. The bonds were transferred at their fair
value. As of December 31, 1997, three of the four bonds have matured.
The fair value of the one remaining bond at the time of the transfer in 1995 was
$9,837,000. The unrealized loss of $163,000 (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 security. The
tax effect is reported as a portion of the deferred tax asset in Note 8.
The one remaining bond has reached its final step and has no more call dates.
Only the interest rate on this note was contingent, all principal is paid at
maturity. There is no circumstance under which the interest rate paid on this
note will decline.
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, 1997 and 1996
are shown in the next table.
<TABLE>
(in thousands)
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
Gross Gross Gross Gross Gross Gross
Proceeds Gains Losses Proceeds Gains Losses Proceeds Gains Losses
---------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Sales $ 7,734 -- $ (1) -- -- -- -- -- --
Calls $ 2,168 -- -- $ 3,317 $ 55 -- $ 13,071 -- --
Available-for-sale:
Sales $ 117,003 $ 54 $ (471) $ 128,713 $ 6 $ (814) $ 93,342 $ 683 $ (760)
Calls $ 9,028 -- -- $ 761 -- -- $ 21,020 -- $ (22)
</TABLE>
GAAP permits securities that were classified as held-to-maturity at the time of
purchase to be reclassified to available-for-sale if necessary to maintain the
holder's interest rate risk profile after a significant business combination.
The Company reclassified some of its held-to-maturity securities as a
consequence of the FVB acquisition and subsequently sold them.
The Bank is a member of the Federal Reserve Bank . As a condition of membership,
the Bank is required to purchase Federal Reserve Bank ("FRB") stock.
Subsequently, as the Bank's surplus has increased, it has been required to
purchase additional shares. The Company also acquired the shares owned by
Citizens State Bank in the transaction described in Note 19. In 1996, the Bank
became a member of the Federal Home Loan Bank ("FHLB"), purchasing stock as
required of members. The FRB and FHLB stock are reported as equity securities,
and are classified as available-for-sale, although the Bank is required to hold
the stock so long as it maintains its membership in these organizations.
Securities with a book value of approximately $134.2 million at December 31,
1997 and $227.2 million at December 31, 1996 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>
(in thousands)
<CAPTION>
December 31
1997 1996
------------------------------------
<S> <C> <C>
Real estate loans:
Residential $ 246,283 $ 172,846
Non-residential 249,725 199,203
Construction 16,127 10,245
Commercial, industrial, and agricultural 184,374 154,162
Home equity lines 37,150 34,323
Consumer 75,151 43,944
Leases 61,108 58,526
Municipal tax-exempt obligations 7,931 8,658
Other 3,699 2,260
------------------------------------
$ 881,548 $ 684,167
====================================
</TABLE>
The amounts above are shown net of deferred loan origination, commitment, and
extension fees of $2,782,000 for 1997 and $2,362,000 for 1996.
Impaired Loans
The table below discloses information about the loans classified as impaired and
the valuation allowance related to them:
<TABLE>
(in thousands
<CAPTION>
December 31
1997 1996
-------------------------------
<S> <C> <C>
Loans identified as impaired $ 4,980 $ 5,945
Impaired loans for which a valuation
allowance has been determined $ 702 $ 4,003
Impaired loans for which no valuation
allowance has been determined $ 4,278 $ 1,942
Amount of valuation allowance $ 60 $ 1,196
Average amount of recorded investment
in impaired loans for the year $ 4,242 $ 6,060
Interest recognized during the year for
loans identified as impaired at year-end $ 540 $ 269
Interest received in cash during the year for
loans identified as impaired at year-end $ 540 $ 248
</TABLE>
As indicated in Note 1, a valuation allowance is established for an impaired
loan when the market value of the loan is less than the recorded investment. As
shown above, no valuation allowance has been determined for the loans totaling
$4.3 million at December 31, 1997 for which market value exceeds the recorded
investment. The valuation allowance amounts disclosed above are included in the
allowance for credit loss reported in the balance sheets for December 31, 1997
and 1996 and in the following note.
Refund Anticipation Loans
The Company makes tax refund anticipation loans ("RAL's"). Taxpayers desiring to
receive their income tax refunds early borrow from the Company. The Internal
Revenue Service later sends the refund to the Company. The funds advanced are
generally repaid within several weeks. Therefore, processing costs represent the
major cost of the loan rather than the cost of funds as for other loan types.
Because of their short duration, the Company cannot recover the processing costs
through interest calculated over the term of the loan. Consequently, the Company
has a tiered fee schedule for this service which varies by the amount of funds
advanced rather than the length of time that the loan is outstanding.
Nonetheless, the fees are reported in the statements of income as interest
income, and totaled $7,422,000 for 1997, $3,030,000 for 1996, and $3,253,000 for
1995. 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
RAL's included in the above table of outstanding loans at December 31, 1997 or
1996.
4. Allowance for Credit Losses
The following summarizes the changes in the allowance for credit losses:
<TABLE>
(in thousands)
<CAPTION>
Year ended December 31
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 16,572 $ 12,349 $ 12,911
Tax refund anticipation loans:
Provision for credit losses 4,649 1,100 2,863
Recoveries on loans previously charged-off 1,524 1,437 383
Loans charged-off (5,946) (1,123) (4,402)
All other loans:
Allowance for credit loss recorded in
acquisition transaction 794
Provision for credit losses 2,331 3,164 7,061
Recoveries on loans previously charged-off 3,683 2,790 733
Loans charged-off (2,459) (3,145) (7,200)
--------------------------------------------
Balance, end of year $ 21,148 $ 16,572 $ 12,349
============================================
</TABLE>
The ratio of losses to total loans for the RAL's is higher than for other loans.
For RAL's, the provision for credit 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 $3.2 million in 1997 and $21.7 million
in 1996. The difference between the two amounts relates to a change in
classification for some of the accounts from transaction to non-transaction.
6. Premises and Equipment
Premises and equipment consist of the following:
<TABLE>
(in thousands)
<CAPTION>
December 31
1997 1996
----------------------------
<S> <C> <C>
Land $ 2,137 $ 1,282
Buildings and improvements 8,765 4,334
Leasehold improvements 6,961 6,396
Furniture and equipment 20,392 13,495
----------------------------
Total cost 38,255 25,507
Accumulated depreciation
and amortization (24,660) (18,672)
----------------------------
Net book value $ 13,595 $ 6,835
============================
</TABLE>
Depreciation and amortization on fixed assets included in other operating
expenses totaled $2,981,000 in 1997, $2,067,000 in 1996, and $2,041,000 in 1995.
7. Deposits
Deposits and the related interest expense consisted of the following:
<TABLE>
<CAPTION>
Interest Expense for the
(in thousands) Balance as of December 31 Year ended December 31
1997 1996 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest bearing deposits $ 265,751 $ 178,511 $ -- $ -- $ --
Interest bearing deposits:
NOW accounts 188,080 143,191 1,821 1,494 1,476
Money market deposit accounts 407,626 438,558 15,792 15,998 16,736
Other savings deposits 125,895 88,104 2,493 2,141 2,347
Time certificates of $100,000
or more 164,421 95,177 6,230 3,917 2,974
Other time deposits 252,382 169,542 12,890 9,456 8,502
----------------------------- ----------------------------------
$1,404,155 $1,113,083 $39,226 $33,006 $32,035
============================= ==================================
</TABLE>
8. Income Taxes
The provisions (benefits) for income taxes related to operations and the tax
benefit related to stock options that is credited directly to shareholders'
equity are as follows:
<TABLE>
(in thousands)
<CAPTION>
Year ended December 31
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 8,085 $ 6,385 $ 1,952
Deferred (1,599) (2,013) 339
--------------------------------------------
6,486 4,372 2,291
--------------------------------------------
State:
Current 3,670 3,076 1,238
Deferred (503) (495) 456
--------------------------------------------
3,167 2,581 1,694
--------------------------------------------
Total tax provision $ 9,653 $ 6,953 $ 3,985
============================================
Reduction in taxes payable associated with
exercises of stock options $ (2,960) $ (1,044) $ (254)
</TABLE>
The current provision for income taxes includes credits of $171,000, $319,000,
and $41,000 related to realized net securities losses for 1997, 1996, and 1995,
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 35 percent
for the reasons shown in the following table.
<TABLE>
(in thousands
<CAPTION>
Year ended December 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Tax provision at Federal statutory rate 35.0% 35.0% 34.0%
Interest on securities exempt from Federal taxation (9.5) (10.9) (16.4)
State income taxes, net of Federal income tax benefit 6.4 6.5 7.8
ESOP dividends deductible as an expense for tax purposes (1.0) (1.0) (1.0)
Goodwill amortization 1.1 -- --
Other, net 0.4 1.1 3.3
--------------------------------------
Actual tax provision 32.4% 30.7% 27.7%
======================================
</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, 1997
and 1996, included within other assets on the balance sheet are net deferred tax
assets of $9,820,000 and $8,711,000, respectively. The net deferred tax assets
as of December 31, 1997 and 1996 and the change in the tax effect of the
principal temporary differences for the year ending that date are disclosed in
the following table.
<TABLE>
<CAPTION>
Tax Tax
(in thousands) Components Acquired Effect Components Effect Components
1997 Components 1997 1996 1996 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Allowance for credit loss $ 8,615 $ 51 $ 1,856 $ 6,708 $ 2,082 $ 4,626
State taxes 1,322 -- 245 1,077 627 450
Loan fees 270 -- (93) 363 (81) 444
Depreciation 515 (1,258) 606 1,167 211 956
Post retirement benefits 682 -- 49 633 46 587
Other real estate owned 17 -- 3 14 14 --
Nonaccrual interest 392 -- 78 314 94 220
Other 83 481 (416) 18 (213) 231
--------------------------------------------------------------------------
11,896 (726) 2,328 10,294 2,780 7,514
Valuation allowance -- -- -- -- -- --
--------------------------------------------------------------------------
Total deferred tax assets 11,896 (726) 2,328 10,294 2,780 7,514
--------------------------------------------------------------------------
Deferred tax liabilities:
Loan costs 869 -- 222 647 142 505
Accretion on securities 211 (16) (206) 433 (66) 499
Federal effect of state tax asset 590 (74) 198 466 185 281
Other 45 -- 12 33 11 22
--------------------------------------------------------------------------
Total deferred tax liabilities 1,715 (90) 226 1,579 272 1,307
--------------------------------------------------------------------------
Net deferred tax asset
before unrealized gains and
losses on securities 10,181 (636) 2,102 8,715 2,508 6,207
Unrealized (gains) and losses
on securities (361) (4) 127
--------------------------------------------------------------------------
Net deferred tax asset $ 9,820 $ (636) $ 2,102 $ 8,711 $ 2,508 $ 6,334
==========================================================================
</TABLE>
The change in the tax effect of the unrealized loss on securities
available-for-sale is recorded directly to equity, rather than being included as
a component of deferred tax expense or benefit. Hence there is no entry in the
columns labeled "Tax Effect" in the table above for the change. The deferred tax
assets and liabilities assumed in the acquisitions of FVB and CSB are also shown
separately from the changes in deferred tax assets and liabilities that are
reflected in the deferred tax benefits in the first table of this note.
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 in the future to realize all
material amounts.
9. Shareholders' Equity
The Company has four 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 1996. 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 both plans 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 and fourth plans were established in 1983 and 1986
for employees and directors, respectively. All options approved under these
plans have been granted as non-qualified options, and the plans are active now
only for the exercise of options held by employees and directors.
The following table presents information concerning the stock option plans as of
December 31, 1997, 1996, and 1995 (adjusted for stock splits and stock
dividends).
<TABLE>
<CAPTION>
Per Share
Options Price Ranges
------------- -------------------
<S> <C> <C>
1997
Granted 248,746 $27.75 to $46.88
Exercised 278,515 $9.21 to $36.50
Cancelled and expired 12,554 $9.21 to $41.31
Outstanding at end of year 730,675 $10.33 to $46.88
Range of expiration dates 3/1/98 to 7/1/07
Exercisable at end of year 319,393 $10.33 to $36.50
Shares available for future grant 365,687
1996
Granted 290,676 $19.75 to $28.50
Exercised 182,293 $9.21 to $19.83
Cancelled and expired 1,900 $10.33 to $23.13
Outstanding at end of year 772,998 $9.21 to $28.50
Exercisable at end of year 405,364 $9.21 to $25.63
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 666,515 $9.21 to $19.83
Exercisable at end of year 411,883 $9.21 to $19.00
</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 five years from the date of grant. The
Board has granted some options which are exercisable in cumulative 10% annual
installments and expire ten years from the date of grant. The options granted
under the directors' plan are exercisable after six months.
The option plans permit employees and directors to pay the exercise price of
options they are exercising and the related tax liability with shares of Company
stock they already own. The owned shares are surrendered to the Company at
current market value. Shares with a current market value of $4,282,000,
$2,099,000, and $824,000 were surrendered in the years ended December 31, 1997,
1996, and 1995, respectively. These surrendered shares are netted against the
new shares issued for the exercise of stock options in the Consolidated
Statements of Changes in Shareholders' Equity.
In January 1997, the Company offered to purchase about 6.6% of the then
outstanding shares of common stock from its shareholders at a price of $30.00,
net to the seller. Terms of the tender offer allowed for the Company to purchase
up to 500,000 shares of common stock duly tendered to it. The offer was not
conditioned on any minimum number of shares being tendered. 65,247 shares of
stock were tendered at a cost to the Company of $1,957,410.
10. Securities Sold Under Agreements to Repurchase and Federal Funds
Purchased
The Company enters into certain transactions, the legal form of which is a sale
of securities under an agreement to repurchase at a later date at a set price.
The substance of these transactions is a secured borrowing by the Company. The
Bank also purchased Federal funds from correspondent banks. The following
information is presented concerning these transactions:
<TABLE>
<CAPTION>
(dollars in thousands) Repurchase Agreements Federal Funds Purchased
Year ended December 31 Year ended December 31
1997 1996 1995 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average interest
rate at year-end 4.57% 4.29% 4.53% 6.25% 5.75% 5.75%
Weighted average interest
rate for the year 4.54% 4.40% 5.01% 5.29% 5.14% 5.79%
Average outstanding
for the year $ 22,659 $ 25,428 $ 10,153 $ 9,109 $ 15,142 $ 16,649
Maximum outstanding
at any month-end
during the year $ 32,216 $ 31,142 $ 21,900 $ 21,485 $ 35,271 $ 29,416
Amount outstanding
at end of year $ 14,813 $ 23,155 $ 21,900 $ 6,480 $ 10,335 $ 29,416
</TABLE>
11. Long-term Debt and Other Borrowings
As part of the Company's asset and liability management strategy, fixed rate
term advances were borrowed from the FHLB. As of December 31, 1997, total
outstanding balances to the FHLB were $38,000,000 and the quarterly principal
payments are $2,500,000.
Also included in other borrowings are $1 million of Treasury Tax and Loan demand
notes issued to the U.S. Treasury and miscellaneous other borrowings.
