SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
Commission File No. 0-11117
SDNB FINANCIAL CORP
(Exact name of Registrant as Specified in its Charter)
Incorporated in California - IRS Employer I.D. No. 95-3725079
1420 Kettner Boulevard, San Diego, California 92101
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number including area code: 619-233-1234
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock
Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant as of the close of business
on March 3, 1995: $4,037,000
The number of shares of Common Stock outstanding as of the close of
business on March 3, 1995: 1,538,364
The Registrant's 1994 Annual Report to Shareholders is incorporated by
reference into Part IV of this Form 10-K.
Total number of pages including cover page: 44.
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business. SDNB Financial Corp
(the "Company") was organized under the laws of California on April
15, 1982, at the direction of San Diego National Bank (the "Bank") for
the purpose of becoming a bank holding company by acquiring all of the
outstanding capital stock of the Bank, a national banking association.
The Federal Reserve Board ("Reserve Board") approved the Company's
application to become a bank holding company on November 1, 1982, and
continues as the Company's primary regulator.
The Bank was granted its Charter by the Comptroller of the
Currency ("Comptroller") on November 12, 1981, and commenced
operations as a national bank on the same date. The Bank is engaged
in a general commercial banking business through its head office in
San Diego, California. The Comptroller is the Bank's primary
regulator.
Until June 30, 1993, the Company owned SDNB Development Corp
("Devco"), a California corporation, for the purpose of said entity
participating as a joint venture partner in the San Diego National
Bank Building Joint Venture (the "Joint Venture"), a partnership
formed for the purpose of constructing and developing an office
building in downtown San Diego to house the Company and the Bank.
Effective July 1, 1993, the Company merged Devco into itself, thus
assuming the position as Joint Venture partner.
In addition, the Company owns SDNB Mortgage Bankers ("Mortgage"),
a California corporation, for the purpose of said entity engaging in
mortgage banking and brokerage activities pursuant to approval from
the Federal Reserve Bank of San Francisco as permitted by Section
225.25(b)(1) of Regulation Y and Section 4(c)(3) of the Bank Holding
Company Act of 1956. Mortgage has obtained a corporate real estate
broker's license from the California Department of Real Estate.
Mortgage is currently inactive.
(b) Financial Information About Industry Segments. Not
applicable to the Company, which presently operates in only one
business area, banking.
(c) Narrative Description of Business.
1. Supervision and Regulation. The banking industry is
subject to extensive federal regulation and is undergoing significant
change. In 1991, the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") was enacted. FDICIA substantially amended
the Federal Deposit Insurance Act ("FDI Act") and certain other
statutes. Since FDICIA's enactment, the federal bank regulatory
agencies have been in the process of adopting regulations to implement
its statutory provisions. Most of these new regulatory provisions are
now in effect, while others are being phased in over time. FDICIA and
its implementing regulations contain a number of substantial
provisions that likely will have a significant impact on the banking
industry as a whole and potentially could have a material impact upon
the operations and earnings of the Company.
The following discussion summarizes certain aspects of the
banking laws and regulations that affect the Company. Proposals to
change the laws and regulations governing the banking industry are
frequently raised in Congress and before the various bank regulatory
agencies. The likelihood and timing of any changes and the impact
such changes might have on the Company are impossible to determine
with certainty. A change in applicable laws or regulations, or a
change in the way such laws or regulations are interpreted by
regulatory agencies or courts, may have a material impact on the
business of the Company. To the extent that the following information
describes statutory or regulatory provisions, it is qualified entirely
by reference to the particular statutory or regulatory provision.
(a) Bank Holding Company Regulation. As a registered bank
holding company, the Company and its nonbank subsidiaries are subject
to supervision and regulation under the Bank Holding Company Act
("BHCA") by the Reserve Board. The Reserve Board requires regular
reports from the Company and is authorized by the BHCA to make regular
examinations of the Company and its subsidiaries.
Under the BHCA, the Company may not acquire direct or indirect
ownership or control of more than 5% of the voting shares of any
company, including a bank, without the prior approval of the Reserve
Board, except as specifically authorized under the BHCA. The Company
is also subject to regulation under this banking law with respect to
certain acquisitions of domestic banks. Under the BHCA, the Company,
subject to the approval of the Reserve Board, may acquire shares of
nonbanking corporations, the activities of which are deemed by the
Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
The Reserve Board has enforcement powers over bank holding
companies and their nonbanking subsidiaries, among other things to
interdict activities that represent unsafe or unsound practices or
constitute violations of law, rule, regulation, administrative orders
or written agreements with a federal bank regulator. These powers may
be exercised through the issuance of cease-and-desist orders, civil
money penalties and other actions.
Under the Reserve Board's statement of policy with respect to
bank holding company operations, a bank holding company is required to
serve as a source of financial strength to its subsidiary depository
institutions and to commit all available resources to support such
institutions in circumstances where it might not do so absent such
policy. Although this "source of strength" policy has been challenged
in litigation, the Reserve Board continues to take the position that
it has authority to enforce it. For a discussion of circumstances
under which a bank holding company may be required to guarantee the
capital levels or performance of its subsidiary bank, see "Capital
Adequacy" below. The Reserve Board also has the authority to
terminate any activity of a bank holding company that constitutes a
serious risk to the financial soundness or stability of any subsidiary
depository institution or to terminate its control of any bank or
nonbank subsidiaries.
The BHCA currently prohibits the Reserve Board from approving
the acquisition by the Company of any voting shares of, or
substantially all of the assets of, any bank located outside of the
State of California, unless such acquisition specifically is
authorized by the laws of the state in which such bank is located.
However, under recently enacted federal legislation, the restriction
on interstate acquisitions will be abolished effective September 1995,
and thereafter, bank holding companies from any state will be able to
acquire banks and bank holding companies located in any other state,
subject to certain conditions, including nationwide and state imposed
concentration limits. Banks also will be able to branch across state
lines by acquisition, merger or de novo, effective June 1, 1997
(unless state law would permit such interstate branching at an earlier
date), provided certain conditions are met, including that applicable
state law must expressly permit such interstate branching. Since
January 1, 1991, California has allowed nationwide banking on a
reciprocal basis, thus allowing out-of-state banks to acquire
California banks and California banks to acquire banks in other
states.
Bank holding companies and their subsidiary banks are also
subject to the provisions of the Community Reinvestment Act of 1977
("CRA"). Under the terms of the CRA, the Comptroller (or other
appropriate bank regulatory agency) is required in connection with its
examination of a bank to assess such bank's record in meeting the
credit needs of the community served by that bank, including low- and
moderate-income neighborhoods. Further, such assessment is also
required of any bank that has applied, among other things, to merge or
consolidate with, or acquire the assets or assume the liabilities of,
a federally-regulated financial institution, or to open or relocate a
branch office. In the case of a bank holding company applying for
approval to acquire a bank or bank holding company, the Reserve Board
will assess the record of each subsidiary bank of the applicant bank
holding company in considering the application.
As a result of a Presidential initiative, each of the four
federal banking agencies published a notice of proposed rulemaking in
December 1993, and as a result of extensive public comment, published
a revised notice in October 1994 to amend the CRA regulations. Both
the original and revised proposal would replace the current CRA
assessment system with a new evaluation system that would rate
institutions based on their actual performance (rather than efforts)
in meeting community credit needs. Under the revised proposal, each
institution would be evaluated based on the degree to which it is
providing loans (the lending test), branches and other services (the
service test) and investments (the investment test) to low- and
moderate-income areas in the communities it serves, based on the
communities' demographics, characteristics and needs, the
institution's capacity, product offerings and business strategy, and
the performance of the institution and similarly situated
institutions. Each depository institution would have to report to its
federal supervisory agency and make available to the public data on
the geographic distribution of its loan applications, denials,
originations and purchases. Institutions would continue to receive
one of four composite ratings: Outstanding, Satisfactory, Needs to
Improve or Substantial Noncompliance. For the lending, services and
investment tests, however, the Satisfactory category would be divided
into High Satisfactory and Low Satisfactory. An institution that
received a composite rating of Substantial Noncompliance could be
subject to enforcement action. The Company is studying the proposal
and determining whether the regulations, if enacted in their revised
proposed form, would require changes to the CRA action plans of the
Bank.
The primary assets of the Company consist of the ownership of
the Bank, and through the Joint Venture, a 62% interest in the San
Diego National Bank Building. Various legal limitations affect the
extent to which the Bank may extend credit, pay dividends, or
otherwise supply funds to the Company or the Bank's other affiliates.
In particular, the Bank is subject to certain restrictions imposed by
Federal law on any extensions of credit to the Company or, with
certain exceptions, other affiliates. Such restrictions prohibit the
Company or such other affiliates from borrowing from the Bank unless
the loans are secured by specified collateral. Further, such secured
loans and investments by the Bank are limited to 10% of the Bank's
capital and surplus in the case of the Company or to any other such
affiliate and 20% of the Bank's capital and surplus as to the Company
and all such affiliates in the aggregate.
In addition, there are certain limitations on the payment of
dividends to the Company by the Bank. In general, the Bank may pay
dividends out of its net profits. However, the prior approval of the
Comptroller is required if the total of all dividends declared by the
Bank in any calendar year will exceed the Bank's net profits for that
year combined with its retained net profits for the preceding two
years. The Bank had a net loss of approximately $1.49 million for
1993 and 1994 combined. Until the effects of that loss are overcome,
the Bank will be precluded from paying dividends to the Company
without such approval.
In addition, the Comptroller and the Federal Deposit Insurance
Corporation ("FDIC") have authority to prohibit a bank from engaging
in an unsafe or unsound practice in conducting its business. The
payment of dividends, depending upon the financial condition of the
bank in question, could be deemed to constitute such an unsafe or
unsound practice, and the regulatory agencies have indicated their
view that it generally would be an unsafe and unsound practice to pay
dividends except out of current operating earnings.
Finally, under FDICIA, an insured depository institution is
prohibited from making any capital distribution to its owner,
including any dividend, if, after making such distribution, the
depository institution fails to meet the required minimum level for
any relevant capital measure, including the risk-based capital
adequacy and leverage standards discussed below.
The Company and the Federal Reserve Bank of San Francisco
("Reserve Bank") entered into an agreement on November 20, 1992,
pursuant to which the Company has submitted the proposed capital
infusion plan outlined in the management discussion and analysis to
improve the financial condition of the Company, the Bank and the Joint
Venture. Management and the Board continue to pursue completion of
the measures outlined to the Reserve Bank. Under the terms of the
agreement the Company must obtain the approval of the Reserve Bank
prior to the declaration of any cash dividends or the incurrence of
debt, other than in the ordinary course of business, and the Company
must give notice to the Reserve Bank prior to adding or replacing a
director or a senior executive officer.
(b) Capital Adequacy. The Reserve Board and the
Comptroller have adopted risk-based capital adequacy guidelines for bank
holding companies and banks under their supervision. Under the
guidelines the so-called "Tier 1 capital" and "total capital" as a
percentage of risk weighted assets and certain off-balance sheet
instruments must be at least 4% and 8%, respectively.
The Reserve Board and the Comptroller have also imposed a
leverage standard to supplement their risk based ratios. This
leverage standard focuses on a banking institution's ratio of Tier 1
capital to average total assets adjusted for goodwill and certain
other items. Under these guidelines, banking institutions that meet
certain criteria, including excellent asset quality, high liquidity,
low interest rate exposure and good earnings, and have received the
highest regulatory rating must maintain a ratio of Tier 1 capital to
total assets of at least 3%. Institutions not meeting these criteria,
as well as institutions with supervisory, financial or operational
weaknesses, along with those experiencing or anticipating significant
growth are expected to maintain a Tier l capital to total assets ratio
equal to at least 4% to 5%.
As reflected in the following table, the risk-based capital
ratios and leverage ratios of the Company and the Bank as of December
31, 1994 exceeded the fully phased-in risk-based capital adequacy
guidelines and the leverage standard.
Capital Components and Ratios at December 31, 1994
(dollars in thousands)
Company Bank
Capital Components
Tier 1 capital $9,329 $11,667
Total capital 10,868 13,081
Risk-weighted assets
and off-balance sheet
instruments 123,142 113,106
Risk-based Capital Ratio
Tier 1 capital 7.59% 10.35%
Total capital 8.85% 11.61%
Leverage Ratio 5.33% 7.09%
FDICIA requires each federal banking agency, including the
Reserve Board, to revise its risk-based capital standards, in order to
ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risk of nontraditional
activities, as well as reflect the actual performance and expected
risk of loss on multifamily mortgages. The federal banking agencies
in September 1993 issued proposed rules whereby exposures to interest
rate risk would be measured as the effect that a specified change in
market interest rates would have on the net economic value of a bank.
This economic perspective considers the effect that changing market
interest rates may have on the value of a bank's assets, liabilities,
and off-balance-sheet positions. Institutions with interest rate risk
exposure in excess of a threshold level would be required to hold
additional capital proportionate to that risk. The Company is
studying these latest proposals but cannot assess at this point the
impact the proposals would have on the Company's capital requirements.
The Reserve Board, the FDIC, the Comptroller and the Office of
Thrift Supervision have issued a final rule amending the risk-based
capital guidelines to take account of concentration of credit risk and
the risk of non-traditional activities. The final rule amends each
agency's risk-based capital standards by explicitly identifying
concentration of credit risk and the risk arising from non-traditional
activities, as well as an institution's ability to manage those risks,
as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. This final rule
has not materially impacted the Company's capital requirements, but
there can be no assurance that the adoption of other proposals
implementing FDICIA will not have an adverse impact on the Company's
capital requirements.
Bank regulators and legislators continue to indicate their
desire to raise capital requirements applicable to banking
organizations beyond current levels. However, management is unable to
predict whether and when higher capital requirements would be imposed
and if so, at what levels and on what schedule.
FDICIA substantially revised the bank regulatory and funding
provisions of the FDI Act and made revisions to several other federal
banking statutes. Among other things, FDICIA required the federal
banking agencies to take "prompt corrective action" in respect to
depository institutions that do not meet minimum capital requirements.
FDICIA established five capital tiers: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized". A depository
institution's capital tier will depend upon where its capital levels
are in relation to various relevant capital measures, which will
include a risk-based capital measure and a leverage ratio capital
measure, and certain other factors.
Under the implementing regulations adopted by the federal
banking agencies, a bank is considered "well capitalized" if it has
(i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1
risk-based capital ratio of 6% of greater, (iii) a leverage ratio of
5% or greater and (iv) is not subject to any order or written
directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank is defined as one
that has (i) a total-risk-based capital ratio of 8% or greater, (ii) a
Tier 1 risk-based capital ratio of 4% or greater and (iii) a leverage
ratio of 4% or greater (or 3% or greater in the case of a bank with a
composite CAMEL rating of 1). A bank is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of
less than 6%, (ii) a Tier 1 risk-based capital ratio of less than 4%
or (iii) a leverage ratio of less than 4% (or 3% or greater in the
case of a bank with a composite CAMEL rating of 1), (B) "significantly
undercapitalized" if the bank has (i) a total risk-based capital ratio
of less than 6%, or (ii) a tier 1 risk-based capital ratio of less
than 3% or (iii) a leverage ratio of less than 3% and (C) "critically
undercapitalized" if the bank has a ratio of tangible equity to total
assets equal to or less than 2%. The Reserve Board may reclassify a
"well capitalized" bank as "adequately capitalized" or subject an
"adequately capitalized" or "undercapitalized" institution to the
supervisory actions applicable to the next lower capital category if
it determines that the bank is in an unsafe or unsound condition or
deems the bank to be engaged in an unsafe or unsound practice and not
to have corrected the deficiency. The Bank currently meets the
definition of a "well capitalized" institution.
"Undercapitalized" depository institutions, among other things,
are subject to growth limitations, are prohibited, with certain
exceptions, from making capital distributions, are limited in their
ability to obtain funding from a Federal Reserve Bank and are required
to submit a capital restoration plan. The federal banking agencies
may not accept a capital plan without determining, among other things,
that the plan is based on realistic assumptions and is likely to
succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the
depository institution's parent holding company must guarantee that
the institution will comply with such capital restoration plan and
provide appropriate assurance of performance. If a depository
institution fails to submit an appropriate plan, including if the
holding company refuses or is unable to make the guarantee described
in the previous sentence, it is treated as if it is "significantly
undercapitalized". Failure to submit or implement an acceptable
capital plan also is grounds for the appointment of a conservator or a
receiver. "Significantly undercapitalized" depository institutions
may be subject to a number of additional requirements and
restrictions, including orders to sell sufficient voting stock to
become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Moreover,
the parent holding company of a significantly undercapitalized
depository institution may be ordered to divest itself of the
institution or of nonbank subsidiaries of the holding company.
"Critically undercapitalized" institutions, among other things, are
prohibited from making any payments of principal and interest on
subordinated debt, and are subject to the appointment of a receiver or
conservator.
FDICIA directed, among other things, that each federal banking
agency prescribe standards for depository institutions and depository
institution holding companies relating to internal controls,
information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth,
compensation, a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value
to book value for publicly traded shares and other standards as they
deem appropriate. The Reserve Board adopted such standards in 1993.
FDICIA also contains a variety of other provisions that may
affect the operations of the Company, including new reporting
requirements, regulatory standards for real estate lending, "truth in
savings" provisions, limitations on the amount of purchased mortgage
servicing rights and purchased credit card relationships includable in
Tier 1 capital, and the requirement that a depository institution give
90 days' prior notice to customers and regulatory authorities before
closing any branch. FDICIA also contains a prohibition on the
acceptance or removal of brokered deposits by depository institutions
that are not "well capitalized" or are "adequately capitalized" and
have not received a waiver from the FDIC.
(c) FDIC Deposit Insurance Assessments. As an institution
insured by the Bank Insurance Fund ("BIF"), the Bank is subject to
FDIC deposit insurance assessments. Under current law, as amended by
FDICIA, the insurance assessment to be paid by BIF-insured
institutions shall be specified in a schedule required to be issued by
the FDIC that specifies, at semi-annual intervals, target reserve
ratios designed to increase the reserve ratio to 1.25% of estimated
insured deposits (or such higher ratio as the FDIC may determine in
accordance with the statute) in 15 years. FDICIA also authorizes the
FDIC to impose one or more special assessments in any amounts deemed
necessary to enable repayment of amounts borrowed by the FDIC from the
Treasury Department. The FDIC set an assessment rate for the BIF of
0.195% for periods prior to June 30, 1992, and an assessment rate of
0.23% effective on June 30, 1992. Consistent with FDICIA, on
September 15, 1992, the FDIC approved the implementation of a risk-
based deposit premium assessment system under which each depository
institution is placed in one of nine assessment categories based on
the institution's capital classification under the prompt corrective
action provisions described above and whether such institution is
considered by its supervisory agency to be financially sound or to
have supervisory concerns. The assessment rates under the new system
range from 0.23% to 0.31% depending upon the assessment category into
which the insured institution is placed. The new assessment system
became effective January 1, 1993. The Bank's assessment rate
increased significantly under the new system which resulted in an
increase in deposit insurance assessment expense. The FDIC has
announced that it estimates that the target reserve ratio will be
achieved during 1995 and that assessment rates could be reduced
significantly. If the estimates prove accurate, there would be a
beneficial effect on the results of operations.
A significant increase in the assessment rate or a special
additional assessment with respect to insured deposits, however, could
have an adverse impact on the results of operations and capital of the
Bank.
(d) Governmental Policies. The earnings of the Company are
significantly affected by the monetary and fiscal policies of
governmental authorities, including the Reserve Board. Among the
instruments of monetary policy used by the Reserve Board to implement
these objectives are open-market operations in U.S. Government
securities and Federal funds, changes in the discount rate on member
bank borrowings and changes in reserve requirements against member
bank deposits. These instruments of monetary policy are used in
varying combinations to influence the overall level of bank loans,
investments and deposits, and the interest rates charged on loans and
paid for deposits. The Reserve Board frequently uses these
instruments of monetary policy, especially its open-market operations
and the discount rate, to influence the level of interest rates and to
affect the strength of the economy, the level of inflation or the
price of the dollar in foreign exchange markets. The monetary
policies of the Reserve Board have had a significant effect on the
operating results of banking institutions in the past and are expected
to continue to do so in the future. It is not possible to predict the
nature of future changes in monetary and fiscal policies, or the
effect which they may have on the Company's business and results of
operations.
(e) Other Legislative Initiatives. From time to time, various
proposals are introduced in the United States Congress and before
various bank regulatory authorities which would alter the powers of,
and restrictions on, different types of banking organizations and
which would restructure part or all of the existing regulatory
framework for banks, bank holding companies and other financial
institutions.
Moreover, a number of other bills have been introduced in
Congress which would further regulate, deregulate or restructure the
financial services industry. It is not possible to predict whether
these or any other proposals will be enacted into law or, even if
enacted, the effect which they may have on the Company's business and
results of operations.
2. Business of the Bank. The Bank focuses primarily upon
wholesale commercial banking operations, emphasizing the needs of
small and medium size business firms and corporations and the personal
banking needs of business executives and professional persons located
in the Bank's immediate service area. The Bank's marketing strategy
stresses its local ownership and commitment to service community
business needs.
