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THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED
PURSUANT TO RULE 901(d) OF REGULATION S-T.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission file number 0-11113
SANTA BARBARA BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 95-3673456
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1021 Anacapa Street, Santa Barbara, California 93101
(Address of principal executive offices) (Zip Code)
(805) 564-6300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of Each Exchange on Which Registered
Common Stock, no par value Not Listed
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 1, 1996, based on the sales prices
reported to the Company on that date of $23.25 per share:
Common Stock - $145,165,816*
*Based on reported beneficial ownership by all directors and executive
officers and the Company's Employee Stock Ownership Plan; however, this
determination does not constitute an admission of affiliate status for
any of these stockholders.
As of March 1, 1996, there were 7,679,345 shares of the issuer's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Proxy
Statement for the Annual Meeting of Shareholders on April 23, 1996 and
the Annual Report to Shareholders for the fiscal year ended December 31,
1995 are incorporated by reference into Parts I, II, and III.
Pursuant to Rules 12b-23 and 12b-32 and Instruction G to Form 10-K, the
following indicated items of information from the registrant's Proxy
Statement for the Annual Meeting of Shareholders on April 23, 1996
("Proxy") and the Annual Report to Shareholders for the fiscal year
ended December 31, 1995 ("Annual Report") are incorporated into this
form by reference to the page number in the relevant printed document.
Annual
Report Proxy
(Page Numbers in Printed
Documents as Distributed
to Shareholders)
PART I
Item 1. Business 13
a) General Description of Business
Operations commenced as Santa Barbara National
Bank with one office and 18 employees in 1960.
The Company was formed in 1982. The Bank (name
changed to Santa Barbara Bank & Trust) became
the principal subsidiary of the Company, and has
grown to 15 banking offices and trust, escrow,
and real estate offices. Two of the banking
offices were added in the merger with Community
Bank of Santa Ynez Valley on March 31, 1989. In
1995, three banking offices were opened in Ventura
county. A second subsidiary, SBBT Service Corporation,
was formed in 1988.
The Bank continued its pattern of growth in 1995
with significant increases in assets and deposits.
b) Financial Information about Industry Segments
There are no identifiable industry segments.
c) Narrative Description of Business 13-37
As of December 31, 1995, the Company had the
equivalent of approximately 500 employees engaged
to provide banking and trust services to the local
community, including correspondent services to
other local banks.
For most of its banking products, the Company
faces competition in its market area from branches
of most of the major California money banks, some
of the state-wide savings and loan associations,
and other community banks and savings and loans.
For some of its products, the Company faces
competition from other non-bank financial service companies,
especially securities firms.
d) Financial Information about Foreign and Domestic
Operations and Export Sales
The Company does not have any foreign business
operations or export sales of our own. However,
it does provide financial services including wire
transfers, currency exchange, letters of credit,
and loans to other businesses involved in foreign
trade.
Item 2. Properties 44,48,
The Company maintains executive and administrative 55
offices at leased premises at 1021 Anacapa Street, Santa
Barbara, California. Of the 15 branch banking offices,
all or a portion of 12 are leased. The office space used
by the Real Estate and Escrow departments is owned, and
space is leased for the Trust, and Management Information
Services, and Loan Servicing departments.
Item 3. Legal Proceedings
There are no material legal proceedings pending.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the
fiscal year covered by this report.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
a) Market Information 37,58
b) Holders
There are approximately 1,588 holders of stock as
of March 1, 1996.
c) Dividends 37,41
Dividends are currently declared four times 58
a year, and the Company expects to follow the
same policy in the future.
Item 6. Selected Financial Data 58
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 13-37
Item 8. Financial Statements and Supplementary Data 38-57
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors 4-5
Executive Officers 7
Item 11. Executive Compensation 9-15
Item 12. Security Ownership of Certain Beneficial Owners and
Management 8
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statements, and Reports on
Form 8-K
a) The following documents are filed as a part of
this Report:
1) Financial Statements:
Consolidated Balance Sheets as of December 31,
1995 and 1994 39
Consolidated Statements of Income for the years
ended December 31, 1995, 1994, and 1993 40
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1995, 1994,
and 1993 41
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994, and 1993 42
2) Financial Statement Schedules:
The following schedules and information are included
in the Footnotes to the above Financial Statements or
in Management's Discussion and Analysis of Financial
Condition and Results of Operations, both of which
are included in the Annual Report:
Interest Rate Sensitivity 16
Distribution of Average Assets, Liabilities, and
Shareholders' Equity and Related Interest Income,
Expense, and Rates 18
Volume and Rate Variance Analysis of Net Interest
Income 19
Maturity Distribution and Yield Analysis of the
Securities Portfolios 20
Loan Portfolio Analysis by Category 24
Maturity and Sensitivities of
Selected Loan Types to Changes
in Interest Rates 25
Risk Elements:
Non-Accrual, Past Due
and Restructured Loans 28
Potential Problem Loans 29
Foreign Loans 29
Summary of Loan Loss Experience 26
Foregone Interest on Non-Accrual Loans 29
Detailed Deposit Summary 31
Maturity Distribution of Time Certificates of
Deposit of $100,000 or More 31
Return on Equity and Assets, Operating and
Capital Ratios 58
Short-term Borrowings 51
b) No reports on Form 8-K were filed during the fourth
quarter of the fiscal year ended December 31, 1995.
c) Exhibits - See exhibits listed in "Exhibit Index"
d) Financial statement schedules required by Regulation S-X
which are excluded from the annual report to shareholders-
Not Applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be
signed by the undersigned, thereunto duly authorized.
Santa Barbara Bancorp
By /s/David W. Spainhour 3/27/96
David W. Spainhour date
President
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
/s/ Donald M. Anderson 3/27/96 /s/ David W. Spainhour 3/27/96
Donald M. Anderson date David W. Spainhour date
Chairman of the Board President
Director Director
/s/ William S. Thomas 3/27/96 /s/ Donald Lafler 3/27/96
William S. Thomas date Donald Lafler date
Vice Chairman Senior Vice President
Chief Operating Officer Chief Financial Officer
/s/ Frank H. Barranco, M.D. 3/27/96 /s/ Edward E. Birch 3/27/96
Frank H. Barranco, M.D. date Edward E. Birch date
Director Director
/s/ Richard M. Davis 3/27/96 /s/ Anthony Guntermann 3/27/96
Richard M. Davis date Anthony Guntermann date
Director Director
/s/ Dale E. Hanst 3/27/96 /s/ Harry B. Powell 3/27/96
Dale E. Hanst date Harry B. Powell date
Director Director
EXHIBIT INDEX TO
SANTA BARBARA BANCORP FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Exhibit
Number Description
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession**
3 Articles of incorporation and bylaws
3.1 Restated Articles of Incorporation of Santa Barbara
Bancorp (filed as Exhibit 3(i) to the Company's
Form S-4, File No. 33-19181, and is incorporated
herein by reference thereto).
3.2 Certificate of Amendment of Articles of Incorporation
of the Company as filed with the California Secretary
of State on January 24, 1996.***
3.3 Amended and Restated Bylaws of the Company dated
September 25, 1991 (filed as "Other Information" to
the Company's form 10-Q for the quarter ended
September 30, 1991, File No. 0-11113, and is
incorporated herein by reference thereto).
3.4 Amendment No. One to Bylaws of the Company as
adopted by the Board of Directors on
October 24, 1995.***
4 Instruments defining rights of security holders - The
rights of security holders are defined by applicable
law and in the Bylaws of the Company-see Exhibit 3.2 above.
9 Voting trust agreement**
10 Material contracts
10.1 Compensation Plans and Agreements:
10.1.1 Santa Barbara Bancorp Restricted Stock Option Plan
(previously filed as Exhibit 4.1 to Post-Effective
Amendment No. One to the Company's Registration
Statement on Form S-8, filed with the Commission on
June 13, 1995, File No. 33-48724, incorporated
herein by this reference).
10.1.2 Santa Barbara Bancorp Director Stock Option Plan
(previously filed as Exhibit 4.2 to Post-Effective
Amendment No. One to the Company's Registration
Statement on Form S-8, filed with the Commission on
June 13, 1995, File No. 33-48724, incorporated herein
by this reference).
10.1.3 Santa Barbara Bancorp Stock Option Plan (previously
filed as Exhibit 4.2 of the Company's Registration
Statement on Form S-8, filed with the Commission on
October 28, 1991, File No. 33-43560, incorporated
herein by this reference).
10.1.4 Santa Barbara Bank & Trust Incentive and Investment
and Salary Savings Plan, as amended through
December 31, 1991 (previously filed with the
Commission as Exhibit 10.1.4 to the Company's annual
report on Form 10-K on March 29, 1993, File
No. 0-11113, incorporated herein by this reference).
10.1.5 First Amendment to Santa Barbara Bank & Trust
Incentive & Investment and Salary Savings Plan
executed April 27, 1994.***
10.1.6 Second Amendment to Santa Barbara Bank & Trust
Incentive & Investment and Salary Savings Plan
executed June 17, 1994.***
10.1.7 Third Amendment to Santa Barbara Bank & Trust
Incentive & Investment and Salary Savings Plan
executed December 28, 1994.***
10.1.8 Fourth Amendment to Santa Barbara Bank & Trust
Incentive & Investment and Salary Savings Plan
executed March 2, 1995.***
10.1.9 Santa Barbara Bank & Trust Employee Stock Ownership
Plan and Trust, as amended and restated through
July 6, 1995 (previously filed with the Commission as
Exhibit 4.1 to the Post-Effective Amendmentr No. One to
the Company's Registration Statement on Form S-8, filed
with the Commission on July 10, 1995, File No. 33-43560,
incorporated herein by this reference).
10.1.10 First Amendment to Santa Barbara Bank & Trust Employee
Stock Ownership Plan and Trust executed
February 24, 1995.***
10.1.11 Description of Group Term Life and Accidental
Death and Dismemberment Benefits and of Payment
of Membership Dues (previously filed with the
Commission as Exhibit 10.1.7 to the Company's
annual report on Form 10-K on March 29, 1993,
File No. 0-11113, incorporated herein by this
reference).
10.1.12 Santa Barbara Bank & Trust Key Employee Retiree
Health Plan dated December 29, 1992 (previously filed
with the Commission as Exhibit 10.1.8 to the Company's
annual report on Form 10-K on March 16, 1994, File
No. 0-11113, incorporated herein by this reference).
10.1.13 First Amendment to Trust Agreement of Santa Barbara
Bank & Trust Voluntary Beneficiary Association, executed
July 23, 1993.***
10.1.14 Santa Barbara Bank & Trust Retiree Health Plan
(Non-Key Employees) dated December 29, 1992 (previously
filed with the Commission as Exhibit 10.1.9 to the
Company's annual report on Form 10-K on March 16, 1994,
File No. 0-11113, incorporated herein by this reference).
10.1.15 Santa Barbara Bank & Trust Second Amended and
Restated Flexmaster Plan adopted effective
October 1, 1991.***
10.2.0 Securities and Insurance Service Agreement
10.2.1 IRA Custodial Agreement.
11 Statement re computation of per share earnings***
12 Statement re computation of ratios**
13 Annual report to security-holders
16 Letter re change in certifying accountant**
18 Letter re change in accounting principles**
21 Subsidiaries of the registrant
22 Published report regarding matters submitted to vote
of security-holders**
23 Consents of experts and counsel:
23.1 Consent of Independent Public Accountants
23.2 Consent of Independent Public Accountants
24 Power of attorney**
27 Financial Data Schedules
99 Additional exhibits-Notice of Annual Meeting of Shareholders
and Proxy Statement for Annual Meeting occurring
April 23, 1996 filed with the Commission on March 15, 1995,
File No. 0-11113, incorporated herein by this reference.
* Shareholders may obtain a copy of any exhibit by writing to:
Clare McGivney, Corporate Services Administrator
Santa Barbara Bancorp
P.O. Box 1119
Santa Barbara, CA 93102
** Not applicable
*** Filed herewith
Exhibit 3.2
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
SANTA BARBARA BANCORP
David W. Spainhour and Jay D. Smith certify that:
1. They are the president and secretary, respectively, of SANTA
BARBARA BANCORP, a California corporation.
2. Article Third of the Articles of Incorporation of this
Corporation is amended in its entirety to read as follows:
"THIRD: AUTHORIZED STOCK
This Corporation is authorized to issue only one class of
shares of stock, designated as common stock. The total number
of such shares which this Corporation is authorized to issue
is twenty million (20,000,000). Upon the amendment of this
Article to read as set forth herein, every two (2) outstanding
shares of common stock of this Corporation shall be converted
into three (3) shares of common stock. No fractional shares
shall be issued in connection with such stock split. In lieu
thereof, the Corporation shall pay to each shareholder of
record who otherwise would receive a fractional share a cash
amount equal to product obtained by multiplying the fractional
share otherwise issuable to such shareholder by the mean
between the closing bid price and the closing asked price per
share as reported by NASDAQ as of January 23, 1996, or on the
next most recent prior date on which trades of the
Corporation's common stock are reported by NASDAQ."
3. The foregoing amendment to the Articles of Incorporation of
this Corporation has been duly approved by the board of directors of
this Corporation.
4. The foregoing amendment to the Articles of Incorporation of
this Corporation is not required to be approved by a vote of the
shareholders pursuant to Section 902(c) of the California Corporations
Code.
Each of the undersigned declares under penalty of perjury under the
laws of the State of California that the statements contained in the
foregoing certificate are true and correct of his own knowledge, and
that this declaration was executed on this 16th, day of January, 1996,
at Santa Barbara, California.
David W.Spainhour, President
Jay D. Smith, Secretary
Exhibit 3.4
CERTIFICATE OF RESOLUTION
SANTA BARBARA BANCORP
Santa Barbara, California
AMENDMENT NUMBER ONE TO BYLAWS
This is to certify that I am the duly elected, qualified and acting
Secretary of the above-named Corporation and that by resolution of the
Board of Diretors of the Corporation duly adopted at the meeting held on
October 24, 1995, Sections 2.10 and 2.11 of the Bylaws of the
Corporation were added to read in as follows:
2.10 Shareholder Action Without a Meeting.
2.10.1 Written Consents. Unless otherwise provided in
the Articles of Incorporation, any action which may be taken at any
annual or special meeting of the shareholders, other than the election
of directors, may be taken without a meeting and without prior notice if
a consent in writing, setting forth the action so taken, shall be signed
by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take such action
at a meeting at which all shareholders entitled to vote thereon were
present and voted.
2.10.2 Notice of Written Consent. Unless the consents of
all shareholders entitled to vote have been solicited in writing, prompt
notice of any corporate action approved by shareholders without a
meeting by less than unanimous written consent shall be given, in
accordance with Section 601(b) of the California General Corporation
Law, to those shareholders entitled to vote who have not consented in
writing. Such notice must be given at least ten (10) days before the
consummation of any action authorized by such approval if the action
involves (i) a contract or other transaction with an interested
director, governed by Section 310 of the California General Corporation
Law, (ii) the indemnification of any present or former agent of the
Corporation within the meaning of Section 317 of the California General
Corporation Law, (iii) any reorganization within the meaning of the
California General Corporation Law, or (iv) a plan of distribution in
dissolution other than in accordance with the rights of any outstanding
preferred shares as provided in California General Corporation Law
Section 2007.
2.10.3 Election of Directors by Written Consent. A
director may be elected at any time to fill a vacancy (other than a
vacancy resulting from the removal of a director) not filled by the
Board by the written consent of persons holding a majority of the
outstanding shares entitled to vote for the election of directors, and
any required notice of any such election shall promptly be given as
provided in Section 2.10.2, above. Directors may not otherwise be
elected without a meeting unless a consent in writing, setting forth the
action so taken, is signed by all of the persons who would be entitled
to vote for the election of directors.
2.10.4 Record Date. In order that the Company may
determine the stockholders entitled to consent to corporate action by
written consent without a meeting, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors,
and which date shall not be more than ten (10) days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. Any stockholder of record seeking to have the stockholders
authorize or take corporate action by written consent shall, by written
notice (the "Notice") to the Secretary of the Corporation, request the
Board of Directors to fix a record date. In the absence of other
Notice, or action by the Board of Directors, the delivery to the
Corporation of any written consent by any stockholder seeking to have
the stockholders authorize or take corporate action by written consent
shall be deemed to be the stockholder's delivery of the Notice to the
Corporation. The Board of Directors shall promptly, but in all event
within ten (10) days after the date on which such a request is received,
adopt a resolution fixing the record date. If no record date has been
fixed by the Board of Directors within ten (10) days of its receipt of
the Notice, when no prior action by the Board of Directors is required
by applicable law, the record date shall be the day on which the Notice
is delivered to the Corporation. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is
required by applicable law, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting
shall be at the close of business on the date on which the Board of
Directors adopts the resolution taking such prior action.
2.10.5 Duration of Consents. Consents to corporate action
(a) shall be effective only on delivery to the Corporation of the
original or a certified copy of the consent and (b) shall be valid for a
maximum of sixty (60) days after the date of the earliest dated consent
delivered to the Corporation in the manner provided in this Section
2.10.
2.10.6 Revocation of Consents. Consents may be revoked at
any time prior to the time that written consents of the number of shares
required to authorize the proposed action have been filed with the
Secretary of the Corporation. Consents may be revoked by written notice
delivered to any of (a) the Corporation, (b) the shareholder or
shareholders soliciting consents or soliciting revocations in opposition
to action by consent proposed by the Corporation (the "Soliciting
Shareholders"), or (c) a proxy solicitor or other agent designated by
the Corporation or the Soliciting Shareholders. A revocation of a
consent shall be effective upon receipt by the applicable person.
2.10.7 Inspectors of Election. Within three (3) business
days after the delivery of any consents to the Corporation or the
determination by the Board of Directors that the Corporation should seek
corporate action by written consent, as the case may be, the Secretary
shall engage independent inspectors of elections (the "Inspectors") for
the purpose of performing a ministerial review of the validity of the
consents and revocations. The cost of retaining inspectors of election
shall be borne by the Corporation.
2.10.8 Procedures for Counting. Consents and revocations
shall be delivered to the Inspectors upon receipt by the Corporation,
the Soliciting Shareholders or their proxy solicitors or other
designated agents. As soon as consents and revocations are received,
the Inspectors shall review the consents and revocations and shall
maintain a count of the number of valid and unrevoked consents. The
Inspectors shall keep such count confidential and shall not reveal the
count to the Corporation, the Soliciting Shareholder or their
representatives or any other entity except in connection with the
Preliminary Report or the Final Report. As soon as practicable, the
Inspectors shall issue a preliminary report (the "Preliminary Report")
to the Corporation and the Soliciting Shareholders stating: (i) the
number of valid consents; (ii) the number of valid revocations; (iii)
the number of valid and unrevoked consents; (iv) the number of invalid
consents; (v) the number of invalid revocations; and (vii) whether,
based on their preliminary count, the requisite number of valid and
unrevoked consents has been obtained to authorize or take the action
specified in the consents.
2.10.9 Inspectors' Final Report. Unless the Corporation
and the Soliciting Shareholders shall agree to a shorter or longer
period, the Corporation and the Soliciting Shareholders shall have
forty-eight (48) hours after the Inspectors' delivery of the Preliminary
Report to review the Preliminary Report and copies of the consents and
revocations and to advise the Inspectors and the opposing party in
writing as to whether they intend to challenge the Preliminary Report of
the Inspectors. If no written notice of an intention to challenge the
Preliminary Report is received within such 48-hour period, the
Inspectors shall issue to the Corporation and the Soliciting
Shareholders their final report (the "Final Report") containing the
information from the Inspectors' determination with respect to whether
the requisite number of valid and unrevoked consents was obtained to
authorize and take the action specified in the consents. If the
Corporation or the Soliciting Shareholders issue written notice of an
intention to challenge the Inspectors' Preliminary Report within such
48-hour period, a challenge session shall be scheduled by the Inspectors
as promptly as practicable. A transcript of the challenge session shall
be recorded by a certified court reporter. Following completion of the
challenge session, the Inspectors shall as promptly as practicable issue
their Final Report to the Soliciting Shareholders and the Corporation.
The Final Report shall contain the information included in the
Preliminary Report, plus all changes, if any, in the vote total as a
result of the challenge and a certification of whether the requisite
number of valid and unrevoked consents was obtained to authorize or take
the action specified in the consents. A copy of the Final Report of the
Inspectors shall be included in the Corporation's records in which the
proceedings of meetings of shareholders are maintained.
2.10.10 Further Review. If the Inspectors state in the
Final Report that the requisite number of valid and unrevoked consents
was not obtained to authorize or take the action specified in the
consents, the party soliciting the consents thereafter may make one
additional request in accordance with the provisions of Section 2.10.8
hereof that the Inspectors again review the consents and revocations and
issue a further Preliminary Report and Final Report.
2.10.11 Notice to Shareholders. The Corporation shall
give prompt notice to the shareholders of the results of any consent
solicitation or the taking of the corporate action without a meeting and
by less than unanimous written consent.
2.10.12 Content of Consents; Delivery of Consents. Each
written consent shall bear the date of signature of each shareholder who
signs the consent and a clear statement of the name of the shareholder
who signs the consent. Consents and revocations of consent shall be
delivered to the Corporation or any other person by hand or by certified
or registered mail, return receipt requested. Consents shall be
effective upon receipt by the corporation and revocations shall be
effective to a party under Section 2.10.6 hereof. Other notices and
requests delivered under this Section 2.10 may be delivered personally,
by facsimile or other form of electronic transmission that provides for
confirmation of receipt, or by certified or registered United States
mail, return receipt requested, and, if properly addressed, shall be
deemed delivered (a) on the date of delivery, if delivery was made
personally or by transmission by facsimile or other form of electronic
transmission, or (b) on the fifth (5th) business day after the date on
which deposited with the United States Postal Service.
2.10.13 Severability. Each term and provision of this
Section 2.10 shall be valid and enforceable to the fullest extent
permitted by law. If independent counsel to the Corporation delivers to
the Corporation a written opinion stating, or a court of competent
jurisdiction determines, that this Section 2.10, or any portion thereof,
or the application thereof to any person or circumstance is illegal or
unenforceable with respect to any corporate action to be taken by
written consent for which a consent has been delivered to the
Corporation, then this Section 2.10, or such portion thereof, as the
case may be, shall after the date of such delivery of such opinion or
such determination be null and void in total or with respect to such
person or circumstance, as the case may be, and the remainder of this
Section 2.10 or the application thereof to persons or circumstances
other than those to which it is held invalid or unenforceable, shall not
be affected thereby.
2.11 Shareholder Proposals.
2.11.1 Consideration of Proposals. At any annual or
special meeting of shareholders, only such business shall be conducted
as shall have been properly brought before the meeting. The provisions
of this Section 2.11 shall control the determination of whether a
proposal by any shareholder, in his or her capacity as a shareholder,
for action by the shareholders of the Corporation has been properly
brought before the meeting. Notwithstanding anything in these Bylaws to
the contrary, no business shall be conducted at any meeting of
shareholders except in accordance with the procedures of this Section
2.11.
2.11.2 Submission of Proposal. To be properly brought
before an annual meeting of shareholders or any special meeting of
shareholders noticed and called other than on behalf of the proposing
shareholder, any proposal for action by the shareholders submitted by a
shareholder of the Corporation shall be made in writing and shall be
delivered or mailed to the Secretary of the Corporation at its principal
place of business not less than twenty (20) days nor more than fifty
(50) days prior to scheduled date of the meeting; provided that if less
than thirty (30) days' notice of the meeting is given to the
shareholders, such proposal shall be mailed or delivered to the
Secretary of the Corporation not later than the close of business on the
Seventh (7th) day following the day on which notice of the meeting was
mailed to the shareholders. To be properly brought before any special
meeting of shareholders noticed and called on behalf of the proposing
shareholder, all proposals for action submitted by such requesting
shareholders shall be made in writing and shall be delivered or mailed
to the Secretary of the Corporation at its principal place of business
simultaneously with such shareholder(s) submission of their request for
the meeting. Notwithstanding the foregoing, any shareholder may submit
for consideration at a meeting any proposal which is directly related to
a matter which is specifically identified in the written notice of the
meeting as a matter on which action by the shareholders will be
requested at the meeting.
2.11.3 Content of Submission. A shareholder's notice to
the Secretary of the Corporation requesting that a proposal for action
be submitted for consideration at any meeting of shareholders shall set
forth as to the matter which the shareholder proposes to bring before
the meeting: (a) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business
at the meeting; (b) the name and address, as they appear on the
Corporation's books of the shareholder proposing such business; (c) the
class and number of shares of stock of the Corporation owned by the
shareholder beneficially and of record; (d) any material interest of the
shareholder in the business proposed to be brought before the meeting;
and (e) any other information that is required by law to be provided by
the shareholder in the shareholder's capacity as a proponent of a
shareholder proposal.
2.11.4 Number of Proposals. No shareholder, other than
the shareholder(s) on whose behalf the meeting is noticed and called,
may submit more than one (1) proposal for consideration at any one (1)
meeting of the shareholders of the Corporation.
2.11.5 Federal Rules. Nothing in this Section shall be
deemed to limit or waive the application of, or the need for any
shareholder to comply with, any of the provisions of Section 14 of the
Securities Exchange Act of 1934 and the Rules promulgated thereunder
applicable to the inclusion of any shareholder proposal in any proxy
statement or form of proxy used by the Corporation in connection with
any meeting of shareholders.
2.11.6 Chairperson's Statement. The Chairperson of the
meeting shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the meeting and in
accordance with the provisions of this Section and, if the
Chairperson so determines, shall so declare to the meeting and any such
business not properly brought before the meeting shall not be
transacted.
I hereby certify that the foregoing resolution now stands on record
on the books of said Corporation, and has not been modified, repealed or
set aside in any manner, and is now in full force and effect.