During the course of 1997, the Company borrowed funds for liquidity purposes
from the discount window at the Federal Reserve Bank, but there were no such
borrowings in 1996.
12. Other Operating Income and Expense
Significant items included in amounts reported in the Consolidated Statements of
Income for the years ended December 31, 1997, 1996, and 1995 for other service
charges, commissions, and fees are listed in the table below. The refund
transfer fees are earned for the electronic transmission of tax refunds to
customers to facilitate earlier receipt of their refund.
The table above also discloses the largest items included in other operating
expense. Most of the categories of expense, especially consultants, marketing
expense, and the amortization of goodwill, increased because of additional
activity related to the acquisition of FVB and CSB. Consultants include the
Company's independent accountants, attorneys, and other management consultants
used for special projects.
<TABLE>
(in thousands)
<CAPTION>
Year ended December 31
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Income items:
Merchant credit card processing $3,200 $2,619 $2,146
Refund transfer fees 2,943 1,243 1,629
Loan broker fees 636 282 300
ATM fees 491 351 270
Expense items:
Consultant expense $2,179 $ 945 $ 803
Marketing expense 2,126 1,628 1,392
Merchant credit card clearing fees 2,116 1,763 1,434
Software expense 1,500 1,105 892
Telephone and wires 1,181 760 833
Supplies and sundries 904 624 672
Postage and freight 829 671 661
Amortization of goodwill 737 8 0
Charitable contributions 681 740 462
Net cost (benefit) of operating foreclosed real estate (195) 277 31
</TABLE>
13. Employee Benefit Plans
The Company has two defined-contribution profit sharing plans. The first is
the Employee Stock Ownership Plan ("ESOP"). The second is the Incentive &
Investment and Salary Savings Plan.
The ESOP was initiated in January, 1985. As of December 31, 1997, the ESOP held
748,657 shares at an average cost of $11.74 per share.
The second plan has two components. The Salary Savings Plan component, 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. The Company matches 100% of the first
3% of the employee's compensation that the employee elects to defer and 50% of
the next 3%, but not more than 4.5% of the employee's total compensation. In
1997, 1996, and 1995 the employer's matching contributions were $856,000,
$663,000, and $597,000, respectively. The other component is the Incentive &
Investment Plan. It was established in 1966, and permits contributions by the
Company to be invested in various mutual funds chosen by the employees.
The Company's total contributions to the two plans are the larger of (1) 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, or (2) the amount deductible in the Company's
current year tax return. Deductions for contributions to qualified plans are
limited to 15% of eligible compensation. In 1997, the deductible amount was the
limiting factor for the contribution.
Total contributions to the profit sharing plans were $2,799,000 in 1997,
$2,259,000 in 1996, and $1,294,000 in 1995.
14. Disclosures about Fair Value of Financial Instruments
GAAP 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.
There are several factors which users of these financial statements should keep
in mind regarding the fair values disclosed in this note. First, there are
uncertainties inherent in the process of estimating the fair value of financial
instruments. Secondly, 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.
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 and Cash Equivalents
The face value of cash, federal funds sold, and securities purchased under
agreements to resell are their 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. As explained in Note 1,
securities classified as available-for-sale are 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 short-term instruments, the carrying amount is a reasonable estimate of
their fair value. For FHLB advances, the only component of debt not considered
short-term, the fair value is estimated using rates currently quoted by the FHLB
for advances of similar remaining maturities.
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 does not believe that its loan
commitments have a fair value within the context of this note because generally
fees have not been charged, 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 carrying amount and estimated fair values of the Company's financial
instruments as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 67,799 $ 67,799 $ 51,181 $ 51,181
Federal funds sold 48,000 48,000 70,000 70,000
Securities available-for-sale 286,998 286,998 141,679 141,679
Securities held-to-maturity 222,350 238,449 276,359 289,430
Bankers' acceptances 49,400 49,362 64,732 64,711
Loans 860,400 860,570 667,595 664,520
Total financial assets $1,534,947 $1,551,178 $1,271,546 $1,281,521
Financial liabilities:
Deposits $1,404,155 $1,406,092 $1,113,083 $1,114,471
Repurchase agreements,
Federal funds purchased,
and other borrowings 60,293 60,544 72,490 72,393
Total financial liabilities $1,464,448 $1,466,636 $1,185,573 $1,186,864
Unrecognized financial
instruments:
Interest rate option contract $60 $-- $-- $--
Commitments to
extend credit -- -- -- --
Standby letters of credit -- 237 -- 158
</TABLE>
15. Other Postretirement Benefits
The Accumulated Postretirement Benefit Obligation
The Company recognizes the net present value of the estimated future cost of
providing health insurance benefits to retirees under the Retiree Health Plan as
those benefits are earned rather than when paid.
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 commitment the Company has made to provide these benefits results in an
obligation that must be recognized in the financial statements. This obligation,
the accumulated postretirement benefit obligation ("APBO"), 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 re-measured 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; and 4) 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, 1997 and 1996:
<TABLE>
(in thousands)
<CAPTION>
December 31
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Retirees eligible for benefits $ (942) $ (802) $ (805)
Dependents eligible for benefits (353) (375) (420)
Active employees fully eligible (759) (592) (645)
Active employees not fully eligible (1,612) (1,384) (1,409)
-----------------------------------------
Accumulated postretirement benefit obligation (3,666) (3,153) (3,279)
Fair value of plan assets 4,081 3,208 2,560
-----------------------------------------
Plan assets in excess of accumulated
postretirement benefit obligation 415 55 (719)
Unrecognized prior service cost 4 5 6
Unrecognized net gain (848) (317) 278
-----------------------------------------
Accrued postretirement benefit cost $ (429) $ (257) $ (435)
=========================================
</TABLE>
The above table also compares the fair value of plan assets to the APBO and
computes the portion of the APBO required to be accrued, which is termed the
accrued postretirement benefit cost. Costs of $429,000 and $257,000 are included
within the category for accrued interest payable and other liabilities in the
consolidated balance sheets for December 31, 1997 and 1996, respectively.
The Components of the Net Periodic Postretirement Benefit Cost
Each year the Company recognizes 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>
(in thousands) Year ended December 31
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Service cost $ 188 $ 200 $ 148
Interest cost 223 228 185
Return on assets (205) (175) (120)
Amortization cost 1 1 --
---------------------------------------
Net periodic postretirement cost $ 207 $ 254 $ 213
=======================================
</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 APBO 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, plan changes,
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 on the APBO. The following table discloses the discount rates
that have been and will be used.
For Determining
For Measuring the NPPBC for
Discount the APBO at the Year Ended
Rate Used December 31 December 31
8.73% 1994 1995
7.06% 1995 1996
7.22% 1996 1997
7.04% 1997 1998
The discount rate is selected each year by reference to the current rates of
investment grade corporate bonds. Higher discount rates result in a lower APBO
at the end of the year and the NPPBC to be recognized for the following year,
while lower rates raise both.
At the time it implemented 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.
The Use of Estimates and the Amortization of Experience Gains and Losses
Among the significant estimates or assumptions used in determining the NPPBC 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. If the rate of return is greater than
this estimate, the Company will have what is termed an experience gain. 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. If costs rise
at a lesser rate, the Company will have an experience gain.
Rather than the whole amount of the experience gains or losses being recognized
in the year after they arise, SFAS 106 provides for them 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 December 31, 1997 and December 31, 1996, the Company had
unamortized or unrecognized gains of $848,000 and $317,000, respectively. These
amounts are reported in the first table of this note.
Funding of the Retiree Health Plan
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 first table as the
amount by which the plan assets exceed the APBO.
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 at
least sufficient to pay the costs of current medical premiums of retirees and
the costs of the life insurance premiums. Proceeds from the life insurance
policies payoffs will fund benefits and premiums in the future. As of December
31, 1997, the VEBA was overfunded by $800,000. The APBO related to the key
employees of $383,000 is totally unfunded.
16. Earnings per share and Stock-Based Compensation
As described in Note 1, the Company reports earnings per share according to the
provisions of SFAS 128. The following table presents a reconciliation of basic
earnings per share and diluted earnings per share. The denominator of diluted
earnings per share includes the effect of dilutive securities. The only
potentially dilutive securities that are outstanding are the stock options
reported in Note 9. The number of options assumed to be exercised is computed
using the "Treasury Stock Method" whereby the proceeds from the assumed exercise
and the tax benefit received for the difference between the market price and the
exercise price would be used for market repurchases of shares.
<TABLE>
<CAPTION>
Basic Diluted
(dollars and shares in thousands) Earnings Earnings
Per Share Per Share
----------- ------------
<S> <C> <C>
For the Year Ended December 31, 1997
Numerator--net income $20,136 $20,136
Denominator--weighted average shares outstanding 7,597 7,597
Plus: net shares issued in assumed stock options exercises 195
Diluted denominator 7,792
Earnings per share $2.65 $2.58
For the Year Ended December 31, 1996
Numerator--net income $15,665 $15,665
Denominator--weighted average shares outstanding 7,635 7,635
Plus: net shares issued in assumed stock options exercises 171
Diluted denominator 7,806
Earnings per share $2.05 $2.01
For the Year Ended December 31, 1995
Numerator--net income $10,416 $10,416
Denominator--weighted average shares outstanding 7,677 7,677
Plus: net shares issued in assumed stock options exercises 125
Diluted denominator 7,802
Earnings per share $1.36 $1.33
</TABLE>
In implementing the provisions of SFAS 123 as described in Note 1, the Company
has retained the allowable alternative method of accounting for the issuance of
stock options to employees. Had the Company implemented the provisions of SFAS
123 by adopting the new method of recognizing compensation expense over the
expected life of the options based on their fair market value as computed by the
binomial option model, the Company's pro forma salary expense, net income, and
earnings per share for the years ended December 31, 1997, 1996 and 1995 would
have been as follows:
<TABLE>
(in thousands)
<CAPTION>
Year ended December 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Salary expense:
As reported $ 25,215 $ 20,706 $ 18,402
Pro forma $ 26,117 $ 21,144 $ 18,483
Net income:
As reported $ 20,136 $ 15,665 $ 10,415
Pro forma $ 19,613 $ 15,412 $ 10,368
Earnings per share:
As reported $ 2.58 $ 2.01 $ 1.33
Pro forma $ 2.52 $ 1.97 $ 1.33
</TABLE>
Under the method implemented by the Company, no compensation expense is recorded
if stock options are granted to employees at an exercise price equal to the
market value of the stock at the time of the grant.
17. Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements could cause the regulators to initiate certain mandatory or
discretionary actions that, if undertaken, could have a direct material effect
on the Company's financial statements.
The table below sets forth the Company's actual capital amounts and ratios and
the minimum amounts and ratios that the Company and the Bank are required to
maintain which have been established by regulation to ensure capital adequacy.
In addition, the table includes the minimum amounts and ratios required to meet
the regulatory standards of "well capitalized".
Tier I and Tier II (or total) capital as well as risk-weighted assets are all
defined in the regulations. However, the capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
As shown in the table below, as of December 31, 1997, both the Company and the
Bank are well capitalized under the regulatory framework for prompt corrective
action.
Santa Barbara Bancorp ("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. The dividends needed by Bancorp to pay for
the acquisitions of FVB and CSB, exceeded the amount allowable without prior
approval of the California Department of Financial Institutions ("CDFI"). As
part of its approval of the acquisitions, the CDFI approved the excess
distributions. During 1997, it also approved other dividends from the Bank to
Bancorp to fund the latter's quarterly cash dividends to its shareholders and
for other incidental purposes.
As described in Note 19, after purchasing FVB and CSB, Bancorp merged the assets
(including the recognized goodwill) and liabilities of the acquired banks into
the Bank. To the Bank, this represented a contribution of capital from its
parent. Consequently, even though $42.3 million in dividends had been paid to
the parent company, its capital balances were restored with the contribution.
The net effect on the Bank's capital position was a decrease in the retained
earnings component of capital and an identical increase in the surplus
component.
<TABLE>
<CAPTION>
(dollars in thousands) Santa Barbara Santa Barbara Minimum Amounts Minimum Amounts
Bank & Trust Bancorp and Ratios for Capital and Ratios to be Well
Actual Actual Adequacy Purposes Capitalized
----------------------------------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------- ------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Tier I & Tier II Capital
(to Risk Weighted Assets) $ 113,747 11.4% $ 113,151 11.3% $ 80,152 8.0% $ 100,191 10.0%
Tier I Capital
(to Risk Weighted Assets $ 101,120 10.1% $ 100,524 10.0% $ 40,076 4.0% $ 60,114 6.0%
Tier I Capital
(to Average Assets) $ 101,120 7.1% $ 100,524 7.0% $ 57,253 4.0% $ 71,566 5.0%
Risk Weighted Assets $ 1,001,600 $ 1,001,906
Average Assets $ 1,431,210 $ 1,431,320
As of December 31, 1996
Total Tier I & Tier II Capital
(to Risk Weighted Assets) $ 117,153 16.5% $ 116,427 16.5% $ 56,562 8.0% $ 70,703 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 108,220 15.2% $ 107,494 15.2% $ 28,281 4.0% $ 42,422 6.0%
Tier I Capital
(to Average Assets) $ 108,220 9.0% $ 107,494 9.0% $ 47,563 4.0% $ 59,454 5.0%
Risk Weighted Assets $ 706,973 $ 707,026
Average Assets $ 1,189,031 $ 1,189,084
</TABLE>
18. 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,
1997, the minimum rentals under non-cancelable leases for the next five years
and thereafter are shown in the following table.
<TABLE>
<CAPTION>
There-
(in thousands) Year ended December 31 after Total
-------------------------------------------- -------- ----------
1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C> <C> <C>
Non-cancellable
lease expense $2,868 $2,464 $2,068 $1,766 $1,055 $3,555 $13,776
</TABLE>
Total net rentals for premises included in other operating expenses are
$2,642,000 in 1997, $2,351,000 in 1996, and $2,127,000 in 1995.
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
have been available from unaffiliated third parties at the time the negotiations
occurred and the terms were approved by the Company's Board of Directors.
In order to meet the financing needs of its customers in the normal course of
business, 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
has not usually charged 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 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 the 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 that 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 three months.
The maximum exposure to credit risk is represented by the contractual notional
amount of those instruments. As of December 31, 1997 and 1996, the contractual
notional amounts of these instruments are as follows:
<TABLE>
<CAPTION>
(in thousands) December 31
1997 1996
--------------------------------
<S> <C> <C>
Standby letters of credit $ 20,716 $ 9,202
Loan commitments 43,356 26,083
Undisbursed loans 59,069 15,588
Unused consumer credit lines 59,073 54,904
Unused credit lines 130,347 82,837
--------------------------------
$ 312,561 $ 188,614
================================
</TABLE>
Since many of the commitments are expected to expire without being drawn upon,
the amounts in the table 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. One significant concentration in the loan portfolio is represented by
loans collateralized by real estate; the nature of this collateral, however, is
quite varied: 1-4 family residential, multifamily residential, and commercial
buildings of various kinds. As the economy along the central coast shows
vitality, the underlying value of real estate continues to improve. The Company
has considered this concentration in evaluating the adequacy of the allowance
for credit 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.
