SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 31, 1996
(Amended)
Commission file number 2-76555
SDN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3683748
(State or other jurisdiction of (I.R.S.Employer or
incorporation or organization) Identification No.)
135 Saxony Road, Encinitas, California 92024-0905
(Address of principal executive offices) (Zip Code)
(619) 436-6888
(Registrant's telephone number, including area code)
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
As of March 31, 1996, the registrant completed its
Acquisition (the "Acquisition") of Liberty National Bank
("Liberty") for approximately $15.1 million in cash as
contemplated by the October 26, 1995 Agreement and Plan of Merger
by and among the registrant, Liberty, and Dartmouth Capital
Group, L.P., a Delaware limited partnership ("the Partnership")
and the registrant's controlling shareholder.
As of March 27, 1996, the Partnership invested approximately
$13.4 million in the registrant to fund the Liberty Acquisition.
In exchange for that investment, the registrant issued a total of
3,392,405 additional shares of Common Stock at a price per share
of $3.95, the registrant's book value per share as of December
31, 1995. At the Partnership's direction the registrant issued
1,764,000 of those shares of Common Stock, in the aggregate, to
certain limited partners of the Partnership (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 Acquisition, the Partnership
owns 48.0% of the Common Stock and the Direct Holders own, in the
aggregate 50.75% of the Common Stock.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements and pro forma financial
information are being filed within 60 days from which this report
was originally filed, April 15, 1996, for the reported event of
March 31, 1996.
Description Page
(a) Financial statements of business acquired
Audited financial statements and auditor's
report for Liberty National Bank 3
(b) Pro forma financial information
Unaudited pro forma condensed combined
financial statements for SDN Bancorp, Inc. 23
(c) Exhibits
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
SDN BANCORP, INC.
June 13, 1996 By: /s/ Curt A. Christianssen
---------------------------
Curt A. Christianssen
Senior Vice President
Chief Financial Officer
<PAGE>
LIBERTY NATIONAL BANK
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995, 1994 AND 1993
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the
Board of Directors of
Liberty National Bank:
We have audited the accompanying balance sheets of LIBERTY
NATIONAL BANK (a national banking association) as of December 31,
1995 and 1994, and the related statements of operations, changes
in shareholders' equity and cash flows for the years ended
December 31, 1995, 1994 and 1993. These financial statements are
the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Liberty National Bank as of December 31, 1995 and 1994, and
the results of its operations and its cash flows for the years
ended December 31, 1995, 1994 and 1993, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
January 31, 1996
<PAGE>
LIBERTY NATIONAL BANK
BALANCE SHEETS - DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
ASSETS:
Cash and due from banks (Notes 2 and 11) $ 7,185,677 $ 7,320,487
Time deposits with other banks (Note 11) 689,000 2,077,245
Federal funds sold (Note 11) 9,350,000 1,700,000
Securities available for sale (at approximate
market value) (Notes 3 and 11) 34,753,608 15,890,316
Securities held to maturity (approximate
market value of $2,059,212 in 1994)
(Notes 3 and 11) - 2,054,845
Loans 88,929,644 95,538,560
Less--Allowance for loan losses 1,686,000 2,527,671
------------ ------------
Loans, net (Notes 4, 6 and 11) 87,243,644 93,010,889
Property and equipment, net (Note 5) 1,226,187 1,253,249
Other real estate owned 1,169,486 5,303,401
Accrued interest receivable and other
assets (Note 8) 2,482,350 3,185,968
------------ ------------
Total assets $144,099,952 $131,796,400
============ ============
LIABILITIES:
Deposits (Note 11):
Demand deposits $ 22,419,422 $ 20,659,699
Savings deposits 29,096,858 41,303,787
Time deposits, $100,000 and over 8,787,581 11,011,674
Other time deposits 70,576,077 48,281,794
------------ -----------
Total deposits 130,879,938 121,256,954
------------- -----------
Accrued interest payable and other liabilities 1,727,984 205,953
------------ ------------
Total liabilities 132,607,922 121,462,907
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY (Notes 1 and 7):
Common stock, $3.33-1/3 par value:
Authorized--1,750,000 shares;
Issued and outstanding--
978,160 shares in 1995 and 1994 3,260,493 3,260,493
Surplus 4,062,204 4,062,204
Undivided profits 4,105,246 3,100,460
Unrealized gains (losses) on securities
available for sale, net of taxes
(Notes 3 and 8) 64,087 (89,664)
------------ ------------
Total shareholders' equity 11,492,030 10,333,493
------------ ------------
Total liabilities and shareholders'
equity $144,099,952 $131,796,400
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
LIBERTY NATIONAL BANK
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $10,941,005 $ 9,781,451 $11,455,556
