SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995,
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 2-76555
SDN BANCORP, INC.
----------------------------------------------------
(Exact name of small business issuer in its charter)
Delaware 95-3683748
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 Saxony Road, Encinitas, California 92024
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(Address of principal executive offices)(Zip Code)
Issuer's telephone number, including area code:
------------------------------------------------
(619) 436-6888
Securities registered pursuant to Section 12 (b) of the Exchange
Act:
None
Securities registered pursuant to Section 12 (g) of the Exchange
Act:
None
Check whether the issuer (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 issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and
no disclosure will be contained, to the best of issuer's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB. X
The issuer's revenues for the year ended December 31, 1995
were $4,568,000.
The aggregate market value of Common Stock held by
non-affiliates at March 8, 1996: $534,875. The Bank is not
aware of any sale or trade of Common Stock within the last 60 days.
The last sale at $5.82 per share occurred on September 30,
1995.
The number of shares of Common Stock outstanding at March 8,
1996: 895,467
Documents incorporated by reference: None
TABLE OF CONTENTS
Part I
Page
Item 1. Business 2
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of
Security Holders 24
Part II
Item 5. Market for the Issuer's Common Stock
and Related Stockholder Matters 24
Item 6. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 25
Item 7. Financial Statements 31
Item 8. Disagreements on Accounting and Financial 31
Disclosure
Part III
Item 9. Directors and Executive Officers of Issuer;
Compliance with Section 16(a) 32
Item 10. Executive Compensation 33
Item 11. Security Ownership of Certain Beneficial Owners
and Management 34
Item 12. Certain Relationships and Related Transactions 35
Part IV
Item 13. Exhibits and Reports on Form 8-K 36
Signatures 37
PART I
ITEM 1. BUSINESS
Bancorp
SDN Bancorp was incorporated under the laws of the State
of California on October 19, 1981. SDN Bancorp became a bank
holding company on March 22, 1983, when it acquired 100% of the
outstanding shares of San Dieguito National Bank ("Bank"), a
national banking association headquartered in Encinitas,
California. Bancorp acquired the Bank's stock pursuant to a
reorganization whereby each outstanding share of the Bank's common
stock was converted into one share of Bancorp's common stock, and
all of the outstanding shares of the Bank's common stock were
transferred to Bancorp.
As of September 30, 1995, SDN Bancorp, a California corporation
("Bancorp-CA") completed the recapitalization (the
"Recapitalization") contemplated by the July 21, 1995 Stock
Purchase Agreement (the "Stock Purchase Agreement") whereby
Bancorp-CA reincorporated under Delaware law through its merger
(the "Merger") with and into SDN Bancorp, Inc., a newly formed
corporation under Delaware law ("Bancorp" or the "Company"), with
Bancorp constituting the surviving corporation, and thereafter
issued an aggregate of 841,739 shares of Company Common Stock to
Dartmouth Capital Group, L.P., a Delaware limited partnership (the
"Partnership") together with certain of its partners (collectively,
the "New Investors"). As a result of this Recapitalization and
Merger, Bancorp is owned 94% by the New Investors. The
Partnership, which owns 48% of the Common Stock, is controlled by
its sole general partner, Dartmouth Capital Group, Inc., ("DCG,
Inc.") a Delaware corporation.
Bancorp's only significant asset is the stock of the Bank and,
as the sole shareholder of the Bank, the primary function of
Bancorp is to coordinate the general policies and activities of the
Bank.
Bancorp and its sole subsidiary have approximately 27 full-time
and 24 part-time employees as of March 8, 1996. None of these
employees is represented by a union or covered under a collective
bargaining agreement.
Acquisitions
General. The Partnership and DCG, Inc. were organized in May
1995 to evaluate and, if and when appropriate, acquire controlling
or substantial equity positions in, or certain assets and
liabilities of, one or more banks or thrifts or similar financial
institutions located principally in California. The Partnership
and DCG, Inc. are registered bank holding companies under the Bank
Holding Company Act of 1956, as amended. The Partnership and DCG,
Inc. are sometimes collectively referred to in this Annual Report
as "Dartmouth Capital Group." As of the date of this Annual
Report, the Partnership's principal asset is its controlling equity
investment in Bancorp.
Pending Acquistions. Since the Partnership's investment in
Bancorp, Bancorp has entered into a definitive agreement to acquire
Liberty National Bank ("Liberty"), which will be completed as of
March 31, 1996, and has announced a letter of intent to acquire
Commerce Security Bank ("Commerce"), which Bancorp expects will be
completed in the third quarter of 1996. The pending acquisition of
Liberty (the "Liberty Acquisition") and the proposed acquisition of
Commerce (the "Commerce Acquisition") are sometimes referred to
collectively in this Annual Report as the "Pending Acquisitions."
In October 1995, Bancorp entered into a definitive agreement to
acquire Liberty for a total of approximately $15.1 million in cash.
As of March 27, 1996, the Partnership invested approximately $13.4
million in Bancorp to fund the Liberty Acquisition. In exchange
for that investment, Bancorp issued a total of 3,392,405 additional
shares of Common Stock at a price per share of $3.95, Bancorp's
book value per share as of December 31, 1995. At the
Partnership's direction, Bancorp issued 1,764,000 of those shares
of Common Stock, in the aggregate, to the Direct Holders and the
remaining 1,628,405 shares of Common Stock directly to the
Partnership. Giving effect to the issuance of those shares to fund
the Liberty Acquistion, the Partnership owns 48.0% of the Common
Stock and the Direct Holders own, in the aggregate, 50.75% of the
Common Stock.
Bancorp announced on March 1, 1996 that it had entered into a
letter of intent to acquire Commerce for a combination of cash and
stock valued at approximately $21.3 million. The Commerce
Acquisition is subject to the finalization of a definitive
acquisition agreement and to the receipt of federal and state
regulatory approvals, among other conditions. Under the terms of
the letter of intent, a new Delaware corporation ("Holding
Company") to be formed by the Company would acquire 100% of the
outstanding shares of Commerce common stock. Sixty percent of
those Commerce shares would be exchanged for cash equal to
approximately 150% of Commerce's book value per share as of
December 31, 1995, and 40% of Commerce's shares would be exchanged
for Holding Company common stock having a pro forma book value as
of December 31, 1995, approximately equal to Commerce's book value
per share as of that date. The Partnership has agreed to invest up
to $15.9 million in the Company to provide the additional capital
necessary to complete the Commerce Acquisition. In exchange for
that investment, Bancorp will issue addditional shares of Common
Stock to the Partnership and the Direct Holders at a price per
share of $3.95.
The Bank
The Bank commenced operations as a national banking association
on December 22, 1980. The Bank's main office is located at 135
Saxony Road in Encinitas, California. In December 1990, the Bank
opened a full-service office in the downtown area of Carlsbad,
California.
The Bank offers a full range of commercial banking services,
including commercial loans, various types of consumer and real
estate loans, the acceptance of checking, savings and money market
deposits, certificates of deposit, as well as other non-deposit
banking services. The Bank operates a 24-hour automated teller
machine at each of its offices and has drive-through banking at its
main office. The Bank does not issue VISA or MasterCard credit
cards, but is a merchant depository for cardholder drafts under
both types of credit cards. The Bank does not operate a trust
department or provide international banking services directly;
however, the Bank can arrange with correspondent institutions to
offer trust and international services to the Bank's customers from
time to time upon request.
Bank policy prohibits accepting brokered deposits. As of March
8, 1996, the Bank held no such brokered deposits.
At December 31, 1995, real estate loans and construction loans
were approximately 42% of the Bank's loan portfolio. Such loans
are generally secured by a first trust deed and are for a period of
five years or less with a floating interest rate. Approximately
14% of the real estate loans are loans made for the purpose of
acquiring unimproved residential land with maturities of
approximately one year and loan-to-value ratio, based on recent
appraisals, of 45% or less. Approximately 70% of the real estate
loans are secured by commercial properties, most of which are
owner-occupied, with a maximum loan-to-value (appraised) ratio of
75%, and have an average loan balance of approximately $267,000.
The other 16% of the real estate loans are secured by improved
residential properties. The average balance of all real estate
loans is approximately $234,000.
As of December 31, 1995, there were three real estate loans
totaling $772,000 on non-accrual status. Two of the loans,
totaling $638,000, are secured by residential land. The other
loan, for $134,000, is secured by a single-family owner-occupied
property.
The Bank, like other banks, also makes a number of unsecured
loans, based upon the cash flow, income, character and/or net worth
of the borrower. Collectibility of these loans is solely dependent
upon the borrower's financial capability at maturity. Unsecured
loans, in many cases, are more risky than secured loans. At
December 31, 1995, the Bank had $12.6 million in commercial loans
and $6.3 million in installment loans which are considered to be
unsecured by the Bank, for a total of $18.9 million (48% of the
loan portfolio). However, a majority of these loans are
collateralized by junior liens on real estate, personal property or
governmental agency guarantees.
Premises
Bancorp maintains its office at the same location as the Bank's
main and administration offices in Encinitas, California. The
Bank presently operates two full-service banking offices in San
Diego County and its principal market area is the northern coastal
area of San Diego County.
The Bank's main office and administration offices are located
at 135 Saxony Road in Encinitas, California. This is a two-story,
freestanding building with approximately 10,300 square feet of
commercial space built to the Bank's specifications. The Bank
occupies the premises pursuant to a 20-year, triple net lease which
commenced March 1982, with an option to extend the lease for an
additional 10 years. The Bank currently pays a rental of $18,545
per month. Increases in rent will occur in May of 1997, as well
as during the option period.
In December 1995, the Bank renewed and amended the lease for
its service center at 6354 Corte del Abeto, Suite F, Carlsbad,
California. The office space area consists of approximately 4,220
square feet. The Bank occupies the premises pursuant to a
six-month lease. The Bank currently pays a rental of $2,595 per
month, plus a pro rata share of certain common expenses of $494.00
per month.
The Bank's office at 675 Carlsbad Village Drive, Carlsbad,
California, opened in December 1990. The office is a one-story,
freestanding building with approximately 5,550 square feet of
commercial space. The Bank occupies the premises pursuant to a
15-year lease with options to extend the term of the lease for two
five-year periods. The rent is currently $12,252 per month and
increases four percent (4%) per year at the beginning of each new
lease year through the tenth lease year, at which time rent will be
adjusted to a then fair market rent in accordance with conditions
as set forth in the lease. Such rent then increases four percent
(4%) per year through the remaining original term of the lease.
Economic Conditions in the Market Area
The Bank concentrates on serving the needs of small and
medium-sized businesses, professionals and individuals located in
the northern coastal area of San Diego County, California. The
general economy in this market area, and particularly the real
estate market, is recovering from the effects of a prolonged
recession that has adversely affected the ability of certain
borrowers of the Bank to perform their obligations to the Bank.
The financial condition of the Bank has been, and is expected to
continue to be, affected by overall general economic conditions and
the real estate market in California. See Item 6, "MANAGEMENT'S
DISCUSSION AND ANALYSIS - Economic Considerations".
The future success of the Bank is dependent, in large part,
upon the quality of its assets. Management of the Bank has devoted
substantial time and resources to the identification, collection
and workout of non- performing assets. The real estate markets
and the overall economy in California are likely to affect the
Bank's assets in future periods and, accordingly, the Bancorp's
financial condition and results of operations.
Competition
The banking and financial services business in California
generally, and in the Bank's market areas specifically, is highly
competitive. The increasingly competitive environment is a result
primarily of changes in regulation, changes in technology and
product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Bank
competes for loans, deposits and customers for financial services
with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions,
and other nonbank financial service providers. Many of these
competitors are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader array of
financial services than the Bank. In order to compete with the
other financial services providers, the Bank principally relies
upon local promotional activities, personal relationships
established by officers, directors and employees with its
customers, and specialized services tailored to meet its customers'
needs.
Effect of Governmental Policies and Recent Legislation
Banking is a business which depends on rate differentials. In
general, the difference between the interest rate paid by the Bank
on its deposits and its other borrowings and the interest rate
received by the Bank on loans extended to its customers and
securities held in the Bank's portfolio comprise the major portion
of Bancorp's earnings. These rates are highly sensitive to many
factors that are beyond the control of the Bank. Accordingly, the
earnings and growth of the Bank and Bancorp are subject to the
influence of domestic and foreign economic conditions, including
inflation, recession and unemployment.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and
fiscal policies of the federal government and the policies of
regulatory agencies, particularly the Federal Reserve Board. The
Federal Reserve Board implements national monetary policies (with
objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities,
by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the
discount rates applicable to borrowings by depository institutions.
The actions of the Federal Reserve Board in these areas influence
the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature
and impact of any future changes in monetary policies cannot be
predicted.
From time to time, legislation is enacted which has the effect
of increasing the cost of doing business, limiting or expanding
permissible activities or affecting the competitive balance between
banks and other financial institutions. Proposals to change the
laws and regulations governing the operations and taxation of
banks, bank holding companies and other financial institutions are
frequently made in Congress, in the California legislature and
before various bank regulatory and other professional agencies.
For example, legislation was introduced in Congress that would
repeal the current statutory restrictions on affiliations between
commercial banks and securities firms. Under the proposed
legislation, bank holding companies would be allowed to control
both a commercial bank and a securities affiliate, which could
engage in the full range of investment banking activities,
including corporate underwriting. The likelihood of any major
legislative changes and the impact such changes might have on
Bancorp are impossible to predict. See below Item 1. "BUSINESS -
Supervision and Regulation."
Supervision and Regulation
Bank holding companies and banks are extensively regulated
under both federal and state law. Set forth below is a summary
description of certain laws and regulations which relate to the
regulation of Bancorp and the Bank. The description does not
purport to be a complete summary of all such authority and is
qualified in its entirety by reference to the applicable laws and
regulations.
Bancorp, as a registered bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956, as amended
(the "BHCA"). Bancorp is required to file with the Federal
Reserve Board quarterly and annual reports and such additional
information as the Federal Reserve Board may require pursuant to
the BHCA. The Federal Reserve Board may conduct periodic
examinations of Bancorp and its subsidiaries.
The Federal Reserve Board may require that Bancorp terminate an
activity or terminate control of or liquidate or divest certain
subsidiaries or affiliates if and when the Federal Reserve Board
believes the activity or the control of the subsidiary or affiliate
constitutes a significant risk to the financial safety, soundness
or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of
certain bank holding company debt, including authority to impose
interest ceilings and reserve requirements on such debt. Under
certain circumstances, Bancorp must file written notice with and
obtain approval from the Federal Reserve Board prior to purchasing
or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve
Board, a bank holding company and its nonbanking subsidiaries are
prohibited from requiring certain tie-in arrangements in connection
with any extension of credit, lease or sale of property or
furnishing of services. Further, Bancorp is required by the
Federal Reserve Board to maintain certain levels of capital. See
Item 1. "BUSINESS - Supervision and Regulation - Capital
Standards."
Bancorp is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the
outstanding shares of any class of voting securities or
substantially all of the assets of any bank or bank holding
company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of Bancorp and another
bank holding company.
Bancorp is prohibited by the BHCA, except in certain
statutorily prescribed instances, from acquiring direct or indirect
ownership or control of more than 5% of the outstanding voting
shares of any company that is not a bank or bank holding company
and from engaging directly or indirectly in activities other than
those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, Bancorp, subject to the
prior approval of the Federal Reserve Board, may engage in any, or
acquire shares of companies engaged in, activities that are deemed
by the Federal Reserve Board to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
In making any such determination, the Federal Reserve Board is
required to consider whether the performance of such activities by
Bancorp or an affiliate can reasonably be expected to produce
benefits to the public, such as greater convenience, increased
competition or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking
practices. The Federal Reserve Board is also empowered to
differentiate between activities commenced de novo and activities
commenced by acquisition, in whole or in part, of a going concern.
Under Federal Reserve Board regulations, a bank holding company
is required to serve as a source of financial and managerial
strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the Federal
Reserve Board's policy that in serving as a source of strength to
its subsidiary banks, a bank holding company should stand ready to
use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity
and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its
obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve Board to
be an unsafe and unsound banking practice or a violation of the
Federal Reserve Board's regulations or both. This doctrine has
become known as the "source of strength" doctrine. Although the
United States Court of Appeals for the Fifth Circuit found the
Federal Reserve Board's source of strength doctrine invalid in
1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHCA, the decision, which is not
binding on federal courts outside the Fifth Circuit, was recently
reversed by the United States Supreme Court on procedural grounds.
The validity of the source of strength doctrine is likely to
continue to be the subject of litigation until definitively
resolved by the courts or by Congress.
Bancorp is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, Bancorp
and its subsidiary are subject to periodic examination by, and
may be required to file reports with, the California State Banking
Department.
Finally, Bancorp is subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended,
including but not limited to, filing annual, quarterly and other
current reports with the Securities and Exchange Commission.
The Bank, as a national banking association, is subject to
primary supervision, examination and regulation by the Office of
the Comptroller of the Currency ("Comptroller"). If, as a result
of an examination of a bank, the Comptroller should determine that
the financial condition, capital resources, asset quality, earnings
prospects, management, liquidity or other aspects of the bank's
operations are unsatisfactory or that the bank or its management is
violating or has violated any law or regulation, various remedies
are available to the Comptroller. Such remedies include the power
to enjoin "unsafe or unsound practices," to require affirmative
action to correct any conditions resulting from any violation or
practice, to issue an administrative order that can be judicially
enforced, to direct an increase in capital, to restrict the growth
of the bank, to assess civil monetary penalties, and to remove
officers and directors. The Federal Deposit Insurance Corporation
( FDIC ) has similar enforcement authority, in addition to its
authority to terminate a bank's deposit insurance in the absence of
action by the Comptroller and upon a finding that a bank is in an
unsafe or unsound condition, is engaging in unsafe or unsound
activities, or that its conduct poses a risk to the deposit
insurance fund or may prejudice the interest of its depositors.
The deposits of the Bank are insured in the manner and to the
extent provided by law through Bank Insurance Fund ( BIF ) which is
administered by the FDIC. For this protection, the Bank pays a
quarterly statutory assessment. See Item 1. "BUSINESS -
Supervision and Regulation - Premiums for Deposit Insurance." The
Bank is also subject to certain regulations of the Federal Reserve
Board and applicable provisions of Delaware law, insofar as they do
not conflict with or are not preempted by federal banking law.
Various other requirements and restrictions under the laws of
the United States and the State of California affect the operations
of the Bank. Federal and California statutes and regulations
relate to many aspects of the Bank's operations, including reserves
against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices, capital requirements and disclosure
obligations to depositors and borrowers. Further, the Bank is
required to maintain certain levels of capital. See Item 1.
"BUSINESS - Supervision and Regulation - Capital Standards."
Restrictions on Transfers of Funds by Bancorp and the Bank
Bancorp is a legal entity separate and distinct from the Bank.
Bancorp's ability to pay cash dividends is limited by Delaware
law. Under Delaware law, shareholders of Bancorp may receive
dividends when and as declared by the Board of Directors out of
funds legally available for such purpose. With certain exceptions,
a Delaware corporation may not pay dividends either out of its
surplus, as defined under Delaware law, or if there is no surplus,
out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year.
Federal Reserve Board policy prohibits a bank holding company
from declaring or paying a cash dividend which would impose undue
pressure on the capital of subsidiary banks or would be funded only
through borrowings or other arrangements that might adversely
affect the holding company's financial position. The policy
further declares that a bank holding company should not continue
its existing rate of cash dividends on its common stock unless its
net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its
capital needs, asset quality and overall financial condition.
Other Federal Reserve Board policies forbid the payment by bank
subsidiaries to their parent companies of management fees which are
unreasonable in amount or exceed the fair market value of the
services rendered.
There are statutory and regulatory limitations on the amount of
dividends which may be paid to Bancorp by the Bank. The prior
approval of the Comptroller is required if the total of all
dividends declared by a national bank in any calendar year exceeds
the bank's net profits (as defined) for that year combined with its
retained net profits (as defined) for the preceding two years, less
any transfers to surplus.
The Comptroller also has authority to prohibit the Bank from
engaging in activities that, in the Comptroller's opinion,
constitute unsafe or unsound practices in conducting its business.
It is possible, depending upon the financial condition of the bank
in question and other factors, that the Comptroller could assert
that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice. Further, the
Comptroller and the Federal Reserve Board have established
guidelines with respect to the maintenance of appropriate levels of
capital by banks or bank holding companies under their
jurisdiction. Compliance with the standards set forth in such
guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit
the amount of dividends which the Bank or Bancorp may pay. See
Item 1. "BUSINESS - Supervision and Regulation - Prompt Corrective
Regulatory Action and Other Enforcement Mechanisms - Capital
Standards" for a discussion of these additional restrictions on
capital distributions.
At present, substantially all of Bancorp's revenues, including
funds available for the payment of
dividends and other operating expenses, are, and will continue to
be, primarily dividends paid by the Bank. At December 31, 1995,
the Bank had no retained earnings available for the payment of cash
dividends.
The Bank is subject to certain restrictions imposed by federal
law on any extensions of credit to, or the issuance of a guarantee
or letter of credit on behalf of Bancorp or other affiliates, the
purchase of or investments in stock or other securities thereof,
the taking of such securities as collateral for loans and the
purchase of assets of Bancorp or other affiliates. Such
restrictions prevent Bancorp and such other affiliates from
borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and
investments by the Bank to or in Bancorp or to or in any other
affiliate is limited to 10% of the Bank's capital and surplus (as
defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's
capital and surplus (as defined by federal regulations).
Additional restrictions on transactions with affiliates may be
imposed on the Bank under the prompt corrective action provisions
of federal law. See Item 1. "BUSINESS - Supervision and Regulation
- - Prompt Corrective Regulatory Action and Other Enforcement
Mechanisms."
Capital Standards
The Federal Reserve Board and the Comptroller have adopted
risk-based minimum capital guidelines intended to provide a measure
of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on
the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which
range from 0% for assets with low credit risk, such as certain U.S.
Treasury securities, to 100% for assets with relatively high credit
risk, such as business loans.
A banking organization's risk-based capital ratios are obtained
by dividing its qualifying capital by its total risk-adjusted
assets. The regulators measure risk-adjusted assets, which include
off balance sheet items, against both total qualifying capital (the
sum of Tier 1 capital and limited amounts of Tier 2 capital) and
Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies)
and minority interests in certain subsidiaries, less most
intangible assets. Tier 2 capital may consist of a limited amount
of the allowance for possible loan and lease losses, cumulative
preferred stock, long term preferred stock, eligible term
subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2
capital is subject to certain other requirements and limitations of
the federal banking agencies. The federal banking agencies require
a minimum ratio of qualifying total capital to risk-adjusted assets
of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets
of 4%.
In addition to the risked-based guidelines, federal banking
regulators require banking organizations to maintain a minimum
amount of Tier 1 capital to total average assets, referred to as
the leverage ratio. For a banking organization rated in the
highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to
total average assets is 3%. For all banking organizations not
rated in the highest category, the minimum leverage ratio must be
at least 100 to 200 basis points above the 3% minimum, or 4% to 5%.
In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have
the discretion to set individual minimum capital requirements for
specific institutions at rates significantly above the minimum
guidelines and ratios.
The OCC, FRB, and FDIC have issued a final rule effective
September 1, 1995, to implement the portion of Section 305 of
FDICIA that requires the banking agencies to revise their
risk-based capital standards to ensure that those standards take
adequate account of interest rate risk. The final rule amends the
capital standards to specify that the banking agencies will include
in their evaluations of a bank's capital adequacy an assessment of
the exposure to declines in the economic value of the bank's
capital due to changes in interest rates. The final rule does not
codify a measurement framework for assessing the level of a bank's
interest rate risk exposure nor does it specify a level of exposure
above which a bank will be required to hold more capital. However,
pursuant to the final rule, a bank may be required to hold
additional capital for interest rate risk if it has a significant
exposure or a weak interest rate risk management process.
Concurrent with the publication of this final rule, the banking
agencies are issuing for comment a joint policy statement that
describes a uniform supervisory framework that the banking agencies
will use to measure and assess the exposure of a bank's net
economic value to changes in interest rates. After the banking
agencies and banking industry gain sufficient experience with the
proposed measurement process, the banking agencies intend, through
a subsequent rulemaking process, to issue a proposed rule that
would establish an explicit capital charge for interest rate risk
that will be based upon the level of a bank's measured interest
rate risk exposure. On December 12, 1995, the OCC, FDIC and FRB
announced that they are continuing to analyze this proposed new
framework and, therefore, banks will not be required to supply
additional information in this area for the first quarter of 1996.