Dated at Santa Barbara,
California
November 7, 1995
Jay Donald Smith
Secretary
Exhibit 3.5
CERTIFICATE OF RESOLUTION
SANTA BARBARA BANCORP
Santa Barbara, California
AMENDMENT NUMBER TWO TO BYLAWS
This is to certify that I am the duly elected, qualified and acting
Secretary of the above-named Corporation and that by resolution of the
Board of Diretors of the Corporation duly adopted at the meeting held on
December 19, 1995, Section 3.2.1 of the Bylaws of the Corporation was
amended as follows:
Authorized Number. The number of directors who may be
authorized to serve on the Board of Directors of the
Corporation shall be no less than seven (7) nor more than
thirteen (13). Until a different number within the foregoing
limits is specified in an amendment to this Section 3.2.1
duly adopted by the Board of Directors or the shareholders,
the exact number of authorized directors shall be nine (9).
I hereby certify that the foregoing resolution now stands on record on
the books of said Corporation, and has not been modified, repealed or set
aside in any manner, and is now in full force and effect.
Dated at Santa Barbara,
California
January 18, 1996
Jay Donald Smith
Secretary
Exhibit 10.1.5
FIRST AMENDMENT
TO
SANTA BARBARA BANK & TRUST
INCENTIVE & INVESTMENT AND SALARY SAVINGS PLAN
THIS FIRST AMENDMENT (the "First Amendment") is made and entered
into, effective on the dates set forth below, by and between SANTA
BARBARA BANK & TRUST, a California corporation ("Employer"), and SANTA
BARBARA BANK & TRUST, a California corporation ("Trustee"), with
reference to the following facts:
RECITALS:
A. The Employer sponsors the Santa Barbara Bank & Trust
Incentive & Investment and Salary Savings Plan (the "Plan"), pursuant to
that certain Plan document executed December 31, 1991 (the "Plan
Document").
B. The Trustee serves as the Trustee of the trust established
under the Plan.
C. The Employer and the Trustee desire to execute this First
Amendment in order to modify the amount of the Employer's matching
contribution under the Plan.
AGREEMENT:
NOW, THEREFORE, the parties hereto, intending to be legally bound,
do hereby agree as follows:
1. AMENDMENT TO SECTION 4.1(b)
Section 4.1(b) of the Plan Document is hereby amended in its
entirety to read as follows:
"(b) On behalf of each Participant who is eligible to share in
matching contributions for the Plan Year, a matching
contribution equal to the sum of (i) one-hundred percent
(100%) of that portion of the Participant's Deferred
Compensation up to three percent (3.0%) of the Participant's
Compensation, plus (ii) fifty percent (50%) of that portion of
the Participant's Deferred Compensation in excess of three
percent (3.0%) of Compensation and up to six percent (6.0%) of
Compensation; provided, in no event shall the amount of the
matching contribution under this Section 4.1(b) on behalf of
any Participant in any Plan Year exceed four and one-half
percent (4.5%) of the Participant's Compensation for the Plan
Year. The aggregate matching contribution under this Section
4.1(b) shall be deemed to be an Employer Non-Elective
Contribution.
2. MISCELLANEOUS
2.1 Ratification. Except as expressly modified by this First
Amendment, the Plan Document is hereby ratified and confirmed and
remains in full force and effect.
2.2 Effective Date. The Effective Date of this First
Amendment shall be January 1, 1994.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment, effective on the date set forth above.
"EMPLOYER:"
SANTA BARBARA BANK & TRUST, a
California corporation
By:
Name: Jay D. Smith
Title: Secretary
April 27, 1994
Date
"TRUSTEE:"
SANTA BARBARA BANK & TRUST, a
California corporation
By
Name: Janice Kroekel
Title: Assistant Vice President
April 27, 1994
Date
Exhibit 10.1.6
SECOND AMENDMENT
TO
SANTA BARBARA BANK & TRUST
INCENTIVE & INVESTMENT AND SALARY SAVINGS PLAN
THIS SECOND AMENDMENT (the "Second Amendment") is made and entered
into, effective on the date set forth below, by and between SANTA
BARBARA BANK & TRUST, a California corporation, in its capacity as an
Employer ("Employer"), and SANTA BARBARA BANK & TRUST, a California
corporation, in its capacity as Trustee of the Plan described below
("Trustee"), with reference to the following facts:
RECITALS:
A. The Employer sponsors the Santa Barbara Bank & Trust
Incentive & Investment and Salary Savings Plan (the "Plan") pursuant to
that certain Plan document executed December 31, 1991, as previously
amended by that certain First Amendment dated effective January 1, 1994
(as so amended, the "Plan Document").
B. The Trustee serves as the Trustee of the Trust established
under the Plan.
C. The Employer and the Trustee desire to execute this Second
Amendment in order to shorten the eligibility period for Eligible
Employees to make salary reduction contributions, and receive Employer
matching contributions, under the so-called "Salary Savings" portion of
the Plan.
AGREEMENT:
NOW, THEREFORE, the parties hereto, intending to be legally bound,
do hereby agree as follows:
1. AMENDMENT TO SECTION 3.1
The current Paragraph of Section 3.1 of the Plan Document is hereby
amended in its entirety to read as follows:
"3.1 Conditions of Eligibility.
(a) Subject to Sections 3.1(b) and 3.1(c), below,
each Eligible Employee who commences employment prior to
January 1, 1990, and has attained age 16 shall be eligible to
participate hereunder as of the date he has satisfied such
requirements. Each Eligible Employee who commences
employment with the Employer after December 31, 1989, and
prior to January 1, 1991, and who has completed one (1) Year
of Service and has attained age 16 shall be eligible to
participate hereunder as of the date he has satisfied such
requirements. Each Eligible Employee who commences
employment with the Employer after December 31, 1990, and who
has completed one (1) Year of Service and has attained age 18
shall be eligible to participate hereunder as of the date he
has satisfied such requirements.
(b) Notwithstanding the provisions of Section
3.1(a) above, effective July 1, 1994, each Eligible Employee
who has attained age 18 and completed ninety (90) days of
employment with the Employer shall be eligible to (a) make
Deferred Compensation contributions to the Plan in accordance
with Section 4.2, below, and (b) receive Employer's Matching
Contributions with respect to such Deferred Compensation in
accordance with Section 4.1(b), below; provided, such
Eligible Employee shall not be eligible to receive an
allocation of the discretionary Employer's Non-Elective
Contribution under Section 4.1(c), below, until such Eligible
Employee has completed one (1) Year of Service with the
Employer in accordance with Section 3.1(a), above, and
commenced participation in accordance with Section 3.1(c),
below.
(c) An Eligible Employee who has satisfied the
participation requirements of this Section 3.1 shall commence
participation in the Plan at the time specified in Section
3.3, below."
2. MISCELLANEOUS
2.1 Ratification. Except as expressly modified by this Second
Amendment, the Plan Document is hereby ratified and confirmed and
remains in full force and effect.
2.2 Effective Date. The Effective Date of this Second
Amendment shall be July 1, 1994.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment, effective on the date set forth above.
"EMPLOYER":
SANTA BARBARA BANK & TRUST,
a California corporation
By
Jay D. Smith
Senior Vice President
June 17, 1994
Date
"TRUSTEE":
SANTA BARBARA BANK & TRUST,
a California corporation
By
Janice Kroekel
Assistant Vice President
June 17, 1994
Date
Exhibit 10.1.7
THIRD AMENDMENT
TO
SANTA BARBARA BANK & TRUST
INCENTIVE & INVESTMENT AND SALARY SAVINGS PLAN
THIS THIRD AMENDMENT (the "Third Amendment") is made and entered
into, effective on the dates set forth below, by and between SANTA
BARBARA BANK & TRUST, a California corporation, in its capacity as an
employer (the "Employer"), and SANTA BARBARA BANK & TRUST, a California
corporation, in its capacity as trustee of the Plan described below (the
"Trustee"), with reference to the following facts:
RECITALS:
A. The Employer sponsors the Santa Barbara Bank & Trust
Incentive & Investment and Salary Savings Plan (the "Plan"), pursuant to
that certain Plan document executed December 31, 1991, as previously
amended by that certain First Amendment dated effective January 1, 1994,
and that certain Second Amendment dated effective July 1, 1994 (as so
amended, the "Plan Document").
B. The Trustee serves as the Trustee of the Trust established
under the Plan.
C. The Plan previously has been amended and restated to
reflect the requirements of the Tax Reform Act of 1986 and certain
subsequent legislation, and since the date of that amendment and
restatement, there have been further developments in legislation, case
law, and administrative pronouncements that require and permit the Plan
to be amended further.
D. The Employer desires to adopt this Third Amendment in order
to amend the Plan to reflect such matters.
AMENDMENT:
NOW, THEREFORE, the parties hereto, intending to be legally bound,
do hereby agree as follows:
1. DIRECT ROLLOVERS
Pursuant to Rev. Proc. 93-12, 1993-1 C.B. 479, the Plan is hereby
amended to include the following language:
"Notwithstanding any other provision of the Plan to the
contrary:
1. This Article applies to distributions made on or after
January 1, 1993. Notwithstanding any provision of the Plan to the
contrary that would otherwise limit a distributee's election under this
Article, a distributee may elect, at the time and in the manner
prescribed by the Plan Administrator, to have any portion of an eligible
rollover distribution paid directly to an eligible
retirement plan specified by the distributee in a direct rollover.
2. Definitions. For purposes of this Article:
2.1 Eligible Rollover Distribution: An
eligible rollover distribution is any distribution of all or
any portion of the balance to the credit of the distributee,
except that an eligible rollover distribution does not
include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the
distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated
beneficiary, or for a specified period of ten years or more;
any distribution to the extent such distribution is required
under Section 401(a)(9) of the Code; and the portion of any
distribution that is not includable in gross income
(determined without regard to the exclusion for net
unrealized appreciation with respect to employers
securities).
2.2 Eligible Retirement Plan: An eligible
retirement plan is an individual retirement account described
in Section 408(a) of the Code, an individual retirement
annuity described in Section 408(b) of the Code, an annuity
plan described in Section 403(a) of the Code, or a qualified
trust described in Section 401(a) of the Code, that accepts
the distributee's eligible rollover distribution. However,
in the case of an eligible rollover distribution to the
surviving spouse, an eligible retirement plan is an
individual retirement account or individual retirement
annuity.
2.3 Distributee: A distributee includes an
employee or former employee. In addition, the employee's or
former employee's surviving spouse and the employee's or
former employee's spouse or former spouse who is the
alternate payee under qualified domestic relations order, as
described in Section 414(p) of the Code, are distributees
with regard to the interest of the spouse or former spouse.
2.4 Direct Rollover: A direct rollover is a
payment by the Plan to the eligible retirement plans
specified by the distributee."
2. 411(a)(11) WAIVERS
Pursuant to Rev. Proc. 93-47, 1993-2 C.B. 578, and notwithstanding
any provision of the Plan to the contrary, the following language is
hereby added to the Plan:
"If a distribution is one to which Sections 401(a)(11) and
417 of the Internal Revenue Code do not apply, such
distribution may commence less than 30 days after the notice
required in Section 1.411(a)-11(c) of the Income Tax
Regulations is given, provided that (1) the Plan
Administrator clearly informs the participant that the
participant has a right to a period of at least 30 days after
receiving the notice to consider the decision of whether or
not to elect a distribution (and, if applicable, a particular
distribution option), and (2) the participant, after
receiving the notice, affirmatively elects a distribution."
3. $150,000 COMPENSATION LIMIT
Pursuant to Rev. Proc. 94-13, 1994-3 I.R.B. 18, and notwithstanding
any provision of the Plan to the contrary, the Plan is hereby amended to
include the following language:
"In addition to other applicable limitations set forth
in the Plan, and notwithstanding any other provision of the
Plan to the contrary, for Plan Years beginning on or after
January 1, 1994, the annual compensation of each employee
taken into account under the Plan shall not exceed the OBRA
'93 annual compensation limit. The OBRA '93 annual
compensation limit is $150,000, as adjusted by the
Commissioner for increases in the cost of living in
accordance with section 401(a)(17)(B) of the Internal Revenue
Code. The cost-of-living adjustment in effect for a calendar
year applies to any period, not exceeding 12 months, over
which compensation is determined (determination period)
beginning in such calendar year. If a determination period
consists of fewer than 12 months, the OBRA '93 annual
compensation limit will be multiplied by a fraction, the
numerator of which is the number of months in the
determination period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994,
any reference in this Plan to the limitation under section
401(a)(17) of the Code shall mean the OBRA '93 annual
compensation limit set forth in this provision.
If compensation for any prior determination period is
taken into account in determining an employee's benefits
accruing in the current Plan Year, the compensation for that
prior determination period is subject to the OBRA '93 annual
compensation limit in effect for that prior determination
period. For this purpose, for determination periods
beginning before the first day of the first Plan Year
beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000.
4. PLAN AMENDMENTS
Notwithstanding any provision of the Plan to the contrary, this
Plan may be amended by action of the Board of Directors of the Employer
or such Committee to which the Board may delegate from time to time the
authority and responsibility for adopting such amendments, and any
amendment approved by such persons may be executed by any authorized
agent of the Employer.
5. MISCELLANEOUS
5.1 Ratification. Except as expressly set forth above, the
Plan, as previously amended and restated to reflect the requirements of
the Tax Reform Act of 1986 and certain subsequent legislation, and as
further amended by the First Amendment and the Second Amendment, remains
in full force and effect.
5.2 Effective Date. The provisions described above are
effective on the date(s) prescribed in connection with each such
provision, and to the extent no date is so prescribed the provisions of
this Third Amendment shall be effective on the first day of the Plan
Year in which this amendment is executed by the Employer and Trustee.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment, effective on the dates set forth above.
"EMPLOYER:"
SANTA BARBARA BANK & TRUST, a California corporation
By
Name: Jay D. Smith
Title: Secretary
December 28, 1994
Date
"TRUSTEE:"
SANTA BARBARA BANK & TRUST, a California corporation
By
Name: Janice Kroekel
Title: Assistant Vice President
December 28, 1994
Date
Exhibit 10.1.8
FOURTH AMENDMENT
TO
SANTA BARBARA BANK & TRUST
INCENTIVE AND INVESTMENT AND SALARY SAVINGS PLAN
THIS FOURTH AMENDMENT (the "Fourth Amendment") is made and entered
into, effective on the date set forth below, by and between SANTA
BARBARA BANK & TRUST, a California corporation (in its capacity as
"Employer"), and SANTA BARBARA BANK & TRUST, a California corporation
(in its capacity as "Trustee"), with reference to the following facts:
RECITALS:
A. The Employer sponsors that certain Incentive and Investment
and Salary Savings Plan pursuant to that certain document executed
December 31, 1991, as amended by that First Amendment dated effective
January 1, 1994, that certain Second Amendment dated effective July 1,
1994, and that certain Third Amendment executed December 28, 1994 (as so
amended, the "Plan").
B. The Employer desires to amend the Plan in order to clarify
the manner in which the Plan shall reallocate amongst participants an
amount which cannot be allocated to a particular participant in a Plan
Year by reason of the limits imposed by Section 415 of the Internal
Revenue Code (the "Code").
AGREEMENTS:
NOW, THEREFORE, the parties hereto, intending to be legally bound,
do hereby agree as follows:
1. AMENDMENT TO SECTION 4.10
Section 4.10 of the Plan is hereby modified and amended to read in
its entirety as follows:
"4.10 Adjustment For Excessive Annual Additions.
(a) For purposes of this Section 4.10, the term:
(1) "Excess Amount" shall mean, for each Participant
in each limitation year, the excess, if any, of (i) the
"annual additions" which would be credited to his account
under the terms of the Plan without regard to the limitations
of Section 415, over (ii) the maximum "annual additions"
permitted by Code Section 415, as determined pursuant to
Section 4.9, above.
(2) "Section 415 Suspense Account" shall mean an
unallocated account equal to the sum of "excess amounts" for
all Participants in the Plan during the limitation year,
determined after such excess amounts have been reallocated to
all Participants to the extent permitted by Section 415 and
in accordance with the provisions of Section 4.10(b), below.
The amount allocated to the Section 415 Suspense Account
shall not share in any earnings or losses of the Trust Fund.
(b) If the "annual additions" under this Plan would cause
the maximum "annual additions" to be exceeded for any
Participant by reason of (i) the allocation of Forfeitures,
(ii) a reasonable error in estimating a Participant's
Compensation, (iii) a reasonable error in determining the
amount of elective deferrals (within the meaning of Code
Section 402(g)(3)) that may be made with respect to any
Participant under the limits imposed on such deferrals, or
(iv) other facts and circumstances to which Treasury
Regulations Section 1.415-6(b)(6) shall be applicable, then
the Administrator shall:
(1) Allocate and reallocate such excess amounts to
other Participants in accordance with Section 4.4, above, but
subject to the limits on "annual additions" imposed by
Section 4.9, above;
(2) Allocate to the Section 415 Suspense Account
any "excess amount" remaining after application of Paragraph
(1), above; and
(3) Allocate and reallocate the Section 415
Suspense Account in the next limitation year (and, if the
amount in that Section 415 Suspense Account is not fully
allocated in the next limitation year, then in succeeding
limitation years) to all Participants in the Plan before any
Employer or Employee contributions which would constitute
annual additions are made to the Plan for such limitation
year, and reduce Employer contributions to the Plan for such
limitation year by the amount of the Section 415 Suspense
Account allocated and reallocated during such limitation
year.
(c) The Plan may not distribute excess amounts, other than
voluntary Employee contributions, to Participants or Former
Participants."
2. MISCELLANEOUS
2.1 Ratification. Except as expressly amended by the First
Amendment, the Second Amendment, the Third Amendment, and this Fourth
Amendment, the Plan is hereby ratified, confirmed, and approved, and
remains in full force and effect.
2.2 Effective Date. The effective date of this Fourth
Amendment shall be January 1, 1995.
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amendment, effective on the date set forth above.
"EMPLOYER":
SANTA BARBARA BANK & TRUST, a
California corporation
By
Name: Jay D. Smith
Title: Secretary
March 2, 1995
Date
"TRUSTEE":
SANTA BARBARA BANK & TRUST, a
California corporation
By
Name: Janice Kroekel
Title: Assistant Vice President
March 2, 1995
Date
Exhibit 10.1.10
FIRST AMENDMENT
TO
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
OF
SANTA BARBARA BANK & TRUST
THIS FIRST AMENDMENT (the "First Amendment") is made and entered into,
effective on the date set forth below, by and between SANTA BARBARA BANK &
TRUST, a California corporation, as Employer (the "Employer"), and SANTA
BARBARA BANK & TRUST, a California corporation, as Trustee (the "Trustee"),
with reference to the following facts:
RECITALS:
A. The Employer sponsors an Employee Stock Ownership Plan and Trust
(the "ESOP") pursuant to that certain plan document executed June 28, 1994
(the "Plan").
B. The ESOP is implementing certain procedures to satisfy the "required
diversification" rules of Internal Revenue Code ("IRC") Section 401(a)(28).
C. In order to provide the Trustee sufficient flexibility to satisfy
those rules in a manner that is in the best interests of plan participants,
the Employer desires to amend the Plan in a manner described below.
AMENDMENT:
NOW, THEREFORE, the parties hereto, intending to be legally bound, do
hereby agree and amend the Plan as follows:
1. AMENDMENT TO SECTION 4.6.1
Subparagraph C of Section 4.6.1 of the Plan is hereby amended in its
entirety to read as follows:
"C. The Trustee shall satisfy the diversification direction of the
Qualified Participant under this Section 4.6.1 by either (1)
distributing to the Qualified Participant, within ninety (90) days
after the end of the period in which the Participant may make a
diversification election under this Section 4.6.1, either such
number of shares of Company Stock which the Participant has elected
to diversify, or cash in an amount equal to the fair market value
of such shares of Company Stock (determined as of the last
Anniversary Date prior to the date of the distribution), provided,
any such shares of Company Stock distributed to a Qualified
Participant shall be subject to the "put option" requirements of
Section 7.11, below; or (2) offering within the Trust at least
three distinct investment options (in accordance with Treasury
Regulations implementing Code Section 401(a)(28)) in which an
amount equal to the fair market value of the number of shares of
Company Stock which the Qualified Participant has elected to
diversify shall be invested during the ninety-day period after the
period in which the Qualified Participant may elect a
diversification election pursuant to this Section 4.6.1, or (3)
transferring to another qualified retirement plan sponsored by the
Employer the number of shares of Company Stock which the Qualified
Participant elects to diversify (or an amount representing the fair
market value of those shares as of the last Anniversary Date
preceding the date of the transfer), and offering in that other
plan at least three distinct investment options (in accordance with
Treasury Regulations implementing Code Section 401(a)(28)) into
which the proceeds from the sale of the designated number of shares
of the Company Stock (or an amount of cash representing the fair
market value) shall be invested during the 90-day period following
the period in which the Participant may make a diversification
election pursuant to this Section 4.6.1."
2. MISCELLANEOUS
2.1 Ratification. Except as expressly modified by this First
Amendment, the Plan is hereby ratified and confirmed and remains in full
force and effect.
2.2 Effective Date. The effective date of this First
Amendment shall be January 1, 1995.
(Signatures appear on the following page.)
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment, effective on the date set forth above.
EMPLOYER":
SANTA BARBARA BANK & TRUST,
a California corporation
By
Name: Jay D. Smith
Title: Secretary
February 24, 1995
Date
"TRUSTEE":
SANTA BARBARA BANK & TRUST,
a California corporation
By:
Name: Janice Kroekel
Title: Assistant Vice President
February 24, 1995
Date
Exhibit 10.1.13
FIRST AMENDMENT
TO
TRUST AGREEMENT
OF
SANTA BARBARA BANK & TRUST
VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION
THIS FIRST AMENDMENT (the "First Amendment") is made and entered
into, effective on the date set forth below, by and between SANTA
BARBARA BANK & TRUST, a California corporation, in its capacity as the
Employer establishing the Trust described below (the "Bank"), and SANTA
BARBARA BANK & TRUST, a California corporation, in its capacity as
Trustee under the Trust Agreement described below (the "Trustee"), with
reference to the following facts:
RECITALS:
A. The Bank and the Trustee executed that certain Trust
Agreement of Santa Barbara Bank & Trust Voluntary Employees' Beneficiary
Association dated effective December 29, 1992 (the "Trust Agreement"),
establishing a trust (the "Trust") intended to qualify as a "Voluntary
Employees' Beneficiary Association" ("VEBA") under Internal Revenue Code
("Code") Section 501(c)(9).
B. The Bank desires to amend the Trust Agreement, in the manner
reflected below, in order to permit certain portions of contributions
made by the Bank to the Trust to be returned to the Bank on the
occurrence of the circumstances described below.
C. The Bank intends that this Amendment not be effective unless
the Internal Revenue Service determines that this Amendment would not
cause the Trust to fail to qualify as a VEBA under Code Section 501(c)(9).
AGREEMENTS:
NOW, THEREFORE, the parties hereto, intending to be legally bound,
do hereby agree as follows:
1. AMENDMENT TO SECTION 8.3
Section 8.3 of the Trust Agreement is amended to read as follows:
"8.3 Prohibited Reversion and Inurement. Except to
the extent the Bank may make a good faith mathematical or
other computational error in determining the amount of its
contribution in any Plan Year and except as otherwise provided
in Section 9.1, below, under no circumstances shall any assets
or net earnings of the Trust, either during the existence of
the Trust or at the termination thereof:
8.3.1 Reversion. Revert to the Bank or be
applied to or for the benefit of the Bank (except to the
extent the Trust Fund is applied to pay the cost of Coverage
pursuant to the Plan); or
8.3.2 Inurement. Otherwise be paid to, or
inure to the benefit of, any private individual, shareholder
or other person, except through the payment of the cost of
Coverage pursuant to the Plan and the costs of administering
the Trust."
2. AMENDMENT TO SECTION 9.1
Section 9.1 of the Trust Agreement is amended to read as follows:
9.1 Qualification and Initial Contribution. The Bank and the
Trustee shall cooperate in preparing and submitting to the Internal
Revenue Service all documents that may be necessary to obtain from the
Internal Revenue Service a letter determining that the Trust, in
operation with the Plan, constitutes a VEBA and the Trust is exempt from
federal income taxes under Section 501(a) of the Code.
9.1.1 Amendment. The Bank and the Trustee shall execute
any amendment to this Agreement that may be necessary to obtain such
determination letter, and any such amendment shall have retroactive
effect to the extent necessary to ensure the qualification of the Trust
as a tax-exempt VEBA as of the effective date of this Agreement.
9.1.2 Initial Contribution. The Bank and the Trustee
acknowledge and agree that all contributions made by the Bank to the
Trust for the period ended December 31, 1992, have been made on
condition that the Trust promptly obtain such favorable determination
letter. If the Trust shall fail to qualify as a tax-exempt VEBA with
respect to the period ended December 31, 1992, then all such
contributions shall be returned to the Bank.
9.1.3 Subsequent Contribution. The Bank and the Trustee
acknowledge and agree that all contributions made by the Bank to the
Trust are made on condition that such contributions are deductible by
the Bank under Section 419 of the Code. If a deduction is not allowable
under that Section for any portion of any such contribution for the
taxable year of the Bank with respect to which a contribution is made,
then the non-deductible portion of such contribution shall be returned
to the Bank if the Bank demands such portion within one year following
(a) the last day of the Bank's taxable year with respect to which such
contribution was made, or (b) if later, the date on which the Internal
Revenue Service disallows a deduction for all or any portion of such
contribution; provided, no portion of the earnings on such excess
contribution may be returned to the Bank, and any losses attributable to
such excess contribution shall reduce the amount which otherwise would
have been returned to the Bank under this Section 9.1.3.
3. MISCELLANEOUS
3.1 Ratification. Except as amended by this First Amendment,
the Trust Agreement is valid and effective and remains in full force and
effect.
3.2 Effective Date. This Amendment shall be effective only if
the Internal Revenue Service determines that this Amendment shall not
adversely affect the qualification of the Trust as a VEBA under Code
Section 501(c)(9). If the Internal Revenue Service makes that
determination, then this Amendment shall be effective on the later of
December 29, 1992, or any subsequent date which the Internal Revenue
Service determines to be the earliest date as of which this Amendment
may be effective.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment, effective on the date set forth above.