Because the Bank's primary service area is comprised largely of
commercial and professional businesses, the Bank places particular
emphasis on banking services appropriate to serve the financial
requirements of these business sectors. The Bank concentrates on
business with commercial, industrial and professional customers in
connection with both loans and deposits. In addition, the Bank seeks
business from manufacturing and industrial corporations in San Diego
County for whom it can provide financing and other banking needs. The
Bank believes that the attraction of such businesses or large personal
accounts enables it to provide professional, efficient and
personalized banking services on an effective basis. The Bank also
offers courier services, collection services, notary public services,
money market certificates of deposit, letters of credit and other
customary bank services to its business customers.
On September 13, 1988, the Bank was granted trust powers by the
Comptroller. The trust department, specializing in self-directed
employee benefit plans, began active operations in 1989. In 1992, the
Bank, citing failure of the department to achieve profitable
operations, discontinued operations and transferred the Bank's
fiduciary responsibilities to another institution. In 1994, the Bank
entered into an agreement with Danielson Trust Company ("Danielson")
under which Danielson will provide trust and related services to Bank
customers.
In addition to offering a comprehensive array of general banking
services, the Bank offers specialized services to certain businesses
that have been identified by the Bank's management as key sources of
deposits and loans. These services, which are offered directly or
through the Bank's correspondent banks, include cash management
consulting and money market investments. The Bank also offers
directly, or through correspondent banks, certain international
services, such as letters of credit and documentary collections.
As a corollary and supplement to its wholesale banking
operations, the Bank provides a full range of retail commercial
banking services, including checking and savings accounts, safe
deposit boxes, traveler's checks, and cashier's checks. The Bank
issues credit cards through third parties and is a merchant depository
for cardholder drafts.
The Bank engages in a full range of lending activities. The
types of credit made available are:
Business Loans and Lines of Credit
Business acquisition and expansion
Equipment and vehicle financing
Working capital
Accounts receivable and inventory financing
Standby letters of credit
SBA and CSSBDC guaranteed loans
Consumer Loans and Lines of Credit
Personal loans (secured and unsecured)
Personal property loans (automobiles, boats, airplanes,
recreational vehicles, mobile homes)
Home equity loans (secured by 1-4 family dwellings)
Home improvement loans (secured and unsecured)
Home equity lines of credit (secured by deed of trust on 1-4
family dwellings)
Personal lines of credit (Ready Money-unsecured lines attached
to a checking account)
Real Estate Financing
Mini-perm loans for commercial and multi-family property
Residential and commercial land loans
Development, interim construction and rehabilitation loans for
commercial, 1-4 family and multi-family property
HUD guaranteed loans
The commercial lending (business loans and lines of credit) is
directed primarily at businesses whose demands for funds fall within
the Bank's unsecured lending limit (approximately $2,100,000 at
December 31, 1994), and who are depositors with the Bank.
The Bank has no foreign loans or highly leveraged transactions.
At December 31, 1994, approximately fifty-nine percent (59%) of the
Bank's total loans were commercial, a majority of which are written
with an original maturity of 90 to 180 days. Real estate loans,
including interim construction and mini-perm, comprised approximately
thirty-eight percent (38%) of the portfolio, with an average maturity
of nine to eighteen months for interim construction loans and five
years for the mini-perm loans. The balance of the loans are
installment and consumer loans. Most of the loans bear adjustable
interest rates, which change with the Bank's base rate. The Bank's
loan loss reserve was approximately $2,148,000, or two and two-tenths
percent (2.2%) of gross loans at December 31, 1994. The Bank intends
to maintain the loan loss reserve at a level sufficient to absorb
charge-offs from unexpected and adverse economic developments.
The Bank's investment portfolio includes United States government
and agency investments, state and municipal bonds, bankers
acceptances, certificates of deposit and other miscellaneous
investments.
A majority of the Bank's deposits are derived from customers who
have other account relationships with the Bank. The Bank has never
used money brokers to secure deposits. The Bank's deposits are
comprised of time certificates of deposit, demand accounts (including
interest bearing demand accounts) and savings deposits (including
money market savings).
During the years 1992 through 1994, the Company and the Bank have
been adversely affected by a number of factors emanating primarily
from the condition of the economy in San Diego. These factors, more
fully described in management's discussion and analysis and in the
statistical information which follows include:
a) Higher than normal loan loss provisions.
b) OREO losses and expenses from higher than normal levels of
OREO properties.
c) Reduction in net interest margins between 1992 and 1993 as a
result of declining interest rates.
d) Reduction in the level of the loan portfolio resulting from
continuing low demand.
Additionally, the Bank has incurred substantial expense in
connection with legal fees and provision for additional costs
involving the Pioneer Mortgage Company litigation.
Competition. The Bank competes with other commercial banks,
savings and loan associations, finance companies, money market funds,
credit unions, insurance companies and brokerage firms. Many of the
regulations and limitations imposed upon account balances and interest
rates were eliminated by the Depository Institutions Deregulation and
Monetary Control Act of 1980. Savings and loan associations, credit
unions and other business concerns were allowed to offer traditional
banking services as a result of the Garn-St. Germain Depository
Institutions Act of 1982 (the "Garn Act"). Among other provisions,
the Garn Act enabled federally insured institutions to offer a new
account similar to and directly competitive with money market
accounts. Over the years following passage of the Garn Act, these
changes have impacted the Bank's competition for deposits and the
corresponding cost of deposits and have also resulted in a greater
portion of the Bank's deposits being subject to rate changes.
The Bank also competes for deposits with other institutions, such
as brokerage firms and credit card companies, which offer alternative
investment vehicles, such as money market funds, as well as
traditional banking services, such as check access to money market
funds and check advances on credit card accounts. In 1989, the Bank
initiated the Executive Money Market account, designed to be
competitive with accounts offered by securities firms. Other entities
(both public and private) seeking to raise capital through the
issuance and sale of debt or equity securities also compete with the
Bank in the acquisition of deposits.
As stated previously, nationwide reciprocal interstate banking
became effective in California on January 1, 1991 (after having been
allowed on a regional basis since 1987). This was preceded in 1990 by
the acquisition by larger California institutions of three independent
banks in the San Diego area. Additionally, in 1992, Bank of America
merged with Security Pacific National Bank and in 1993 First
Interstate Bank successfully bid for San Diego Trust & Savings Bank
(completion of the transaction occurred early in 1994). Management
and the Board of Directors believe that the reduction in the number of
the independent banks represents a business development opportunity
for the Bank to obtain customers who would prefer to do business with
a locally-based bank rather than one headquartered elsewhere.
The Company has formed a Strategic Planning Committee which is
studying the Bank's position in the marketplace as affected by the
developments cited above. The Committee reports periodically to the
Board.
3. Employees. As of March 3, 1995, the Company and/or the
Bank had ninety-nine (99) full-time employees, of whom eight (8) were
executive officers. Six (6) of the executive officers have entered
into employment contracts with the Company or the Bank. None of the
Company's or the Bank's employees is covered by a collective
bargaining agreement and the Company believes that its relationship
with its employees is satisfactory.
4. Statistical Disclosure. Following is the statistical
disclosure required for bank holding companies.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED STATISTICAL INFORMATION
DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(IN THOUSANDS)
1994 1993 1992
Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield
Balance Expense Rate Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans
Commerical 63,180 5,597 8.86% 78,229 6,601 8.44% 83,755 7,031 8.39%
Real estate 37,082 3,623 9.77% 40,137 3,446 8.59% 37,252 3,457 9.28%
Installment 3,146 280 8.90% 3,392 357 10.52% 3,938 337 8.56%
Total loans (including fees) 103,408 9,500 9.19% 121,758 10,404 8.54% 124,945 10,825 8.66%
Investment securities
U.S. Treasury securities 4,184 165 3.94% 3,700 129 3.49% 3,791 192 5.06%
Securities of government agencies 20,917 1,021 4.88% 14,416 642 4.45% 6,242 348 5.58%
State and political obligations 4,617 397 8.60% 3,332 406 12.18% 3,535 436 12.33%
Other securities 682 39 5.72% 903 55 6.09% 2,019 101 5.00%
Total investment securities 30,400 1,622 5.34% 22,351 1,232 5.51% 15,587 1,077 6.91%
Certificates of deposit in other banks 1,469 63 4.29% 1,494 67 4.48% 3,150 172 5.46%
Federal Funds Sold 18,407 732 3.98% 13,235 364 2.75% 12,621 408 3.23%
Total interest-earning assets 153,684 11,917 7.75% 158,838 12,067 7.60% 156,303 12,482 7.99%
Noninterest-earning assets
Cash and due from banks 12,415 12,315 13,421
Premises and equipment 11,408 11,742 12,577
Other, less allowance for loan losses 143 3,472 4,403
Total noninterest-earning assets 23,966 27,529 30,401
TOTAL ASSETS 177,650 186,367 186,704
<CAPTION>
SELECTED STATISTICAL INFORMATION
DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(IN THOUSANDS)
1994 1993 1992
Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield
Balance Expense Rate Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and
money markets 71,173 1,700 2.39% 64,430 1,452 2.25% 72,211 1,925 2.67%
Time deposits 22,831 797 3.49% 45,391 1,694 3.73% 43,624 1,944 4.46%
Total interest-bearing deposits 94,004 2,497 2.66% 109,821 3,146 2.86% 115,835 3,869 3.34%
Securities sold under repurchase agree-
ments and federal funds purchased 14,603 367 2.51% 7,762 185 2.38% 4,034 144 3.57%
Short-term debt 2,456 209 8.51% 2,393 174 7.27% 2,001 155 7.75%
Long-term debt 10,251 621 6.06% 10,486 673 6.42% 10,750 833 7.75%
Total interest-bearing liabilities 121,314 3,694 3.04% 130,462 4,178 3.20% 132,620 5,001 3.77%
Noninterest-bearing liabilities
Demand deposits 46,354 44,265 41,106
Other liabilities 364 282 501
Total liabilities 168,032 175,009 174,227
Minority interest in subsidiary 0 0 0
Stockholders' equity 9,618 11,358 12,477
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 177,650 186,367 186,704
Net interest income 8,223 7,889 7,481
Margin analysis
Interest income/earning assets 7.75% 7.60% 7.99%
Interest expense/earning assets 2.40% 2.63% 3.20%
Net interest income/earning assets 5.35% 4.97% 4.79%
<FN>
1)All loans are stated net of unearned income.
2)Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 34%.
3)These averages reflect the consolidated assets and liabilities of SDNB Financial Corp and subsidiaries.
The averages for San Diego National Bank are calculated on a daily basis. The average for SDNB Financial Corp and other
subsidiaries are calculated on a quarterly basis.
4)Non-accrual loans - Loans are placed on non-accrual status when a reasonable doubt exists as to the collectibility of interest
or principal. As of December 31, 1994, 1993 and 1992, the Bank had loans on non-accrual status totaling $6,046, $5,343, and
$1,918, respectively. Average balances for loans include these amounts; however, revenue is recognized on a cash basis for
these loans.
5)Revenue for loans includes portions of fees recognized as current income of $453, $532, and $511 in 1994, 1993, and 1992,
respectively.
6)Expense for short-term debt totaling $167 in 1994, $147 in 1993, and $155 in 1992, and the expense for long-term debt of $621 in
1994, $673 in 1993, and $833 in 1992, are classified as building operating expense on the consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VOLUME/RATE VARIANCE ANALYSIS
1994 compared to 1993 1993 compared to 1992 1992 compared to 1991
Volume Rate Total Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Interest on Earning Assets:
Loans
Commercial loans (1,320) 316 (1,004) (466) 36 (430) 783 (1,518) (735)
Real estate loans (275) 452 177 258 (269) (11) (717) (549) (1,266)
Installment loans (25) (52) (77) (51) 71 20 59 (125) (66)
Total loans (1,620) 716 (904) (259) (162) (421) 125 (2,192) (2,067)
Investment securities
U.S. Treasury securities 18 18 36 (5) (58) (63) 61 (46) 15
Securities of government agencies 312 67 379 376 (82) 294 (313) (179) (492)
State and political obligations 130 (139) (9) (25) (5) (30) (124) (10) (134)
Other securities (13) (3) (16) (65) 19 (46) (31) (43) (74)
Total investment securities 447 (57) 390 281 (126) 155 (407) (278) (685)
Certificates of deposit in other banks (1) (3) (4) (78) (27) (105) 5 (44) (39)
Federal funds sold 172 196 368 19 (63) (44) 175 (212) (37)
Total interest income change (1,002) 852 (150) (37) (378) (415) (102) (2,726) (2,828)
Increase (Decrease) in Interest Paid on Liabilities:
Interest on deposits
Savings, NOW accounts, and money markets 158 90 248 (194) (279) (473) 177 (1,407) (1,230)
Other domestic time deposits (794) (103) (897) 76 (326) (250) (285) (1,019) (1,304)
Total interest on deposits (636) (13) (649) (118) (605) (723) (108) (2,426) (2,534)
Securities sold under agreement to repurchase
and federal funds purchased 171 11 182 101 (60) 41 (16) (85) (101)
Short-term debt 5 30 35 29 (10) 19 0 (44) (44)
Long-term debt (15) (37) (52) (20) (140) (160) (20) (216) (236)
Total interest expense change (475) (9) (484) (8) (815) (823) (144) (2,771) (2,915)
Net change in net interest income (527) 861 334 (29) 437 408 42 45 87
<FN>
Note: Change in interest income or expense can be attributed to (a) changes in volume (change in volume times old rate),
(b) changes in rates (change in rate times old volume),and (c) changes in rate/volume (change in rate times the change
in volume). The rate/volume variances are allocated proportionally between the rate and the volume variances based
on their absolute values.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
1994
(Book Value)
December 31, 1994:
<S> <C>
Available-For-Sale:
U.S. Government agencies 9,637
Average maturity (in years) 2.11
FRB Stock 273
9,910
Held-To-Maturity:
U.S. Treasuries 1,998
Average maturity (in years) 0.83
U.S. Government agencies 11,397
Average maturity (in years) 2.74
States and municipalities 3,176
Average maturity (in years) 3.43
Other bonds and notes 750
Average maturity (in years) 4.58
17,321
<CAPTION>
1993 1992
(Book Value) (Book Value)
December 31, 1993 and 1992:
<S> <C> <C>
Held-For-Investment:
U.S. Treasuries 6,004 1,004
Average maturity (in years) 0.47 0.50
U.S. Government agencies 19,588 11,677
Average maturity (in years) 3.72 3.56
States and municipalities 4,362 3,250
Average maturity (in years) 2.69 4.11
Other bonds and notes 0 1,739
Average maturity (in years) 0 1.87
FRB Stock 273 273
30,227 17,943
<CAPTION>
MATURITY IN YEARS
Under 1 1 to 5 5 to 10 Over 10 Total
<S> <C> <C> <C> <C> <C>
Available-For-Sale:
U.S. Government agencies 1,977 7,660 0 0 9,637
Weighted average interest rate 5.15% 5.92% 0.00% 0.00% 5.76%
FRB Stock 0 0 0 273 273
Weighted average interest rate 0.00% 0.00% 0.00% 6.00% 6.00%
1,977 7,660 0 273 9,910
Held-To-Maturity:
U.S. Treasuries 1,001 997 0 0 1,998
Weighted average interest rate 4.00% 4.37% 0.00% 0.00% 4.18%
U.S. Government agencies 2,986 4,300 4,111 0 11,397
Weighted average interest rate 5.40% 4.66% 5.64% 0.00% 5.21%
States and municipalities *<F1> 250 2,169 757 0 3,176
Weighted average interest rate 8.48% 5.95% 8.77% 0.00% 6.82%
Other bonds and notes 0 500 250 0 750
Weighted average interest rate 0.00% 4.68% 8.00% 0.00% 5.79%
4,237 7,966 5,118 0 17,321
<FN>
<F1>
* Taxable equivalent yield based upon 34% Federal Income Tax rate.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOAN PORTFOLIO LOAN TYPE
Real Estate Real Estate Installment
Commercial Construction Mortgage and Consumer Total
<S> <C> <C> <C> <C> <C>
Totals at year-end:
1994 57,613 5,750 31,461 2,234 97,058
1993 67,087 8,995 32,099 2,852 111,033
1992 85,377 12,717 30,721 3,306 132,121
1991 81,120 12,682 23,751 4,275 121,828
1990 70,752 23,758 27,241 3,193 124,944
Maturities at the end of 1994:
1 year or less 47,207 5,612 11,788 1,141 65,748
1- 5 years 10,119 138 18,108 1,079 29,444
after 5 years 287 0 1,565 14 1,866
Outstanding loans at the end
of 1994 which are due after
one year earn interest as follows:
Fixed rate 465 0 2,491 406 3,362
Adjustable rate 9,941 138 17,182 687 27,948
</TABLE>
<TABLE>
<CAPTION>
RISK ELEMENTS
Nonperforming assets consist of non-accrual loans, restructured loans, past due loans and other real estate owned. Non-accrual
loans are loans on which interest recognition has been suspended until realized because of doubts as to the borrower's ability
to repay principal or interest. Restructured loans are loans where the terms have been altered to provide a reduction or
deferral of interest or principal because of a deterioration in the borrower's financial position. Past due loans are
accruing loans that are contractually past due 90 days or more as to interest or principal payments. The following summarizes
the nonperforming assets at December 31:
<S> <C> <C> <C> <C> <C>
1994 1993 1992 1991 1990
Non-accrual loans 6,046 5,343 1,918 2,442 215
Restructured loans (still 2,316 3,162 0 0 0
Loans 90 days past due 20 481 248 2,238 1,595
8,382 8,986 2,166 4,680 1,810
Other real estate owned 268 1,050 2,091 4,987 0
Total 8,650 10,036 4,257 9,667 1,810
<FN>
1) Non-accrual - Loans are placed on non-accrual when a reasonable doubt exists as to the collectibility
of interest or principal. Gross interest income that would have been recorded for the year ended
December 31, 1994, if non-accrual loans had been current and in accordance with their original terms,
is approximately $682. Interest actually recognized for those loans was $643. Non-accrual loans
totaling $1,196 in 1993, $521 in 1992 and $326 in 1991 were also classified as restructured loans.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Allowance for loan losses (as of Jan. 1) 2,522 2,111 2,011 1,499 1,407
Losses charged-off
Commerical 2,211 2,277 1,294 722 506
Real estate construction 0 20 120 0 0
Real estate mortgage 0 264 101 56 162
Installment 151 155 60 70 14
Total loans charged-off 2,362 2,716 1,575 848 682
Recoveries of losses previously charged-off
Commerical 121 144 299 81 139
Real estate construction 0 0 0 0 0
Real estate mortgage 10 4 50 0 0
Installment 7 29 6 9 0
Total recoveries 138 177 355 90 139
Net loans charged-off 2,224 2,539 1,220 758 543
Additions charged to operating expense 1,850 2,950 1,320 1,270 635
Allowance for loan losses (as of Dec. 31) 2,148 2,522 2,111 2,011 1,499
Average loans outstanding 103,897 121,758 124,945 123,490 115,663
Ratio of net charge-offs to average
loans outstanding 2.14% 2.09% 0.98% 0.61% 0.47%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES BY CATEGORY
1994 1993 1992 1991 1990
Percent of Percent of Percent of Percent of Percent of
loans in each loans in each loans in each loans in each loans in each
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commerical 1,635 59.4% 1,862 60.4% 1,304 64.5% 1,417 66.6% 800 56.6%
Real estate construction 49 5.9% 57 8.1% 101 9.6% 96 10.4% 226 19.0%
Real estate mortgage 80 32.4% 206 28.9% 222 23.4% 196 19.5% 213 21.8%
Installment 62 2.3% 93 2.6% 25 2.5% 30 3.5% 28 2.6%
Unallocated 322 NA 304 NA 459 NA 272 NA 232 NA
Total 2,148 100.0% 2,522 100.0% 2,111 100.0% 2,011 100.0% 1,499 100.0%
<FN>
1) Beginning in 1993, the Bank evaluates the adequacy of its allowance for loan losses using a "migration analysis" of net charge-
offs to classified loans. Certain loans are segregated by management and reserved specifically based on potential loss
exposure. The remainder of the loans in the portfolio are segregated into significant pools. Potential loss exposure is
determined by creating a loss experience percentage for loans with similar characteristics and quality. These percentages are
applied to the Bank's current portfolio to estimate the amount of future losses. The Bank also makes a provision for undrawn
commitments and letters of credit. This quantitative analysis is supplemented with a provision based on qualitative factors
including but not limited to trends in volume and severity of past due and classified loans and trends in the volume of
nonaccural loans troubled debt-restructurings and other loan modifications, trends in the nature and volume of the portfolio,
experience ability and depth of lending management and staff, trends in lending policies and procedures including underwriting
standards and collection charge-off and recovery practices, national and local economic and business conditions and developments
including the condition of various market segments, existence and effect of any concentrations of credit and changes in the
level of such concentrations, quality of the institution's loan review system and the degree of oversight by the institution's
board of directors, effect of external factors such as competition and legal and regulatory requirements on the level of
estimated credit losses in the institution's current portfolio. The reserve balance represents the aggregate of these
allocations.