After considering the public comments received, the three agencies
decided that further analysis of the proposal is necessary. This
means there will be no additions to the interest rate risk portion
of the Call Reports that banks will file as of March 31, 1996.
Effective January 17, 1995, the federal banking agencies issued
a final rule relating to capital standards and the risks arising
from the concentration of credit and nontraditional activities.
Institutions which have significant amounts of their assets
concentrated in high risk loans or nontraditional banking
activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums.
The federal banking agencies have not imposed any quantitative
assessment for determining when these risks are significant, but
have identified these issues as important factors they will review
in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an
interagency policy statement on the allowance for loan and lease
losses which, among other things, establishes certain benchmark
ratios of loan loss reserves to classified assets. The benchmark
set forth by such policy statement is the sum of (i) assets
classified loss; (ii) 50 percent of assets classified doubtful;
(iii) 15 percent of assets classified substandard; and (iv)
estimated credit losses on other assets over the upcoming 12
months.
Federally supervised banks and savings associations are
currently required to report deferred tax assets in accordance with
SFAS No. 109, Accounting for Income Taxes . See Item 1.
"BUSINESS - Supervision and Regulation - Accounting Changes." The
federal banking agencies recently issued final rules governing
banks and bank holding companies, effective April 1, 1995, which
limit the amount of deferred tax assets that may be included in
Tier 1 capital for risk-based and leverage capital purposes. This
standard has been in effect on an interim basis since March 1993.
Under the final rule, deferred tax assets that can only be realized
if an institution earns taxable income in the future, are limited
for regulatory capital purposes to the amount that the institution
expects to realize within one year of the quarter-end report date
- -- based on its projection of taxable income -- or 10% of Tier 1
capital, whichever is less. However, deferred tax assets that can
be realized through carrybacks to taxes paid on income earned in
prior periods and from the reversal of existing taxable temporary
differences generally will not be limited.
Future changes in regulations or practices could further reduce
the amount of capital recognized for purposes of capital adequacy.
Such a change could affect the ability of the Bank to grow and
could restrict the amount of profits, if any, available for the
payment of dividends.
The following table presents the capital ratios for the Bank,
compared to its minimum regulatory capital requirements as of
December 31, 1995 and December 31, 1994. See Item 6. "MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Administrative Proceedings."
<TABLE>
<CAPTION>
December 31, Minimum
Requirement
----------- -----------
1995 1994
<S> <C> <C> <C>
Total Risk-Based Capital 10.7% 4.5% 8.0%
Tier 1 Risk-Based Capital 9.4% 3.2% 4.0%
Leverage Ratio 6.8% 2.6% 3.0%-5.0%
</TABLE>
Prompt Corrective Action and Other Enforcement Mechanisms
Federal law requires each federal banking agency to take
prompt corrective action to resolve the problems of insured
depository institutions, including but not limited to those that
fall below one or more prescribed minimum capital ratios. The law
required each federal banking agency to promulgate regulations
defining the following five categories in which an insured
depository institution will be placed, based on the level of its
capital ratios: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized
and critically undercapitalized.
An institution that, based upon its capital levels, is
classified as "well capitalized," "adequately capitalized" or
"undercapitalized" may be treated as though it were in the next
lower capital category if the appropriate federal banking agency,
after notice and opportunity for hearing, determines that an unsafe
or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an
insured depository institution is subject to more restrictions.
The federal banking agencies, however, may not treat an institution
as "critically undercapitalized" unless its capital ratio actually
warrants such treatment.
Risk Management
The FRB has issued SR-95-51, "Rating the Adequacy of
Management Processes and Internal controls at State Member Banks
and Bank Holding Companies", dated November 14, 1995, noting that
Federal Reserve System examiners, beginning in 1996, are instructed
to assign a formal supervisory rating to the adequacy of an
institution's risk management processes, including its internal
controls. Guidelines for assigning the rating are provided in the
attachment to this SR, which also defines the five rating
categories and the specific elements to be evaluated when
determining which rating to assign. The five ratings are strong,
satisfactory, fair, marginal and unsatisfactory.
The SR notes that the specific rating of risk management
and internal controls should be given significant weight when
evaluating management under the bank (CAMEL) and bank holding
company (BOPEC) rating systems.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted
final safety and soundness standards for all insured depository
institutions. The standards, which were issued in the form of
guidelines rather than regulations, relate to internal controls,
information systems, internal audit systems, loan underwriting and
documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking
agencies in identifying and addressing problems at insured
depository institutions before capital becomes impaired. If an
institution fails to meet these standards, the appropriate federal
banking agency may require the institution to submit a compliance
plan. Failure to submit an acceptable compliance plan may
result in enforcement proceedings.
On July 10, 1995, the OCC, FDIC, FRB, and OTS published
the final rule implementing three of the safety and soundness
standards required by Section 132 of FDICIA. This section
required the agencies to issue regulations setting operational and
managerial standards, asset quality and earnings standards, and
compensation standards. At the time, the agencies also reissued
for public comment the standards for asset quality and earnings.
The agencies published an advance notice of proposed rulemaking in
July 1992, and a notice of proposed rulemaking in November 1993.
The agencies determined that these standards should be
issued as guidelines. Accordingly, the operational and managerial
standards and the compensation standards, which are issued in
final, are guidelines and are appended to the regulations regarding
enforcement. The agencies are reissuing the asset quality and
earnings standards for public comment, as they are significantly
different from the ratio-based standards in the November 1993
proposal. Because the Riegle Community Development and Regulatory
Improvement Act of 1994 (CDRI) gave the agencies flexibility to
issue broader standards, the agencies determined that the ratios
previously proposed were too restrictive. The public comment
period ended on August 24, 1995. No further actions have been
reported to date.
In December 1992, the federal banking agencies issued
final regulations prescribing uniform guidelines for real estate
lending. The regulations, which became effective on March 19,
1993, require insured depository institutions to adopt written
policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must
address loan portfolio management, underwriting standards and loan
to value limits that do not exceed the supervisory limits
prescribed by the regulations.
Appraisals for "real estate related financial
transactions" must be conducted by either state certified or state
licensed appraisers for transactions in excess of certain amounts.
State certified appraisers are required for all transactions with
a transaction value of $1,000,000 or more; for all nonresidential
transactions valued at $250,000 or more; and for "complex" 1-4
family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However,
appraisals performed in connection with "federally related
transactions" must now comply with the agencies' appraisal
standards. Federally related transactions include the sale, lease,
purchase, investment in, or exchange of, real property or interests
in real property, the financing or refinancing of real property,
and the use of real property or interests in real property as
security for a loan or investment, including mortgage-backed
securities.
Premiums for Deposit Insurance
The FDIC adopted final regulations implementing a
risk-based premium system required by federal law. Under the
regulations, insured depository institutions are required to pay
insurance premiums depending on their risk classification. To
determine the risk-based assessment for each institution, the FDIC
will categorize an institution as well capitalized, adequately
capitalized or undercapitalized based on its capital ratios. A
well capitalized institution is one that has at least a 10% total
risk-based capital ratio, a 6% Tier 1 risk-based capital ratio and
a 5% Tier 1 leverage capital ratio. An adequately capitalized
institution will have at least an 8% total risk-based capital
ratio, a 4% Tier 1 risk-based capital ratio and a 4% Tier 1
leverage capital ratio. An undercapitalized institution will be
one that does not meet either of the above definitions. The FDIC
will also assign each institution to one of three subgroups based
upon reviews by the institution's primary federal or state
regulator, statistical analyses of financial statements and other
information relevant to evaluating the risk posed by the
institution.
In August 1995, the FDIC announced that, effective June 1,
1995, it had significantly reduced the deposit insurance premiums
paid by most banks but kept existing assessment rates intact for
deposits insured through SAIF. Under this structure, the
best-rated institutions insured by the BIF pay four cents per $100
of domestic deposits annually, down from the prior rate of 23
cents per $100. The weakest institutions continue to pay 31 cents
per $100. Institutions insured by SAIF pay premiums on a
risk-related basis of 23 cents per $100 to 31 cents per $100.
The FDIC determined that BIF was fully recapitalized as
of May 31, 1995, which required the FDIC to refund the premium
overpayments for the months of June through September. Refunds
were processed on September 15, 1995.
On November 14, 1995, the FDIC announced that, starting in
January 1996, it will further reduce the deposit insurance premiums
paid by most banks and keep existing assessment rates intact for
deposits covered by SAIF. Under the new rate structure for the
BIF, assessment rates will be lowered by four cents per $100 of
domestic deposits. Given the four cent reduction, the
highest-rated institutions (approximately 92 percent of the nearly
11,000 BIF-insured banks) will pay the statutory annual minimum of
$2,000 for FDIC insurance. Rates of all other institutions will be
reduced by four cents per $100 as well, leaving a premium range of
3-27 cents per $100, instead of the current 4-31 cents per $100.
Interstate Banking and Branching
On September 29, 1994, the President signed into law the
Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act"). Under the Interstate Act, beginning one
year after the date of enactment, a bank holding company that is
adequately capitalized and managed may obtain approval under the
BHCA to acquire an existing bank located in another state without
regard to state law. A bank holding company would not be permitted
to make such an acquisition if, upon consummation, it would control
(a) more than 10% of the total amount of deposits of insured
depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state
may limit the percentage of total deposits that may be held in that
state by any one bank or bank holding company if application of
such limitation does not discriminate against out-of-state banks.
An out-of-state bank holding company may not acquire a state bank
in existence for less than a minimum length of time that may be
prescribed by state law except that a state may not impose more
than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997,
mergers of insured banks located in different states and conversion
of the branches of the acquired bank into branches of the resulting
bank. Each state may permit such combinations earlier than June 1,
1997, and may adopt legislation to prohibit interstate mergers
after that date in that state or in other states by that state's
banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or
state bank to establish branches in a state other than its home
state if permitted by the laws of that state, subject to the same
requirements and conditions as for a merger transaction.
The Interstate Act is likely to increase competition in
Bancorp's market areas especially from larger financial
institutions and their holding companies. It is difficult to
assess the impact such likely increased competition will have on
Bancorp's operations.
In 1986, California adopted an interstate banking law.
The law allows California banks and bank holding companies to be
acquired by banking organizations in other states on a "reciprocal"
basis (i.e., provided the other state's laws permit California
banking organizations to acquire banking organizations in that
state on substantially the same terms and conditions applicable to
banking organizations solely within that state). The law took
effect in two stages. The first stage allowed acquisitions on a
"reciprocal" basis within a region consisting of 11 western states.
The second stage, which became effective January 1, 1991, allows
interstate acquisitions on a national "reciprocal" basis.
California has also adopted similar legislation applicable to
savings associations and their holding companies.
In September 1994, President Clinton signed the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
( Riegle-Neal ), which amended the Bank Holding Company Act of
1954, as amended ( BHC Act ), and the Federal Deposit Insurance Act
( FDIA ) to provide for interstate banking, branching and mergers.
Subject to the provisions of certain state laws and other
requirements, on September 29, 1995, one year after the date of its
enactment, Riegle-Neal allows a bank holding company that is
adequately capitalized and adequately managed to acquire a bank
located in a state other than the holding company s home state
regardless of whether or not the acquisition is expressly
authorized by state law. Similarly, beginning on June 1, 1997, the
federal banking agencies may approve interstate merger
transactions, subject to applicable restrictions and state laws.
Further, a state may elect to allow out of state banks to open de
novo branches in that state. Riegle-Neal includes several other
provisions which may have an impact on the business of Bancorp or
the Bank. Those provisions include, among other things, a mandate
for review of regulations to equalize competitive opportunities
between United States and foreign banks, evaluation on a bank-wide,
state-wide and, if applicable, metropolitan area basis of the
Community Reinvestment Act compliance of banks with interstate
branches, and, in the event the FDIC is appointed as conservator or
receiver of a financial institution, the revival of otherwise
expired causes of action for fraud and intentional misconduct
resulting in unjust enrichment or substantial loss to an
institution.
California has adopted the Caldera, Weggeland, and Killea
California Interstate Banking and Branching Act of 1995 ( IBBA ),
which became effective on October 2, 1995. The IBBA is concerned
with the supervision of state chartered banks which operate across
state lines, and covers such matters as branching, applications for
new facilities and mergers, consolidations and conversions, among
other things. The IBBA allows a California state bank to have
agency relationships with affiliated and unaffiliated insured and
depository institutions and allows a bank subsidiary of a bank
holding company to act as an agent to receive deposits, renew time
deposits, service loans and receive payments for a depository
institution affiliate. In addition, pursuant to the IBBA,
California opted in" to the Riegle-Neal provisions regarding
interstate branching, allowing a state bank chartered in a state
other than California to acquire by merger or purchase, at any time
after effectiveness of the IBBA, a California bank or industrial
loan company which is at least five years old and thereby to
establish one or more California branch offices. However, the IBBA
prohibits a state bank chartered in a state other than California
from entering California by purchasing a California branch office
of a California bank or industrial loan company without purchasing
the entire entity or by establishing a de novo California branch
office.
The changes effected by Riegle-Neal and the IBBA may
increase the competitive environment in which the Bank operates in
the event that out of state financial institutions directly or
indirectly enter the Bank s market area. It is expected that
Riegle-Neal will accelerate the consolidation of the banking
industry as a number of the largest bank holding companies attempt
to expand into different parts of the country that were previously
restricted. However, at this time, it is not possible to predict
what specific impact, if any, Riegle-Neal and the IBBA will have on
the Bank, the competitive environment in which the Bank operates,
or the impact on the Bank of any regulations to be proposed under
Riegle-Neal and the IBBA.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements
and reporting obligations involving home mortgage lending
operations and Community Reinvestment Act ("CRA") activities. The
CRA generally requires the federal banking agencies to evaluate the
record of a financial institution in meeting the credit needs of
their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective
measures that may be required for a violation of certain fair
lending laws, the federal banking agencies may take compliance with
such laws and CRA into account when regulating and supervising
other activities. In December 1993, and October 1995 the federal
banking agencies issued a proposal to change the manner in which
they measure a bank's compliance with its CRA obligations. In
April 1995 the agencies adopted their new, interagency regulations
implementing the community reinvestment.
The 1995 final rule changed the objective criteria for
evaluation. The final rule intends to take into account the unique
characteristics and needs of each institution's community, as well
as the capacity and relevant constraints upon institutions for
meeting the credit needs of the assessment area. Institutions
have options for selecting the method by which its CRA performance
will be evaluated. The evaluations can be completed under a
small institution performance standard, for institutions whose
total assets are $250 million or under. Large institutions
performance criteria covers all institutions of assets of $250
million or more and for multiple bank holding companies which
total bank and thrift assets in excess of $1 billion. There is
also performance criteria for wholesaler limited purpose
institutions. These types of institutions must summit a written
request to its primary regulator to obtain this level of
designation.
Accounting Changes
In May 1993, the FASB issued SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 prescribes the
recognition criterion for loan impairment and the measurement
methods for certain impaired loans and loans whose terms are
modified in troubled debt restructurings. SFAS No. 114 states that
a loan is impaired when it is probable that a creditor will be
unable to collect all principal and interest amounts due according
to the contracted terms of the loan agreement. A creditor is
required to measure impairment by discounting expected future cash
flows at the loan's effective interest rate, or by reference to an
observable market price, or by determining that foreclosure is
probable. SFAS No. 114 also clarifies the existing accounting for
in-substance foreclosures by stating that a collateral-dependent
real estate loan would be reported as real estate owned only if the
lender had taken possession of collateral.
SFAS No. 118 amended SFAS No. 114 to allow a creditor to
use existing methods for recognizing interest income on an impaired
loan. To accomplish that it eliminated the provisions in SFAS No.
114 that described how a creditor should report income on an
impaired loan. SFAS No. 118 also amends the disclosure
requirements in SFAS No. 114 to require information about the
recorded investments in certain impaired loans and about how a
creditor recognizes interest income related to those impaired
loans. SFAS No. 114 is effective for financial statements issued
for fiscal years beginning after December 15, 1994. SFAS No. 118
is effective concurrent with the effective date of SFAS No. 114.
The Bank adopted SFAS No. 114 and SFAS No. 118 in 1995. The effect
of adoption of SFAS 114 on the Bank's financial position and
results of operations was not considered by management to be
significant.
In 1995, FASB issued SFAS No. 123 "Accounting for Stock
Based Compensation" effective for fiscal years beginning after
December 15, 1995. SFAS No. 123 establishes a fair value-based
method for accounting for employee stock-based compensation plans,
but also allows companies to continue to apply the intrinsic
value-based method currently included in Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued for
Employees. At December 31, 1995, Bancorp did not have any
employee stock-based compensation plans.
Selected Statistical and Financial Information
The tables on the following pages present certain
statistical and financial information for the Bank (except where
otherwise indicated), which is the only subsidiary of Bancorp. The
other assets and liabilities of Bancorp are insignificant and,
therefore, are not material to the understanding of this
presentation.
The following table represents selected financial data
of Bancorp for each of the last five years for the period ended, or
as of December 31.
<TABLE>
<CAPTION>
At Year End December 31,
(Dollars in Thousands, Except for Per
Share Amounts)
Summary of Operations
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net interest income
before provision for
possible loan loss $ 2,817 $ 2,861 $ 2,994 $ 4,079 $ 4,094
Provision for possible
loan loss 295 583 1,085 350 1,125
----- ----- ----- ----- -----
Net interest income
after provision for
possible loan loss 2,522 2,278 1,909 3,729 2,969
Net non interest
expense 3,595 3,267 3,885 3,960 4,318
----- ----- ----- ----- -----
Loss before income
taxes and extra-
ordinary item (1,073) (989) (1,976) (231) (1,349)
Benefit for income
taxes (443) - - - (274)
----- ----- ----- ----- -----
Loss before extra-
ordinary item (630) (989) (1,976) (231) (1,075)
Extraordinary item:
forgiveness of
indebtedness net
of $443,000 income
taxes 625 - - - -
----- ----- ----- ----- -----
Net Loss $ (5) $ (989) $ (1,976) $ (231) $(1,075)
===== ===== ===== ===== =====
Loss per share
Loss before extra-
ordinary item $ (2.35) $(18.41) $ (36.78) $ (0.41) $ (1.91)
Extraordinary item 2.33 - - - -
----- ------ ------ ------ -----
Earnings loss
per share $ (0.02) $(18.41) $ (36.78) $ (0.41) $ (1.91)
===== ====== ====== ====== =====
Average shares
outstanding 895,467 564,145 564,145 564,145 563,224
At Year End December 31,
(Dollars In Thousands)
Financial Position 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Assets $55,905 $57,686 $61,916 $80,200 $91,749
Loans, Net 38,338 45,492 48,179 55,789 70,473
Deposits 51,431 55,876 59,651 76,149 87,180
Shareholders equity
(deficit) 3,541 (948) 41 2,017 2,248
</TABLE>
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Differential
The following schedule sets forth (for Bancorp on a
consolidated basis) the annual average amount outstanding for each
major category in the statements of condition for the past two
years. It also indicates the total amount of interest earned, or
paid, for the years covered and the average rates earned or paid
during those years for each such category. The Bank has not
engaged in foreign activities in either period. Non-accrual loans
are included in total loans outstanding while non-accrued interest
thereon is excluded from the computation of rates earned.
<TABLE>
<CAPTION>
1995 1994
Interest Average Interest Average
Average Income Yield Average Income Yield
Balance or or Cost Balance or or Cost
Expense Expense
(Dollars in Thousands)
<C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning
assets:
Loans (1). . . . . $ 42,272$ 4,086 9.67% $46,979 $4,044 8.61%
Taxable investment
securities. . 5,061 311 6.15 4,578 247 5.40
Federal funds sold . 2,128 117 5.50 1,337 56 4.19
Interest-bearing
deposits with
financial
institutions. . 868 54 6.22 979 43 4.39
------ ----- ---- ----- ----- ----
Total interest-earning
assets 50,329 4,568 9.08 53,873 4,390 8.15
Other assets:
Cash and demand
deposits with banks 3,757 4,667
Other assets 2,909 2,772
------ ------
Total Assets $ 56,995 $ 61,312
====== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits
Interest-bearing
demand. . . . $ 10,492 149 1.42% 11,333 167 1.47%
Money market . . 9,176 231 2.52 12,230 316 2.58
Savings. . . . . 5,235 115 2.20 6,049 135 2.23
Time . . . . . . 18,394 1,075 5.84 17,740 727 4.10
------ ----- ---- ------ ----- ----
Total interest-
bearing deposits 43,297 1,570 3.63 47,352 1,345 2.84
Long-term debt. 1,776 181 10.19 1,895 184 9.71
------ ----- ----- ------ ----- ----
Total interest-
bearing
liabilities. 45,073 1,751 3.88 49,247 1,529 3.10
Other liabilities:
Non interest-bearing
demand deposits. 11,197 11,822
Other liabilities. 806 770
------ ------
Total liabilities. 57,076 61,839
Shareholders' equity (81) (527)
------ ------
Total liabilities
and Shareholders'
equity . . . $ 56,995 $ 61,312
====== ======
Net interest income: $2,817 $2,861
Net yield on
interest-earning
assets . . . . . 5.60% 5.31%
(1) Before deduction of the average balance in the allowance for
loan losses of $639,000 in 1995 and $821,000 in 1994. Loan fees of
$104,000 in 1995 and $130,000 in 1994 are included in the
computations.
Rate and Volume Variances -- Interest Income and Expense
The following table sets forth changes in interest income and
interest expense on the basis of allocation to changes in rates and
changes in volume of the various components. Non-accrual loans are
included in total loans outstanding while non-accrued interest
thereon is excluded from the computation of rates earned. Loan
fees of $104,000 in 1995 and $130,000 in 1994 are included in the
computations.
</TABLE>
<TABLE>
<CAPTION>
1995 1994
Changes due to Net Changes due to Net
Rate Volume Mix(1) Change Rate Volume Mix(1) Change
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING
ASSETS
Interest-earning
assets:
Loans $ 498 $(405) $ (51) $ 42 $124 $(195) $ 6 $(65)
Taxable
investment
securities 34 26 4 64 (36) (6) (1) (43)
Federal funds
sold. 18 33 10 61 18 (73) 24 (31)
Interest-bearing
deposits with
financial
institutions 18 (5) (2) 11 2 (30) 2 (26)
--- --- ---- --- --- ---- -- ----
Total interest-
earning
assets 568 (351) (39) 178 108 (304) 31 (165)
INTEREST BEARING
LIABILITIES
Interest-bearing
liabilities:
Deposits
Interest-
bearing
demand (6) (12) 0 (18) (15) 5 0 (10)
Money market (7) (79) 1 (85) (12) (60) (2) (74)
Savings (2) (18) 0 (20) (18) (9) (1) (28)
Time 309 27 12 348 28 30 (1) 57
--- --- --- --- --- --- --- ---
Total
interest-
bearing
depos its 294 (82) 13 225 (17) (34) (4) (55)
Federal funds
purchased and
securities
sold under
agreements to
repurchase
Long-term debt 9 (12) 0 (3) 18 6 (1) 23
--- --- -- --- --- --- --- ---
Total interest-
bearing
liabilities 303 (94) 13 222 1 (28) (5) (32)
--- --- -- --- --- --- --- ---
Net interest
income. $265 $(257) $ (52) $(44) $107 $(276) $36 $(133)
==== ==== ==== ==== ==== ==== === ====
</TABLE>
(1) Represents the change attributable to change in rate and
volume.