"TRUSTEE" "BANK"
SANTA BARBARA BANK & TRUST, SANTA BARBARA BANK & TRUST,
a California corporation a California corporation
Name: Janice Kroekel Name: Jay D. Smith
Title: Assistant Vice President Title: Secretary
Date: July 23, 1993 Date: July 23, 1993
Exhibit 10.1.15
SANTA BARBARA BANK & TRUST
SECOND AMENDED AND RESTATED FLEXMASTER PLAN
October 1, 1991
SECOND AMENDED AND RESTATED FLEXMASTER PLAN
OF
SANTA BARBARA BANK & TRUST
THIS AMENDED AND RESTATED FLEXMASTER PLAN is adopted by SANTA
BARBARA BANK & TRUST, a California corporation (the "Bank"), with
reference to the following facts:
RECITALS:
A. The Bank previously adopted an Amended and Restated
Cafeteria Plan (the "Cafeteria Plan"), effective May 1, 1991, in order
to provide its employees an option to elect either to receive the entire
amount of their compensation from the Bank in cash, or to direct the
Bank to apply a portion of that compensation to purchase certain
benefits.
B. The Bank now desires to amend and restate the Cafeteria Plan
in order to reflect the addition of other nontaxable benefits available
under such plan.
PLAN:
NOW, THEREFORE, the Bank, intending to be legally bound, hereby
adopts the following Plan:
1. DEFINITIONS
For purposes of this Plan, each of the following terms shall have the
meaning set forth below:
1.1 "Annual Earnings" means, with respect to each Participant
for each Plan Year, the amount of taxable wages paid by the Bank to the
Participant during the twelve-month period ending on the July 31st
immediately preceding the commencement of such Plan Year, as rounded
upward to the next higher multiple of One Thousand Dollars ($1,000.00).
1.2 "Bank" means Santa Barbara Bank & Trust, a California
corporation.
1.3 "Change in Family Status" means the occurrence of any one
or more of the following events:
1.3.1 Marriage; Divorce. The marriage or divorce of the
Participant;
1.3.2 Death. The death of the spouse or other dependent of
the Participant;
1.3.3 Birth; Adoption. The birth or adoption of a child of
the Participant;
1.3.4 Termination or Commencement of Employment. The
Participant's spouse terminates employment or commences employment with
a new employer;
1.3.5 Change of Employment Status. The Participant or the
Participant's spouse switches from a part-time to a full-time employment
status or from a full-time to a part-time employment status; or
1.3.6 Change in Health Coverage. There is a significant
change in the health coverage of the Participant or the spouse of the
Participant that is available as a result of the employment of the
Participant's spouse.
1.4 "Class Multiple" means the Participant's multiple as
determined under the table set forth below:
Then the
Participant's Class
Class No. If the Participant is: Multiple is:
1 A President, Executive 3
Vice-President, or Senior
Vice-President
2 An employee who has 10 2
or more years of service
with the Bank
3 An employee who has at 1.5
least 5 but less than
10 years of service with
the Bank
4 An employee who has less 1
than 5 years of service
1.5 "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any reference to any section of the Code shall be
deemed to include a reference to any comparable or succeeding provision
of any legislation that amends, supplements, or replaces such section.
1.6 "Commencement Date" means the first day on which an
Employee first performs any service for the Bank in the capacity as a
common law employee of the Bank.
1.7 "Component Benefit Plans" means (a) the Dental Care Plans,
(b) the Dependent Care Reimbursement Plan, (c) the Dependent Life
Insurance Plans, (d) the Employee Life and Accidental Death and
Disability Plans, (e) the Health Care Reimbursement Plan, (f) the Long-
Term Disability Insurance Plans, and (g) the Medical Insurance Plans.
1.8 "Dental Care Plans" means the group dental care plans
under which the Bank provides group dental coverage to its Employees and
their dependents, as the same may be amended from time to time. As of
the Effective Date of this Plan, the Bank sponsors the following Dental
Care Plans: (a) Santa Barbara Bank & Trust Direct Reimbursement Dental
Plan (Plan No. 514); and (b) Dental Net (Plan No. 516).
1.9 "Dependent Care Assistance Plan" means the Santa Barbara
Bank & Trust Dependent Care Assistance Plan, under which the Bank
reimburses its Employees for certain dependent care expenses, as the
same may be amended from time to time.
1.10 "Dependent Life Insurance Plans" means the group life
insurance plans under which the Bank provides life insurance coverage
for the dependents of its Employees, as the same may be amended from
time to time.
1.11 "Effective Date" means October 1, 1991.
1.12 "Election Form" means a form, as prescribed by the Plan
Administrator, on which a Participant may elect, inter alia, to receive
nontaxable benefits under one or more of the Component Benefits Plans.
1.13 "Employee" means any individual who is a common law
employee of the Bank.
1.14 "Employee Life and Accidental Death and Dismemberment
Plans" means the group life and accidental death and dismemberment
insurance plans under which the Bank provides life and accidental death
and dismemberment coverage to its employees, as the same may be amended
from time to time.
1.15 "Employer Contribution" means, for each Participant in
each Plan Year, a dollar amount equal to the sum of (a) the Fixed Health
Contribution, plus (b) the Variable Contribution. Such Employer
Contribution represents the amount (other than Salary Reduction
Contributions) which the Employer shall contribute to this Plan for each
Participant in each Plan Year.
1.16 "Fixed Health Contribution" means a dollar amount which
the Bank elects to contribute to the Plan in each Plan Year for each
Participant, as determined and announced by the Bank prior to the
beginning of such Plan Year. Commencing October 1, 1991, and continuing
until changed by the Bank, the Fixed Health Contribution shall be Three
Thousand Eighteen Dollars ($3,018.00).
1.17 "Health Care Reimbursement Plan" means the Santa Barbara
Bank & Trust Health Care Reimbursement Plan, under which the Bank
reimburses its Employees for certain medical expenses, as the same may
be amended from time to time.
1.18 "Highly Compensated Employee" means a "highly compensated
employee," as that term is defined in Section 414(q) of the Code.
1.19 "Key Employee" means a "key employee," as that term is
defined in Section 416(i)(1) of the Code.
1.20 "Long-Term Disability Insurance Plans" means the group
long-term disability insurance plans, under which the Bank provides
group long-term disability coverage to Bank employees, as the same may
be amended from time to time.
1.21 "Medical Insurance Plans" means the group medical
insurance plans under which the Bank provides group medical coverage to
its Employees and their dependents, as the same may be amended from time
to time. As of the effective date of this Plan, the Bank sponsors the
following Medical Insurance Plans: (a) CaliforniaCare Plan (Plan No.
507); (b) Enhanced CaliforniaCare Plan (Plan No. 519) (c) the Freedom
Plan (Plan No. 513); and (d) the Prudent Buyer Plan (Plan No. 515).
1.22 "Participant" means each Employee who satisfies the
requirements of participation set forth in Section 2.1 of this Plan.
1.23 "Participant's Account" means the account established for
each Participant by the Bank pursuant to Section 3.1, below.
1.24 "Plan" means this "Santa Barbara Bank & Trust Amended and
Restated FlexMaster Plan," as the same may be amended from time to time
in accordance with Section 5, below.
1.25 "Plan Administrator" means the Bank, or such person or
committee as the Bank may appoint from time-to-time to supervise the
administration of the Plan.
1.26 "Plan Year" means each period of twelve consecutive months
commencing on each October 1 and ending on September 30 in the
immediately subsequent calendar year.
1.27 "Salary Reduction Contribution" means the amount of
compensation, if any, that the Participant has elected to contribute to
the Plan. The maximum amount of Salary Reduction Contributions by a
Participant in any Plan Year shall not exceed the excess, if any, of (a)
the cost of benefits which the Participant elects to receive under
Component Benefit Plans in such Plan Year, over (b) the amount of the
Employer Contribution in that year.
1.28 "Variable Contribution" means the sum of the Life/AD&D
Credit Amount, and (b) the LTD Credit Amount. For purposes of this
Section 1.28, the terms:
1.28.1 "Life/AD&D Credit Amount" shall be equal to the
product determined by multiplying:
A. The lesser of (1) the product determined by
multiplying (a) the Participant's Class Multiple, times (b) the amount
of the Participant's Annual Earnings, or (2) Four Hundred Thousand
Dollars ($400,000); times
B. The Participant's credit factor, as determined
under the table set forth below, with the Participant's age being
determined as of the July 31st immediately preceding the first day of
the Plan Year for which the credit factor is being determined:
Participant's Age Credit Factor
Less than 26 .00152
26-29 .00126
30-34 .00152
35-39 .00206
40-44 .00282
45-49 .00414
50-54 .00690
55-59 .01098
60-64 .01352
65-69 .02286
70 or more .06078
1.28.2 "LTD Credit Amount" shall mean the product
determined by multiplying:
A. The lesser of (1) the amount of the Participant's
Annual Earnings, or (2) Two Hundred Fifty-Seven Thousand One Hundred
Forty-Three Dollars ($257,143.00); times
B. The Participant's credit factor, as determined
under the table set forth below, with the Participant's age being
determined as of the July 31st immediately preceding the first day of
the Plan Year for which the credit factor is being determined:
Participant's Age Credit Factor
Less than 26 .0011
26-29 .0012
30-34 .0018
35-39 .0024
40-44 .0034
45-49 .0048
50-54 .0063
55-59 .0072
60-64 .0065
65-69 .0040
70 or more .0031
2. PARTICIPATION
2.1 Eligibility to Participate. An Employee shall be eligible
to participate in the Plan if the Employee (a) customarily works at
least twenty-one (21) hours per week for the Bank, and (b) has completed
ninety (90) days of employment with the Bank.
2.2 Commencement of Participation. An Employee who has
satisfied the conditions set forth in Section 2.1, above, may commence
participation in the Plan effective on the later of (a) the Effective
Date of this Plan, or (b) the first day of the first calendar month
beginning after the Employee satisfies the conditions to eligibility set
forth in Section 2.1, above.
2.3 Termination of Participation. A Participant will cease to
be a Participant as of the earlier of:
2.3.1 Plan Termination. The date on which the Plan
terminates; or
2.3.2 Eligibility Conditions. The date on which the
Participant fails to satisfy the conditions to eligibility set forth in
Section 2.1, above; provided, if a Participant who remains employed by
the Bank fails to satisfy the conditions to eligibility set forth in
Section 2.1, above, because such Participant begins working for the Bank
fewer than twenty-one hours per week, then (a) such Participant shall
remain a Participant and the Participant's election pursuant to Section
3.3, below, shall remain in effect for the remainder of the Plan Year,
and (b) such Participant's status as a Participant shall cease
automatically, effective on the first day of the next succeeding Plan
Year, unless the Participant once again has satisfied the conditions to
eligibility described in Section 2.1, above.
2.4 Reinstatement of Participant. A person who has ceased to
be a Participant under Section 2.3, above, once again shall become a
Participant only after satisfying the conditions to eligibility set
forth in Section 2.1, above.
3. OPTIONAL BENEFITS
3.1 Credits to Participant's Account. The Bank shall establish
for each Participant under this Plan a Participant's Account, to which
the Bank shall credit:
3.1.1 Employer Contribution. The amount of the Employer
Contribution for each Plan Year; and
3.1.2 Salary Reduction Contributions. The amount of
Salary Reduction Contributions which the Participant elects to make to
the Plan for such Plan Year.
3.2 Application of Account Credits. The amount credited to each
Participant's Account shall be applied in each Plan Year as follows:
3.2.1 Core Benefits. First, subject to Section 3.2.3,
below, such amount shall be applied toward the purchase of:
A. Long-term disability insurance coverage for such
Participant, under such of the Long-Term Disability Insurance Plans as
is selected by the Participant, in an amount equal to fifty percent
(50%) of such Participant's Annual Earnings for such Plan Year;
B. Life and accidental death and dismemberment
insurance coverage for the Participant under such of the Employee Life
and Accidental Death and Dismemberment Plans as is selected by the
Participant, in an amount equal to the lesser of (1) $50,000, or (2) one
hundred percent (100%) of the Participant's Annual Earnings for such
Plan Year; and
C. The premium cost of coverage for the Participant
under such Medical Insurance Plan and Dental Care Plan as are selected
by the Participant; provided, if the Participant presents to the Bank
evidence satisfactory to the Bank establishing that the Participant
receives insurance coverage under a medical insurance plan or dental
care plan other than those sponsored by the Bank, then no portion of the
amount credited to the Participant's Account shall be applied toward the
purchase of coverage under one of the corresponding plans sponsored by
the Bank.
3.2.2 Election. Thereafter, subject to Section 3.2.3,
below, the remaining balance of such Participant's Account after
application of Section 3.2.1, above, shall be applied, in accordance
with the Participant's designation on the Election Form for such Plan
Year, either:
A. To pay the Participant additional taxable
compensation during such Plan Year;
B. To provide the Participant additional nontaxable
benefits under one or more of the Component Benefit Plans; or
C. To provide the Participant such combination of
additional taxable compensation and nontaxable benefits under one or
more of the Component Benefit Plans as the Participant desires.
3.2.3 Failure to Elect. Notwithstanding the provisions
of Sections 3.2.1 and 3.2.2, above, if for any Plan Year a Participant
fails to complete and return an Election Form to the Plan Administrator
on or before the date specified by the Plan Administrator, then:
A. The Participant shall be deemed to have elected,
and the amount credited to the Participant's Account shall be applied,
to purchase (a) long-term disability insurance coverage for such
Participant, under one of the Long-Term Disability Insurance Plans, in
an amount equal to fifty percent (50%) of the Participant's Annual
Earnings for the Plan Year; (b) Life and Accidental Death and
Dismemberment Insurance coverage for the Participant, under one of the
Employee Life and Accidental Death and Dismemberment Plans, in an amount
equal to the lesser of $50,000 or one hundred percent (100%) of the
Participant's Annual Earnings for the Plan Year; and
B. The Participant shall not be entitled to receive
any other benefits under this Plan or any Component Benefit Plan for
such Plan Year, and shall forfeit, to the extent not necessary to
purchase the benefits described in subparagraph A, above, all amounts
credited to the Participant's Account for such Plan Year.
3.3 Election Procedure. The election described in Section
3.2.2, above, shall be made at the time, and in the manner, set forth in
this Section 3.3.
3.3.1 Annual Election. Prior to the commencement of each
Plan Year, the Plan Administrator shall provide an Election Form to each
Employee who is expected to be a Participant as of the first day of the
next ensuing Plan Year. On the Election Form, each such Employee shall
(a) specify the amount, if any, of Salary Reduction Contributions which
the Employee shall make during the ensuing Plan Year, and (b) authorize
and direct the Bank as to the manner in which amounts credited to the
Participant's Account shall be applied by the Bank pursuant to Section
3.2.2, above, during the ensuing Plan Year.
A. The amount of the reduction in the Employee's
compensation for the next ensuing Plan Year initially shall be not less
than the difference between (1) the amount of the cost of the optional
benefits selected by the Employee pursuant to Section 3.2.2, above, for
such Plan Year, and (2) the amount of the Employer Contribution. During
the Plan Year such reduction shall be adjusted automatically in the
event there is a change in the cost of a benefit provided by a third-
party insurance company under one of the Component Benefit Plans, and
the Bank elects to require Participants to bear that increase.
B. Each Election Form must be completed and returned
to the Plan Administrator on or before such date as the Plan
Administrator shall specify, which date shall be prior to the first day
of the Plan Year to which the Election Form is to apply.
3.3.2 New Participant. As soon as practicable before
each Employee becomes a Participant, the Plan Administrator shall
provide an Election Form to the Employee. Such Election Form must be
completed and returned to the Plan Administrator on or before such date
as the Plan Administrator shall specify, which date shall be prior to
the first day of the first pay period to which any reduction in the
Participant's compensation is to apply.
3.4 Duration of Election. Each election made pursuant to
Sections 3.2.2 and 3.3, above, shall continue to apply as set forth in
this Section 3.4.
3.4.1 General Rule. Except as otherwise provided in Sections
3.4.2 and 3.4.3, below, each such election shall be irrevocable and
shall remain effective until the last day of the Plan Year to which it
relates.
3.4.2 Voluntary Revocation. A Participant voluntarily
may elect to revoke any election previously made in accordance with
Section 3.4, above, if the benefit being purchased by the Bank in
accordance with such election is provided by an independent third-party
provider under a Medical Insurance Plan or Dental Care Plan; and:
A. Both (1) the cost of that coverage changes
significantly during the Plan Year, and (2) the Participant makes a new
election to receive such coverage from another third-party provider, if
any, offering similar coverage through this Plan;
B. Both (1) the extent of such coverage is
significantly curtailed or ceases during the Plan Year, and (2) the
Participant makes a new election to receive such coverage from another
third-party provider, if any, offering similar coverage through this
Plan; or
C. Both (1) there is a Change in Family Status and
with respect to the Participant, and (2) any new election which the
Participant makes is consistent with such Change in Family Status.
3.4.3 Mandatory Termination. A Participant's election
under Section 3.4, above, shall be terminated:
A. Automatically when the Participant ceases to be a
Participant, provided, in accordance with Section 2.3.2, above, the
election of a Participant who remains employed by the Bank but no longer
works at least twenty-one (21) hours per week for the Bank on a
customary basis shall be revoked automatically effective on the first
day of the first Plan Year next following the date on which the
Participant begins working less than twenty-one (21) hours per week;
B. Automatically upon the termination of this Plan;
C. Automatically if the benefit which the Participant
has designated in the Participant's Election Form no longer is offered
under this any of the Component Benefit Plans; and
D. At such time as, and to the extent which, the Plan
Administrator reasonably determines is necessary to ensure that the Plan
will not be treated as a discriminatory cafeteria plan under Section 125
of the Code. Any such termination or modification by the Plan
Administrator shall be applied under rules uniformly applicable to all
similarly situated Participants. Such action may include, without
limitation, modification of elections made by Highly Compensated
Employees or by Key Employees.
3.5 Maximum Employer Contribution. Notwithstanding any other
provision of this Plan to the contrary, the Bank shall not be obligated
to contribute toward the purchase of any optional benefit elected by a
Participant pursuant to Section 3.2.2, above, any amount in excess of
the sum of (a) the Employer Contribution and (b) the Participant's
Salary Reduction Contribution.
3.6 Appeals Procedure. If a claim for benefits under this
Plan is partially or fully denied by the Plan Administrator, then the
Participant may request a review of that decision by submitting to the
Bank, not later than sixty (60) days after receiving notice of the Plan
Administrator's decision, a written request for review of the decision.
Within sixty (60) days of receiving such application, the Bank shall
review the application, hold such hearings as, in the sole discretion of
the Employer, it deems appropriate, and advise the Participant, in
writing, of its decision. If the decision on review is not provided
within such sixty (60) day period, then the application for appeal shall
be deemed to be denied.
3.7 Description of Nontaxable Benefits. The costs, extent,
requirements for participation, and other terms and conditions of the
benefits which a Participant may elect to receive under Section 3.2,
above, shall be those which are set forth in the Bank's Component
Benefit Plans, as the same may be amended from time to time.
4. ADMINISTRATION
4.1 Duties of Plan Administrator. The Plan Administrator
shall administer the Plan in accordance with its terms, for the
exclusive benefit of Participants, in a manner which ensures that the
Plan satisfies the rules applicable to qualified "cafeteria plans" under
Section 125 of the Code.
4.2 Powers of Plan Administrator. The Plan Administrator
shall have full power and authority to administer and carry into effect
the terms and conditions of the Plan, subject to applicable requirements
of law. Such power shall include, but not be limited to, the power:
4.2.1 Revoke Elections. To modify or revoke, for the
purpose of ensuring that the Plan does not violate the nondiscrimination
rules applicable to cafeteria plans, an election made by a Participant
under this Plan;
4.2.2 Rules and Regulations. To make and enforce such
reasonable rules and regulations as the Plan Administrator deems
necessary or proper for the efficient administration of the Plan,
including the establishment of any claims procedures that may be
required by applicable provisions of law;
4.2.3 Interpretation. To interpret in good faith the
terms and conditions of this Plan;
4.2.4 Resolution. To resolve all questions concerning
the Plan and the eligibility of any Employee to participate in the same;
and
4.2.5 Agents. To appoint and retain such agents,
counsel, accountants, consultants, and other persons as may be necessary
or appropriate to assist in the administration of the Plan.
4.3 Records. The Plan Administrator shall establish and
maintain such records as are necessary or appropriate to the efficient
administration of the Plan. Each Participant, upon reasonable advance
notice to the Plan Administrator, shall be entitled to inspect such of
those records as pertain to that Participant.
4.4 Filing. The Plan Administrator shall timely file all
forms required to be filed with respect to the Plan pursuant to Section
6039D of the Code, each successor provision of the Code, and all
counterpart provision of California law.
4.5 Indemnification. The Bank shall indemnify, defend, and
hold the Plan Administrator free and harmless from and against any and
all liabilities, damages, costs and expenses, including reasonable
attorneys' fees, occasioned by any actions which the Plan Administrator
takes, or fails to take, in good faith, in connection with the
administration of the Plan.
5. AMENDMENT AND TERMINATION
The Plan may be amended or terminated at any time by a written
instrument executed by the Board of Directors of the Bank, or its
designee.
6. MISCELLANEOUS
6.1 No Employment Rights. Neither the adoption and
maintenance of this Plan, nor any express or implicit provision of this
Plan, shall be deemed:
6.1.1 Contract. To constitute a contract between the
Bank and any person, or to be a consideration for or an inducement or
condition of, the employment of any person;
6.1.2 Right. To give any person the right to be retained
in the employ of the Bank;
6.1.3 Discharge. To interfere with the right of the Bank
to discharge any Employee (including any Participant) at any time; or
6.1.4 Continuing Employment. To give the Bank the right
to require an Employee to remain in the employ in the Bank, or to
interfere with an Employee's right to terminate his employment at any
time.
6.2 Enforceability; Exclusive Benefit. Subject to the
provisions of Section 6.1, above, the Bank:
6.2.1 Legally Enforceable. Represents that the rights
created in this Plan in favor of its Employees are intended to be
legally enforceable; and
6.2.2 Exclusive Benefit. Agrees to administer this Plan
for the exclusive benefit of its Employees.
6.3 Interpretation. As used in this Plan, the masculine,
feminine, and neuter gender and the singular and plural numbers each
shall be deemed to include the other whenever the context indicates or
requires. The captions to various sections of this Plan are for
convenience and reference purposes only, and shall not affect in any way
the meaning or interpretation of this Plan.
6.4 Governing Law. This Plan shall be construed,
administered, and enforced in accordance with the laws of the State of
California, and in such manner as is necessary to permit the Plan to
continue to be qualified as a "cafeteria plan" which satisfies the
requirements of Section 125 of the Code.
IN WITNESS WHEREOF, the Bank has caused this Plan to be adopted,
effective on the Effective Date.
SANTA BARBARA BANK & TRUST,
a California corporation
By_________________________________
Name: Janice Kroekel
Title: Assistant Vice President
Date: May 1, 1991
Exhibit 11.0
SANTA BARBARA BANCORP AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Years Ended December 31,
1995 1994
Primary Fully Diluted Primary Fully Diluted
Weighted Average Shares
Outstanding 7,677,057 7,677,057 7,646,839 7,646,839
Weighted Average Options
Outstanding 677,598 677,599 750,567 750,567
Anti-dilution adjustment (1) (13,504) 0 (33,441) (33,441)
Adjusted Options Outstanding 664,094 677,599 717,126 717,126
Equivalent Buyback Shares (2) (450,542) (432,252) (497,924) (496,093)
Total Equivalent Shares 213,552 245,347 219,202 221,033
Adjustment for Non-Qualified
Tax Benefit (3) (87,556) (100,592) (89,873) (90,624)
Weighted Average Equivalent
Shares Outstanding 125,996 144,755 129,329 130,409
Weighted Average Shares
for Computation 7,803,053 7,821,812 7,776,168 7,777,248
Fair Market Value (4) $ 18.40 $ 19.83 $ 16.99 $ 16.99
Net Income $10,415,548 $10,415,548 $12,950,918 $12,950,918
Per Share Earnings $ 1.33 $ 1.33 $ 1.67 $ 1.67
(1) Options with exercise prices above fair market value are excluded because of their anti-dilutive effect.
(2) The number of shares that could be purchased at fair market value from the proceeds were the adjusted
options outstanding to be exercised.
(3) The Company receives a tax benefit when non-qualified options are exercised equal to its tax rate times
the difference between the market value at the time of exercise and the exercise price. This benefit is
assumed available for purchase of additional outstanding shares.
(4) Fair market value for the computation is defined as the average market price during the period for
primary dilution, and the greater of that average or the end of period market price for full dilution.
SANTA BARBARA BANCORP 1995 ANNUAL REPORT
Core Values
Exceed Customer Expectations
Foster Employee Commitment
Maximize Shareholder Return
Support Our Communities
Vision
To be the financial services provider of choice in the communities and
markets we serve through exceptional employees delivering legendary
customer service.
Mission
To identify our customers' financial needs and exceed their expectations
in the delivery of quality products and services in a responsible and
ethical manner to assure the maximization of our shareholders' return.
To partner with the communities we serve to provide enduring economic
value and sustainable quality of life.
To Our Shareholders & Friends
For the first time in thirty years, your company, Santa Barbara Bancorp,
is not reporting a record earnings year. Earnings were impacted by our
expansion into Ventura County, third quarter loan loss provisions
related to two large problem loans, and a last-minute IRS rule change
that resulted in diminished demand for, and loan losses on, Refund
Anticipation Loans (RAL's). Earnings for the fourth quarter of 1995,
however, were the highest ever recorded, up 5.2% over earnings for the
same quarter in 1994. We firmly believe that 1995 was a watershed year
in the history of our institution. The initiatives begun last year will
lay the foundation for the next thirty years of success.