Prior to 1993, the Bank evaluated the adequacy of its allowance for loan losses on an individual loan basis. In determining
the adequacy of the allowance, management evaluated each loan with regard to creditworthiness of the borrower, sources of
repayment, general and industry specific economic conditions, and collateral . The bank reserved non-classified on a percentage
basis related to past loss experience. Loans determined to be of higher than normal risk were assigned a higher reserve amount
based upon possible loss exposure. The reserve balance for the years 1990 - 1992 were the aggregate of those allocations.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DEPOSITS
1994 1993 1992
Average Average Average
Outstanding Yield Outstanding Yield Outstanding Yield
<S> <C> <C> <C> <C> <C> <C>
Demand 46,354 0.00% 44,265 0.00% 41,106 0.00%
Interest-bearing demand 14,496 1.48% 14,280 1.47% 13,884 2.09%
Savings 56,677 2.63% 50,150 2.48% 58,327 2.81%
Time deposits 22,831 3.49% 45,391 3.73% 43,624 4.46%
<CAPTION>
At December 31, 1994, time deposits in amounts of $100,000 or more had a maturity breakdown as follows (in thousands):
Time All
Certificates Other
of Deposit Time
<S> <C> <C>
3 months or less 6,808 532
Over 3 through 6 months 2,024 203
Over 6 through 12 months 501 206
Over 12 months 200 -
9,533 941
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS
1994 1993 1992
<S> <C> <C> <C>
Return on assets (0.09)% (1.37)% (1.18)%
(Net income divided by average total assets)
Return on equity (1.65)% (22.56)% (17.72)%
(Net income divided by average equity)
Equity to assets 5.41% 6.09% 6.68%
(Average equity divided by average total assets)
Dividend payout ratio 0.00% 0.00% 0.00%
(Dividends per share divided by net income per share)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHORT-TERM BORROWINGS
1994 1993 1992
<S> <C> <C> <C>
Securities sold under repurchase agreements
and federal funds sold
a) Outstanding at end of period 12,285 9,273 4,698
b) Average interest rate, end of period 2.78% 2.16% 2.68%
c) Maximum outstanding during period 18,614 12,393 6,273
d) Approximate average amount
outstanding during period 14,603 7,762 4,034
e) Weighted average interest rate 2.51% 2.38% 3.57%
Short-term debt
a) Outstanding at end of period 2,544 2,384 2,340
b) Average interest rate, end of period 9.19% 7.36% 7.28%
c) Maximum outstanding during period 2,554 2,448 2,340
d) Approximate average amount
outstanding during period 2,456 2,393 2,001
e) Weighted average interest rate 8.51% 7.27% 7.75%
</TABLE>
Item 2. Properties.
The Company owned no properties directly at December 31, 1994.
The Company's executive offices and the Bank's executive offices and
banking facilities are located at 1420 Kettner Boulevard, San Diego,
California 92101 (the "Bank Building"), which is owned by the Joint
Venture. In January 1982, the Bank executed a 99-year ground lease,
which was subsequently assumed by the Joint Venture, for
approximately 27,000 square feet of undeveloped real property located
at the site. The Company's wholly-owned subsidiary, Devco, was the
50% joint venturer with a limited partnership, Kettner Building
Associates, Ltd. ("KBA"), in the ownership and operation of the Bank
Building. As previously stated, effective July 1, 1993, Devco was
merged into the Company and the Company assumed the partnership
ownership. Commencing in 1985 and continuing into 1987, the Company
(through Devco) acquired the 10% general partnership interest and a
14% limited partnership interest in KBA. The only activity of KBA is
its 50% interest in the Joint Venture. Therefore, the acquisition of
the partnership interests increased the Company's combined interest in
the Bank Building to approximately 62% at December 31, 1987.
On March 3, 1987, the Joint Venture obtained long-term financing
from Home Fed Bank. The Home Fed loan in the original amount of
$11,250,000 was payable in monthly installments with an adjustable
interest rate (as described below) and matures in 1997. During 1993,
Resolution Trust Corporation, as successor to Home Fed, sold the loan
as a part of a package to an investment group.
In November 1994, the Home Fed note was purchased by the two
limited partnerships managed by WHR Management Corp. ("WHR") which
propose to purchase the Company's stock (see management discussion and
analysis). In January 1995, the Joint Venture and WHR entered into a
modification agreement. This agreement reduces the debt service
requirement to $800,000 per year, all allocable to interest. Prior to
such modification, the annual debt service requirement was $823,000
allocable first to interest at a rate equal to 2.25% over the 11th
District Cost of Funds (which interest rate changed monthly).
Pursuant to the terms of the original trust deed (absent the
modification), due to projected increase in the benchmark interest
rates, annual payments of debt service were projected to increase on
May 1, 1995, to approximately $917,000. Further, the modification
also allows prepayment of the loan on April 1, 1995, for $7,708,000
(assuming all interest payments have been made); on January 1, 1996,
for $8,691,000; and quarterly thereafter at amounts which increase by
approximately $373,000 each quarter. On April 1, 1997, the
outstanding principal balance will be due and payable if not
previously prepaid.
On January 4, 1994, the Joint Venture executed a new note to
Pacific View Construction Company Inc. ("Pacific View") a corporation
controlled by Charles I. Feurzeig, Chairman of the Board of the
Company. On January 4, 1988, the Joint Venture had obtained a $2
million loan from Pacific View, the proceeds of which were used to
retire existing debt of the Joint Venture and to provide reserves for
tenant improvements and negative cash flows. The loan, which is
secured by a second trust deed on the Bank Building, was paid down by
$100,000 in 1993. The Joint Venture anticipates entering into a
modification agreement to make a partial payment of $250,000 on the
note out of the proceeds of the stock issuance referred to in
management's discussion and analysis. The note would be further
modified to fix the interest rate at 10% per annum and extend the due
date to April 1, 1997. It is anticipated that the Company will also
purchase customer notes from the Bank in the amount of approximately
$1,100,000 (par) and assign such notes to the Joint Venture. The
Joint Venture would then assign the notes as payment against the note
balance.
The Bank has leased the ground floor and the mezzanine of the
Bank Building, which constitutes approximately 26,000 square feet, and
the Company has leased a portion of the seventh floor, which
constitutes approximately 12,000 square feet. The ground floor and
mezzanine lease term is for 20 years, commencing May 1985, with an
option for the Bank to renew on the same terms for two consecutive
seven-year periods following the expiration of the initial term. The
base rent paid by the Bank is currently $2.24 per square foot per
month, subject to annual upward cost-of-living adjustments limited to
an increase of 5% of the base rent for each year and 15% of the base
rent for each five year period. The base rent includes all taxes,
utilities, insurance, maintenance and operational common area expenses
(the "pass-through expenses"). If the pass-through expenses exceed in
any year the sum of $5.00 per square foot, the Bank pays such excess.
The lease also provides for a right of first refusal in favor of the
Bank on not less than one full leasable floor (approximately 17,000
square feet) as the same shall become available for lease within the
Bank Building.
The seventh floor lease term is five years and seven months
commencing September 1990, with an option to renew for two consecutive
five year terms. The base rate is currently $1.98 per square foot per
month, subject to annual upward cost-of-living adjustments and pass-
through expense similar to the Bank lease.
The Company and the Bank believe the leased space at 1420 Kettner
Boulevard (including the right of first refusal space) will be
adequate for their needs for the foreseeable future.
At December 31, 1994, the Bank Building was approximately 90%
leased, although concessions to some tenants who are not utilizing all
of their leased premises would reduce the effective occupancy to
approximately 82%.
Item 3. Legal Proceedings.
In January 1993, the Bank was named as a defendant in an
adversary proceeding in Bankruptcy Court filed by Pioneer Liquidating
Corporation ("PLC") successor to six bankrupt Pioneer Mortgage Company
entities ("Pioneer"). Investors in Pioneer had previously filed suit
against the Bank. That Pioneer litigation was settled in 1992. The
PLC case has been transferred to the United States District Court.
The PLC complaint, which does not specify the amount of damages,
alleges that the Bank and five other banks received preferential
payments and voidable transfers from Pioneer prior to the filing of
the Chapter 11 petition in January 1991. The attorneys for PLC have
alleged recoverable transfers from the Bank in excess of $14 million
but have stated informally that they are seeking recovery of
approximately $1.75 million. Of the $1.75 million, the sum of
$250,000 would be in cash with the balance in the form of charged off
Bank loans. PLC and the Bank have been engaged in ongoing settlement
negotiations, however, as yet no resolution has been reached. As of
December 31, 1994, the Bank has set aside a provision of $250,000 for
resolution of this litigation.
In December 1991, the Bank filed suit against its Directors' and
Officers' liability insurer, alleging that the insurer had breached
the insurance contract and acted in bad faith by refusing to pay the
Bank's defense and settlement costs in connection with the Pioneer
investor lawsuits. During 1994 the Bank and its insurer settled their
dispute. Under the terms of the settlement, the insurer paid the Bank
$713,000 (in addition to the $750,000 the insurer had previously
advanced towards the Bank's settlement with the investors) which has
been credited to miscellaneous other operating income.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter of 1994.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
(a) Market Information. Since October 6, 1987, the
Company's Common Stock has been listed on the National Association of
Securities Dealers ("NASDAQ") National Market System. There is only a
limited market for the Company's Common Stock.
Stock Price Information
Period 1994 1993
First Quarter
Low $ 2.50 $ 3.50
High 3.25 4.00
Second Quarter
Low 2.50 3.50
High 3.25 4.38
Third Quarter
Low 2.50 2.50
High 4.75 4.00
Fourth Quarter
Low 3.00 2.50
High 4.75 3.38
(b) Holders. As of March 3, 1995, the Company's outstanding
shares of Common Stock were held by approximately 700 shareholders of
record (including those through broker/nominees).
(c) Dividends. There were no stock or cash dividends declared in
1994 or 1993.
As discussed earlier (page 6) the Bank is presently precluded
from paying dividends to the Company. As a result, the Company must
rely on distributions from the Joint Venture to pay its expenses. It
is anticipated that it is possible to do so until such time as the
Bank may be able to resume dividend payments.
Item 6. Selected Financial Data.
Consolidated Financial Highlights
Incorporated by reference - see inside front cover of the 1994
Annual Report to Shareholders.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Incorporated by reference - see pages 5 to 11 of the 1994
Annual Report to Shareholders.
Item 8. Financial Statements and Supplementary Data.
Incorporated by reference - see pages 12 to 22 of the 1994
Annual Report to Shareholders.
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosures.
None
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant.
Positions Held With the Company
And Principal Occupation During
Name Age Past Five Years
Howard W. Brotman 65 Senior Vice President and Chief
Financial Officer of the Company and
the Bank, from before 1990 to present;
Secretary of the Company, February
1993 to present.
Joyce I. Chewning 48 Senior Vice President of the Company,
January 1994 to present; Senior Vice
President, Operations of the Bank from
before 1990 to present.
Margaret "Midge" Costanza 62 Director of the Company since
June, 1993; Partner, Martin &
Costanza, presentation skills
trainers, from before 1990 to present;
Political Consultant-Congresswoman
Lynn Schenk and State Treasurer
Kathleen Brown, 1993 to November,
1994; Campaign Coordinator, California
Democratic State Central Committee and
Boxer for Senate Committee, 1991 to
1992; Executive Director, Search
Alliance, a health research
organization, 1990 to 1991.
Charles I Feurzeig 83 Chairman of the Board of the Company
since 1982; Owner and operator of
commercial shopping centers; President
of Pacific View Construction, Co.,
Inc., developer of homes, from before
1990 to present.
Murray L. Galinson 57 Director of the Company since 1982;
President and Chief Executive Officer
of the Company and the Bank from
before 1990 to present.
Karla J. Hertzog 44 Director of the Company since
February, 1992; President of TOPS
Personnel Service, Inc., a temporary
personnel agency, from before 1990 to
present.
Robert B. Horsman 48 Director of the Company since 1991;
Executive Vice President of the
Company, January 1994 to present;
Executive Vice President of the Bank
from before 1990 to present.
Gail Jensen-Bigknife 44 Senior Vice President of the Bank from
before 1990 to present.
<PAGE>
Positions Held With the Company
And Principal Occupation During
Name Age Past Five Years
Mark P. Mandell 44 Director of the Company since January,
1992. Attorney-at-law from before
1990 to present; Vice President and
Legal Counsel, Square One Development
Corporation, commercial real estate
developers, from before 1990 to
present.
Richard Nance 50 Senior Vice President of the Bank from
before 1990 to present.
Debra Perkins 40 Vice President/Compliance of the Bank
from before 1990 to present.
Connie M. Reckling 46 Vice President/Human Resources of the
Bank, 1990 to present.
Patricia L. Roscoe 51 Director of the Company since 1990;
Chairman of Patti Roscoe & Associates,
Inc. and Roscoe/Cottrell, Inc.,
destination management companies, from
before 1990 to present.
Julius H. Zolezzi 65 Director of the Company since 1982;
President of Zolezzi Enterprises,
Inc., which owns fishing vessels and
of Embarcadero Marine, Inc., a
supplier of diesel fuel, from before
1990 to present.
<PAGE>
Item 11. Executive Compensation
Long-Term
Annual Compensation Compensation
Name and Principal
Position Year Salary Bonus Option Awards
Murray L. Galinson 1994 $174,050 $0 $ 0
President/CEO 1993 167,700 0 35,003
1992 167,700 0 0
Robert B. Horsman 1994 $113,300 $0 $ 0
Executive Vice President 1993 109,200 0 27,548
1992 107,600 0 0
Joyce Chewning
Senior Vice President 1994 $102,440 0 $ 0
1993 97,940 0 10,099
1992 93,596 0 0
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Potential Realizable
Value of Assumed
Annual Rates of Stock
Options % of Total Price Appreciation
Granted Options Granted Option Term
<F1> To Employees In Exercise Expiration ------------------
Officer <F2> Fiscal Year Price Date @5% @10%
- ------- ------- ----------- ------ ------- ------------------
<S> <C>
Murray L. Galinson None
Robert B. Horsman None
Joyce Chewning None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Acquired Value Options at Fiscal Year End - at Fiscal Year End -
Officer on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ------- -------------- -------- ---------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Murray L. Galinson None None E 27,489 None
U 35,003 None
Robert B. Horsman None None E 11,585 None
U 27,548 None
Joyce Chewning None None U 19,099 None
</TABLE>
<PAGE>
Director Compensation.
During 1994, Mr. Feurzeig was paid $1,000 per board meeting
and $150 per committee meeting. All other non-employee directors were
paid $500 per board meeting and $75 per committee meeting.
Executive Employment Agreements.
On February 12, 1993, the Company entered into new employment
agreements, comparable to previous agreements, with Murray L.
Galinson, Robert B. Horsman and Joyce Chewning, which continue through
December 31, 1995. The agreements provide for base salaries of
$167,700, $109,200 and $93,500, respectively, with adjustments on
January 1 of each year during the term at the discretion of the Board
of Directors, but in no event will the adjusted salary be less than
the preceding year. For 1995, beginning salaries (subject to possible
mid-year adjustment) have been set at $180,605 for Mr. Galinson,
$117,598 for Mr. Horsman and $106,229 for Ms. Chewning. The
agreements also provide for normal employee perquisites, participation
in the other compensation plans and for extension of employment for
three years from the date of a "change of control" of the Company or
the Bank.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth those shareholders known to the
Company who owned beneficially or of record more than 5% of the Common
Stock of the Company on March 3, 1995.
Name of Amount and Nature
Beneficial of Beneficial Percent (1)
Owner Ownership (1) of Common Stock (2)
Charles I Feurzeig 332,164 (3) 18.9
1420 Kettner Blvd.
San Diego, CA 92101
Murray L. Galinson 172,400 (4)(6) 9.8
1420 Kettner Blvd.
San Diego, CA 92101
Deferred Savings Plan of 84,074 4.8 (7)
the San Diego National Bank
401(k) Plan
1420 Kettner Blvd.
San Diego, CA 92101
The following table sets forth information as to outstanding
shares of the Company's Common Stock beneficially owned by each
director of the Company as of March 3, 1995, and by all directors and
executive officers of the Company and the Bank as a group. Except as
indicated, the persons named have sole voting power and sole
investment power over the amount of shares shown.
Name of Amount and Nature
Beneficial of Beneficial Percent (1)
Owner Ownership (1) Common Stock (2)
Margaret Costanza 200 *
Charles I. Feurzeig 332,164 (3) 18.9
Murray L. Galinson 172,400 (4)(6) 9.8
Karla J. Hertzog 200 *
Robert B. Horsman 18,436 (6) 1.1
Mark P. Mandell 200 *
Patricia L. Roscoe 16,051 1.0
Julius H. Zolezzi 56,448 3.2
All Executive Officers
and Directors as a group 626,249 35.7
(14 persons) (3) (4) (5) (6)
(1) All percentages and share amounts in these sections were
calculated on the basis of outstanding securities, plus shares
issuable pursuant to vested stock options. Includes shares owned
beneficially and of record, directly or indirectly, together with
associates. Also includes shares held by or on behalf of minor
and/or adult children and family trusts.
(2) Asterisk indicates percentage of less than 1%.
(3) Includes 70,640 shares held by Balboa Crest, a partnership of
which Mr. Feurzeig is a general partner.
(4) Includes 85,358 shares held as trustee/custodian.
(5) Includes 164,614 shares issuable to directors and executive
officers pursuant to vested stock options.
(6) Does not include shares owned by the Deferred Savings Plan of the
San Diego National Bank 401(k) Plan attributable to executive
officers' vested interests therein.
(7) The Deferred Savings Plan of the San Diego National Bank 401(k)
Plan holds 5.5% of currently outstanding stock if vested options
are not included in the outstanding stock.
Item 13. Certain Relationships and Related Transactions.
The Bank had banking transactions in the ordinary course of
its business with the Company and its subsidiaries, directors,
executive officers, and their associates, on the same terms, including
interest rates and collateral on loans, as those prevailing at the
same time for comparable transactions with other customers of the
Bank, and which do not, in the opinion of management, involve more
than the normal risks of collectability or present other unfavorable
features. Under federal law, additional restrictions are placed upon
the aggregate amount of, and other terms and conditions of, loans to
executive officers, directors and principal shareholders. The maximum
aggregate available amount of all such loans and credit extensions to
all directors and officers of the Bank at December 31, 1994, together
with their associates, was approximately $367,000 (constituting
approximately 4% of the Company's equity capital). The actual
aggregate balance outstanding on all such loans and credit extensions
at December 31, 1994 was $177,000. In October 1990, the Bank Board
adopted a policy of eliminating further lending to executive officers
and directors (except for cash-secured loans) beyond the maturity of
the existing debt. An exception to this policy was granted to one
director where the amounts of the loans outstanding are less than the
amounts outstanding when the policy was adopted.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
1. Financial statements Page*
Consolidated Balance Sheets at December 31,
1994 and 1993. 12
Consolidated Statements of Operations for each of
the three years in the period ended
December 31, 1994. 13
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended
December 31, 1994. 14
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 31,
1994. 15
Notes to Consolidated Financial Statements. 16-22
Report of Independent Accountants. 23
*Refers to respective page numbers of Annual Report to
Shareholders for the year ended December 31, 1994 which is
incorporated by reference.
2. Financial statement schedules.
All schedules are omitted because they are not applicable
or the required information is shown in the financial
statements or notes thereto.
3. Exhibits (listed by numbers corresponding to the Exhibit
Table of Item 601 of Regulation S-K).
(a) 3 (a) Restated Articles of Incorporation of the Company
and amendment -incorporated by reference from 1988
Form 10-K.
(b) Bylaws of the Company as amended through May 18,
1988 - incorporated by reference from 1988 Form
10-K.
10. (a) (1) Company's 1984 Stock Option Plan, as amended -
incorporated by reference from 1992 Form 10-K.
(2) The Company's 1994 Stock Option Plan.
(b) Employment contracts of certain executive officers
- incorporated by reference from 1992 Form 10-K.
(c) Sample indemnification agreements with directors
and officers - incorporated by reference from 1988
Form 10-K.
13. Annual Report to Shareholders.
22. Subsidiaries of the Registrant.
23. (a) Consent of Independent Accountants.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by the Company
during the fourth quarter of its fiscal year ended
December 31, 1994.
(c) Exhibits required by Item 601 of Regulation S-K and not
incorporated by reference are attached.
(d) Not applicable.
<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 or Section 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SDNB FINANCIAL CORP
Dated: March 17, 1995 By: /s/Murray L. Galinson
Murray L. Galinson
President and Chief Executive Officer
By: /s/Howard W. Brotman
Howard W. Brotman
Senior Vice President, Secretary
and Chief Financial Officer
<PAGE>
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 Registrant and in the capacities and on the dates
indicated.