Investment Securities
All investment securities are classified as held-to-maturity
by the Bank. The amortized cost and
estimated market value of investments are as follows:
<TABLE>
<CAPTION>
At December 31, 1995
(Dollars in thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 1,403 $ 16 $ - $ 1,419
U.S. Government
agencies 4,839 15 (3) 4,851
Municipal Bonds 687 10 - 697
Mortgage-backed
securities 80 10 - 90
----- ----- ---- -----
Total $ 7,009 $ 51 $ (3) $ 7,057
===== ==== ==== =====
At December 31, 1994
(Dollars in thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 2,396 $ - $ (19) $ 2,377
U.S. Government
Agencies 1,255 - (74) 1,181
Municipal Bonds 793 1 - 794
Mortgage-backed
securities 91 7 - 98
------ ------ ------- ------
Total $ 4,535 $ 8 $ (93) $ 4,450
====== ====== ======= ======
</TABLE>
The following table shows the maturities of investment
securities at December 31, 1995 and 1994 and the weighted average
yields of such securities:
<TABLE>
December 31,
1995 1994
Weighted Weighted
Book Market Average Book Market Average
Value Value Yield Value Value Yield
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U. S. Government
agencies and Municipal
Bonds:
Within one year $ 3,980 $ 4,013 6.15% $ 1,997 $1,983 4.55%
After one year
but within five
years 2,949 2,954 5.85 2,447 2,369 6.15
After five years
(Mortgage-backed
securities) 80 90 9.44 91 98 9.72
----- ----- ---- ----- ----- ----
Total $ 7,009 $ 7,057 6.06% $ 4,535 $4,450 5.61%
Federal Reserve
Bank Stock:
No stated
maturity $ 113 $ 113 6.00% $ 51 $ 51 6.00%
----- ----- ---- ----- ----- ----
Total Federal
Reserve Bank
stock $ 113 $ 113 6.00% $ 51 $ 51 6.00%
----- ----- ---- ----- ----- ----
Total investment
portfolio $ 7,122 $ 7,170 6.06% $ 4,586 $4,501 5.52%
==== ===== ===== ==== ===== ====
</TABLE>
Interest Rate Sensitivity
The following table analyzes the Bank's assets and liabilities
at December 31, 1995, by interest rate sensitivity, showing the
amount of each category which is subject to repricing over
specified time horizons. Floating rate categories are repriceable
on a daily basis except for savings accounts which require 15 days
notice before a change in rates. By definition, rate sensitive
assets less rate sensitive liabilities equals the gap for that
time horizon. The gap is negative if liabilities exceed the assets
that are subject to repricing in a given time horizon. Bank policy
is to control the rate sensitivities in order that the one year
cumulative gap does not exceed a positive or negative 10% of total
assets.
<TABLE>
<CAPTION>
Over 3 Over 6 Over 1
Months Months Year Over
3 Months to 6 to 12 to 5 Zero
Floating Or Less Months Months 5Years Years Rate(1) Total
(Dollars in Thousands)
<C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and
due from
banks $ $ $ $ $ $ $3,640 $3,640
Interest-
bearing
deposits
w/financial
institu-
tions 692 99 791
Investment
securities 1,638 212 2,130 2,949 80 7,009
Federal funds
sold 2,300 2,300
Loans 29,100 391 255 160 3,231 5,840 38,977
Premises
and equipment,
net 597 597
Other assets
(3) 2,305 2,305
------ ----- ------ ----- ----- ----- ----- ------
Total
assets $ 31,400 $2,721 $ 566 2,290 6,180 5,920 6,542 55,619
====== ===== ====== ===== ===== ===== ===== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest
bearing demand
deposits $ $ $ $ $ $ $13,525 $13,525
Interest
bearing
demand 10,582 10,582
Money
market and
savings 13,272 13,272
Time deposits
under
$100,000 5,418 3,298 2,250 614 11,580
Time deposits
of $100,000
or more 1,952 300 200 100 2,552
Other
liabilities. 276 276
Shareholder's
equity 3,832 3,832
------- ------ ------ ------ ------ ------ ----- ------
Total
liabilities &
shareholder's
equity $ 23,854 $ 7,370 $ 3,598 $ 2,450 $ 714$ - $ 17,633 $55,619
====== ====== ===== ===== ==== ==== ====== ======
GAP $ 7,546 $(4,649)$(3,032)$ (160)$ 5,466 $5,920(11,091) -
% of Total
Assets 13.57% -8.36 % -5.45% 0.29% 9.83% 10.64%
Cumulative
GAP (2) .$ 7,54 $2,897 $ (135)$ (295)$ 5,171$11,091$ - -
% of Total
Assets 13.57% 5.21% -.24% -.53% 9.30% 19.99%
</TABLE>
(1) Assets or liabilities which are not interest rate sensitive.
(2) The cumulative gap in Floating Rate (Federal funds sold) and Zero Rate
(non-interest bearing demand deposits) is usually effected due to the
significant deposits made by the Bank's title and escrow customers at year end.
(3) Allowance for possible loan losses of $639,000 as of December 31, 1995,
is included in other assets.
Loan Portfolio
The following table sets forth the amount of domestic loans outstanding at
the end of each of the past two years, according to type of loan. The Bank has
no foreign loans or energy related loans.
<TABLE>
<CAPTION>
At December 31,
1995 1994
% of % of
Total Total
Amount Loans Amount Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 16,188 41.48% $18,936 40.84%
Real estate -- construction 599 1.54 1,170 2.52%
Real estate -- other 15,710 40.26 18,060 38.95%
Installment 6,525 16.72 8,201 17.69%
------ ------ ------ ------
39,022 100.00% 46,367 100.00%
Less:
Allowance for loan losses (639) (821)
Unearned fees (45) (54)
------ ------
Total: $ 38,338 $45,492
====== ======
</TABLE>
The following table shows the amounts of certain loans (commercial,
financial and agricultural and real estate construction) outstanding as of
December 31, 1995, which, based on remaining scheduled repayments of principal,
are due in one year or less, more than one year through five years, and more
than five years. The amounts due after one year are classified according to
the sensitivity to changes in interest rates. Demand or other loans having no
stated maturity and no stated schedule of repayments are reported as due in one
year or less.
<TABLE>
<CAPTION>
Commercial,
Financial, and Real Estate
Agricultural Construction
(Dollars in Thousands)
<S> <C> <C>
Aggregate maturities of loans
which are due:
In one year or less (1) $ 4,497 $ 599
After one year through
five years:
Interest rates are floating
or adjustable 5,551 -
Interest rates are fixed or
predetermined 296 -
After five years:
Interest rates are floating
or adjustable 5,308 -
Interest rates are fixed
or predetermined 536 -
------ -------
Total $ 16,188 $ 599
====== =======
</TABLE>
(1) In certain cases, for loans with contractual maturities of one year or
less, the Bank is willing to entertain requests for extension from the
borrower. Although the Bank is not obligated to do so, such requests are
generally honored if there has been no deterioration in the borrower's
financial condition and current market rates are applied.
Risk Elements
The Bank's current policy is to stop accruing interest on loans which
are past due as to principal or interest 90 days or more, except in
circumstances where the loan is well-secured and in the process of collection.
When a loan is placed on non-accrual, previously accrued and unpaid interest
is generally reversed out of income unless adequate collateral appears to be
available from which to collect the amounts due. The following table shows the
total aggregate principal amount of non-accrual and other non-performing loans
(accruing loans on which interest or principal is past due 90 days or more) as
of the end of each of the past two years. For the most recent year, additional
gross interest income of $195,000 would have been recorded on non-accrual loans
had the loans been current, and no accrued but unpaid interest income on such
loans was included in net income.
<TABLE>
<CAPTION>
At December 31,
1995 1994
(Dollars in Thousands)
<S>
Loans on a non-accrual basis, <C> <C>
not restructured $ 1,492 $ 616
Accruing loans past due 90
days or more as to interest
or principal 46 826
Restructured loan 82 1,050
------ ------
Total $ 1,620 $ 2,492
====== ======
As a percent of outstanding
loans (1) 4.4% 5.4%
====== ======
</TABLE>
(1) For discussion of the change between 1995 and 1994, see Item 6,
"MANAGEMENT'S DISCUSSION AND ANALYSIS - Allowance and Provision for Loan
Losses".
Loans aggregating $1,361,000 at December 31, 1995 have been designated as
impaired in accordance with SFAS 114 as amended by SFAS 118. The Bank's method
used to measure the amount of impairment on these loans is to compare the loan
amount to the fair value of collateral. The total allowance for loan losses
related to these loans was $197,000 at December 31, 1995.
As of the end of the most recent period, Management was not aware of any
loans, then current, as to which there were serious doubts as to the ability of
such borrowers to comply with present loan repayment terms.
As of December 31, 1995, in Management's judgment, the concentration of
loans existed in the commercial loan area and real estate loans. Approximately
41% of the Bank's loans were commercial loans. Many of the Bank's commercial
loans were secured by real estate collateral. Approximately 42% of the Bank's
loans were real estate and construction loans, 30% of these loans are secured
by single family residential properties in San Diego County. (See additional
comments in previous section titled The Bank. While Management believes such
concentrations to have no more than the normal risk of collectibility, a
substantial decline in real estate values could have an adverse impact on
collectibility, increase real estate non-performing loans, or have other
adverse impact upon the Bank. Furthermore, since the Bank's operations are
limited geographically, economic problems (such as localized unemployment,
drops in personal income, or declines in the value of real property) resulting
in substantial adverse effects on the San Diego County market would likely
have an adverse effct on the Bank's loans portfolio by decreasing the ability
of borrowers to meet their debt service requirements and by reducing the value
of collateral held by the Bank. See previous section titled "Economic
Conditions in the Market Area."
The Bank also originates loans guaranteed by the Small Business
Administration (SBA). The Bank sells the guaranteed portion and retains the
servicing and the unguaranteed portion. At December 31, 1995, the Bank had
approximately $737,000 of the retained unguaranteed portion of SBA loans with a
servicing portfolio of approximately $2,975,000. These unguaranteed portions
generally bear a higher than normal risk of loss.
Loan Loss Experience
The following table summarizes average loans outstanding for each of the
last two years and changes in the allowance for possible loan losses arising
from loan losses and additions to the allowance from provisions charged to
operating expense:
<TABLE>
<CAPTION>
At December 31,
1995 1994
(Dollars in Thousands)
<S> <C> <C>
Average loans outstanding $ 42,272 $ 46,979
====== ======
Allowance for loan losses
Balance at beginning of period $ 821 $ 823
Loan charged off during period ------ ------
Commercial, financial and
agricultural 258 532
Real estate -- mortgage 115 25
Installment 329 114
------ ------
Total 702 671
Recoveries during period 225 (1) 86
------ ------
Net loans charged off during period 477 585
Additions charged to operations 295 583
------ ------
Balance at end of period $ 639 $ 821
====== ======
Loan loss and quality ratios:
Net charge-offs to average loans 1.13% 1.25%
Provision for loan losses to
average loans 0.70% 1.24%
Allowance at end of period
to average loans 1.51% 1.75%
Allowance at end of period to
gross loans outstanding at end
of period 1.64% 1.77%
Allowance as percent of non-
performing loans 39.44% 32.95%
</TABLE>
(1) Recoveries (in thousands) in 1995 were $121 commercial, financial and
agricultural; $2 real estate; and $102 installment.
In determining the adequacy of the allowance for loan losses, management
considers such factors as historical loan loss experience, known problem loans,
evaluations made by regulatory agencies and its outside loan reviewer,
assessment of economic conditions, and other appropriate data to identify the
risks in the portfolio. In determining the amount of the allowance, a specific
allowance amount is assigned to those loans with identified special risks, and
the remaining loan portfolio is reviewed by category and assigned a specific
allowance percentage for inherent losses. The allocation process does not
necessarily measure anticipated future credit losses; rather, it reflects
Management's assessment at a certain date of perceived credit risk exposure
and the impact of current and anticipated economic conditions, which may or
may not result in future credit losses.
Although no assurance can be given that actual losses will not exceed the
amount provided for in the allowance, management believes that the allowance
for loan losses is adequate in light of all known relevant factors. Even if
it is adequate, however, increased costs of collection on some of these loans,
non-accrual of interest on those which are or may be placed on non-accrual, and
the possibility of further charge-offs could have an adverse impact on the
Bank's profitability in the near future. See Item 6, "MANAGEMENT'S DISCUSSION
AND ANALYSIS - Allowance and Provision for Loan Losses" for additional
information.
The following table indicates Management's allocation of the allowance for
each of the past two years:
<TABLE>
Year Ending December 31,
(Dollars in Thousands)
1995 1994
Percentage Percentage
Amount of of Total Amount of of Total
Allowance Allowance Allowance Allowance
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 260 40.7% $ 330 40.2%
Real estate & construction 184 28.8 205 25.0
Consumer 63 9.8 89 10.8
Unallocated 132 20.7 197 24.0
----- ------ ---- ----
Total $ 639 100.0% $ 821 100.0%
===== ===== ===== =====
</TABLE>
Deposits
The following table shows the average amount and average rate paid on the
categories of deposits for each of the past two years.
<TABLE>
Year Ending December 31,
1995 1994
Average Average
(Dollars in Thousands)
Amount Rate Paid Amount Rate Paid
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Non-interest bearing
demand $11,198 0.00% $11,822 0.00%
Interest bearing
demand 10,492 1.42% 11,333 1.47%
Money Market 9,176 2.52% 12,230 2.58%
Savings 5,235 2.20% 6,049 2.23%
Time 18,394 5.84% 17,740 4.10%
------ ----- ------ -----
Total $54,495 2.88% $ 59,174 2.27%
====== ===== ====== =====
</TABLE>
The following table shows the maturities of time certificates of deposits of
$100,000, or more, as of the end of the most recent year.
<TABLE>
<CAPTION>
At December 31,
1995
(Dollars in Thousands)
<S> <C>
Due in three months or less $ 1,952
Due in over three months through six months 300
Due in over six months through twelve months 200
Due in over twelve months 100
--------
Total $ 2,552
========
</TABLE>
Return on Equity and Assets
The following table sets forth Bancorp's ratios of net income to average
shareholders' equity and average total assets for each of the past two years
together with the ratio of average shareholders' equity to average total
assets.
<TABLE>
<CAPTION>
Year ending
December 31,
1995 1994
<S> <C> <C>
Return on average equity(1) nm% nm%
Return on average assets (0.01)% (1.61)%
Average equity to average assets (.14)% (.086)%
Dividend payout ratio - -
</TABLE>
(1) Return on average equity is not meaningful as the average equity for
1994 and 1995 was negative.
Short-Term Borrowings
Federal funds purchases in 1995 averaged less than 1% of shareholder's
equity. An average of $6,300 was borrowed at a weighted average interest rate
of 5.98%. During 1994, $200,000 was borrowed at 5.7% for one day.
ITEM 2. PROPERTIES
For information on Bancorp's and the Bank's properties, see Item 1,
"BUSINESS-Premises and Market Area."
ITEM 3. LEGAL PROCEEDINGS
The Bank has been subject to various legal actions which are deemed to be
part of its normal course of business. Management, after consultation with
legal counsel, believes that the ultimate liability, if any, arising from such
actions will not have a materially adverse affect on the financial position or
results of operations of the Bank or Bancorp. As of December 31, 1995, neither
the Bank nor the Bancorp had any asserted lawsuits against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Bank or Bancorp to a vote of its security
holders, through the solicitation of proxies or otherwise, during the fourth
quarter of its fiscal year ended on December 31, 1995.
PART II
ITEM 5. MARKET FOR ISSUER'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Trading in Bancorp's common stock has been very limited, and such trades
cannot be characterized as amounting to an active trading market. Bancorp's
Common Stock is traded over-the-counter, is not listed on any exchange, and is
not quoted on the NATIONAL ASSOCIATION OF SECURITIES DEALERS' AUTOMATED
QUOTATION SYSTEM ("NASDAQ "). Bancorp is aware of one security dealer which
currently handle trades in Bancorp's stock, Western Financial Corporation, San
Diego, California.
No trades in Bancorp's common stock have been reported by securities dealers
during the last two years. This does not include shares that may have been
traded directly by shareholders or through other dealers and not through
Western Financial Corporation, as to which no information is generally
available to Bancorp.
As of March 8, 1996, there were 414 shareholders of record. As of September
27, 1995, in connection with reincorporating the Company from a California
corporation to a Delaware corporation, the Company conducted in substance a
1-for-21 reverse split of its Common Stock (the Reverse Split ). As of that
date, shareholders became entitled to receive one share of new common stock for
every twenty-one share of old stock previously held. Fractional shares were
rounded up to the next higher number of whole shares.
On September 30, 1995 (i.e., after the 1:21 reverse split became effective),
the Company completed a recapitalization in which it sold newly-issued shares
constituting a controlling interest in the Company at a price of $5.82 per
share.
After the Merger but prior to the issuance of shares to the Partnership and
Direct Holders, SDN transferred to an escrow agent additional newly-issued SDN
common stock (the Escrowed Shares ) representing 3.0% of the total shares of
SDN common shares outstanding following the Closing. The Escrowed Shares are
held by the escrow agent primarily for the benefit of those persons (the
Record Date Shareholders ) who held shares of SDN common stock as of September
28, 1995 and their transferees, and secondarily for the benefit of the
Partnership and its transferees. Through the Series A (Primary) Stock Rights
(the Primary Stock Rights ), each Record Date Shareholder has a beneficial
interest in a pro rata portion of the Escrowed Shares. The Escrowed Shares
may be distributed out of escrow to the holders of the Primary Stock Rights
based upon the outcome of two separate sets of contingencies as of two future
dates: March 31, 1997 (the First Determination Date ) and September 30, 1998
(the Second Determination Date ). The Primary Stock Rights are attached to
and tradeable only in conjunction with the Record Date Shareholders shares of
SDN common stock. The holders of the Primary Stock Rights effectively hold the
voting and dividend rights on the Escrowed Shares while those shares remain in
escrow.
The Escrowed Shares available for distribution following the First
Determination Date (the First Distribution Pool ) constitute one-third of the
Escrowed Shares (i.e., 1.0% of the shares of SDN common stock outstanding
immediately after the Closing); the Escrowed Shares available for distribution
following the Second Determination Date (the Second Distribution Pool )
constitute two-thirds of the Escrowed Shares (i.e. 2.0% of the shares of SDN
common stock outstanding immediately after the Closing). The holders of the
Primary Stock Rights may receive some of all of the Escrowed Shares in the
First Distribution Pool depending upon the net losses actually suffered (and
an estimate of future losses still to be suffered) by SDNB as of the First
Determination Date with respect to all of SDNB s assets that were classified
as of the Closing and the extent towhich those losses exceed SDNB s loss
reserve for classified assets as of March 31, 1995 ($261,000). The holders of
the Primary Stock Rights may receive some or all of the Escrowed Shares in the
Second Distribution Pool depending upon the amount of losses and expenses, if
any, SDN has suffered (including accruals for future losses it expects to
suffer) as of the Second Determination Date arising out of any claims asserted
against SDN or SDNB based on facts or circumstances that occured prior to the
Closing.
Following, respectively, the First Determination Date and the Second
Determination Date and the distribution, if any, of Escrowed Shares to the
Primary Stock Right holders, any portion of the Escrowed Shares in the
applicable Distibution Pool that was not required to be distributed to the
Primary Stock Right holders will be distributed to the Partnership and the
Direct Holders pursuant to a Series A (Residual) Stock Right issued to the
Partnership as of the Closing.
The last trade prior to the merger that was reported by Western Financial
Corporation (which handles most trades of the Company's stock) occurred in
December, 1992 at $4.00 per share. No other transactions have been reported to
prior to the merger.
Dividends
Neither Bancorp nor Bank have paid any cash dividends, and it is the Board of
Directors' current policy that no cash dividends be declared by Bancorp or
Bank.Neither Bancorp nor Bank are permitted to pay any dividends without the
consent of the Federal Reserve Bank of San Francisco and the Office of the
Comptroller of the Currency. See Item 1, "BUSINESS - Supervision and
Regulation - Restrictions on Transfer of Funds to Bancorp by the Bank."
Holders of Bancorp's stock are entitled to receive dividends as and when
declared by the Board of Directors out of funds legally available therefor
underthe laws of the State of Delaware. See "BUSINESS-- Restrictions on
Transfers of Funds by Bancorp and the Bank."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On September 30, 1995, the Company completed its recapitalization. See
"BUSINESS--Bancorp"
Bancorp owns 100% of San Dieguito National Bank ("Bank"). As of December
31, 1995, Bancorp has had no significant business activities independent from
the Bank. Accordingly, the following discussion relates primarily to the
operating results and financial condition of the Bank.
In 1995, Bancorp had a consolidated net loss of $5,000 for the year ended
December 31, 1995, compared to a consolidated net loss of $989,000 for the same
period in 1994. Included in the $5,000 net loss is an extraordinary gain from
extinguishment of debt of $1,068,000 in connection with the Recapitalization.
Bancorp's loss before extraordinary item for the year ended December 31, 1995
was $1,073,000 versus a net loss of $989,000 for the same period in 1994. The
increase in the loss before extraordinary item in 1995 is due to a $358,000
increase in non-interest expense, and a $44,000 decrease in net interest
income, partially offset by a $288,000 decrease in the provision for loan
losses and a $30,000 increase in non-interest income. Net loss per share
(after adjustment for extraordinary item) was $.02 in 1995, compared to a
net loss per share of $18.41 in 1994.
The net loss before extraordinary items of $989,000 in 1994 is a decrease
of $987,000, or 49.9%, from the net loss of $1,976,000 in 1993. Loss per
share was $18.41 in 1994 compared to a loss per share of $36.78 in 1993,
adjusted for the reverse stock split and stock dividends which occured on
September 27, 1995.
Average interest earning assets in 1995 were approximately $50.3 million, a
decrease of $3.6 million, or 6.7%, from the 1994 average. Total assets was
$55.9 at December 31, 1995 compared to total assets of $57.7 at December 31,
1994. Total assets of $55.9 million at December 31, 1995 is inclusive of the
$3.2 million received as a result of the Recapitalization.
Average loans for 1995 were approximately $42.3 million, a decrease of $4.7
million, or 10.0%, from the average for 1994. Total loans at December 31,
1995 were $39.0 million compared to $46.3 million at December 31, 1994. This
$7.3 million decrease was primarily a result of a $2.7 million decrease in
commercial loans and a $2.9 million decrease in real estate and construction
loans.
Average deposits in 1995 were approximately $54.5 million (excluding
Bancorp's deposit account which is eliminated in consolidation), a decrease of
$4.7 million, or 7.9%, from the average for 1994. Total deposits decreased
to $51.4 million at December 31, 1995 compared to $55.9 million at December 31,
1994. This $4.5 million decrease is primarily due to a $3.1 million decrease
in savings deposits (including money market) and a $2.6 million decrease in
certificates of deposits, partially offset by a $1.3 million increase in
demand deposits.
Average interest earning assets decreased approximately $4.8 million, or
8.2% between 1993 and 1994, from $58.7 million in 1993 to $53.9 million in
1994.Average loans decreased approximately $2.2 million, or 4.5% between 1993
and 1994, from $49.2 million in 1993 to $47.0 million in 1994. Average Federal
funds sold decreased approximately $1.8 million, or 58.1%, from $3.1 million
in 1993 to $1.3 million in 1994.
Average deposits decreased approximately $3.8 million, or 6.0% between 1993
and 1994, from $62.9 million in 1993 to $59.2 million in 1994. Demand deposits
decreased approximately $2.1 million, or 15.1% between 1993 and 1994, from
$13.9 million in 1993 to $11.8 million in 1994. Interest bearing deposits
decreased approximately $1.7 million, or 3.4% from $49.0 million in 1993 to
$47.3 million in 1994.
Net Interest Income and Net Interest Margin
In 1995, Bancorp's net interest income decreased $44,000 due to an increase
of $222,000 in interest expense, partially offset by an increase of $178,000 in
interest income. Interest expense increased primarily due to an increase in the
average rate paid on interest-bearing liabilities that rose from 3.10% in 1994
to 3.88% in 1995, partially offset by a decrease in total interest-bearing
liabilities. Interest income increased primarily due to an increase in the
average yield earned on interest-earning assets, that rose to 9.08% in 1995
from 8.15% in 1994, partially offset by a decrease in total interest-earning
assets. As a result of these factors, the net yield earned on interest earning
assets increased from 5.31% in 1994 to 5.60% in 1995.
In 1994, Bancorp's net interest income decreased $133,000 due to a $165,000
decrease in interest income partially offset by a $32,000 decrease in interest
expense. The decrease in interest income was primarily due to a reduction in
loan volume and overall earning assets and was partially offset by higher rates
earned on earning assets that increased from 7.76% in 1994 to 8.15% in 1994.
Interest expense decreased primarily from a decrease in interest bearing
liabilities and was partially offset by an increase in rates paid on interest
bearing liabilities that rose from 3.07% in 1993 to 3.10% in 1994.
Loan fee income decreased $26,000 from $130,000 in 1994 to $104,000 in
1995. Loan fees were $238,000 in 1993. This decrease reflects the decline in
local real estate and construction lending.
Allowance and Provision for Loan Losses
The provision for loan losses is an expense charged against operating
income and added to the allowance for loan losses. The allowance for loan
losses represents the amounts which have been set aside for the specific
purpose of absorbing losses which may occur in the Bank's loan portfolio.
Management of the Bank continues to carefully monitor the allowance for loan
losses in relation to the size of the Bank's loan portfolio and known risks
or problem loans.