Our competitive strategy declares that the Company will be
differentiated in the markets we serve as the financial services
provider of choice, offering a broad array of financial products and
measurably superior service.
This focused and aggressive strategy led the Company to pursue a three-
pronged approach in 1995 to assure future competitiveness. The first,
and most visible, was the geographic expansion of our franchise to the
communities of Ventura, Camarillo and Oxnard in Ventura County, which is
described in the following section. The second initiative was internally
known as the Credit Project, and the third initiative was directed at
the enhancement of our sales and marketing function in the Trust &
Investment Services Division.
Photograph of three individuals with caption: William S. Thomas, Jr.,
President, Chief Executive Officer, SBB&T; David W. Spainhour, Chairman
of the Board, SBB&T; Donald M. Anderson, Chairman of the Board, Bancorp.
The first of the three initiatives, geographic expansion, began in
earnest with the opening of the Camarillo office in February, 1995. In
April, the Ventura and Oxnard offices opened in temporary facilities
until September, 1995, when their permanent quarters were completed. The
combined deposits of the three offices exceeded $55 million by year-end
and achieved profitability in October, 1995. Loan activity was high, and
trust and investment management business was excellent.
The Credit Project was a major event in 1995. The addition to staff of
experienced loan review personnel was accomplished along with the
strengthening of the credit administration area. The commercial loan
function was reorganized into the Community Banking Group, the Business
Banking Group, and the Private Clients Group. This is discussed in the
next three sections.
The changes in Trust & Investment Services were significant as well.
Research indicated that our existing clients were pleased with the level
of personal service and attention they receive from our trust
administrators and staff. The performance of our portfolio managers for
investments and real estate has been outstanding. The identified need in
the Trust & Investment Services area was to communicate our expertise to
prospective clients, cultivate referrals and generate new customers. The
structure and staff to accomplish this sales and marketing effort are
now in place.
We are confident that 1996 and the years that follow will benefit from
this investment. As our Company's success continues to grow, we hope to
continue our expansion, offering the values of community banking to
local markets throughout the Central Coast.
We thank our dedicated employees who each day add new meaning to our
commitment to legendary customer service.
As always, our success is your success. Thank you for your loyal support
of your Company.
William S. Thomas, Jr.,
President, Chief Executive
Officer, SBB&T
David W. Spainhour,
Chairman of the Board,
SBB&T
Donald M. Anderson
Chairman of the Board,
Bancorp
Caption to two photographs:
(Left) The largest affordable housing project ever developed in Santa
Barbara was a partnership between the owners, Bill and Margie Wagner,
Sr., the Santa Barbara Redevelopment Agency, and Santa Barbara Bank &
Trust. Ugo L. Melchiori, left, was the general contractor.
The El Patio Garden development consists of 113 two, three, and four-
bedroom apartments, all of which are designated as "affordable" units.
Both the Wagners and Mr. Melchiori have been Bank customers for over 25
years. The La Cumbre and Main Offices serve their needs.
(Right) Was it a stop for a cup of coffee that encouraged the
multimillion dollar flower industry to grow and flourish in the
Carpinteria Valley? Perhaps so. After five generations of growing
flowers in Holland, four van Wingerden family brothers came to the
United States to grow flowers here. They were told that the north county
was the ideal area to locate, however, when they made that coffee stop
and saw the lands of Carpinteria, it was all they had hoped for and
more.
Case Van Wingerden, Jr., of Westland Floral, representing the second
U.S. generation, has one million square feet of growing area under glass
and with a staff of 50 employees, raises chrysanthemums sold to florists
and supermarkets nationwide. The Carpinteria Office accommodates his
needs, along with uncles, brothers, and nephews in the floral industry.
Positioned For Growth In The Retail Market
In 1995, we undertook a major expansion into Ventura County, which
opened up a highly promising new market for the Bank and positioned us
for significant growth in 1996. With First Interstate Bank's acquisition
of the Bank of A. Levy, Ventura County's leading independent bank, the
need for a strong, service-oriented community bank became clear. SBB&T
opened its Camarillo office in February, followed in April by office
openings in Oxnard and Ventura. We recognized that central to the
success of these efforts was the selection of a core of highly-trained,
committed employees, dedicated to their community and conversant with
the local market. All of our new employees, most of whom were formerly
with the Bank of A. Levy, met these criteria, bringing with them a level
of expertise and enthusiasm that greatly expedited the transition phase.
Within six months, our first-year goal of $36 million in deposits for
all three offices was met and exceeded, with deposits reaching $55
million by the end of 1995. In October, the offices achieved
profitability on our initial investment.
SBB&T's adherence to a policy of commitment to community service
provided a strong basis for our success in Ventura County. Bank officers
routinely express their interest and involvement in the community
through their volunteer activities in the Chamber of Commerce, Rotary,
Lions Clubs, YMCA, symphony boards and other service organizations. At
the same time, donations to programs benefiting youth and arts programs
helped to consolidate our position as a caring, service-oriented bank
with strong ties to the local community.
Rapid changes in the financial industry, fueled by mergers and
consolidations, continue to create challenging opportunities for SBB&T
in the retail banking sector. To address these changes, consumer lending
has been restructured, creating additional support for traditional
products and adding the capability to make indirect loans. Residential
real estate loan origination became a priority business line, with our
loan representatives now producing at the level required to maintain our
number one position in this market.
Photograph of two individuals at a winery. Caption:
In 1970, Richard Sanford, wine grower, became a Bank customer and also
planted his first vines in the Santa Ynez Valley on what became a 125
acre vineyard and he also became a Bank customer. With an annual
production of 40 thousand cases of consistently award winning wines,
demand now requires international distribution. A Sanford chardonnay
wine is served to first class passengers on British Airways and a
variety of wines have been served at several White House occasions. Tom
Prendiville, right, is the Bank's Commercial Loan Officer who services
the winery financial needs. The company accounts are maintained at the
Buellton Office.
In both Santa Barbara and Ventura Counties, we are responding to
intensified competition in the marketplace through a more aggressive
sales and business development stance. In tandem with that, we recognize
the need to stay abreast of technological changes in the financial
industry, adopting those technologies and products that best meet our
customers' needs. Our intention is to maintain our competitive edge in
the market area where we already excel, while seeking out and expanding
our customer base in other areas. To this end, we undertook a
restructuring of our offices in 1995 that resulted in an increased focus
on business development and greater operational efficiency without
sacrificing our goal of exceeding customer expectations in the delivery
of our products and services.
Groups of offices were reorganized by area, each one overseen by a
business development manager whose responsibility is to assist in
generating new business in that area. Sales goals set in mid-1995 for
both the calling program, which targets potential new customers, and for
referrals to other departments within the Bank were well exceeded by the
end of the year.
These efforts were greatly aided by the installation of a new wide-area
computer network which links communications and data processing among
all the offices. Employees can access data through more than 350
terminals in our bank-wide system, which also facilitates the opening of
new accounts with on-screen visuals, graphs and growth charts. A
customer/prospect database maintains up-to-date information on potential
customers and allows us to track and evaluate our calling and sales
efforts. Sophisticated market research based on customer-base
profitability models supports these sales efforts. Our product managers
are constantly researching the technology market for new applications
and products to enhance customer service and increase operating
efficiency.
In-laid text box reads: Reader polls conducted by Santa Barbara County's
two leading newspapers have consistently ranked SBB&T as the area's
"Best Bank."
While refining our efforts to maintain and improve customer service at
the office level, we are responding to customer desires for the
convenience of electronic transactions. Last year our ATM network
expanded to include new installations at the Camarillo and Solvang
factory outlet malls. The implementation of a new debit card program
allows customers to access their checking accounts at merchant
locations. In 1995, we completed the infrastructure that will support an
array of electronic banking functions, and this year we will be
exploring those areas further.
Photograph of two individuals with unbrellas outside of the Camrosa
Water District. Caption reads: Well water from the Camrosa Water
District is supplied to 26,000 domestic and agricultural users covering
30 square miles of the greater Camarillo area. Richard Hajas is the
District General Manager, and Jan Gibson is the Camarillo Office Manager
where the accounts are maintained.
At the foundation of these new initiatives is an emphasis on personal
customer service. We believe that the basis for our success in the face
of unprecedented competition is building and maintaining relationships
with our customers. From the first-time borrower to the sophisticated
investor, our approach continues to be customer-focused. Our employees
are committed to getting to know our customers, discovering their needs
and meeting those needs.
Photograph of woman and two miniature horses. Caption: Quicksilver Ranch
celebrates the arrival of the year's first foal. This day-old miniature
horse will soon be joined by many others destined for show rings
throughout the Western states or to become a gentle and affectionate pet
of new owners. Santa Ynez Valley ranch owners Aleck & Louise Stribling
receive financial services from our Solvang Office.
In 1995, we achieved the number one position in residential real estate
lending, we extended our financial service network into Ventura County,
and we consolidated our position as the leading independent bank in
Santa Barbara County. The Bank enjoys a clear dominance of the market in
this county, with a market share of 27% for retail deposits, twice that
of the next leading bank. Our strong capital position, our reputation
for exemplary service and the breadth of our product capabilities have
firmly positioned the Bank to examine further expansion possibilities.
Wells Fargo's acquisition of First Interstate Bank, and the resulting
closure of branch offices, may present further opportunities for
expansion within Ventura and Santa Barbara Counties. In the months
ahead, we will also be looking northward to communities that closely
match ours in terms of demographics and a need for banking services that
revolve around our core values of commitment to employee, customer,
community and shareholder. We expect that expansion will be gradual and
undertaken in partnership with other financial institutions that share
our institutional culture and values.
Business Banking: Positioned for Market Expansion
In market surveys conducted by the Bank last year, 44% of business
people named SBB&T as the bank with the best customer service. The same
surveys also indicated that there were opportunities to expand our
lending relationships to identified market segments in the business
community. As a result, our commercial lending group saw a
reconfiguration to better accommodate specific categories of customers.
A new Business Banking Division was formed to oversee the Bank's
commercial lending activities. As a corollary, a Community Banking
Division is being established to be of assistance to smaller and start-
up businesses.
Additions to staff and leadership in the Credit Administration and
Lending Divisions have added specific, long-term experience in the
business banking field. A Trade Finance Department was added to serve
the needs of companies conducting all or part of their business in other
countries. In addition to foreign currency exchange and letter of credit
facilities required for Trade Finance, other new products and services,
such as accounts receivable financing and PC-based cash management, have
rounded out our ability to offer exemplary customer service. The result
of these initiatives is a highly-refined focus on meeting the needs of
the business community.
In a move to enhance efficiency and flexibility, our Employee Benefits
Trust Group forged an alliance with the PlanMember Services Program.
This alliance, which includes a marketing and sales component, will
allow us to offer clients a wider choice of investments and services for
their IRA's and company retirement plans.
Our business development efforts are directed toward the retention of
existing relationships and the cultivation of new prospects. We are
constantly refining the focus of our prosect calling program to pursue
those market segments that represent the highest potential
opportunities.
In-laid text box reads: More businesses use SBB&T for their financial
needs than the next four banks combined.
The key elements are now in place for improving our penetration in the
lending markets we serve in 1996. Our goal is to aggressively seek the
opportunity to bid on every transaction. We are proud of our reputation
as the bank for business in the communities we serve.
Photograph of two individuals outside of the Santa Barbara Mission.
Caption reads: On that memorable morning of April 21, 1782, the site of
El Real Presidio de Santa Barbara was dedicated marking the founding of
the pueblo of Santa Barbara. Yet it was four years later that Presidio
workmen were reassigned to begin construction of the mission, one of a
chain of 21 missions to be constructed. Its dedication was on December
4, 1786. The Santa Barbara Mission we see today, the fourth to be
constructed on the site, is considered to be the "Queen of the Mission,"
and is the only California Mission operated by the Franciscan Order from
its conception to this very day. The Franciscan Friars' account is at
the Main Office.
Positioned For Growth In The Management Of Wealth
In 1995, the Trust & Investment Services Division instituted new and
streamlined procedures to increase efficiency and provide customers with
the broadest possible array of financial services. The division is the
largest on the Central Coast and is the only trust & investment division
in coastal California to offer full-service capabilities under one roof
between Los Angeles and San Francisco.
A dedicated Trust & Marketing Sales Department was established to
actively solicit new business through a variety of efforts, including
media campaigns, seminars, public presentations and on-going calling
efforts. Media advertising was designed to publicize the superior
investment performance and the capacities of our skilled portfolio
managers. Our accounts actively participated in the robust markets for
both stocks and bonds, and our staff continues to focus on fully
understanding the divergent objectives of our clients.
The start-up this year of a Retail Investment Services Group,
administered through the Trust & Investment Services Division, provides
for investment counseling and sales of mutual funds, annuities and asset
allocation models through all of the Bank's offices. By December, after
less than a year of operation, the new group was running at a break-even
pace, with profits expected in 1996.
Photograph of outdoor scene. Caption reads: The Ventura County Museum of
History and Art featured a two-month photo exhibit called "Isla de los
Vaqueros: the Ranching History of Santa Rosa Island" which was sponsored
by the Bank. The museum account is maintained at the Ventura Office.
Photograph of dancer. Caption reads: Santa Barbara, California's Fiesta
City, celebrated its first Old Spanish Days Fiesta in 1924. This annual
event of pageantry, mercados, street dances, parades, rodeos, and
feasting is the state's largest five-day event and beckons
visitors worldwide.
The organization is a longtime Main Office customer.
In 1995, the Trust Real Estate Management Group was awarded the
Accredited Management Organization designation by the Institute of Real
Estate Management, a distinction currently accorded to only one other
bank nationwide. The designation was based on criteria in the areas of
experience, integrity and fiscal responsibility. In the same year, the
real estate group applied for and received a corporate broker's license,
which will allow for greater flexibility in handling properties not held
in trust or in the Bank's name. We currently have the only trust
division in our market area capable of offering in-house property
management services.
An integral part of the Trust and Investment Services Division is a
trust tax capability. An improved and upgraded computer system
facilitates monthly updating of records and has resulted in our
continuing to produce the earliest returns of any area trust division.
The in-house availability of a trust tax capability, at a time when most
major banks are outsourcing this service, assures our clients of the
most comprehensive and individualized service possible.
In-laid text box reads: Our team of financial advisors is not positioned
to offer investment management services equal to or better than any
other provider.
The Private Clients Division formed last year, and administered under
the Trust & Investment Services Division, is staffed by experienced
officers who can facilitate multiple bank activities for their clients,
such as trust and investment management, as well as depository and
lending activities. The Private Clients Division combines those elements
that have served our commercial borrowers well for the past thirty years
with new iniatives and skills in the areas of investment and wealth
management. This division represents a continuation of our tradition of
superlative service to some of the Bank's most long-standing and valued
customers. Clients within this division receive highly personalized
service from our private client personnel, who ensure that SBB&T has the
opportunity to fulfill all of their banking needs.
SBB&T's reputation for stability and our long-term credibility within
the community provide the mainstay of our response to increasing
competition in the private client field. Our staff of private bankers,
with many years of cumulative experience in the Bank, successfully
combine business acumen and technology to provide more rapid decision
making and greater personalized service than the larger, regional banks.
While we have sought out and embraced new technologies that advance
efficiency and customer convenience, we believe that our success lies in
our truly legendary customer service delivered by exceptional employees.
In a marketplace increasingly dedicated to technology, customers will
see a clear differentiation in levels of service offered by the major
banks as opposed to independent banks such as SBB&T. Our reputation
throughout the state for legendary customer service, combined with our
breadth of products, including trust and investment services, real
estate and private banking, is a strong factor in our belief that we
will continue to grow our franchise.
Photograph of three individuals standing in lemon field. Caption reads:
(Top) Eighteen million pounds of lemons plus avocados, oranges,
grapefruit and kiwis are harvested annually on the Leavens Ranches which
total 1,200 acres. Paul and daughter Leslie meet with Vice President Lee
Draughton, a responsive Commercial Lending Officer, who is supported by
a lending philosophy to serve the agriculture industry. Accounts are
located at the Ventura Office.
Photograph of fire engine, two youngsters and a fire dog. Caption
reads:(Middle) "Sheriff's Day at the Ranch" is a fundraising event for
the Sheriff and Fire Departments which attract over 5,000 people. The
Bank sponsored the Children's Fire Theatre where youngsters learned fire
safety in the home and met Sparky the Fire Dog. The La Cumbre Office
maintains the account.
Photograph of two individuals working with a computer. Caption
reads:(Right) The Bank is a founding member of the newly formed Systems
& Software Consortium, Inc. which is composed of members from business,
academia, and government. Its purpose is to play a helpful supporting
role in the growth of a significant high technology industry in Ventura
and Santa Barbara Counties. Michael Ditmore, President and CEO
(standing) confers with Dr. Mark Schniepp, Director of the University of
California Santa Barbara Economic Forecast Project. The account
relationship is maintained at the Magnolia Office.
Photograph of Jonathan Winters. Caption reads: Jonathan Winters: Actor,
author, artist, makes weekly visits to the Montecito Village Office.
OFFICERS AND DIRECTORS
BOARD OF DIRECTORS
DONALD M. ANDERSON
Chairman of the Board-Bancorp
DAVID W. SPAINHOUR
Chairman of the Board - SBB&T
WILLIAM S. THOMAS, JR
President, Chief Exec. Officer
EDWARD E. BIRCH, Ph. D.
Exec. Vice President
College Advance. Westmont College
RICHARD M. DAVIS
Retired Div. Mgr., Gen. Tel.
ANTHONY GUNTERMANN
Certified Public Acct.
DALE E. HANST
Attorney at Law
HARRY B. POWELL
Retired Business Exec.
FRANK BARRANCO, M.D.
Retired
DANIEL B. TURNER
Director Emeritus
EXECUTIVE ADMINISTRATION
DONALD M. ANDERSON
Chairman of the Board-Bancorp
DAVID W. SPAINHOUR
Chairman of the Board - SBB&T
WILLIAM S. THOMAS, JR.
President, Chief Exec. Officer
DAVID A. ABTS
Exec. V.Pres., Ret. Bank./Support Svs.
JOHN J. McGRATH
Sr. Vice Pres., Chief Credit Officer
JAY D. SMITH
Sr. Vice Pres., Gen. Coun. & Corp. Sec.
KENT M. VINING
Sr. Vice Pres., Strat. Plan. Officer
DONALD LAFLER
Sr. Vice Pres., Chief Financial Officer
CATHERINE STEINKE
Sr. Vice Pres., Dir. of Human Res.
ADMINISTRATION
VICE PRESIDENTS
MICHAEL CONLEY
SHARON E. GREEN
JERRY HELTON
EDWIN C. HOLT
DEL HOOVER
MARK A. HUBERT
H. GEORGE KALLUSKY
CHRIS LEM
HAZEL MARCUS
MICHAEL MURPHY
CYNTHIA PLAHN
SHERRELL REEFER
DAVE RISTIG
JOYCE SPEZMAN-MARGOLIN
KIM TAUFER
AL TODD
GARY TURNER
RICH TURNER
ASST. VICE PRESIDENTS
TERRY BALL
BRAD BROWN
DEBRA CARTER
TERRY CAVAZOS
NICOLE DINKELACKER
RITA DUBOIS
KIM EVANS
MIKE FITZGIBBON
ROGER JANES
KERRY KELLEY
JANICE NICCUM KROEKEL
ROY MARTINEZ
SCOTT MATTHEW
CLARE MCGIVNEY
KEVIN QUIGLEY
MARGARET ROGERS
BRIAN ROSS
TERRY SLATON
MARK S. STANLEY
RALPH STROHBACH
MARY TREBBIN
OFFICERS
SHERRY BAKER
PHILIP BERRY
PATRICIA BOUCHER
DAVID BRIAN
DANI CARAM
MICHELLE DREXLER-HALL
NANCY DUNCAN
MARYLOU FAVELA
COSMO FEDELE
WENDY MIRBOD
MARCIA NIESSEN
JULIE PUGH
BRIAN ROSS
SHIRLEY SCALES
TERRI SLATON
CAROLYN SNYDER
JOE STRONKS
QUYEN URICK
CREDIT ADMINISTRATION
PERRY RITENOUR
Sr. Vice Pres., Cred. Admin.
VICE PRESIDENTS
PAUL MISTELE
LARRY PAPKIN
LOAN ADJUSTMENTS
SUSAN MARSHALL
Vice Pres.
IRENE TERRY
Asst. Vice Pres.
JULIA FOX
Officer
LOAN SERVICES
PAMELA J. GEREMIA
Vice Pres., Mgr.
ASST. VICE PRESIDENTS
BARBARA ALMEIDA
ANN M. MARKONIS
CHARLENE RAY
KAREN CLEMOW
OLGA MEDINA
Officer
ESCROW
PAMELA MARTIN
Asst. Vice Pres., Mgr.
OFFICERS
DIANE NORIAN
DIANE PALACIO
LENDING
STEPHEN J. MIHALIC
Sr. Vice Pres., Chief Lend. Of.
COMMERCIAL LENDING
VICE PRESIDENTS
GERALD O. COWAN
Sr. Vice President
LINDA CABLE
DONALD DUNCAN
MICHAEL FLOYD
MICHAEL R. KIRKWOOD
PHIL MORREALE
THOMAS PRENDIVILLE
BERNARD M. WITTKINS
JOHN H. WURZEL
COMMUNITY LENDING
WILLIAM ENHOLM
Vice Pres., Mgr.
REAL ESTATE INDUSTRIES
DONALD RAPP
Vice President
BRUCE I. WENNERSTROM
Sr. Vice President
REAL ESTATE
CHARLES BROWNING
Vice Pres., Mgr.
TERRY SWANN
Vice Pres.
ASST. VICE PRESIDENTS
JANICE BAXTER
CYNTHIA EYANSON
TERI GAUTHIER
ELIZABETH HEITMANN
ALICE MADRID
DONALD MCMAHON
THOMAS SLATER
CONSUMER LOANS
GERALD J. LUKIEWSKI
Vice Pres., Mgr.
ROBERT CURRY
Vice Pres.
DON ENDERBY
Asst. Vice President
DAWN MOORE
Officer
PRIVATE CLIENT GROUP
JOHN F. MURPHY
Sr. Vice President, Mgr.
RICHARD B. WELCH
Sr. Vice President
VICE PRESIDENTS
ROY GASKIN
GARY HARRIS
TRUST & INVESTMENTS
DONALD E. BARRY
Sr. Vice Pres., Trust & Inv. Mgr.
JOHN ZIEGLER
Sr. Vice President
VICE PRESIDENTS
JOHN BRINKER
JEAN BUBRISKI
CHRIS COLBERT
ANTHONY FIELDHOUSE
WILLIAM HOPKINS
BARRY HUNTER
JANICE JOHNSON
WENDY PENKE
PAULETTE POSCH
KATHERINE SCHOMER
ALICE SYKES
FRANK TABAR
JIM WILLIAMS
ASST. VICE PRESIDENTS
KAREN BAILEY-SHIFFMAN
DAVID COVELL
NICKIE FURNIER CRANDALL
MIKE KELLY
JUDITH MILAM
MICHAEL MORGAN
BARBARA PETRONIS
SALLY SYLVIA
OFFICERS
WARREN BITTERS
MILTON BURTON
TEREASE CANN
JEANINE KARCZEWSKI
CATHERINE MOAKLEY
ROBERT RAMIREZ
RETAIL BANKING
ALFRED J. ROTELLA
Vice Pres., Mgr.
OUR GANG SERVICES
PAMELA HOLST
Vice Pres., Mgr.
FRANCES JIMENEZ
Asst. Vice President
MARJORIE KOCHER
Officer
SANTA BARBARA AREA
JOANNE FUNARI
Vice President
Area Business Dev. Mgr.
MAIN OFFICE
LISA DANIEL
Vice Pres., Mgr.
EMMA TORRES
Vice Pres.
ASST. VICE PRESIDENTS
SANDRA COCKLIN
LORETTA GARDNER
OFFICERS
KELLY SILVA
TRACY TALBOT
MOONSOOK WATERS
COTTAGE OFFICE
DORIS WENGLER
Asst. Vice President, Mgr.
MARGIE FAIRGRAY
Officer
MESA OFFICE
THOMAS TURNER
Asst. Vice President, Mgr.
OFFICERS
VICTORIA WILLIAMS
MICHAEL DOMINGUEZ
SAN ROQUE OFFICE
MARY YOST
Asst. Vice President, Mgr.
OFFICERS
LISA VARGAS
JENNIFER WELCH
GOLETA AREA
LYNNETTE DAVIS
Vice President
Area Business Dev. Mgr.
GOLETA/FAIRVIEW
OFFICE
LISA HERNANDEZ
Vice Pres., Mgr.
CAROL THOMAS
Vice President
MARY LOUISE LISCOMBE
Officer
LA CUMBRE OFFICE
LISA NEWBERRY
Asst. Vice Pres., Mgr.
OFFICERS
DAVID HALL
DIANNE NOCKEY
MAGNOLIA OFFICE
SCOTT HANSEN
Asst. Vice President, Mgr.
OFFICERS
JUSTIN LENGNER
MARTHA MERA
MONTECITO
CARPINTERIA AREA
ANGELA KRABLIN
Vice President
Area Business Dev. Mgr.
MONTECITO OFFICE
OFFICERS
DEBBIE JIMENEZ
JAMES VOPELAK
CARPINTERIA OFFICE
CHRISTINE DEVRIES
Asst. Vice President, Mgr.
OFFICERS
CHRISTOPHER O'CONNOR
THOMAS WHITTAKER
MONTECITO VILLAGE
OFFICE
LINDA COWAN
Vice President, Manager
OFFICERS
ROSEMARY BERTKA
DEBORAH WILSON
SANTA YNEZ AREA
CHUCK PIRA
Vice President
Area Business Dev. Mgr.
SOLVANG OFFICE
OFFICERS
SHIRLEY BROWN
CHERYL REYNOLDS
PEGGY CHAMBLIN
BUELLTON OFFICE
SUSAN JENSEN
Officer
VENTURA AREA
SUZANNE CHADWICK
Vice President
Area Business Dev. Mgr.