19. Acquisitions
On March 31, 1997, the Company acquired all the outstanding stock of FVB for
$26.1 million in cash. Immediately prior to the close, FVB had $123.0 million in
assets and $108.0 million in liabilities.
On September 30, 1997, the Company acquired all the outstanding stock of CSB for
$16.2 million in cash. Immediately prior to the close, CSB had $93.3 million in
assets and $84.3 million in liabilities.
Both acquisitions were accounted for under purchase accounting, with assets and
liabilities recorded at their estimated fair market value at the time of the
acquisition. The excess of the purchase price over the net assets is recorded as
goodwill. Goodwill amortized during the year ended December 31, 1997 totaled
approximately $646,000. The Company issued no stock in connection with these
acquisitions. The following table shows estimated fair market value of the
assets and liabilities of the two banks, the purchase price paid, and the
resulting goodwill.
<TABLE>
<CAPTION>
(in thousands) FMV of FMV of
Assets Liabilities Purchase Intangibles
Acquired Assumed Price Recorded
--------------------------------------------------------------
<S> <C> <C> <C> <C>
First Valley Bank $124,967 $109,139 $26,100 $10,272
Citizens State Bank 92,974 84,320 16,170 7,516
--------------------------------------------------------------
Total $217,941 $193,459 $42,270 $17,788
==============================================================
</TABLE>
The branches of FVB and CSB were immediately merged into the Bank on April 1,
1997 and October 1, 1997, respectively. Under the provisions of purchase
accounting, the results of operations of the acquired entity are included in the
financial statements of the acquirer only from the date of the acquisition
forward. Therefore, the consolidated financial statements of the Company as of
December 31, 1995 and 1996, and for each of the two years then ended do not
include any amounts related to FVB or CSB. The 1997 consolidated financial
statements of the Company include the assets and liabilities acquired in the
transactions and results of operations from April 1, 1997 for FVB and from
October 1, 1997 for CSB.
The following table presents an unaudited pro forma combined summary of
operations of the Company, FVB, and CSB for the years ended December 31, 1997,
1996 and 1995, as if the acquisitions had been effective January 1, 1995.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Interest income $ 121,122 $ 102,829 $ 94,622
Interest expense 9,509 10,117 15,737
----------------------------------------
Net interest income 111,613 92,712 78,885
Provision for credit losses -120 -100 50
Noninterest income 7,501 7,154 5,894
Noninterest expense 5,275 8,394 8,128
----------------------------------------
Income before provision for income taxes 113,959 91,572 76,601
Provision for income taxes 330 1,531 1,325
----------------------------------------
Net income $ 113,629 $ 90,041 $ 75,276
========================================
Basic earnings per share $ 14.96 $ 11.79 $ 9.81
Weighted average shares assumed
to be outstanding 7,597 7,635 7,677
Diluted earnings per share $ 14.58 $ 11.53 $ 9.65
Weighted average shares assumed
to be outstanding 7,792 7,806 7,802
</TABLE>
The information in the table above combines the historical results of the
Company, FVB, and CSB after giving effect to the amortization of goodwill and
exclusion of an estimated amount of earnings from the consideration paid to the
shareholders of FVB and CSB using the average rate received during the years for
Federal funds sold. No attempt has been made to eliminate the immaterial
intercompany transactions which occurred, nor has an attempt been made to
eliminate the duplicated administrative costs. The figures included in the table
for pro forma combined diluted earnings per share are based on the pro forma
combined net income in the table and the actual average common shares and share
equivalents. Because the consideration paid to the shareholders of FVB and CSB
consisted entirely of cash, the average shares and share equivalents outstanding
are identical to those reported in Note 16.
This unaudited combined pro forma summary of operations is intended for
informational purposes only and is not necessarily representative of the future
results of the Company or of the results of the Company that would have occurred
had the acquisitions actually been transacted on January 1, 1995.
20. Santa Barbara Bancorp
The condensed financial statements of the Bancorp are presented on the following
two pages.
<TABLE>
SANTA BARBARA BANCORP
(Parent Company Only)
Balance Sheets
(in thousands)
<CAPTION>
December 31
1997 1996
---------------------------
<S> <C> <C>
Assets
Cash $ 956 $ 667
Investment in and advances to subsidiaries 118,894 108,327
Note receivable 259 51
Other assets 47 88
---------------------------
Total assets $ 120,156 $ 109,133
===========================
Liabilities
Dividends payable $ 1,982 $ 1,526
Other liabilities 8 14
---------------------------
Total liabilities 1,990 1,540
---------------------------
Equity
Common stock 5,081 5,059
Surplus 32,790 35,415
Unrealized gain (loss) on securities available-for-sale 496 2
Retained earnings 79,799 67,117
---------------------------
Total shareholders' equity 118,166 107,593
---------------------------
Total liabilities and shareholders' equity $ 120,156 $ 109,133
===========================
</TABLE>
<TABLE>
Income Statements
(in thousands)
<CAPTION>
Year ended December 31
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Equity in earnings of subsidiaries:
Undistributed $ -- $ 6,398 $ 5,680
Dividends 19,945 9,182 4,686
Interest income 7 6 6
Miscellaneous expenses (231) (294) (131)
Income tax benefit 415 373 174
-----------------------------------------------
Net income $ 20,136 $ 15,665 $ 10,415
===============================================
</TABLE>
<TABLE>
SANTA BARBARA BANCORP
(Parent Company Only)
Statements of Cash Flows
(in thousands)
<CAPTION>
Year ended December 31
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Interest received $ 5 $ 5 $ 6
Cash paid to suppliers and others (245) (277) (131)
Income tax benefit 458 291 174
-------------------------------------------
Net cash provided by operating activities 218 19 49
-------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in loans made to
customers (208) 3 1
Capital contribution to subsidiary (125) (25) --
Purchase of capital stock of First Valley
Bank and Citizens State Bank (42,270) -- --
Distributed earnings of subsidiaries 52,267 9,182 4,686
-------------------------------------------
Net cash provided by investing activities 9,664 9,160 4,687
-------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,409 1,146 454
Payments to retire common stock (5,012) (4,982) (953)
Dividends paid (6,990) (5,022) (4,095)
-------------------------------------------
Net cash used in financing activities (9,593) (8,858) (4,594)
-------------------------------------------
Net increase in cash and cash equivalents 289 321 142
Cash and cash equivalents at beginning of period 667 346 204
-------------------------------------------
Cash and cash equivalents at end of period $ 956 $ 667 $ 346
===========================================
Reconciliation of net income to net cash provided by operating activities:
Net income $20,136 $15,665 $10,415
Adjustments to reconcile net income to net cash provided by operating
activities:
Earnings from subsidiaries (19,945) (15,580) (10,366)
(Increase) decrease in other assets 41 (80) --
Increase (decrease) in accrued expenses (14) 14 --
-------------------------------------------
Net cash provided by operating activities $ 218 $ 19 $ 49
===========================================
</TABLE>
<PAGE>
<TABLE>
Quarterly Financial Data (Unaudited)
<CAPTION>
1997 Quarters 1996 Quarters
-------------------------------------------- ---------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
---------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 29,300 $ 27,075 $ 27,026 $ 31,534 $ 23,011 $ 21,212 $ 21,364 $ 23,991
Interest expense 11,794 10,887 10,780 9,744 8,958 8,451 8,574 9,064
Net interest income 17,506 16,188 16,246 21,790 14,053 12,761 12,790 14,927
Provision for
credit losses -- 733 1,690 4,557 -- -- 1,049 3,215
Noninterest income 6,388 5,837 6,003 6,916 4,845 4,564 4,473 5,062
Noninterest expense 17,102 15,004 13,849 14,150 12,750 11,492 11,017 11,335
Income before
income taxes 6,792 6,288 6,710 9,999 6,148 5,833 5,197 5,439
Income taxes 2,071 2,009 2,211 3,362 1,833 2,128 1,428 1,563
Net income $ 4,721 $ 4,279 $ 4,499 $ 6,637 $ 4,315 $ 3,705 $ 3,769 $ 3,876
Net income per share:
Basic $0.62 $0.56 $0.59 $0.88 $0.57 $0.48 $0.49 $0.51
Diluted $0.60 $0.55 $0.58 $0.85 $0.55 $0.47 $0.48 $0.51
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated herein by reference to the
Company's Proxy Statement for the Annual Meeting of Shareholders on April 21,
1998 ("Proxy Statement"), pages 4-8.
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference to the
Company's Proxy Statement , pages 9-16.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated herein by reference to the
Company's Proxy Statement, pages 8-9.
Item 13. Certain Relationships and Related Transactions
The information required by Item 12 is incorporated herein by reference to the
Company's Proxy Statement, page 18.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
(a)1. FINANCIAL STATEMENTS
The listing of financial statements required by this item is set
forth in the index for Item 8 of this report.
(a)2. FINANCIAL STATEMENTS SCHEDULES
The listing of supplementary financial statement schedules required
by this item is set forth in the index for Item 8 of this report.
(a)3. EXHIBITS
The listing of exhibits required by this item is set forth in the
Exhibit Index on page 69 of this report. Each management contract or
compensatory plan or arrangement required to be filed as an exhibit
to this report is listed under Item 10.1 "Compensation Plans and
Agreements," in the Exhibit Index.
(b) REPORTS ON FORM 8-K
One report on Form 8-K was filed during the fourth quarter of the
fiscal year ended December 31, 1997. The acquisition of all of the
outstanding shares of Citizens State Bank of Santa Paula, California
for $16.2 million was reported on Form 8-K filed with the Commission
on October 8, 1997.
(c) EXHIBITS
See exhibits listed in "Exhibit Index" on page 69 of this report.
(d) FINANCIAL STATEMENT SCHEDULES
There are no financial statement schedules required by Regulation S-X
which have been excluded from the annual report to shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed by the
undersigned, thereunto duly authorized.
Santa Barbara Bancorp
By /s/David W. Spainhour 3/2/98
David W. Spainhour date
President
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ Donald M. Anderson 3/2/98 /s/ David W. Spainhour 3/2/98
Donald M. Anderson date David W. Spainhour date
Chairman of the Board President
Director Director
/s/ William S. Thomas 3/2/98 /s/ Donald Lafler 3/2/98
William S. Thomas, Jr. date Donald Lafler date
Vice Chairman Senior Vice President
Chief Operating Officer Chief Financial Officer
/s/ Frank H. Barranco, M.D. 3/2/98 /s/ Edward E. Birch 3/2/98
Frank H. Barranco, M.D. date Edward E. Birch date
Director Director
/s/ Richard M. Davis 3/2/98 /s/ Anthony Guntermann 3/2/98
Richard M. Davis date Anthony Guntermann date
Director Director
/s/ Dale E. Hanst 3/2/98 /s/ Harry B. Powell 3/2/98
Dale E. Hanst date Harry B. Powell date
Director Director
/s/ Terrill F. Cox 3/2/98
Terrill F. Cox date
Director
<PAGE>
EXHIBIT INDEX TO SANTA BARBARA BANCORP FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
Exhibit
Number Description
3 Articles of incorporation and bylaws:
3.1 Restated Articles of Incorporation of Santa Barbara Bancorp (filed as
Exhibit 3(i) to the Company's Form S-4, File No. 33-19181, and is
incorporated herein by reference thereto).
3.2 Certificate of Amendment of Articles of Incorporation of the
Company as filed with the California Secretary of State on April
10, 1989. ***
3.3 Certificate of Amendment of Articles of Incorporation of the Company
as filed with the California Secretary of State on January 24, 1996
(previously filed with the Commission as Exhibit 3.2 to the Company's
annual report on Form 10-K for 1995, incorporated herein by this
reference).
3.4 Amended and Restated Bylaws of the Company dated September 25, 1991
(filed as "Other Information" to the Company's form 10-Q for the
quarter ended September 30, 1991, incorporated herein by this
reference).
3.5 Amendment No. One to Bylaws of the Company as adopted by the Board of
Directors on October 24, 1995 (previously filed with the Commission
as Exhibit 3.4 to the Company's annual report on Form 10-K for 1995,
incorporated herein by this reference).
3.6 Amendment No. Two to Bylaws of the Company as adopted by the Board
of Directors on December 19, 1995. ***
3.7 Amendment No. Three to Bylaws of the Company as adopted by the
Board of Directors on May 20, 1997. ***
10 Material contracts
10.1 Compensation Plans and Agreements:
10.1.1 Santa Barbara Bancorp Amended and Restated Restricted Stock Option
Plan as amended effective December 17, 1996 (previously filed with
the Commission as Exhibit 10.1.1 to the Company's annual report on
Form 10-K for 1996, incorporated herein by this reference).
10.1.1.1 Santa Barbara Bancorp Restricted Stock Option Agreement (Incentive
Stock Option) (previously filed with the Commission as Exhibit
10.1.1.1 to the Company's annual report on Form 10-K for 1996,
incorporated herein by this reference).
10.1.1.2 Santa Barbara Bancorp Restricted Stock Option Agreement (Nonstatutory
Stock Option - 5 Year) (previously filed with the Commission as
Exhibit 10.1.1.2 to the Company's annual report on Form 10-K for
1996, incorporated herein by this reference).
10.1.1.3 Santa Barbara Bancorp Restricted Stock Option Agreement (Nonstatutory
Stock Option - 10 Year) (previously filed with the Commission as
Exhibit 10.1.1.3 to the Company's annual report on Form 10-K for
1996, incorporated herein by this reference).
10.1.1.4 Santa Barbara Bancorp Restricted Stock Option Agreement (Incentive
Reload Option) (previously filed with the Commission as Exhibit
10.1.1.4 to the Company's annual report on Form 10-K for 1996,
incorporated herein by this reference).
10.1.1.5 Santa Barbara Bancorp Restricted Stock Option Agreement
(Non-statutory Reload Option) (previously filed with the Commission
as Exhibit 10.1.1.5 to the Company's annual report on Form 10-K for
1996, incorporated herein by this reference).
10.1.2 Santa Barbara Bancorp Director Stock Option Plan (previously filed as
Exhibit 4.2 to Post-Effective Amendment No. One to the Company's
Registration Statement on Form S-8, filed with the Commission on June
13, 1995, File No. 33-48724, incorporated herein by this reference).
10.1.3 Santa Barbara Bancorp Stock Option Plan (previously filed as Exhibit
4.2 of the Company's Registration Statement on Form S-8, filed with
the Commission on October 28, 1991, File No. 33-43560, incorporated
herein by this reference).
10.1.4 Santa Barbara Bank & Trust Incentive & Investment and Salary Savings
Plan, as amended through December 31, 1991 (previously filed with the
Commission as Exhibit 10.1.4 to the Company's annual report on Form
10-K for 1992, incorporated herein by this reference).
10.1.4.1 First Amendment to Santa Barbara Bank & Trust Incentive & Investment
and Salary Savings Plan (previously filed with the Commission as
Exhibit 10.1.5 to the Company's annual report on Form 10-K for 1995,
incorporated herein by this reference).