The allowance for loan losses was $639,000, or 1.6% of gross loans, at
December 31, 1995, compared to $821,000, or 1.8%, of gross loans at December
31, 1994 and $823,000, or 1.7%, of gross loans for the same period in 1993.
The provision for loan losses for the year ended December 31, 1995 was
$295,000, compared to $583,000, for the same period in 1994, and $1,085,000
for the same period in 1993.
At December 31, 1995, $28.3 million, or 73%, of total loans were secured by
deeds of trust on real estate. This includes loans to companies or individuals
for business purposes which are also secured by real estate. The Bank, like
other banks, also makes a number of loans to companies and individuals which
are secured by other collateral or based solely upon the cash flow, income,
character and/or net worth of the borrower. At December 31, 1995, the Bank
had $10.7 million or 27% of total loans in this category. The majority of
these loans are collateralized by business property, personal property and/or
governmental agency guarantees. The collection of these loans is more
dependent upon the borrower's financial capability at maturity than loans
that are secured by real estate.
Non-performing loans and other real estate owned ("OREO") at December 31,
are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
(Dollars in thousands)
<S> <C> <C>
Loans past due 90 days and still
accruing $ 46 $ 826
Loans on non-accrual 1,574 1,666
----- -----
Total non-performing loans $1,620 $2,492
===== =====
As a percent of total loans 4.2% 5.4%
===== =====
OREO 1,411 1,288
----- -----
Total non-performing assets $3,031 $3,780
===== =====
As a percent of total assets 5.4% 6.5%
===== =====
</TABLE>
The $1,574,000 in loans on non-accrual at December 31, 1995 consists of
twenty-six loans of which twenty loans totaling 93% of the total amount are
secured by real estate. Thirteen of these loans totaling $213,000 are FHA
guaranteed loans. At December 31, 1994, the $1,666,000 in loans on non-accrual
consisted of sixteen loans, of which seven loans totaling 88% of the total
dollar amount were secured by real estate. Loans on non-accrual status totaled
$1,446,000 at December 31, 1993.
Using the peer group of all banks headquartered in San Diego County with
total assets less than $500 million as of September 30, 1995, the most recent
peer group data available, the ratio of the allowance for loan losses to non-
performing loans was 67% for such regional peer group compared to the Bank's
ratio of 52%. At December 31, 1995, the same ratio for the Bank was 39% as a
result of a $182,000 decrease in the allowance for loan losses and a $29,000
decrease in non-performing loans at December 31, 1995 compared to September 30,
1995. This decrease in the allowance for loan losses was largely due to net
loan charge offs of $263,000 during the fourth quarter of 1995. As of
September 30, 1995, non-performing loans as a percentage of total loans was 3%
for the regional peer group compared to the Bank's percentage of 4%. The
Bank's percentage remained at 4% as of December 31, 1995.
The OREO balance of $1,411,000 at December 31, 1995 is comprised of three
properties. Three properties with a total carrying value of $1,052,000 were
added to OREO in 1995 as a result of foreclosure, three properties with a total
carrying value of $476,000 were sold in 1995, and five properties were written
down by $453,000. All of the OREO properties are recorded at amounts which are
equal to or less than the market value based on current independent appraisals
reduced by estimated selling costs.
A portion of the non-performing loans represents the Bank's willingness to
allow loans to go into default in order to pursue collection efforts rather
than to grant liberal loan renewals. As discussed above, most of the
non-performing loans are secured by real estate.
Given the current local economic conditions and the importance of real
estate values to the Bank's loan portfolio, it is possible the level of non-
performing loans may increase until the local economy improves significantly.
Current collection and foreclosure activities could likely result in additional
non-accrual and OREO amounts. See "Economic Considerations".
The calculation of the adequacy of the allowance for loans losses requires
the use of management estimates. These estimates are inherently uncertain and
depend on the outcome of future events. Management's estimates are based upon
previous loan loss experience, current economic conditions as well as the
volume, growth and composition of the loan portfolio, the estimated value of
collateral and other relevant factors. The Bank's lending is concentrated in
Southern California, which has experienced adverse economic conditions,
including declining real estate values. These factors have adversely affected
borrowers' ability to repay loans. Although management believes the level of
the allowance as of December 31, 1995 is adequate to absorb losses inherent in
the loan portfolio, additional decline in the local economy may result in
increasing losses that cannot reasonably be predicted at this date. The
possibility of increased costs of collection, non-accrual of interest on those
which are or may be placed on non-accrual, and further charge-offs could have
an adverse impact on the Bank's and Bancorp's financial condition in the
future.
Non-Interest Income
Non-interest income increased by $30,000 in 1995 compared to 1994. This
was primarily due to $60,000 of legal costs reimbursed from a loan recovery.
Non-interest income increased $11,000, or 1.7%, from $655,000 in 1993 to
$666,000 in 1994, due to an increase in gain on sale of OREO, partially
offset by a decrease in deposit service charges.
Non-Interest Expense
Non-interest expense increased $358,000 in 1995 compared to 1994. This
increase is largely comprised of a $309,000 increase in losses and carrying
costs of OREO, $86,000 of other expense recorded in June 1995 as a result of
the May 1995 OCC examination, and $50,000 of accrued operational expenses
relating to changes contemplated as a part of the Recapitalization. These
increases in non-interest expense were offset by a $94,000 decrease in salaries
and employee benefits and a $16,000 decrease in occupancy and equipment
expenses. Non-interest expense decreased $607,000 from 1993 to 1994. A
primary factor for this decrease was the closing of the La Costa office in
August, 1993.
Although the Bank took a number of actions to reduce non-interest expenses
and increase non-interest income in the past, the Bank continues to evaluate
ways to realize even greater efficiency and ways to reduce overhead costs.
Since many of the Bank's costs are fixed, their impact on the overhead ratio
cannot be substantially improved without a significant increase in the Bank's
size.
Provision for Income Taxes
As a result of a net operating loss for 1995, is no provision for Federal
or California income tax was made during 1995. Prior to the sale of the Shares
to the New Investors on September 30, 1995 (see "Capital Resources", below),
Bancorp had a substantial Federal net operating loss carryforward ("NOL")
available to offset income earned in future periods. As expected, the sale of
the Shares resulted in an "ownership change" for federal income tax purposes
under Section 382 of the Internal Revenue Code, which substantially limits
Bancorp's ability to utilize that NOL against future income and will result in
higher tax costs during future periods than would have been incurred had the
sale of the Shares not taken place. Because of the change in Bancorp's
ownership resulting from the Recapitalization, an annual limitation of
approximately $300,000 has been placed on the amount of net operating loss
carryforward generated prior to the ownership change which can be utilized for
Federal and California State taxes.
Capital Resources
As of September 30, 1995, Bancorp completed the Recapitalization
contemplated by the July 21, 1995 Stock Purchase Agreement by and among
Bancorp--CA, the Bank and Dartmouth Capital Group, L.P. In accordance with the
terms of the Stock Purchase Agreement, effective as of September 30, 1995,
Bancorp issued and sold a total of 841,739 shares (the "Shares") of Common
Stock to the Partnership and the Direct Holders. The aggregate consideration
paid for the Shares was $4,900,000 million in cash. After transaction costs of
$406,000, Bancorp realized net proceeds of $4,494,000. The Shares represent,
in the aggregate, 94% of the shares of Common Stock outstanding immediately
after such issuance. Depending upon the outcome of certain future
contingencies described in the Stock Purchase Agreement, the Partnership could
receive additional sharesof Bancorp common stock currently being held in
escrow, thereby increasing its collective interest to as much as 97% of the
outstanding shares of common stock of Bancorp. Alternatively, also depending
upon the outcome of those contingencies, the Common Stock now in escrow will be
distributed to the Record Date Holders.
As contemplated by the Stock Purchase Agreement, the purchase of the Shares
was conditioned upon, among other things, the prior consummation of the Merger
and forgiveness of a total of $1,068,000 of principal and accrued interest with
respect to certain of Bancorp's subordinated debentures and senior debt. See
"BUSINESS--Acquisitions" for a description of the funding for the Liberty and
Commerce Acquisitions.
Current risk-based regulatory capital standards generally require banks and
holding companies to maintain a ratio of "core" or "Tier 1" capital
(consisting principally of common equity) to risk-weighted assets of at least
4%, the ratio of Tier 1 capital to adjusted total assets (leverage ratio) of at
least 3% and a ratio of total capital (which includes Tier 1 capital plus
certain forms of subordinated debt, a portion of the allowance for loan losses,
and preferred stock) to risk-weighted assets of at least 8%. Risk-weighted
assets are calculated by multiplying the balance in each category of assets
according to a risk factor which ranges from zero for cash assets and certain
government obligations to 100% for some types of loans, and adding the products
together.
Prior to September 30, 1995, the Bank was considered "significantly
undercapitalized" under the Prompt Corrective Action provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and would be
considered "critically undercapitalized" if its ratio of tangible equity to
total assets should equal or be less than 2%. At August 31, 1995, the Bank's
such ratio was 2.04%. See "Administrative Proceedings". As part of the
Recapitalization, Bancorp contributed approximately $3.2 million of capital to
the Bank.
The following is a summary of Bancorp's and the Bank's capital ratios at
December 31, 1995.
<TABLE>
<CAPTION>
December 31, Minimum
Requirement
Bank Bancorp
----- ------- -----------
<S> <C> <C> <C>
Total Risk-Based Capital 10.7% 11.3% 8.0%
Tier 1 Risk-Based Capital 9.4% 8.7% 4.0%
Leverage Ratio 6.8% 6.3% 3.0%-5.0%
</TABLE>
As of December 31, 1995, the Bank was considered "well capitalized" under
the Prompt Corrective Action Provisions.
Liquidity
The Bank relies on deposits as its principal source of funds and,
therefore,must be in a position to service depositors' needs as they arise.
Management of the Bank attempts to maintain a loan-to-deposit ratio of not
greater than 80% and a liquidity ratio (liquid assets, including cash and due
from banks, Federal funds sold and investment securities to deposits) of
approximately 20%. The average loan-to-deposit ratio was 78% in 1995, 79% in
1994 and 76% in 1993 . The average liquidity ratio was 22% in 1995, 20% in
1994, and 23% in 1993. At December 31, 1995, the Bank's liquidity ratio was
28% as a result of the Recapitalization and Bancorp's contribution of
additional capital to the Bank. While fluctuations in the balances of a few
large depositors cause temporary increases and decreases in liquidity from time
to time, the Bank has not experienced difficulty in dealing with such
fluctuations from existing liquidity sources.
Should the level of liquid assets (primary liquidity) not meet the
liquidity needs of the Bank, other available sources of liquid assets
(secondary liquidity), including the purchase of Federal Funds, sale of
repurchase agreements, sale of loans, and the discount window borrowing from
the Federal Reserve Bank, could be employed. The Bank has rarely used these
sources in the past since its liquidity levels have been maintained primarily
through funds provided by deposits.
Bancorp's liquidity needs are primarily limited to debt service. Bancorp
has sufficient funds in order meet its debt service requirements.
Economic Considerations
Approximately 74% of the Bank's loan portfolio at December 31, 1995
consisted of short-term loans tied to a floating interest rate which changes at
least annually (41% is tied to a daily floating prime rate). This loan
portfolio mix enables the Bank to adjust its yields quickly in a changing
interest rate environment. The Bank's assets are more sensitive to interest
rate changes than its liabilities. This is partly because it has more non-
interest bearing liabilities (demand deposits and capital) than non-interest
earning assets. Given these circumstances and absent other factors, declining
market rates of interest will generally have a negative impact on the Bank's
net interest income, while rising interest rates will have a positive effect.
The Bank concentrates on serving the needs of small and medium-size
businesses, professionals and individuals located in the San Diego County area
of California. The general economy in this market area, and particularly the
real estate market, is slowly recovering from the results of a prolonged
recession that has adversely affected the ability of certain borrowers of the
Bank to perform their obligations to the Bank. In addition, problems with the
Mexican peso may continue to adversely affect cross-border traffic, which also
will adversely affect the ability of certain borrowers to perform their
obligations to the Bank.
The assessment of recent economic reports and the current economic
environment in Bancorp's market areas are encouraging. Local economists have
stated they believe the San Diego economy has stopped its decline and feel we
have experienced a modest recovery during 1995 with the outlook for the first
part of 1996 being positive.
The financial condition of the Bank has been, and is expected to continue
to be, affected by overall general economic conditions and the real estate
market in California. The future success of the Bank is dependent, in large
part, uponthe quality of its assets. Although management of the Bank has
devoted substantial time and resources to the identification, collection and
workout of nonperforming assets, the real estate markets and the overall
economy in California are likely to have a significant effect on the Bank's
assets in future periods and, accordingly, Bancorp's financial condition and
results of operations.
Inflation
The majority of Bancorp's assets and liabilities are monetary items held by
the Bank, the dollar value of which is not affected by inflation. Only a small
portion of total assets is in premises and equipment. The lower inflation rate
of recent years did not have the positive impact on the Bank that was felt in
many other industries. The small fixed asset investment of Bancorp minimizes
any material misstatement of asset values and depreciation expenses which may
result from fluctuating market values due to inflation. A higher inflation
rate, however, may increase operating expenses or have other adverse effects on
borrowers of the Bank, making collection more difficult for the Bank. Rates of
interest paid or charged generally rise if the marketplace believes inflation
rates will increase.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements
Page
No.
Report of Independent Accountants
Financial Statements of SDN Bancorp and subsidiary F1
Consolidated Statements of Condition December 31, 1995 and
1994 F3
Consolidated Statements of Operations - Years ended
December 31, 1995, 1994 and 1993 F4
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1995, 1994 and 1993 F5
Consolidated Statements of Cash Flows - Years ended
December 31, 1995, 1994 and 1993 F6
Notes to Consolidated Financial Statements -
December 31, 1995, 1994 and 1993 F7
All financial statement schedules are omitted because they are not
applicable, not material, or because the information is included in the
financial statements or notes thereto.
Report of Independent Accountants
February 2, 1996,
except as to Note 18,
which is as of February 29, 1996
To the Board of Directors and Shareholders of
SDN Bancorp, Inc. and Subsidiary
In our opinion, the accompanying consolidated statement of
condition and the related consolidated statements of operations, of
shareholders' equity (deficit) and of cash flows present fairly, in
all material respects, the financial position of SDN Bancorp, Inc.
(formerly known as SDN Bancorp) and its subsidiary at December 31,
1995, and the results of their operations and their cash flows for
the year in conformity with generally accepted accounting
principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with
generally accepted auditing standards which 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, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for the opinion expressed above. The financial statements of
SDN Bancorp and subsidiary for the years ended December 31, 1994
and 1993 were audited by other independent accountants whose report
dated February 3, 1995, did not express an opinion on the
statements for the year ended December 31, 1994 because
of doubt about SDN Bancorp's subsidiary's ability to continue as a
going concern and expressed an unqualified opinion on the
statements for the year ended December 31, 1993.
Price Waterhouse LLP
SDN BANCORP, INC AND SUBIDIARY
Consolidated Statements of Condition
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Assets
Cash and due from banks (Note 3) $ 3,640,000 $ 2,842,000
Federal funds sold 2,300,000 -
---------- ----------
Total cash and cash equivalents 5,940,000 2,842,000
Interest-bearing deposits in
other financial institutions 989,000 1,078,000
Held-to-maturity investment
securities, at amortized cost,
approximate fair value:
1995 - $7,057,000;
1994 - $4,450,000; (Note 4) 7,009,000 4,535,000
Loans 38,977,000 46,313,000
Less allowance for loan losses 639,000 821,000
---------- ----------
Loans, net (Notes 5, 6 and 7) 38,338,000 45,492,000
Premises and equipment, net (Note 8) 597,000 779,000
Real estate acquired through
foreclosure, net (Note 9) 1,411,000 1,288,000
Accrued interest receivable and
other assets 1,621,000 1,672,000
---------- ----------
$55,905,000 $57,686,000
========== ==========
Liabilities and Shareholders'
Equity (Deficit)
Deposits (Note 10):
Demand:
Non-interest-bearing $13,445,000 $12,570,000
Interest-bearing 10,582,000 10,206,000
Savings:
Regular 4,714,000 6,110,000
Money market 8,558,000 10,234,000
Time:
Under $100,000 11,580,000 12,212,000
$100,000 or more 2,552,000 4,544,000
---------- ----------
Total deposits 51,431,000 55,876,000
Accrued expenses and other
liabilities 396,000 864,000
Notes payable (Note 2) - 675,000
Mandatory convertible debentures
(Notes 2 and 11) 537,000 1,219,000
---------- ----------
Total liabilities 52,364,000 58,634,000
Commitments and contingencies
(Note 16)
Shareholders' equity (deficit)
(Note 2):
Preferred stock; $.01 par value;
1,000,000 shares authorized; no
shares issued and outstanding at
December 31, 1995 and 1994 - -
Common stock, $.01 par value;
5,000,000 shares authorized 895,467
issued and outstanding at December
31, 1995 9,000 -
Common stock, no par value;
10,000,000 shares authorized;
564,145 issued and outstanding
at December 31, 1994 - -
Additional paid-in capital 7,593,000 2,951,000
Accumulated deficit (4,061,000) (3,899,000)
----------- -----------
Total shareholders' equity
(deficit) 3,541,000 (948,000)
----------- -----------
$55,905,000 $57,686,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
SDN BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $4,086,000$4,044,000 $4,109,000
Interest on investment
securities, substantially all
taxable 311,000 247,000 290,000
Interest on Federal funds sold 117,000 56,000 87,000
Interest on deposits in financial
institutions 54,000 43,000 69,000
--------- --------- ---------
Total interest income 4,568,000 4,390,000 4,555,000
--------- --------- ---------
Interest expense:
Demand deposits 149,000 167,000 176,000
Savings deposits 346,000 451,000 554,000
Time deposits (Note 10) 1,075,000 727,000 670,000
Debentures and other 181,000 184,000 161,000
--------- --------- ---------
Total interest expense 1,751,000 1,529,000 1,561,000
--------- --------- ---------
Net interest income 2,817,000 2,861,000 2,994,000
Provision for loan losses
(Note 7) 295,000 583,000 1,085,000
--------- --------- ---------
Net interest income after
provision for loan losses 2,522,000 2,278,000 1,909,000
--------- --------- ---------
Non-interest income:
Service charges 464,000 464,000 494,000
Other income 232,000 202,000 161,000
--------- --------- ---------
Total non-interest income 696,000 666,000 655,000
--------- --------- ---------
Non-interest expenses:
Salaries and employee benefits 1,811,000 1,905,000 2,052,000
Professional, regulatory and
other services 346,000 335,000 434,000
Occupancy and equipment (Note 16) 861,000 877,000 988,000
Legal 113,000 124,000 244,000
Insurance 114,000 117,000 128,000
Losses and carrying costs of real
estate acquired through foreclosure
(Note 9) 531,000 222,000 182,000
Other 515,000 353,000 512,000
--------- --------- ---------
Total non-interest expenses 4,291,000 3,933,000 4,540,000
Loss before income tax benefit
and extraordinary item (1,073,000) (989,000)(1,976,000)
Income tax benefit (Note 15) 443,000 - -
--------- --------- ----------
Loss before extraordinary item
(Note 2) (630,000) (989,000)(1,976,000)
Extraordinary Item:
Gain from forgiveness of
indebtness, net of $443,000
income taxes (Note 2) 625,000 - -
--------- ---------- ---------
Net loss $ (5,000)$(989,000)(1,976,000)
========= ========= ==========
Net income (loss) per common share:
Loss before extraordinary item $ ( 2.35)$ (18.41) $ (36.78)
Extraordinary item - gain from
forgiveness of indebtness, net 2.33 - -
--------- --------- ----------
Net loss $ (.02)$ (18.41) $ (36.78)
========= ========= ==========
</TABLE>
See notes to consolidated financial statements.
SDN BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity (Deficit)
For the Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Additional
Number of Common Paid-in Accumulated
Shares Stock Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Balance at
December 31,
1992 564,145 $2,951,000 $ - (934,000) 2,017,000
Net loss - - - (1,976,000)(1,976,000)
-------- --------- --------- --------- ---------
Balance at
December 31,
1993 564,145 2,951,000 - (2,910,000) 41,000
Net loss - - - (989,000) (989,000)
-------- --------- --------- --------- ---------
Balance at
December 31,
1994 564,145 2,951,000 - (3,899,000) (948,000)
Merger and
reverse stock
split(1 for 21)
(Note 12) (537,281)(2,951,000) 2,951,000 - -
Stock
dividend
(Note 2) 26,864 1,000 156,000 (157,000) -
Issuance of
common stock 841,739 8,000 4,486,000 - 4,494,000
Net loss - - - (5,000) (5,000)
------- ---------- --------- ---------- ---------
Balance at
December 31,
1995 895,467 $9,000 $7,593,000(4,061,000) 3,541,000
======= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
SND BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
For the years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Operating activities:
Net loss $ (5,000) $ (989,000)$(1,976,000)
Adjustments to reconcile net
loss to net cash provided (used)
by operating activities:
Provision for loan losses and
real estate acquired through
foreclosure 678,000 715,000 1,171,000
Depreciation and amortization 201,000 204,000 227,000
Decrease (increase) in accrued
interest receivable 15,000 (43,000) 70,000
Increase (decrease) in accrued
interest payable (183,000) 146,000 33,000
Extraordinary item - gain on
forgiveness of indebtness,
net (625,000) - -
Deferred income tax benefit (443,000) - -
Other - net 188,000 223,000 79,000
---------- --------- ----------
Net cash (used) provided
by operating activities (174,000) 256,000 (396,000)
--------- ---------- ----------
Investing activities:
Net decrease in interest-bearing
deposits in other financial
institutions 89,000 191,000 389,000
Purchases of held-to-maturity
investment securities (5,890,000)(3,110,000) (250,000)
Proceeds from maturities of
held-to-maturity investment
securities 3,416,000 2,945,000 676,000
Net decrease in loans 5,807,000 923,000 4,902,000
Net purchases of premises
and equipment (19,000) (62,000) (73,000)
Proceeds from sales of real
estate acquired through
foreclosure 476,000 1,277,000 844,000
--------- --------- --------
Net cash provided by investing
activities 3,879,000 2,164,000 6,488,000
--------- --------- ---------
Financing activities:
Net decrease in deposits (4,445,000)(3,775,000)(16,498,000)
Repayment of notes payable (656,000) - (100,000)
Net proceeds from issuance
of notes payable - 14,000 211,000
Proceeds from issuance of
common stock 4,494,000 - -
---------- --------- -----------
Net cash used by
financing activities (607,000)(3,761,000)(16,387,000)
---------- ----------- ------------
Net increase (decrease)
in cash and cash
equivalents 3,098,000 (1,341,000)(10,295,000)
Cash and cash equivalents
at beginning of year 2,842,000 4,183,000 14,478,000
--------- --------- ----------
Cash and cash equivalent
at end of year $5,940,000 $2,842,000 $4,183,000
========== ========== ==========
Supplemental Disclosure
of Cash Flow Activities:
Cash paid for income taxes $ 2,000 $ 2,000 $ 2,000
========== ========== ==========
Cash paid for interest $1,673,000 $1,384,000 $1,528,000
========== ========== ==========
Supplemental Disclosure of
Non-Cash Flow Activities:
Loans transferred to
real estate acquired
through foreclosure $ 982,000 $1,251,000 $1,537,000
========== ========== ==========
Other real estate sold
and financed by Bank $ 371,000 $ 377,000 $ -
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
SDN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1995, 1994, and 1993
NOTE 1 - SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
SDN Bancorp, Inc., a Delaware corporation, is sole owner of San
Dieguito National Bank ("Bank"), a federally-chartered commercial
bank.
Nature of Operations
The Bank operates two branches in a suburban community of San Diego
County, California. The Bank's primary source of revenue is
providing commercial banking services to customers, who are
predominately small and middle-market businesses and individuals.
Use of Estimates in Preparation of Financial Statements
The accounting and reporting policies of SDN Bancorp, Inc. and
subsidiary ("Bancorp") are in accordance with generally accepted
accounting principles and conform to prevailing practices within
the banking industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. A summary of the significant accounting policies used
in the preparation of these financial statements follows.
Risks and Uncertainties
In the normal course of its business, the Bank encounters two
significant types of risk: economic and regulatory. Economic risk
is comprised of three components - interest rate risk, credit risk
and market risk. The Bank is subject to interest rate risk to the
degree that its interest-bearing liabilities mature and reprice at
different speeds, or on a different basis, than its
interest-bearing assets. Credit risk is the risk of default on the
Bank's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk
results from changes in the value of assets and liabilities which
may impact, favorably or unfavorably, the realizability of those
assets and liabilities.