Interest on securities (Note 3) 1,202,720 728,170 538,340
Interest on time deposits with
other banks 85,025 390,893 742,626
Interest on federal funds sold 590,340 142,748 72,237
----------- ----------- -----------
Total revenue from earning
assets 12,819,090 11,043,262 12,808,759
----------- ----------- -----------
COST OF FUNDS:
Interest on savings deposits 1,048,291 1,366,666 1,546,127
Interest on time deposits,
$100,000 and over 691,397 544,383 582,613
Interest on other time deposits 3,837,887 2,229,252 2,659,531
Interest on federal funds
purchased 322 11,387 11,249
Interest on securities sold under
agreements to repurchase 5,519 43,805 -
----------- ----------- -----------
Total cost of funds 5,583,416 4,195,493 4,799,520
----------- ----------- -----------
Net revenue from earning
assets before provision
for loan losses 7,235,674 6,847,769 8,009,239
PROVISION FOR LOAN LOSSES (Note 4) 150,000 1,315,000 4,781,500
----------- ----------- -----------
Net revenue from earning
assets 7,085,674 5,532,769 3,227,739
----------- ----------- -----------
OTHER REVENUE:
Service charges and fees 327,946 414,169 601,850
Other revenue 2,024,059 2,029,864 1,836,209
----------- ----------- -----------
Total other revenue 2,352,005 2,444,033 2,438,059
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
OPERATING EXPENSES:
Salaries and related benefits $ 3,362,330 $ 3,426,346 $3,344,048
Occupancy expense (Notes 5 and 6) 1,122,420 1,227,741 992,045
Other operating expenses
(Note 9) 3,339,777 5,432,623 4,008,394
----------- ----------- -----------
Total operating expenses 7,824,527 10,086,710 8,344,487
----------- ----------- -----------
Income (loss) before provision
for (benefit from) income
taxes 1,613,152 (2,109,908) (2,678,689)
PROVISION FOR (BENEFIT FROM) INCOME
TAXES (Note 8) 608,366 (803,117) (1,161,000)
----------- ----------- ------------
Net income (loss) $ 1,004,786 $(1,306,791)$(1,517,689)
=========== ============ ============
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE (Note 1): $ 1.03 $ (1.34)$ (1.55)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
LIBERTY NATIONAL BANK
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,004,786 $(1,306,791) $(1,517,689)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 216,803 215,857 253,095
(Gain) loss on sales of
equipment 19,682 (3,785) 5,902
Provision for loan losses 150,000 1,315,000 4,781,500
Provision (benefit) for deferred
taxes 607,566 532,338 (953,336)
Increase (decrease) in deferred
loan fees (93,994) 469,045 45,839
(Increase) decrease in other real
estate owned 4,133,915 (1,596,943) (1,488,086)
(Increase) decrease in accrued
interest receivable and other
assets (15,284) (120,704) 27,833
Increase (decrease) in accrued
interest payable and other
liabilities 1,522,031 (668,029) 26,518
------------ ------------ ------------
Net cash provided by
(used in) operating
activities 7,545,505 (1,164,012) 1,181,576
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in time deposits
with other banks 1,388,245 11,462,988 3,342,735
Proceeds from sales and maturities
of securities 55,130,000 13,931,983 2,075,000
Purchases of securities (71,673,360) (16,963,427) (8,290,350)
Net decrease in loans 5,711,239 13,521,157 17,143,212
Proceeds from disposition of
property and equipment 16,650 42,603 43,984
Purchases of property and equipment (226,073) (149,670) (77,021)
------------ ------------ ------------
Net cash provided by (used
in) investing activities (9,653,299) 21,845,634 14,237,560
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in demand and
savings deposits (10,447,206) (10,588,312) (2,567,101)
Decrease in time deposits,
$100,000 and over (2,224,093) (3,726,430) (8,336,307)
Increase (decrease) in other time
deposits 22,294,283 (10,053,309) (2,146,383)
------------ ------------ ------------
Net cash provided by (used
in) financing activities 9,622,984 (24,368,051) (13,049,791)
------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 7,515,190 (3,686,429) 2,369,345
CASH AND CASH EQUIVALENTS, beginning
of year 9,020,487 12,706,916 10,337,571
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $16,535,677 $ 9,020,487 $12,706,916
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest $ 5,583,416 $ 4,195,494 $ 4,851,183
Income taxes (1,234,640) (811,871) 539,005
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
LIBERTY NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. Organization and Summary of Significant Accounting Policies
Liberty National Bank (the Bank) is a nationally chartered bank.
The Bank primarily accepts deposits from and makes loans to
individuals and businesses in Orange County and Los Angeles
County, California.
On October 26, 1995, the Bank signed an Agreement and Plan of
Merger (the "Agreement") under which SDN Bancorp, Inc., a
Delaware corporation ("SDN"), headquartered in Encinitas,
California, will acquire the Bank through a cash merger (the
"Merger"). Also party to the transaction is Dartmouth Capital
Group, L.P., a Delaware limited partnership (the "Partnership")
and SDN's largest shareholder, which is expected to fund the
transaction.