10.1.4.2 Second Amendment to Santa Barbara Bank & Trust Incentive & Investment
and Salary Savings Plan (previously filed with the Commission as
Exhibit 10.1.6 to the Company's annual report on Form 10-K for 1995,
incorporated herein by this reference).
10.1.4.3 Third Amendment to Santa Barbara Bank & Trust Incentive & Investment
and Salary Savings Plan (previously filed with the Commission as
Exhibit 10.1.7 to the Company's annual report on Form 10-K for 1995,
incorporated herein by this reference).
10.1.4.4 Fourth Amendment to Santa Barbara Bank & Trust Incentive & Investment
and Salary Savings Plan (previously filed with the Commission as
Exhibit 10.1.8 to the Company's annual report on Form 10-K for 1995,
incorporated herein by this reference).
10.1.4.5 Fifth Amendment to Santa Barbara Bank & Trust Incentive &
Investment and Salary Savings Plan executed 12/30/96. ***
10.1.4.6 Sixth Amendment to Santa Barbara Bank & Trust Incentive &
Investment and Salary Savings Plan executed 12/05/97. ***
10.1.4.7 Seventh Amendment to Santa Barbara Bank & Trust Incentive &
Investment and Salary Savings Plan executed 12/05/97. ***
10.1.5 Santa Barbara Bank & Trust Employee Stock Ownership Plan and Trust,
as amended and restated through July 6, 1995 (previously filed with
the Commission as Exhibit 4.1 to the Post-Effective Amendment No. One
to the Company's Registration Statement on Form S-8, filed with the
Commission on July 10, 1995, File No. 33-43560, incorporated herein
by this reference).
10.1.5.1 First Amendment to Santa Barbara Bank & Trust Employee Stock
Ownership Plan and Trust (previously filed with the Commission as
Exhibit 10.1.10 to the Company's annual report on Form 10-K for 1995,
incorporated herein by this reference).
10.1.5.2 Second Amendment to Santa Barbara Bank & Trust Employee Stock
Ownership Plan and Trust executed 12/30/96. ***
10.1.5.3 Third Amendment to Santa Barbara Bank & Trust Employee Stock
Ownership Plan and Trust executed 1/07/97. ***
10.1.5.4 Fourth Amendment to Santa Barbara Bank & Trust Employee Stock
Ownership Plan and Trust executed 12/05/97. ***
10.1.7 Santa Barbara Bank & Trust Key Employee Retiree Health Plan dated
December 29, 1992 (previously filed with the Commission as Exhibit
10.1.8 to the Company's annual report on Form 10-K for 1993,
incorporated herein by this reference).
10.1.7.1 First Amendment to Santa Barbara Bank & Trust Key Employee Retiree
Health Plan dated 12/30/96. ***
10.1.7.2 Second Amendment to Santa Barbara Bank & Trust Key Employee
Retiree Health Plan dated 12/17/97. ***
10.1.8 Trust Agreement of Santa Barbara Bank & Trust Voluntary Beneficiary
Association dated December 21, 1992. ***
10.1.8.1 First Amendment to Trust Agreement of Santa Barbara Bank & Trust
Voluntary Beneficiary Association, (previously filed with the
Commission as Exhibit 10.1.13 to the Company's annual report on Form
10-K for 1995, incorporated herein by this reference).
10.1.9 Santa Barbara Bank & Trust Retiree Health Plan (Non-Key Employees)
dated December 29, 1992 (previously filed with the Commission as
Exhibit 10.1.9 to the Company's annual report on Form 10-K for 1993,
incorporated herein by this reference).
10.1.9.1 First Amendment to Santa Barbara Bank & Trust Retiree Health Plan
(Non-Key Employees) dated 12/30/96. ***
10.1.9.2 Second Amendment to Santa Barbara Bank & Trust Retiree Health Plan
(Non-Key Employees) dated 12/17/97. ***
10.1.10 Santa Barbara Bancorp 1996 Directors Stock Option Plan, as amended
December 17, 1996 (previously filed with the Commission as Exhibit
10.1.10 to the Company's annual report on Form 10-K for 1996,
incorporated herein by this reference).
10.1.10.1 Santa Barbara Bancorp 1996 Directors Stock Option Agreement
(previously filed with the Commission as Exhibit 10.1.10.1 to the
Company's annual report on Form 10-K for 1996, incorporated herein by
this reference).
10.1.10.2 Santa Barbara Bancorp 1996 Directors Stock Option Agreement (Reload
Option) (previously filed with the Commission as Exhibit 10.1.10.2 to
the Company's annual report on Form 10-K for 1996, incorporated
herein by this reference).
13 Annual report to security-holders (included as Item 8)
21 Subsidiaries of the registrant
27 Financial Data Schedule
*Shareholders may obtain a copy of any exhibit by writing to:
Clare McGivney, Corporate Services Administrator
Santa Barbara Bancorp
P.O. Box 1119
Santa Barbara, CA 93102
***Filed herewith
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Santa Barbara Bank & Trust, a California corporation, doing business
under the name of Santa Barbara Bank & Trust
Sanbarco Mortgage Corporation, a California corporation, doing business
under the name of Sanbarco Mortgage Company
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT
OF
ARTICLES OR INCORPORATION
OF
SANTA BARBARA BANCORP
The undersigned, DAVID W. SPAINHOUR and JAY D. SMITH, do hereby certify
that:
1. They are the duly elected and acting President and Secretary,
respectively, of SANTA BARBARA BANCORP, a California corporation.
2. Article THIRD of the Articles of Incorporation of said Corporation is
hereby amended to read in its entirety as follows:
"THIRD: AUTHORIZED STOCK
This Corporation is authorized to issue only one class of shares of stock,
which shall be designated "Common Stock." The total number of such shares
of Common Stock which this Corporation is authorized to issue is twenty
million (20,000,000). Upon amendment of this Article to read as herein set
forth, each outstanding share shall be split up, divided and converted
into one and one third (1 1/3) shares. No fractional shares shall be
issued to shareholders in connection with such stock split, but rather, in
lieu thereof cash shall be paid and distributed to each shareholder who
would otherwise have been entitled to receipt of a fractional share, and
the amount of cash to be distributed shall be based upon the market price,
after adjustment for the effect of the stock split hereinabove declared,
of this Corporation's Common Stock on the effective date of the stock
split."
3. The foregoing Amendment of the Articles of Incorporation has been duly
adopted by the Board of Directors of the Corporation.
4. The Corporation has only one class of shares outstanding. This
Amendment effects only a stock split, as that term is defined in Section 188 of
the California Corporations Code, and as such constitutes an amendment that may
be adopted with approval of the Board of Directors acting alone, pursuant to
Section 902(c) of the California Corporations Code.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
Date: April 3, 1989
David W. Spainhour
President
Jay D. Smith
Secretary
<PAGE>
Exhibit 3.6
CERTIFICATE OF RESOLUTION
SANTA BARBARA BANK & TRUST
Santa Barbara, California
AMENDMENT NUMBER TWO TO BYLAWS
This is to certify that I am the duly elected, qualified and acting
Secretary of the above-named Corporation and that by resolution of the Board of
Diretors of the Corporation duly adopted at the meeting held on December 19,
1995, Section 3.2.1 of the Bylaws of the Corporation was amended as follows:
Authorized Number. The number of directors who may be authorized to
serve on the Board of Directors of the Corporation shall be no less than
seven (7) nor more than thirteen (13). Until a different number within the
foregoing limits is specified in an amendment to this Section 3.2.1 duly
adopted by the Board of Directors or the shareholders, the exact number of
authorized directors shall be nine (9).
I hereby certify that the foregoing resolution now stands on record on the books
of said Corporation, and has not been modified, repealed or set aside in any
manner, and is now in full force and effect.
Dated at Santa Barbara,
California
January 18, 1996
Jay Donald Smith
Secretary
<PAGE>
Exhibit 3.7
CERTIFICATE OF RESOLUTION
SANTA BARBARA BANCORP
Santa Barbara, California
AMENDMENT NUMBER THREE TO BYLAWS
This is to certify that I am the duly elected, qualified and acting
Secretary of the above-named Corporation and that by resolution of the Board of
Directors of the Corporation duly adopted at the meeting held on May 20, 1997,
Section 3.2.1 of the Bylaws of the Corporation was amended as follows:
Authorized Number: The number of directors who may be authorized to
serve on the Board of Directors of the Corporation shall be no less than
seven (7) nor more than thirteen (13). Until a different number within the
foregoing limits is specified in an amendment to this Section 3.2.1 duly
adopted by the Board of Directors or the shareholders, the exact number of
authorized directors shall be ten (10).
I hereby certify that the foregoing resolution now stands on record on the
books of said Corporation, and has modified, repealed or set aside in any
manner, and is now in full force and effect.
Dated at Santa Barbara,
California
May 21, 1997
Jay Donald Smith
Secretary
<PAGE>
Exhibit 10.1.4.5
FIFTH AMENDMENT
TO
SANTA BARBARA BANK & TRUST
AND INVESTMENT AND SALARY SAVINGS PLAN
THIS FIFTH AMENDMENT (the "Fifth Amendment") is made and entered into,
effective on the date set forth below, by and between SANTA BARBARA BANK &
TRUST, a California corporation (in its capacity as "Employer"), and SANTA
BARBARA BANK & TRUST, a California corporation (in its capacity as "Trustee"),
with reference to the following facts:
RECITALS:
A. The Employer sponsors that certain Incentive and Investment and Salary
Savings Plan (the "Plan") pursuant to that certain document executed December
31, 1991, as amended by that certain First Amendment dated effective January 1,
1994, that certain Second Amendment dated effective July 1, 1994, that certain
Third Amendment executed December 28, 1994, and that certain Fourth Amendment
executed effective January 1, 1995 (as so amended, the "Plan Document").
B. The Employer desires to amend the Plan Document in order to confirm the
manner in which prior service with an entity that is acquired by the Employer
shall be credited under the Plan.
AGREEMENTS:
NOW, THEREFORE, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. AMENDMENT PLAN DOCUMENT
Section 1.61 of the Plan Document is hereby amended to read as follows:
"1.61 "Year of Service" means the computation period of twelve (12)
consecutive months, herein set forth, during which an Employee has at
least 1,000 Hours of Service.
1.61.1 Eligibility. For purposes of eligibility for
participation, the initial computation period shall begin with the date on
which the Employee first performs an Hour of Service. The participation
computation period beginning after a 1-Year Break in Service shall be
measured from the date on which an Employee again performs an Hour of
Service. The participation computation period shall shift to the Plan Year
which includes the anniversary of the date on which the Employee first
performed an Hour of Service. An Employee who is credited with the
required Hours of Service in both the initial computation period (or the
computation period beginning after a 1-Year Break in Service) and the Plan
Year which includes the anniversary of the date on which the Employee
first performed an Hour of Service, shall be credited with two (2) Years
of Service for purposes of eligibility to participate.
1.61.2 Vesting. For vesting purposes, the computation period
shall be the Plan Year, including periods prior to the Effective Date of
the Plan.
1.61.3 Other. For all other purposes, the computation period
shall be the Plan Year.
1.61.4 Prior Service. There shall be recognized as "Years
of Service" under this Plan:
A. All Years of Service by the Employee with
Community Bank of Santa Ynez Valley; and
B. All Years of Service by the Employee with any entity
acquired by the Bank or Bancorp (as defined below) if the terms and
conditions of such acquisition expressly require that such prior Years of
Service be credited as such under this Plan. For purposes of this Section
1.61.4, an entity shall be deemed to be "acquired by the Bank or Bancorp"
if (1) that entity is merged into the Bank or Bancorp, or (2) the Bank or
Bancorp purchase or otherwise acquire at least eighty percent (80% of the
outstanding voting equity interests in such entity, or (3) the Bank or
Bancorp acquire substantially all the assets of such entity."
1.61.5 Affiliated Employer. All Years of Service with any
Affiliated Employer shall be recognized."
2. MISCELLANEOUS
2.1 Ratification. Except as expressly amended by this Fifth Amendment, the
Plan Document is hereby ratified, confirmed, and approved, and remains in full
force and effect.
2.2 Effective Date. The effective date of this Fifth Amendment shall be
January 1, 1996.
IN WITNESS WHEREOF, the parties hereto have executed this Fifth Amendment,
effective on the date set forth above.
"EMPLOYER"
SANTA BARBARA BANK & TRUST, a
California corporation
By:
Name: Jay D. Smith
Title: Senior Vice President
Date: December 30, 1996
"TRUSTEE"
SANTA BARBARA BANK & TRUST, a
California corporation
By:
Name: Janice Kroekel
Title: Assistant Vice President
Date: December 30, 1996
<PAGE>
Exhibit 10.1.4.6
SIXTH AMENDMENT
TO
SANTA BARBARA BANK & TRUST
INCENTIVE AND INVESTMENT AND SALARY SAVINGS PLAN
THIS SIXTH AMENDMENT (the "Sixth Amendment") is made and entered into,
effective on the date set forth below, by and between SANTA BARBARA BANK &
TRUST, a California corporation (in its capacity as "Employer"), and SANTA
BARBARA BANK & TRUST, a California corporation (in its capacity as "Trustee"),
with reference to the following facts:
RECITALS:
A. The Employer sponsors that certain Incentive and Investment and Salary
Savings Plan (the "Plan") pursuant to that certain document executed December
31, 1991, as amended by that certain First Amendment dated effective January 1,
1994; that certain Second Amendment dated effective July 1, 1994, that certain
Third Amendment executed December 28, 1994; that certain Fourth Amendment
executed effective January 1, 1995; and that certain Fifth Amendment dated
effective January 1, 1996 (as so amended, the "Plan Document").
B. The Employer desires to amend the Plan Document in order to conform the
Plan Document to recent changes in applicable law.
AGREEMENTS:
NOW, THEREFORE, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. COMMENCEMENT OF DISTRIBUTIONS
Employer hereby:
1.1 Changes in Law. Acknowledges that (a) Section 401(a)(9) of the Code
formerly provided that distributions to a participant must commence by the
"required beginning date," which was defined to mean April 1 of the calendar
year following the calendar year in which the participant attained age 70-1/2,
(b) Section 401(a)(9) of the Code was amended by the "Small Business Job
Protection Act of 1986" to redefine the term "required beginning date" to mean
April 1 of the calendar year following the later of the calendar year in which
the participant attains age 70-1/2, or the calendar year in which the
participant retires from employment with the Employer, (c) the Plan Document has
not yet been amended to provide for such deferral, and (d) the Employer desires
to amend the Plan Document to conform the provisions thereof to the amended
provisions of Section 401(a)(9) of the Code.
1.2 Amendment. Amends the Plan Document, notwithstanding any other
provision of the Plan Document to the contrary, to include the following
provision:
"1. Minimum Distributions. Notwithstanding any other provision of
this Plan to the contrary, in order to conform the terms of this Plan to
the provisions of the Small Business Job Protection Act of 1996, the term
"required beginning date" shall mean, and distributions shall not be
required to commence under the rules of Section 401(a)(9), until April 1
of the calendar year following the later of the calendar year in which the
participant attains age 70-1/2, or the calendar year in which the
participant retires from employment with the Employer.