The Bank is subject to regulations of various governmental
agencies. These regulations can and do change significantly from
period to period. The Bank also undergoes periodic examinations by
the regulatory agencies, which may subject it to changes in asset
valuations, in amounts of required loss allowances and in operating
restrictions resulting from the regulators' judgments based on
information available to them at the time of their examination.
Principles of Consolidation
The consolidated financial statements of the SDN Bancorp, Inc.
include the accounts of the Bank after elimination of all material
intercompany transactions and accounts.
Investment Securities
During 1994, the Bank adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"), which requires investments to be
classified into three categories: held-to-maturity, trading, or
available-for-sale. SFAS 115 requires that debt securities that
the Bank has the positive intent and ability to hold to maturity be
classified as held to maturity. At December 31, 1995 and 1994, the
Bank classified all of its investment securities as
held-to-maturity.
Held-to-maturity investment securities are carried at cost,
adjusted for the amortization of premiums and the accretion of
discounts. Premiums and discounts are amortized and accreted to
operations using the straight-line method which management believes
approximates the interest method. Management has the intent and
the Bank has the ability to hold these assets as long-term
investments until their expected maturities. Under certain
circumstances (including the significant deterioration of the
issuer's credit worthiness or a significant change in tax-exempt
status or statutory or regulatory requirements), securities held to
maturity may be sold or transferred to another classification.
Gains and losses realized on sales of investment securities are
generally determined on the specific identification method and are
included in other income.
Loans and Loan Fees
Loans are stated at the principal amount outstanding, net of
unearned discounts and fees. Loan origination fees and certain
direct costs are deferred and recognized as an element of interest
income over the life of the related loans. Net deferred loan
origination fees were $45,000 and $54,000 at December 31, 1995 and
1994, respectively.
Allowance for Loan Losses
A provision for possible losses on loans is charged to expense
when, in the opinion of management, such losses are expected to be
incurred or are inherent in the portfolio. Losses on loans secured
by real estate are usually indicated when the fair value of the
underlying security is estimated to be less than the carrying value
of the loan.
The accompanying consolidated financial statements require the use
of management estimates to calculate the allowance for loan losses.
These estimates are inherently uncertain and their accuracy
dependson the outcome of future events. Management's estimates are
based upon previous loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio,
the value of collateral, and other relevant factors. The Bank's
lending is concentrated in Southern California which has recently
experienced adverse economic conditions including declining real
estate values. These factors have adversely affected borrowers'
ability to repay loans. Although management believes the level of
the allowance as of December 31, 1995 and 1994 is adequate to
absorb losses inherent in the loan portfolio, additional decline in
the local economy may result in increasing losses that cannot
reasonably be predicted at this time. Such losses may also result
in unanticipated reduction of the Bank's capital.
During 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS 114") as amended by SFAS 118, "Accounting for Loan
Impairment-Income Recognition and Disclosures" ("SFAS 118"). Under
SFAS 114, a loan is deemed to be impaired when, based on current
information and events, it is probable that a creditor may not
collect amounts due according to the original contractual terms of,
and as scheduled in, the original loan agreement. SFAS 114
requires that impaired loans be measured using one of the following
methods: (i) the present value of expected cash flows discounted at
the loan's effective interest rate; (ii) the observable value of
the loan's market price; or (iii) the fair value of the collateral
if the loan is collateral dependent. The effect of adoption of
SFAS 114 on the Bank's financial position and results of operations
was not considered by management to be significant. Cash receipts
from impaired loans placed on non-accrual status are first applied
to reduce principal.
Nonperforming Loans and Past Due Loans
Included in the nonperforming loan category are loans which have
been categorized by management as nonaccrual, because collection of
interest is doubtful, and loans which have been restructured to
provide a reduction in the interest rate or a deferral of interest
or principal payments.
When the payment of principal or interest on a loan is delinquent
for 90 days, or earlier in some cases, the loan is placed on
nonaccrual status, unless the loan is in the process of collection
and the underlying collateral fully supports the carrying value of
the loan. If the decision is made to continue accruing interest on
the loan, periodic reviews are made to confirm the accruing status
of the loan. When a loan is placed on nonaccrual status, interest
accrued during the current year prior to the judgment
of uncollectibility is charged to operations. Generally, any
payments received on nonaccrual loans are applied first to
outstanding loan amounts and next to the recovery of charged-off
loan amounts. Any excess is treated as recovery of lost interest.
Restructured loans are those loans on which concessions in terms
have been granted because of a borrower's financial difficulty.
Interest is generally accrued on such loans in accordance with the
new terms.
Premises and Equipment
Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation on
furniture,fixtures, and equipment is computed using the
straight-line method over the estimated useful lives, which range
from two to fifteen years. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of
the improvements or the remaining lease term, whichever is shorter.
Expenditures for betterments and major repairs are capitalized
and ordinary maintenance and repairs are charged to operations
as incurred.
Real Estate Acquired Through Foreclosure
The Bank records real estate acquired through foreclosure or "deed
in lieu of" as the lesser of the outstanding loan amount or fair
value less estimated costs to sell, at the time of foreclosure.
Any resulting loss on foreclosure is charged to the valuation
allowance for loan losses and a new basis is established in the
property. A valuation allowance is established to reflect declines
in value subsequent to foreclosure, if any, below the new basis.
Required developmental costs associated with foreclosed property
under construction are capitalized and considered in determining
the fair value of the property. Operating expenses of such
properties, net of related income, and gains and losses on their
disposition are included in other non-interest expenses.
Income Taxes
The Bancorp provides for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109).
Under the liability method which is prescribed by SFAS 109, a
deferred tax asset and/or liability is computed for both the
expected future impact of differences between the financial
statement and tax bases of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and tax
credit carryforwards. SFAS 109 also requires the establishment of
a valuation allowance, if necessary, to reflect the likelihood of
realization of deferred tax assets. The effect of tax rate changes
are to be reflected in income in the period such changes are
enacted.
Deferred income taxes are provided by applying statutory tax rates
in effect at the balance sheet date to temporary differences
between the book basis and the tax basis of assets and liabilities.
The resulting deferred tax assets and liabilities are adjusted to
reflect changes in tax laws or rates. The deferred tax assets have
been fully reduced by a valuation allowance as management believes
that it is more likely than not that the deferred tax assets will
not be realized.
Cash Equivalents
Cash and cash equivalents include cash, amounts due from banks, and
Federal funds sold. Generally, Federal funds are sold for a
one-day period.
Earnings Per Share
Earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the
year and dilutive common stock equivalents. The weighted average
number of common shares used to compute earnings per share was
268,198 for the year ended December 31, 1995 and 53,728 for both
the years ended 1994 and 1993. All per share amounts have been
restated to give effect to the one for twenty-one reverse stock
split and the 26,864 common stock dividend declared during
September 1995.
The assumed conversion of the mandatory convertible debentures
("Debentures") is anti-dilutive for the years ended December 31,
1995, 1994 and 1993. Therefore, primary loss per share and loss
per share assuming full dilution are the same for those years.
NOTE 2 - MERGER AND RECAPITALIZATION
On September 27, 1995, SDN Bancorp ("Bancorp-CA"), a California
corporation, reincorporated under Delaware law through a merger
("Merger") with SDN Bancorp, Inc. ("Bancorp"), a Delaware
corporation and wholly-owned subsidiary of Bancorp-CA, with Bancorp
constituting the surviving corporation. In connection with the
Merger, each Bancorp-CA shareholder received one share of common
stock (the "Common Stock") of Bancorp for twenty-one shares of
common stock of Bancorp-CA.
On September 28, 1995, in accordance with the Stock Purchase
Agreement as defined below, Bancorp placed an additional 26,864
shares into escrow, to be distributed, either partially or
entirely, to the holders of the shares of Common Stock outstanding
as of September 28, 1995, or to the New Investors, as defined
below, depending upon the outcome of certain contingencies. The
rights to receive the additional shares in escrow are not
detachable from the shares of common stock. The placing of these
shares into escrow has been accounted for as a stock dividend.
On September 30, 1995, Bancorp issued and sold a total of 841,739
shares (the "Shares") of Common Stock to a Partnership
("Partnership") and certain investors in the Partnership
(collectively, "New Investors") in accordance with a Stock Purchase
Agreement dated July 21, 1995 ("Stock Purchase Agreement"). The
aggregate consideration paid for the Shares was $4,900,000 in cash.
After transaction costs of $406,000, Bancorp realized net proceeds
of $4,494,000. The Shares represent, in the aggregate, 94% of the
shares of Common Stock outstanding immediately after such issuance.
If the New Investors ultimately receive all of the additional
shares of Common Stock held in escrow, their interest will increase
to 97% of the outstanding shares of common stock.
As contemplated by the Stock Purchase Agreement, the purchase of
the Shares was conditioned upon, among other things, the prior
consummation of the Merger and forgiveness of indebtness of
$1,068,000, net of tax of $443,000. Debt forgiven consisted of
$682,000 of debentures, $19,000 of notes payable and $367,000 of
accrued interest and advances from directors. The aggregate amount
of forgiven debt has been reflected as an extraordinary gain in the
Statement of Operations. In addition, between September 30, 1995
and October 12, 1995, $656,000 in principal plus $102,000 of
accrued interest on notes payable was repaid from the
recapitalization proceeds. The forgiveness of indebtness together
with the sale of the shares to the New Investors represents the
Recapitalization ("Recapitalization").
Prior to September 30, 1995, the Bank was considered "significantly
undercapitalized" under the Prompt Corrective Action provisions of
the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). As part of the Recapitalization, Bancorp contributed
approximately $3.2 million of capital to the Bank on September 30,
1995. As a result Bancorp and the Bank were considered "well
capitalized" for Federal regulatory purposes as of that date. The
Bank was operating under an agreement (the "OCC Agreement") entered
into during September 1992, with the Office of the Comptroller of
the Currency ("OCC") which, among other matters, required the Bank
to achieve and maintain certain capital ratios. On October 23,
1992, Bancorp signed a Memorandum of Understanding ("MOU") with the
Federal Reserve Bank ("FRB"), which confirmed a plan to address
certain concerns. Upon completion of the Recapitalization as
described above, the OCC terminated the OCC Agreement and the FRB
terminated the MOU.
NOTE 3 - CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances with the
Federal Reserve Bank. Included in cash and due from banks in the
consolidated statements of condition are restricted amounts
aggregating $468,000 at December 31, 1995 and $490,000 at December
31, 1994.
NOTE 4 - INVESTMENT SECURITIES
All investment securities are classified as held-to-maturity by the
Bank. The amortized cost and estimated market value of investments
are as follows:
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Loss Value
<S> <C> <C> <C> <C>
U.S. Treasury $1,403,000 $16,000 $ - $1,419,000
U.S. Government agencies 4,839,000 15,000 (3,000) 4,851,000
Municipal bonds 687,000 10,000 - 697,000
Mortgage-backed
securities 80,000 10,000 - 90,000
--------- ------ ------ ---------
Total $7,009,000 $51,000 $(3,000) $7,057,000
========= ======= ======= ==========
December 31, 1994
Gross Gross Estimated
AmortizedUnrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury $2,396,000 $ - $(19,000) $ 2,377,000
U.S. Government agencies 1,255,000 - (74,000) 1,181,000
Municipal bonds 793,000 1,000 - 794,000
Mortgage-backed
securities 91,000 7,000 - 98,000
---------- -------- -------- ---------
Total $4,535,000 $ 8,000$ (93,000) $4,450,000
========== ========= ======== =========
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1995, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $3,980,000$4,013,000
Due after one year through five years 2,949,000 2,954,000
--------- ---------
Total 6,929,000 6,967,000
Mortgage-backed securities 80,000 90,000
--------- ---------
Total $7,009,000$7,057,000
========= =========
</TABLE>
Investment securities with an amortized cost of $4,522,000 and
$4,535,000 and an estimated market value of $4,560,000 and
$4,450,000 at December 31, 1995 and 1994, respectively, were
pledged to secure public deposits and for other purposes required
or permitted by law.
NOTE 5 - LOANS
The loan portfolio consists of the various types of loans made
principally to borrowers located in San Diego County. All loans in
the Bank's loan portfolio are classified as held to maturity and
are classified by major type as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Commercial $16,188,000$18,936,000
Real estate - mortgage 15,710,000 18,060,000
Real estate - construction 599,000 1,170,000
Consumer 6,525,000 8,201,000
---------- ----------
39,022,000 46,367,000
Less:
Allowance for loan losses (639,000) (821,000)
Unearned fees (45,000) (54,000)
----------- ----------
Total $38,338,000$45,492,000
=========== ===========
</TABLE>
As of December 31, 1995 and 1994, loans outstanding to directors,
officers and entities with which these individuals are associated,
which in aggregate exceed $60,000 per individual, were $173,000 and
$317,000, respectively. In the opinion of management, all
transactions entered into between the Bank and such related parties
have been and are in the ordinary course of business, and made on
the same terms and conditions consistent with the Bank's general
lending policies similar to transactions with unaffiliated persons.
An analysis of activity with respect to these related party loans
is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Beginning balance $317,000 $422,000 $453,000
New loans 61,000 56,000 74,000
Repayments/reductions (23,000) (86,000) (105,000)
Other - no longer related party (182,000) (75,000) -
--------- -------- ---------
Ending balance $173,000 $317,000 $422,000
======== ======== ========
</TABLE>
NOTE 6 - NONPERFORMING LOANS AND PAST DUE LOANS
The following table presents information relating to nonperforming
loans and past due loans:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Nonaccrual loans, not restructured $1,492,000 $616,000
90 days or more past due loans,
not on nonaccrual 46,000 826,000
Restructured loans 82,000 1,050,000
---------- ---------
Total $1,620,000 $2,492,000
========== ==========
</TABLE>
Loans aggregating $1,361,000 at December 31, 1995 have been
designated as impaired in accordance with SFAS 114 as amended by
SFAS 118. The total allowance for loan losses related to these
loans was $196,500 at December 31, 1995. The average balance of
impaired loans during 1995 was $1,985,000. Interest income on
impaired loans of $10,000 was recognized for cash payments received
in 1995. Loans having carrying values of $982,000 were transferred
to foreclosed real estate in 1995. The Bank is not committed to
lend additional funds to debtors whose loans have been modified.
With respect to the above nonperforming loans, the following table
presents interest income actually earned and additional interest
income that would have been earned under the original terms of the
loans:
<TABLE>
<CAPTION>
Year ended
December 31,
1995 1994
<S> <C> <C>
Nonaccrual loans:
Income recognized $ 10,000 $ 3,000
Foregone income 192,000 74,000
Restructured loans:
Income recognized - 16,000
Foregone income 3,000 74,000
</TABLE>
NOTE 7 - ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $821,000 $823,000 $771,000
Provision for loan losses 295,000 583,000 1,085,000
Loans charged off (702,000) (671,000)(1,095,000)
Loan recoveries 225,000 86,000 62,000
--------- --------- ----------
Balance at end of year $639,000 $821,000 $823,000
======== ======== ========
</TABLE>
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1995 and 1994 are summarized
as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Furniture, fixtures, and equipment $1,424,000 $1,423,000
Leasehold improvements 1,323,000 1,319,000
--------- ----------
2,747,000 2,742,000
Less accumulated depreciation and
amortization (2,150,000) (1,963,000)
----------- -----------
Premises and equipment, net $597,000 $779,000
========== ==========
</TABLE>
NOTE 9 - REAL ESTATE ACQUIRED THROUGH FORECLOSURE
An analysis of activity in the allowance for credit losses on other
real estate is as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Balance at beginning of year $ 3,000 $ 65,000
Provision charged to expense 383,000 132,000
Charge-offs (66,000) (194,000)
--------- ---------
Balance at end of year $320,000 $ 3,000
======== ========
</TABLE>
NOTE 10 - DEPOSITS
Included in interest-bearing deposits are certificates of deposit
in amounts of $100,000 or more. These certificates and their
remaining maturities at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Three months or less $1,952,000 $2,204,000
Four through six months 300,000 1,450,000
Seven through twelve months 200,000 790,000
Thereafter 100,000 100,000
--------- ---------
Total $2,552,000 $4,544,000
========== =========
</TABLE>
Interest expense for certificates of deposit in amounts of $100,000
or more was $218,000 and $155,000 for the years ended December 31,
1995 and 1994, respectively.
NOTE 11 - MANDATORY CONVERTIBLE DEBENTURES
The mandatory convertible debentures bear interest at Wall Street
Journal prime plus 3.0%, payable quarterly. The debentures are
mandatorily convertible at May 30, 1998 into Bancorp common stock,
at a rate equal to the lower of: (i) $52.50 per share (subject to
certain anti-dilutive adjustments and the power of the Bancorp's
Board of Directors to reduce the conversion price), or (ii) the
then current fair market value per share of Bancorp common stock.
Prior to May 30, 1998, the Debentures are convertible, at the
option of the holder, between April 15 and June 15 of each calendar
year, or within 60 days after the date of any Notice of Redemption
by the Bancorp, at a price of $52.50 per share (subject to
anti-dilutive adjustments and the power of the Bancorp's Board of
Directors to reduce the conversion price).
The Debentures are not subject to any sinking fund requirements and
are subordinated in right of payment to the obligations of the
Bancorp under any other indebtedness. At the Bancorp's option, the
Debentures are redeemable, subject to FRB approval, on 70 days
notice at 105% of par if the notice is sent prior to March 1, 1996,
and at 100% of par if the notice is sent thereafter. The indenture
does not provide for a right of acceleration of Debentures upon a
default in payment of interest or principal or in the performance
of any covenant in the Debentures or the indenture, and no trustee
is appointed under the indenture to enforce the rights of Debenture
holders. Prior to conversion of the Debentures, a Debenture holder
has none of the rights or privileges of a shareholder of the
Bancorp.
NOTE 12 - INTEREST RATE RISK
The Bank is principally engaged in providing short-term commercial
loans with interest rates that fluctuate with various market
indices and short-term, variable-rate real estate loans. These
loans are primarily funded through short-term demand deposits and
certificates of deposit with fixed rates. At December 31, 1995,
the Bank had interest-earning assets of $49,189,000 having a
weighted average effective yield of 8.71% and interest-bearing
liabilities of $38,080,000 with a weighted average rate of 3.19%.
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
During 1995, the bank adopted Statement of Financial Accounting
Standard No. 107, "Disclosures about Fair Value of Financial
Instruments" ("SFAS 107"), which requires disclosure of estimated
fair values about financial instruments, whether or not recognized
in the statement of financial condition, for which it is practical
to estimate that value. In cases where quoted market prices are
not available, fair value estimates are based on the present value
of expected future cash flows, or other valuation techniques, all
of which are significantly affected by the assumptions used
therein. Accordingly, most fair value estimates cannot be
substantiated by comparison to independent market quotes and could
not be realized from offering for sale the Bancorp's entire
holdings of a particular financial instrument at one time.
Furthermore, management does not intend to dispose of significant
portions of all of its financial instruments and, thus, any
aggregate unrealized gain or loss should not be interpreted as a
forecast of future earnings and cash flows.
SFAS 107 excludes certain financial instruments from its disclosure
requirements, such as equity investments in consolidated
subsidiaries, and obligations for pension and other postretirement
benefits and deferred compensation arrangements, among others. In
addition, fair value estimates do not attempt to estimate the value
of anticipated future business, such as trust and core deposit
relationships, and the value of assets and liabilities that are not
considered financial instruments such as deferred tax assets,
intangibles, and premises and equipment.
The fair values of financial instruments are derived using numerous
subjective assumptions and may not be necessarily indicative of the
net realizable or liquidation value of these instruments. These
fair value estimates involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with
precision. The fair values are also influenced by the estimation
methods, including discount rates and cash flow assumptions, chosen
from acceptable alternatives. Comparisons of fair value
information among companies are limited by variability in
estimations and judgments in responding to the requirements of SFAS
107.
In accordance with SFAS 107, the following methods and assumptions
were used to estimate the fair value of each material class of
financial instruments at a specific point in time:
Cash and due from banks, Federal funds sold, Interest-bearing
deposits in other financial institutions, Accrued interest
receivable, Accrued expenses and other liabilities and Mandatorily
convertible debentures
The carrying amount of these financial instruments reasonably
approximates fair value.
Investment securities
The fair value of investment securities is based upon quoted market
prices.
Loans
The fair value of loans is based upon the aggregate estimated fair
values of each product type, giving effect to credit quality and
time to maturity. The fair value of fixed rate loans is estimated
by discounting expected future cash flows, using risk-free rates
adjusted by estimated credit risk. The carrying amount of variable
rate loans reasonably approximates fair value.
Deposits
The fair value of demand and savings deposits is the amount payable
on demand at the reporting date. The carrying amount for variable
rate time deposit accounts reasonably approximates fair value. The
fair value of fixed rate time deposits is estimated using a
discounted cash flow calculation. The discount rate on such
deposits is based upon rates offered as of the reporting date for
deposits with similar remaining maturities.
Commitments to extend credit and standby letters of credit
The fair value of commitments to extend credit and letters of
credit is estimated to be the cost to terminate or otherwise settle
such obligations with counterparties. The fair value of such items
at the reporting date is not considered to be material in relation
to the financial statements taken as a whole (Note 14).
The carrying amount and fair value of the Bancorp's financial
instruments at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31, 1995
Carrying Fair
Amount Value
<S> <C> <C>
Financial assets:
Cash and due from banks $ 3,640,000 $ 3,640,000
Federal funds sold 2,300,000 2,300,000
Interest-bearing deposits in other
financial institutions 989,000 989,000
Held-to-maturity investment
securities held-to-maturity 7,009,000 7,057,000
Loans, net 38,338,000 38,281,000
Accrued interest receivable 391,000 391,000
Financial liabilities:
Deposits 51,431,000 51,327,000
Accrued expenses and
other liabilities 396,000 396,000
Mandatory convertible
debentures 537,000 537,000
</TABLE>
NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include loan
commitments and standby letters of credit. The instruments
involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the financial
statements.
The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for loan commitments
and standby letters of credit is represented by the contractual
amount of those instruments. The credit risk involved in issuing
letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Bank uses the same
credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Since many of the loan commitments may expire without being drawn
upon, the total commitment amount does not necessarily represent
future cash requirements. The Bank evaluates each customer's
credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary upon extension of credit,
is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable,
inventory, property, plant, equipment, and other income-producing
commercial properties.
The Bank's lending activities are concentrated in San Diego County,
California. The Bank's commercial loan portfolio is diverse as to
the industries represented. The real estate portfolio includes
credits to many different borrowers for a variety of projects and
for residential real estate.
Undisbursed loan commitments amount to approximately $5,783,000 and
$7,098,000 at December 31, 1995 and 1994, respectively. Standby
letters of credit aggregate approximately $154,000 and $237,000 at
December 31, 1995 and 1994, respectively.
NOTE 15 - INCOME TAXES
The income tax (benefit) from continuing operations is summarized
as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Current
Federal $ - $ - $ -
State - - -
- - -
Deferred
Federal (322,000) - -
State (121,000) - -
--------- -------- ---------
(443,000) - -
--------- -------- ---------
$(443,000) $ - $ -
========== ========= ==========
</TABLE>
The income tax expense from extraordinary item is summarized as
follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Current
Federal $ - $ - $ -
State - - -
------- ------- -------
- - -
Deferred
Federal 322,000 - -
State 121,000 - -
------- ------- -------
443,000 - -
------- ------- -------
$443,000 $ - $ -
======= ======= =======
</TABLE>
Deferred taxes are provided for the temporary differences which
caused them. Deferred tax assets at December 31,
1995 and 1994, are as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $1,376,000 $1,257,000
Differences between book and tax basis
of premises and equipment 157,000 77,000
Real estate acquired through foreclosure 133,000 -
State taxes - 120,000
Allowance for loan losses 113,000 261,000
General business credit carryforward 77,000 -
Alternative minimum tax credit 12,000 12,000
Other 86,000 81,000
--------- ---------
1,954,000 1,808,000
Less valuation
allowance (1,954,000)(1,808,000)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
</TABLE>
The provision (benefit) for federal income taxes differs from the
amount computed by applying the federal income
tax statutory rate as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Loss from continuing operations:
Taxes calculated at statutory
rate $(365,000)$(336,000)$(672,000)
Increase (decrease) resulting
from:
State tax, net of federal
tax effect (80,000) (72,000) (145,000)
Tax-exempt interest (15,000) (22,000) (23,000)
Officer's life insurance (9,000) (9,000) (9,000)
Deferred benefit write-off 12,000 - -
General business credit (77,000) - -
Other (55,000) 53,000 68,000
Valuation allowance 146,000 386,000 781,000
-------- ------- --------
Total $(443,000)$ - $ -
======== ======== ========
</TABLE>
At December 31, 1995, tax loss carryforwards and tax credit
carryforwards of approximately $5,289,000 and $90,000,
respectively, are available to offset future taxable income. The
tax loss carryforwards expire in 2007 through 2010. As a result of
the passage of the Tax Reform Act of 1986, there may be certain
limitations which could prohibit the Bank from fully utilizing the
benefits of the above credit carryforwards. Because of a
substantial change in Bancorp's ownership resulting from the
Recapitalization on September 30, 1995, the annual amount of net
operating loss carryforwards, generated prior to the ownership
change, that may be utilized is limited to approximately $300,000.