Under the terms of the Agreement, all of the outstanding shares
of the Bank's common stock (except shares as to which dissenters'
rights have been exercised and, with limited exceptions, shares
beneficially owned by the parties to the Agreement), will be
converted into cash at the greater of $14.80 per share or 130% of
the Bank's book value (subject to certain adjustments) per share
at the month end next preceeding the closing, calculated on a
fully diluted basis, in each case subject to possible small
upward adjustments depending upon the timing of the closing. The
Agreement further provides that, prior to the closing, the Bank
will have canceled all outstanding stock options to acquire its
common stock, in each case in return for a payment to the holder
of the stock option equal to the spread between the exercise
price of the option and the price per share to be paid by SDN.
The consummation of the Merger is subject to certain standard
conditions, including but not limited to the approval of the
Agreement by the holders of not less than two-thirds of the
Bank's common stock and the receipt of all required regulatory
approvals. All of the Directors of the Bank have entered into a
Voting Agreement in which they have agreed to vote all of their
respective shares of common stock in favor of the Merger and
against any comparable transaction with a third party. The merger
is expected to be completed in March, 1996.
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 statements.
The accounting and reporting policies of the Bank conform to
generally accepted accounting principles and general practice
within the banking industry. The following are descriptions of
the more significant of those policies.
Securities Available for Sale and Securities Held to Maturity
During 1993, the Financial Accounting Standards Board issued
Statement of Financial Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. This
statement requires that investments in equity securities that
have readily determinable fair values and for all investments
in debt securities are to be classified as held to maturity,
<PAGE>
trading or available for sale. SFAS No. 115 had to be adopted
in 1994, but earlier adoption was permitted. The Bank adopted
this statement during 1993. During 1993, the Bank changed its
intent of holding all securities to maturity to having a
portion of the securities available for sale. Under SFAS
No. 115, securities held to maturity are reported at amortized
cost, and securities available for sale are reported at fair
value, with unrealized gains and losses reported as a separate
component of shareholders' equity, net of deferred taxes.
Securities available for sale may be held for indefinite
periods of time and may be sold in response to changes in
interest rates and/or significant prepayment risk.
The Bank's calculation of cost is increased by accretion of
discounts and decreased by amortization of premium, both
computed on the straight-line method that approximates the
effective interest method. Such amortization and accretion
are reflected in interest on securities. Gains and losses on
the sale of securities are based upon the adjusted cost and
computed on the specific identification method.
Loans
Loans are carried at face value, less payments collected and
net of the allowance for loan losses and deferred loan fees.
Interest on loans is accrued monthly on a simple interest
basis. Net loan fees and related direct costs are deferred
and recognized as interest income over the term of the loan on
a level yield basis.
The allowance for loan losses is maintained at a level
considered adequate by management to provide for losses that
can be reasonably anticipated. Management considers current
economic conditions, historical loan loss experience, and
other factors in determining the adequacy of the allowance.
The allowance is based on estimates, and ultimate losses may
vary from the current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they
are reported in earnings in the periods in which they become
known. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs.
On January 1, 1995 the Bank adopted the FASB Statement of
Financial Account Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" (FASB 114). This statement generally
requires impaired loans to be measured based on the present
value of expected future cash flows discounted at the loan's
effective interest rate, or as an expedient, at the loan's
observable market price or the fair value of the collateral if
the loan is collateral dependent. A loan is impaired when it
is probable the creditor will be unable to collect all
contractual principal and interest payments due in accordance
with the terms of the loan agreement. The accrual of interest
is discontinued on such loans and no income is recognized
until all recorded amounts of principal have been recovered in
full. The adoption of this statement did not have a material
impact upon the results of operations or the financial
position of the Bank, taken as a whole.
The Bank excludes from their loan impairment calculations
smaller balance, homogeneous loans such as consumer
installment loans and lines of credit. In determining whether
a loan is impaired or not, the Bank applies its normal loan
review procedures in making that judgement. Loans for which an
insignificant delay, i.e., 45 days past due, or insignificant
shortfall in amount of payments is anticipated, but the Bank
expects to collect all amounts due, are not considered for
impairment. The Bank measures
<PAGE>
impairment on a loan-by-loan basis using either the present
value of expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral
if the loan is collateral dependent.
Other Real Estate Owned
Real estate acquired by foreclosure or deed in lieu of
foreclosure is carried at the lower of the recorded investment
in the property or its fair value, less estimated carrying
costs and costs of disposition. At foreclosure, the value of
the underlying loan is written down to the fair value of the
real estate acquired by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged
to other operating expenses. Operating expenses of such
properties, net of related income and gains or losses on their
disposition, are recorded in other operating expenses.
Property and Equipment
Property and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation is computed on
the straight-line method over the estimated useful lives of
the assets. Amortization is computed on the straight-line
method over the useful lives of the leasehold improvements or
the term of the lease, whichever is shorter.
Income Taxes
The Bank accounts for income taxes using the liability method
for financial reporting purposes, pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes.
Earnings (Loss) Per Common and Common Equivalent Share
Earnings (loss) per common and common equivalent share (stock
options) were computed based on the weighted average number of
shares and common stock equivalents outstanding during each
period. If all stock options were exercised, they would not
have a material dilutive effect in 1995 and would have been
antidilutive in 1994 and 1993; therefore, stock options have
been excluded from the calculations. The weighted average
number of shares was approximately 978,160 in 1995, 1994 and
1993, respectively.