2. Option to Defer. If under prior provisions of this Plan, a
participant attained age 70-1/2 in a calendar year after 1995 and failed
to receive a distribution that would have been required in any calendar
year under such prior provisions of this Plan, then such distributions
shall not be required to be provided to such participant if the
participant is afforded, prior to the last day of such calendar year, an
option either to receive such distribution or to defer the commencement of
such distributions until April 1 of the calendar year following the
calendar year in which the participant retires from employment with the
Employer."
2. MISCELLANEOUS
2.1 Ratification. Except as expressly modified by this Sixth Amendment,
the Plan Document is hereby ratified, confirmed, and approved, and remains in
full force and effect.
2.2 Effective Date. The effective date of this Sixth Amendment shall be
January 1, 1997.
IN WITNESS WHEREOF, the parties hereto have executed this Sixth Amendment,
effective on the date set forth above.
"EMPLOYER":
SANTA BARBARA BANK & TRUST, a
California corporation
By
Name: Jay D. Smith
Title: Senior Vice President
Date: December 5, 1997
"TRUSTEE":
SANTA BARBARA BANK & TRUST, a
California corporation
By
Name: Janice Kroekel
Title: Assistant Vice President
Date: December 5, 1997
<PAGE>
Exhibit 10.1.4.7
SEVENTH AMENDMENT
TO
SANTA BARBARA BANK & TRUST
INCENTIVE AND INVESTMENT AND SALARY SAVINGS PLAN
THIS SEVENTH AMENDMENT (the "Seventh Amendment") is made and entered into,
effective on the date set forth below, by and between SANTA BARBARA BANK &
TRUST, a California corporation (in its capacity as "Employer"), and SANTA
BARBARA BANK & TRUST, a California corporation (in its capacity as "Trustee"),
with reference to the following facts:
RECITALS:
A. The Employer sponsors that certain Incentive and Investment and Salary
Savings Plan (the "Plan") pursuant to that certain document executed December
31, 1991, as amended by that certain First Amendment dated effective January 1,
1994; that certain Second Amendment dated effective July 1, 1994, that certain
Third Amendment executed December 28, 1994; that certain Fourth Amendment
executed effective January 1, 1995; that certain Fifth Amendment dated effective
January 1, 1996; and that certain Sixth Amendment dated effective January 1,
1997 (as so amended, the "Plan Document").
B. The Employer desires to amend the Plan Document in order to confirm the
manner in which prior service with an entity that is acquired by the Employer
shall be credited under the Plan.
AGREEMENTS:
NOW, THEREFORE, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. MERGER WITH CITIZENS BANK
1.1 Merger. Employer hereby:
1.1.1 Merger Transaction. Acknowledges that (a) Citizens State Bank
of Santa Paula ("Citizens Bank") formerly sponsored that certain "Citizens State
Bank of Santa Paula Profit Sharing 401(k) Plan" (the "Citizens Plan"), and (b)
in transactions that closed effective October 1, 1997, (i) Citizens Bank merged
with and into Employer, (ii) the Citizens Plan was merged with and into this
Plan, and (iii) the assets formerly held in the trust under the Citizens Plan
were merged into the trust under this Plan;
1.1.2 Prior Vesting. Acknowledges that the Citizens Plan provided
that each participant in that plan (a) was 100% vested in "Employer Matching
Contributions" allocated to the participant's account under that plan, and (b)
became vested, in accordance with the following schedule, in "Employer
Discretionary Contributions" allocated to the participant's account under the
Citizens Plan:
Years of Service Vesting Percentage
0 -0-
1 33.33%
2 66.67%
3 100.00%
4 100.00%
5 or more 100.00%
1.2 Amendment. Employer hereby amends the vesting provisions of the Plan
Document by adding at the end thereof the following new subsection to read as
follows:
"Notwithstanding any other provision of this Plan to the contrary, each
Participant who formerly participated in the Citizens State Bank of Santa
Paula Profit Sharing 401(k) Plan (the "Citizens Plan") and who had an
account balance which was held under that Citizens Plan and has been
merged into this Plan shall become vested in such account balance as
follows:
1. Employer Matching Contributions. That portion of such Partici-
pant's account balance attributable to "Employer Matching Contributions,"
as defined under the Citizens Plan, shall be and remain one hundred
percent (100% vested in such contributions.
2. Employer Discretionary Contributions. That portion of such
Participant's account balance attributable to "Employer Discretionary
Contributions" (as defined in the Citizens Plan) shall be and become
vested in such contributions in accordance with the following schedule:
Years of Service Vesting Percentage
0 -0-
1 33.33%
2 66.67%
3 100.00%
4 100.00%
5 or more 100.00%
Each such Participant shall be and become vested in all other
contributions allocated to such Participant's accounts under this Plan on
or after October 1, 1997, in accordance with the regular vesting schedule
under this Plan for such other contributions."
2. MISCELLANEOUS
2.1 Ratification. Except as expressly modified by this Seventh Amendment,
the Plan Document is hereby ratified, confirmed, and approved, and remains in
full force and effect.
2.2 Effective Date. The effective date of this Seventh Amendment shall be
October 1, 1997.
IN WITNESS WHEREOF, the parties hereto have executed this Seventh
Amendment, effective on the date set forth above.
"EMPLOYER":
SANTA BARBARA BANK & TRUST, a
California corporation
By
Name: Jay D. Smith
Title: Senior Vice President
Date: December 5, 1997
"TRUSTEE":
SANTA BARBARA BANK & TRUST, a
California corporation
By
Name: Janice Kroekel
Title: Assistant Vice President
Date: December 5, 1997
<PAGE>
Exhibit 10.1.5.2
SECOND AMENDMENT
TO
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
OF
SANTA BARBARA BANK & TRUST
THIS SECOND AMENDMENT (the "Second Amendment") is made and entered into,
effective on the date set forth below, by and between SANTA BARBARA BANK &
TRUST, a California corporation, as Employer (the "Employer"), and SANTA BARBARA
BANK & TRUST, a California corporation, as Trustee (the "Trustee"), with
reference to the following facts:
RECITALS:
A. The Employer sponsors an Employee Stock Ownership Plan and Trust (the
"ESOP") pursuant to that certain plan document executed June 28, 1994, as
amended by that certain First Amendment dated effective January 1, 1995 (as so
amended, the "Plan Document").
B. The Employer desires to amend the Plan Document to confirm the terms
and conditions on which prior service with an acquired company will be credited
under the ESOP.
AMENDMENT:
NOW, THEREFORE, the parties hereto, intending to be legally bound, do
hereby agree and amend the Plan as follows:
1. AMENDMENT TO PLAN DOCUMENT
Section 1.56.6 of the Plan Document is hereby amended in its entirety to
read as follows:
"1.56.5 Prior Service. There shall be recognized as "Years of Service"
under this Plan:
A. All Years of Service by the Employee with Community Bank of
Santa Ynez Valley; and
B. All Years of Service by the Employee with any entity acquired by
the Bank or Bancorp (as defined below) if the terms and conditions of such
acquisition expressly require that such prior Years of Service be credited
as such under this Plan. For purposes of this Section 1.56.6, an entity
shall be deemed to be "acquired by the Bank or Bancorp" if (1) that entity
is merged into the Bank or Bancorp, or (2) the Bank or Bancorp purchase or
otherwise acquire at least eighty percent (80% of the outstanding voting
equity interests in such entity, or (3) the Bank or Bancorp acquire
substantially all the assets of such entity."
2. MISCELLANEOUS
2.1 Ratification. Except as expressly modified by this Second Amendment,
the Plan Document is hereby ratified and confirmed and remains in full force and
effect.
2.2 Effective Date. The effective date of this Second Amendment shall be
January 1, 1996.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment, effective on the date set forth above.
"EMPLOYER":
SANTA BARBARA BANK & TRUST,
a California corporation
By
Name: Jay D. Smith
Title: Senior Vice President
Date: December 30, 1996
"TRUSTEE":
SANTA BARBARA BANK & TRUST,
a California corporation
By
Name: Janice Kroekel
Title: Assistant Vice President
Date: December 30, 1996
<PAGE>
Exhibit 10.1.5.3
THIRD AMENDMENT
TO
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
OF
SANTA BARBARA BANK & TRUST
THIS THIRD AMENDMENT (the "Third Amendment") is made and entered into,
effective on the date set forth below, by and between SANTA BARBARA BANK &
TRUST, a California corporation, as Employer (the "Employer"), and SANTA BARBARA
BANK & TRUST, a California corporation, as Trustee (the "Trustee"), with
reference to the following facts:
RECITALS:
A. The Employer sponsors an Employee Stock Ownership Plan and Trust (the
"ESOP") pursuant to that certain plan document executed June 28, 1994, as
amended by that certain First Amendment dated effective January 1, 1995, and
that certain Second Amendment dated effective January 1, 1996 (as so amended,
the "Plan Document").
B. The Employer desires to amend the Plan Document as set forth in Section
1, below.
AMENDMENT:
NOW, THEREFORE, the parties hereto, intending to be legally bound, do
hereby agree and amend the Plan as follows:
1. AMENDMENT TO PLAN DOCUMENT
1.1 Section 4.6. Current Section 4.6.2 of the Plan Document (regarding
so-called "Early Diversification") is hereby deleted in its entirety, and the
remainder of Section 4.6 of the Plan Document is hereby amended in its entirety
to read as follows:
4.6 Directed Investment of Accounts. Except as otherwise provided in
this Section 4.6, no Participant shall be entitled to direct the
investment of amounts allocated to the Participant's accounts under this
Plan.
4.6.1 Diversification by Qualified Participant. For Plan Years
beginning after December 31, 1986, each "Qualified Participant" may elect,
within ninety (80) days after the close of each Plan Year during the
Qualified Participant's "Qualified Election Period," to direct the
Trustee, in writing, as to the investment of the number of shares of
Company Stock determined pursuant to Section 4.6.2, below. For purposes of
this Section 4.6, the term (a) "Qualified Participant" means any
Participant or Former Participant who has completed ten (10) Plan Years of
Service as a Participant and has attained age 55, and (b) "Qualified
Election Period" means the six-Plan-Year-Period beginning with the later
of (1) the first Plan Year in which the Participant first became a
"Qualified Participant," or 92) the first Plan Year beginning after
December 31, 1986.
4.6.2 Number of Shares. With respect to each Plan Year during
the Qualified Election Period, the Qualified Participant may elect to
direct the investment of twenty-five percent (25%) of the total number of
shares of Company Stock acquired by or contributed to the Plan that have
ever been allocated to the Qualified Participant's Company Stock Account
(reduced by the number of shares of Company Stock which the Participant
previously was entitled to elect to diversity). With respect to the last
year in the Qualified Election Period, the preceding sentence shall be
applied by substituting "fifty percent (50%)" for "twenty-five percent
(25%)."
4.6.3 Manner of Diversification. The Trustee shall satisfy the
diversification direction of the Qualified Participant under this Section
4.6 by either:
A. Distribute to the Qualified Participant, within ninety
days after the end of the period in which the Participant may make a
diversification election under this Section 4.6.1, either such number of shares
of Company Stock which the Participant has elected to diversify, or cash in an
amount equal to the fair market value of such shares of Company Stock
(determined as of the last Anniversary Date prior to the date of the
distribution), provided, any such shares of Company Stock distributed to a
Qualified Participant shall be subject to the "put option" requirements of
Section 7.22,below; or
B. Offering within the Trust at least three distinct
investment options (in accordance with Treasury Regulations implementing
Code Section 401(a)(28)) in which an amount equal to the fair market value of
the number of shares of Company Stock which the Qualified Participant has
elected to diversify shall be invested during the ninety-day period after the
period in which the Qualified Participant may elect a diversification election
pursuant to this Section 4.6.1; or C. Transferring to another qualified
retirement plan sponsored by the Employer the number of shares of Company Stock
which the Qualified Participant elects to diversify (or an amount representing
the fair market value of those shares as of the last Anniversary Date preceding
the date of the transfer), and offering in that other plan at least three
distinct investment options (in accordance with Treasury Regulations
implementing Code Section 401(a)(28)) into which the proceeds from the sale of
the designated number of shares of the Company Stock (or an amount of cash
representing the fair market value) shall be invested during the 90-day period
following the period in which the Participant may make a diversification
election pursuant to this Section 4.6.
Notwithstanding the foregoing provisions of this Section 4.6.3, if the
fair market value (determined pursuant to Section 6.1, below, at the Plan
valuation date immediately preceding the first day in which a Qualified
Participant is eligible to make an election) of Company Stock acquired by
or contributed to the Plan after December 31, 1986, and allocated to a
Qualified Participant's Company Stock Account is not greater than five
hundred dollars ($500.00), then no portion of the shares of Company Stock
allocated to that account shall be subject to the requirements of this
Section 4.6. For purposes of determining whether the fair market value of
such stock exceeds $500, all Company Stock held in accounts of all
employee stock ownership loans (as defined in Code Section 4975(e)(7)) and
tax credit employee stock ownership plans (as defined in Code Section
409(a)) maintained by the Employer or any Affiliated Employer shall be
considered pursuant to this Plan.
1.2 Section 8.1.1. Section 8.1.1 of the Plan Document is hereby amended in
its entirety to read as follows:
"8.1.1 Investment. To invest, manage, and control the Plan assets in
accordance with either (a) investment directives received from time to
time from the Employer (acting through such Committee of Employees of the
Employer as the Employer may appoint from time to time), or (b) in the
absence of such directives from the Employer, the "funding policy and
method" adopted by the Employer from time to time."
2. MISCELLANEOUS
2.1 Ratification. Except as expressly modified by this Third Amendment,
the plan Document is hereby ratified and confirmed and remains in full force and
effect.
2.2 Effective Date. The effective date of this Third Amendment shall be
January 1, 1997.
IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment,
effective on the date set forth above.
"EMPLOYER":
SANTA BARBARA BANK & TRUST,
a California corporation
By
Name: Jay D. Smith
Title: Senior Vice President
Date: January 7, 1997
"TRUSTEE":
SANTA BARBARA BANK & TRUST,
a California corporation
By
Name: Janice Kroekel
Title: Assistant Vice President
Date: January 7, 1997
<PAGE>
Exhibit 10.1.5.4
FOURTH AMENDMENT
TO
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
OF
SANTA BARBARA BANK & TRUST
THIS FOURTH AMENDMENT (the "Fourth Amendment") is made and entered into,
effective on the date set forth below, by and between SANTA BARBARA BANK &
TRUST, a California corporation, as Employer (the "Employer"), and SANTA BARBARA
BANK & TRUST, a California corporation, as Trustee (the "Trustee"), with
reference to the following facts:
RECITALS:
A. The Employer sponsors an Employee Stock Ownership Plan and Trust (the
"ESOP") pursuant to that certain plan document executed June 28, 1994, as
amended by (i) that certain First Amendment dated effective January 1, 1995;
(ii) that certain Second Amendment dated effective January 1, 1996; and (iii)
that certain Third Amendment dated effective January 1, 1997 (as so amended, the
"Plan Document").