VENTURA OFFICE
ELIZABETH SEITZ
Asst. Vice President, Mgr.
LEE DRAUGHON
Vice President, Loan Officer
KIM FERTIG
Vice President, Loan Officer
JUDY FRAZIER
Vice Pres., Trust Admin.
KENNETH HELMS
Asst. Vice President
DONNA DE LOS SANTOS
Officer
OXNARD OFFICE
KIMBERLEY GIBAS
Asst. Vice President, Mgr.
OFFICERS
ROSEMARY COLBERN
DANIELLE NAVAS
CAMARILLO OFFICE
JANICE GIBSON
Asst. Vice President, Mgr.
OFFICERS
SHARIE QUARRY
AMY WHITNEY
Santa Barbara Bancorp
and Subsidiaries
HISTORICAL SUMMARY (unaudited)
Balance Sheets (as of December 31): 1995 1994 1993 1992 1991 1990 1989
Assets:
Cash and due from banks $ 74,746 $ 69,630 $ 50,946 $ 44,059 $ 44,987 $ 29,233 $ 46,941
Federal funds sold 65,000 15,000 -- -- 20,000 25,000 40,000
Securities 357,565 386,959 383,518 387,670 323,585 235,119 149,031
Bankers' acceptances
and commercial paper 139,294 80,594 63,614 35,300 -- -- 19,883
Net loans 546,452 486,520 454,163 467,862 491,529 531,962 445,475
Premises and equipment, net 8,149 7,391 6,657 5,111 7,598 6,036 6,874
Other assets 21,155 21,522 20,245 21,237 19,483 16,495 13,774
Total assets $ 1,212,361 $ 1,067,616 $ 979,143 $ 961,239 $ 907,182 $ 843,845 $ 721,978
Liabilities and shareholders' equity:
Demand deposits $ 158,122 $ 147,085 $ 114,557 $ 116,342 $ 107,068 $ 99,806 $ 107,677
Time and savings deposits 895,898 809,632 751,696 733,033 693,554 646,613 527,661
Total deposits 1,054,020 956,717 866,253 849,375 800,622 746,419 635,338
Securities sold under
agreements to repurchase
and Federal funds purchased 51,316 9,487 20,155 25,983 30,046 27,092 26,228
Other liabilities 6,028 7,452 6,744 8,736 9,299 12,077 7,039
Shareholders' equity 100,997 93,960 85,991 77,145 67,215 58,257 53,373
Total liabilities and shareholders' equity $ 1,212,361 $ 1,067,616 $ 979,143 $ 961,239 $ 907,182 $ 843,845 $ 721,978
Statements of Income
(for the years ended December 31):
Operating revenue $ 103,888 $ 87,984 $ 82,535 $ 85,978 $ 91,335 $ 90,268 $ 78,698
Operating expense (1) 89,488 70,515 65,848 69,968 76,803 76,224 65,656
Income before taxes 14,400 17,469 16,687 16,010 14,532 14,044 13,042
Applicable income taxes (1) 3,985 4,518 3,757 4,310 3,824 3,740 3,392
Net income $ 10,415 $ 12,951 $ 12,930 $ 11,700 $ 10,708 $ 10,304 $ 9,650
Per share data (adjusted
for stock dividends and splits):
Average shares outstanding 7,672 7,647 7,783 7,773 7,797 7,780 7,894
Net income $ 1.36 $ 1.69 $ 1.66 $ 1.51 $ 1.37 $ 1.32 $ 1.22
Cash dividends declared $ 0.55 $ 0.52 $ 0.47 $ 0.38 $ 0.31 $ 0.18 $ 0.17
Other statistics:
Stock dividends declared - - - - 5% 2x5% -
Stock splits declared 3 FOR 2 - - - - - 4 FOR 3
Trust assets under administration
(market value) $ 1,393,737 $ 1,188,748 $ 1,165,522 $ 926,233 $ 853,428 $ 722,862 $ 700,948
(1) For the year 1992, operating expense includes the cumulative effect of the accounting change and provision
for income tax includes the tax effect of the change. For the year 1993, provision for income tax includes
the tax effect of the change in accounting principle for that year.
Santa Barbara Bancorp
and Subsidiaries
HISTORICAL SUMMARY (unaudited)
Balance Sheets (as of December 31): 1988 1987 1985 1980 1975 1970 1965
Assets:
Cash and due from banks $ 48,273 $ 23,684 $ 24,485 $ 12,357 $ 21,755 $ 5,253 $ 1,766
Federal funds sold 30,000 15,000 23,600 3,425 1,100 700 --
Securities 171,419 143,714 137,369 64,299 33,327 11,935 6,701
Bankers' acceptances
and commercial paper 29,200 24,729 19,619 4,934 -- -- --
Net loans 344,051 277,054 206,563 103,580 39,544 21,134 12,854
Premises and equipment, net 5,248 6,210 5,326 4,590 1,936 718 194
Other assets 7,376 7,348 6,308 3,307 1,339 373 164
Total assets $ 635,567 $ 497,739 $ 423,270 $ 196,492 $ 99,001 $ 40,113 $ 21,679
Liabilities and shareholders' equity:
Demand deposits $ 96,866 $ 84,658 $ 82,060 $ 64,405 $ 39,134 $ 16,867 $ 8,370
Time and savings deposits 470,074 357,281 292,404 109,798 50,085 20,188 11,000
Total deposits 566,940 441,939 374,464 174,203 89,219 37,055 19,370
Securities sold under
agreements to repurchase
and Federal funds purchased 15,924 11,115 15,875 4,723 3,750 -- --
Other liabilities 7,213 8,391 6,994 3,202 1,211 394 394
Shareholders' equity 45,490 36,294 25,937 14,364 4,821 2,664 1,915
Total liabilities and shareholders' equity $ 635,567 $ 497,739 $ 423,270 $ 196,492 $ 99,001 $ 40,113 $ 21,679
Statements of Income
(for the years ended December 31):
Operating revenue $ 60,444 $ 51,706 $ 45,524 $ 21,870 $ 7,054 $ 3,067 $ 1,203
Operating expense (1) 49,953 44,038 41,703 18,375 5,983 2,424 1,075
Income before taxes 10,491 7,668 3,821 3,495 1,071 643 128
Applicable income taxes (1) 2,410 1,173 (43) 1,183 286 331 30
Net income $ 8,081 $ 6,495 $ 3,864 $ 2,312 $ 785 $ 312 $ 98
Per share data (adjusted
for stock dividends and splits):
Average shares outstanding 7,899 7,671 7,489 7,113 6,001 6,012 6,012
Net income $ 1.02 $ 0.85 $ 0.52 $ 0.33 $ 0.13 $ 0.05 $ 0.02
Cash dividends declared $ 0.13 $ 0.11 $ 0.08 $ 0.05 $ 0.03 $ 0.01 $ 0.00
Other statistics:
Stock dividends declared 12% -- 5% 15% 8% 5% 5%
Stock splits declared -- -- 5 FOR 4 -- -- -- --
Trust assets under administration
(market value) $ 616,948 $ 600,817 $ 315,961 $ 112,696 $ 46,265 $ 25,477 $ 5,548
(1) For the year 1992, operating expense includes the cumulative effect of the accounting change and provision
for income tax includes the tax effect of the change. For the year 1993, provision for income tax includes
the tax effect of the change in accounting principle for that year.
Santa Barbara Bancorp and Subsidiaries
1995 FINANCIAL STATEMENTS AND INFORMATION
Table of Contents Page
Management's Resposibility for Financial Reporting 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Report of Independent Public Accountants 38
Consolidated Balance Sheets 39
Consolidated Statements of Income 40
Consolidated Statements of Changes in
Shareholders' Equity 41
Consolidated Statements of Cash Flows 42
Notes to Consolidated Financial Statements 43
Selected Annual and Quarterly Financial Data 58
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The Management of Santa Barbara Bancorp is responsible for the
preparation, integrity, and fair presentation of the Company's annual
financial statements and related financial data contained in this
report. With the exception that some of the information in Management's
Discussion and Analysis of Financial Condition and Results of Operations
is presented on a tax-equivalent basis to improve comparability, all
information has been prepared in accordance with generally accepted
accounting principles and, as such, includes certain amounts that are
based on Management's best estimates and judgments.
The consolidated financial statements presented on pages 38 through 41
have been audited by Arthur Andersen LLP, who have been given
unrestricted access to all financial records and related data, including
minutes of all meetings of shareholders, the Board of Directors, and
committees of the Board. Management believes that all representations
made to Arthur Andersen LLP during the audit were valid and appropriate.
Management is responsible for establishing and maintaining an internal
control structure over financial reporting. Two of the objectives of
this internal control structure are to provide reasonable assurance to
Management and the Board of Directors that transactions are properly
authorized and recorded in our financial records, and that the
preparation of the Company's financial statements and other financial
reporting is done in accordance with generally accepted accounting
principles.
Management has made its own assessment of the effectiveness of the
Company's internal control structure over financial reporting as of
December 31, 1995, in relation to the criteria described in the report,
Internal Control--Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
There are inherent limitations in the effectiveness of any internal
control structure, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective
internal control structure can provide only reasonable assurance with
respect to reliability of financial statements. Furthermore, the
effectiveness of any internal control structure can vary with changes in
circumstances. Nonetheless, based on its assessment, Management believes
that as of December 31, 1995, Santa Barbara Bancorp's internal control
structure was effective in achieving the objectives stated above.
The Board of Directors is responsible for reviewing and monitoring the
policies and practices employed by Management in preparing the Company's
financial reporting. This is accomplished through its Audit Committee,
which is comprised of directors who are not officers or employees of the
Company. The Committee reviews accounting policies, control procedures,
internal and independent audit reports, and regulatory examination
reports with Management, the Company's internal auditors, and
representatives of Arthur Andersen LLP. Both the Company's internal
auditors and the representatives of Arthur Andersen LLP have full and
free access to the Committee to discuss any issues which arise out of
their examinations without Management present.
signature
David W. Spainhour
President and
Chief Executive Officer
Santa Barbara Bancorp
signature
William S. Thomas, Jr.
President and
Chief Executive Officer
Santa Barbara Bank & Trust
signature
Donald Lafler
Senior Vice President and
Chief Financial Officer
Santa Barbara Bancorp and
Santa Barbara Bank & Trust
Santa Barbara Bancorp and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview of the Earnings, Financial Condition, and Business of the
Company
Summary Results
Total assets, loans, deposits and equity of Santa Barbara Bancorp all
grew in 1995, both in terms of their average balances for the year and
from period end to period end. This growth occurred in part due to the
Company's expansion into adjacent Ventura County, where three new branch
offices were opened. However, net income decreased compared to the prior
year for the first time in 30 years. Among the reasons for the decrease
are the additional expenses incurred to open the new offices, a higher
than expected level of losses resulting from the tax refund anticipation
loan ("RAL") program, increased provisioning for potential loan losses
on several large credits, and a higher cost of funds. Each of these is
explained in more detail below in the relevant section of this
discussion.
As economic recovery continued to be elusive, the inability of some
borrowers to repay loans according to their contractual terms has
increased the amount of non-performing assets compared to the amount at
the end of 1994. However, they still represented less than eight tenths
of one percent of total assets. This is less than the average for peer
banks (Note A).
Business of the Company
Santa Barbara Bancorp (the "Bancorp") is a California bank holding
company incorporated in 1982 that is headquartered in the city of Santa
Barbara. The Bancorp on its own has a few operations, but these are very
insignificant in comparison to those of its major subsidiary, Santa
Barbara Bank & Trust (the "Bank"). Unless otherwise stated, "Company"
refers to the consolidated entity and to the Bank when the context
indicates. "Bancorp" refers to the parent company only.
The Bank first opened for business in March, 1960, as Santa Barbara
National Bank, and became a state-chartered bank in May, 1979, changing
its name to Santa Barbara Bank & Trust. The Bank operates ten banking
offices along the southern Santa Barbara County coastline, two offices
in the county's central Santa Ynez Valley, and three offices in adjacent
Ventura County: one in Camarillo, one in Oxnard, and one in the City of
Ventura. A full range of banking services are offered to households,
professionals, and small to medium size businesses.
The Bancorp's other operating subsidiary, SBBT Service Corporation (the
"ServiceCorp"), provides correspondent bank services, such as check
processing to other financial institutions throughout the Central Coast
of California.
The remainder of this discussion is to assist readers of the
accompanying financial statements by providing information on the
environment in which the Company operates, the risks for a financial
institution in this environment, the strategies adopted by the Company
to address these risks, and the results of these strategies. Each of
these elements will be addressed as they relate to the major asset and
liability components of the Company's balance sheets, and the major
income and expense categories of the Company's statements of income and
to significant changes therein. Lastly, it is intended to provide
insight into Management's assessment of the operating trends over the
last several years and its expectations for 1996.
External Factors Impacting the Company
The major external factors impacting the Company include economic
conditions, regulatory considerations, and trends in the banking and
financial services industries.
Economic Conditions
From a national perspective, the most significant economic factors
impacting the Company in the last three years have been the actions of
the Federal Reserve Board ("the Fed") to raise or lower short-term
interest rates to manage the pace of growth in the economy--raising
rates to slow the pace and forestall inflation, lowering rates to spur
growth and avoid recession. These changes impact the Company as market
rates for loans, investments and deposits respond to the Fed's actions.
The local economy appears to be experiencing some recovery. New
companies are establishing their headquarters in the area. While heavy
rains in early 1995 caused extensive damage in the Company's market
area, reservoirs are filled and the severe drought of the last several
years is over. This positively impacts tourism which has long been
important to the communities in the Company's market area and has
brought an end to water hookup moratoria which slowed housing growth.
The local governments have generally been perceived to be inclined
towards environmentalism and slow-growth. However, at both the state and
local levels more attention is now being paid to the need to create a
supportive business climate in order to maintain a healthy, sustainable
economy.
Regulatory Considerations
The Company is impacted by changes in the regulatory environment. As a
state-chartered commercial bank, the Bank is regulated by the California
State Department of Banking. The Bancorp, as a bank holding company, the
Bank, as a member of the Federal Reserve Bank (the "FRB"), and the
ServiceCorp, as a non-bank subsidiary of a bank holding company, are all
regulated by the FRB. The Bank became a member of the Federal Reserve
System in 1995 to simplify regulatory issues. Prior to becoming a
member, the Bank's primary Federal regulator was the FDIC.
Changes in regulation impact the Company in different ways. The FRB
requires that the Company maintain cash reserves with it equal to a
percentage of the Company's transaction deposits. The FRB may increase
or decrease the percentage of deposits that must be held at the FRB to
impact the amount of funds available to commercial banks to lend to
their customers as a means of stimulating or slowing economic activity.
The Company is also impacted by minimum capital requirements. These
rules are discussed below in the section entitled "Capital Adequacy."
A third recent regulatory change impacting the Company is the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") which
became effective in 1992. Among the changes this legislation has brought
to the banking industry are new requirements relating to the audit
committees of Boards of Directors, to internal controls over financial
reporting, and to the measurement and management of interest rate risk.
The actions which the various banking agencies can take with respect to
financial institutions which fail to maintain adequate capital and
comply with other requirements of the act are discussed below in the
section titled "Regulation."
Trends in the Banking and Financial Services Industries
Among the major trends within the banking and financial services
industry over the last several years has been the continuing
consolidation through mergers and seizures. 1995 saw a continuation of
this trend as a number of large mergers and takeovers were announced
across the country. In the Company's market area, the acquisition of the
largest community bank in Ventura County, Bank of A. Levy, was completed
by First Interstate Bancorp, which was itself later in the year to
become the target of a hostile acquisition by Wells Fargo. This process
of consolidation is expected to continue, and Management expects that,
as in the past, it will provide the opportunity for the Company to gain
both "in-market" market share from customers not satisfied with the new
institution chosen for them and the opportunity for expansion into new
geographic markets.
Banks once had an almost exclusive franchise for deposit products and
provided the majority of business financing. With deregulation in the
1980's, other kinds of financial institutions began to offer competing
products. Also, increased competition in consumer financial products has
come from companies not typically associated with the banking and
financial services industry such as AT&T and General Motors. Community
banks, including the Company, are working to offset this trend by
developing new products that capitalize on the service quality that a
local institution can offer. Among these are new residential loan
products and programs for the sale of mutual funds and annuities to
retail customers through the Company's Trust & Investment Services
Division.
Risk Management
The Company sees the process of addressing the potential impacts of
these external factors as part of its management of risk. In addition to
common business risks such as disasters, theft, and loss of market
share, the Company is subject to special types of risk due to the nature
of its business. New and sophisticated financial products are
continually appearing with different types of risk which need to be
defined. Also, the risks associated with existing products must
periodically be reassessed. The Company cannot operate risk-free and
make a profit. Instead, the process of risk definition and reassessment
allows the Company to select the level of risk and the corresponding
level of reward that is appropriate to the current economic conditions.
The special risks related to financial products are credit risk, market
risk, mismatch risk, and basis risk. Credit risk is discussed in the
sections related to loans. The nature of each of the other risks will be
explained in the next secion. The effective management of these risks is
the backbone of the Company's business strategy.
NET INTEREST MARGIN AND CHANGES IN THE RELATIVE PROPORTIONS OF ASSETS
AND LIABILITIES
The Company earns income from two sources. The primary source is through
the management of its financial assets and liabilities and the second is
by charging fees for services provided. The first involves functioning
as a financial intermediary. The Company takes in funds from depositors
or other creditors and then either loans the funds to borrowers or
invests those funds in securities or other financial instruments. Fee
income is discussed in other sections of this analysis.
Net interest income is the difference between the interest income and
fees earned on loans and investments and the interest expense paid on
deposits and other liabilities. The amount by which interest income will
exceed interest expense depends on two factors: the volume of earning
assets compared to the volume of interest bearing deposits and
liabilities, and the interest rate earned on those interest earning
assets compared with the interest rate paid on those interest bearing
deposits and liabilities.
Net interest margin is net interest income expressed as a percentage of
earning assets. To maintain its net interest margin, the Company must
manage the relationship between interest earned and paid, and that
relationship is subject to the following types of risks that are related
to changes in interest rates.
Market Risk Relating to Fixed Rate Instruments
The market values of assets or liabilities on which the interest rate is
fixed will increase or decrease with changes in market interest rates.
If the Company invests funds in a fixed-rate long-term security and then
interest rates rise, the security is worth less than a comparable
security just issued because the older security pays less interest than
the newly issued security. If the older security had to be sold, the
Company would have to recognize a loss. Correspondingly, if interest
rates decline after a fixed rate security is purchased, its value
increases. Therefore, while the value changes regardless of which
direction interest rates move, the adverse exposure to "market risk" is
primarily due to rising interest rates. This exposure is lessened by
managing the amount of fixed rate assets and by keeping maturities
relatively short. However, these steps must be balanced against the need
for adequate interest income because variable rate and shorter term
fixed rate securities generally earn less interest than longer term
fixed rate securities.
Note 14 to the financial statements discloses the carrying amounts and
fair values of the Company's financial assets and liabilities as of the
end of 1995 and 1994. Other than a relatively small difference due to
credit quality issues pertaining to loans, the difference between the
carrying amount and the fair value is a measure of how much more or less
valuable the Company's financial instruments are to it than when
acquired. The excess of fair values over carrying amounts at the end of
1995 is $20.7 million compared with a deficit of $7.8 million at the end
of 1994. Most of this $28.5 million relative appreciation is related to
securities as shown in Note 2 to the financial statements. The Company
has a large portfolio of municipal securities. These longer term notes
had unrealized gains of $15.9 million at the end of 1995, having
increased in value with the steady decline in interest rates during the
latter half of 1995, compared to unrealized gains of only $8.3 million
at December 31, 1994. Also shown in Note 2, the U.S. Treasury and agency
securities in the held-to-maturity portfolio had net unrealized gains of
$1.6 million at December 31, 1995 as compared to net unrealized losses
of $13.1 million at December 31, 1994.
There is market risk relating to the Company's fixed-rate or term
liabilities as well as its assets. For liabilities, the adverse exposure
to market risk is to lower rates because the Company must continue to
pay the higher rate until the end of the term of the certificate.
However, because the amount of fixed rate liabilities is significantly
less than the fixed rate assets, and because the average maturity is
substantially less than for the assets, the market risk is not as great.
The difference between the carrying amount and the fair value in the
table in Note 14 shows the impact of declining rates on the term
deposits. They are worth $3.5 million more to customers at December 31,
1995 than they were when issued because they are paying higher than
current market rates. However, this is much less than the $20.7 million
by which the Company's assets are worth more to it than when acquired
because they too are paying higher rates than are currently available
for comparable assets.
Mismatch Risk
The second interest-related risk arises from the fact that when interest
rates change, the changes do not occur equally in the rates of interest
earned and paid because of differences in the contractual terms of the
assets and liabilities held. The Company has a large portion of its loan
portfolio tied to its base lending rate. If the base lending rate is
lowered because of general market conditions, e.g., other banks are
lowering their lending rates, these loans will be repriced. If the
Company were at the same time to have a large proportion of its deposits
in long-term fixed rate certificates, net interest income would decrease
immediately. Interest earned on loans would decline while interest
expense would remain at higher levels for a period of time because of
the higher rate still being paid on the deposits.
TABLE 1--Interest Rate Sensitivity
As of December 31, 1995
(in thousands)
After three After six After one Noninterest
Within months months year but bearing or
three but within but within within After five nonrepricing
months six months one year five years years items Total
Assets:
Loans (Note F) $ 313,798 $ 99,523 $ 31,564 $ 61,661 $ 43,524 $ 8,731 $ 558,801
Cash and due from banks -- -- -- -- -- 74,746 74,746
Federal funds sold 65,000 -- -- -- -- -- 65,000
Securities: -- -- -- -- -- --
Held-to-maturity 10,944 -- 21,470 151,560 47,756 -- 231,730
Available-for-sale 30,009 15,035 10,128 70,175 -- 488 125,835
Bankers' acceptances 129,476 9,818 -- -- -- -- 139,294
Other assets (Note E) -- -- -- -- -- 16,955 16,955
Total assets 549,227 124,376 63,162 283,396 91,280 100,920 $ 1,212,361
Liabilities and
shareholders' equity:
Borrowed funds:
Repurchase agreements
and Federal funds
purchased 51,316 -- -- -- -- -- $ 51,316
Other borrowings 1,000 -- -- -- -- 210 1,210
Interest-bearing deposits -- -- -- -- -- --
Savings and interest- -- -- -- -- -- --
bearing transaction
accounts 414,376 -- 254,973 -- -- -- 669,349
Time deposits 75,263 44,394 45,541 60,990 361 -- 226,549
Demand deposits -- -- -- -- -- 158,122 158,122
Other liabilities -- -- -- -- -- 4,818 4,818
Net shareholders' equity -- -- -- -- -- 100,997 100,997
Total liabilities and
shareholders' equity 541,955 44,394 300,514 60,990 361 264,147 $ 1,212,361
Interest rate-
sensitivity gap $ 7,272 $ 79,982 $ (237,352) $ 222,406 $ 90,919 $ (163,227)
Gap as a percentage of
total assets 0.60% 6.60% (19.58%) 18.34% 7.50% (13.46%)
Cumulative interest
rate-sensitivity gap $ 7,272 $ 87,254 $ (150,098) $ 72,308 $ 163,227
Cumulative gap as a per-
centage of total assets 0.60% 7.20% (12.38%) 5.96% 13.46%
A decrease in net interest income could also occur with rising interest
rates if the Company had a large portfolio of fixed rate loans and
securities funded by deposit accounts on which the rate is steadily
rising. This exposure to "mismatch risk" is managed by matching the
maturities and repricing opportunities of assets and liabilities. This
is done by varying the terms and conditions of the products that are
offered to depositors and borrowers. For example, if many depositors
want longer-term certificates while most borrowers are requesting loans
with floating interest rates, the Company will adjust the interest rates
on the certificates and loans to try to match up demand. The Company can
then partially fill in mismatches by purchasing securities with the
appropriate maturity or repricing characteristics.
One of the means of monitoring this matching process is by use of a
table like Table 1, titled "Interest Rate Sensitivity." The table shows
the extent to which the maturities or repricing opportunities of the
major categories of assets and liabilities are matched. This table is
sometimes called a "gap" report, because it shows the gap between assets
and liabilities repricing or maturing in each of a number of periods.
The gap is stated in both dollars and as a percent of total assets. The
Company's target is to have a gap as a percentage of total assets of no
more than 10% plus or minus in any of the three periods within one year,
with the emphasis on the first two periods.
The first measuring period shown in the table covers assets and
liabilities that mature or reprice within the three months following
December 31, 1995. This is the most critical period because there is
little time to correct a mismatch that is having an adverse impact on
income. For example, if the Company had a significant positive gap--
assets significantly exceeded liabilities--and interest rates dropped
suddenly, the Company would have to wait for more than three months
before enough deposits could be repriced to offset the lower earnings on
the assets.
As of year-end 1995, the Company had a very small positive gap in this
first period. Assets exceeded liabilities by 0.60% of total assets, well
within the target range of 10%. There is some arbitrariness in the
assignment of deposit accounts that reprice at the option of the Company
to specific time periods. For the purposes of this table, the Company
has made the assumption that some of the money market accounts will
reprice within three months, but this will be governed by market
conditions rather than contractual terms.
In the next period, after three months but within six months, there is
also an excess of assets over liabilities, but again the mismatch is
within the target range of the Company.
For the third period, after six months but within one year, liabilities
substantially exceed assets. However, this excess is also due to some
assumptions the Company makes with respect to its deposits. NOW
accounts, money market accounts, and passbook savings accounts may be
repriced at any time, and thus by their contractual terms would
ordinarily be placed in the first period--within three months. However,
depositors do not expect the rate on these accounts to change with each
slight movement of market interest rates, so Management does not
normally expect to reprice these accounts more often than every six
months to a year. These accounts are therefore placed in the third
period--after six months but within one year. In practice, however, if
interest rates were to rise or fall precipitously, these accounts would
be repriced as often as necessary to protect the net interest margin
while remaining competitive in the market place. Management is therefore
not taking any specific steps to lessen the gap for this period, other
than reviewing the assumptions about repricing frequency on a continuing
basis in light of current market conditions.