Signatures Title Date
/s/Charles I. Feurzeig Chairman of the Board March 17, 1995
CHARLES I. FEURZEIG and Director
/s/Murray L. Galinson President, Chief March 17, 1995
MURRAY L. GALINSON Executive Officer and
Director
/s/Margaret Costanza Director March 17, 1995
MARGARET COSTANZA
/s/Karla J. Hertzog Director March 17, 1995
KARLA J. HERTZOG
/s/Robert B. Horsman Director March 17, 1995
ROBERT B. HORSMAN
/s/Mark P. Mandell Director March 17, 1995
MARK P. MANDELL
/s/ Patricia L. Roscoe Director March 17, 1995
PATRICIA L. ROSCOE
/s/Julius H. Zolezzi Director March 17, 1995
JULIUS H. ZOLEZZI
/s/Howard W. Brotman Senior Vice President, March 17, 1995
HOWARD W. BROTMAN Secretary and Chief
Financial Officer
<PAGE>
INDEX OF EXHIBITS
Exhibit Number
10 (a) (2) SDNB Financial Corp 1994 Stock Option Plan
13 Annual Report to Shareholders.
22 Subsidiaries of Registrant.
23 (a) Consent of Independent Accountants.
SDNB FINANCIAL CORP
1994 STOCK OPTION PLAN
1. PURPOSES.
The purpose of this Stock Option Plan (the "Plan") is to
strengthen SDNB FINANCIAL CORP., a California corporation (the
"Corporation"), and its controlled subsidiaries by providing an
additional means of attracting and retaining key executive officers,
employees and directors, and by providing such persons added incentive
for high levels of performance and for unusual efforts to increase the
earnings of the Corporation. The Plan seeks to accomplish these
purposes by encouraging stock ownership of the Corporation so that such
persons may acquire or increase their proprietary interest in the
success of the Corporation. The Plan is intended to comply with the
provisions of the Internal Revenue Code of 1986, as amended, pertaining
to incentive stock options.
2. DEFINITIONS.
Whenever the following terms are used in this Plan, they will
have the meaning specified below unless the context clearly indicates
the contrary.
(a) "Board of Directors" means the Board of Directors of
SDNB Financial Corp.
(b) "Cash Bonus Award" means a cash award granted pursuant
to Section 8 of the Plan.
(c) "Committee" means the Committee appointed to
administer the Plan pursuant to Section 3 thereof.
(d) "Common Stock" means the common shares, no par value,
of SDNB Financial Corp., and any class of voting common shares into
which said common shares may hereafter be converted.
(e) "Employee" means any regular full-time employee of
SDNB Financial Corp., or any of its present or future parent or
subsidiary corporations.
(f) "Fair Market Value" means the value of a share of
Common Stock at any given time established by the Committee by use of
any reasonable valuation method, taking into consideration prices at
which shares of Common Stock have recently traded, the number of shares
traded and other relevant factors as determined by the Committee. Until
changed by the Committee, it shall mean the midpoint between the bid and
ask price on the date of determination.
(g) "Incentive Award" means Incentive Stock Option, Non-
qualified Stock Option, Restricted Stock, Stock Appreciation Right or
Cash Bonus Award granted under the Plan.
(h) "Incentive Stock Option" means an option as defined
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), including an Incentive Stock Option granted under the Plan.
(i) "Non-qualified Stock Option" means a stock option
other than an Incentive Stock Option granted under the Plan.
(j) "Option" means either a Non-qualified Stock Option or
an Incentive Stock Option.
(k) "Optionee" means any person holding an Incentive Stock
Option or a Non-qualified Stock option granted under the Plan.
(l) "Parent" and "subsidiary" shall have the meaning set
forth on subsections (e) and (f), respectively, of Section 424 of the
Code.
(m) "Plan" means this Stock Option Plan, as it may be
amended from time to time.
(n) "Restricted Stock" means a right to purchase shares of
Common Stock of the Corporation which is nontransferable and subject to
substantial risk of forfeiture until restrictions lapse. Restrictions
lapse over a period of years, based on continuing employment.
(o) "Stock Appreciation Right" means a right granted
pursuant to Section 10 of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by a committee
appointed by the Board of Directors of the Corporation (the
"Committee"). The Committee shall consist of not less than three
members of the Board of Directors, who shall be appointed by, and serve
at the pleasure of, the Corporation's Board of Directors. Each member
of the Committee shall be a "disinterested person" within the meaning of
Rule 16b-3 of the Securities Exchange Act of 1934. The Board of
Directors may from time to time remove members from, or add members to,
the Committee. Vacancies on the Committee, however caused, shall be
filled only by the Board of Directors. The Committee shall select one
of its members as Chairman, and shall hold meetings at such times and
places as it may determine. Acts by a majority of the Committee in a
meeting at which a quorum is present and acts approved in writing by a
majority of the members of the Committee shall be the valid acts of the
Committee. No member of the Committee shall vote on any matter
concerning his own participation in the Plan.
(b) The Committee shall be authorized to grant Incentive
Awards under the Plan to such Employees of the Corporation and such
other eligible persons at such times and in such amounts as it may
decide.
(c) The interpretation and construction by the Committee
of any provisions of the Plan or of any Incentive Award granted under it
shall be final. No member of the Committee or the Board of Directors
shall be liable for any action or determination made in good faith with
respect to the Plan or any Option granted under it and the members shall
be entitled to indemnification and reimbursement in the manner and to
the extent permitted by applicable law.
4. NATURE OF STOCK OPTIONS.
The Plan is designed to qualify certain Options granted
hereunder as "Incentive Stock Options" within the meaning of Section 422
of the Code. Such compliance shall not preclude the grant of Non-
qualified Stock Options or other Incentive Awards. Any Options granted
or exchanged under this Plan, which do not meet the limitations required
(including all Options granted to directors who are not full-time
officers or employees of the Corporation or its subsidiaries) to qualify
as Incentive Stock Options shall be deemed "non-qualified" for tax
purposes. The Committee shall have the authority to grant Non-qualified
Stock Options to any eligible officer, employee or director.
5. ELIGIBILITY.
5.1 Officers and Employees. Full-time officers and
Employees of the Corporation or its controlled subsidiaries, who perform
services of special importance to the Corporation (or such subsidiaries)
relative to its management, operation or development shall be eligible
to receive Incentive Awards under the Plan. A "full-time officer" shall
be deemed to include a person providing services as an officer on behalf
of the Corporation or any subsidiary. The selection of recipients of
Incentive Awards shall be within the sole and absolute discretion of the
Committee.
5.2 Directors and Others. Any director of the Corporation
or its controlled subsidiaries shall be eligible to receive Incentive
Awards under the Plan. Options granted to directors who are not full-
time officers or employees of the Corporation cannot be granted as
Incentive Stock Options for tax purposes. The Committee is further
authorized to grant Non-qualified Stock Options hereunder to such other
persons as the Committee deems to be in the best interests of the
Corporation. Said Options shall be granted on the specific terms set
forth in the agreement relating thereto.
5.3 Termination of Eligibility. If the Optionee ceases to
be a director of or employed by the Corporation or a parent or
subsidiary thereof, for any reason other than his death or termination
for cause, any Option granted hereunder to such Optionee shall expire
three months (12 months in the case of an Optionee whose eligibility
has ceased because of his disability) from the date of the occurrence
giving rise to such termination of eligibility or upon the date it
expires by its terms, whichever is earlier. During such three-month
period, the Option may be exercised in accordance with its terms, but
only in respect of the number of such shares for which the right to
exercise has accrued as of the date of such cessation of affiliation as
a director or termination of employment, as the case may be. The
Committee shall decide whether an authorized leave of absence or absence
for military or governmental service, or absence for any other reason,
shall constitute termination of eligibility for purposes of this Section
5.3. If an Optionee's affiliation with the Corporation is terminated
"for cause," including willful breach of duty by an employee during the
course of his employment or habitual neglect of his duties, his Option
shall expire immediately, although the Committee may reinstate the
Option, in its sole discretion, within 30 days of the date of
termination and such terminated employee may exercise such reinstated
Option within a period not to exceed three months from such Optionee's
termination of employment.
5.4 Death of Optionee. If the Optionee shall die while
eligible to participate in the Plan or within three months after the
termination of his eligibility and shall not have fully exercised the
Option, the Option may be exercised (subject to the condition that no
option shall be exercisable after its expiration and only to the extent
that the Optionee's right to exercise such Option had accrued pursuant
to Section 7.6 hereof at the time of his death and had not previously
been exercised) at any time within 12 months after the Optionee's death
by the executors or administrators of the Optionee or by any person or
persons who shall have acquired the Option directly from the Optionee by
bequest or inheritance.
5.5 Non-Assignability of Option Rights. No Option shall
be assignable or transferrable otherwise than by will or the laws of
descent and distribution. During the life of an Optionee, an Option
shall be exercisable only by him.
6. SHARES OF COMMON STOCK SUBJECT TO PLAN.
6.1 Identification of Stock. The aggregate number of
shares of Common Stock that may be issued or transferred or exercised
pursuant to Incentive Awards under the Plan shall not exceed 400,000
shares of the Corporation's authorized but unissued or acquired or
reacquired Common Stock, no par value (herein the "Stock") (subject to
adjustment as provided in Section 7.7). If any Incentive Award granted
hereunder shall expire or terminate for any reason without having been
exercised in full, the unpurchased shares subject thereto shall again be
available for purposes of this Plan. Provided, however, shares as to
which an Option has been surrendered in connection with the exercise of
a related Stock Appreciation Right will not again be available for the
grant of any further Incentive Awards.
6.2 Limitation on Amount of Stock Subject to Incentive
Stock Options. For Options granted under this Plan, to the extent that
the aggregate fair market value (determined as of the date an option is
granted) of the Stock with respect to which Options are exercisable for
the first time by any employee during any calendar year under the Plan
(and any other plans maintained by the Corporation, its parent or
subsidiaries) exceeds $100,000, such Options shall be Non-qualified
Stock Options.
7. TERMS AND CONDITIONS OF OPTIONS.
Any Option (or other Incentive Awards) granted pursuant to the
Plan shall be evidenced by an agreement in such form as the Committee
shall from time to time determine, which agreement shall comply with
and be subject to the following, among other, terms and conditions:
7.1 Number of Shares. Each Option shall state the number
of shares to which it pertains.
7.2 Option Exercise Price. Each Option shall state the
purchase price upon exercise thereof.
7.2.1 Options Granted to More than 10% Shareholders. The
exercise purchase price for options granted to persons eligible to
receive Options under this Plan who own more than 10% of the voting
power or value of all classes of the Corporation's stock or of any
parent or subsidiary corporation ("Control Person[s]") shall be not less
than 110% of the Fair Market Value of the Stock subject to the Option on
the date of granting the Option; provided, however, that this Section
7.2.1 shall not apply to any Non-Qualified Stock Options granted under
the Plan.
7.2.2 Options Granted to Others. The exercise purchase
price for Options granted to persons other than a Control Person shall
be not less than the Fair Market Value of the shares of Stock on the
date of granting the Option; provided that in the event options are
issued in exchange for options of an acquired company in a merger or
consolidation, the options shall be exchanged on a like basis as that
company's stock is exchanged for the Corporation's Common Stock.
7.3 Method of Exercise. An option shall be exercised by
written notice to the Corporation stating the number of shares with
respect to which the Option is being exercised and designating a time
for the delivery thereof, which term shall be at least twenty (20) days
after the giving of such notice unless an earlier date shall have been
mutually agreed upon. At the time specified in the notice, the
Corporation shall deliver to the Optionee at the principal office of the
Corporation, or such other appropriate place as may be determined by the
Committee, a certificate or certificates for such shares of previously
authorized but unissued shares or acquired or reacquired shares of Stock
as the Corporation may elect. Notwithstanding the foregoing, the
Corporation may postpone delivery of any certificate or certificates
after notice of exercise for such reasonable period as may be required
to comply with any applicable listing requirements of any national or
other securities exchange or to reasonably cause the issuance of said
certificate(s). In the event an Option shall be exercisable by any
person other than the Optionee, the required notice under this section
shall be accompanied by appropriate proof of the right of such person to
exercise the Option.
7.4 Medium and Time of Payment. The exercise price shall
be payable in full upon the exercise of the Option by certified or bank
cashier's check, or, if specifically authorized in the option agreement,
by the delivery of certificates evidencing shares of Common Stock of the
Corporation having a Fair Market Value (as defined herein and subject to
the approval of the Committee) equivalent to the full (or partial, as
the case may be) purchase price for the shares to be acquired on
exercise of the Option. Any shares so assigned and delivered to the
Corporation in full or partial payment of the exercise purchase price
will be valued at their Fair Market Value on the exercise date. No
fractional shares will be issued pursuant to the exercise of Incentive
or Non-qualified Stock Option nor will any cash payment be made in lieu
of fractional shares. No commission may be paid by the Company to any
broker on the sale of shares of Stock pursuant to the exercise of the
Option.
7.5 Term of Option.
7.5.1 Options to Control Persons. The term of an
Incentive Stock Option granted to Control Persons shall be determined by
the Committee at the time of grant, but shall not exceed five (5) years
from the day of the grant. In n o event shall any Option be exercisable
after the expiration of its term.
7.5.2 Options to Others. The term of any Option other
than an Incentive Stock Option granted to a Control Person shall be
determined by the Committee at the time of
grant, but shall not exceed ten (10) years from the date of grant. In
no event shall an Option be exercisable after the expiration of its
term.
7.6 Vesting and Exercise of Option. Each Option shall
become exercisable and the total number of shares subject thereto shall
be purchasable in such installments, which need not be equal, as the
Committee shall determine; provided, however, if the holder of an Option
shall not in any given installment period purchase all of the shares of
Stock which such holder is entitled to purchase in such installment
period, such holder's right to purchase any shares of Stock not
purchased in such installment period shall continue until the expiration
or sooner termination of such holder's Option. The Committee may, at
any time after grant of the Option and from time to time, increase the
number of shares purchasable in any installment subject to the total
number of shares subject to the Option. No Option or installment
thereof shall be exercisable except in respect of whole shares, and
fractional share interests shall be disregarded. Not less than twenty
(20) shares may be purchased at one time unless the number purchased is
the total number at the time available for purchase under the Option.
7.7 Adjustments Upon Changes In Capitalization. Subject
to any required action by the shareholders, the number of shares of
Stock covered by each outstanding Option, and the price per share
thereof in each such Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Stock of the
Corporation resulting from a subdivision or consolidation of shares or
the payment of a stock dividend (but only on the Stock) or any other
increase or decrease in the number of such shares effected without
receipt of consideration by the Corporation or for per share
consideration less than the option price of such Option. Any fractional
share that would otherwise result from an adjustment pursuant to this
Section 7.7 shall be rounded downward to the next full number of shares
without other compensation or consideration to the holder of such
Option. To the extent that the foregoing adjustments shall be made by
the Committee, whose determination in that respect shall be final,
binding and conclusive.
7.8 Reorganization. Subject to any required action by the
shareholders, if the Corporation shall be the surviving corporation in
any merger or consolidation, each outstanding Option shall pertain to
and apply to the securities to which a holder of the number of shares of
Stock subject to the Option would have been entitled. A dissolution or
liquidation of the Corporation or a merger, acquisition, consolidation
or other reorganization in which the Corporation is not the surviving
corporation, shall cause each outstanding Option to terminate; provided
that each Optionee shall, in such event, have the right immediately
prior to such dissolution or liquidation, or merger, consolidation or
reorganization in which the Corporation is not the surviving
corporation, to exercise his Option in whole or in part without regard
to the installment provisions of Section 7.6 of the Plan, provided that
the Option is otherwise exercisable in accordance with the terms set
forth herein.
The grant of an Option pursuant to the Plan shall not
affect in any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or any part of its business
or assets.
7.9 Rights as a Shareholder. An Optionee or a transferee
of an Option (as expressly permitted hereunder) shall have no rights as
a shareholder with respect to any shares underlying his Option until the
date of the issuance to him of a certificate for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other
rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 7.7 hereof.
7.10 Modification, Extension and Renewal of Options.
Subject to the terms and conditions and within the limitations of the
Plan, the Committee may modify, extend or renew outstanding options
granted under the Plan, or accept the surrender of outstanding Options
(to the Extent not heretofore exercised) and authorize the granting of
new options in substitution therefor (to the extent not theretofore
exercised).
7.11 Other Provisions. The Option or other Incentive
Award agreements authorized under the Plan shall contain such other
provisions, including without limitation, restrictions upon the exercise
of such Incentive Awards, as the Committee shall deem advisable.
8. CASH BONUS AWARD
At the time an Optionee exercises an Incentive Stock Option or
Non-qualified Stock Option or sells shares of Common Stock received upon
the exercise of an Incentive Stock Option or Non-qualified Stock Option
or any other Incentive Stock Option or Non-qualified Stock Option
granted by the Corporation before the effective date of this Plan, the
Committee may grant a Cash Bonus Award in such amount as the Committee
may determine. The Committee may make such a determination at the time
of grant or exercise or at the time such shares are sold. The Cash
Bonus Award may be subject to any condition imposed by the Committee,
including a reservation of the right to revoke a Cash Bonus Award at any
time before it is paid.
9. RESTRICTED STOCK.
The Committee may approve the grant of Restricted Stock to an
Employee, subject to the following terms and conditions:
(a) The date of grant will be the date the Committee takes
the necessary action to approve the grant; provided, however, that if
the minutes or appropriate resolutions of the Committee provide that a
Restricted Stock grant is to be made as of a date in the future, the
date of grant will be such future date.
(b) All shares of Restricted Stock sold or granted
pursuant to the Plan (including any shares of Restricted Stock received
by the holder as a result of stock dividends, stock splits or any other
forms of capitalization) may be made subject to such terms and
conditions as the Committee may in its sole discretion deem appropriate
(the "Restrictions"), including, but not limited to, the following:
(i) The shares may not be sold, transferred, or
otherwise alienated or hypothecated until the Restrictions are removed
or expire.
(ii) The Committee may require the Holder to enter
into an escrow agreement providing that the certificates representing
Restricted Stock sold or granted pursuant to the Plan will remain in the
physical custody of an escrow holder until all Restrictions are removed
or expire.
(iii) Each certificate representing Restricted Stock
sold or granted pursuant to the Plan will bear a legend making
appropriate reference to the Restrictions imposed on the Restricted
Stock.
(iv) The Committee may impose Restrictions designed to
facilitate exemption from or compliance with the Securities Act of 1933,
as amended, and/or the Securities Exchange Act of 1934, as amended, with
requirements of any stock exchange upon which such shares or shares of
the same class are then listed and with any blue sky or other securities
laws applicable to such shares.
(c) The Restrictions imposed under subparagraph (b) above
upon Restricted Stock will lapse in accordance with a schedule or other
conditions as determined by the Committee.
(d) Subject to the provisions of subparagraph (b) above
and subparagraph (e) below, the holder will have all rights of a
shareholder with respect to the Restricted Stock granted or sold,
including the right to vote the shares and receive all dividends and
other distributions paid or made with respect thereto.
(e) In the event a holder of Restricted Stock ceases to be
an Employee, all such holder's Restricted Stock subject to restrictions
at the time his or her employment terminates will be returned to or
repurchased by the Corporation at the original price at which such
Restricted Stock had been purchased unless the Committee determines
otherwise.
10. STOCK APPRECIATION RIGHTS.
Stock Appreciation Rights may be granted, with the express
approval of the Board of Directors of the Corporation, to Employees in
connection with the granting of an Option under the Plan. Such Stock
Appreciation Rights, if granted, would authorize an Employee to
surrender an Option and receive a payment based on the excess of the
fair market value of the Stock to which the Option relates over the
option price. The terms and conditions of any such Stock Appreciation
Rights which will be set forth in the option agreement relating thereto,
shall include the following (as well as any additional terms provided by
the Committee):
(a) The date of grant will be the date the Committee takes
the necessary action to approve the grant; provided, however, that if
the minutes or appropriate resolutions of the Committee (or Board of
Directors) provide that a Stock Appreciation Right is to be granted as
of a date in the future, the date of grant will be such future date.
(b) A Stock Appreciation Right may be granted in
connection with an Incentive Stock Option or a Non-qualified Stock
Option, either at the time of grant or at any time thereafter during the
term of the Option.
(c) A Stock Appreciation Right will entitle the holder of
the related Option upon exercise of the Stock Appreciation Right, to
surrender such Option, or any portion thereof to the extent of the
number of shares with respect to which such Stock Appreciation Right is
exercised, and to receive payment of an amount computed pursuant to
subsection (e) hereof. Such Option will, to the extent surrendered,
then cease to be exercisable.
(d) A Stock Appreciation Right granted hereunder will be
exercisable at such time or times, and only to the extent, that a
related Option is exercisable, and will not be transferable except to
the extent that such related Option may be transferable.
Notwithstanding anything to the contrary herein, no Stock Appreciation
Right related to an Incentive Stock Option may be exercised when the
purchase price of a share of Common Stock specified in the related
Incentive Stock Option is greater than the fair market value of such
share.