Statement of Cash Flows
For purposes of this statement, cash and cash equivalents
includes cash on hand, amounts due from correspondent banks
and federal funds sold.
Reclassifications
Certain amounts have been reclassified in the prior years to
conform to classifications followed in 1995.
2. Average Federal Reserve Balances
During 1995 and 1994, the Bank had average cash reserve
requirements to be maintained at the Federal Reserve Bank of
approximately $172,000 and $236,000, respectively.
3. Securities
During 1995, implementation guidelines were issued with respect
to SFAS No. 115. These guidelines allowed an entity to reassess
the classification of its securities held to maturity and make a
one time transfer on or before December 31, 1995 of all or a
portion of these securities to available for sale without
impacting the accounting treatment for held to maturity
securities. Accordingly, the Bank transferred the remainder of
its held to maturity portfolio in the amount of $894,892 into the
available for sale category. At the same time, the Bank recorded
gross unrealized gains of $12,946, relating to the transferred
securities.
The cost and estimated fair values of securities available for
sale as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1995
----------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Government agency
securities $ 1,000,932 $ 12,198 $ - $ 1,013,130
U.S. Treasury securities 32,747,289 85,351 - 32,832,640
State and municipal
securities 894,892 12,946 - 907,838
----------- -------- -------- -----------
$34,643,113 $110,495 $ - $34,753,608
=========== ======== ======== ===========
</TABLE>
The cost and estimated fair values of securities available for
sale and securities held to maturity as of December 31, 1994 are
as follows:
<TABLE>
<CAPTION>
1994
----------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Government agency
securities $ 1,003,169 $ 5,271 $ - $ 1,008,440
U.S. Treasury securities 15,041,739 1,517 161,380 14,881,876
----------- -------- -------- -----------
$16,044,908 $ 6,788 $161,380 $15,890,316
=========== ======== ======== ===========
Securities held to maturity:
State and municipal
securities $ 2,054,845 $ 12,442 $ 8,075 $ 2,059,212
=========== ======== ======== ===========
</TABLE>
<PAGE>
The cost and estimated fair value of securities available for
sale and securities held to maturity at December 31, 1995, by
contractual maturity, are shown below:
<TABLE>
<CAPTION>
Securities Available Securities Held To
For Sale Maturity
------------------------- ------------------------
Estimated Estimated
Fair Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or
less $29,811,882 $29,855,640 $ - $ -
Due after one year
through five years 4,831,231 4,897,968 - -
Due after five years
through 10 years - - - -
Due after 10 years - - 219,700 219,700
----------- ----------- ----------- -----------
$34,643,113 $34,753,608 $ 219,700 $ 219,700
=========== =========== =========== ===========
</TABLE>
At December 31, 1995 and 1994, securities with a fair value of
approximately $721,313 and $3,214,000, respectively, were pledged
to secure public deposits, as required by law.
Proceeds from sales of securities during 1995, 1994 and 1993
were $0, $8,177,983 and $0, respectively. Proceeds from
maturities or calls of securities during 1995, 1994 and 1993 were
$ 55,130,000, $5,754,000 and $2,075,000, respectively. Gross
gains and (losses) on sales and called securities were $7,000 and
$0 in 1995 and $475 and $(89,737) in 1994, respectively. There
were no gains or losses on sold or called securities in 1993.
Included in interest on securities in 1995, 1994 and 1993, is
$88,657, $119,878 and $162,037 respectively, of interest from
nontaxable obligations of states and municipalities.
4. Loans
The loan portfolio consists of the following at December 31, 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Commercial $ 44,439,240 $ 40,861,374
Real estate-construction 3,646,270 6,400,817
Real estate-other 28,832,975 36,486,422
Installment loans 13,799,771 13,672,554
Deferred loan fees (1,788,612) (1,882,607)
------------ ------------
88,929,644 95,538,560
Less--Allowance for loan losses 1,686,000 2,527,671
------------ ------------
Net loans $ 87,243,644 $ 93,010,889
============ ============
</TABLE>
The Bank sells the government-guaranteed portion of Small
Business Administration (SBA) loans which it originates to
participants in the secondary market and retains servicing
responsibilities. Such loans are sold at a premium, a portion of
which is immediately recognized as income. The remaining
premium, representing estimated normal servicing fees and/or a
yield adjustment on the portion of the SBA loan retained by the
Bank, is deferred and recognized as income in future periods as
long as the loans are serviced. The total SBA loan portfolio
being serviced by the Bank at December 31, 1995 and 1994, is
$142,899,605 and $140,284,425, respectively. The portion of the
SBA loans
<PAGE>
retained by the Bank totaled $33,580,173 and $31,904,579 at
December 31, 1995 and 1994, respectively.
An analysis of the activity with respect to aggregate loan
balances involving related parties (officers, directors and their
affiliates) is as follows:
Balance at New Loans Balance at
December 31, 1994 and Additions Repayments December 31, 1995
$2,956,990 $ 231,199 $1,287,362 $1,900,827
All related party loans were current as to principal and interest
as of December 31, 1995 and 1994. In management's opinion, these
loans were made in the ordinary course of business at prevailing
rates and terms.