If these accounts were placed in the first period, the gap for this
third period would be slightly positive and the gap for the first period
would be about negative 19%, outside the target range for the period.
This presentation would show the Company benefiting in the short term by
falling rates more than is likely to be the case because there are
practical limits to how much and how frequently interest rates can be
dropped on deposit accounts even if the Company is permitted to do so.
The cumulative dollar gap and cumulative gap as a percentage of total
assets is also shown in the table. It is important to take note of the
cumulative gap amounts if they are additive or magnify the gaps for the
individual period. Because cumulative gaps through the third period are
offsetting, no additional considerations apply than explained above for
the individual periods.
The periods of over one year are the least critical because more steps
can be taken to mitigate the adverse effects of any interest rate
changes. The Company does attempt to loosely match its long-term
municipal bond holdings with long-term IRA certificates of deposit.
However, much of the rest of the assets in this category are highly
liquid U.S. Treasury notes. As part of the Liquidity Portfolio as
explained in "Securities" below, these would be sold if interest rates
rise in order to achieve a repricing.
Basis Risk
The third interest-related risk arises from the fact that interest rates
rarely change in a parallel or equal manner. The interest rates
associated with the various assets and liabilities differ in how often
they change, the extent to which they change, and whether they change
sooner or later than other interest rates. For example, while the
repricing of a specific asset and a specific liability may fall in the
same period of the gap report, the interest rate on the liability may
rise one percent in response to rising market rates while the asset
increases only one-half percent. While evenly matched in the gap report,
the Company would suffer a decrease in net interest income. This
exposure to "basis risk" is the type of interest risk least able to be
managed, but is also the least dramatic. Avoiding concentration in only
a few types of assets or liabilities is the best insurance that the
average interest received and paid will move in tandem, because the
wider diversification means that many different rates, each with their
own volatility characteristics, will come into play.
Net Interest Income and Net Economic Value Simulations
A gap report can show mismatches in the maturities and repricing
opportunities of assets and liabilities, but has limited usefulness in
measuring or managing market risk and basis risk. To assess the extent
of these risks in both its current position and the potential results of
positions it might take in the future, the Company uses a computer model
to simulate the impact of different interest rate scenarios on net
interest income and on net economic value. Net economic value or the
market value of portfolio equity is defined as the difference between
the market value of financial assets and liabilities. These hypothetical
scenarios include both sudden and gradual interest rate changes, and
changes in both directions.
TABLE 2--Distribution of Average Assets, Liabilities, and Shareholders' Equity and Related Interest Income,
Expense, and Rates (Taxable equivalent basis - Notes B and E)
(amounts in thousands) 1995 1994 1993
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Loans (Note C):
Commercial $ 152,149 $16,055 10.55% $ 169,001 $16,472 9.75% $181,813 $15,725 8.65%
Real estate 306,288 26,226 8.56 230,607 19,138 8.30 206,504 18,803 9.11
Consumer 77,381 10,692 13.82 78,997 11,603 14.69 83,153 8,905 10.71
Total loans 535,818 52,973 9.89 478,605 47,213 9.86 471,470 43,433 9.21
Securities:
Taxable 290,950 16,127 5.54 350,849 18,580 5.30 300,645 17,074 5.68
Non-taxable 85,162 10,562 12.40 83,711 11,114 13.28 76,723 10,490 13.67
Equity 238 14 6.00 - - - - - -
Total securities 376,350 26,703 7.10 434,560 29,694 6.83 377,368 27,564 7.30
Money market instruments:
Bankers' acceptances 54,367 3,294 6.06 31,282 1,500 4.80 22,662 760 3.35
Federal funds sold 53,695 3,131 5.83 16,709 772 4.62 26,881 795 2.96
Total money market
instruments 108,062 6,425 5.95 47,991 2,272 4.73 49,543 1,555 3.14
Total earning assets 1,020,230 86,101 8.44% 961,156 79,179 8.24% 898,381 72,552 8.08%
Non-earning assets 59,998 58,313 64,109
Total assets $1,080,228 $1,019,469 $962,490
Liabilities and shareholders' equity:
Borrowed funds:
Repurchase agreements and
Federal funds purchased $ 26,801 1,474 5.50% $ 23,632 878 3.72% $ 24,952 728 2.92%
Other borrowings 1,450 74 5.10 2,314 81 3.50 2,586 68 2.63
Total borrowed funds 28,251 1,548 5.48 25,946 959 3.70 27,538 796 2.89
Interest bearing deposits:
Savings and interest bearing
transaction accounts 602,661 20,559 3.41 562,049 14,714 2.62 505,085 11,493 2.28
Time deposits 212,056 11,476 5.41 214,860 9,294 4.33 240,080 10,073 4.20
Total interest bearing
deposits 814,717 32,035 3.93 776,909 24,008 3.09 745,165 21,566 2.89
Total interest bearing
liabilities 842,968 33,583 3.98% 802,855 24,967 3.11% 772,703 22,362 2.89%
Demand deposits 132,095 119,578 100,384
Other liabilities 6,892 6,662 5,572
Net shareholders' equity 98,273 90,374 83,831
Total liabilities and
shareholders' equity $1,080,228 $1,019,469 $962,490
Interest income/earning assets 8.44% 8.24% 8.08%
Interest expense/earning assets 3.29 2.60 2.49
Net interest margin 52,518 5.15 54,212 5.64 50,190 5.59
Provision for loan losses
charged to operations/earning assets 9,924 0.97 6,257 0.65 6,150 0.68
Net interest margin after provision
for loan losses on tax equivalent basis 42,594 4.18% 47,955 4.99% 44,040 4.91%
Less: taxable equivalent income
included in interest income from
non-taxable securities and loans 3,913 4,279 4,119
Net interest income $38,681 $43,676 $39,921
TABLE 3--Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis - Notes D and E)
(in thousands)
1995 over 1994 1994 over 1993
Volume Rate Total Volume Rate Total
Increase (decrease) in:
Interest income:
Loans
Commercial loans $ (1,712) $ 1,295 $ (417) $ (1,160) $ 1,907 $ 747
Real estate loans 6,470 618 7,088 2,089 (1,754) 335
Consumer loans (234) (677) (911) (465) 3,163 2,698
Total loans 4,524 1,236 5,760 464 3,316 3,780
Securities:
Taxable (3,270) 817 (2,453) 2,706 (1,200) 1,506
Non-taxable 191 (743) (552) 931 (307) 624
Equity securities 7 7 14 -- -- --
Total securities (3,072) 81 (2,991) 3,637 (1,507) 2,130
Money market instruments:
Bankers' acceptances 1,323 471 1,794 346 394 740
Federal funds sold 2,110 249 2,359 (369) 346 (23)
Total money market
instruments 3,433 720 4,153 (23) 740 717
Total earning assets 4,885 2,037 6,922 4,078 2,549 6,627
Liabilities:
Repurchase agreements and
Federal funds purchased 130 466 596 (41) 191 150
Other borrowings (36) 29 (7) (7) 20 13
Total borrowed funds 94 495 589 (48) 211 163
Interest bearing deposits:
Savings and interest bearing
transaction accounts 1,130 4,715 5,845 1,387 1,834 3,221
Time certificates of deposit (122) 2,304 2,182 (1,084) 305 (779)
Total interest bearing
deposits 1,008 7,019 8,027 303 2,139 2,442
Total interest bearing
liabilities 1,102 7,514 8,616 255 2,350 2,605
Net interest margin $ 3,783 $ (5,477) $ (1,694) $ 3,823 $ 199 $ 4,022
Asset/Liability Management
The Company monitors asset and deposit levels, developments and trends
in interest rates, its liquidity and capital adequacy, and marketplace
opportunities. It responds to all of these to protect and enhance net
interest income while managing risks within acceptable levels. This
process, known as asset/liability management, is carried out by changing
the maturities and relative proportions of the various types of loans,
investments, deposits and other borrowings in the ways described above.
Table 2, "Distribution of Average Assets, Liabilities and Shareholders'
Equity and Related Interest Income, Expense and Rates," sets forth the
daily average balances for the major asset and liability categories, the
related income or expense where applicable, and the resultant yield or
cost attributable to the average earning assets and interest-bearing
liabilities. Average balances for the year are used in the table rather
than the end of the year amounts shown in the balance sheets of the
accompanying financial statements. When comparing year to year, the use
of average balances more accurately reflects growth patterns since these
balances are not significantly impacted by period-end transactions. The
amount of interest earned or paid for the year is also directly related
to the average balances and not to what the balances happened to be on
the last day of the year.
Changes in the dollar amount of interest earned or paid will vary from
one year to the next because of changes in the average balances
("volume") of the various earning assets and interest-bearing liability
accounts and changes in the interest rates applicable to each category.
Table 3, "Volume and Rate Variance Analysis of Net Interest Income,"
analyzes the difference in interest earned and paid on the major
categories of assets and liabilities in terms of the effects of volume
and rate changes for the periods indicated.
Each of the major categories of assets and liabilities will be discussed
below, with a description of the reason for significant changes in the
balances, how they impacted the net interest income and margin, and how
they fit in with the overall asset/liability strategy for managing risk.
As mentioned above, the Company carefully monitors its net interest
income and its net interest margin. As might be expected, as the Company
has grown and has had more earning assets, net interest income generally
has increased. However, whether the net interest margin increases or
decreases depends on how well the Company has managed interest rate
risks, product pricing policy, product mix, and also on external trends
and developments.
As shown in Table 2, the net interest margin increased from 5.59% in
1993 to 5.64% in 1994, as the average rate earned on assets increased 16
basis points while the average rate paid for liabilities increased by
only 11 basis points. In 1995, the average rate earned increased by only
20 basis points while the average rate paid for liabilities increased by
69 basis points, resulting in a decline in the net interest margin to
5.15%. Table 3 shows the volume and rate variance analysis of net
interest income for 1995 compared to 1994, and 1994 compared to 1993.
This analysis computes the proportion of the change in net interest
income due to changes in the balances from one year to another and the
proportion due to changes in rates between the two years.
There are always steps that the Company can take to increase its net
interest margin. Among these steps would be to increase the average
maturity of its securities portfolios because longer term instruments
normally earn a higher rate; to emphasize fixed rate loans because they
earn more than variable rate loans; to purchase lower rated securities;
and to lend to less creditworthy borrowers. However, as noted above,
banking is a process of balancing risks, and each of these alternative
tactics involve more risk. The first two involve more market risk, the
second two more credit risk. Management intends to continue to use a
balanced approach.
Non-earning Assets
For a bank, non-earning assets are those assets like cash reserves,
equipment, and premises which do not earn interest. This ratio is
watched carefully by Management because it represents the efficiency
with which funds are used. Tying up funds in non-earning assets lessens
the amount of interest that may be earned. Non-earning assets averaged
6.66% of total average assets in 1993. This was higher than usual for
the Company. The major reason for this increase was Other Real Estate
Owned ("OREO"). During 1993, foreclosure action was taken on one large
loan resulting in the addition of over $9 million in OREO. Though only
$2.0 million of the properties obtained in this foreclosure remained
unsold at December 31, 1993, carrying it as OREO during most of the year
significantly impacted the average balance of non-earning assets.
Similarly, the expected foreclosure on another loan resulted in $5
million being carried as OREO for a portion of 1993, before the loan was
eventually paid.
With most of these properties disposed of in 1993, the average balance
of OREO was only $1.9 million in 1994 compared with $11.0 million in
1993. This aggressive approach to disposing of foreclosed property
allowed average non-earning assets to drop to 5.72% of assets in 1994.
In 1995, average non-earning assets dropped to 5.55%. The Company's
ratio compares very favorably to its peers. As of September 30, 1995,
the average ratio of non-earning assets to total assets for all FDIC
banks, regardless of size, was 15.72%. Using the Company's average asset
size and average rate of 5.95% earned in 1995 on money market
investments, having an extra 10.17% of assets earning interest meant the
Company had $109.8 million more in earning assets compared with its
peers and earned $6.5 million in pre-tax income on those assets. These
additional earnings are somewhat offset by higher lease expense,
additional equipment cost, and occasional losses taken on quick sales of
foreclosed property. Overall, however, Management believes that these
steps give the Company an earnings advantage. This efficient use of
assets also allows the Company to produce a given amount of revenue at
substantially less risk than its competition. There is less risk because
additional deposits or borrowings do not have to be obtained to fund the
assets generating the revenue.
SECURITIES
The major components of the earning asset base for 1995 were the
securities portfolios, the loan portfolio and the Company's holdings of
money market instruments. The structure and detail within these
portfolios are very significant to an analysis of the financial
condition of the Company. The loan and money market instrument
portfolios will be covered in later sections of this discussion.
TABLE 4--Maturity Distribution and Yield
Analysis of the Securities Portfolios
After one After five
As of December 31, 1995 One year year to years to Over
(amounts in thousands) or less five years ten years ten years Total
Maturity distribution:
Available-for-sale:
U.S. Treasury obligations $ 30,109 $ 70,175 -- -- $ 100,284
U.S. agency obligations 25,063 -- -- -- 25,063
Equity securities 488
Subtotal 55,172 70,175 -- -- 125,835
Held-to-maturity:
U.S. Treasury obligations 25,111 72,417 -- -- 97,528
U.S. agency obligations 4,925 46,901 -- -- 51,826
State and municipal
securities 2,378 32,242 $ 21,823 $ 25,933 82,376
Subtotal 32,414 151,560 21,823 25,933 231,730
Total $ 87,586 $ 221,735 $ 21,823 $ 25,933 $ 357,565
Weighted average yield (Tax equivalent-Note B):
Available-for-sale:
U.S. Treasury obligations 4.94% 5.34% -- -- 5.22%
U.S. agency obligations 5.79% -- -- -- 5.79%
Equity securities 6.00%
Weighted average 5.33% 5.34% -- -- 5.33%
Held-to-maturity:
U.S. Treasury obligations -- -- -- -- --
U.S. agency obligations 5.30% 5.78% -- -- 5.66%
State and municipal
securities 11.61% 13.25% 11.09% 10.30% 11.70%
Weighted average 5.97% 7.52% 11.09% 10.30% 7.95%
Overall weighted average 5.56% 6.83% 11.09% 10.30% 7.02%
SFAS 115 and the Establishment of Two Portfolios
Upon implementation of SFAS 115 on December 31, 1993, the Company
classified its securities into two portfolios, the "Earnings" or held-
to-maturity portfolio, and the "Liquidity" or available-for-sale
portfolio.
The Earnings Portfolio consists only of securities purchased with the
intention and ability to hold to maturity, to be sold only in event of
concerns with the issuer's creditworthiness, a change in tax law that
eliminates their tax-exempt status, or other infrequent situations as
permitted by SFAS 115. Securities in the Earnings Portfolio would not be
sold because of changes in market rates, liquidity needs, or
asset/liability management concerns. The Earnings Portfolio consists of
long-term tax-exempt obligations, and U.S. Treasury and agency
securities with maturities normally up to five years from date of
purchase.
The Liquidity Portfolio consists of securities which might be sold for
liquidity needs and asset/liability concerns, and will be sold if their
market value deteriorates to a predetermined point because of higher
interest rates. The Liquidity Portfolio consists of U.S. Treasury and
agency securities with original maturities normally up to two years from
date of purchase.
Prior to adoption of SFAS 115, the Company followed a policy of selling
securities which had declined in value due to increases in market
interest rates. While this resulted in immediate losses, it permitted
the reinvestment of the proceeds in higher yielding securities. The
Company was able to take a tax deduction for the loss in the year of the
sale, but the taxes on the increased income were spread out over the
life of the new security, for a net economic benefit to earnings. After
adoption of SFAS 115, the Company continued to follow this policy for
the Liquidity Portfolio, but could not sell securities from the Earnings
Portfolio because of their held-to-maturity classification.
"Window of Opportunity" Period to Reassess and Reclassify
As discussed in Note 2 to the financial statements, in November 1995,
the FASB permitted a one time, "window of opportunity" period lasting
until December 31, 1995 to reassess the classification of securities and
reclassify them from held-to-maturity to available-for-sale without
calling into question the ability or intent to hold to maturity the
securities remaining in the held-to-maturity classification.
As was the case with other financial institutions, the Company had
discovered after the implementation of SFAS 115 that it had
significantly less flexibility to use its securities for asset/liability
management purposes when they were classified as held-to-maturity. The
Company could not sell securities that had declined in value because of
increases in interest rate in order to reinvest the proceeds at higher
rates. Similarly, if the Company desired to change the average maturity
of securities to create more complementary matching characteristics with
other assets and liabilities by selling some securities and repurchasing
others in new maturity ranges, it was unable to sell the ones which were
causing the mismatch because they had been classified as held-to-
maturity.
Therefore, in this "window of opportunity" period, the Company reviewed
its securities and concluded that there were opportunities to achieve
more flexibility and better maturity balance by reclassifying certain
securities with maturities in crowded maturity zones from its Earnings
Portfolio (held-to-maturity) to its Liquidity Portfolio (available-for-
sale), then selling those securities and purchasing other securities
with different maturities. On November 29, 1995, the Company transferred
$144 million of U.S. Treasuries from its Earnings Portfolio to its
Liquidity Portfolio. The Company then sold $94 million of those
securities at an aggregate net loss of $77,000 and started purchasing
other securities into targeted, less crowded maturity zones. The
objective is to achieve, over time, a better maturity balance in both
the Liquidity and Earnings Portfolios, establishing relatively level
amounts in each maturity range.
In addition to achieving more flexibility, the Company also established
a $50 million Discretionary Portfolio of securities which while
classified as available-for-sale were not currently needed for liquidity
or asset/liability management. However, because of their classification,
should liquidity or asset/liability management considerations make their
sale advisable, such sales are permitted. The portfolio will be
accounted for like the Liquidity Portfolio because the securities will
be classified as "available-for-sale" but they will be managed more like
securities in the Earnings Portfolio and will not be automatically sold
if their market values deteriorate to a predetermined point because of
higher interest rates. This will result in some additional capital
volatility as unrealized gains and losses for these securities are
recognized in the separate component of capital. Securities in the
Discretionary Portfolio will normally have maturities up to three years
from date of purchase. In Note 2 to the financial statements, they are
all included in the amounts shown for available-for-sale securities.
Planned Amortization Class ("PAC's") Securities
In December 1995, the Company began to investigate the advisability of
purchasing short-term, high-quality, planned amortization class
securities. These securities are specialized portions of larger
collateralized mortgage obligation pools. The objective is to achieve
increased yields with high-quality, short-term securities other than
just U.S. Treasuries and agencies. These PAC securities with the
underlying mortgages guaranteed by U.S. agencies currently yield 40 to
50 basis points more than U.S. Treasuries of the same maturity range.
When acquired, they will be classified as available-for-sale and placed
in either the Discretionary or Liquidity Portfolio. As of December 31,
1995, no PAC's had been acquired; subsequently, the Company has acquired
some PAC bonds, all of which have been classified into the Discretionary
Portfolio. Management intends to purchase approximately $30 million of
these securities.
Purposes Served by the Securities Portfolios
The securities portfolios of the Company serve several purposes: 1) they
(primarily the Liquidity Portfolio) provide liquidity to even out cash
flows from the loan and deposit activities of customers; 2) the deposits
of public agencies and trust customers must be secured by certain assets
of the Company as required by law, and portions of any of the securities
portfolios may be used for this function; 3) they are a large base of
assets, the maturity and interest rate characteristics of which can be
changed more readily than the loan portfolio to better match changes in
the deposit base and other funding sources of the Company; 4) they
(primarily the Earnings Portfolio) are an alternative interest-earning
use of funds when loan demand is light; and, 5) they may provide
partially tax -exempt income.
Liquidity and Portfolio Distribution: The first purpose listed above,
liquidity, is provided through proceeds arising from the outright sale
of securities, the maturity of securities, and repurchase agreements
involving securities. Although securities in the Earnings Portfolio
(held-to-maturity) may not be sold without calling into question the
Company's intent to hold the remaining securities in the Earnings
Portfolio to maturity, securities in the Liquidity and Discretionary
Portfolios (both available-for-sale) can be sold to provide liquidity
when needed. Maturing securities also provide liquidity irrespective of
the portfolio in which held; to best achieve this, the combined
portfolios should be of an adequate size and have staggered maturities.
In assessing the adequacy of the size of the portfolios and managing the
maturity schedule, the Company also looks at the combination of bankers
acceptances and Federal funds sold. Liquidity can also be achieved by
repurchase agreements. Under these arrangements, certain types of
securities can be sold under agreements to repurchase in order to obtain
short-term, temporary liquidity.
It is expected that the Earnings Portfolio will stay relatively stable
as a percentage of assets through the reinvestment of maturing
securities. The relative amounts of securities maintained in the
Discretionary and the Liquidity Portfolios should change based on
expected liquidity needs. The Company's investment and liquidity
policies direct that if the ratio of loans to assets increases, then
most new purchases will have relatively short maturities and would be
made for the Liquidity Portfolio so that funds will be available as
needed. When loans are decreasing as a percentage of total assets, most
new purchases would be made for the Discretionary Portfolio to obtain
higher yields.
Pledging: The legal requirements for securing specific deposits by
pledging certain of the Company's securities, the second purpose of the
portfolio, may only be satisfied by certain types of securities. A large
proportion of the deposits may be secured by state and municipal
securities, but some can only be secured by U.S. Treasury securities, so
holding a minimum amount of these securities will always be necessary.
Matching: As discussed above, a major concern in managing interest rate
risk is matching the maturities and/or repricing characteristics of
assets and liabilities so that changes in interest rates will affect
both sides of the balance sheet equally. The Company tries to better
meet the needs of loan customers by being flexible in offering a variety
of maturity and repricing terms for the funds they borrow from the
Company. Their decisions, however, will not always match the maturity
and repricing decisions made by the deposit customers. Because the
Company can select from a wide variety of securities which have
different maturities and repricing terms, the securities portfolios may
be used to obtain the desired overall matching.
This use of the portfolios for matching is also available only if there
are frequent maturities that provide cash to reinvest. With a little
over 23% of the combined portfolios made up of long-term tax-exempt
securities, it is necessary for most of the remaining portion of the
portfolio to be invested in securities with shorter maturities; the
maturity of most purchases in the last two years has been in the 1 to 3
year range.
Alternative to Loans: When loan demand is not sufficient to keep up
with the inflow of funds from depositors, the funds may be invested in
securities. There is generally less credit risk with securities than
with loans, but the yields are also lower. The securities purchased for
this purpose are placed in the Earnings or Discretionary Portfolios.
Table 4 sets forth the amounts and maturity ranges of the securities at
December 31, 1995. The weighted average yields (using taxable equivalent
adjustments in calculating the yields of state and municipal securities-
- -Note B) of the securities are also shown. The average yields on the
taxable securities (U.S. Treasury and agency securities) are
significantly lower than the average rates earned from loans as shown in
Table 2. Because of this, securities are purchased for earnings only
when loan demand is weak.
Tax-Exempt Securities: Prior to 1986, much of the income from the
securities now included in the Earnings Portfolio had the additional
advantage of being tax-exempt through investment in state and municipal
bonds.
The average yields for tax-exempt securities reported in Table 4 are
significantly higher than for taxable securities, but this advantage is
not readily available since the passage of the Tax Reform Act of 1986
("TRA"). Certain provisions of this act disallow a deduction for income
tax purposes for the portion of the interest expense paid on deposits
and other liabilities that fund most tax-exempt securities now
purchased.
However, certain issues of municipal securities may still be purchased
with the tax advantages available before TRA. Such securities, because
they can only be issued in very limited amounts, are generally issued
only by small municipalities, and the Company must do a careful credit
evaluation to ascertain that the municipality has a diverse and healthy
tax base from which to repay the debt. In reviewing securities for
possible purchase, management must also ascertain that they have
desirable maturity characteristics, and that the amount of tax-exempt
income they generate will not be enough to trigger the Alternative
Minimum Tax or the tax advantage could be lost. In the last several
years the Company has been able to identify some securities that met all
of these criteria and purchased $3.7 million in 1995, $9.7 million in
1994, and $2.6 million in 1993. The Company expects any purchases in
coming years to be of about the same magnitude, and expects to be able
to continue to earn approximately $7 million per year in tax-exempt
income.
Portfolio Turnover, Unrealized Gains and Losses, and Securities Losses
As shown in the accompanying consolidated statements of cash flows there
is a relatively large turnover in the securities portfolios. The
purchase of relatively short-term securities both to provide liquidity
and to minimize market risk, as explained above, is part of the reason
for the high turnover in the Company's securities portfolios. The
reclassification and sale of $94 million of U.S. Treasuries for maturity
restructuring during the FASB 115 "window of opportunity" period in
November 1995, also as explained above, is another part of the reason.
Turnover from sales will also result from the Company following its
"stop loss" policy of liquidating taxable fixed rate securities with a
remaining maturity of over one year if they have declined in fair value
by a specified amount, while holding securities that have appreciated in
fair value because of declining rates. With the adoption of SFAS 115,
only the securities in the Liquidity Portfolio are subject to sale for
this reason.
In 1994, as short-term interest rates increased substantially, many of
the available-for-sale securities were sold because their established
stop-loss points were reached. In fact, a number of the securities
purchased during 1994 with the proceeds of maturing or sold securities
were themselves sold as their stop-loss points were in turn passed.
These sales caused $1.19 million in realized pre-tax losses.This loss
offsets some of the Company's taxable income thereby providing an
immediate tax benefit and the proceeds permitted the Company to increase
its average earning rate by purchasing new securities at the higher
rates.
There are a few exceptions to this stop-loss policy. The tax advantage
of holding gains and selling losses is minimal on securities with a
remaining maturity of less than one year, so these securities and
securities expected to be called within a year are not sold even if they
are below their stop-loss point. Secondly, securities purchased with a
maturity selected to match a specific liquidity need may be exempted
because they are going to be held to maturity to meet that need.