(e) Upon the exercise of the Stock Appreciation Right, the
holder will be entitled to receive payment of an amount determined by
multiplying (i) the difference obtained by subtracting (a) the exercise
price of a share of Common Stock specified in the related Incentive
Stock Option or Non-qualified Stock Option from (b) the Fair Market
Value of a share of Common Stock on the date of exercise of such Stock
Appreciation Right, times (ii) the number of shares as to which such
Stock Appreciation Right will have been exercised. Upon exercise of
such Stock Appreciation Rights, and to the extent thereof, the related
Incentive Stock Option or Non-qualified Stock Option will cease to be
exercisable.
(f) Payment of the amount determined under subsection (e)
above may be made solely in whole shares of Common Stock valued at their
Fair Market Value on the date of exercise of the Stock Appreciation
Right or alternatively, in the sole discretion of the Committee, solely
cash or a combination of cash and shares as the Committee deems
advisable. If the Committee decides to make full payment in shares of
Common Stock, and the amount payable results in a fractional share,
payments for such fractional shares shall be made in cash.
(g) The Committee may approve the grant of Stock
Appreciation Rights unrelated to Options to eligible persons, subject to
the terms and conditions determined by the Board of Directors.
11. AMENDMENT OF THE PLAN.
The Board of Directors of the Corporation may, insofar as
permitted by law, from time to time, with respect to any shares at that
time not subject to Options, suspend or discontinue the Plan or revise
or amend it in any respect whatsoever, subject to approval of the
shareholders of the Corporation as may be required. The following
amendments or modifications may be adopted only with the prior vote of
the holders of the majority of the Corporation's outstanding Common
Stock:
(a) Increase the maximum number of shares which may be
obtained pursuant to Options granted under the Plan, either in the
aggregate or by an individual;
(b) Change the minimum option price;
(c) Increase the maximum term of Options provided for
herein;
(d) Decrease, directly or indirectly (by cancellation and
restriction of Options or otherwise), the exercise price applicable to
any Option granted under the Plan;
(e) Permit the granting of Options to any one other than
persons eligible under the terms of the Plan; or
(f) Materially increase the benefits accruing to
participants.
12. APPLICATION OF FUNDS.
The proceeds received by the Corporation from the sale of
Stock pursuant to Options may be used for general corporate and business
purposes.
13. NO OBLIGATION TO EXERCISE OPTION.
The granting of an Option shall impose no obligation upon the
Optionee to exercise such option.
14. APPROVAL OF SHAREHOLDERS.
The Plan must be approved by the holders of a majority of the
outstanding shares of Common Stock of the Corporation no later than 12
months after it is adopted by the Board of Directors of the Corporation.
Immediately upon obtaining such approval, the Plan shall be
appropriately endorsed by duly authorized officers of the Corporation.
No Option or other Incentive Award granted under the Plan may be
exercised until the shareholders of the Corporation have approved the
Plan.
15. SECURITIES LAWS COMPLIANCE.
Notwithstanding anything contained herein, the Corporation
shall not be obligated to grant any Option under this Plan or to sell or
issue any share pursuant to any Option agreement executed pursuant to
the Plan unless such grant of an Option or sale of Stock upon exercise
of an Option is at such time effectively registered or exempt from
registration under the Securities Act of 1933, as amended, and is
qualified or exempt from qualification under the California Corporate
Securities Law of 1968.
16. TERM OF PLAN.
Unless previously terminated by the Board of Directors, this
Plan shall be effective on September 10, 1994, and shall terminate at
the close of business on September 10, 2004, and no Incentive Awards
shall be granted under it thereafter. Termination of the Plan shall not
affect any Option or other Incentive Award theretofore granted.
SDNB FINANCIAL CORP., a California
corporation
By:/s/Murray L. Galinson
Murray L. Galinson, President
By:/s/Howard W. Brotman
Howard W. Brotman, Secretary
EXHIBIT "13"
ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
SDNB Financial Corp
1994 Annual Report
(This page also include a graphic of the Company's logo and a photograph
of the San Diego National Bank Building.)
<PAGE>
SDNB Financial Corp is the holding company for San Diego National Bank
and San Diego National Bank Building Joint Venture. San Diego National
Bank was established in 1981 to provide San Diego business with an
independent, community bank delivering superb service and competitive
consumer and commercial financial products. Our continuing goal is to
maintain the position as a leading community bank in San Diego County.
We serve our clients in a profitable and ethical manner while helping to
improve the quality of life in our community, America's Finest City.
FINANCIAL HIGHLIGHTS
1990 1991 1992 1993 1994
For the Year, In Thousands
Total interest income $17,213 $15,116 $12,334 $11,930 $11,818
Net interest income 8,912 8,468 8,321 8,571 8,912
Securities gains, net 0 80 25 0 0
Provision for loan losses 635 1,270 1,320 2,950 1,850
Netincome (loss) 740 (511) (2,211) (2,562) (159)
At Year End, In Thousands
Assets $177,704 $205,232 $194,689 $170,693 $173,185
Deposits 144,556 154,979 164,739 138,150 138,276
Loans, net 123,445 119,817 130 010 108,511 94,910
Investment securities 25,856 15,006 17,943 30 227 27 231
Long term obligations 11,038 10 881 10,630 10,379 10,158
Shareholders' equity 14,815 14,261 12 050 9,488 8,969
Per Share, Retroactively Adjusted for Stock Dividends
Net income (loss) $ 0.46 $(0.33) $(1.44) $(1.67) $(0.10)
Cash Dividends paid 0.22 0.08 0.00 0.00 0.00
Shareholders' equity 9.71 9.27 7.83 6.17 5.83
<PAGE>
The recessionary grip on the San Diego economy began to show signs of
easing in 1994. Reflecting positive momentum in the local business
sector, SDNB Financial Corp made tremendous gains moving toward
profitability. The loss for the Company was $159,000 in 1994 compared to
a loss of $2,562,000 in 1993. Profits for San Diego National Bank were
$382,000 in 1994 compared to a loss of $1,870,000 in 1993. Through-out
the year, the Company continued to set the standard for community banks.
Investing heavily in the well-being of the business and civic
communities, San Diego National Bank, one of San Diego's remaining
locally-owned financial institutions, dedicated itself to meeting the
challenges of securing a healthier economic environment. Whether it was
working with Mayor Susan Golding and the Greater San Diego Chamber of
Commerce to make the city more receptive to small businesses, or feeding
the hungry at the Rescue Mission, San Diego National Bank was there,
making our community a better place to work and live.
Looking to the future, the Company also invested in current
opportunities for growth and expansion that abound for a well-
capitalized, independent bank holding company with a planned capital
infusion of $6 million. An agreement with two limited partnerships
managed by WHR Management Corp., a New York-based investment firm, to
invest $2.2 million in conjunction with a proposed $3 million rights
offering to existing shareholders, is slowly working its way through the
process of regulatory approval. Upon the successful completion of the
offering to shareholders, WHR will add an additional investment of up to
$1.1 million.
A solid economic foundation requires continual stimulation of new jobs
and businesses. San Diego National Bank has been an active partner and
resource to many innovative projects designed to fuel financial growth
and new business start-up. Among these are the Banker's Small Business
Community Development Corp. of San Diego County, offering lending
assistance to minority, women-owned and other qualified small
businesses; Accion International Foundation, a non-profit economic
development organization, targeted to low-income families trying to
break the cycle of poverty through self-employment; Special Small
Business Investment Corp., and the California Southern Small Business
Development Corp.
San Diego National Bank representatives serve on the loan committee for
the "EMTEK Fund", providing seed capital for emerging technology
companies, and the Rehabilitation Loan Committee of the San Diego
Housing Commission. Bank representatives are active with Lender's
Community Reinvestment Association and other economic development
programs.
(This page also has a halftone graphic of the logo "sdnb")
<PAGE>
(Photograph described by the caption below) SDNB supports many companies
and organizations that are involved in tourism. It is one of the key
ingredients in San Diego's economy.
(Photograph described by the caption below)
SDNB Action Squad volunteers lent their hands to United Way's "Hands on
San Diego" project. Here, Denyce Hubbard is painting at one of the local
youth hostels.
(Photograph described by the caption below)
Our commitment to small business is demonstrated by John McNulty's
involvement in the Bankers Small Business Community Development
Corporation (BSB/CDC). It provides financing to minority and women-owned
businesses.
(Photograph described by the caption below)
Cultural organizations such as the San Diego Symphony are important to
any major city. We, at SDNB, do our part to support their activities.
(Photograph described by the caption below)
Our sponsorship of the "Women Who Mean Business" awards was one example
of our commitment to the large number of women who own or operate
successful businesses. Murray Galinson is seen here giving an award to
one of the event's honorees.
(This page also has a halftone graphic of the word "community")
<PAGE>
(Photograph described by the caption below)
Many of our staff volunteer each month to serve seniors lunch at the
Senior Community Center of San Diego. Debbie Keeney states it has been a
very rewarding experience.
(Photograph described by the caption below)
Murray Galinson is pictured here with Eddy Rose Riley, the winner of our
holiday card contest. Eddy Rose attends El Toyon Elementary School in
National City, SDNB's "adopted" school.
(Photograph described by the caption below)
Our involvement with the Youth Enterprise Zone (YEZ) enables us to share
our business expertise with high school students who desire to become
entrepreneurs.
(Photograph described by the caption below)
The staff has raised several hundreds of dollars for charities by paying
to dress casual. Recipients of these funds include the American Cancer
Society, March of Dimes, Muscular Dystrophy and San Diego Youth &
Community Services.
(Photograph described by the caption below)
SDNB Board member, Midge Costanza, exhibits her artistic talents to
Wyland, the famous ocean artist. The painting of the wall by Wyland
illustrates our commitment to our environment.
(Photograph described by the caption below)
The Wellness Community, San Diego holds a "duck race" at the Del Mar
Fair each year. The proceeds benefit cancer patients and their families.
Kristy Gregg is one of many of the SDNB staff that volunteers time at
the event.
<PAGE>
(Photograph of Charles I. Feurzeig, Chairman of the Board and Murray L.
Galinson, President and Chief Executive Officer)
In response to surveys assessing the needs of small to mid-sized
business owners and professionals, San Diego National Bank initiated
trust, investment and custodial services through Danielson Trust Company
and leasing services through Heritage Leasing Capital.
Corporate downsizing and sale of local businesses to institutions
headquartered outside of San Diego created a void in the charitable and
institutional giving levels. San Diego National Bank employees extended
themselves with personal time and monetary contributions to help fill
the need. Monthly "casual dress days" for employees who donated to
specific charities raised thousands of dollars throughout the year.
SDNB invested in education by contributing expertise and support to
educational institutions such as California Western Law School, San
Diego State University, University of California, San Diego and our
adopted elementary school, El Toyon, in National City. Health was a
major focus for the year. The bank hosted a seminar on health care
reform and its implication for employers and industry professionals. We
sponsored events and raised money for Sharp Rehabilitation Center, the
Wellness Community, San Diego Hospice, Mercy Hospital and the UCSD
Medical Center.
The list of organizations to which San Diego National Bank employees and
board members contribute encompass arts and cultural institutions like
the Museum of Photographic Arts, the Symphony and the Opera. Service and
volunteer organizations like Big Brothers, United Way, American Red
Cross, Junior League, The City Club, Rachel's House, Episcopal Community
Services and many others benefited from SDNB's policy of giving back to
the community and corporate stewardship.
With three women directors on the board, the Company is serious about
women-owned businesses. A goal of recognizing and supplementing the
financial needs of this significant entrepreneurial sector was enhanced
through involvement in many activities. The painting by internationally
famous oceans' artist Wyland on the SDNB Building north wall blossomed
into a week-long community celebration of the California gray whale,
attracting thousands. Now a landmark, this example of public art serves
as a distinguishing symbol of our bank, as well as providing visual
testimony to the spirit San Diego National Bank invests in its
community.
We are proud of our record of achievement and contribution, and the
employees, board members, investors and customers who believe in
community banking and commitment.
/s/Charles I. Feurzeig
CHARLES I. FEURZEIG
CHAIRMAN OF THE BOARD
/s/Murray L. Galinson
MURRAY L. GALINSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(This page also has a halftone graphic of the word "leadership")
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
The results of operations for 1994 reflect a continuation of the
problems of a still depressed economy in which the Company operates. The
Company recorded a loss for 1994 of $159,000 compared to losses of
$2,562,000 and $2,211,000 in 1993 and 1992, respectively. Rising
interest rates in 1994 have contributed substantially to the
improvement. Also included in 1994 is the recovery of previously
expensed legal fees (see "Other Non-Interest Income"). For the past
several years, the Company and the Bank have been adversely affected by
a number of factors emanating primarily from the condition of the
economy in San Diego. These factors, which are more fully described
herein, include:
a. The continued need for high loan loss provisions.
b. OREO losses and expenses from higher than normal levels of the OREO
properties.
c. Reduced net interest margin between 1992 and 1993 as a result of
declining interest rates. An improved
net interest margin in 1994, however, as a result of a sharp increase in
interest rates.
d. Reduction in the level of the loan portfolio resulting from
continuing low loan demand.
Additionally, the Company has incurred substantial expense in connection
with legal fees and provision for additional costs from the Pioneer
Mortgage litigation (see "Other Non-Interest Expenses").
While the Company reports a much reduced loss in 1994 than in the prior
three years, there can be no assurances that the factors noted above, or
other factors, will not continue to adversely impact the Company and the
Bank. Discussion of the individual elements of the Company's operations
is contained in subsequent sections of this report.
Liquidity and Asset/Liability Management
Monitoring of the Bank's interest rate sensitivity and liquidity is the
responsibility of the Asset/Liability Management Committee (ALM), which
reports directly to the Management Committee. It is Management's
philosophy that ALM manage the Bank's balance sheet to provide the
highest possible returns while maintaining an acceptable amount of
interest-rate risk and adequate liquidity.
By the nature of its commercial/wholesale focus, the Bank has moderate
interest-rate risk exposure in a declining-rate environment. This
phenomenon can be seen in the "Static Gap Summary" (Table 1). At
December 31, 1994, approximately 75% of the Bank's earning assets adjust
immediately to changes in interest rates. Within three months, this
increases to 84% of earning assets. Consequently, the Bank utilizes
deposit liabilities that also adjust relatively quickly. Within the same
three-month period, approximately 95% of the Bank's interest-bearing
liabilities (mostly deposits) adjust to current rates.
The Bank's cumulative gap position at the three month repricing interval
has remained relatively constant from December 31, 1993 to December 31,
1994; however, the gap at the one day interval has narrowed by 37%. This
shift is explained by two factors. First, the Bank was able to increase
lower rate, immediately repricable deposits by $11.6 million during
1994. Second, securities sold under repurchase agreements increased by
$5.2 million in the one-day maturity time frame. Because of these
increases and slowing loan demand, ALM was able to price "money desk"
certificates of deposit unattractively, assuring that those funds
already in the Bank would be withdrawn at maturity. Money desk funds
reduced from a peak of over $14 million in 1993 to under $1 million at
December 31, 1994, accounting for the bulk of the decrease in
certificates of deposit.
The Bank's liquidity needs are projected by comparing anticipated
funding needs against current resources and anticipated deposit growth.
Any current surplus of funds is invested to maximize income while
maintaining safety and providing for future liquidity. During 1994, cash
and cash equivalents increased $20.3 million. Federal funds sold
increased by $17.7 million as a consequence of ALM's preference to keep
investment maturities short in the rising interest rate environment of
1994. Approximately $3 million was provided by operating activities,
despite a small net loss on the consolidated statement of operations.
The bulk of the increase in cash and cash equivalents, $14.2 million,
was provided by investing activities. Of this amount, $11.5 million was
due to a decrease in gross loans. Maturities of investment securities
outpaced new purchases by $2.6 million during the year. An additional
$3.1 million was provided by financing activities, mainly the increase
in securities sold under repurchase agreements. Liquidity is provided on
a daily basis by federal funds sold and on a longer-term basis by
structuring the Bank's investment portfolio to provide a steady stream
of maturing issues. Additionally, the Bank may raise additional funds
from time to time through money desk operations or via the sale of loans
to another institution.
The Bank has never purchased high-yield securities or participated in
highly-leveraged transactions.
See "Capital Resources" for a discussion of other factors that could
affect liquidity.
<TABLE>
<CAPTION>
TABLE 1. STATIC GAP SUMMARY
DECEMBER 31, 1994
Immediately Non-rate
Adjustable 1 Day 3 6 Sensitive
Or 1 Day Through Through Through And Over
(In thousands) Maturity 3 Months 6 Months 12 Months 12 Months Total
<S> <C> <C> <C> <C> <C> <C>
Loans (net) 87,630 3,498 1,357 665 3,908 97,058
Investment securities - 9,558 1,004 2,759 13,910 27,231
Certificates of deposit in other banks - 688 693 - - 1,381
Federal funds sold 24,000 - - - - 24,000
Total interest earning assets 111,630 13,744 3,054 3,424 17,818 149,670
Non-interest earning assets - - - - 12,954 12,954
Total assets 111,630 13,744 3,054 3,424 30,772 162,624
Deposits:
Savings, NOW accounts and
money markets 74,717 - - - - 74,717
Time deposits - 12,908 3,220 1,533 239 17,900
Total deposits 74,717 12,908 3,220 1,533 239 92,617
Securities sold under agreement
to repurchase 12,285 - - - - 12,285
Total interest bearing liabilities 87,002 12,908 3,220 1,533 239 104,902
Non-interest bearing liabilities - - - - 46,415 46,415
Shareholders' equity - - - - 11,307 11,307
Total liabilities and
shareholders' equity 87,002 12,908 3,220 1,533 57,961 162,624
Interest rate sensitivity gap 25,153 836 (166) 1,891 (27,714)
Cumulative interest rate sensitivity gap 25,153 25,989 25,823 27,714 -
</TABLE>
Capital Resources
Since its initial capitalization in 1981, the Company had relied
primarily on internally generated income to fund its growth and provide
depositor protection. In July 1994, the Company announced that it had
signed a letter of intent whereby two limited partnerships managed by
WHR Management Corp. ("WHR") would invest $4 million in the Company's
common stock. Subsequent discussions with regulatory authorities have
led to a reduction to $2.2 million in the amount of the initial
investment by WHR in order to avoid WHR being considered a bank holding
company. In conjunction with the investment by WHR, the Company plans a
$3 million "rights offering" to existing shareholders. Upon completion
of the rights offering, WHR will invest an additional $1.1 million, or
such lesser amount so that after such investment WHR would hold an
aggregate of 24.9% of the outstanding common stock of the Company,
taking into account the shares issued in the rights offering. The
transactions are subject to approval by regulatory authorities and by
the Company's shareholders at the Annual Meeting of Shareholders
scheduled for March 17, 1995. The Company anticipates that the funds
raised would be used to provide capital to the Bank to finance future
expansion, including possible acquisitions, and to reduce the
obligations of the San Diego National Bank Building Joint Venture
("Joint Venture").
In a separate but related transaction, WHR purchased the existing first
mortgage loan on the building and modified its terms (see "Subsidiary
Data"). As disclosed in the notes to the consolidated financial
statements, the Bank is temporarily precluded from paying dividends to
the Company. As further disclosed, the Company merged SDNB Development
Corp into itself effective July 1, 1993, thereby allowing cash flow from
the Joint Venture to come directly to the Company. During 1994, the
Joint Venture cash flow provided the Company with sufficient funds to
meet its normal ongoing obligations but was not sufficient to allow the
payment of cash dividends, which would also require approval of the
Federal Reserve Bank of San Francisco under terms of an agreement dated
November 20, 1992. There can be no assurance that the Joint Venture cash
flow will continue to provide the Company with sufficient funds to meet
ongoing obligations.
Investment Securities
As reflected in the consolidated financial statements and in the
accompanying notes thereto, the investment portfolio of the Bank has
been negatively impacted by the decline in the bond market caused by
higher interest rates compounded by the impact on the market of the
"structured" or derivative securities. Though the Bank held no bonds
issued by Orange County, California, or any of its political
subdivisions, the general market conditions have led to declines in
value of securities both in the available for sale and held to maturity
categories. Management believes, however, that there is sufficient
liquidity and available sources of liquidity to allow all such notes
(which are fully guaranteed by United States government
instrumentalities as to principal) to mature and thus avoid realization
of any material amount of the presently unrealized losses.