At December 31, 1995, the Bank had $3,615,707 in impaired loans,
all of which have a related loss allowance, aggregating $160,103.
Of the $3,615,707 of impaired loans, all were measured using the
fair value of collateral. The average principal balance of
impaired loans during 1995 was $4,908,095. The Bank recognized
$93,141 of interest income related to impaired loans during the
year ended December 31, 1995.
Loans on which the accrual of interest has been discontinued
amounted to $3,710,000, $4,496,000 and $13,647,000 at
December 31, 1995, 1994, and 1993, respectively. If these loans
had been current throughout their terms, interest income would
have increased approximately $363,651, $1,061,000 and $780,000
for 1995, 1994, and 1993, respectively.
The activity in the allowance for loan losses account for the
years ended December 31, 1995, 1994 and 1993, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance, beginning of period $2,527,671 $4,900,946 $2,873,380
Loans charged off (1,467,929)(4,106,588)(2,870,139)
Recoveries on loans
previously charged off 476,258 418,313 116,205
Provision for loan losses 150,000 1,315,000 4,781,500
---------- ---------- ----------
Balance, end of period $1,686,000 $2,527,671 $4,900,946
========== ========== ==========
</TABLE>
5. Property and Equipment
Property and equipment consisted of the following at December 31,
1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $ 204,022 $ 204,022
Bank premises 360,791 325,906
Furniture, fixtures and equipment 1,851,103 1,951,570
Leasehold improvements 787,769 903,921
---------- ----------
3,203,685 3,385,419
Less--Accumulated depreciation
and amortization 1,977,498 2,132,170
---------- ----------
$1,226,187 $1,253,249
========== ==========
</TABLE>
<PAGE>
The amount of depreciation and amortization included in operating
expenses was $216,803, $215,857 and $253,095 in 1995, 1994 and
1993, respectively, and is based on the following estimated asset
lives:
Bank premises 31.5 years
Furniture, fixtures and equipment 3 to 15 years
Leasehold improvements Useful life or life of
lease, whichever is shorter
6. Commitments and Contingencies
In the normal course of business to meet the financing needs of
its customers, the Bank is a party to financial instruments with
"off-balance sheet" risk. Financial instruments consist of
commitments to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a
customer to a third party. The Bank does not enter into any
interest rate swaps or caps or forward or future contracts.
The nature of the off-balance sheet risk inherent in these
instruments is the possibility of accounting loss from (1) the
failure of another party to perform according to the terms of a
contract that would cause a draw on a standby letter of credit,
or (2) changes in market rates of interest for those few
commitments and undisbursed loans which have fixed rates of
interest. To minimize this risk, the Bank uses the same credit
policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The decision as to
whether collateral should be required is based on the
circumstances of each specific commitment or conditional
obligation.
Loan commitments are not usually made for more than one year. If
rates are quoted, they are generally stated in relation to the
prime rate.
These financial instruments involve, to varying degrees, exposure
to credit risk in excess of the amounts recognized in the
statements of financial condition. This exposure is represented
by the contractual notional amount of those instruments. At
December 31, 1995 and 1994, the contractual notional amount of
these instruments was approximately $14,839,560 and $11,454,817
for undisbursed loans and loan commitments and approximately
$1,186,371 and $987,300 for commitments under standby letters of
credit, respectively. There were no standby letters of credit to
related parties at December 31, 1995 and December 31, 1994.
Since many of the commitments are expected to expire without
being drawn upon, the amounts above do not necessarily represent
future cash requirements.
The Bank has concentrated its lending activity almost exclusively
to customers within the Los Angeles, Orange, Riverside and San
Bernardino counties of California. Commercial and real estate
loans to small and medium size companies in widely diversified
industries represent the largest component of the portfolio. The
next single largest grouping of loans is that to individuals for
household, family and other personal expenditures.
<PAGE>
The Bank has various types of real estate loans both for
development and long-term financing. As of December 31, 1995 and
1994, the Bank's real estate loan portfolio was as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Construction and land development $ 3,646,270 $ 6,400,817
Mortgage - commercial 21,047,073 23,289,649
Mortgage - residential 7,785,902 13,196,773
----------- -----------
Total $32,479,245 $42,887,239
=========== ===========
</TABLE>
The construction and land development sector of the loan
portfolio is widely diversified in a number of projects with an
emphasis on loans for the construction of single family
residential properties in Orange County and in the Los Angeles
basin. Substantially all the real estate loans are concentrated
within a close proximity to the Bank's locations. It is judged
that none of these lending activities expose the Bank to undue
credit risk; however, economic conditions and real estate markets
in Southern California may effect the Bank's loan portfolio and
underlying collateral values.
The Bank is a defendant in various pending lawsuits that arose in
the ordinary course of business. It is management's opinion that
the litigation will not result in any material adverse effect on
the Bank's financial position and results of operations.