Other Effects of Interest Rate Changes on the Securities Portfolios
The Company does not have a trading portfolio. That is, it does not
purchase securities on the expectation that interest rates will decrease
and thereby allow subsequent sale at a gain. Instead, if the purposes
mentioned above are to be met, purchases must be made throughout
interest rate cycles. Rather than anticipate the direction of changes in
interest rates, the Company's investment policy directs that securities'
maturities (other than for municipal securities) be approximately
equally spaced into quarterly maturity zones within the respective
portfolios (Earnings, Discretionary and Liquidity).
Hedges, Derivatives, and Other Disclosures
The Company has not made use of interest rate swaps or other forms of
off-balance sheet hedging, but expects to establish policies and
procedures in 1996 to permit limited types and amounts of off-balance
sheet hedges to help manage interest rate risk.
The Company did not purchase any derivative securities in 1995, but as
noted above has started in early 1996 to acquire up to $30 million of
high-quality, short-term planned amortization class securities. The
Company has purchased several structured notes issued by U.S. agencies,
but, as described in Note 2 of the accompanying financial statements,
they are step-up bonds that pay an increased interest rate if not
called. They are not indexed nor have contingent terms other than
whether the issuer will decide to call them.
The Company has not purchased any securities arising out of a highly
leveraged transaction, and its investment policy prohibits the purchase
of any securities of less than investment grade or so-called "junk
bonds."
Money Market Instruments--Federal Funds Sold and Bankers' Acceptances
Cash in excess of amounts immediately needed for operations is generally
lent to other financial institutions as Federal funds sold. Excess cash
expected to be available for longer periods is generally used to
purchase short-term U.S. Treasury securities or bankers' acceptances.
Average Federal funds sold and bankers' acceptances as a percentage of
average earning assets tends to vary based on changes and differences in
short-term market rates. While the acceptances of only highly rated
financial institutions are utilized, acceptances have some amount of
risk above that of U.S. Treasury securities, and the Company therefore
requires that there be a reasonable spread in the yields between the
bankers' acceptances and U.S. Treasury securities to justify the
assumption of that additional risk.
The average balance of bankers' acceptances held during 1995 was $54.4
million and the amount at year-end was $139 million. These figures are
higher than the comparable balances for 1993 or 1994, primarily because
a large proportion of the proceeds from the sale of the securities as a
result of the SFAS window of opportunity were invested in bankers'
acceptances. One purpose of the sale and reinvestment as explained above
was to better balance the maturities in the securities portfolios. The
Company could not immediately purchase securities in the right maturity
ranges and so temporarily invested the funds in bankers' acceptances
until suitable Treasury and agency securities were available.
LOAN PORTFOLIO
Table 5 sets forth the distribution of the Company's loans at the end of
each of the last five years.
TABLE 5--Loan Portfolio Analysis by Category
(in thousands)
December 31
1995 1994 1993 1992 1991
Real estate:
Residential $ 142,143 $108,923 $ 54,395 $ 40,496 $ 30,133
Non-residential 179,272 145,928 123,534 108,117 96,548
Construction and development 20,846 26,695 41,030 67,524 85,454
Commercial, industrial, and agricultural 144,011 148,396 168,227 168,575 188,252
Home equity lines 34,597 32,573 36,219 43,877 44,318
Consumer 28,494 27,319 27,331 36,888 44,328
Municipal tax-exempt obligations 7,573 7,831 11,888 9,445 7,955
Other 1,865 1,766 1,606 2,293 2,152
$ 558,801 $499,431 $ 464,230 $477,215 $ 499,140
Net deferred fees $ 2,139 $ 2,038 $ 1,301 $ 1,162 $ 1,219
The amounts shown in the table for each category are net of the deferred
or unamortized loan origination, extension, and commitment fees and
origination costs for loans in that category. The total amounts for
these net fees are shown at the bottom of the table. These deferred
amounts are amortized over the lives of the loans to which they relate.
The year-end balance for all loans had increased about $35 million from
the end of 1993 to the end of 1994 and about $59 million from the end of
1994 to the end of 1995. Economic recovery, the expansion into the
Ventura County market, and new calling programs centered on potential
commercial customers, were all reasons for the growth.
Residential mortgages showed the largest growth in 1995. More variety in
the kinds and terms of loans offered to customers and more aggressive
pricing resulted in an expanded share of the residential real estate
mortgage market. Most of these loans are 1-4 family adjustable rate
mortgage loans, which generally have low initial "teaser" rates. While
these loans have interest rate "caps," nearly all can be repriced to a
market rate of interest within a reasonable time. A few loans have
payment caps which would result in negative amortization if interest
rates rise appreciably.
During 1995, the Company entered into indirect financing agreements with
a number of local automobile dealers whereby the Company purchases loans
dealers have made to customers. While automobile dealers frequently
provide financing to customers through manufacturers' finance
subsidiaries, some customers prefer loan terms that are not included in
the standard packages. Other customers are purchasing used cars not
covered by the manufacturers' programs. Based on parameters agreed to by
the Company, the dealer makes the loan to the customer and then sells
the loan to the Company. This program is neither a factoring or flooring
arrangement. The individual customers are the borrowers and thus there
is no large concentration of credit risk. There were approximately $1.7
million of such loans included in the consumer loan total as of December
31, 1995. The Company expects to reach a balance of $12 million of these
loans by the end of 1996.
The same interest rate and liquidity risks that apply to securities are
also incurred in lending activity. Long-term fixed rate loans are
subject to market risk. The table in Note 14 to the financial statements
shows only a very slight difference between the carrying amount of loans
and their market value. This occurs because the majority of the loans
made by the Company either amortize monthly or have relatively short
maturities and, except for the consumer loans and the municipal
obligations, most have floating rates of interest. The floating rates
are generally tied to the Company's base lending rate or to another
market rate indicator, which serve to lessen the risk to the Company
from increases in interest rates. The Company sells any of the fixed
rate real estate loans that are salable in the secondary market as a
means of limiting market risk.
Table 6 shows the maturity of selected loan types outstanding as of
December 31, 1995, and shows the proportion of fixed and floating rate
loans for each type. Net deferred loan origination, extension, and
commitment fees are not shown in the table. There is no maturity or
interest sensitivity associated with the fees because they have been
collected in advance.
TABLE 6--Maturities and Sensitivities of Selected
Loan Types to Changes in Interest Rates
(in thousands)
Due after
Due in one one year to Due after
year or less five years five years
Commercial, industrial, and
agricultural loans:
Floating rate $ 115,254 -- --
Fixed rate 10,744 $ 11,413 $ 1,313
Real estate-construction
and development:
Floating rate 21,853 -- --
Fixed rate -- -- --
Municipal tax-exempt
obligations -- 7,068 505
$ 147,851 $ 18,481 $ 1,818
The amortization and short maturities also help to maintain the
liquidity of the portfolio and reduce credit risk, but they result in
lower interest income if rates are falling. At present, Management
prefers to incur market risk from longer maturities in the securities
portfolios, and avoid such risk in the loan portfolio.
Tax Refund Anticipation Loans ("RAL's") and Refund Transfers
The Company has been providing RAL's for the last four tax years. The
taxpayer requests a loan through a tax preparer, with the expected
refund as the source of repayment. The Company does not earn interest
based on the amount of the loan or the length of time it is outstanding.
Instead, the Company collects a fee for each loan. After withholding the
loan fee due to the Company (the withheld fee is recognized as income
only after the loan is collected), the Company advances to the taxpayer
the amount of the refund due on the taxpayer's return up to specified
amounts based on certain criteria. Each taxpayer signs an agreement
permitting the Internal Revenue Service (the "IRS") to pay their refund
to the Company to pay off the loan. Any amount due the taxpayer above
the amount of the RAL is sent by the Company to the taxpayer when
received from the IRS.
For the 1993 tax season, almost $45 million was lent to over 42,000
taxpayers. The collected fees amounted to just over $1 million. The pre-
tax earnings after losses from these loans was about $412,000, and the
average loan was outstanding for 20 days.
The program was expanded in 1994. About 150,000 loans were made,
totaling $230 million. The fees earned were $4.8 million and net charge-
offs were $2.4 million (1.03% of total loans), resulting in net fee
income after losses of $2.4 million.
As is more fully discussed below, approximately $75.5 million was lent
to about 75,600 taxpayers in 1995. Fees earned on the loans totaled $3.2
million with net loan charge-offs through year-end totaling $4.0
million.
TABLE 7--Summary of Loan Loss Experience
(in thousands)
Year ended December 31
1995 1994 1993 1992 1991
Balance of the allowance for
loan loss at beginning of year $12,911 $10,067 $ 9,353 $7,611 $6,207
Charge-offs:
Real estate:
Residential 1,086 -- -- -- --
Non-residential 4,847 47 -- 70 --
Construction and development -- -- 3,380 331 878
Commercial, industrial, and agricultural 787 921 1,268 1,553 1,169
Home equity lines 86 200 -- 77 --
Tax refund anticipation 4,402 3,030 650 404 --
Other consumer 394 345 570 762 711
Municipal tax-exempt obligations -- -- -- -- --
Total charge-offs 11,602 4,543 5,868 3,197 2,758
Recoveries:
Real estate:
Residential 22 -- -- -- --
Non-residential 12 -- -- -- --
Construction and development -- -- 2 -- --
Commercial, industrial, and agricultural 430 235 130 116 137
Home equity lines 34 50 -- -- --
Tax refund anticipation 383 672 62 77 --
Other consumer 235 173 238 96 125
Municipal tax-exempt obligations -- -- -- -- --
Total recoveries 1,116 1,130 432 289 262
Net charge-offs 10,486 3,413 5,436 2,908 2,496
Provision for loan losses charged
to operations 9,924 6,257 6,150 4,650 3,900
Balance at end of year $12,349 $12,911 $10,067 $9,353 $7,611
Ratio of net charge-offs to
average loans outstanding 1.96% 0.71% 1.15% 0.60% 0.48%
Losses are higher for RAL's than for most other loan types, but were
substantially greater in 1995 than in previous years. The tax preparers
participating in the program are located across the country and few of
the taxpayers have any customer relationships with the Company other
than these RAL's. Many taxpayers make use of the service because they do
not have a permanent mailing address at which to receive their refund.
Therefore, if there is a problem with the return such that the IRS
rejects, partially disallows, or disregards the request of the taxpayer
to remit the refund to the Company, collection efforts may be less
effective than with local customers.
The Company has taken several steps to minimize losses from these loans.
Preparers are screened before they are allowed to submit their
electronic filings, procedures have been defined for the preparers to
follow to ensure that the agreement signed by the taxpayer is a valid
loan, and the preparers' IRS reject rates are monitored very carefully.
If rejects are above normal, they are dropped from the program. If
rejects are below expectations, they are paid an incentive fee.
Through the 1994 filing season, the Company only extended the loans to
the taxpayer after receiving an acknowledgement from the IRS that it has
run several preliminary computer checks on the taxpayer for such items
as a valid Social Security number and that there are no outstanding
liens from the IRS against the taxpayer. However, for the 1995 filing
season, the IRS eliminated that acknowledgement. To reduce the
additional credit risk, the Company ran credit checks on all taxpayers
who were new to the program in the 1995 filing year. While helpful, this
step was not sufficient to mitigate a change made in IRS procedures
during the tax filing season after the Company had made a large amount
of loans. The IRS placed a moratorium on electronic payment of refunds
which had a significant portion related to the Earned Income Tax Credit
("EIC"). Without confirmation, and with significant uncertainty
regarding whether the IRS would reimburse the Company for loans related
to EIC, the Company began to restrict loans only to those taxpayers who
met certain credit standards, and excluded the EIC related portion of
any refund from the amount which it would lend. However, losses resulted
from the loans the Company had already made.
The Company had raised fees for the season to cover the additional
expenses associated with credit checks. Also, fewer taxpayers qualified
for loans with the restrictions implemented after the IRS change. These
factors reduced the number of loans and the associated fees.
The Company instituted substantial collection efforts as soon as the
problems were recognized and approximately 1,900 customers representing
$900,000 in loans are making payments. In addition, the Company has
entered into cooperative agreements with the other banks making RAL's in
1996. Under these agreements, if a taxpayer owing money to one bank from
a prior year applies for a loan from another bank, that second bank will
repay the delinquent amount to the first bank before remitting the
refund to the taxpayer. From the beginning of 1996 to the date of the
preparation of this discussion, just over $1 million has been recovered
in delinquent loans from prior years. Additional amounts are expected to
be recovered.
Many taxpayers not qualifying for loans in 1995 still had their returns
filed electronically and received their refunds more quickly by having
the refund sent electronically by the IRS to the Company. The Company
then prepared a check or authorized the tax preparer to issue a check to
the taxpayer. The Company earned approximately $1.6 million in fees for
this refund transfer service, which helped to offset the losses and the
cost of collection efforts. The net result for the program in 1995 was a
pre-tax loss of about $683,000. This figure includes only the recoveries
received during 1995, with the large amount of recoveries on 1995 loans
(about $921,000) received in 1996 to be reported with 1996 operating
results.
The balances outstanding during each tax filing season are included in
the average balance for consumer loans shown in Table 2, but there are
no such loans included in the balance sheets as of December 31, 1995 or
1994 because all loans not collected from the IRS are charged-off before
year-end. The fees earned on the loans are included in the accompanying
income statements for 1995, 1994, and 1993 within interest and fees on
loans. The fees earned on the refund transfers are included in other
service charges, commissions, and fees.
TABLE 8--Allocation of the Allowance for Loan Losses
(amounts in thousands)
December 31, 1995 December 31, 1994 December 31, 1993
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
Commercial, industrial,
and agricultural $ 6,048 25.2% $ 5,343 29.2% $ 3,508 35.4%
Real estate:
Residential 836 24.9 1,183 21.4 1,074 11.5
Non-residential 2,503 31.4 2,856 28.7 1,652 26.0
Construction
and development 526 3.6 1,141 5.3 881 8.7
Home equity lines 534 6.1 496 6.4 491 7.6
Consumer 447 5.0 438 5.4 462 5.8
Municipal tax-exempt
obligations -- 1.3 -- 1.5 -- 2.5
Other 126 2.5 91 2.1 104 2.5
Not specifically allocated 1,329 -- 1,363 -- 1,895 --
Total allowance $12,349 100.0% $12,911 100.0% $ 10,067 100.0%
Allowance for loan loss
as percentage of
year-end loans 2.21% 2.59% 2.17%
ALLOWANCE FOR LOAN LOSSES
Credit risk is inherent in the business of extending loans to
individuals, partnerships, and corporations. The Company sets aside an
allowance or reserve for loan losses through charges to earnings. The
charges are shown in the income statements as provision for loan losses.
All specifically identifiable and quantifiable losses are immediately
charged off against the allowance.
Determination of Adequacy and the Allocation Process
The Company formally assesses the adequacy of the allowance on a
quarterly basis. An important step in this assessment and in managing
credit risk is to periodically grade all of the larger loans, all of the
delinquent loans, and other loans for which there is a question of
repayment. A significant portion of all other loans are also graded. A
portion of the allowance is then allocated to the delinquent or
otherwise questionable loans in an amount sufficient to cover
Management's estimate of the loss that might exist in them. A portion of
the allowance is also allocated to the remainder of the loans based on
the latest grading of their quality. Relatively more is allocated to
those loans which, while currently performing according to their terms,
are in categories that have characteristics which lead Management to
conclude that there is inherently more risk of problems in the future.
The implementation by the Company of Statements of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan
("SFAS 114") and No. 118, Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures ("SFAS 118") on January 1, 1995
is discussed in Note 1 to the financial statements. The statements
specify how lenders must determine the amount of the allowance that must
be recorded for certain types of loans that are impaired. Valuation
allowances established in accordance with the provisions of these
statements are included in the allocation process outlined above.
There are limitations to any grading process. The first is that it is
impracticable to grade every loan every quarter. Therefore, it is
possible that some of the smaller currently performing loans not
recently graded will not be as strong as their last grading and an
insufficient portion of the allowance will have been allocated to them.
The second limitation is that grading must be done without knowing
whether all relevant facts are at hand. Delinquent borrowers may
deliberately or inadvertently omit important information from reports or
conversations with lenders regarding their financial condition and the
strength of repayment sources. The third limitation is that even for
experienced reviewers, grading loans and estimating possible losses
involve judgments about the present situation and the impact of
potential future events. Eventual losses therefore may differ from the
most recent estimate. Because of these limitations, the Company assumes
that there are losses inherent in the current portfolio which will be
sustained, but which have not been identified to date. It therefore
maintains the allowance at an amount larger than the total that is
allocated as described above.
To the extent that the allowance is insufficient to cover the amounts
allocated and its estimate of unidentified losses, Management records
additional provision for loan loss. If the allowance is greater than
appears to be required, less provision expense will be recorded.
The allowance allocation shown in Table 8, "Allocation of the Allowance
for Loan Losses," should not be interpreted as an indication of the
specific amounts or specific loan categories in which charge-offs did or
may ultimately occur. There is no allocation of allowance to RAL's
because all loans unpaid were charged-off prior to year-end, yet there
inevitably will be losses in 1996 for these loans. At the bottom of the
table is the ratio of the allowance for loan losses to total loans for
each year.
Loan Losses
Table 7, "Summary of Loan Loss Experience," shows the additions to,
charge-offs against, and recoveries for the Company's allowance for loan
losses. Also shown is the ratio of charge-offs to average loans for each
of the last five years. This ratio has been adversely impacted in the
last several years by problems with two large relationships and with the
higher charge-offs in the RAL program.
The larger ratio for the Company in 1993 was due to $3.3 million in
charge-offs associated with one large loan in order to recognize the
decline in the value of the real estate that secured it. The Company
subsequently had to foreclose on the property, adding OREO of about $9
million. During 1993, the Company was able to sell most of the property
it had taken in foreclosure with no further net loss, and recognized a
gain when the remaining property was sold in 1994.
In 1995, the Company charged-off $4.5 million from various loans made to
one borrower. Although the loan is secured by collateral from which some
recovery is expected, the uncertainty regarding the amount and timing of
recovery led Management to charge-off all of one $4.2 million loan and
portions of a series of smaller loans. Foreclosure proceedings were
delayed by bankruptcy and the actions of other creditors, but have been
initiated whenever possible.
TABLE 9--Nonaccrual and Past Due Loans
(in thousands)
Year ended December 31
1995 1994 1993 1992 1991
Nonaccrual $8,972 $6,326 $3,126 $ 888 $3,058
90 days or more past due 395 1,290 862 322 100
Total noncurrent loans $9,367 $7,616 $3,988 $1,210 $3,158
Total noncurrent loans as per-
centage of the total loan portfolio 1.68% 1.52% 0.86% 0.25% 0.63%
Allowance for loan loss as a per-
centage of noncurrent loans 132% 170% 252% 773% 241%
Approximately $4.0 million, $2.4 million, and $588,000 of the net
charge-offs (charge-offs less recoveries) for 1995, 1994, and 1993,
respectively, are related to the RAL's. The reasons for these charge-
offs are explained earlier in this discussion on page 25.
There are very few banks in the country that have RAL programs, so
comparability with the net charge-off ratio of other institutions is
lost unless the RAL net charge-offs are eliminated. If the Company had
not had the RAL program, the ratio of net charge-offs to average loans
would have been 1.21% in 1995, 0.22% in 1994, and 1.03% in 1993. These
ratios compare with the net charge-off ratios for the Company's FDIC
peers of 0.60% for the first nine months of 1995, 0.54% for 1994, and
0.92% for 1993. The portion of the Company's 1995 and 1993 ratios
related to the two large charge-offs were 0.84% and 0.70%, respectively.
NONACCRUAL, PAST DUE, AND RESTRUCTURED LOANS
Table 9 summarizes the Company's nonaccrual and past due loans for the
last five years.
Past Due Loans: Included in the amounts listed above as 90 days or more
past due are commercial and industrial, real estate, and all types of
consumer loans. These loans are well secured and in the process of
collection. These figures do not include loans in nonaccrual status.
Nonaccrual Loans: If there is reasonable doubt as to the collectibility
of principal or interest on a loan, the loan is placed in nonaccrual
status, i.e., the Company stops recognizing income from the interest on
the loan and reverses any uncollected interest that had been accrued but
not received. These loans may or may not be collateralized, but
collection efforts are being pursued.
Noncurrent loans increased during 1995 to a high of $15.4 million at the
end of the second quarter. Charge-offs and repayments by the borrowers
account for the decrease to $9.4 million at year-end. The ratio of
noncurrent loans to total loans of 1.68% is higher than its FDIC peers'
ratio of 1.15%.
Management strengthened the credit adminsitration, review, and analysis
functions by hiring additional staff in 1994 and 1995. Secondly,
Management established a Special Assets Committee which has given
increased attention to the larger problem loans. All delinquent loans
are reviewed by the Committee and action plans formulated for collection
or charge-off.
Based on current information available from the loan grading process and
because the change in emphasis from RAL's to refund transfers means less
credit risk, Management expects that charge-offs will be lower during
1996 than in 1995. However, undoubtedly some portion of the balance of
nonaccrual loans will have to be charged off, and some borrowers now
current in their payments will become delinquent.
Interest income from nonaccrual loans in the portfolio at year-end that
was not recognized is shown below:
TABLE 10--Foregone Interest
(in thousands)
Year ended December 31
1995 1994 1993
Interest that would
have been recorded
under original terms $1,291 $671 $301
Gross interest recorded 753 424 188
Foregone interest $ 538 $247 $113
Restructured Loans: The Company did not have any restructured loans at
the end of 1991 or 1992. The only restructured loans at the end of 1993,
1994, and 1995 are reported above in the total of nonaccrual loans.
Potential Problem Loans: From time to time, Management has reason to
believe that certain borrowers may not be able to repay their loans
within the parameters of the present repayment terms, even though, in
some cases, the loans are current at the time. These loans are regarded
as potential problem loans, and a portion of the allowance is allocated
as discussed above to cover the Company's exposure to loss should the
borrowers indeed fail to perform according to the terms of the notes.
This class of loans does not include loans in a nonaccrual status or 90
days or more delinquent but still accruing, which are shown in Table 9.
At year-end 1995, these loans amounted to $13,767,000 or 2.46% of the
portfolio. The corresponding amounts for 1994 and 1993 were $32,561,000
or 6.52% of the portfolio and $18,729,000 or 4.03% of the portfolio,
respectively. The 1995 amount is comprised of loans of all types. $4.2
million of the allowance for loan losses--an average of 30% of the
outstanding balance--has been allocated to these loans to cover
potential losses.
OTHER LOAN PORTFOLIO INFORMATION
Other information about the loan portfolio is presented that may be
helpful to readers of the financial statements follows.
Foreign Loans: The Company does not have nor has it ever had any foreign
loans in its loan portfolio.
Loan Sales: During the last several years, the Company has sold most of
the fixed-rate single family mortgage loans it originates as well as
selected other portfolio loans. These loans are made to accommodate the
borrower, but are sold to mitigate the market risk inherent in fixed
rate assets. Servicing is not generally retained. When it is, the
Company earns a fee. The sales are made without recourse, that is, the
purchaser cannot look to the Company in the event the borrower does not
perform according to the terms of the note.
Participations: Occasionally, the Company will sell or purchase a
portion of a loan from another bank. Banks usually sell a portion of a
loan as a means of staying within the bank's maximum limit for loans to
any one borrower. A portion of another bank's loan may be purchased by
the Company as an accommodation to a smaller bank unable to lend the
whole amount under its regulatory lending limit to its borrower, but
this would be done only if the loan also represents a good investment
for the Company. In these cases, the Company conducts its own
independent credit review prior to committing to purchase.
Loan to Value Ratio: The Company follows a policy of not loaning more
than 65% to 90% of the value of the collateral for construction and
development loans depending on the type of the project. The limits are
75% of the value of commercial property and no more than 80% of
residential property for its real estate loans. The Company generally
does not make use of credit enhancements like loan insurance to exceed
these amounts. The above ratios are sometimes exceeded when the loan is
being originated for sale to another institution that does lend at
higher ratios and the sale is immediate, when the exception is
temporary, or when other special circumstances apply. There are no
specific loan to value ratios for other commercial, industrial or
agricultural loans not secured by real estate. Adequacy of the
collateral is established based on the individual borrower and the
purpose of the loan. Consumer loans may have maximum loan to collateral
ratios based on the loan amount, the nature of the collateral, and other
factors.
Loan Concentrations: The concentration profile of the Company's loans is
discussed in Note 16 to the accompanying consolidated financial
statements. The Company's one material concentration of loans to
borrowers engaged in similar activities at year-end 1995 is for real
estate construction and development.
A majority of the $21 million in construction and development loans have
been made to developers. However, these projects include a wide variety
of properties--single family, small and large apartment complexes,
condominiums, commercial offices, and industrial and retail space--and
they are geographically dispersed throughout the Company's market area.
These loans are generally payable upon sale or refinancing of the
property, but also have a maturity date irrespective of sale or
refinance. With slower sales in the real estate market, some of the
properties have not sold or refinanced before the maturity date. The
Company may extend the maturity date for a fee after a new review of the
loan and the borrower's efforts to sell.
Mortgage Servicing Rights: In May, 1995, the FASB issued Statement of
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights.
This statement requires companies engaged in mortgage banking activities
to recognize the rights to service mortgage loans for others as separate
assets. This statement is effective for fiscal years beginning after
December 15, 1995. The Company adopted this statement on January 1,
1996.
The Company sells some of the mortgage loans that it originates. Most
are sold "servicing released"--the purchaser takes over the collection
of the payments. However, some are sold with "servicing retained"--the
Company continues to receive the payments from the borrower and forwards
the funds to the purchaser. The Company earns a fee for this service.
For loans originated for sale, the statement requires that a portion of
the investment in the loan be ascribed to the right to receive this fee
for servicing and that this value be recorded as a separate asset. The
Company anticipates no material impact on its financial statements from
the implementation of this statement.