Subsequent significant changes in ownership could result in
additional limitations on the utilization of net operating loss carryforwards.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Leases
A summary of noncancelable future operating lease commitments
follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $404,000
1997 399,000
1998 405,000
1999 410,000
2000 416,000
Thereafter 1,271,000
---------
Total $3,305,000
=========
</TABLE>
It is expected that in the normal course of business, leases that
expire will be renewed or replaced by leases on other property or
equipment.
Rent expense under all noncancelable operating lease obligations
aggregated $417,000, $421,000, and $474,000 for 1995, 1994 and
1993, respectively. Most of the leases provide that the Bank pay
taxes, maintenance, insurance, and certain other operating expenses
applicable to the leased premises in addition to the monthly
minimum payments.
Litigation
From time to time the Bank is a defendant in legal actions arising
from transactions conducted in the ordinary course of business.
Management, after consultation with legal counsel, believes that
the ultimate liability, if any, arising from such actions will not
have a material effect on the Bank,s financial position.
Pending Acquisition
Bancorp, the Partnership and Liberty National Bank ("Liberty")
entered into an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of October 26, 1995, providing for the
acquisition of Liberty by Bancorp. Liberty is based in Huntington
Beach, California and at September 30, 1995 had total assets of
$146 million and total deposits of $130 million (unaudited). The
acquisition will be affected through a consolidation of Liberty and
a subsidiary of Bancorp in which Liberty's stockholders receive
cash for their shares. The Partnership intends to infuse most of
the additional capital necessary to affect the transaction for
Bancorp. The Merger Agreement provides that Liberty stockholders
will receive the greater of $14.80 per share or 130% of Liberty's
book value (subject to certain adjustments) shortly prior to the
closing, calculated on a fully diluted basis, in each case subject
to possible small upward adjustments depending upon the timing of
the closing. There are currently 978,160 shares of Liberty
common stock outstanding, resulting in a minimum aggregate purchase
price of approximately $14.5 million (unaudited).
NOTE 17 - PARENT COMPANY INFORMATION
The following are condensed financial statements of SDN Bancorp,
Inc. (Parent company only) as of December 31, 1995 and 1994 and for
each of the three years in the period ended December 31, 1995:
1995 1994
Condensed Statements of Condition
<TABLE>
<CAPTION>
Assets
<S> <C> <C>
Cash in subsidiary $ 80,000 $ 3,000
Interest bearing deposits 198,000 1,526,000
Investment in subsidiary 3,832,000 -
Receivables and other
assets 88,000 -
--------- ---------
Total assets $4,198,000 $1,529,000
========= =========
Liabilities and Shareholders'
Equity (Deficit)
Accrued expenses $120,000 $283,000
Mandatory convertible debentures 537,000 1,219,000
Due to subsidiary - -
Notes payable to subsidiary - 300,000
Notes payable to shareholders - 675,000
--------- ---------
Total liabilities 657,000 2,477,000
--------- ---------
Shareholders' equity (deficit):
Common stock 9,000 2,951,000
Additional paid-in capital 7,593,000 -
Accumulated deficit (4,061,000) (3,899,000)
--------- ---------
Total shareholders'
equity (deficit) 3,541,000 (948,000)
--------- ---------
Total liabilities and
shareholders' equity
(deficit) $ 4,198,000 $1,529,000
========= =========
</TABLE>
Condensed Statements
of Operations 1995 1994 1993
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Interest income $ 4,000 $ - $ -
Expenses:
Interest expense 205,000 211,000 185,000
Other expense 9,000 - 7,000
------- ------- -------
Total expenses 214,000 211,000 192,000
Loss before income
tax benefit, extraordinary
item and undistributed
net loss of subsidiary (210,000) (211,000) (192,000)
Income tax benefit 91,000 - -
------- ------- -------
Income (loss) before
extraordinary item and
undistributed net loss
of subsidiary (119,000) (211,000) (192,000)
Extraordinary item -
gain on extinguishment
of debt, net 625,000 - -
------- ------- -------
Income (loss) before
undistributed net
loss of subsidiary 506,000 (211,000) (192,000)
Undistributed net loss
of subsidiary (511,000) (778,000) (1,784,000)
------- ------- ---------
Net loss $ (5,000) $(989,000)$(1,976,000)
======= ======== =========
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Operating activities:
Net loss $(5,000) $(989,000)$(1,976,000)
Adjustments to reconcile
net loss to net cash
used by operating
activities:
Extraordinary item -
gain from
extinguishment
of debt, net (625,000) - -
Undistributed net
loss of subsidiary 511,000 778,000 1,784,000
Other - net 26,000 199,000 52,000
------- ------- ---------
Net cash used by
operating activities (93,000) (12,000) (140,000)
Investing activities:
Investment in
subsidiary (3,170,000) - -
Net increase in
interest bearing
deposits (198,000) - -
--------- --------- ---------
Net cash used by
investing activities (3,368,000) - -
--------- --------- ---------
Financing activities:
Repayment of notes
payable (956,000) - (100,000)
Proceeds from
issuance of notes
payable - 14,000 211,000
Proceeds from
issuance of common
stock 4,494,000 - -
--------- --------- ---------
Net cash provided by
financing activities 3,538,000 14,000 111,000
--------- --------- ---------
Net increase (decrease)
in cash in subsidiary 77,000 2,000 (29,000)
Cash in subsidiary at
beginning of year 3,000 1,000 30,000
--------- --------- ---------
Cash in subsidiary at
end of year $80,000 $ 3,000 $ 1,000
========== ========= =========
</TABLE>
There are legal limitations restricting the extent to which the
Bank can lend or dividend funds to the Bancorp. Any such
extensions of credit are subject to strict collateral requirements.
Dividends declared by the Bank in any calendar year may not,
without the approval of the OCC, exceed net earnings, as defined,
for that year combined with its retained net earnings for the
preceding two years, less any required transfers to surplus.
Federal banking law also prohibits the Bank from extending credit
to the Parent in excess of 10% of the Bank's capital stock and
surplus, as defined, or approximately $447,000 at December 31,
1995.
NOTE 18 - SUBSEQUENT EVENT
On February 29, 1996, Bancorp executed a letter of intent for a
business combination with Commerce Security Bank ("Commerce").
Commerce is headquartered in Sacramento, California with offices in
five western states and at December 31, 1995 had total assets of
$213 million and total deposits of $192 million (unaudited). The
acquisition, if consummated, is expected to be affected through the
creation of a new holding company which would acquire 100% of the
stock of Commerce and Bancorp. The letter of intent provides that
the Commerce stockholders will receive 90% (150% of 60% of
Commerce's book value) of Commerce's December 31, 1995 book value
in cash, which approximates $14.8 million, and 40% of Commerce's
book value in stock. The Partnership intends to infuse most of the
additional capital necessary to affect the transaction for Bancorp.
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF ISSUER
The following table provides certain information with respect to the directors
and executive officers of Bancorp as of March 8, 1996.
Relationship to Relationship to
Bancorp and Bank Business Experience
Name and Address Age Starting Date and Starting Date During Past 5 Years
Robert P. Keller 58 Director - 1995 Director - 1995 President and CEO
President & CEO President & CEO Dartmouth Bank from
1990 to 1991.
Director and CEO New
Dartmouth Bank from
1991 to 1994.
President and
CEO ofIndependent
Bancorp of Arizona
and Chairman and CEO
of Caliber Bank of
Arizona from 1994 to
1995. From 1995 to
present, President
and CEO of Dartmouth
Capital Group. In
October 1995 was
appointed President
and CEO of SDN
Bancorp,Inc. and San
Dieguito National
Bank.
K. Thomas Kemp 58 Director - 1995 EVP of Fund American
Enterprise Holding,
Inc. Director of
Centricut, Inc. and
White Mountian Ins.
Holding, Inc.
Edward A. Fox 60 Director - 1995 Dean of Amos Tuck
School of Business
of Dartmouth College
until 1994. Director
of Delphi Financial
Corp. And Greenwich
Capital Management
Group.
Charles E. Hugel 68 Director - 1995 Chief Executive
Officer of
Combustion
Engineering until
1990. Director,
Eaton Corp. & Pitney
Bowes, Inc.
Jefferson W. Kirby 35 Director - 1995 Employed by affiliate
of Bankers Trust New
York Corp. From 1987
to 1990. Employed by
Alleghany Corp.
Holding Co. since
1992 and was
appointed Vice
President 1994.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
No executive officer of the Bancorp earned cash compensation during the
year ended December 31, 1995 except in his or her capacity as an executive
officer of the Bank. The following table sets forth a comprehensive overview
of the compensation of the Bancorp's Chief Executive Officer during 1995 and
comparative data for the previous two fiscal years. No other executive officer
of Bancorp or the Bank received annual compensation in excess of $100,000
during 1995.
<TABLE>
<CAPTION>
Annual All Other
Compensation Compensation
Name and Salary Salary (Director Fees
Principal Positions Year Amount Only)
<S> <C> <C> <C>
Robert P. Keller 1995 $ 41,000(1) $ -
Director, President
CEO of Bancorp:
President, CEO and
Director of Bank
Paul E. Schedler 1995 $ 150,000(2) $ -
Director, President 1994 $ 120,000 -
FormerCEO, CFO of 1993 $ 120,000 -
Bancorp:President,
CEO and Director
of Bank
</TABLE>
(1) Represents salary from October 1995 through December 1995
Annual salary is $150,000.
(2) Includes $40,000 per Severance Agreement.
The Bank furnishes, and plans to continue to furnish, executive
officers with an automobile allowance. Certain other Bank officers also may
be compensated with an automobile allowance. The Bank has provided, and may
provide in the future, certain of its executive officers with certain specified
life, disability and medical insurance benefits. Portions of the automobile
expenses, and insurance premiums attributable to personal use did not exceed
$50,000 or ten percent (10%) of the compensation reported above.
Effective January 1993, all director fees were suspended. No other
fees were paid for committee or special board meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the security ownership of certain
beneficial owners of more than five percent of Bancorp's outstanding common
stock.
<TABLE>
<CAPTION>
Security Ownership of Certain Beneficial Owners
Title of Class Name and Amount and Percent
Address of Nature of of
Beneficial Beneficial Class
Owner Owner
<C> <C> <C> <C>
Common Stock Dartmouth Capital Group, LP 129,739 47.99%
Dartmouth Capital Group, Inc.(1)
135 Saxony Road
Encinitas, CA 92024
Ernest J. Boch 89,000(2) 9.94%
Subaru of New England, Inc.
95 Morse Street
Norwood, MA 02062
Byrne & sons , l.p. 70,000(3) 7.82%
700 Bitner Road
Park City, UT 84060
Jefferson W. Kirby 89,000(4) 9.94%
Alleghany Corporation
375 Park Ave., 32nd Floor
New York, NY 10152
</TABLE>
(1) As the sole general partner of the Partnership, DCG, Inc.
exercises sole control over the voting and disposition of the
shares of Common Stock held of record by the Partnership.
(2) Excludes shares beneficially owned by DCG, Inc. Mr. Boch is a
principal shareholder and director of DCG, Inc., and pursuant to
the terms of a shareholder agreement among such shareholders
(the "DCG Shareholder Agreement"), he has a right to designate
a director of DCG, Inc. Mr. Boch disclaims beneficial ownership
of shares of Common Stock beneficially owned by DCG, Inc.
(3) Excludes any shares beneficially owned by DCG, Inc. John J.
Byrne, the sole general partner of Byrne & sons, l.p., is a
shareholder of DCG, Inc.. Pursuant to the terms of the DCG
Shareholder Agreement, Mr. Byrne has the right to designate a
director of DCG, Inc.
(4) Excludes shares beneficially owned by DCG, Inc. Mr. Kirby is a
principal shareholder and director of DCG, Inc., and pursuant to
the terms of the DCG Shareholder Agreement, he has a right to
designate a director of DCG, Inc.. Mr. Kirby disclaims beneficial
ownership of shares of Common Stock beneficially owned by
DCG, Inc.
The following table sets forth the security ownership of Bancorp's
common stock by each of the directors and nominees for director of Bancorp.
<TABLE>
<CAPTION>
Title of Class Name and Amount and Percent
Address of Nature of of
Beneficial Beneficial Class
Owner Owner
<C> <C> <C> <C>
Common Stock Edward A. Fox 44,000(1) 4.91%
R.R. Box 67-15
Ames Cove Road
Harborside, ME 04624
Charles E. Hugel 25,000(1) 2.79%
Bald Peak Colony Club
Melvin Village, NH 03850
Robert P. Keller 4,000(1) 0.45%
129 Shore Road
Gilford, NH 03246
K. Thomas Kemp 10,000(1) 1.12%
6 Goodfellow Road
Hanover, NH 03755
Jefferson W. Kirby 89,000(1) 9.94%
Alleghany Corporation
375 Park Ave., 32nd Floor
New York, NY 10152
</TABLE>
(1) Excludes shares beneficially owned by the General Partner.
The named individual serves as a director and shareholder of
the General Partner. Pursuant to the terms of the DCG
Shareholder Agreement, each of the named individuals has a
right to designate a director of the General Partner. Each of
the named individuals disclaims beneficial ownership of shares
of Common Stock beneficially owned by the General Partner.
ITEM 12. CERTAIN TRANSACTIONS AND RELATED TRANSACTIONS
Certain Transactions
There are no existing or proposed material transactions between Bancorp or
the Bank and any of Bancorp's executive officers, directors, or beneficial
owners of 5% or more of the Common Stock, or the immediate family or associates
of any of the foregoing persons.
Some of Bank's directors and executive officers and their immediate
families, as well as the companies with which such directors and executive
officers are associated, are customers of, and have had banking transactions
with the Bank in the ordinary course of the Bank's business and the Bank
expects to have such ordinary banking transactions with such persons in the
future. In the opinion of Management of the Bank, all loans and commitments to
lend included in such transactions were made in compliance with applicable laws
on substantially the same terms, including interest rates and collateral, as
those prevailing for comparable transactions with other persons of similar
creditworthiness and did not involve more than a normal risk of Collectibility
or present other unfavorable features. Although the Bank does not have any
limits on the aggregate amount it would be willing to lend to directors and
officers as a group, loans to individual directors and officers must comply
with the Bank's lending policies and statutory lending limits. Total loans to
executive officers and directors at December 31, 1995 were $173,000 (5.0% of
the Bank's shareholders' equity).
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON 10K
(a) (1) Exhibits Index
3.1 Certificate of Incorporation of SDN Bancorp, Inc., dated
September 26, 1995.
3.2 Bylaws of SDN Bamcorp, Inc., dated September 27, 1995.
4.1 Indenture with respect to Mandatory Convertible Debentures due
1998 (filed as Exhibit 4 to Bancorp's Registration Statement on
Form S-1, File No. 33-4045 filed March 17, 1986 and incorporated
by reference herein)
10.2 RESERVED
10.3 Lease for 135 Saxony Road, Encinitas, California (filed as
Exhibit 10.4 to the Company's Registration Statement on Form
S-14, File No. 2-76555 filed March 18, 1982 and incorporated
herein)
10.4-10.5 RESERVED
10.6 Lease for 6354 Corte del Abeto, Carlsbad, California (filed as
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1984 and incorporated herein).
10.8 RESERVED
10.9 Lease Agreement between Sheryl L. Bullock as Trustee, as
Landlord, and San Dieguito National Bank, as Tenant, dated July
27, 1990. (Filed as Exhibit 10.1 to Bancorp's Form 10-Q for the
quarter ended June 30, 1990 and incorporated by reference
herein)
20.1 Terms of Primary Stock Right dated September 28, 1995
21.1 Subsidiaries of the Registrant (filed as Exhibit 22 to Bancorp's
Registration Statement on Form S-1, File No. 33-4045 filed March
17, 1986 and incorporated by reference herein)
(2) Executive Compensation Plans and Arrangements
(b) Reports on Form 8-K.
(1) Change in control of Registrant and the Recapitalization of SDN
Bancorp, Inc., filed October 13, 1995
(2) Agreement and Plan of Merger with Liberty National Bank, filed
October 26, 1995.
(3) Change in Registrant's Certifying Public Accountant of SDN Bancorp,
Inc., filed December 11, 1995
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the issuer has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SDN BANCORP
By Robert P. Keller /s/
----------------------------------------
Robert P. Keller
President, Chief Executive Officer
Date: March 29, 1996
By Cathy J. Wingengbach /s/
---------------------------------------
Cathy J. Wingenbach
Principal Bank Accounting Officer
Date: March 29, 1996
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 issuer
and in the capacities and on the dates indicated.
Signature Title Date
Robert P. Keller /s/ Director, President March 29, 1996
- --------------------- and Chief Executive
Robert P. Keller Officer
K. Thomas Kemp /s/ Director March 29, 1996
- ---------------------
K. Thomas Kemp
Edward A. Fox /s/ Director March 29, 1996
- ---------------------
Edward A. Fox
Charles E. Hugel /s/ Director March 29, 1996
- ---------------------
Charles E. Hugel
Jefferson W. Kirby /s/ Director March 29, 1996
- ---------------------
Jefferson W. Kirby
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Issuers Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
An annual report and a Proxy Statement will be sent by Bancorp to its security
holders and four copies of such materials will be furnished to the Commission,
for its information, but shall not be deemed "filed" with the Commission.
EXHIBIT INDEX
Page Number
Exhibit in Sequential
Number Description Numbering System
3.1 Certificate of Incorporation ofSDN Bancorp, Inc. dated September
26, 1995.
3.2 Bylaws of SDN Bancorp, Inc. dated September 27, 1995.
4.1 Indenture with respect to Mandatory Convertible Debentures due 1998
(filed as Exhibit 4 to Bancorp's Registration Statement on Form S-1,
File No. 33-4045 filed March 17, 1986 and incorporated by reference
herein)
10.2 RESERVED
10.3 Lease for 135 Saxony Road, Encinitas, California (filed as Exhibit
10.4 to the Company's Registration Statement on Form S-14, File No.
2-76555 filed March 18, 1982 and incorporated herein)
10.4-10.5 RESERVED
10.6 Lease for 6354 Corte del Abeto, Carlsbad, California (filed as Exhibit
10.6 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1984 and incorporated herein).
10.8 RESERVED
10.9 Lease Agreement between Sheryl L. Bullock as Trustee, as Landlord, and
San Dieguito National Bank, as Tenant, dated July 27, 1990. (Filed as
Exhibit 10.1 to Bancorp's Form 10-Q for the quarter ended June 30,
1990 and incorporated by reference herein).
20.1 Terms of Primary Stock Right dated September 28, 1995.
21.1 Subsidiaries of the Registrant (filed as Exhibit 22 to Bancorp's
Registration Statement on Form S-1, File No. 33-4045 filed March 17,
1986 and incorporated by reference herein)
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
of
SDN BANCORP, INC.
1. Name. The name of the corporation is SDN Bancorp, Inc.
2. Registered Office and Agent. The address of the
registered office of the corporation in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, Wilmington, in the
County of New Castle. The registered agent at such address is The
Corporation Trust Company.
3. Purpose. The purpose of the corporation is to engage in
any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
4. Capitalization. The corporation shall be authorized to
issue the following capital stock:
Number
Class Par Value Authorized
Common Stock $.01 5,000,000
Preferred Stock $.01 1,000,000
5. Preferred Stock. The Board of Directors is expressly
authorized to provide for the issuance of all or any shares of the
Preferred Stock, in one or more series, and to fix for each such
series such number of shares of stock thereof and such voting
powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or
other special rights and such qualifications, limitations or
restrictions thereof, as shall be set forth in the resolution or
resolutions adopted by the Board of Directors providing for the
issue of such series and as may be permitted by the General
Corporation Law of the State of Delaware.
6. Incorporator. The name and mailing address of the
incorporator is:
Paul E. Schedler
San Dieguito National Bank
135 Saxony Road
Encinitas, CA 92024-2797
7. Compromises or Arrangements. Whenever a compromise or
arrangement is proposed between this corporation and its creditors
or any class of them and/or between this corporation and its
stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application
in a summary way of this corporation or of any creditor or
stockholder thereof or on the application of any receiver or
receivers appointed for this corporation under the provisions of
section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers
appointed for this corporation under the provisions of section 279
of Title 8 of the Delaware Code, order a meeting of the creditors
or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be
summoned in such manner as the said court directs. If a majority
in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this
corporation as a consequence of such compromise or arrangement, the
said compromise or arrangement and the said reorganization shall,
if sanctioned by the court to which the said application has been
made, be binding on all the creditors or class of creditors, and/or
on all the stockholders or class of stockholders, of this
corporation, as the case may be, and also on this corporation.
8. Business Combinations with Interested Stockholders. The
corporation expressly elects not to be governed by Section 203 of
the Delaware General Corporation Law.
9. By-Laws. The Board of Directors may adopt, amend or
repeal the By-laws of the corporation, except that any By-law
adopted by the stockholders may be altered or repealed only by the
stockholders if such By-law so provides.
10. Elections. The election of directors by the
stockholders need not be by written ballot unless the By-laws of
the corporation provide otherwise.
11. Personal Liability of Directors. No director shall be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except to the extent that such exculpation from liability is not
permitted under the Delaware General Corporation Law as the same
exists or may be hereafter amended. This provision shall
not eliminate the liability of a director for any act or omission
occurring prior to the date upon which this provision becomes
effective. No amendment to or repeal of this provision shall apply
to or have any effect on the liability or alleged liability of any
director for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal.
IN WITNESS WHEREOF, the undersigned has executed this
instrument on September 25, 1995.
Paul E. Schedler /s/
---------------------
Paul E. Schedler
Incorporator
EXHIBIT 3.2
BY-LAWS
OF
SDN BANCORP
ARTICLE I
Stockholders
Section 1. Annual Meeting. An annual meeting of the
stockholders of the corporation, for the election of the Directors
to succeed those whose terms expire and for the transaction of such
other business as may properly come before the meeting, shall be
held on the first Wednesday in April of each year (or if that be a
legal holiday in the place where the meeting is to be held, on the
next succeeding full business day) at the hour stated in the notice
of the meeting. If the annual meeting of the stockholders is not
held on such date, the Directors shall cause the meeting to be held
as soon thereafter as convenient.
Section 2. Special Meetings. Special meetings of the
stockholders may be called by the President or by order of the
Board of Directors, and shall be called by the Secretary (or
in the case of the death, absence, incapacity or refusal of the
Secretary, by any other officer) upon written application by one or
more stockholders owning shares of the capital stock of the
corporation which represent at least 10 percent of the votes
entitled to be cast at the meeting.
Section 3. Place and Hour of Meetings. All meetings of
stockholders shall be held at the principal office of the
corporation at 10:00 a.m. local time unless a different place or
hour is fixed by the person or persons calling the meeting and
stated in the notice of the meeting.
Section 4. Notices of Meetings and Adjourned Meetings. A
written notice of each annual or special meeting of the
stockholders stating the place, date, and hour thereof, shall be
given by the Secretary (or the person or persons calling the
meeting), not less than 10 nor more than 60 days before the date of
the meeting, to each stockholder entitled to vote thereat, by
leaving such notice with such stockholder or at his or her
residence or usual place of business, or by depositing it postage
prepaid in the United States mail, directed to each stockholder at
his or her address as it appears on the records of the corporation.