B. The Employer desires to amend the Plan Document in order to conform the
Plan Document to certain changes in applicable law.
AGREEMENTS:
NOW, THEREFORE, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. COMMENCEMENT OF DISTRIBUTIONS
Employer hereby:
1.1 Changes in Law. Acknowledges that (a) Section 401(a)(9) of the Code
formerly provided that distributions to a participant must commence by the
"required beginning date," which was defined to mean April 1 of the calendar
year following the calendar year in which the participant attained age 70-1/2,
(b) Section 401(a)(9) of the Code was amended by the "Small Business Job
Protection Act of 1986" to redefine the term "required beginning date" to mean
April 1 of the calendar year following the later of the calendar year in which
the participant attains age 70-1/2, or the calendar year in which the
participant retires from employment with the Employer, (c) the Plan Document has
not yet been amended to provide for such deferral, and (d) the Employer desires
to amend the Plan Document to conform the provisions thereof to the amended
provisions of Section 401(a)(9) of the Code.
1.2 Amendment. Amends the Plan Document, notwithstanding any other
provision of the Plan Document to the contrary, to include the following
provision:
"1. Minimum Distributions. Notwithstanding any other provision of
this Plan to the contrary, in order to conform the terms of this Plan to
the provisions of the Small Business Job Protection Act of 1996, the term
"required beginning date" shall mean, and distributions shall not be
required to commence under the rules of Section 401(a)(9), until April 1
of the calendar year following the later of the calendar year in which the
participant attains age 70-1/2, or the calendar year in which the
participant retires from employment with the Employer.
2. Option to Defer. If under prior provisions of this Plan, a
participant attained age 70-1/2 in a calendar year after 1995 and failed
to receive a distribution that would have been required in any calendar
year under such prior provisions of this Plan, then such distributions
shall not be required to be provided to such participant if the
participant is afforded, prior to the last day of such calendar year, an
option either to receive such distribution or to defer the commencement of
such distributions until April 1 of the calendar year following the
calendar year in which the participant retires from employment with the
Employer."
2. MISCELLANEOUS
2.1 Ratification. Except as expressly modified by this Fourth Amendment,
the Plan Document is hereby ratified, confirmed, and approved, and remains in
full force and effect.
2.2 Effective Date. The effective date of this Fourth Amendment shall be
January 1, 1997.
IN WITNESS WHEREOF, the parties hereto have executed this Sixth Amendment,
effective on the date set forth above.
"EMPLOYER":
SANTA BARBARA BANK & TRUST, a
California corporation
By
Name: Jay D. Smith
Title: Senior Vice President
Date: December 5, 1997
"TRUSTEE":
SANTA BARBARA BANK & TRUST, a
California corporation
By
Name: Janice Kroekel
Title: Assistant Vice President
Date: December 5, 1997
<PAGE>
Exhibit 10.1.7.1
FIRST AMENDMENT
TO
SANTA BARBARA BANK & TRUST KEY EMPLOYEE RETIREE HEALTH PLAN
THIS FIRST AMENDMENT (the "Amendment") is made and executed, effective on
the date set forth below, by SANTA BARBARA BANK & TRUST, a California
corporation (the "Bank"), with reference to the following facts:
RECITALS:
A. The Bank adopted that certain "Santa Barbara Bank & Trust Retiree
Health Plan (the "Plan") pursuant to that certain Plan document executed
December 29, 1992 (the "Plan Amendment").
B. The Bank now desires to amend the Plan as set forth below.
AMENDMENT:
NOW, THEREFORE, the Bank, intending to be legally bound, does hereby amend
the Plan Document as follows:
1. AMENDMENT
The Plan Document is hereby amended as follows:
1.1 New Section 1.9. Sections 1.9 through 1.23 are hereby renumbered to be
Sections 1.10 through 1.24, respectively (and all cross-references to those
Sections are hereby modified accordingly), and there is hereby added the
following new Section 1.9 to read as follows:
"1.9 "Excluded Key Employee" means each person who (a) has been a
"key employee," as that term is defined for purposes of Code Section
419A(d)(3), during any plan year under any plan previously maintained by
the Bank to provide health insurance coverage to retired employees, and
(b) had terminated employment with the Bank prior to adoption of this Plan
on December 29, 1992."
1.2 Former Section 1.13. Former Section 1.13 (which has been renumbered as
Section 1.14 pursuant to Section 1.1, above) is hereby amended in its entirety
to read as follows:
"1.14 "Key Employee" means each Employee other than an Excluded Key
Employee who, at any time during any Plan Year under this Plan or any plan
year under any plan previously maintained by the Bank to provide health
insurance coverage to retired employees, is or has been a "key employee,"
as that term is defined for purposes of Code Section 419A(c)(3), as
amended from time to time."
1.3 Former Section 1.23.4. Former Section 1.23.4 (which has been
renumbered as Section 1.24.4 pursuant to Section 1.1, above) is hereby amended
to read in its entirety as follows:
"1.24.4 Prior Service Credit. There shall be recognized as "Years
of Service" under this Plan:
A. All Years of Service by the Employee with Community Bank of
Santa Ynez Valley; and
B. All Years of Service by the Employee with any entity acquired by
the Bank or Bancorp (as defined below) if the terms and conditions of such
acquisition expressly require that such prior Years of Service be credited
as such under this Plan. For purposes of this Section 1.24.4, an entity
shall be deemed to be "acquired by the Bank or Bancorp" if (1) that entity
is merged into the Bank or Bancorp, or (2) the Bank or Bancorp purchase or
otherwise acquire at least eighty percent (80% of the outstanding voting
equity interests in such entity, or (3) the Bank or Bancorp acquire
substantially all the assets of such entity."
2. MISCELLANEOUS
2.1 Ratification. Except as modified by this Amendment, the Plan Document
is hereby ratified and confirmed and remains in full force and effect.
2.2 Effective Date. The effective date of this Amendment shall be
January 1, 1996.
IN WITNESS WHEREOF, the Bank has executed this Amendment, effective on the
date set forth above.
SANTA BARBARA BANK & TRUST, a
California corporation
December 30, 1996
By:
Jay D. Smith, Senior Vice-President
<PAGE>
Exhibit 10.1.7.2
SECOND AMENDMENT
TO
SANTA BARBARA BANK & TRUST KEY EMPLOYEE RETIREE HEALTH PLAN
THIS SECOND AMENDMENT (the "Second Amendment") is made and executed,
effective on the date set forth below, by SANTA BARBARA BANK & TRUST, a
California corporation (the "Bank"), with reference to the following facts:
RECITALS:
A. The Bank adopted that certain "Santa Barbara Bank & Trust Retiree
Health Plan (the "Plan") pursuant to that certain Plan document executed
December 29, 1992 (the "Plan Document"), as amended by that certain First
Amendment dated effective January 1, 1996 (the "First Amendment").
B. The Bank now desires to amend the Plan as set forth below.
AMENDMENT:
NOW, THEREFORE, the Bank, intending to be legally bound, does hereby amend
the Plan Document:
1. AMENDMENT
The Plan Document is hereby amended as follows:
1.1 Section 1.2. Section 1.2 of the Plan is hereby amended in its entirety
to read as follows:
"1.2 "Bank" means (a) Santa Barbara Bank & Trust, a California
corporation, including but not limited to all corporations and other
entities into which or with which such corporation is merged or
consolidated, and (b) all corporations and other entities which acquire
all or substantially all of the assets of such corporation, if as part of
the agreement for the acquisition of such assets the purchaser has agreed
to assume the obligations of the "Bank" under this Plan."
1.2 New Section 1.3. Current Sections 1.3 through 1.24 (as previously
renumbered by the First Amendment) are hereby further renumbered as new Sections
1.4 through 1.25, respectively, and the following new Section 1.3 is hereby
inserted into the Plan to read in its entirety as follows:
"1.3 "Change of Control" shall mean any one transaction or any
series of related transactions in which any Person (a) acquires direct or
indirect voting control over more than thirty-five percent (35%) of the
outstanding shares of Bancorp's common capital stock, or (b) acquires all
or substantially all of the assets of the Bank. The effective date of any
such Change of Control shall be the first date as of which any Person
first acquires such voting control over more than thirty-five percent
(35%) of the outstanding shares of Bancorp's common capital stock, or
acquires all or substantially all of the assets of the Bank. For purposes
of this Section 1.3, the term "Person" shall have the meaning ascribed to
that term for purposes of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended.
1.3 New Section 1.23. Current Sections 1.23 (defining the term "Spouse")
through 1.25 (defining the term "Year of Service"), as previously renumbered by
the First Amendment and by Section 1.2 of this Second Amendment are hereby
further renumbered as Sections 1.24 through 1.26, respectively, and the
following new Section 1.23 is hereby inserted into the Plan to read in its
entirety as follows:
"1.23 "Restricted Period" shall mean the period which:
1.23.1 Commencement. Commences on the date on which (a) Bancorp
or the Bank executes with another Person a written agreement (the
"Reorganization Agreement") to acquire all or substantially all of the
assets of the Bank, or to merge, consolidate, combine, or otherwise
reorganize Bancorp or the Bank with any one or more other Persons (as such
term is defined for purposes of Section 13(d) or 14 of the Securities
Exchange Act of 1934) in any transaction in which the Reorganization
Agreement contemplates that those Persons who are shareholders of Bancorp
as of the date such Reorganization Agreement is executed will own less
than sixty-five percent (65%) of the combined voting power of all common
stock and other voting securities of the surviving entity immediately
after the effective date of such merger, consolidation, combination, or
other reorganization; or (b) any Person other than Bancorp announces that
such Person intends to conduct a tender offer to acquire more than
thirty-five percent (35%) of the outstanding common stock and other voting
securities of Bancorp; and
1.23.2 Expiration. Expires on the last day of the period of
twenty-four (24) consecutive calendar months commencing on the date of any
Change of Control."
1.4 Section 2.1.1. Section 2.1.1 is hereby amended in its entirety to read
as follows:
"2.1.1 Eligible Retirees. A person shall be deemed to satisfy the
requirements of this Section 2.1.1 if that person satisfies the
requirements of either Paragraph A or Paragraph B of this Section 2.1.1.
A. A person satisfies the requirements of this Paragraph A only if
(1) that person is a Former Employee who at any time while employed by the
Bank or Bancorp was a Key Employee; and (2) both of the following
requirements are satisfied as of the effective date as of which that
person terminates employment with Bancorp or the Bank: (a) that person has
completed at least eight (8) Years of Service, and (b) that person has
attained at least the age of fifty-five (55).
B. A person shall be deemed to satisfy the requirements of this
Paragraph B if, during the Restricted Period, either (i) Bancorp or the
Bank terminates (or delivers to the person notice of the termination of)
such person's employment with Bancorp or the Bank other than for cause, or
(ii) there occurs a Deemed Termination of such person's employment with
Bancorp or the Bank. For purposes of this Paragraph B, the term:
(1) "Cause" shall mean (a) gross negligence, (b) willful
misconduct, (c) the person repeatedly and materially fails, for a period
of at least thirty (30) days after receiving written notice of such
failure, to perform the duties and functions inherent in the position and
assigned to the person by Bancorp or the Bank (as the case may be); or (d)
the person engages in any conduct which materially adversely affects
Bancorp or the Bank (as the case may be) or the person's ability to
perform that person's obligations and duties as an employee of Bancorp or
the Bank.
(2) "Deemed Termination" shall mean the occurrence of any
one or more of the following circumstances with respect to such person:
a. A change in the person's status, title, position or
responsibilities (including reporting responsibilities) which, in the
person's reasonable judgment, represents an adverse change from his
status, title, position or responsibilities as in effect immediately prior
thereto; the assignment to the person of any duties or responsibilities
which, in the person's reasonable judgment, are inconsistent with his
status, title, position or responsibilities; or any removal of the person
from or failure to reappoint or reelect him to any of such offices or
positions, except in connection with the termination of his employment for
Cause or as a result of his death;
b. A reduction in the person's base salary or any
failure to pay the person any compensation or benefits to which he is
entitled within five days of the due date therefor;
c. A failure to increase the person's base salary at
least annually at a percentage of base salary at least equal to the
average percentage increases (other than increases resulting from the
person's promotion) granted to the person during the three full years
ended prior to a Change of Control (or such lesser number of full years
during which the person was employed);
d. The Bank's requiring the person to be based at any
place outside a 25-mile radius from Santa Barbara, California, except for
reasonably required travel on the Bank's business which is not greater
than such travel requirements during the two-year period preceding any
Change of Control;
e. The failure by the Bank to (i) continue in effect
(without reduction in benefit level, and/or reward opportunities) any
material compensation or employee benefit plan in which the person was
participating immediately prior to the Effective Date, including, but not
limited to, the plans listed on the Appendix, unless a substitute or
replacement plan has been implemented which provides substantially
identical compensation or benefits to the person or (ii) provide the
person with compensation and benefits, in the aggregate, at least equal
(in terms of benefit levels and/or reward opportunities) to those provided
for under each other compensation or employee benefit plan, program and
practice as in effect at any time within ninety (90) days preceding the
Effective Date or at any time thereafter; or
f. The insolvency or the filing of a petition for
bankruptcy with respect to the Bank.
1.5 Section 5.2. Section 5.2 of the Plan is hereby amended to read in its
entirety as follows:
"5.2 Amendment and Termination. The Bank shall have sole and
absolute discretion to amend or modify this Plan in any regard, and to
terminate this Plan altogether, at any time; provided, notwithstanding the
foregoing or any other provision of this Plan, during any Restricted
Period the Bank may not (a) revoke the Plan, or (b) modify the provisions
of Paragraph B of Section 2.1.1 of the Plan, or (c) otherwise modify or
amend the Plan in any manner (whether directly or indirectly such as by
amending any other employee benefit arrangement that benefits any person
who is affected by the provisions of Paragraph B of Section 2.1.1, above)
that has the effect of eliminating or reducing the protections afforded by
Paragraph B of Section 2.1.1 hereof.
1.6 New Section 6.5. There is hereby added to the Plan a new Section 6.5
to read in its entirety as follows:
"6.5 Binding Effect. This Plan shall be binding upon all
successors and assigns of the Bank."
2. MISCELLANEOUS
2.1 Restatement. The officers of the Bank are hereby authorized, in their
discretion, to restate the Plan by incorporating into a single plan document the
terms of the original Plan Document, the First Amendment, and this Second
Amendment.
2.2 Ratification. Except as modified by the First Amendment and this
Second Amendment, the Plan Document is hereby ratified and confirmed and remains
in full force and effect.
2.3 Effective Date. The effective date of this Second Amendment shall be
January 1, 1997.
IN WITNESS WHEREOF, the Bank has executed this Second Amendment, effective
on the date set forth above.