Net Interest Income / Net Interest Margin
Net interest income for 1994 was $8,912,000 compared to $8,571,000 for
1993 and $8,321,000 for 1992, which represents increases of 4% and 3%,
respectively. Net interest income is determined by the spread of
earnings on assets over the cost of funds. The three-year history is
shown in the following chart:
1994 1993 1992
NET INTEREST SPREAD
Yield on average earnings assets
(taxable equivalent) 7.75% 7.60% 7.99%
Cost of funds 1.89% 2.11% 2.57%
Net interest spread 5.86% 5.49% 5.42%
The Wall Street Prime interest rate rose from 6% at the beginning of
1994 to 8.5% at the end of the year, averaging 7.14% for the year. The
rate had remained at 6% during all of 1993 after averaging 6.25% in
1992. In addition to interest rates, changes in the volumes of assets
and liabilities also affect net interest income. The volume/rate
variance analysis (Table 2) shows the change in net interest income that
is attributable to changes in volume versus changes in rates. As
reflected in Table 2, net interest spread is affected by several
factors:
a) Since the vast majority of the Bank's loans (92% at December 31,
1994), are at variable rates, the changes in the prime interest rate
described above resulted in the decrease in interest earned based on
rate between 1992 and 1993, and the sharp increase between 1993 and
1994.
b) The reduction in average loan balances, which began in 1993,
continued during 1994, resulting in a substantial decrease in interest
earned based on volume.
c) The amount of time certificates has declined from $50 million at
the
end of 1992 to $18 million at December 31, 1994. This outflow was
partially offset by increases in money market accounts on which the Bank
pays a lower rate of interest. The decline in time certificates is
attributable to two major factors:
1. The reduction in "money desk" certificates is described previously
(see "Liquidity and Asset/Liability Management").
2. Continuing depositors have apparently chosen to shift to the more
flexible money market accounts as the interest rate differential between
those accounts and time certificates diminished.
<TABLE>
<CAPTION>
TABLE 2. VOLUME/RATE VARIANCE ANALYSIS
1994 compared to 1993 1993 compared to 1992 1992 compared to
1991
Volume Rate Total Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST ON EARNING ASSETS:
Loans
Commercial loans (1,320) 316 (1,004) (466) 36 (430) 783 (1,518) (735)
Real estate loans (275) 452 177 258 (269) (11) (717) (549) (1,266)
Installment loans (25) (52) (77) (51) 71 20 59 (125) (66)
Total loans (1,620) 716 (904) (259) (162) (421) 125 (2,192) (2,067)
Investment securities
U.S. Treasury securities 18 18 36 (5) (58) (63) 61 (46) 15
Securities of government agencies 312 67 379 376 (82) 294 (313) (179) (492)
State and political obligations 130 (139) (9) (25) (5) (30) (124) (10) (134)
Other securities (13) (3) (16) (65) 19 (46) (31) (43) (74)
Total investment securities 447 (57) 390 281 (126) 155 (407) (278) (685)
Certificates of deposit in other banks (1) (3) (4) (78) (27) (105) 5 (44) (39)
Federal funds sold 172 196 368 19 (63) (44) 175 (212) (37)
Total interest income change (1,002) 852 (150) (37) (378) (415) (102) (2,726) (2,828)
INCREASE (DECREASE) IN INTEREST PAID ON LIABILITIES:
Interest on deposits
Savings, NOW accounts, and money markets 158 90 248 (194) (279) (473) 177 (1,407) (1,230)
Other domestic time deposits (794) (103) (897) 76 (326) (250) (285) (1,019) (1,304)
Total interest on deposits (636) (13) (649) (118) (605) (723) (108) (2,426) (2,534)
Securities sold under agreement to repurchase
and federal funds purchased 171 11 182 101 (60) 41 (16) (85) (101)
Short-term debt 5 30 35 29 (10) 19 0 (44) (44)
Long-term debt (15) (37) (52) (20) (140) (160) (20) (216) (236)
Total interest expense change (475) (9) (484) (8) (815) (823) (144) (2,771) (2,915)
Net change in net interest income (527) 861 334 (29) 437 408 42 45 87
<FN>
Note: Change in interest income or expense can be attributed to (a) changes in volume (change in volume
times old rate), (b) changes in rates (change in rate times old volume),and (c) changes in rate/volume
(change in rate times the change in volume). The rate/volume variances are allocated proportionally
between the rate and the volume variances based on their absolute values.
</FN>
</TABLE>
<PAGE>
Loans and Allowance and Provision for Loan Losses
Management employs a "migration analysis method" to establish the
required amount of loan loss allowance. This process tracks realized
loan losses back through the prior two years to estimate loss exposure
on the classified and unclassified loan portfolios. Additionally, loss
experience is tracked in pools of loans with similar characteristics to
estimate the loss exposure unique to various loan types. The measured
loss exposure is then applied to the current loan portfolio and further
adjusted for "qualitative factors" such as:
Changes in the trends of the volume and severity of past due and
classified loans; and trends in the volume of non-accrual loans,
troubled debt restructurings and other loan modifications;
Changes in the nature and volume of the portfolio;
Changes in the experience, ability, and depth of lending management
and staff;
Changes in lending policies and procedures, including underwriting
standards and collections, charge-offs and recovery practices;
Changes in national and local economic and business conditions and
developments, including the condition of various market segments;
The existence and effect of any concentrations of credit, and
changes in the level of such concentrations;
Changes in the quality of the loan review system and the degree of
oversight by the Board of Directors; and
The effect of external factors such as competition and legal and
regulatory requirements on the level of estimated credit losses in the
current portfolio.
This method of establishing loan loss reserves complies with the
policies of the Office of the Comptroller of the Currency as reflected
in Banking Circular 201, revised, dated February 20, 1992, and in
Banking Bulletin 93-60, dated December 21, 1993. The Company began
testing this new method during 1992 and comparing its results to results
reached by the previously existing procedures employed by the Company.
The test proved that the two methods were comparable, and the Company
adopted the new migration analysis method during 1993.
Evaluation and classification of problem loans is an ongoing process
involving grading by loan officers, evaluation by the credit
administration department of the Bank, and a review on a regular basis
by an independent loan review firm. Additionally, in response to the
problems in the economy and increases in the level of classified loans,
in 1993 the Bank established a Special Assets Department to deal solely
with problem loans including identification, modification where
appropriate, and early recognition of loss potential. As is reflected in
the following chart, the introduction of the Special Assets Department
has resulted in improved early recognition of problem loans and
opportunity to restructure them, thereby increasing the amount of loans
reported as nonperforming (both those that are current in payment and
those that are not current), but improving the collection record on such
loans. The migration analysis adequately recognizes the loss potential
included in those credits.
LOANS REPORTED AS NONPERFORMING
AT DECEMBER 31,
(in thousands) 1994 1993 1992
CURRENT AND NONCURRENT
Non-accrual loans 6,046 5,343 1,918
Restructured loans (still accruing) 2,316 3,162 0
Loans 90 days past due 20 481 248
8,382 8,986 2,166
Other real estate owned 268 1,050 2,091
Total 8,650 10,036 4,257
1994 1993 1992
NONCURRENT
Non-accrual loans 1,276 3,373 1,223
Restructured loans (still accruing) 0 0 0
Loans 90 days past due 20 481 248
1,296 3,854 1,471
Other real estate owned 268 1,050 2,091
Total 1,564 4,904 3,562
Loans reported as nonperforming but
which are current, as a percentage of
total loans reported as nonperforming 82% 51% 51%
Accordingly, the Company believes its method for establishing the loan
loss allowance is sound. But no method, however valid, can consistently
predict future events with complete accuracy. In recent years, several
factors used by the Bank to establish loan loss allowances have been
subject to considerable volatility, and this in turn has affected the
volatility of nonperforming loans, charge-offs, and the coverage ratio.
In addition, the Bank's method of reporting, particularly its
conservative listing of loans as nonperforming, is not always an
accurate indicator of actual future losses for several reasons. These
issues are explained in greater detail below.
The economy in San Diego suffered a sharp downturn in recent years,
particularly in the real estate market. The Bank is a community bank
with a relatively small loan portfolio comprised of mostly
commercial/real estate loans that tend to be individually larger in
amount than loans made by retail banks. As a result of these and other
factors, the Bank can experience large swings in nonperforming loans,
charge-offs, and the coverage ratio when one or a few loans are
transferred from one category to another. These factors are not reasons
for changing a valid method of determining loan loss allowances and are
not always accurate predictors of losses, but they do have short-term
effects on those allowances and related reported figures.
Significant components of the loan loss charge-offs in 1994 ($1.2
million of a total of $2.4 million) and in 1993 ($660,000 of a total of
$2.7 million) were attributable in each year to a single loan which
became a problem loan late in the year. In both cases, the Bank
responded with a partial charge-off, consistent with its conservative
reporting of problem loans. The changing levels of nonperforming loans
from December 31, 1992 to December 31, 1993, also provide an excellent
example of the volatility of non-performing loans. During 1993, a single
large real estate loan was transferred into the nonperforming category
as a result of financial problems experienced by the borrower directly
on account of the troubled real estate market in San Diego; that loan
accounted for $2.5 million of the total increase of $5.8 million in
nonperforming loans for the period but the loan was completely collected
by the end of 1994. Another $4.4 million of the increase was due to
conservative reporting as the result of the establishment of the Special
Assets Department and the early recognition of potentially problem
loans: restructured but accruing loans increased by $3.1 million (from
zero) and non-accrual but current loans increased by $1.3 million (from
$700,000).
Similar factors explain the decrease in nonperforming loans in 1992
compared to 1991 by $5.4 million, from $9.6 million to $4.2 million.
Approximately 89% of this decrease is attributable to the Bank's
aggressive efforts to work off problems that had been created in prior
years from the depressed real estate market. In 1992, the Bank sold more
than one-half of its Other Real Estate Owned ($2.8 million of a total of
$5.4 million) and reduced its over-90 day past due loans by $2.0 million
through diligent administration.
What this demonstrates, among other things, is that the conservative
reporting of nonperforming loans is a useful management tool, but it is
not always a good predictor of loan losses (nor is it intended to be)
and there is no direct correlation between nonperforming loans and the
proper level of loan loss reserves (nor should there be). As the
foregoing chart dramatically shows, a significant portion of the loans
reported as "nonperforming" are in fact performing in that payments on
those loans are current. (See the percentages in the final line of the
foregoing chart.) Also, many of the Bank's loans are collateralized (86%
were collateralized at December 31, 1994), and that collateral can
affect the recovery on troubled loans, of course. For example, the
complete repayment on the $2.5 million loan referred to above was
attributable to realization on the collateral.
For these reasons, Management believes that the migration analysis is
the proper method of establishing the loan loss allowance, even though
it may result in a short-term effect on the relationship between
reported non-performing loan amounts and the balance in the allowance.
Activity in the allowance for loan losses is described in the notes to
the consolidated financial statements.
Management believes that any loans classified for regulatory purposes as
loss, doubtful, substandard or special mention do not represent or
result from trends or uncertainties which Management reasonably expects
will materially impact future operating results, liquidity or capital
resources, or represent material credits about which Management is aware
of any information which causes Management to have serious doubts as to
the ability of the borrowers to comply with the loan repayment terms.
Accordingly, Management believes that the allowance for loan losses is
properly established and adequate in amount.
Management is concerned, however, that recent increases in the prime
interest rate, particularly in late 1994 and early 1995, and the
possibility of further increases, will negatively impact the future cash
flow of borrowers of "mini-perm" real estate loans and their ability to
service the debt. Management estimates that as much as $11.5 million in
such loans at December 31, 1994 could be subject to such impact.
Management has begun a pro-active program to enter into modification
agreements, where necessary, to keep such loans performing. Such
modifications may include capping, reducing or deferring future interest
payments. If the proposed modifications covered all such loans, the Bank
would be forgoing future income of approximately $58,000 annually for
each one-half percent of interest not charged.
Miscellaneous Other Operating Income
During 1994, the Bank and its directors' and officers' insurer settled
their dispute regarding the Bank's legal and settlement costs in the
Pioneer Mortgage federal class action and state court cases (see notes
to consolidated financial statements). Under the terms of the
settlement, the insurer paid the Bank $713,000 (in addition to the
$750,000 the insurer had previously advanced toward the Bank's
settlement with the plaintiffs) which has been credited to miscellaneous
other operating income.
No directors or officers have been named as defendants in the remaining
claims alleged in the Pioneer Liquidating Corporation complaint.
Management does not anticipate any further insurance recovery to result.
Other Non-Interest Expenses
Included in other non-interest expenses are the following:
Legal fees and settlement costs (and provisions therefor) in connection
with the Pioneer Mortgage Company and Pioneer Liquidating Corporation
litigation:
In 1994 $ 504,000
In 1993 $ 592,000
In 1992 $1,455,000
Matters pertaining to the federal class action and state court cases
resulting from the 1991 Pioneer Mortgage Company litigation, including
the Bank's claim against its insurer, have been settled. The 1993
litigation brought by Pioneer Liquidating Corporation remains before the
court and, although settlement discussions have been initiated, no
agreement has been reached. Management is unable to predict whether
such settlement will be achieved but has recorded a $250,000 provision
for additional costs in connection therewith (included in 1994 expenses
above). The case is scheduled for trial in November 1995.
If such costs exceed the amount that has been reserved, the result would
have a detrimental effect on the Company's financial results in 1995.
Additionally, should the settlement efforts fail, the Company can expect
a continuation of abnormally high legal fees as the litigation winds its
way through the legal system.
Other Real Estate Owned ("OREO") losses and expenses:
In 1994 $ 462,000
In 1993 $ 754,000
In 1992 $1,257,000
OREO property, which peaked at approximately $5 million in 1991,
continued to decline in 1994 (to $268,000 at December 31, 1994) as
Management instituted vigorous efforts to dispose of repossessed
property. A new property was repossessed early in 1995 with a book value
of approximately $550,000. Management is unable to predict if there will
be other repossessions in the future but intends to continue to dispose
of such properties as quickly as is prudent.
Miscellaneous expense in 1993 includes provision for a loss in the
amount of $500,000 due to an unfavorable arbitration decision which
required the Bank to rescind the 1988 sale of a single family residence
which it had taken in foreclosure in 1987. The property was resold in
1994.
Subsidiary Data
San Diego National Bank The Bank earned $382,000 in 1994 compared to
losses of $1,870,000 in 1993 and $1,363,000 in 1992. Return on average
assets (ROA) was 0.23%, (1.07%) and (0.78%), respectively. Return on
average equity (ROE) was 3.20%, (14.65%) and (10.05%), respectively. The
reasons for the change in Bank earnings have been enumerated in the
preceding pages.
See notes to the consolidated financial statements for information
regarding the Bank's capital ratios.
San Diego National Bank Building Joint Venture The Joint Venture
recorded pre-consolidation gross building revenues of $2,046,000,
$2,048,000 and $1,994,000 in 1994, 1993 and 1992, respectively,
resulting in pre-consolidation, pre-tax losses of $447,000, $453,000 and
$723,000, respectively. Depreciation and amortization expenses were
$636,000, $640,000 and $692,000 in 1994, 1993 and 1992, respectively.
At the beginning of the Joint Venture, the limited partners' share of
its losses was charged against the investment capital accounts of the
limited partners. During 1990 these capital accounts reached zero,
requiring the Company to absorb additional losses of approximately
$168,000 in 1994, $171,000 in 1993 and $275,000 in 1992 which would
otherwise have been charged to the limited partners. The cumulative
amount of such absorbed additional losses is $1,282,000 through December
31, 1994.
There is a substantial amount of vacant office space in downtown San
Diego. A recent study indicated that the downtown vacancy rate was
approximately 23% (36th highest among 47 U.S. cities included in the
survey) and rental rates were ranked 35th lowest in the same survey.
This creates a highly competitive rental market, generally requiring the
granting of generous lease concessions and/or low rental rates to obtain
new tenants or retain existing ones. Some tenants with limited time
remaining on existing leases have begun negotiating for lower current
rental rates in exchange for extensions of their leases. Management
anticipates a gradual reduction in rental income as existing leases
expire and new leases are written at substantially lower rates. At the
end of 1994, the building was approximately 90% leased, although
concessions to some tenants who are not utilizing all of their leased
premises would reduce the effective occupancy to approximately 82%.
In November 1994, the existing first mortgage loan on the building was
purchased by the two limited partnerships managed by WHR Management
Corp. which propose to purchase the Company's stock (see "Capital
Resources"). In January 1995, the Joint Venture and WHR entered into a
modification agreement which reduces the debt service requirement to
$800,000 per year, all allocable to interest. Prior to such
modification, the annual debt service requirement was $823,000 allocable
first to interest at a rate equal to 2.25% over the 11th District Cost
of Funds (which interest rate changed monthly). Pursuant to the terms of
the original trust deed (absent the modification), due to projected
increase in the benchmark interest rates, annual payments of debt
service were projected to increase on May 1, 1995, to approximately
$917,000. Further, the modification allows prepayment of the loan on
April 1, 1995, for $7,708,000 (assuming all interest payments have been
made); on January 1, 1996, for $8,691,000; and quarterly thereafter at
amounts which increase by approximately $373,000 each quarter. On April
1, 1997, the outstanding principal balance will be due and payable if
not previously prepaid.
Additionally, the Joint Venture anticipates entering into a modification
agreement to make a partial payment of $250,000 on the second trust deed
note payable to Pacific View Construction, Inc. ("PV note") out of the
proceeds of the stock issuance referred to in other sections of
management's discussion and analysis. The PV note would be further
modified to fix the interest rate at 10% per annum and extend the due
date to April 1, 1997. It is anticipated that the Company will also
purchase customer notes from the Bank in the amount of approximately
$1,100,000 (par) and assign such notes to the Joint Venture. The Joint
Venture would then assign the notes as payment against the PV note
balance. The result of such transaction would be to further reduce the
Joint Venture's debt service requirements.
The first and second mortgage notes described above would both mature on
April 1, 1997. Management intends to pursue all opportunities to
refinance the property at, or prior to, that time. Such a refinancing,
or ultimately a possible sale of the building, would depend upon market
conditions. Management is unable to predict the market conditions which
will exist in 1997.
Business Environment
Through the 1990's economic recovery of San Diego and the entire
Southern California area has lagged behind that of the nation as a
whole. As discussed earlier, a rising interest rate environment in 1994
has resulted in an increase in the Bank's net interest spread. Should
interest remain at this relatively high level, there could be a
beneficial effect to the Company. Conversely, should interest rates
decline, net interest spread will be negatively impacted. The majority
of the Bank's variable rate loans adjust on the day that a rate
reduction is made. The offsetting reduction in interest paid on deposits
is delayed until certificates of deposit mature and, additionally,
competitive pressure from savings institutions and non-bank money funds
may inhibit reduction in rates paid on other interest-bearing accounts.