As of December 31, 1995, minimum annual future lease commitments
under noncancellable operating leases for premises are as
follows:
Year ending December 31:
1996 $ 304,284
1997 304,284
1998 304,284
1999 304,284
2000 304,284
Thereafter 228,213
-----------
$1,749,633
===========
Total rent expense for premises included in occupancy expenses
for 1995, 1994 and 1993, was $385,266, $424,788 and
$444,785,respectively.
7. Shareholders' Equity
The Bank had a stock option plan that expired on March 17, 1992,
which authorized the issuance of up to 274,144 shares of its
common stock. Options were granted at an exercise price of not
less than the fair market value of the common stock at the date
of grant. Options that have been granted are exercisable in
cumulative 20 percent installments and expire 10 years after the
date of grant. Options that have been granted to directors were
exercisable at date of grant. As of December 31, 1995, 80,112
shares were exercisable under this plan.
During 1992, the Bank adopted a new stock option plan that
expires in 2002, which authorizes the issuance of up to 189,000
additional shares of its common stock. Options are granted at an
exercise price of not less than the fair market value of the
common stock at the date of grant. Options that have been
granted vest annually in 20 percent increments and expire 5 and
10 years from the date of grant for directors and employees,
respectively. As of December 31, 1995, 19,414 shares were
exercisable under this plan.
<PAGE>
The following information is presented concerning the stock
option plans as of December 31, 1995:
Number of Number
Shares of
Subject Options
to Option Exercisable Exercise Prices Expiration Dates
121,743 99,526 $6.25 to $13.00 05/12/1996
to 06/21/2004
During 1995, no options were granted, 3,859 options were canceled
at $8.13 - $10.13 per share and no options were exercised.
Under national banking law, the Bank is limited in its ability to
declare dividends to its shareholders to the total of its net
income for the year, combined with its retained net income for
the preceding two years less any
required transfers to surplus and any dividends declared during
the period. The effect of this law is such that the Bank may not
declare dividends at December 31, 1995.
8. Income Taxes
The current and deferred amounts of the provisions for (benefit
from) income taxes for the years ended December 31, 1995, 1994
and 1993, consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ - $(1,336,255) $(207,664)
State 800 800 -
------------- ------------ ----------
800 (1,335,455) (207,664)
------------- ------------ ----------
Deferred:
Federal 425,431 597,524 (633,532)
State 182,135 (65,186) (319,804)
------------- ------------ ----------
607,566 532,338 (953,336)
------------- ------------ -----------
$ 608,366 $ (803,117) $(1,161,000)
============= ============ ===========
</TABLE>
<PAGE>
Total tax expense (benefit) differs from the amount computed
using the federal statutory rate as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------- -------------------- ------------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Tax expense
at federal
statutory
rate $ 548,282 34.00% $ (717,358) (34.00)% $(910,090) (34.00)%
State income
taxes, net
of federal
income tax
benefit 120,737 7.49 ( 42,495) (2.01) (211,071) ( 7.89)
Interest on
state and
municipal
securities (25,130) ( 1.56) (35,954) (1.70) (49,482) ( 1.85)
Other (35,523) ( 2.20) (7,310) ( .35) 9,643 .30
---------- ------- ------------ ------- ---------- ------
$ 608,366 37.73% $ (803,117) (38.06)% $(1,161,000) (43.44)%
========== ======= ============ ======= ========== ======
</TABLE>
Deferred taxes arise from temporary differences between income
reported for financial reporting purposes and that reported for
federal income tax purposes. The tax effects of the principal
temporary differences resulting in deferred taxes were:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Provision for loan losses $ 394,371 $1,016,768 $(725,747)
Write-down of other real estate owned 123,502 57,387 (265,821)
Depreciation (97) (8,833) (31,821)
Net operating loss (15,411) (304,662) (24,752)
Other 105,201 (228,322) 94,805
----------- ---------- ----------
$ 607,566 $ 532,338 $(953,336)
=========== ========== ==========
</TABLE>
At December 31, 1995 and 1994, the components of the net deferred
tax asset which is included in accrued interest receivable and
other assets on the accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Depreciation $ (59,614) $ (59,711)
Allowance for loan losses 202,402 596,773
Other real estate owned 138,253 261,755
Net operating loss 344,826 329,415
Other non-deductible accruals (12,902) 92,299
----------- -----------
Unrealized (gain) loss on securities 612,965 1,220,531
available for sale (46,408) 64,929
----------- -----------
566,557 1,285,460
Less: Valuation Allowance - -
----------- -----------
$ 566,557 $1,285,460
=========== ===========
</TABLE>
<PAGE>
9. Other Operating Expenses
Other operating expenses include the following:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Legal and professional fees $ 833,138 $1,146,827 $ 856,773
Insurance and FDIC assessments 504,258 596,672 546,663
Business development and
referral expenses 530,90 562,049 446,271
Stationary and office supplies 322,42 302,396 288,507
Data processing expenses 416,271 342,076 375,268
Messenger services 114,537 111,333 139,466
Other real estate owned expenses 319,337 1,803,208 823,128
Other operating expenses 298,857 568,062 532,318
---------- ---------- ----------
$3,339,777 $5,432,623 $4,008,394
========== ========== ==========
</TABLE>
10. Regulatory Matters
The Bank is subject to regulation by the Office of the
Comptroller of the Currency (OCC). Representatives of the OCC
completed an examination of the Bank in the fourth quarter of
1992. As a result of their examination, the OCC established a
formal agreement (the Agreement) dated June 7, 1993, which among
other provisions requires the Bank to maintain a ratio of Tier 1
capital to risk-weighted assets of at least 9.5 percent and a
leverage ratio of at least 6.5 percent, improve the Bank's asset
quality and make various changes in loan policies and procedures.