The notice of a special meeting of the stockholders shall state the
purpose or purposes for which the meeting is called. An
affidavit of the Secretary, Assistant Secretary, or transfer agent
of the corporation that the notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated
therein. No notice need be given to any person with whom
communication is unlawful or to any person who has waived such
notice (a) in writing (which writing need not specify the business
to be transacted at, or the purpose of, the meeting) signed by such
person before or after the time of the meeting or (b) by attending
the meeting except for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. No notice
need be given to any person to whom (a) notice of two consecutive
annual meetings, and all notices of meetings or of a taking of
action by written consent without a meeting to such person during
the period between such two consecutive annual meetings, or (b)
all, and at least two, payments (if sent by first class mail) of
dividends or interest on securities during a 12 month period, have
been mailed addressed to such person at his or her address as shown
on the records of the corporation, have been returned
undeliverable. If any such person shall deliver to the corporation
a written notice setting forth his or her then current address, the
requirement that notice be given to such person in accordance with
this Section 4 shall be reinstated. When a meeting is adjourned to
another time and place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting
at which the adjournment is taken except that, if the adjournment
is for more than 30 days or if, after the adjournment, a new record
date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given in the manner provided in this Section 4.
Section 5. Quorum. At any meeting of the stockholders, a
quorum for the transaction of business shall consist of one or more
individuals appearing in person or represented by proxy and owning
or representing a majority of the shares of the corporation then
outstanding and entitled to vote, provided that less than such
quorum shall have power to adjourn the meeting from time to time.
Section 6. Voting. Unless otherwise provided in the
Certificate of Incorporation and subject to the provisions of
Section 10 of this Article I, each stockholder shall have one vote
for each share of capital stock entitled to vote held by such
stockholder according to the records of the corporation. Persons
holding stock in a fiduciary capacity shall be entitled to vote the
shares so held. Persons whose stock is pledged shall be entitled
to vote unless in the transfer by the pledgor on the books of the
corporation the pledgor has expressly empowered the pledgee to vote
the pledged shares, in which case only the pledgee or the pledgee's
proxy shall be entitled to vote.
Section 7. Proxies. Each stockholder entitled to vote at a
meeting of stockholders or to express consent or dissent to
corporate action in writing without a meeting may authorize another
person or persons to act for him or her by proxy, but no such proxy
shall be voted or acted upon after eleven months from its date,
unless the proxy provides for a longer period.
Section 8. Action at Meeting. When a quorum is present at
any meeting, action of the stockholders on any matter properly
brought before such meeting shall require, and may be effected by,
the affirmative vote of the holders of shares of capital stock
present in person or represented by proxy, which shares represent
a majority of the votes cast on any matter, except where a
different vote is required by law, the Certificate of Incorporation
or these By-laws. If the Certificate of Incorporation so provides,
no ballot shall be required for any election unless requested by a
stockholder present or represented at the meeting and entitled to
vote in the election.
Section 9. Stockholder Lists. The officer who has charge of
the stock ledger of the corporation shall prepare and make, at
least 10 days before every meeting of stockholders, a complete list
of stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours,
for a period of at least 10 days prior to the meeting, either at a
place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list
shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any
stockholder who is present. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by this section or the books of the
corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 10. Record Date.
(a) In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a
record date, which shall not be more than 60 nor less than 10 days
before the date of such meeting, nor more than 60 days prior to any
other action.
(b) If no record date is fixed:
(1) The record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on
which notice is given, or, if notice is waived, at the close of
business on the day next preceding the day on which the meeting is
held.
(2) The record date for determining stockholders
entitled to express consent to corporate action in writing without
a meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first such written consent
is expressed.
(3) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which
the Board of Directors adopts the resolution relating thereto.
(c) A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board
of Directors may fix a new record date for the adjourned meeting.
Section 11. Action by Written Consent. Any action required
by law to be taken at any annual or special meeting of stockholders
of the corporation, or any action which may be taken at any annual
or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of corporate
action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in
writing; such consent shall be effective as of the date stated
therein and shall be filed with the minutes of the meeting of the
stockholders.
ARTICLE II
Directors
Section 1. Powers. The business and affairs of the
corporation shall be managed by or under the direction of the Board
of Directors.
Section 2. Number of Directors. The Board of Directors
shall consist of not less than 6 nor more than 11 persons. The
number of Directors is initially fixed at 7, and may be increased
or decreased by the Board of Directors at any time.
Section 3. Election and Tenure. Each Director shall be
elected by plurality vote of the stockholders at the annual meeting
of stockholders or as provided in Section 5 of this Article II. In
the event of a failure to elect Directors at an annual meeting of
the stockholders, the Directors may be elected at any regular or
special meeting of the stockholders entitled to vote for election
of Directors, provided that notice of such meeting shall contain
mention of such purpose. Each Director shall serve until the date
fixed in these By-laws for the next annual meeting of stockholders
after such Director's election and thereafter until his or her
successor is elected and qualified, or until his or her earlier
resignation or removal.
Section 4. Qualification. No Director need be a
stockholder.
Section 5. Vacancies and Newly Created Directorships.
Vacancies and newly created Directorships resulting from any
increase in the authorized number of Directors may be filled by a
majority of the Directors then in office, although less than a
quorum, or by a sole remaining Director. When one or more
Directors shall resign from the Board, effective at a future date,
a majority of Directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies by
vote to take effect when such resignation or resignations shall
become effective.
Section 6. Removal. Any Director or the entire Board of
Directors may be removed, with or without cause, at any time upon
the affirmative vote by the holders of a majority the shares then
entitled to vote at an election of the Directors. Any vacancy in
the Board caused by any such removal may (but need not be) filled
in the manner provided in Section 5 of Article II.
Section 7. Resignation. Any Director of the corporation may
resign at any time by giving written notice to the Board of
Directors, to the Chairman of the Board, if any, to the President,
or to the Secretary, and any member of a committee may resign
therefrom at any time by giving notice as aforesaid or to the
chairman or secretary of such committee. Any such resignation
shall take effect at the time specified therein, or, if the time be
not specified, upon receipt thereof; and unless otherwise specified
therein, the acceptance of such resignation shall not be necessary
to make it effective.
Section 8. Annual Meeting. Immediately after each annual
meeting of stockholders and at the place thereof, if a quorum of
the Directors is present, there shall be a meeting of the Directors
without notice.
Section 9. Regular Meetings. Regular meetings of the
Directors may be held at such times and places as shall from time
to time be fixed by resolution of the Board, and no notice need be
given of regular meetings held at times and places so fixed,
provided, however, that any resolution relating to the holding of
regular meetings shall remain in force only until the next annual
meeting of stockholders and that, if at any meeting of Directors at
which a resolution is adopted fixing the times or place or places
for any regular meetings any Director is absent, no meeting shall
be held pursuant to such resolution without notice to or waiver by
such absent Director pursuant to Section 11 of this Article II.
Section 10. Special Meetings. Special meetings of the
Directors may be called by the Chairman of the Board (if any), the
President, or by any two Directors, and shall be held at the place
and on the date and hour designated in the call thereof.
Section 11. Notices. Notices of any special meeting of the
Directors shall be given by the Secretary or an Assistant Secretary
to each Director, by mailing to him, postage prepaid, and addressed
to such Director at his or her address as registered on the books
of the corporation, or if not so registered at his or her last
known home or business address, a written notice of such meeting at
least four days before the meeting, or by sending notice of such
meeting to him by prepaid telegram addressed to him at such
address, or by actual delivery of such notice to him personally or
by telephone, facsimile, telex or cable at least 48 hours before
the meeting. In the absence of all such officers, such notice may
be given by the officer or one of the Directors calling the
meeting. Notice need not be given to any Director who has waived
notice (a) in writing executed by him before or after the meeting
and filed with the records of the meeting, or (b) by attending the
meeting except for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. A notice
or waiver of notice of a meeting of the Directors need not specify
the business to be transacted at or the purpose of the meeting.
Section 12. Quorum. At any meeting of the Directors a
majority of the total number of Directors fixed pursuant to Section
2 of Article II shall constitute a quorum for the transaction
of business; provided always that any number of Directors (whether
one or more and whether or not constituting a quorum) present at
any meeting or at any adjourned meeting may adjourn such meeting,
provided that all absent Directors receive or waive notice pursuant
to Section 11 of Article II of any such adjournment that exceeds
four business days.
Section 13. Action at Meeting. At any meeting of the
Directors at which a quorum is present, the action of the Directors
on any matter brought before the meeting shall be decided by vote
of a majority of those present, unless a different vote is required
by law, the Certificate of Incorporation, or these By-laws.
Section 14. Action by Written Consent. Any action required
or permitted to be taken at any meeting of the Board of Directors,
or of any committee thereof, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section 15. Telephone Meetings. Members of the Board of
Directors, or any committee thereof, may participate in a meeting
of such Board or committee by means of conference telephone or
similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation
in a meeting pursuant to this Section 15 shall constitute presence
in person at such meeting.
Section 16. Place of Meetings. The Board of Directors may
hold its meetings, and have an office or offices, within or without
the State of Delaware.
Section 17. Compensation. The Board of Directors shall have
the authority to fix the compensation of Directors.
Section 18. Committees.
(a) The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the Directors of the
corporation. The Board may designate one or more Directors as
alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the
absence or disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from
voting, whether or not he, she or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise
all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may
authorize the seal of the corporation to be affixed to all papers
which may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property or assets,
recommending to the stockholders a dissolution of the corporation
or a revocation of a dissolution, or amending the By-laws of the
corporation. Such a committee may, to the extent expressly
provided in the resolution of the Board of Directors, have the
power or authority to declare a dividend or to authorize the
issuance of stock.
(b) At any meeting of any committee, a majority of the whole
committee shall constitute a quorum and, except as otherwise
provided by statute, by the Certificate of Incorporation, or by
these By-laws, the affirmative vote of at least a majority of the
members present at a meeting at which there is a quorum shall be
the act of the committee.
(c) Each committee, except as otherwise provided by resolution
of the Board of Directors, shall fix the time and place of its
meetings within or without the State of Delaware, shall adopt its
own rules and procedures, and shall keep a record of its acts and
proceedings and report the same from time to time to the Board of
Directors.
ARTICLE III
Officers
Section 1. Officers and Their Election. The officers of the
corporation shall be a President, a Secretary, a Treasurer and such
Vice Presidents, Assistant Secretaries, Assistant Treasurers and
other officers as the Board of Directors may from time to time
determine and elect or appoint. The Board of Directors may appoint
one of its members to the office of Chairman of the Board and
another of its members to the office of Vice-Chairman of the Board
and from time to time define the powers and duties of these offices
notwithstanding any other provisions of these By-laws. The
President, the Secretary and the Treasurer shall be elected by the
Board of Directors at its annual meeting or at the first meeting of
the Board after the date fixed by these By-laws therefor and may,
but need not, be members of the Board of Directors. Two or more
offices may be held by the same person.
Section 2. Term of Office. The President, the Treasurer
and the Secretary shall, unless sooner removed under the provisions
of these By-laws, hold office until the next annual election of
officers and thereafter until their respective successors are
elected and qualified or until their earlier resignation or
removal. All other officers shall hold office for such term as
shall be determined from time to time by the Board of Directors.
Section 3. Vacancies. Any vacancy at any time existing in
any office may be filled by the Directors.
Section 4. President. The President shall be the chief
executive officer of the corporation except as the Board of
Directors may otherwise provide. It shall be the President's
duty and he or she shall have the power to see that all orders and
resolutions of the Board of Directors are carried into effect. He
or she shall from time to time report to the Board of Directors all
matters within his or her knowledge which the interests of the
corporation may require to be brought to its notice. The
President, when present, shall preside at all meetings of the
stockholders and of the Board of Directors, unless otherwise
provided by the Board of Directors. The President shall perform
such duties and have such powers additional to the foregoing as the
Board of Directors shall designate.
Section 5. Chairman of the Board. The Chairman of the
Board, if any, shall have the powers and duties expressly
designated in these By-laws and shall perform such duties and have
such powers additional thereto as the Board of Directors shall
designate.
Section 6. Vice Presidents. In the absence or disability
of the President, the President's powers and duties shall be
performed by the Vice President, if only one, or, if more than one,
by the one designated for the purpose by the Board of Directors.
Each Vice President shall perform such duties and have such powers
additional to the foregoing as the Board of Directors shall
designate.
Section 7. Treasurer. The Treasurer shall keep full and
accurate accounts of receipts and disbursements in books belonging
to the corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the corporation in such
depositories as shall be designated by the Board of Directors or in
the absence of such designation in such depositories as he or she
shall from time to time deem proper. The Treasurer shall disburse
the funds of the corporation as shall be ordered by the Board of
Directors, taking proper vouchers for such disbursements. The
Treasurer shall promptly render to the President and to the Board
of Directors such statements of his or her transactions and
accounts as the President and Board of Directors respectively may
from time to time require. The Treasurer shall perform such
duties and have such powers additional to the foregoing as the
Board of Directors may designate.
Section 8. Assistant Treasurers. In the absence or
disability of the Treasurer, the Treasurer's powers and duties
shall be performed by the Assistant Treasurer, if only one, or if
more than one, by the one designated for the purpose by the Board
of Directors. Each Assistant Treasurer shall perform such duties
and have such powers additional to the foregoing as the Board of
Directors shall designate.
Section 9. Secretary. The Secretary shall issue notices of
all meetings of stockholders, of the Board of Directors and of
committees thereof where notices of such meetings are required by
law or these By-laws. The Secretary shall record the proceedings
of the meetings of the stockholders and of the Board of Directors
and shall be responsible for the custody thereof in a book to be
kept for that purpose. The Secretary shall also record the
proceedings of the committees of the Board of Directors unless such
committees appoint their own respective secretaries. Unless the
Board of Directors shall appoint a transfer agent and/or registrar,
the Secretary shall be charged with the duty of keeping, or causing
to be kept, accurate records of all stock outstanding, stock
certificates issued and stock transfers. The Secretary shall sign
such instruments as require his or her signature. The Secretary
shall have custody of the corporate seal and shall affix and attest
such seal on all documents whose execution under seal is duly
authorized. In the Secretary's absence at any meeting, an
Assistant Secretary or the Secretary pro tempore shall perform his
or her duties thereat. The Secretary shall perform such duties and
have such powers additional to the foregoing as the Board of
Directors shall designate.
Section 10. Assistant Secretaries. In the absence or
disability of the Secretary, the Secretary's powers and duties
shall be performed by the Assistant Secretary, if only one, or, if
more than one, by the one designated for the purpose by the Board
of Directors. Each Assistant Secretary shall perform such duties
and have such powers additional to the foregoing as the Board of
Directors shall designate.
Section 11. Salaries. The salaries and other compensation
of officers, agents and employees shall be fixed from time to time
by or under authority from the Board of Directors. No officer
shall be prevented from receiving a salary or other compensation by
reason of the fact that such Officer is also a Director of the
corporation.
Section 12. Removal. The Board of Directors may remove any
officer, either with or without cause, at any time.
Section 13. Bond. The corporation may secure the fidelity
of any or all of its officers or agents by bond or otherwise.
Section 14. Resignations. Any officer, agent or employee of
the corporation may resign at any time by giving written notice to
the Board of Directors, to the Chairman of the Board, if any, to
the President or to the Secretary of the corporation. Any such
resignation shall take effect at the time specified therein, or, if
the time be not specified, upon receipt thereof; and unless
otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
ARTICLE IV
Capital Stock
Section 1. Stock Certificates and Uncertificated Shares.
The shares of the corporation shall be represented by certificates,
unless the Board of Directors of the corporation provides by
resolution or resolutions that some or all of any or all classes or
series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate
until such certificate is surrendered to the corporation.
Notwithstanding the adoption of such resolution by the Board of
Directors, every holder of stock represented by certificates and
upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the
corporation by the Chairman or Vice Chairman of the Board of
Directors, or the President or Vice President, and by the Treasurer
and/or Assistant Treasurer, or the Secretary or an Assistant
Secretary of the corporation representing the number of shares
registered in certificate form. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as
if he or she were such officer, transfer agent or registrar at the
date of issue.
Section 2. Classes of Stock. If the corporation shall be
authorized to issue more than one class of stock or more than one
series of any class, the face or back of each certificate issued by
the corporation to represent such class or series shall either (a)
set forth in full or summarize the powers, designations,
preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the
qualifications, limitations or restrictions thereof, or (b) contain
a statement that the corporation will furnish a statement of the
same without charge to each stockholder who so requests.
Section 3. Transfer of Stock. Shares of stock shall be
transferable on the books of the corporation pursuant to applicable
law and such rules and regulations as the Board of Directors shall
from time to time prescribe. The Board of Directors may at any
time or from time to time appoint a transfer agent or agents or a
registrar or registrars for the transfer or registration of shares
of stock.
Section 4. Holders of Record. Prior to due presentment for
registration of transfer the corporation may treat the holder of
record of a share of its stock as the complete owner thereof
exclusively entitled to vote, to receive notifications and
otherwise entitled to all the rights and powers of a complete owner
thereof, notwithstanding notice to the contrary.
Section 5. Lost, Stolen, or Destroyed Stock Certificates.
The Board of Directors may direct a new stock certificate or
certificates or uncertificated shares to be issued in place of any
certificate or certificates theretofore issued by the corporation
alleged to have been lost, stolen, or destroyed upon the making of
an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen or destroyed. When authorizing such issue
of a new certificate or certificates, the Board of Directors may,
in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed
certificate or certificates or his or her legal representative, to
give the corporation a bond sufficient to indemnify it against any
claim that may be made against the corporation on account of the
alleged loss, theft, or destruction, of such certificates or the
issuance of such new certificate or uncertificated shares.
ARTICLE V
Indemnification of Directors, Officers and Others
Section 1. Indemnification of Directors and Officers. The
corporation shall indemnify, to the fullest extent permitted by the
General Corporation Law of the State of Delaware as presently in
effect or as hereafter amended:
(a) Subject to the provisions of Section 9 of this Article
V, any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative and whether external or internal to the corporation
(other than by action by or in the right of the corporation) by
reason of the fact that he is or was a Director or officer of the
corporation, or is or was serving at the request of the corporation
as a Director or officer of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such
suit, action or proceeding if he acted in good faith and in a
manner which he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that
his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and
in a manner which he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that
his conduct was unlawful.
(b) Any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was a Director or
officer of the corporation, or is or was serving at the request of
the corporation as a Director or officer of another corporation,
partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and amounts paid in settlement
actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which
such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Section 2. Indemnification of Employees and Others. The Board
of Directors, in its discretion, may authorize the corporation to
indemnify to the fullest extent permitted by the General
Corporation Law of the State of Delaware (as presently in effect or
as hereafter amended):
(a) Subject to the provisions of Section 9 of this
Article V, any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was an employee or
agent of the corporation, or is or was serving at the request of
the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in
connection with such suit, action or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
(b) Any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was an employee or
agent of the corporation, or is or was serving at the request of
the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and amounts paid in settlement
actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which
such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Section 3. Determination to Indemnify. Any indemnification under
this Article V(unless required by law or ordered by a court) shall
be made by the corporation only as authorized in the specific case
upon a determination that indemnification of the Director,
officer,employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in Sections l
and 2 of this Article V. Such determination shall be made (i) by
the Board of Directors by a majority vote of a quorum consisting of
Directors who were not parties to such action, suit or proceeding,
or (ii) if such a quorum is not obtainable, or, even if obtainable
a quorum of disinterested Directors so directs, by independent
legal counsel in a written opinion, or (iii) by the stockholders of
the corporation.
Section 4. Advances of Expenses. Expenses incurred by a
Director or officer in defending a civil or criminal action, suit
or proceeding shall be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the Director or officer to
repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the corporation as authorized in
this Article V. Any advance under this Section 4 shall be made
promptly, and in any event within ninety days, upon the written
request of the person seeking the advance.
Section 5. Non-Exclusive Right; Contractual Nature. The
indemnification and advancement of expenses provided by, or granted
pursuant to, the other Sections of this Article V shall not be
deemed exclusive of any other rights to which any person, whether
or not entitled to be indemnified under this Article V, may be
entitled under any statute, by-law,agreement, vote of stockholders
or disinterested Directors or otherwise, both as to action in his
official capacity and as to action in another capacity while
holding such office. Each person who is or becomes a Director or
officer as described in Section 1 of this Article V shall be deemed
to have served or to have continued to serve in such capacity in
reliance upon the indemnity provided for in this Article V. All
rights to indemnification under this Article V shall be deemed to
be provided by a contract between the corporation and the person
who serves as a Director or officer of the corporation at any time
while these by-laws and other relevant provisions of the General
Corporation Law of the State of Delaware and other applicable
law,if any, are in effect. Any repeal or modification thereof
shall not affect any rights or obligations then existing.
Section 6. Insurance. The Board of Directors may at any time
and from time to time cause the corporation to purchase and
maintain insurance on behalf of any person who is or was a
Director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a Director,
officer, employee or agent of another corporation,
partnership,joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such
liability under the provisions of the General Corporation Law of
the State of Delaware (as presently in effect or hereafter
amended), the Certificate of Incorporation of the corporation or
these By-laws.
Section 7. One Recovery. The corporation's indemnification under
Sections 1 and 2 of this Article V of any person who is or was a
Director, officer, employee or agent of the corporation, or is or
was serving, at the request of the corporation as a Director,
officer,employee or agent of another corporation, partnership,
joint venture, trust or other enterprise,shall be reduced by any
amounts such person receives as indemnification (i) under any
policy of insurance purchased and maintained on his behalf by the
corporation, (ii) from such other corporation, partnership, joint
venture, trust or other enterprise, or (iii) under any other
applicable indemnification provision.
Section 8. Certain Presumptions. In addition to and without
limiting the foregoing provisions of this Article V and except to
the extent otherwise required by law, any person seeking
indemnification under or pursuant to Section 1 of this Article V
shall be deemed and presumed to have met the applicable standard of
conduct set forth in Section l unless the contrary shall be
established.
Section 9. Claims Procedure.
(a) In addition to and without limiting the foregoing provisions
of this Article V and except to the extent otherwise required by
law, (a) it shall be a condition of the corporation's obligation to
indemnify under Sections l(a) and 2(a) of this Article V (in
addition to any other condition in these By-laws or by law provided
or imposed) that the person asserting, or proposing to assert, the
right to be indemnified, promptly after receipt of notice of
commencement of any action, suit or proceeding in respect of which
a claim for indemnification is or is to be made against the
corporation, notify the corporation of the commencement of such
action, suit or proceeding, including therewith a copy of all
papers served and the name of counsel retained or to be retained by
such person in connection with such action, suit or proceeding, and
thereafter to keep the corporation timely and fully apprised of all
developments and proceedings in connection with such action, suit
or proceeding or as the corporation shall request, and (b) the fees
and expenses of any counsel retained by a person asserting, or
proposing to assert, the right to be indemnified under Section l(a)
or 2(a) of this Article V shall be at the expense of such person
unless the counsel retained shall have been approved by the
corporation in writing.
(b) If a claim for indemnification or advancement of expenses
under this Article V is not paid in full by the corporation within
90 days after a written claim therefor has been received by the
corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim
and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expenses of prosecuting such claim.
Section 10. Rules of Interpretation. For purposes of this Article
V, references to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes
assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall
include any service by a Director or officer of the corporation
which imposes duties on, or involves services by, such person with
respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner
he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Article V.
Section 11. Expenses. To the extent that a Director, officer,
agent or employee of the corporation has been successful on the
merits or otherwise in defense of any action, suit or proceeding
referred to in Section 1 or in Section 2, or in defense of any
claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Section 12. Continuing Benefit. The indemnification and
advancement of expenses provided by, or granted pursuant to, this
Article V shall continue as to a person who has ceased to be a
Director, officer, employee or agent and shall inure to the benefit
of the heirs, executors and administrators of such a person.
Section 13. Severability. If any term or provision of this Article
V or the application thereof to any person, property or
circumstance shall to any extent be invalid or unenforceable,the
remainder of this Article V or the application of such term or
provision to persons, property or circumstances other than those as
to which it is invalid or unenforceable shall not be affected
thereby, and each term and provision of this Article V shall be
valid and enforced to the fullest extent permitted by law.
ARTICLE VI
Miscellaneous Provisions
Section 1. Interested Directors and Officers.
(a) No contract or transaction between the corporation and one or
more of its Directors or officers, or between the corporation
and any other corporation, partnership, association, or other
organization in which one or more of its Directors or officers are
Directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the Director
or officer is present at or participates in the meeting of the
Board or committee thereof which authorizes the contract or
transaction, or solely because his, her or their votes are counted
for such purpose, if:
(1) The material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to
the Board of Directors or the committee, and the Board or committee
in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested Directors, even
though the disinterested Directors be less than a quorum; or
(2) The material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to
the shareholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
shareholders; or
(3) The contract or transaction is fair as to the corporation as
of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof, or the shareholders.