<PAGE>
CONSOLIDATED BALANCE SHEETS
SDNB Financial Corp and Subsidiaries
December 31,
(dollars in thousands) 1994 1993
Assets
Cash and due from banks $ 11,936 $ 9,044
Interest bearing deposits in other banks 1,381 1,682
Federal funds sold 24,000 6,300
Investment securities 27,231 30,227
Loans 97,058 111,033
Less allowance for loan losses 2,148 2,522
Net loans 94,910 108,511
Premises and equipment, net 11,089 11,742
Other real estate owned 268 1,050
Accrued interest receivable and other assets 2,370 2,137
$173,185 $170,693
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 45,693 $ 41,113
Interest bearing 92,583 97,037
Total deposits 138,276 138,150
Securities sold under agreement to repurchase 12,285 9,273
Accrued interest payable and other liabilities 953 1,019
Notes payable 12,702 12,763
Total liabilities 164,216 161,205
Commitments and contingencies (notes 10 and 11)
Shareholders' equity:
Common stock, no par value; authorized
15,000,000 shares, issued and outstanding
1,538,364 in 1994 and 1993 14,585 14,585
Accumulated deficit (5,256) (5,097)
Net unrealized holding losses on
available-for-sale securities (360) 0
Total shareholders' equity 8,969 9,488
$173,185 $170,693
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
SDNB Financial Corp and Subsidiaries
Years ended December 31,
(dollars in thousands except per share amounts) 1994 1993 1992
Interest Income:
Interest and fees on loans $ 9,500 $10,404 $10,825
Interest on federal funds sold 732 364 408
Interest on investment securities:
Taxable 1,394 899 825
Exempt from federal income tax 192 263 276
Total interest income 11,818 11,930 12,334
Interest Expense:
Deposits 2,497 3,146 3,869
Short-term borrowings 409 213 144
Total interest expense 2,906 3,359 4,013
Net interest income 8,912 8,571 8,321
Provision for Loan Losses 1,850 2,950 1,320
Net interest income after
provision for loan losses 7,062 5,621 7,001
Other Operating Income:
Security gains, net 0 0 25
Building income 1,067 1,088 1,108
Miscellaneous 1,580 1,017 1,117
Total other operating income 2,647 2,105 2,250
Other Operating Expenses:
Salaries and employee benefits 3,630 3,371 3,568
Occupancy 492 486 511
Building operating expenses, including
interest expense of $788, $820 and $988
for 1994, 1993 and 1992, respectively 2,296 2,310 2,558
Other non-interest expenses 3,447 4,355 5,304
Total other operating expenses 9,865 10,522 11,941
Loss before income tax (benefit) and
cumulative effect of accounting change (156) (2,796) (2,690)
Income Tax (Benefit) 3 0 (479)
Loss before cumulative effect
of accounting change (159) (2,796) (2,211)
Cumulative Effect of Accounting
Change ($0.15 Per Share) 0 (234) 0
Net loss $ (159) $(2,562) $(2,111)
Net loss per share $(0.10) $(1.67) $(1.44)
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SDNB Financial Corp and Subsidiaries
Net unrealized
holding losses
For years ended on available-
December 31, 1994, 1993 and 1992 Common Accumulated for-sale
(dollars in thousands) Stock Deficit securities Total
Balances at January 1, 1992 $14,585 $(324) $0 14,261
Net loss 0 (2,211) 0 (2,211)
Balances at December 31, 1992 $14,585 $(2,535) $0 $12,050
Net loss 0 (2,562) 0 (2,562)
Balances at December 31, 1993 $14,585 $(5,097) $0 $ 9,488
Effect of adopting Statement of
Financial Accounting Standards
No. 115, Accounting for
Certain Investments in Debt
and Equity Securities
("SFAS No. 115"), on
January 1, 1994 0 0 (10) (10)
Net change in fair value of
available-for-sale securities 0 0 (350) (350)
Net loss 0 (159) 0 (159)
Balances at December 31, 1994 $14,585 $(5,256) $(360) $8,969
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASHFLOWS
SDNB Financial Corp and Subsidiaries
Years ended December 31,
(dollars in thousands) 1994 1993 1992
Operating Activities:
Net loss $ (159) $(2,562) $(2,211)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for loan losses 1,850 2,950 1,320
Provision for depreciation and
amortization 1,332 1,102 1,168
Cumulative effect of accounting change 0 (234) 0
Amortization of investment security
discounts (65) (84) (47)
Other expense not utilizing(providing) cash 175 106 (76)
Unearned loan fees 104 (5) (26)
Taxes refundable (30) 477 (86)
Interest receivable and other assets (144) (691) 465
Interest payable and other liabilities (66) 545 (74)
Total adjustments 3,156 4,166 2,644
Net cash provided by
operating activities 2,997 1,604 433
Investing Activities:
Proceeds from maturities of held
for investment securities 0 10,699 16,971
Proceeds from maturities of
held-to-maturity securities 9,443 0 0
Proceeds from maturities of
available-for-sale securities 6,927 0 0
Proceeds from sales of held
for investment securities 0 0 250
Purchases of held for
investment securities 0 (23,037) (20,204)
Purchases of held-to-maturity securities (8,847) 0 0
Purchases of available-for-sale
securities (4,950) 0 0
Net change in gross loans 11,508 18,549 (11,513)
Proceeds from sale of OREO properties 889 1,041 2,896
Purchases of OREO properties (520) 0 0
Purchases of premises and equipment (232) (221) (343)
Net cash provided (used) by
investing activities 14,218 7,031 (11,943)
Financing Activities:
Funds received for customer
security purchases 0 0 (18,000)
Net change in deposits 126 (26,589) 9,760
Net change in short-term borrowings 3,172 4,619 474
Payments of long-term borrowings (222) (251) (251)
Net cash provided (used) by
financing activities 3,076 (22,221) (8,017)
Change in cash and cash equivalents 20,291 (13,586) (19,527)
Cash and cash equivalents at
beginning of year 17,026 30,612 50,139
Cash and cash equivalents at
end of year $37,317 $17,026 $30,612
For the purpose of the statement of cash flows, the Company considers
cash and cash equivalents to be as follows at December 31,
1994 1993 1992
Cash and due from banks $11,936 $ 9,044 $16,824
Interest-bearing deposits in other banks 1,381 1,682 2,188
Federal funds sold 24,000 6,300 11,600
Totals $37,317 $17,026 $30,612
Supplemental cash flow information: 1994 1993 1992
Cash Paid For:
Interest $ 3,661 $ 4,163 $ 4,995
Income Taxes $ 3 $ 0 $ 0
Non-cash items: transfer of
loans to OREO $ 0 $ 739 $ 0
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. Summary of Significant Accounting Policies
The accounting and reporting policies of SDNB Financial Corp (the
"Company") and subsidiaries are in accordance with generally accepted
accounting principles and conform to general practices within the
banking industry. The following is a summary of the more significant
policies:
Basis of Presentation All dollar amounts are presented in thousands
unless otherwise indicated.
The consolidated financial statements include the accounts of SDNB
Financial Corp and all entities which are more than 50% owned, directly
or indirectly, including San Diego National Bank (the "Bank"), 100%
owned, the Company's principal subsidiary. All significant inter-company
items are eliminated.
Investment Securities The Company implemented Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities ("SFAS No. 115") effective January 1, 1994. The
impact of adoption was immaterial. SFAS No. 115 was issued in May 1993
and addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all
investments in debt securities. Investments are to be classified in
three categories and accounted for as follows:
Classification Accounting
Held-to-maturity Reported at amortized cost
Trading securities Reported at fair value; unrealized gains and
losses included in net income
Available-for-sale Reported at fair value; unrealized gains and
losses included as a separate component of
shareholders' equity
Prior to adoption of SFAS No. 115, due to Management's intent and
ability to hold to maturity, all securities in the investment portfolio
were classified as held for investment and were stated at cost, adjusted
for amortization of premiums and accretion of discounts. Such
amortization and accretion were recognized as adjustments to interest
income on investment securities. Realized gains or losses, if any, are
determined using the specific identification method.
Loans Interest on loans is credited to income based on the principal
amount outstanding. Loans are placed on non-accrual when a reasonable
doubt exists as to the collectibility of interest or principal. Loan
fees received, to the extent they exceed origination costs, are deferred
and amortized over the expected loan term.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS No. 114"). In October 1994, the FASB amended
SFAS No. 114 with Statement of Accounting Standards No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosures ("SFAS No. 118"). The provisions of the statements are
effective for fiscal years beginning after December 15, 1994 and are
applicable to all creditors and to all loans that are individually and
specifically evaluated for impairment, uncollateralized as well as
collateralized. They require that impaired loans be measured at either:
(1) the present value of expected future cash flows by discounting those
cash flows at the loan's effective rate; (2) the loan's observable
market price; or (3) the fair market value of the collateral of the
loan. In general, these statements are not applicable to large groups
of smaller-balance loans that are collectively evaluated for impairment
such as credit card, residential mortgage an/or consumer installment
loans. SFAS No. 118 provides for specific disclosure requirements
related to impaired loans, including: (1) policy for recognizing
interest income on impaired loans; (2) how cash receipts are recorded;
and (3) average balance of impaired loans during periods presented and
related amount of interest income recognized during the time within the
period that the loans were impaired. At this time, management does not
expect that adoption of SFAS No. 114 and SFAS No. 118 will have a
material effect on the financial statements of the Bank.
Allowance for Loan Losses An allowance for loan losses is maintained at
the level deemed appropriate by management to provide for known and
inherent risks in the loan portfolio. The allowance is based on a
continuing review of the portfolio, past loan loss experience, current
economic conditions which may affect the borrowers' ability to pay, and
the underlying collateral value of the loans. Loans which are deemed to
be uncollectible are charged off and deducted from the allowance. The
provision for loan losses and recoveries on loans previously charged off
are added to the allowance.
The allowance for possible loan losses is based on estimates, and
ultimate losses may vary from the current estimates. These estimates are
reviewed periodically and, as adjustments become necessary, they are
reported in earnings in the periods in which they become known.
Premises and Equipment Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is charged to operating expense
using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are capitalized and amortized to
operating expense over the term of the respective lease or the estimated
useful life of the improvement, whichever is shorter. When assets are
sold or retired, the assets and accumulated depreciation are removed
from the accounts. Gains or losses on disposals are credited or charged
to income.
Other Real Estate Owned ("OREO") OREO property is accounted for at the
lower of the recorded investment in the loan satisfied or its appraised
value at the time of
transfer to the OREO category. Investment in loan satisfied is the
unpaid balance of the loan increased by accrued and uncollected
interest, unamortized premium, and loan acquisition costs, if any, and
decreased by previous direct write-down, finance charges, and
unamortized discount, if any. Any excess of the recorded investment in
the loan satisfied over the appraised value of the property is charged
against the allowance for loan losses. Legal fees and direct costs of
acquiring the property and costs of carrying the property subsequent to
recording as OREO are expensed as incurred. Any reduction in the value
of the property subsequent to its being recorded as OREO is charged
directly to expense and is recorded as an allowance. The allowance for
OREO at December 31, 1994 and 1993 was $20 and $389, respectively.
Income Taxes The Company files a consolidated federal income tax return
and a combined California state franchise tax return with its
subsidiaries. Amounts equal to tax benefits of those companies having
taxable losses or credits are reimbursed by those companies which incur
tax liabilities. Any excess of alternative minimum tax over regular tax
determined on a consolidated basis will be borne by the parent company.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"), which requires the use of the liability method in the computation
of income tax expense and current and deferred income taxes payable.
Under SFAS No. 109, income tax expense consists of taxes payable for the
year and the changes during the year in deferred tax assets and
liabilities. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each
year end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Prior to
1993, the provision for income taxes was based on income and expenses
included in the accompanying statement of operations. Differences
between taxes so computed and taxes payable under applicable statutes
and regulations were classified as deferred taxes arising from timing
differences.
Net Loss Per Share Net loss per share for 1994, 1993 and 1992, during
which stock options were not dilutive, are based on 1,538,364 shares
outstanding.
NOTE 2: Cash and Due from Banks
The Bank is required to maintain reserves with the Federal Reserve Bank.
Reserve requirements are based on a percentage of deposit liabilities.
The average amounts held at the Federal Reserve Bank for the years ended
December 31, 1994 and 1993 were approximately $1,371 and $1,059,
respectively.
NOTE 3: Investment Securities
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1994:
Available for sale:
U.S Government agencies $ 9,997 $ 0 $ (360) $ 9,637
Federal Reserve Bank stock 273 0 0 273
$10,270 $ 0 $ (360) $ 9,910
Held to maturity:
U.S. Treasury $ 1,998 $ 0 $ (45) $ 1,953
U.S. Government agencies 11,397 0 (602) 10,795
States and municipalities 3,176 0 (33) 3,143
Other 750 0 0 750
$17,321 $ 0 $ (680) $16,641
December 31, 1993:
Held for investment:
U.S. Treasury $ 6,004 $ 4 $ 0 $ 6,008
U.S. Government agencies 19,588 0 (58) 19,530
States and municipalities 4,362 171 0 4,533
Other 0 0 0 0
Federal Reserve Bank stock 273 0 0 273
$30,227 $ 175 $ (58) $30,344
The scheduled maturities of investment securities as of December 31,
1994 and 1993 are as follows:
Estimated
Amortized Market
Cost Value
December 31, 1994:
Available for sale:
Due in one year or less $ 2,002 $ 1,977
Due after one year through five years 7,995 7,660
Due after five years through ten years 0 0
Federal Reserve Bank stock 273 273
$10,270 $ 9,910
Held to maturity:
Due in one year or less $ 4,237 $ 4,208
Due after one year through five years 7,966 7,501
Due after five years through ten years 5,118 4,932
$17,321 $16,641
Investment securities with a carrying value of $3,276 and $1,827 at
December 31, 1994 and 1993, respectively, were pledged as security for
public deposits and other purposes.
NOTE 4. Loans and Related Allowance for Loan Losses
At December 31, 1994 and 1993 loans consist of the following:
1994 1993
Commercial $ 57,808 $ 67,175
Real estate 37,534 41,419
Installment 2,239 2,858
Unearned loan fees (523) (419)
$ 97,058 $111,033
In the normal course of business, the Bank has made loans to certain
executive officers and directors or entities with which these
individuals are associated under terms consistent with the Bank's
general lending policies. In October, 1990, the Bank discontinued
further lending to such persons or entities (except for cash secured
loans) beyond the maturity of existing loans. Exception to this policy
was granted to one director where the amounts of loans outstanding are
less than the amounts outstanding when the policy was adopted. The
activity for such loans outstanding is as follows:
Balance at Balance
Beginning at End
of Year Additions Collections of Year
Year ended
December 31, 1994 $ 272 $ 91 $ 186 $ 177
Year ended
December 31, 1993 $ 295 $ 300 $ 323 $ 272
A summary of the activity in the allowance for loan losses is as
follows:
1994 1993 1992
Balance at beginning of year $2,522 $2,111 $2,011
Provision charged to operating expenses 1,850 2,950 1,320
Loans charged off (2,362) (2,716) (1,575)
Recoveries 138 177 355
Balance at end of year $2,148 $2,522 $2,111
As of December 31, 1994 and 1993, restructured loans were $3,460 and
$4,318, respectively. Of these totals, $2,316 and $3,162 were accruing
at December 31, 1994 and 1993, respectively. The difference between
interest income recorded as restructured and interest income that would
have been recorded if not restructured was immaterial.
NOTE 5: Premises and Equipment
Premises and equipment at December 31, 1994 and 1993 are summarized as
follows:
1994 1993
Building $11,708 $11,711
Furniture, fixtures and equipment 2,855 2,681
Leasehold improvements 4,356 4,339
18,919 18,731
Less accumulated depreciation and amortization 7,830 6,989
$11,089 $11,742
NOTE 6: Deposits
The year-end balances for deposits by major classification are as
follows:
1994 1993
Non-interest bearing demand $ 45,693 $ 41,113
Interest bearing demand 69,839 59,563
Savings 4,844 3,531
Time deposits of $100 or more 10,474 16,988
Other time deposits 7,426 16,955
$138,276 $138,150
Interest expense on deposits was comprised of the following:
1994 1993 1992
Interest bearing demand $1,623 $1,373 $1,822
Savings 77 79 103
Time deposits of $100 or more 347 725 1,131
Other time deposits 450 969 813
$2,497 $3,146 $3,869
Domestic time deposits over $100 at December 31, 1994 mature in the
following periods:
Time All Other
Certificates Time
of Deposit Deposits
Three months or less $6,808 $532
Over three through six months 2,024 203
Over six through twelve month 501 206
Over twelve months 200 0
$9,533 $941
NOTE 7: Notes Payable
Notes payable consist of the following:
1994 1993
Note payable to two limited partnerships,
managed by WHR (see Note 22) bearing
interest at the average cost of funds for
eleventh district savings and loans (4.04% at
December 31, 1994) plus 2.25%. The loan is
collateralized by the bank building and is due
April 1, 1997. In January 1995 the terms of
this note were modified. The agreement fixes
the annual payments at $800 payable
monthly entirely to interest. The modification
also allows prepayment of the loan on April 1,
1995, for $7,708 (assuming all interest
payments have been made); on January 1, 1996,
for $8,691 and quarterly thereafter at amounts
which increase approximately $373 each quarter. $10,158 $10,379
Note payable to a corporation (which is owned
by a member of the Company's Board of
Directors); bearing interest at prime (8.50% at
December 31, 1994) plus 1.5% due January 4,
1995. The note is collateralized by a junior lien
on the bank building. Management is currently
negotiating a modification and extension. 1,900 1,900
Notes payable to individuals (officers and/or
directors of the Company) bearing interest at
prime (8.50% at December 31, 1994) plus .5%
due June 30, 1995. The notes are unsecured. 390 290
Notes payable to individuals bearing interest at
prime (8.50% at December 31, 1994) plus 1%
due June 30, 1995. The notes are unsecured. 240 150
Notes payable to a corporation bearing interest at
8.25% due May 9, 1995. The note is unsecured. 14 44
$12,702 $12,763
NOTE 8: Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS No. 109"), as of January 1, 1993. The
cumulative effect of this change in accounting for income taxes
increased 1993 net income by $234 ($0.15 per share) and is reported
separately in the consolidated statement of operations. Prior financial
statements have not been restated to apply the provisions of SFAS No.
109.
The components of income tax (benefit) attributable to continuing
operations for the years ended December 31 are as follows:
1994 1993 1992
Current:
Federal $0 $0 $(566)
State 3 0 3
Total current 3 0 (563)
Deferred:
Federal 0 0 84
State 0 0 0
Total deferred 0 0 84
Income tax expense (benefit) $3 $0 $(479)
Income tax expense (benefit) attributable to operations differs from the
amounts computed using the federal statutory income tax rate as a result
of the following at December 31:
1994 1993 1992
Computed expected taxes $ (57) $(951) $(915)
California franchise tax, net of
federal income tax benefit 0 0 (1)
Nontaxable interest income (113) (84) (91)
Alternative minimum tax 0 0 28
Net operating loss carryback
limitations 0 0 497
Adjustment of the valuation
allowance 168 1,003 0
Other 5 32 3
Income tax expense (benefit) $ 3 $ 0 $(479)
The components of net deferred taxes at December 31, 1994 and 1993 are
as follows:
December Deferred December
31, (Expense) 31,
1993 Benefit 1994
OREO gains/losses $ 104 $(542) $(438)
Joint venture (360) 47 (313)
Bad debt allowance 612 (239) 373
Deferred compensation 21 (7) 14
Land lease 158 5 163
Depreciation (176) 27 (149)
Miscellaneous 30 0 30
Net operating loss 1,415 877 2,292
Net deferred tax asset 1,804 168 1,972
Valuation allowance (1,804) (168) (1,972)
$ 0 $ 0 $ 0
At December 31, 1994, the Company has net operating loss ("NOL")
carryforwards for Federal tax purposes of approximately $4,991, to
offset future Federal taxable income. The Company also has NOL
carryforwards for California Franchise Tax purposes of approximately
$5,991, of which 50% is available to offset future state taxable income,
subject to the limitations below. The Federal NOLs begin to expire in
2007 and the California NOLs begin to expire in 1997.
For state tax purposes, no net operating loss deduction may be claimed
for taxable years beginning in the 1991 and 1992 calendar years. In
addition, the current state law does not permit carryovers after 1997.
The Company also has Alternative Minimum Tax credits for financial
reporting purposes to offset future federal taxes of approximately $48.
Current tax statutes impose substantial limitations under certain
circumstances on the use of carryforwards upon the occurrence of an
"ownership change". An ownership change can result from the issuance of
equity securities by the Company, purchases of the Company's securities
in the secondary market or a combination of the foregoing.
NOTE 9: Lease Commitments
At December 31, 1994, minimum rental payments due under the Company's
operating leases having initial or remaining non-cancelable lease terms
in excess of one year are as follows:
1995 $ 1,151
1996 960
1997 866
1998 866
1999 866
Thereafter 18,594
$23,303
Total minimum lease payments include $7,522 of rental payments to the
Joint Venture (the Company's 62%-owned subsidiary) for various lease
terms extending to 2005. The other primary component of the minimum
lease payments is the Joint Venture's rental payments under a 99 year
ground lease.
Total rental expense under operating leases, including amounts paid to
the Joint Venture, was $1,289 in 1994, $1,259 in 1993, $1,155 in 1992.
There are no contingent rental payments applicable to any of the leases.
All leases provide that the Company pay taxes, maintenance, insurance
and certain other operating expenses applicable to the leased premises
in addition to the monthly minimum payments. Certain of the leases
contain renewal clauses at the option of the lessee.
NOTE 10: Contingencies
In the ordinary course of business, there are outstanding various
commitments to extend credit and guarantees, as well as certain claims
resulting from law suits, which are not reflected in the accompanying
consolidated financial statements. Management does not believe that
these items will have a material adverse affect on the consolidated
financial condition of the Company.
In addition, in January 1993, the Bank was named as a defendant in an
adversary proceeding in Bankruptcy Court filed by Pioneer Liquidating
Corporation ("PLC") successor to six bankrupt Pioneer Mortgage Company
entities ("Pioneer"). Investors in Pioneer had previously filed suit
against the Bank. That Pioneer litigation was settled in 1992. The PLC
case has subsequently been transferred to the United States District
Court. The PLC complaint, which does not specify the amount of damages,
alleges that the Bank and five other banks received preferential
payments and voidable transfers from Pioneer prior to the filing of the
Chapter 11 petition in January, 1991. The attorneys for PLC have alleged
recoverable transfers from the Bank in excess of $14 million but have
stated informally that they are seeking recovery of approximately $1.75
million. Of the $1.75 million, the sum of $250 would be in cash with the
balance in the form of charged off Bank loans. PLC and the Bank have
been engaged in ongoing settlement negotiations, however, as yet no
resolution has been reached. As of December 31, 1994, the Bank has set
aside a provision of $250 for resolution of this litigation.
In December 1991, the Bank filed suit against its Directors' and
Officers' liability insurer, alleging that the insurer had breached the
insurance contract and acted in bad faith by refusing to pay the Bank's
defense and settlement costs in connection with the Pioneer investor
lawsuits. During 1994, the Bank and its insurer settled their dispute.
Under the terms of the settlement, the insurer paid the Bank $713 (in
addition to the $750 the insurer had previously advanced towards the
Bank's settlement with the investors), which has been credited to
miscellaneous other operating income.
NOTE 11: Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments may include loan commitments,
interest rate exchange contracts, 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 consolidated
financial statements. To date, the Bank only has loan commitments and
letters of credit. The Bank has never participated in interest rate
contracts.