During the fourth quarter of 1994, the OCC completed another
examination of the Bank as of June 30, 1994. Their results
indicated full compliance with most of the articles of the
Agreement, and partial compliance for the remaining articles. As
a result of the OCC examination conducted as of June 30, 1995,
the Bank was released from the Agreement effective September 18,
1995.
11. Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, requires that the Bank disclose estimated fair
values for its financial instruments.
The fair value estimates are made at a discrete point in time
based on relevant market information and information about the
financial instruments. Because no active market exists for a
significant portion of the Bank's financial instruments, fair
value estimates are based on judgments regarding current economic
conditions, risk characteristics of various financial
instruments, prepayment assumptions, future expected loss
experience, and such other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
In addition, the fair value estimates are based on existing on-
and off-balance sheet financial instruments without attempting to
estimate the value of existing and anticipated future customer
relationships and the value of assets and liabilities that are
not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or
liabilities include the branch network, the value of core
deposits, deferred tax assets and liabilities, other real estate
owned and property and equipment.
Additionally, the Bank intends to hold the majority of all its
assets and liabilities to their stated maturities. Therefore,
the Bank does not intend to realize any significant differences
between carrying value and fair value through sale or other
disposition. No attempt should be made to adjust shareholders'
<PAGE>
equity to reflect the following fair value disclosures.
Fair value estimates, methods, and assumptions are set forth
below for the Bank's financial instruments as of December 31,
1994 and 1993:
Cash, Due From Banks and Federal Funds Sold
For cash, due from Banks and federal funds sold (short-term
investments), the carrying amount (book value) is a reasonable
estimate of fair value.
Time Deposits with Other Banks
The fair value of fixed maturity certificates of deposit is
estimated at the carrying amount based on the short term
maturities (within eight months) of the certificates.
Securities
The fair value of securities held for sale and investment
securities equal quoted market price, if available. If a
quoted market price is not available, fair value is estimated
using quoted market prices of similar securities.
Loans
For certain homogeneous categories of loans, such as
residential mortgages, auto loans, and other consumer loans,
fair value is estimated by discounting the future cash flows
using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same
remaining maturities. For loans which are immediately
repriceable, the carrying value is a reasonable estimate of
fair value. The allowance for loan losses is considered to be
a reasonable market estimate of the credit risks inherent in
the portfolio.
Deposits
The fair value of demand deposits, savings deposits, and
certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of
similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking
into account remaining terms of the agreements. For
fixed-rate loan commitments, fair value also considered the
difference between current levels of interest rates and the
committed rates. The fair value of these unrecorded financial
instruments is not material to the Bank's financial position
or fair value disclosures at December 31, 1995 and 1994 (see
Note 6, Commitments and Contingencies, for the contractual
notional amounts of these unrecorded financial instruments).
<PAGE>
The estimated fair values of the Bank'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, due from banks and $16,535,677 $16,535,677
federal funds sold
Time deposits with other banks 689,000 689,000
Securities available for sale 34,643,113 34,753,608
Securities held to maturity 219,700 219,700
Loans, net 87,243,645 87,210,866
Financial Liabilities:
Deposits 130,879,938 131,214,788
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-------------------------
Carrying Fair
Amount Value
<S> <C> <C>
Financial Assets:
Cash, due from banks and $ 9,020,487 $ 9,020,487
federal funds sold
Time deposits with other banks 2,077,245 2,067,333
Securitites available for sale 15,890,316 15,890,316
Securities held to maturity 2,274,545 2,278,912
Loans 93,010,889 92,846,724
Financial Liabilities:
Deposits 121,256,954 121,253,003
</TABLE>
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Statement
of Condition as of December 31, 1995, and the Unaudited Pro Forma
Condensed Combined Statement of Operations for the year ended
December 31, 1995, give effect to the Liberty Acquisition, which
will be accounted for by the purchase method of accounting, as
if such transaction had occurred on January 1, 1995.
The pro forma information is based on the historical
consolidated financial statements of SDN and Liberty under the
assumptions and adjustments set forth in the accompanying Notes
to the Unaudited Pro Forma Condensed Combined Financial
Statements. The Pro Forma Condensed Combined Financial
Statements do not reflect any cost savings in connection with the
Liberty Acquisition.