Date: December 17, 1997
SANTA BARBARA BANK & TRUST, a
California corporation
By
Jay D. Smith, Senior Vice-President
<PAGE>
Exhibit 10.1.8
TRUST AGREEMENT
OF
SANTA BARBARA BANK & TRUST
VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION
December 29, 1992
<PAGE>
TRUST AGREEMENT
OF
SANTA BARBARA BANK & TRUST
VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION
THIS TRUST AGREEMENT (the "Agreement") is made and entered into, effective
on the date set forth below, by and between SANTA BARBARA BANK & TRUST, a
California corporation, in its capacity as the Employer establishing the Trust
created in this Agreement (the "Bank"), and SANTA BARBARA BANK & TRUST, a
California corporation, in its capacity as Trustee of that Trust (the
"Trustee"), with reference to the following facts:
RECITALS:
A. Concurrently with the execution of this Agreement, the Bank is adopting
the Santa Barbara Bank & Trust Retiree Health Plan to provide health insurance
and dental coverage ("Coverage") to certain of the retired employees (and their
spouses and their dependents) of the Bank and Santa Barbara Bancorp
("Participants").
B. Under the Plan, certain Participants are entitled to receive a
"Post-Retirement Contribution" toward the cost of Coverage.
C. The Bank desires to execute this Agreement in order to establish a
Trust which shall receive contributions from the Bank and apply those
contributions, together with earnings thereon, to pay the Post-Retirement
Contribution toward the cost of Coverage for eligible retirees and their
spouses.
D. The Bank and the Trustee intend that the Trust shall operate as a
"Voluntary Employees' Beneficiary Association" in compliance with the
requirements of Section 501(c)(9) of the Code and all regulations promulgated
thereunder.
AGREEMENTS:
NOW, THEREFORE, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. CREATION OF TRUST
1.1 Creation. The Bank and the Trustee hereby establish the Trust. Bank
concurrently is making an initial contribution to the Trust of One Dollar
($1.00), receipt of which is hereby acknowledged by the Trustee.
1.2 Purpose and Interpretation. The purpose of the Trust is to pay the
Post-Retirement Contribution toward the cost of Coverage pursuant to the terms
of the Plan. This Agreement shall be interpreted, and the Trust shall be
operated, in such manner as to ensure that the Trust qualifies as a VEBA
satisfying the requirements of Section 501(c)(9) of the Code and all regulations
promulgated thereunder, and the requirements of the Employee Retirement Income
Security Act of 1976, as amended ("ERISA").
2. DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings indicated below:
2.1 "Bancorp" means Santa Barbara Bancorp, a California corporation.
2.2 "Bank" means Santa Barbara Bank & Trust, a California corporation.
2.3 "Code" means the Internal Revenue Code of 1986, as amended.
2.4 "Coverage" means coverage under a Group Health Insurance Plan.
2.5 "Effective Date" means December 29, 1992.
2.6 "Employee" means each person who is a common law employee of Bancorp
or the Bank.
2.7 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
2.8 "Group Health Insurance Plan" means, in each Plan Year, each group
health insurance plan and each group dental insurance plan under which the Bank
offers health or dental insurance coverage to Employees in such Plan Year.
2.9 "Key Employee" means each Employee who, at any time during any Plan
Year under this Plan or any plan year under any plan previously maintained by
the Bank to provide health insurance coverage to retired employees, is or has
been a "key employee," as that term is defined for purposes of Code Section
419A(d)(3), as amended from time to time.
2.10 "Participant" means each person who qualifies as a "Participant"
under the terms of the Plan.
2.11 "Plan" means the Santa Barbara Bank & Trust Retiree Health Plan
adopted effective December 29, 1992, as amended from time to time.
2.12 "Plan Administrator" means the person serving as the "Plan
Administrator" of the Plan.
2.13 "Plan Year" shall have the same meaning ascribed to such term in the
Plan.
2.14 "Trust" means the Trust established under this Agreement.
2.15 "Trustee" means the Bank, and each additional or successor trustee
serving as a trustee of the Trust.
2.16 "Trust Fund" means all contributions made by the Bank to the Trust,
all earnings from the investment of such contributions, and all other assets
acquired by the Trustee in its capacity as Trustee or otherwise held by the
Trustee pursuant to this Agreement.
2.17 "VEBA" means a Voluntary Employees' Beneficiary Association
satisfying the requirements of Section 501(c)(9) of the Code, and the
regulations promulgated thereunder.
3. CONTRIBUTIONS
3.1 Receipt of Contributions. The Trustee shall receive such contributions
as are paid to it in cash or in kind, from time to time, by the Bank. Upon
receipt, all such contributions, together with all income and other gains from
such contributions, shall be held, invested, reinvested, and administered by the
Trustee pursuant to the terms of this Agreement without distinction between
principal and income.
3.2 Limitation of Trustee Responsibility. The Trustee shall not be
responsible for the calculation or collection of any contribution under the
Plan, but rather shall be responsible only for such property as is actually
received by the Trustee pursuant to this Agreement.
4. POWERS OF TRUSTEE
4.1 Investment of Funds. Pursuant to the Plan, the Bank shall establish
and implement a funding policy consistent with the purposes of the Plan and the
requirements of law, and from time to time may direct the Trustee to exercise
its investment discretion in such manner as the Bank determines to be
appropriate. Subject to such funding policy and periodic directions from the
Bank, the Trustee shall invest the funds held in Trust as follows:
4.1.1 Permitted Investments. The Trustee shall invest and reinvest
the Trust Fund, without distinction between principal and income, in such
securities or other property, real or personal, wherever situated, as the
Trustee may deem advisable, including but not limited to stocks, common or
preferred, bonds, and other evidences of indebtedness, and real estate or any
interest therein. In making investments, the Trustee shall:
A. Consider, among other factors, the short-term and long-term
needs of the Plan; and
B. Not be restricted to securities or other property of a
character expressly authorized by applicable law for trust investments.
4.1.2 Employment of Custodian. The Trustee may employ a bank or trust
company pursuant to the terms of its usual and customary bank agency agreement,
under which the duties of such bank or trust company shall be of a custodial,
clerical, and record-keeping nature.
4.1.3 Pooled Funds. From time to time the Trustee may transfer to a
common, collective, or pooled trust fund maintained by any person serving as a
corporate trustee hereunder all or such part of the assets held under this
Agreement as the Trustee may deem advisable, and any such monies so transferred
shall be subject to all the terms of provisions of the common, collective, or
pooled trust fund which contemplate the commingling for investment purposes of
such Trust assets with the assets of other trusts. The Trustee may, from time to
time, withdraw from such common, collective, or pool trust fund all or any part
of the monies so invested.
4.1.4 Life Insurance Policies. The Trustee may apply for, own, and
pay premiums on life insurance policies insuring the lives of Participants.
4.2 Other Powers. In addition to the powers expressly or impliedly granted
to the Trustee in other provisions of this Agreement, the Trustee shall have the
power:
4.2.1 Borrow. To borrow money upon such terms and conditions, at any
time or times, and for such purposes of the Trust, as the Trustee may deem
proper or desirable. For sums borrowed, the Trustee may issue promissory notes
and secure the payment thereof by mortgaging or pledging all or any part of the
assets of the Trust.
4.2.2 Real Estate. To buy, sell, and hold title to real estate and
interests therein in the name of the Trustee or in the name of the Trustee's
nominee. In accepting title to real estate, neither the Trustee nor the
Trustee's nominee shall be held to have assumed the obligation to make payment
of any encumbrances thereon from its personal assets, nor any responsibility as
to the validity of the title conveyed to or held by the Trustee's nominee. All
conveyances executed and delivered by the Trustee or the Trustee's nominee shall
be made without except as against the Trustee's own acts, covenants or warranty,
4.2.3 Voting. With respect to all stocks, bonds, and other securities
held in the Trust, (a) to exercise all voting rights with respect to such
securities; (b) to give general and special powers of attorney without power of
substitution in order to exercise such voting rights; (c) to exercise any
conversion privileges, subscription rights or other options and to make any
payments incidental thereto; (d) to consent to or otherwise participate in
corporate reorganizations and other changes affecting corporate securities held
by the Trust; (e) to delegate discretionary powers and to pay any assessments or
charges in connection therewith; and (f) generally to exercise any of the rights
and powers otherwise exercisable by any other owner of such securities.
4.2.4 Prosecute and Defend Claim. To sue and defend in any suit or
legal proceedings by or against the Trust. The Trustee shall have full power in
the Trustee's discretion to compromise and adjust all claims and demands in
favor of or against the Trust upon such terms as the Trustee may deem
appropriate. In the administration of the Trust, the Trustee shall not be
obligated to take any action which may subject the Trustee to any expense or
liability unless the Trustee is first indemnified to the satisfaction of the
Trustee for all expenses and liabilities, including attorneys' fees, which the
Trustee may incur in connection with such action.
4.2.5 Nominee. To register in the name of the Trustee or the
Trustee's nominee any investment held by the Trust and to hold any investment in
bearer form; provided, however, (a) the books and records of the Trustee at all
times shall show that all such investments are part of the Trust Fund, and (b)
such form of registration or holding shall neither increase nor decrease the
liability of the Trustee.
4.2.6 Employment of Agents. To employ such agents, attorneys-in-fact,
experts, and investment and legal counsel, including any firm or corporation
with which the Trustee may be associated as a partner, director, stockholder, or
otherwise, and to delegate discretionary powers to or rely upon information or
advice furnished by, such agents, attorneys-in-fact, experts, or counsel.
4.2.7 Execution of Instruments. To make, execute and deliver any and
all documents of transfer and conveyance and any and all other instruments that
may be necessary or appropriate to carry out the powers granted in this
Agreement.
4.2.8 Necessary Acts. To do all acts, whether or not expressly
authorized in this Agreement, which may be necessary or proper for the
protection of the Trust Fund or for the carrying out of any duty under the Plan
or this Agreement.
5. ADMINISTRATION OF TRUST
5.1 Standard of Care. The Trustee shall discharge its duties under this
Agreement (a) in a manner which satisfies the duties imposed upon "fiduciaries"
by ERISA, and (b) subject to such duties, (1) in the best interests of
Participants, (2) with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in a like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims, and (3) by diversifying the investments of
the Trust so as to minimize the risk of large losses, unless under the
circumstances it is clearly not prudent to do so.
5.2 Accounts and Records. The Trustee shall maintain accurate and detailed
accounts of all investments, receipts, disbursements, and other transactions
under this Agreement, and all such accounts and other records relating thereto
shall be open to inspection and audit at all reasonable times by the Bank and
any person designated by the Bank.
5.2.1 Exclusion of Key Employees. The Bank and the Trustee
acknowledge and agree that:
A. Under the terms of the Plan, no Key Employee is entitled to
receive Coverage or any other benefits under the Plan or this VEBA; and
B. The Trustee shall not make any payment from the Trust to or
for the benefit of any Key Employee.
5.2.2 Annual Accounting. Within sixty (60) days after the end of each
Plan Year, the Trustee shall furnish the Plan Administrator a written statement
of account setting forth all receipts and disbursements during such Plan Year.
The Plan Administrator shall acknowledge in writing receipt of such statement,
and shall advise the Trustee of its approval or disapproval of the statement.
If, within sixty (60) days after receiving such statement, the Plan
Administrator fails to disapprove the statement, then such statement shall be
deemed approved. The actual or deemed approval of the statement of account by
the Plan Administrator shall serve to release and discharge the Trustee from any
liability or accountability to the Plan Administrator with respect to the
propriety of the Trustee's acts or transactions shown on the statement of
account, except with respect to any acts or transactions as to which the Plan
Administrator shall file written objections with the Trustee within such 60-day
time period.
5.3 Exempt Function Income. Prior to filing the Trust's annual income tax
return for each taxable year, the Trustee shall designate that portion of the
Trust's income for such year as qualifies as "exempt function income" as such
term is defined in Section 512(a)(3) of the Code). All such exempt function
income shall be segregated from the general assets of the Trust, accounted for
separately on the Trust's books and records, and used solely for the payment of
the cost of Coverage and those reasonable costs of administering the Trust which
are directly connected with the payment of the cost of the Coverage.
5.4 Payment of Benefits. Subject to Sections 5.2.1 and 8 hereof, the
Trustee shall apply the assets of the Trust to pay the Post Retirement
Contribution toward the cost of Coverage for Participants (as required by the
Plan) at such times, in such amounts, and to such persons, as the Plan
Administrator designates.
5.5 Expenses of Administration. Subject to Section 8.3, below, (a) the
Trustee's compensation, if any, shall be fixed from time to time by agreement
with the Bank, provided, no such compensation shall be paid if the payment or
receipt of such funds would constitute a "prohibited transaction" under the Code
or ERISA; and (b) the Trustee shall be entitled to be reimbursed, by the Bank or
from the Trust Fund, for its reasonable expenses.
6. RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE
6.1 Resignation or Removal. The Bank may remove the Trustee at any time,
without cause, by delivering a written notice of removal to the Trustee. The
Trustee may resign as a trustee under this Agreement by delivering to the Bank a
written notice of resignation. Any such removal or resignation shall be
effective on the later of (a) the date specified in the notice of removal or
resignation, or (b) the fifteenth (15th) day after the delivery of such notice.
6.2 Successor Trustee. Upon the removal, resignation, death, or inability
of any Trustee to serve under this Agreement, a successor shall be appointed (a)
by the Bank, or (b) if the Bank does not then exist or is in bankruptcy
proceedings or its assets are being managed by a receiver, then by a majority of
the Participants then having an interest in the Trust. Upon accepting
appointment as a successor or Trustee, the successor Trustee shall be vested
with the same powers, duties, privileges, and immunities that such Trustee would
have possessed if it originally had been named as the initial trustee in this
Agreement. Upon acceptance of such appointment by the successor Trustee, each
Trustee who shall have resigned or been removed shall assign, transfer, and pay
over to the successor Trustee all funds and properties of the Trust.
6.3 Report by Trustee. Within sixty (60) days after resigning or being
removed, the Trustee who has so resigned or been removed shall furnish to the
Plan Administrator a written statement of account with respect to the portion of
the Plan Year for which the Trustee has served. Upon receipt of such statement,
the Plan Administrator shall acknowledge receipt thereof in writing and shall
advise the Trustee whether the Plan Administrator approves or disapproves such
statement. If the Plan Administrator fails to approve any such statement of
account within sixty (60) days after receiving the statement, then such
statement shall be deemed to be approved. The actual or deemed approval of any
such statement shall serve to release and discharge such Trustee from any
liability or accountability to the Bank with respect to the propriety of the
Trustee's acts or transactions as shown in the statement of account.
6.4 Waiver of Notice. The Trustee and the Bank may, by mutual agreement,
waive any required advance notice of resignation or removal set forth in Section
6.1 above.
7. AMENDMENT AND TERMINATION OF AGREEMENT
Subject to the prohibitions set forth in Section 8, below:
7.1 Amendment. This Agreement may be amended at any time, in whole or in
part, by a written instrument executed by the Bank and the Trustee.
7.2 Termination. This Agreement may be terminated at any time by the Bank.
Upon such termination, the assets of the Trust shall be applied in the manner
directed by the Plan Administrator.