The Bank's exposure to credit loss in the event of non-performance by
the other party for loan commitments and letters of credit is
represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Bank has no
significant concentrations of credit risk with any individual
counterparty or groups of counterparties to originate loans. The Bank's
lending is concentrated in San Diego County. Variable rate loans
totalled $89,124 at December 31, 1994. The total contract amounts of
financial instruments with off-balance sheet risk at December 31 are as
follows:
1994 1993
Loan Commitments:
Variable rate $48,140 $37,745
Fixed rate 431 259
Letters of credit 1,997 1,758
$50,568 $39,762
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 creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank 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 and equipment,
and residential and income-producing properties. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
NOTE 12: Employee Benefit Plans
The Bank maintains a Profit Sharing Plan and Deferred Savings Plan for
the benefit of all employees. Contributions to the Profit Sharing Plan
are made at the discretion of the Board. The Deferred Savings Plan
provides a 401(k) plan for which the Bank may make discretionary
matching contributions on a percentage basis. The Bank accrued nothing
under the plans in the years 1992 through 1994.
NOTE 13: Availability of Funds from Subsidiaries
Funds available for the payment of dividends by the Company would be
obtained from the Bank and the Joint Venture.
There are legal limitations on the ability of the Bank to provide funds
for the Company. Under federal banking law, dividends declared by the
Bank in any calendar year may not, without the approval of the
Comptroller of the Currency, exceed its net income, as defined, for that
year combined with its retained net income for the preceding two years.
Until the effects of the 1993 loss is overcome, the Bank will be
precluded from paying dividends without such approval. Federal banking
law also restricts the Bank from extending credit to the Company in
excess of 10% of capital stock and surplus, as defined, of the Bank.
Any such extensions of credit are subject to strict collateral
requirements.
As further described in Note 16, the Company merged SDNB Development
Corp into itself as of July 31, 1993. The purpose in doing so was to
allow cash flow currently being generated by the Joint Venture to come
directly into the Company. During 1994, Joint Venture cash flow provided
the Company with sufficient funds to meet its normal ongoing obligations
but was not sufficient to allow payment of dividends, which would also
require approval of the Federal Reserve Bank of San Francisco under
terms of an agreement dated November 20, 1992.
NOTE 14: Stock Options
The Company had a 1984 Stock Option Plan which provided for the granting
of options to directors, executives and other key employees. The Company
had reserved 600,000 shares for issuance under the plans. Options were
granted under the plan at a price not less than the fair market value of
the Company's common stock on the date of grant. The options are
exercisable in increments over a number of years as determined by the
Board of Directors. The plan expired September 10, 1994.
At December 31, 1994, there were non-qualified options outstanding for
168,294 shares at purchase prices ranging from $3.25 to $7.94 per share
and incentive options outstanding for 268,952 shares at purchase prices
ranging from $3.25 to $11.13 per share. There were options exercisable
under the plans for 217,167 shares at December 31, 1994. The Board of
Directors has adopted a 1994 Stock Option Plan with provisions similar
to the expired plan, subject to approval by the shareholders.
NOTE 15: Lease Income
The Joint Venture (the Company's 62%-owned subsidiary) is the lessor of
the Building in which the Bank has its main office. The lease term is 20
years. Certain of the Building leases contain renewal clauses at the
option of the lessees. At December 31, 1994, minimum lease payments to
be received by the Joint Venture on non-cancelable operating leases are
as follows:
1995 $ 1,636
1996 1,228
1997 1,059
1998 883
1999 899
Thereafter 4,728
$10,433
NOTE 16: Investment in Joint Venture
The Company's wholly-owned subsidiary, SDNB Development Corp ("Devco")
was the general partner with a 62% interest in a joint venture with a
limited partnership, Kettner Building Associates, Ltd. ("KBA"), in the
ownership and operation of the Building in which the Company has its
headquarters. On July 1, 1993, Devco was merged into the Company and the
Company became the general partner.
The results of operations attributable to the Company's controlling
interest in the Joint Venture are included in consolidated results of
operations with an appropriate allocation to the minority interest, the
remaining limited partners in KBA. During 1990, however, the allocation
exhausted the contributed capital of the remaining limited partners and
the Company began absorbing the entire loss.
NOTE 17: Parent Company Information
The following financial information represents the condensed balance
sheets of SDNB Financial Corp (parent company only) as of December 31,
1994 and 1993, and the related condensed statements of income and cash
flows for each of the three years in the period ended December 31, 1994.
Condensed Balance Sheets 1994 1993
Assets
Cash in San Diego National Bank $ 30 $ 14
Investment in San Diego
National Bank 11,307 11,284
Investment in SDNB Building
Joint Venture (3,375) (2,935)
Investment in SDNB Mortgage
Bankers 6 7
Note receivable from Joint Venture 1,413 1,448
Other assets 462 237
$ 9,843 $10,055
Liabilities and Shareholders' Equity
Liabilities:
Due to subsidiaries for income
taxes $ 32 $ 4
Other liabilities 212 123
Notes payable 630 440
Total Liabilities $ 874 $ 567
Shareholder's equity:
Common Stock, no par value;
authorized 15,000,000 shares,
issued 1,558,364 in 1993 and
in 1992 14,585 14,585
Accumulated deficit (5,256) (5,097)
Net unrealized holding losses on
available-for-sale securities (360) 0
Total shareholders' equity 8,969 9,488
$ 9,843 $10,055
Condensed Statements
of Operations 1994 1993 1992
Management income $ 41 $ 21 $ 0
Interest income 136 66 3
Rental income 225 218 164
Total income 402 305 167
Operating expenses 498 433 352
Loss before income taxes and
equity in undistributed loss
of subsidiaries and cumulative
effect of accounting change (96) (128) (185)
Allocated income tax (1) 0 0
Loss before equity in undistributed
loss of subsidiaries and cumulative
effect of accounting change (97) (128) (185)
Equity in undistributed loss of
subsidiaries (62) (2,313) (2,026)
Loss before cumulative effect of
accounting change (159) (2,441) (2,211)
Cumulative effect of accounting
change 0 (121) 0
Net loss $ (159) $(2,562) $(2,211)
Condensed Statements
of Cash Flows 1994 1993 1992
Operating Activities:
Net loss $ (159) $ (2,562) $ (2,211)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Net change in taxes payable (30) (600) (86)
Provision for depreciation and
amortization 4 6 1
Cumulative effect of accounting
change 0 (121) 0
Net change in other assets (267) 16 (4)
Net change in other liabilities 59 50 (82)
Loss of wholly-owned
subsidiaries 62 2,434 2,026
Total adjustments (172) 1,785 1,855
Net cash used by operating
activities (331) (777) (356)
Investing Activities:
Purchase of leasehold
improvements 0 30 0
Payments from subsidiaries 100 173 0
Net cash provided by investing
activities 100 203 0
Financing Activities:
Proceeds from short-term
borrowings 275 440 0
Repayments of short-term
borrowings (85) 0 0
Proceeds from advances from
subsidiaries 83 488 425
Repayment of advances from
subsidiaries (26) (516) 0
Net cash provided by financing
activities 247 412 425
Increase (decrease) in cash 16 (162) 69
Cash at beginning of year 14 176 107
Cash at end of year $ 30 $ 14 $ 176
NOTE 18: Disclosures About Fair Value of Financial Instruments
In 1992, the Company adopted SFAS 107 which requires the disclosure of
the estimated fair value of its financial instruments. The following
methods and assumptions were used to estimate the fair value of the
other classes of financial instruments for which it is practice to
estimate that value. Carrying value approximates fair value for cash and
due from banks, federal funds sold and securities sold under agreements
to repurchase.
Interest Bearing Deposits in Other Banks For privately placed
certificates of deposit, all of which mature within 90 days, carrying
value approximates fair value. Investment Securities Fair value equals
quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
Loans Fair value for variable rate loans is determined by using the
present value of cash flows discounted from the first repricing
opportunity. For fixed rate loans, the cash flows to maturity are
discounted to achieve the present value. In each case, the discount rate
is equal to the rate at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposit Liabilities The fair value of demand deposits, savings
accounts, NOW accounts and money market accounts is the amount payable
on demand at the reporting date. The fair value of certificates of
deposit is estimated using the rates currently offered for deposits of
similar remaining maturities.
Acceptances Outstanding and Commercial Letters of Credit Settlement
value approximates fair value.
Notes Payable Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate fair value
of existing debt.
Commitments, Guarantees and Standby Letters of Credit The fair values
approximate the carrying amounts which are comprised of unamortized fee
income.
Carrying amount Fair value
Financial Assets:
Cash and due from banks $ 11,936 $ 11,936
Interest bearing deposits in other banks 1,381 1,381
Investment securities 27,231 26,551
Federal funds sold 24,000 24,000
Loans 97,058
Less allowance for loan losses 2,148
Net loans $ 94,910 $ 94,490
Financial Liabilities:
Deposits:
Non-interest bearing $ 45,693 $ 45,693
Interest bearing 92,583 92,451
Total deposits $138,276 $138,144
Securities sold under agreements to repurchase $ 12,285 $ 12,285
Notes payable 12,702 11,803
Unrecognized Financial Instruments:
Acceptances outstanding and commercial
letters of credit $ 766
Commitments, guarantees and standby
letters of credit $ 210
NOTE 19: Miscellaneous Operating Income
Miscellaneous operating income consists of the following:
1994 1993 1992
Fiduciary activity fees $ 0 $ 0 $ 14
Service charge on deposits 633 737 743
Other service charges 149 165 173
OREO income 55 93 155
Other 743 22 29
$1,580 $1,017 $1,114
NOTE 20: Other Non-Interest Expenses
Other non-interest expenses consist of the following:
1994 1993 1992
Data Processing $ 223 $ 239 $ 214
FDIC insurance premiums and
OCC assessments 442 487 400
Professional fees 506 758 1,081
Provision for litigation settlement 250 150 500
Loan and collection expense 330 318 538
OREO expense 59 168 757
Losses on OREO property 403 586 500
Miscellaneous 1,234 1,649 1,314
$3,447 $4,355 $5,304
NOTE 21: Capital Ratios
The Comptroller of the Currency ("OCC") has established a framework for
supervisory requirements of national banks based upon capital ratios.
Based upon this framework, a bank's capitalization is defined as well as
capitalized, adequately capitalized, significantly undercapitalized or
critically capitalized. As of December 31, 1994, the Bank's capital
ratios were 7.09% and 11.61% for tier 1 capital and risk weighted
capital, respectively. Under the OCC framework, a bank is well
capitalized if its ratios are greater than or equal to 6% and 10% for
tier 1 capital and risk weighted capital, respectively.
The Federal Reserve Bank, as the regulatory body of the Company, has
capital ratio requirements providing that all bank holding companies
should meet a minimum ratio of qualifying total capital to weighted-risk
assets of 8 percent, of which at least 4.0 percentage points should be
in the form of tier 1 capital. At December 31, 1994, the Company's
capital ratios were 5.33% and 8.85% for tier 1 capital and risk weighted
capital, respectively.
NOTE 22: Subsequent Event
On January 31, 1995, the Company entered into a stock purchase agreement
whereby two limited partnerships managed by WHR Management Corp. ("WHR")
will purchase 510,121 shares of newly issued common stock for
approximately $2.2 million. In conjunction with the investment by WHR,
the Company plans a $3 million "rights offering" to existing
shareholders. Upon completion of the rights offering, WHR will invest up
to an additional $1.1 million. The transactions are subject to approval
by regulatory authorities and by the Company's shareholders.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of SDNB Financial Corp
We have audited the accompanying consolidated balance sheets of SDNB
Financial Corp and subsidiaries (the "Company") as of December 31, 1994
and 1993, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company'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 consolidated 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 consolidated financial position of
SDNB Financial Corp and subsidiaries at December 31, 1994 and 1993, the
consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
As discussed in note 10 to the consolidated financial statements, a
subsidiary of the Company is a defendant in a lawsuit in which the
amount of damages sought has not yet been specified. While the ultimate
outcome of the litigation cannot presently be determined, the Company
recorded a provision for this matter based on ongoing settlement
negotiations. No further provision for liability, if any, that may
result upon final resolution of this matter has been made in the
accompanying financial statements.
As discussed in notes 1 and 8 to the consolidated financial statements,
the Company changed its method of accounting for income taxes effective
January 1, 1993.
/s/Coopers & Lybrand L.L.P.
San Diego, California
February 17, 1995
INVESTOR RELATIONS INFORMATION
Availability of Form 10-K
The Company will furnish, without charge, upon written request of any
shareholder, a copy of the Company's annual report to the Securities and
Exchange Commission on Form 10-K (including financial statements and
financial statement schedules, but without exhibits) for the fiscal year
ended December 31, 1994. Requests should be addressed to:
Howard W. Brotman, Secretary
SDNB Financial Corp
Post Office Box 12605
San Diego, CA 92112-3605
Direct Mailing to "Street Name" Holders
Shareholders who have certificates of SDNB Financial Corp common stock
held in brokerage accounts or otherwise not in their own names should
receive the Company's annual reports from their brokers or other record
holders.
If you are such a shareholder and desire to receive those and other
reports directly from SDNB Financial Corp at the same time as record
holders, please contact in writing:
Howard W. Brotman, Secretary
SDNB Financial Corp
Post Office Box 12605
San Diego, CA 92112-3605
Independent Accountants
Coopers & Lybrand L. L. P.
402 West Broadway
San Diego, CA 92101
Stock Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Stock Information
Since October 6, 1987 the Company's common stock has been listed on the
NASDAQ National Market System. There is only a limited market for the
Company's common stock.
The Company had approximately 700 shareholders as of December 31, 1994.
Price Information by Period
1994 1993
First quarter
Low $ 2.50 $ 3.50
High 3.25 4.00
Second quarter
Low 2.50 3.50
High 3.25 4.38
Third quarter
Low 2.50 2.50
High 4.75 4.00
Fourth quarter
Low 3.00 2.50
High 4.75 3.38
Dividend Information
There were no stock or cash dividends declared in 1994 or 1993.
Common Stock Listing
The Company's common stock trades on The Nasdaq Stock Market under the
symbol: SDNB.
<PAGE>
THE PEOPLE OF SDNB
Board of Directors
Margaret (Midge) Costanza
Partner, Martin & Costanza Communications
Charles I. Feurzeig
Chairman of the Board, SDNB Financial Corp;
President, Pacific View Construction Co., Inc.
Murray L. Galinson
President, Chief Executive Officer,
SDNB Financial Corp and San Diego National Bank
Karla J. Hertzog
President, TOPS Total Personnel Services, Inc.
Robert B. Horsman
Executive Vice President,
SDNB Financial Corp and San Diego National Bank
Mark P. Mandell
Attorney-at-Law
Patricia L. Roscoe
Chairman, Patti Roscoe & Associates, Inc. and Roscoe/Cottrell, Inc.
Julius H. Zolezzi
President, Zolezzi Enterprises
Officers of SDNB Financial Corp
Murray L. Galinson
President, Chief Executive Officer
Robert B. Horsman
Executive Vice President
Howard W. Brotman
Senior Vice President, Secretary, Chief Financial Officer
Joyce Chewning
Senior Vice President
San Diego National Bank Business Advisory Council
John L. Baldwin
President, Baldwin Pacific Corp.
Betty Byrnes
Medical Administrator
Shlomo Caspi
President, Caspi, Inc. & Caspi Enterprises
Marvin Cohen
Architect
Michael H. Dessent
Dean, California Western School of Law
Norman Eisenberg, CPA
Eisenberg & Bonk
James T. Gianulis
President, Pacific Income Properties, Inc.
Wayne L. Hanson
President, Cygnus Corp.
Warren O. Kessler, MD
Hillcrest Urological Medical Group
Edward Mendelsohn
President, ESM & Associates
Rebecca Newman
Real Estate Broker
James S. Nierman
Real Estate Investor
Gordon W. Parkman
President, Parkman Realty Corp.
Reint Reinders
President, San Diego Convention and Visitors Bureau
Winifred Reno
Owner, The Plantry
Nancy L. Scott
President, Capital Equities of La Jolla
Brad Shuman
President, Imprinted Products, Inc.
C. Randolph Strada
President, First San Diego Co., Inc.
William Verbeck
President, WNV, Inc.
Arnold Winston
President, BancCorp Companies, Inc.
San Diego National Bank Senior Management Committee
Murray L. Galinson
President, Chief Executive Officer
Robert B. Horsman
Executive Vice President
Howard W. Brotman
Senior Vice President, Chief Financial Officer
Joyce Chewning
Senior Vice President, Operations
San Diego National Bank Officers
Gail Jensen-Bigknife
Senior Vice President, Real Estate Loans
Richard Nance
Senior Vice President, Credit Administration
Nancy A. Aul
Vice President, Commercial Banking Group, Main Office Assistant Manager
Ronald P. Bird
Director of Business and Community Development
Paul D. Fowle
Vice President, Commercial Banking Group
Pamela A. McMahon
Vice President, Corporate Banking Group Manager
John McNulty
Vice President, Corporate Banking Group
Debra Perkins
Vice President, Compliance
Connie M. Reckling
Vice President, Human Resources
Roger Remnant
Vice President, Real Estate Loans
Dawn Y. Serafen
Vice President, Operations
John G. Weaver
Vice President, Commercial Banking Group
Kaye Hobson
Assistant Vice President, Finance
Julius J. Kukta
Assistant Vice President, Corporate Banking Group
Eric W. Larson
Assistant Vice President, Finance
JoAnn Piper
Assistant Vice President, Deposit Services
Carol A. States
Assistant Vice President, Commercial Banking Group
Barbara J. Bellini
Administrative Officer
Daryl Durham
EDP Manager
Linda Eggen
Real Estate Administrative Officer
Kristan V. Gregg
Administrative Officer
Jim Martinez
Administrative officer
Susie Mummery
Administrative Officer
Jacqueline M. Murphy
Operations Officer
Susan Ohlendorf
Operations Officer
William D. Scheffel
Financial Analyst
Thomas S. Sperla
Special Assets Manager
Cynthia Velez
Operations Officer
<PAGE>
(This page consists of a photograph of the Board of Directors as
described by the caption below.)
Board of Directors
(top row, standing)
Karla J. Hertzog
President, TOPS Total Personnel Services, Inc.
Mark P. Mandell
Attorney-at-Law
Murray L. Galinson
President, Chief Executive Officer,
SDNB Financial Corp and San Diego National Bank
Robert B. Horsman
Executive Vice President,
SDNB Financial Corp and San Diego National Bank
Patricia L. Roscoe
Chairman, Patti Roscoe & Associates, Inc. and Roscoe/Cottrell, Inc.
(front row, sitting)
Margaret (Midge) Costanza
Partner, Martin & Costanza Communications
Charles I. Feurzeig
Chairman of the Board, SDNB Financial Corp;
President, Pacific View Construction Co., Inc.
(not pictured)
Julius H. Zolezzi
President, Zolezzi Enterprises
<PAGE>
SDNB Financial Corp
1420 Kettner Boulevard
San Diego, California
92101
(619)231-4989
San Diego National Bank is a member of FDIC and an Equal Housing Lender
<PAGE>
EXHIBIT "22"
SUBSIDIARIES OF REGISTRANT
1. San Diego National Bank, a national banking association
2. SDNB Mortgage Bankers, a California corporation
3. San Diego National Bank Building Joint Venture, a California
general partnership
EXHIBIT "23 (a)"
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
SDNB Financial Corp (the "Company") on Form S-8 of our report, which includes
an explanatory paragraph related to the outcome of litigation, dated February
17, 1995 on our audits of the consolidated financial statements of the
Company as of December 31, 1994 and 1993, and for each of the three years in
the period ended December 31, 1994, which is included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
Coopers & Lybrand L.L.P.
San Diego, California
March 21, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SDNB
FINANCIAL CORP REPORT ON FORM 10K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 11,936
<INT-BEARING-DEPOSITS> 1,381
<FED-FUNDS-SOLD> 24,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,910
<INVESTMENTS-CARRYING> 17,321
<INVESTMENTS-MARKET> 16,641
<LOANS> 97,058
<ALLOWANCE> 2,148
<TOTAL-ASSETS> 173,185
<DEPOSITS> 138,276
<SHORT-TERM> 14,829
<LIABILITIES-OTHER> 953
<LONG-TERM> 10,158
<COMMON> 14,585
0
0
<OTHER-SE> (5,616)
<TOTAL-LIABILITIES-AND-EQUITY> 173,185
<INTEREST-LOAN> 9,500
<INTEREST-INVEST> 1,586
<INTEREST-OTHER> 732
<INTEREST-TOTAL> 11,818
<INTEREST-DEPOSIT> 2,497
<INTEREST-EXPENSE> 2,906
<INTEREST-INCOME-NET> 8,912
<LOAN-LOSSES> 1,850
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,865
<INCOME-PRETAX> (156)
<INCOME-PRE-EXTRAORDINARY> (159)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (159)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
<YIELD-ACTUAL> 5.35
<LOANS-NON> 6,046
<LOANS-PAST> 20
<LOANS-TROUBLED> 2,316
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,522
<CHARGE-OFFS> 2,362
<RECOVERIES> 138
<ALLOWANCE-CLOSE> 2,148
<ALLOWANCE-DOMESTIC> 1,826
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 322
</TABLE>