The information shown below should be read in conjunction with
the consolidated historical financial statements of SDN and
Liberty, including the respective notes thereto, which are
included elsewhere in this Report or other filings. The pro
forma data is presented for comparative purposes only and is not
necessarily indicative of the combined financial position or
results of operations in the future or of the combined financial
position or results of operations which would have been realized
had the acquisition been consummated during the period or as of
the date for which the pro forma data is presented.
Pro forma per share amounts for the combined Liberty and SDN
entity are based upon issuance of 3,430,380 shares of SDN common
stock. The issuance price of the SDN common stock used to
determine the number of shares issued is $3.95 per common share.
<PAGE>
SDN BANCORP, INC.
Unaudited Pro Forma Condensed Combined Statement of Condition
December 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma
--------------------------
SDN LNB Adjustments(1) Combined
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,629 $ 7,874 $ (409) a $ 12,094
Federal funds sold 2,300 9,350 (2,200) a 9,450
Securities 7,009 34,754 - 41,763
Loans, net 38,977 88,930 - 127,907
Less: allowance for loan loss (639) (1,686) - (2,325)
Premises and equipment, net 597 1,226 - 1,823
Goodwill and other intangibles - - 4,508 b 4,508
Other assets 3,032 3,652 159 c 6,843
------- -------- -------- --------
Total assets $55,905 $144,100 $ 2,058 $202,063
======= ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $13,445 $ 22,419 $ - $ 35,864
Interest bearing 37,986 108,461 - 146,447
------- -------- -------- --------
Total deposits 51,431 130,880 - 182,311
Accrued interest payable
and other liabilities 933 1,728 - 2,661
------- -------- -------- --------
Total liabilities 52,364 132,608 - 184,972
Common stock 9 3,260 (3,226) d 43
Additional paid-in capital 7,593 4,062 9,454 d 21,109
Retained earnings (deficit) (4,061) 4,170 (4,170) d (4,061)
------- -------- -------- --------
Total shareholders' equity 3,541 11,492 2,058 17,091
------- -------- -------- --------
Total liabilities and
shareholders' equity $55,905 $144,100 $ 2,058 $202,063
======= ======== ======== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined
financial statements.
<PAGE>
SDN BANCORP, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma
----------------------
SDN LNB Adjustments(1) Combined
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans and leases $4,086 $10,941 $ - $15,027
Interest on investment securities 365 1,288 - 1,653
Interest on Federal funds sold 117 590 (149) a 558
------ ------ ------- -------
Total interest income 4,568 12,819 (149) 17,238
Interest Expense
Deposits 1,570 5,577 - 7,147
Debentures and other 181 6 - 187
------ ------ ------- -------
Total interest expense 1,751 5,583 - 7,334
------ ------ ------- -------
Net interest income 2,817 7,236 (149) 9,904
Provision for loan losses 295 150 - 445
------ ------ ------- -------
Net income after provision for loan losses 2,522 7,086 (149) 9,459
Non-interest income 696 2,352 - 3,048
Non-interest expense 4,291 7,825 451 b 12,567
------ ------ ------- -------
Income(loss) before provision for income
tax and extraordinary item (1,073) 1,613 (600) (60)
Provision(benefit) for income taxes (443) 608 252 (87)
------ ------ ------- -------
Income(loss) before extraordinary item (630) 1,005 (348) 27
Extraordinary item, net of taxes 625 - - 625
------ ------ ------- -------
Net income (loss) $ (5) $ 1,005 $ (348) $ 652
====== ====== ======= =======
Weighted average common
shares outstanding 268,198 3,698,578
Income per common share $(0.02) $0.18
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined
financial statements.
<PAGE>
NOTES TO THE
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 - The proforma condensed combined financial statements have been
prepared to reflect the acquisition of Liberty for an aggregate price
of $15.0 million. Pro forma adjustments are made to reflect:
a) transaction costs incurred in conjunction with the Liberty
Acquisition net of additional cash provided by the Partnership in
funding the transaction. Also reflected is the $2.2 million
redemption of Liberty's capital as a funding component of the
Liberty Acquisition. Included in the Pro Forma Condensed
Combined Statement of Operations is an adjustment to interest on
Federal funds sold to reflect the foregone income at the
prevailing Federal funds rates for the year.
b) the excess of the cost over the fair value of the net
assets acquired in the acquisition is as follows:
Purchase price $ 15,027
Historical net tangible assets acquired 11,428
Estimated closing adjustments (973)
Estimated fair value adjustments 64
--------
Estimated fair value of net assets 10,519
--------
Excess cost over net assets acquired $ 4,508
========
Included in the Pro Forma Condensed Combined Statement of
Operations is an adjustment to non-interest expense that reflects
the amortization of the excess cost over net assets acquired over
a useful life of ten years utilizing the straight line method.
c) the tax benefit related to the expenses incurred in conjunction
with the Acquisition and establishment of a valuation reserve for the
state deferred tax asset.
d) the elimination of the historical shareholders' equity in
accordance with purchase method of accounting, which reflects the
issuance of a total of 3,430,380 shares in exchange for cash investment
by the Partnership and services rendered by investment bankers.