(b) Common or interested Directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
Section 2. Stock in Other Corporations. Subject to any limitations
that may be imposed by the Board of Directors, the President or any
person or persons authorized by the Board of Directors may, in the
name and on behalf of the corporation, (a) call meetings of the
holders of stock or other securities of any corporation or other
organization, stock or other securities of which are held by this
corporation, (b) act, or appoint any other person or persons(with
or without powers of substitution) to act in the name and on behalf
of the corporation, or(c) express consent or dissent, as a holder
of such securities, to corporate or other action by such other
corporation or organization.
Section 3. Checks, Notes, Drafts and Other Instruments. Checks,
notes, drafts and other instruments for the payment of money drawn
or endorsed in the name of the corporation may be signed by any
officer or officers or person or persons authorized by the Board of
Directors to sign the same, which authorization may be general or
may be confined to one or more specific instances. No officer or
person shall sign any such instrument as aforesaid unless
authorized by the Board of Directors to do so.
Section 4. Corporate Seal. The seal of the corporation shall be
circular in form,bearing the name of the corporation, the word
"Delaware", and the year of incorporation, and the same may be used
by causing it or a facsimile thereof to be impressed or affixed or
in any other manner reproduced.
Section 5. Fiscal Year. The fiscal year of the corporation shall
be the year ending with December 31.
Section 6. Books and Records.The books, accounts and records of the
corporation, except as may be otherwise required by the laws of the
State of Delaware, may be kept outside of the State of Delaware, at
such place or places as the Board of Directors may from time to
time appoint. Except as may otherwise be provided by law, the
Board of Directors shall determine whether and to what extent the
books, accounts, records and documents of the corporation, or any
of them, shall be open to the inspection of the stockholders.
Section 7. Separability.If any term or provision of the By-laws, or
the application thereof to any person or circumstances or period of
time, shall to any extent be invalid or unenforceable, the
remainder of the By-laws shall be valid and enforced to the fullest
extent permitted by law.
Section 8. Amendments. The By-laws may be amended or repealed by
the stockholders or, if such power is conferred by the Certificate
of Incorporation, by the Board of Directors, except that any By-law
added or amended by the stockholders may be altered or repealed
only by the stockholders if such By-law expressly so provides.
[ARTICLE] 9
[CIK] 0000701255
[NAME]
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[CASH] 3640
[INT-BEARING-DEPOSITS] 989
[FED-FUNDS-SOLD] 2300
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 0
[INVESTMENTS-CARRYING] 7009
[INVESTMENTS-MARKET] 7057
[LOANS] 38977
[ALLOWANCE] 639
[TOTAL-ASSETS] 55905
[DEPOSITS] 51431
[SHORT-TERM] 0
[LIABILITIES-OTHER] 396
[LONG-TERM] 537
[COMMON] 7602
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] (4061)
[TOTAL-LIABILITIES-AND-EQUITY] 55905
[INTEREST-LOAN] 4086
[INTEREST-INVEST] 311
[INTEREST-OTHER] 171
[INTEREST-TOTAL] 4568
[INTEREST-DEPOSIT] 1570
[INTEREST-EXPENSE] 181
[INTEREST-INCOME-NET] 2817
[LOAN-LOSSES] 295
[SECURITIES-GAINS] 0
[EXPENSE-OTHER] 4291
[INCOME-PRETAX] (1073)
[INCOME-PRE-EXTRAORDINARY] (630)
[EXTRAORDINARY] 625
[CHANGES] 0
[NET-INCOME] (5)
[EPS-PRIMARY] (.02)
[EPS-DILUTED] 0
[YIELD-ACTUAL] 0
[LOANS-NON] 1574
[LOANS-PAST] 46
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 821
[CHARGE-OFFS] 702
[RECOVERIES] 225
[ALLOWANCE-CLOSE] 639
[ALLOWANCE-DOMESTIC] 507
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 132
</TABLE>
EXHIBIT 20.1
TERMS OF PRIMARY STOCK RIGHT
This specimen Stock Right sets forth the rights of the Holder
pursuant to the Series A (Primary) Stock Rights issued to the
holders of record of the Common Stock of the Company as of
September 28, 1995. Those rights are attached to, and
evidenced by, the Holder's Underlying Shares of Common Stock, and
will be transferred to any transferee of such Shares without any
separate action on the part of transferor or transferee, and may
not be transferred, assigned, pledged, hypothecated or disposed of
in any way, in whole or in part, separate or apart from the
Holder's Underlying Shares. This document has been delivered to
the recipient only to describe such Stock Rights, and is not
itself a legal instrument.
Issued to holders of record of Common Stock
as of the 28th day of September, 1995
SDN BANCORP, INC.
SERIES A (PRIMARY) STOCK RIGHT
THE HOLDER HEREOF (including his or her permitted transferees
hereof, the "Holder"), having an address as set forth on the stock
transfer records of the Company, holds a beneficial interest in a
certain pool of shares (the "Escrowed Shares") of Common Stock of
SDN Bancorp, Inc., a Delaware corporation (the "Company") and
related property placed in escrow by the Company for the benefit of
the Holder and certain other persons, and is entitled, for each of
the shares (the "Holder's Underlying Shares") of Common Stock held
by the Holder as of the Record Date (as hereinafter defined), to
receive that number, if any, of the Escrowed Shares as determined
pursuant to the formulae set forth in Article II hereof, subject to
the terms and conditions contained herein.
ARTICLE I
DEFINITIONS
1.1 "Actual Losses" means actual losses (including costs of
disposition and other out-of-pocket expenses) realized or incurred
with respect to Classified Assets through the First Determination
Date.
1.2 "Anticipated Losses" means the estimated losses anticipated
to be incurred after the First Determination Date with respect to
Classified Assets that are unliquidated as of such date, which
estimate is based upon, among other relevant factors, current
appraisals of collateral, estimated costs of disposition and
estimated carrying costs, provided that the Company's outside
auditors concur in writing that such loss estimates are reasonable.
1.3 "Bank" means San Dieguito National Bank, a national banking
association organized under the laws of the United States of
America and a wholly-owned subsidiary of the Company, and any legal
successor thereto.
1.4 "Claims Losses" means the aggregate amount of all losses and
expenses incurred by the Company on a consolidated basis (or in the
case of pending but unresolved matters, accruals made by the
Company on a consolidated basis in accordance with generally
accepted accounting principles to reserve against anticipated
future losses) from and after September 30, 1995 as a result of
claims arising out of facts or events occurring on or before
September 30, 1995, calculated as of the Second Determination Date.
1.5 "Classified Asset" means (a) any loan or lease that is
classified on the books and records of the Bank as "substandard,"
"doubtful" or "loss" and (b) any property classified on the books
and records of the Bank as OREO, in each case as of September 30,
1995 (including any loan or lease so classified at a later date if
the classification is effective as of September 30, 1995).
1.6 "Common Stock" means the common stock of the Company, $.01
par value per share.
1.7 "Company" means SDN Bancorp, Inc., a Delaware corporation.
1.8 "Escrow Agent" means Chemical Trust Company of California, or
such successor escrow agent as may hereafter be appointed under the
Escrow Agreement.
1.9 "Escrow Agreement" means that certain Escrow Agreement
between the Company and the Escrow Agent pursuant to which the
Escrowed Shares are held.
1.10 "Escrowed Assets" means all of the Escrowed Shares and any
other assets held in the First Distribution Pool and the Second
Distribution Pool from time to time.
1.11 "Escrowed Shares" means the shares of Common Stock, or any
other securities into which such shares of Common Stock may have
been converted or exchanged, held in the First Distribution Pool
and the Second Distribution Pool from time to time.
1.12 "Excess Losses" means the amount by which (i) the sum of
Actual Losses plus Anticipated Losses exceeds (ii) $261,000;
provided, however, that in no event shall Excess Losses be less
than zero.
1.13 "First Determination Date" means March 31, 1997.
1.14 "First Distribution Pool" means a pool of 8,955 shares of
Common Stock, together with any additional property held by the
Escrow Agent for distribution, in whole or in part, pursuant to
Section 2.1.
1.15 "Market Value" means, as it relates to the Common Stock on
any given date, (i) the mean of the high and low sales prices of
Common Stock as reported by the National Association of Securities
Dealers Automated Quotation System and published in the Wall Street
Journal (or, if not so reported or published, as reported by the
system then regarded as the most reliable source of such
quotations) or, if there are no reported sales on such date, the
mean of the closing bid and asked prices as so reported; or (ii) if
the Common Stock is listed on any domestic stock exchange, the mean
of the high and low sales prices of Common Stock as reported by the
Composite Tape of the New York Stock Exchange and published in the
Wall Street Journal (or, if not so reported or published, as
reported by the principal domestic stock exchange on which the
Common Stock was traded on that date); or (iii) if the Common Stock
is quoted in the domestic over-the-counter market or listed on a
domestic exchange, but there are not reported quotations or sales,
as the case may be, on the given date, the value determined
pursuant to (i) or (ii) above using the reported sale prices or
quotations on the last previous date on which so reported, provided
such date is not more than thirty (30) days prior to the date for
which the Market Price is sought; or (iv) if none of the foregoing
clauses applies, the fair market value as determined in good faith
by the Company's Board of Directors.
1.16 "Officer's Certificate" means a certificate of the Chief
Financial Officer of the Company delivered to the Escrow Agent
pursuant to Section 5.1 of the Escrow Agreement.
1.17 "OREO" means real property (i) acquired by the Bank, in the
ordinary course of the Bank's banking business, through purchase at
a foreclosure sale conducted on a lien in favor of the Bank (or a
comparable sale by a trustee under a deed of trust) or by
acceptance of a deed in lieu of foreclosure or (ii) any asset of
the Bank classified as "in-substance foreclosure".
1.18 "Pro Rata Portion" means the quotient of the number of the
Holder's Underlying Shares divided by the number of all Underlying
Shares.
1.19 "Record Date" means September 28, 1995.
1.20 "Second Determination Date" means September 30, 1998, or
such earlier date as the Company gives written notice of
accelerated distribution pursuant to Section 2.4.
1.21 "Second Distribution Pool" means a pool of 17,909 shares of
Common Stock, together with any additional property held by the
Escrow Agent for distribution, in whole or in part, pursuant to
Section 2.2.
1.22 "Transfer Agent" means the transfer agent of the Common
Stock, as may be designated by the Company from time to time.
1.23 "Underlying Shares" means all shares of Common Stock issued
and outstanding on the Record Date, excluding the Escrowed Shares.
ARTICLE II
CONDITIONS AND NUMBER OF SHARES
2.1 First Distribution. Promptly following the First
Determination Date, a determination shall be made, in accordance
with the procedures set forth in Section 5.1 of the Escrow
Agreement, of the portion of the Escrowed Assets, if any, to be
distributed from the First Distribution Pool to the person who was
the Holder as of such date, calculated as follows:
(a) if Excess Losses are equal to zero, the Holder shall be
entitled to the Holder's full Pro Rata Portion of the Escrowed
Assets in the First Distribution Pool;
(b) if Excess Losses are greater than zero but less than Five
Hundred Thousand Dollars ($500,000), the Holder shall be entitled
to the Holder's Pro Rata Portion of the Escrowed Assets in the
First Distribution Pool as reduced, on a percentage basis, by the
quotient obtained by dividing the amount of Excess Losses by
500,000; and
(c) if Excess Losses are equal to or greater than Five Hundred
Thousand Dollars ($500,000), the Holder shall not be entitled to
any Escrowed Assets in the First Distribution Pool. Promptly after
the foregoing determination of the portion of the Escrowed Assets
to be distributed to the Holder and receipt of the Officer's
Certificate by the Escrow Agent, if Escrowed Assets are to be
distributed, the Escrow Agent will deliver the applicable portion
of the Escrowed Assets in the First Distribution Pool as stated in
the Officer's Certificate (including the applicable number of
Escrowed Shares contained therein) to the Transfer Agent, which
will thereafter distribute to the Holder the Holder's Pro Rata
Portion thereof.
2.2 Second Distribution. Promptly following the Second
Determination Date, a determination shall be made, in accordance
with the procedures set forth in Section 5.1 of the Escrow
Agreement, of the portion of the Escrowed Assets, if any, to be
distributed from the Second Distribution Pool to person who was the
Holder as of such date, calculated as follows:
(a) if Claims Losses are equal to zero, the Holder shall be
entitled to the Holder's full Pro Rata Portion of the Escrowed
Assets in the Second Distribution Pool;
(b) if Claims Losses are greater than zero, but less than Two
Hundred Thousand Dollars ($200,000), the Holder shall be entitled
to the Holder's Pro Rata Portion of the Escrowed Assets in the
Second Distribution Pool as reduced, on a percentage basis, by the
quotient obtained by dividing the amount of Claims Losses by
200,000; and
(c) if Claims Losses are equal to or greater than Two Hundred
Thousand Dollars ($200,000), the Holder shall not be entitled to
any Escrowed Assets in the Second Distribution Pool.
Promptly after the foregoing determination of the portion of the
Escrowed Assets to be distributed to the Holder and receipt of the
Officer's Certificate by the Escrow Agent, the Escrow Agent will
deliver the applicable portion of the Escrowed Assets in the Second
Distribution Pool as stated in the Officer's Certificate (including
the applicable number of Escrowed Shares contained therein) to the
Transfer Agent, which will thereafter distribute to the Holder the
Holder's Pro Rata Portion thereof.
2.3 Notice of Distribution Amount. Whether or not any Escrowed
Shares or other Escrowed Assets are to be distributed to the Holder
from the applicable Distribution Pool, the Company shall furnish to
the Transfer Agent, and shall cause the Transfer Agent to deliver
to the Holder, a notice summarizing the amount of Excess Losses or
Claims Losses, as applicable, and the computation of the number of
Escrowed Shares, if any, and the amount of other Escrowed Assets,
if any, then constituting Residual Assets and being distributed to
the Holder.
2.4 Accelerated Second Distribution. Notwithstanding Section
2.2, at any time prior to the Second Determination Date, or
thereafter until the Escrow Agent's distribution of Escrowed Assets
from the Second Distribution Pool (or its notice that no such
assets will be distributed), the Company may in its sole
discretion, by written instructions to the Escrow Agent, direct the
Escrow Agent to deliver to the Transfer Agent all of the Escrowed
Assets held in the Second Distribution Pool, in which event the
Escrow Agent shall within a reasonable time following its receipt
of such written direction deliver all such Escrowed Assets to the
Transfer Agent, which will thereupon distribute to the Holder the
Holder's full Pro Rata Portion of the Escrowed Assets in the Second
Distribution Pool.
2.5 Fractional Shares. No fractional shares shall be issued
pursuant to this instrument. In the event that the application of
the formulae contained in Section 2.1 or Section 2.2 hereof would
result in a fractional share being issued to the Holder, (i) if
such fraction is equal to or greater than one-half, the number of
shares to be issued to the Holder shall be rounded up to the next
whole number of shares without payment by the Holder and (ii) if
such fraction is less than one-half, the number of shares to be
issued to the Holder either shall be rounded up to the next whole
number of shares without payment by the Holder or shall be rounded
down to the next whole number of shares with payment to the Holder
of the then current Market Value of such fractional share, as the
Company may in its discretion direct the Transfer Agent.
2.6 Undistributed Shares. The Holder shall have no continuing
right in or to any undistributed Escrowed Assets remaining in the
First Distribution Pool following the distribution by the Escrow
Agent in accordance with Section 2.1 hereof or remaining in the
Second Distribution Pool following the distribution by the Escrow
Agent in accordance with Section 2.2 hereof, and following each
such distribution the Escrow Agent may transfer such undistributed
Escrowed Assets as directed under the Escrow Agreement free and
clear of any beneficial interest, voting right or other right of
the Holder.
2.7 Anti-Dilution and Reclassification Provisions. The number of
shares of Common Stock in the First Distribution Pool and the
Second Distribution Pool shall be subject to change or adjustment
as follows:
(a) If, at any time prior to the First Determination Date with
respect to the First Distribution Pool or the Second Determination
Date with respect to the Second Distribution Pool, (i) the Company
shall fix a record date for the issuance of any dividend payable in
shares of its capital stock or (ii) the number of shares of Common
Stock outstanding (or any other securities into which the Common
Stock may have been converted or exchanged) shall have been
increased by a stock split, then the Company shall take appropriate
action to cause the number of Escrowed Shares in the Distribution
Pools to be increased to give effect to the stock dividend or stock
split, and the Distribution Pools will in fact be so increased upon
receipt of such additional securities by the Escrow Agent; and
(b) If, at any time prior to the First Determination Date with
respect to the First Distribution Pool or the Second Determination
Date with respect to the Second Distribution Pool, the number of
shares of Common Stock outstanding (or any other securities into
which the Common Stock may have been converted or exchanged) shall
have been decreased by a reverse stock split, the number of
Escrowed Shares in the Distribution Pools shall be appropriately
decreased to give effect to the reverse stock split, and the
Distribution Pools will be deemed to be so decreased upon receipt
of notice of the same by the Escrow Agent.
(c) If, at any time prior to the First Determination Date with
respect to the First Distribution Pool or the Second Determination
Date with respect to the Second Distribution Pool, any
distribution, exchange, payment or other delivery of property with
respect to shares of Common Stock (or any other securities into
which the Common Stock may have been converted or exchanged) occurs
(including, without limitation, in connection with any
reorganization, reclassification, consolidation, merger, sale,
lease or other transfer), the Escrowed Shares shall be treated pari
passu with the other shares of Common Stock outstanding, the Escrow
Agent shall be entitled to receive such property on behalf of the
Holders and such property shall be added to the appropriate
Distribution Pool for distribution in accordance with Section 4.2
hereof.
ARTICLE III
NONTRANSFERABILITY
3.1 The rights granted to the Holder pursuant to this instrument
are non-detachable from the Underlying Shares and may not be
transferred, assigned, pledged, hypothecated or disposed of in any
way, in whole or in part, separate or apart from the Holder's
Underlying Shares.
ARTICLE IV
VOTING OF SHARES IN ESCROW;
DIVIDENDS AND OTHER DISTRIBUTIONS ON SHARES
4.1 Voting of Escrowed Shares; Responses to Tender Offers, Etc.
In the event of any vote of the holders of Common Stock (or any
other securities of the type then constituting Escrowed Assets) the
record date for which is on or before the date on which all
Escrowed Shares have been distributed by the Escrow Agent, the
Escrow Agent, upon receipt of written request for the same from the
Company (which written request the Company hereby covenants to
make), shall cause the Escrowed Shares to be voted for or against
each proposal in as nearly as possible the same proportion as the
votes actually cast (including by proxy) by holders of all
outstanding Series A (Primary) Stock Rights, including the Holder,
with respect to their respective Underlying Shares. In the event
of any tender offer or similar offer made to holders of Common
Stock (or any other securities of the type then constituting
Escrowed Assets) and the Escrow Agent's receipt of written notice
of the same, the Escrow Agent will tender the number of Escrowed
Shares that constitutes, as nearly as possible, the same percentage
of the Escrowed Shares as the percentage of Underlying Shares
tendered by all holders of outstanding Series A (Primary) Stock
Rights, including the Holder, all as more specifically provided in
Section 6.1 of the Escrow Agreement.
4.2 Dividends, Distributions, Etc. In the event of any dividend
declared on any Escrowed Shares held in the First Distribution
Pool, or of any distribution, exchange, payment or other delivery
of property with respect to any Escrowed Shares held in the First
Distribution Pool (including, without limitation, in connection
with any reorganization, reclassification, consolidation, merger,
sale, lease or other transfer), in either case with a record date
prior to the First Determination Date, all securities, money or
other property so received by the Escrow Agent as a result thereof
shall be added to the First Distribution Pool and distributed or
retained in accordance with the provisions relating to the
distribution of the First Distribution Pool. In the event of any
dividend declared on any Escrowed Shares held in the Second
Distribution Pool, or of any distribution, exchange, payment or
other delivery of property with respect to Escrowed Shares held in
the Second Distribution Pool (including, without limitation, in
connection with any reorganization, reclassification,
consolidation, merger, sale, lease or other transfer), in either
case with a record date prior to the Second Determination Date, all
securities, money or other property so received by the Escrow Agent
as a result thereof shall be added to the Second Distribution
Pool and distributed or retained in accordance with the provisions
relating to the distribution of the Second Distribution Pool.
4.3 Rights Following Distribution of Shares. Except to the
extent expressly provided in Sections 4.1 and 4.2, the Holder shall
have no voting rights and no rights to receive dividends or other
distributions with respect to any of the Escrowed Shares. Without
limiting the foregoing, all rights of the Holder with respect to
assets held in the First Distribution Pool that are not determined
to be distributable to the Holder (as evidenced by the applicable
Officer's Certificate) shall terminate on the First Determination
Date and all rights of the Holder with respect to assets held in
the Second Distribution Pool that are not determined to be
distributable to the Holder (as evidenced by the applicable
Officer's Certificate) shall terminate on the Second Determination
Date.
ARTICLE V
MISCELLANEOUS
5.1 Modification and Waiver. This instrument and any provision
hereof may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party against which enforcement
of the same is sought.
5.2 Notices. Unless otherwise indicated, all notices, demands,
requests and other communications required or permitted to be given
hereunder shall be in writing and shall be deemed duly given
immediately upon personal delivery or upon delivery by facsimile,
provided that the sender receives telephonic or electronic
confirmation that the facsimile was received by the recipient, or
shall be deemed duly given three days after mailing if mailed by
registered or certified mail, postage prepaid, addressed, if to the
Holder, at the Holder's address as shown on the books of the
Company or its transfer agent, if to the Company, at its chief
executive offices and if to the Escrow Agent, at 300 South Grand
Avenue, 4th Floor, Los Angeles, CA 90071, Attn: Paula Oswald, or
in each case at such other address as the addressed party may have
substituted by notice pursuant to this Section 5.2.
5.3 Descriptive Headings and Governing Law. The descriptive
headings of the several sections and paragraphs hereof are inserted
for convenience only and do not constitute a part of this
instrument. This instrument shall be construed and enforced in
accordance with, and the rights of the parties shall be governed
by, the laws of the State of Delaware.
5.4 Additional Obligations of the Company. Pursuant to Section
5.2 of the Escrow Agreement, the Company is obligated (a) to issue
additional shares of Common Stock to the Transfer Agent for
inclusion in the First Distribution Pool and the Second
Distribution Pool to the extent the same shall be necessary to
enable the Transfer Agent to round up fractional shares, and (b) to
provide cash to the Transfer Agent to the extent the same shall be
necessary to enable the Transfer Agent to distribute cash in lieu
of fractional shares, each in accordance with Section 2.5 hereof.
5.5 Intent of Escrow. The Company represents, and by the
Holder's acceptance of the rights conferred under this Primary
Stock Right the Holder acknowledges, that each intends this
instrument, in combination with the Escrow Agreement and other
instruments issued in connection with the Escrow Agreement, to have
the effect of adjusting (if and to the extent resulting from the
terms of such instruments) the purchase price paid for certain
shares of Common Stock by Dartmouth Capital Group, L.P. under that
certain Stock Purchase Agreement dated as of July 21, 1995 by and
among the Company, the Bank and Dartmouth Capital Group, L.P.
5.6 Indemnity. Pursuant to the terms of the Escrow Agreement the
Company has agreed to indemnify, defend and hold harmless the
Escrow Agent against any and all losses, expenses, claims, suits,
obligations, liabilities, and damages, including attorneys' fees
based upon, or arising out of or in connection with, the
performance or non-performance by the Escrow Agent of any of its
obligations hereunder or under the Escrow Agreement, unless such
performance or non-performance constitutes willful misconduct or
gross negligence. Such indemnity shall survive the resignation or
termination of the Escrow Agent, as well as the termination of the
Escrow Agreement or this Primary Stock Right.
5.7 Conflict with Escrow Agreement. The terms of the Escrow
Agreement are expressly incorporated herein by this reference. To
the extent that any provisions of this Primary Stock Right are
different from (or conflict with) any provision of the Escrow
Agreement, such provision(s) of the Escrow Agreement shall be
deemed to supersede and control this Primary Stock Right. This
Primary Stock Right does not, and shall not be deemed to, create
any duties or obligations on the part of the Escrow Agent beyond
those expressly set forth in the Escrow Agreement, this Primary
Stock Right being qualified in its entirety by reference to the
Escrow Agreement, a copy of which may be obtained from the Company
upon written request.