8. PROHIBITION AGAINST DISCRIMINATION, REVERSION OR INUREMENT
Notwithstanding any other provision of this Agreement to the contrary:
8.1 Discrimination. The assets of the Trust shall be applied in a manner
which satisfies the nondiscrimination requirements of Section 505 of the Code;
8.2 Exclusive Benefit. The assets of the Trust at all times shall be
applied and invested for the exclusive purpose of paying the cost of Coverage
under the Plan and the reasonable costs of administering the Trust;
8.3 Prohibited Reversion and Inurement. Under no circumstances shall any
assets or net earnings of the Trust, either during the existence of the Trust or
at the termination thereof:
8.3.1 Reversion. Revert to the Bank or be applied to or for the
benefit of the Bank (except to the extent the Trust Fund is applied to pay the
cost of Coverage pursuant to the Plan); or
8.3.2 Inurement. Otherwise be paid to, or inure to the benefit of,
any private individual, shareholder or other person, except through the payment
of the Post-Retirement Contribution toward the cost of Coverage pursuant to the
Plan and the costs of administering the Trust.
9. MISCELLANEOUS
9.1 Qualification and Initial Contribution. The Bank and the Trustee shall
cooperate in preparing and submitting to the Internal Revenue Service all
documents that may be necessary to obtain from the Internal Revenue Service a
letter determining that the Trust, in operation with the Plan, constitutes a
VEBA and is exempt from federal income taxes under Section 501(a) of the Code.
9.1.1 Amendment. The Bank and the Trustee shall execute any amendment
to this Agreement that may be necessary to obtain such determination letter, and
any such amendment shall have retroactive effect to the extent necessary to
ensure the qualification of the Trust as a tax-exempt VEBA as of the effective
date of this Agreement.
9.1.2 Initial Contribution. The Bank and the Trustee acknowledge and
agree that all contributions made by the Bank to the Trust for the period ended
December 31, 1992, have been made on condition that the Trust promptly obtain
such favorable determination letter. If the Trust shall fail to qualify as a
tax-exempt VEBA with respect to the period ended December 31, 1992, then all
such contributions shall be returned to the Bank.
9.2 No Employment Rights. Neither the adoption and maintenance of this
Agreement, nor any express or implicit provision of this Agreement, shall be
deemed:
9.2.1 Contract. To constitute a contract between the Bank or Bancorp
and any person, or to be a consideration for or an inducement or condition of,
the employment of any person;
9.2.2 Right. To give any person the right to be retained in the
employ of the Bank or Bancorp;
9.2.3 Discharge. To interfere with the right of the Bank or Bancorp
to discharge any Employee at any time; or
9.2.4 Continuing Employment. To give the Bank or Bancorp the right to
require an Employee to remain in the employ of the Bank or Bancorp, or to
interfere with an Employee's right to terminate employment with the Bank or
Bancorp at any time.
9.3 Interpretation. As used in this Agreement, the masculine, feminine,
and neuter gender and the singular and plural numbers each shall be deemed to
include the other whenever the context so indicates or requires. The captions to
the Sections of this Agreement are only for reference purposes, and shall not
affect in any way the meaning or interpretation of this Plan. Any capitalized
term which is set forth in this Agreement and not defined herein shall have the
meaning ascribed to such term in the Plan.
9.4 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the state of California, in a manner consistent with
the requirements of the Code applicable to tax-exempt VEBAs and the requirements
of ERISA applicable to welfare benefit plans and the fiduciaries of such plans.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
effective on the Effective Date set forth above.
"TRUSTEE"
SANTA BARBARA BANK & TRUST, a
California corporation
Name: Janice Kroekel Date: December 21, 1992
Title:
Assistant Vice President and
Benefits Administrator
"BANK"
SANTA BARBARA BANK & TRUST,
a California corporation
Name: Jay D. Smith Date: July 23, 1993
Title:
Senior Vice President, General
Counsel, and Corporate
Secretary
<PAGE>
Exhibit 10.1.9.1
FIRST AMENDMENT
TO
SANTA BARBARA BANK & TRUST RETIREE HEALTH PLAN (Non-Key Employees)
THIS FIRST AMENDMENT (the "Amendment") is made and executed, effective on
the date set forth below, by SANTA BARBARA BANK & TRUST, a California
corporation (the "Bank"), with reference to the following facts:
RECITALS:
A. The Bank adopted that certain "Santa Barbara Bank & Trust Retiree
Health Plan (the "Plan") pursuant to that certain Plan document executed
December 29, 1992 (the "Plan Amendment").
B. The Bank now desires to amend the Plan as set forth below.
AMENDMENT:
NOW, THEREFORE, the Bank, intending to be legally bound, does hereby amend
the Plan Document as follows:
1. AMENDMENT
The Plan Document is hereby amended as follows:
1.1 New Section 1.5. Sections 1.5 through 1.24 of the Plan Document are
hereby renumbered as Sections 1.6 through 1.25, respectively (and all references
to those Sections are hereby modified accordingly), and the following new
Section 1.5 is hereby added to the Plan Document:
"1.5 "Covered Key Employee" means each person who (a) has been a
"key employee," as that term is defined for purposes of Code Section
419A(d)(3), during any plan year under any plan previously maintained by
the Bank to provide health insurance coverage to retired employees, (b)
had terminated employment with the Bank prior to adoption of this Plan on
December 29, 1992, and (c) as of that date satisfied the eligibility
requirements set forth in Section 2.1.1A, below."
1.2 Former Section 1.13. Former Section 1.13 (which has been renumbered as
Section 1.14 pursuant to Section 1.1, above) is hereby amended in its entirety
to read as follows:
"1.14 "Key Employee" means each Employee (other than a Covered Key
Employee) who, at any time during any Plan Year under this Plan or any
plan year under any plan previously maintained by the Bank to provide
health insurance coverage to retired employees, is or has been a "key
employee," as that term is defined for purposes of Code Section
419A(d)(3), as amended from time to time."
1.3 Former Section 1.14. Former Section 1.14 (which has been renumbered as
Section 1.14 pursuant to Section 1.1, above) is hereby amended in its entirety
to read as follows:
"1.15 "Non-Key Employee" means each (a) Covered Key
Employee, and (b) each other Employee who is not a Key Employee."
1.4 Former Section 1.24.4. Former Section 1.24.4 (which has been
renumbered as Section 1.25.4 pursuant to Section 1.1, above) is hereby amended
to read in its entirety as follows:
"1.25.4 Prior Service Credit. There shall be recognized as "Years
of Service" under this Plan:
A. All Years of Service by the Employee with Community Bank of
Santa Ynez Valley; and
B. All Years of Service by the Employee with any entity acquired by
the Bank or Bancorp (as defined below) if the terms and conditions of such
acquisition expressly require that such prior Years of Service be credited
as such under this Plan. For purposes of this Section 1.25.4, an entity
shall be deemed to be "acquired by the Bank or Bancorp" if (1) that entity
is merged into the Bank or Bancorp, or (2) the Bank or Bancorp purchase or
otherwise acquire at least eighty percent (80% of the outstanding voting
equity interests in such entity, or (3) the Bank or Bancorp acquire
substantially all the assets of such entity."
2. MISCELLANEOUS
2.1 Ratification. Except as modified by this Amendment, the Plan Document
is hereby ratified and confirmed and remains in full force and effect.
2.2 Effective Date. The effective date of this Amendment shall be
January 1, 1996.
(Signatures appear on the following page)
IN WITNESS WHEREOF, the Bank has executed this Amendment, effective on the
date set forth above.
Date: December 30, 1996
SANTA BARBARA BANK & TRUST, a
California corporation
By:
Jay D. Smith, Senior Vice-President
<PAGE>
Exhibit 10.1.9.2
SECOND AMENDMENT
TO
SANTA BARBARA BANK & TRUST RETIREE HEALTH PLAN
(Non-Key Employees)
THIS SECOND AMENDMENT (the "Second Amendment") is made and executed,
effective on the date set forth below, by SANTA BARBARA BANK & TRUST, a
California corporation (the "Bank"), with reference to the following facts:
RECITALS:
A. The Bank adopted that certain "Santa Barbara Bank & Trust Retiree
Health Plan (the "Plan") pursuant to that certain Plan document executed
December 29, 1992 (the "Plan Document"), as amended by that certain First
Amendment dated effective January 1, 1996 (the "First Amendment").
B. The Bank now desires to amend the Plan as set forth below.
AMENDMENT:
NOW, THEREFORE, the Bank, intending to be legally bound, does hereby amend
the Plan Document:
1. AMENDMENT
The Plan Document is hereby amended as follows:
1.1 Section 1.2. Section 1.2 of the Plan is hereby amended in its entirety
to read as follows:
"1.2 "Bank" means (a) Santa Barbara Bank & Trust, a California
corporation, including but not limited to all corporations and other
entities into which or with which such corporation is merged or
consolidated, and (b) all corporations and other entities which acquire
all or substantially all of the assets of such corporation, if as part of
the agreement for the acquisition of such assets the purchaser has agreed
to assume the obligations of the "Bank" under this Plan."
1.2 New Section 1.3. Current Sections 1.3 (defining the term "Code")
through 1.24 (defining the term "Year of Service"), as previously renumbered by
the First Amendment, are hereby further renumbered as new Sections 1.4 through
1.26, respectively, and the following new Section 1.3 is hereby inserted into
the Plan to read in its entirety as follows:
"1.3 "Change of Control" shall mean any one transaction or any
series of related transactions in which any Person (a) acquires direct or
indirect voting control over more than thirty-five percent (35%) of the
outstanding shares of Bancorp's common capital stock, or (b) acquires all
or substantially all of the assets of the Bank. The effective date of any
such Change of Control shall be the first date as of which any Person
first acquires such voting control over more than thirty-five percent
(35%) of the outstanding shares of Bancorp's common capital stock or
actually acquires all or substantially all of the Bank's assets. For
purposes of this Section 1.3, the term "Person" shall have the meaning
ascribed to that term for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended.
1.3 New Section 1.23. Current Sections 1.23 (defining the term "Spouse")
through 1.26 (defining the term "Year of Service"), as previously renumbered by
the First Amendment and by Section 1.2 of this Second Amendment, are hereby
further renumbered as Sections 1.24 through 1.27, respectively, and the
following new Section 1.23 is hereby inserted into the Plan to read in its
entirety as follows:
"1.23 "Restricted Period" shall mean the period which:
1.23.1 Commencement. Commences on the date on which (a) Bancorp
or the Bank executes with another Person a written agreement (the
"Reorganization Agreement") to acquire all or substantially all the assets
of the Bank, or to merge, consolidate, combine, or otherwise reorganize
Bancorp or the Bank with any one or more other Persons (as such term is
defined for purposes of Section 13(d) or 14 of the Securities Exchange Act
of 1934) in any transaction in which the Reorganization Agreement
contemplates that those Persons who are shareholders of Bancorp as of the
date such Reorganization Agreement is executed will own less than
sixty-five percent (65%) of the combined voting power of all common stock
and other voting securities of the surviving entity immediately after the
effective date of such merger, consolidation, combination, or other
reorganization; or (b) any Person other than Bancorp announces that such
Person intends to conduct a tender offer to acquire more than thirty-five
percent (35%) of the outstanding common stock and other voting securities
of Bancorp; and
1.23.2 Expiration. Expires on the last day of the period of
twenty-four (24) consecutive calendar months commencing on the date of any
Change of Control."
1.4 Section 2.1.1. Section 2.1.1 is hereby amended in its entirety to read
as follows:
"2.1.1 Eligible Retirees. A person shall be deemed to satisfy the
requirements of this Section 2.1.1 if that person satisfies the
requirements of Paragraph A of this Section 2.1.1.
A. Subject to Paragraph B, below, a person satisfies the
requirements of this Paragraph A only if all of the following requirements
are satisfied as of the effective date as of which that person terminates
employment with Bancorp or the Bank: (1) that person has completed at
least eight (8) Years of Service, (2) that person has attained at least
the age of fifty-five (55), and (3) the sum of the number of the person's
Years of Service plus the person's age is equal to at least seventy-five
(75).
B. In determining whether a person has satisfied the
requirements of Paragraph A of this Section 2.1.1, such person (for all
purposes under such Paragraph A) shall be credited with five (5) Years of
Service in addition to such person's actual Years of Service, and shall be
deemed to be five (5) years older than such person's actual chronological
age, if during the Restricted Period Bancorp or the Bank terminates (or
delivers to Employee notice of the termination of) Employee's employment
with Bancorp or the Bank other than for cause. For purposes of this
Paragraph B, the term "cause" shall mean (1) gross negligence, (2) willful
misconduct, (3) the person repeatedly and materially fails, for a period
of at least thirty (30) days after receiving written notice of such
failure, to perform the duties and functions inherent in the position and
assigned to the person by Bancorp or the Bank (as the case may be); or (4)
the person's engages in any conduct which materially adversely affects
Bancorp or the Bank (as the case may be) or the person's ability to
perform that person's obligations and duties as an employee of Bancorp or
the Bank."
1.5 Section 5.2. Section 5.2 of the Plan is hereby amended to read in its
entirety as follows:
"5.2 Amendment and Termination. The Bank shall have sole and
absolute discretion to amend or modify this Plan in any regard, and to
terminate this Plan altogether, at any time; provided, notwithstanding the
foregoing or any other provision of this Plan, during any Restricted
Period the Bank may not (a) revoke the Plan, or (b) modify the provisions
of Paragraph B of Section 2.1.1 of the Plan, or (c) otherwise modify or
amend the Plan in any manner (whether directly or indirectly such as by
amending any other employee benefit arrangement that benefits any person
who is affected by the provisions of Paragraph B of Section 2.1.1, above)
that has the effect of eliminating or reducing the protections afforded by
Paragraph B of Section 2.1.1 hereof.
1.6 New Section 6.5. There is hereby added to the Plan a new Section 6.5
to read in its entirety as follows:
"6.5 Binding Effect. This Plan shall be binding upon all
successors and assigns of the Bank."
2. MISCELLANEOUS
2.1 Restatement. The officers of the Bank are hereby authorized, in their
discretion, to restate the Plan by incorporating into a single plan document the
terms of the original Plan Document, the First Amendment, and this Second
Amendment.
2.2 Ratification. Except as modified by the First Amendment and this
Second Amendment, the Plan Document is hereby ratified and confirmed and remains
in full force and effect.
2.3 Effective Date. The effective date of this Second Amendment shall be
January 1, 1997.
IN WITNESS WHEREOF, the Bank has executed this Second Amendment, effective
on the date set forth above.
Date: December 17, 1997
SANTA BARBARA BANK & TRUST, a
California corporation
By
Jay D. Smith, Senior Vice-President
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 67,799
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<FED-FUNDS-SOLD> 48,000
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<INVESTMENTS-HELD-FOR-SALE> 286,998
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<TOTAL-ASSETS> 1,592,386
<DEPOSITS> 1,404,155
<SHORT-TERM> 22,293
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0
0
<OTHER-SE> 113,085
<TOTAL-LIABILITIES-AND-EQUITY> 1,592,386
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<INTEREST-TOTAL> 114,935
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<SECURITIES-GAINS> (406)
<EXPENSE-OTHER> 60,105
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