DEPOSITS
An important component in analyzing net interest margin is the
composition and cost of the deposit base. Net interest margin is
improved to the extent that growth in deposits can be focused in the
lower cost core deposit accounts--demand deposits, NOW accounts, and
savings. The average daily amount of deposits by category and the
average rates paid on such deposits is summarized for the periods
indicated in the Table 11.
The average rate paid on deposits declined significantly from 3.79% in
1992 to 2.89% in 1993, but increased in 1994 to 3.09% and to 3.93% in
1995. The Fed pushed rates up sharply during 1994 and only gradually
dropped them in 1995. The average rate was also impacted by a
significant change in the product mix during the last three years
reflecting both a customer choice to shorten the maturities of their
accounts so as to be able to reinvest should interest rates turn up, and
a choice by the Company to encourage shortening so that interest paid
would decrease as rates were falling. There was a general practice among
banks, which the Company also followed, of lowering the rates on the
time deposit categories more than on the transaction and savings account
categories.
TABLE 11--Detailed Deposit Summary
(dollars in thousands)
Year ended December 31
1995 1994 1993
Average Average Average
Balance Rate Balance Rate Balance Rate
NOW accounts $126,883 1.16% $128,212 1.01% $119,778 1.20%
Money market deposit accounts 375,227 4.44 298,561 3.48 231,575 2.70
Savings accounts 100,551 2.42 135,276 2.25 153,732 2.48
Time certificates of deposit for
less than $100,000 and IRA's 154,234 5.53 157,763 4.54 158,613 4.52
Time certificates of deposit for
$100,000 or more 57,822 5.09 57,097 3.72 81,467 3.57
Interest-bearing deposits 814,717 3.93% 776,909 3.09% 745,165 2.89%
Demand deposits 132,095 119,578 100,384
$946,812 $896,487 $845,549
The Company's transaction and savings account categories continued to
increase as a percentage of total deposits in 1995 as they had in 1993
and 1994. The most dramatic growth was in the Personal Money Master
accounts. When introduced by the Company in 1990, these accounts had an
interest rate indexed to the 3-month Treasury bill. Balances grew
substantially from an average balance of $69.1 million in 1993 to $131.7
million in 1994 as the rate paid increased from 3.06% at the beginning
of 1994 to 5.07% by November. After proper notice was given to
depositors, the Company changed the rate paid to an administered rate
(the same way all other non-term deposits are priced) instead of a rate
indexed to the Treasury bill. Despite the change to an administered
rate, balances continued to grow in 1995 to an average of $201.4
million, with $224.7 million at year-end, when the rate was 4.15%.
Potentially, the most volatile deposits in a financial institution are
the large certificates of deposit over $100,000. Because the deposits
exceed the FDIC insurance limit, depositors often select only the
shortest maturities. Nonetheless, many institutions have tried to fund
their growth by means of large certificates of deposit. This usually
requires a "money desk," a separate department devoted to procuring
these deposits by offering premium rates. The aim is to invest the funds
in longer-term assets which earn the higher rates. The hazard in this
practice arises from the mismatch of maturity terms. If interest rates
rise, the bank would need to immediately match the higher interest
rates, or the deposits would migrate to another institution. Meanwhile,
as discussed above, if interest rates go up, fixed-rate loans and
securities lose a portion of their value. If the deposits cannot be
retained, the bank would eventually be forced to liquidate the assets at
a loss.
The Company, however, has not found its over $100,000 certificates to be
very volatile because it does not solicit any deposits from brokers, nor
has it encouraged these certificates by paying premium interest rates.
It has been the Company's experience that large depositors have placed
their funds with the Company because they are confident in its financial
strength and stability. This is also suggested by the lack of any
significant shortening of maturities of these larger certificates beyond
the general customer trend to shorten their deposit maturities.
TABLE 12--Maturity Distribution of Time
Certificates of Deposit of $100,000 or More
(in thousands)
At December 31
1995 1994 1993
Three months or less $21,938 $26,232 $51,022
Over three months
through six months 17,364 10,258 12,868
Over six months
through one year 24,179 14,086 7,953
Over one year 12,957 12,980 11,537
$76,438 $63,556 $83,380
Several courses of action would be available should the Company
experience an outflow of funds in this category. Among the most likely
scenarios would be a sale of some of the securities in the Liquidity
Portfolio followed by an effort to replace these lost deposits with
growth in the other retail deposit products. This course of action is
unlikely to result in a negative impact on earnings for the Company
because, while the cost of acquiring and servicing the transaction
deposits is higher than for certificates, the interest rate paid will be
lower.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS
PURCHASED
Securities sold under agreements to repurchase ("repos") are a form of
borrowing that is secured by some of the securities in the Company's
portfolios. Some banks use these agreements to borrow from other banks
in order to provide temporary liquidity. In contrast, the Company
provides these instruments in amounts over $100,000 to business
customers for their cash management. Like the rate paid on Federal funds
purchased, the interest rate paid on repos is tied to the Federal funds
sold rate. The average rate paid in 1995 increased to 5.01% from 3.26%
in 1994 and 2.90% during 1993. The average balance for these
arrangements varies with economic activity as these customers have more
or less cash to invest. The average balance borrowed during 1995
increased slightly from $9.4 million in 1994, but the outstanding
balance at year-end 1995 was $21.9 million, the highest month-end
balance since 1990.
Federal funds purchased are a form of overnight borrowing from other
banks. The Company purchases funds each day to accommodate other local
community banks on the Central Coast that have excess cash to invest
overnight. The related interest expense is tied to the rate that the
Company receives for its excess cash sold as Federal funds to larger
financial institutions. During the last three years, the Company has
occasionally purchased additional funds from money center banks to meet
liquidity needs, especially during the RAL season. The average balance
was $16.6 million in 1995, compared to $14.3 million in 1994, and $12.7
million for 1993. Management does not anticipate that the Company will
need to borrow funds during 1996 because with the shift in emphasis from
loans to refund transfers, the program does not create any need for
temporary funds. The average balance for 1996 will therefore depend on
the amount of excess cash placed with the Company by the other banks.
OTHER REAL ESTATE OWNED
Real property owned by the Company which was acquired in foreclosure
proceedings is termed Other Real Estate Owned or OREO.
Table 13 summarizes the OREO activity during 1995:
TABLE 13--OREO Activity
(in thousands)
Balance, December 31, 1994 $ 856
Additions 1,525
Sales (596)
Write-downs --
Balance, December 31, 1995 $1,785
The Company follows an aggressive policy of selling collateral it has
acquired in foreclosure. The total at year-end to be disposed of is only
0.15% of total assets, compared with 0.13% held by its FDIC peers as a
percentage of their total assets.
As part of the loan application process, the Company reviews all real
estate collateral for possible problems from contamination by hazardous
waste. This is reviewed again before any foreclosure proceedings are
initiated.
OTHER OPERATING INCOME
At over $7.0 million in 1995, trust fees remain the largest component
of other operating income. Fees increased by $571,000 over 1994. The
market value of assets under administration--on which the majority of
fees are based--increased from $926 million at the start of 1993 to $1.4
billion at the end of 1995.
The Trust and Investment Services Division began selling annuities and
mutual funds to customers in 1995 and earned $183,000 in fees from these
sales. The Company provides assistance to customers to determine what
investments would best match their financial goals and helps the
customers allocate their funds according to the customers' risk
tolerance and need for diversification. The funds and annuities are not
operated by the Company, but instead are managed by registered
investment companies. Fees for managing employee benefit trust business
increased $107,000 or 15% in 1995.
Included within other service charges, commissions and fees are service
fees arising from the processing of merchants' credit card deposits,
escrow fees, and a number of other fees charged for special services
provided to customers. In 1995, this category of income increased
substantially because it included $1.6 million in fees earned for refund
transfers. As explained in the discussion on RAL's on page 27, many of
the taxpayers not qualifying for loans still had their refunds sent by
the IRS to the Company which then issued the refund check more quickly
than would the IRS. The Company earned fees for this service. Management
expects that this will provide a significant source of income in 1996 as
well.
The Company continues to work on increasing other income and fees
because it is an important potential contributor to profitability. In
late 1994, after a thorough evaluation of the cost and value of the
services and a comparison of the Company's fees with other financial
institutions, Management raised most fees and began charging new fees
for a number of services. Similar evaluations and fee schedule revisions
will be done in 1996.
OTHER OPERATING EXPENSE
Total other operating expenses have increased over the last three years
as the Company has grown, but as a percentage of average earning assets,
these expenses have remained relatively steady at 4.11%, 4.09%, and
4.16%, for 1995, 1994, and 1993, respectively. These ratios are quite
favorable compared to the average ratio of 4.30% for its FDIC peer group
for the first nine months of 1995, especially when two important factors
are considered.
The first is that it is exceptional for a financial institution the size
of the Company to have such a large trust division. The expenses of this
division (approximately $4.02 million in 1995) are included in the
general category of other operating expenses (the numerator of the
ratio), but the only earning assets associated with the division (the
denominator of the ratio) are trust customer funds deposited with the
Company, which averaged $82.6 million in 1995.
The second factor is the high proportion of premises leased rather than
owned by the Company. There is increased lease expense, but, as noted
above, by not committing funds to the purchase of premises, the Company
is able to substantially increase its net interest income.
As indicated in Note 12 to the consolidated financial statements, the
Company benefited in 1995, and the ratio of other operating expenses to
earning assets is lower, due to a significant reduction in FDIC deposit
premiums.
Within the whole category of other operating expense, salary and benefit
expenses have increased 15.3% from 1993 to 1995 compared to a 13.5%
increase in average earning assets for the same period. The number of
staff has increased for several reasons. Four additional branch offices
have been opened since the start of 1993. Additional credit review and
administrative personnel were hired as mentioned on page 29, and other
personnel were hired for the new services in the Trust and Investment
Services Division. A number of temporary employees were hired for
collection efforts in the RAL program.
Net occupancy and equipment expense have increased slightly from 1993 to
1995 because of some renovation of branch offices, cost of living
increases on leases, and the opening of the new offices.
The Company incurred approximately $2.5 million in direct operating
expenses related to the new offices and personnel in the Ventura County
expansion. In general, these expenses will increase in 1996 as the
offices are open for the full year. Additional expenses were incurred in
the administrative and support areas of the Company for the startup
activities. A much smaller proportion of these will recur in 1996 unless
additional offices are opened or operations initiated.
CAPITAL RESOURCES
By the current regulatory definitions, the Company is "well-
capitalized," the highest rating of the five categories defined under
FDICIA.
Capital Adequacy Standards
The primary measure of capital adequacy is based on the ratio of capital
to risk weighted assets. This method of measuring capital adequacy is
meant to accomplish several ends: 1) to establish capital requirements
that are more sensitive to the differences in risk associated with
various assets; 2) to explicitly take into account off-balance sheet
exposure in assessing capital adequacy; and, 3) to minimize
disincentives to holding liquid, low-risk assets. The Company, as a bank
holding-company, is required by the FRB to maintain a risk-based capital
ratio of at least 8.00%. At the end of 1995, the Company's ratio was
17.67%. The Bank is also subject to the requirement to maintain a risk-
based capital ratio of 8.00%. The Bank's ratios have always been
slightly higher than the Company's, and at the end of 1995, its ratio
was 17.79%. The ServiceCorp has no minimum capital requirements.
The risk-based capital ratio is strongly impacted by the management of
the investment portfolio because the U.S. Treasury securities are
assigned a zero risk weighting and other instruments in which the
Company has often placed a significant amount of funds--U.S. Agency
securities, State and Municipal securities, Federal funds sold, and
bankers' acceptances--have a 20% risk weighting. The Company's ratio
decreased from 19.28% for year-end 1994 to 17.97% for year-end 1995
because Treasury securities were 23% of total assets at the end of 1994
and 16% at the end of 1995.
The Company is trying to increase loans as a percentage of total assets
in order to increase net interest income. Except for most 1-4 family
residential loans, loans are risk-weighted at 100%. If Management's
projections for loan growth are reached in 1996, the Company's ratio may
decrease slightly, but Management does not anticipate any reason
whatsoever why minimum standards will not continue to be significantly
exceeded.
Future Sources and Uses of Capital
The Company expects sustained growth in capital resources. Net income
has provided $36.3 million in capital in the last three years. Of this
amount, $11.8 million, or 32.5% was distributed in dividends.
In addition to the capital generated from the operations of the Bank,
over the years a significant source of capital growth has been the
exercise of employee stock options. The extent of the growth from this
source in any one year depends on a number of factors, among them the
current stock price in relation to the price at the time options were
granted and the number of options that would expire if not exercised
sometime during the year. In 1995, the increase to capital from the
exercise of options (net of shares surrendered as payment for exercises
and taxes) was $454,000 or 6.5% percent of the net growth in
shareholders' equity in this year.
At December 31, 1995, there were approximately 412,000 options
outstanding and exercisable at less than the current market price, with
an average exercise price of $12.33. This represents a potential
addition to capital of $5.1 million, if all options were exercised with
cash. However, employees are permitted to exercise options by trading
shares of stock already owned. This "swapping" of shares reduces the
amount of new equity created when options are exercised. Therefore, some
amount less than the $5.1 million in new capital is likely to result
from the exercise of options, and they are likely to be exercised over a
number of years.
There are no material commitments for capital expenditures or "off-
balance sheet" financing arrangements as of the end of 1995, except as
reported in Note 16 to the consolidated financial statements. State law
limits the amount of dividends that may be paid by a bank to the lesser
of the bank's retained earnings or the total of its undistributed net
income for the last three years. For the Bank, this would mean
approximately $26.1 million more could have been transferred as
dividends to the Bancorp in 1995, subject to regulatory capital
requirements. The primary need for funds to be transferred to the
Bancorp is for the payment of dividends to its shareholders. Management
expects that the amount of dividends to be transferred to the Bancorp
from the Bank will be in the range of $4 to $6 million per year.
Tender Offer
As disclosed in Note 9 to the accompanying consolidated financial
statements, in 1993 the Company purchased approximately 155,000 shares
of its stock under the terms of a formal tender offer. The Company paid
$3.3 million for the stock tendered, which was accounted for as a
retirement of shares and reduction of capital. As explained in the
tender offer, this action was taken: 1) to provide shareholders with
larger holdings an opportunity to sell shares if they had not been able
to because the market was not able to absorb larger blocks; 2) because
the significant earnings growth over the last several years had resulted
in an accumulation of capital in excess of current needs, and 3) to
reduce the outstanding shares in anticipation of the issuance of new
shares upon the exercise of employee stock options.
REGULATION
The Company is strongly impacted by regulation. The Company and its
subsidiaries may engage only in lines of business that have been
approved by their respective regulators, and cannot open, close, or
relocate offices without their approval. Disclosure of the terms and
conditions of loans made to customers and deposits accepted from
customers are both heavily regulated as to content. The Company and the
Bank must file periodic reports with the various regulators to keep them
informed of their financial condition and operations as well as their
compliance with all the various regulations. The FRB and the California
State Department of Banking conduct periodic examinations of the Company
and the Bank to verify that the reporting is accurate and to ascertain
that the Company and the Bank are in compliance with regulations.
FDICIA became effective in 1992. FDICIA requires banks to meet new
capitalization standards, follow stringent outside audit rules, and
establish stricter internal controls. There are also new requirements to
ensure that the Audit Committee of the Board of Directors is
independent.
The Bank is required by the provisions of the federal Community
Reinvestment Act ("CRA"), to make significant efforts to ensure that
access to banking services is available to every segment of the
community. The Company was last examined in late 1992 by the FDIC for
compliance with this act and was given the highest possible rating of
"Outstanding."
The FRB may take action against a bank holding company or a bank that it
regulates should it make a finding that the financial institution has
failed to maintain adequate capital. This action has usually taken the
form of restrictions on the payment of dividends to shareholders,
requirements to obtain more capital from investors, and restrictions on
operations. The FDIC may also take action against a bank that it finds
is not acting in a safe and sound manner. Management has received no
indication from either regulatory agency that would in any way suggest
that they are contemplating any such finding, and given the strong
capital position of the Company and the Bank, it expects no such finding
to be made in the foreseeable future.
IMPACT OF INFLATION
Inflation has been moderate for the last several years and has had
little or no impact on the financial condition and results of operations
of the Company during the periods discussed here.
LIQUIDITY
Sufficient liquidity is necessary to handle fluctuations in deposit
levels, to provide for customers' credit needs, and to take advantage of
investment opportunities as they are presented in the market place. As
indicated in the Consolidated Statements of Cash Flows included with the
accompanying consolidated financial statements, the principal sources of
liquidity for the Company have been interest payments received on loans
and investments, proceeds from the maturity or sale of securities and
bankers' acceptances, and the growth in deposits.
To manage the Company's liquidity properly, however, it is not enough
merely to have large cash inflows; they must be timed to coincide with
anticipated outflows. Also, the available cash on hand or cash
equivalents must be sufficient to meet the exceptional demands that can
be expected from time to time relating to natural catastrophes such as
flood, earthquakes, and fire.
The timing of inflows and outflows is accomplished by making adjustments
to the mix of the assets and the liabilities so that maturities are well
matched. The timing of liquidity sources and demands is well-matched
when there are approximately the same amount of short-term liquid assets
as volatile, large liabilities, and the maturities of the remaining
longer-term assets are not concentrated in any single time period.
A means of computing liquidity using this concept of matching
maturities, and one that is similar to that used by bank regulators, is
to compute the difference between the short-term, liquid assets and the
volatile, large liabilities. Liquidity is positive if short-term, liquid
assets exceed volatile, large liabilities and negative if they are less.
The difference is then divided by the sum of net loans and long-term
securities to determine the relative size of any mismatch. The formula
reads as follows:
Short-term, Volatile,
Liquid Assets -- Large Liabilities
- --------------------------------------- = Liquidity Ratio
Net Loans and Long-term Securities
Of those assets currently held, the Company considers its short-term
liquid assets to consist of U.S. Treasury and Agency securities with a
remaining term to maturity of two years or less, Federal funds sold, and
bankers' acceptances. In the Company's asset/liability management
framework, bankers' acceptances are used only as an alternative to 6-
month U.S. Treasury securities, rather than as loans, and since only the
highest rated bankers' acceptances are purchased, they are highly liquid
over their 6-month terms. Cash on hand and at the FRB is not included
among liquid assets because the Company maintains only the minimum
amounts required by Federal regulations of these non-earning assets. In
other words, this cash is not available to meet liquidity needs like
funding loans, purchasing assets, or covering large withdrawals, so it
is not counted as liquid.
The volatile, large liabilities are time deposits over $100,000, Federal
funds purchased, repurchase agreements, and other borrowed funds. While
balances held in demand and passbook accounts are immediately available
to depositors, they are generally the result of stable business or
customer relationships with inflows and outflows usually in balance over
relatively short periods of time. Therefore, for the purposes of this
kind of analysis, they are not considered volatile.
As of December 31, 1995, this ratio was a positive 29.4%. This means
that there is a substantial excess of short-term, liquid assets to
handle any sudden withdrawals of large, volatile liabilities. This
positive 29.4% compares with ratios for year-end 1994 and 1993 of 15.8%
and 21.0%, respectively. Liquidity has increased from year-end 1994 to
year-end 1995 even though the large, volatile liabilities and the net
loans have increased because the short-term, liquid assets have
increased even more. This occurred because many of the longer-term
securities were sold as part of the restructuring of the portfolios
described on page 21 and reinvestment in longer term securities had not
occurred by year-end.
Too little liquidity results in lost opportunities and difficulties in
meeting commitments. Excessive liquidity generally results in less
income because the shorter, liquid assets usually do not pay as high an
interest rate as the longer-maturing assets. However, because of the
partially inverted yield curve that prevailed during the second half of
1995, it would be necessary to purchase securities with 2 to 5 years
remaining maturity to earn as much as overnight funds. The Company
purchased some longer-term securities during this period, However,
because the Company manages its liquidity along with considerations of
the three types of interest risk, Management has been reluctant to
invest a large portion of the excess liquidity in instruments with
longer than a two year maturity because of the depreciation that would
result when interest rates begin to rise.
As explained in the section above titled "Securities," as interest rates
fall, the Company's investment policy leads it to purchase securities
with available cash rather than sell it as Federal funds. However, such
a shift into securities does not occur all at once; the Company staggers
its purchases to ensure a range of maturities and to avoid a
concentration of securities at similar interest rates. The first
consideration helps to maintain liquidity through frequent maturities
and the latter avoids having to sell at one time a large amount of
securities classified as available-for-sale under the "stop-loss"
practice described above should interest rates start to rise again.
The large amount of loans showing in Table 6 should not be considered a
significant source of liquidity. The maturity dates of many of these
loans are scheduled renewals.
INCOME TAX EXPENSE
As indicated in Note 1 to the accompanying consolidated financial
statements, the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS 109") at the
beginning of 1993. As was the case under the former standard, income tax
expense continues to be the sum of two components, the current tax
expense or provision and the deferred expense or provision. Current tax
expense is the result of applying the current tax rate to taxable
income, just as it was under the former method, but the new standard
changes the method by which the deferred income tax provision is
computed.
The deferred provision is intended to account for the fact that income
on which the Company pays taxes with its returns differs from pre-tax
income in the accompanying consolidated income statements because some
items of income and expense are recognized in different years for income
tax purposes than in the financial statements. For example, the Company
is only permitted to deduct from taxable income on its Federal tax
return actual net loan charge-offs, irrespective of the amount of
provision for loan loss (bad debt expense) it recognized in its
financial statements. This causes what is termed a "temporary
difference" because eventually, as loans are charged-off, the Company
will be able to deduct for taxes what has already been recognized as an
expense in the financial statements. Another example is the accretion of
discount on certain securities. For its financial statements, the
Company recognizes income as the discount is accreted, but for its tax
return, the Company can defer the recognition of income until the cash
is received at the maturity of the security. The first example causes a
deferred tax asset to be created because the Company has recognized as
an expense for its current financial statements an item that it will be
able to deduct from its taxable income in a future year. The second
example causes a deferred tax liability, because the Company has been
able to delay until a subsequent year the paying of tax on an item of
current year financial statement income.
SFAS 109 requires that the Company measure all its deferred tax assets
and liabilities at the end of each year and the difference between the
net asset or liability at the beginning of the year and the end of the
year is the deferred tax provision for the year. Prior to 1993, the
Company had been computing its deferred provision by a different method
which was then in accordance with generally accepted accounting
principles. Therefore, an initial adjustment had to be recognized to
bring its net deferred asset up to the amount that was computed under
the new standard. This adjustment of $620,000 is shown on the
consolidated statement of income for 1993 as the cumulative effect of a
change in accounting principle.
Most of the Company's temporary differences involve recognizing
substantially more expenses in its financial statements than it has been
allowed to deduct for taxes, and therefore the Company has a net
deferred tax asset. Deferred tax assets are dependent for realization on
past taxes paid, against which they may be carried back, or future
taxable income, against which they may be offset. The Company has had
and expects to have in the future sufficient taxable income each year to
make it very likely that it will be able to realize the benefit of this
deferred tax asset. If there were a question about the Company's ability
to realize the benefit from the asset, then, under the provisions of
SFAS 109, it would have to record a valuation allowance against the
asset to reflect the uncertainty. Given the amount and nature of the
Company's deferred assets, the past taxes paid, and the likelihood of
future taxable income, realizability is assured and no valuation
allowance needs to be provided.
The amounts of the two components, the amounts of the various deferred
tax assets and liabilities, and the tax effect of the principal
temporary differences between taxable income and pre-tax financial
statement income are shown in Note 8 to the accompanying financial
statements.
To ensure that all corporations with substantial income for financial
reporting purposes ("book income") pay some Federal income tax, Congress
established the Alternative Minimum Tax ("AMT") as a second parallel tax
system. Under AMT provisions, there is a limitation on how great the
difference may be between book income and taxable income. If the
difference is too great, a portion of the book income not normally
taxable is nonetheless added to taxable income and the total is
multiplied by the AMT tax rate for comparison with the regular tax
computation. With its tax return, the Company is required to pay the
greater of the Federal tax liability computed under the regular tax
system or that computed using the special rules of the AMT.
The Company has substantial differences between book income and taxable
income due to the temporary differences noted above and due to permanent
differences like the tax-exempt income from state and municipal
securities. These differences were sufficient in 1995 to trigger the AMT
rate. The lowest effective tax rate for the Company occurs at the point
that the regular tax computation and the AMT computation result in the
same tax amount. The Company therefore tries to stay very close to this
crossover point. In these circumstances, the Company carefully considers
the impact of new purchases of tax-exempt securities and other
transactions which might cause the AMT to come into effect. The Company
had anticipated sufficient taxable income in 1995 to avoid AMT, but the
lower amounts of income and additional expenses noted in various
sections of this discussion resulted in a small amount of AMT to be
paid. This amount is deductible as a tax credit in future years to the
extent that taxes computed under the regular tax provisions exceed taxes
computed under the AMT provisions.
COMMON STOCK PRICES AND DIVIDENDS
Stock prices and cash dividends declared for the last eight quarters are
shown on page 58 in "Selected Annual and Quarterly Financial Data." The
stock prices shown represent only trades known to the Company or its
transfer agent. The stock is not listed on an exchange, but offers to
buy and sell, and trading volume are reported on the NASDAQ electronic
bulletin board under the symbol SABB.
The Board of Directors periodically increases the dividend rate in
acknowledgement that earnings have been increasing by a sufficient
amount to ensure adequate capital and also provide a higher return to
shareholders. For the years 1995, 1994, and 1993, the Company has
declared dividends which were 40.3%, 30.8%, and 28.0%, respectively, of
its net income. The most recent information for the Company's peers
shows an average payout ratio of 28.8%.
NOTE A
As of September 30, 1995, for all FDIC banks with an asset size of $1
billion to $10 billion, non-performing assets represented 9.23% of their
equity capital and 0.87% of their total assets. For banks of all sizes
in the FDIC's Western region, they represented 13.59% of equity capital
and 1.18% of total assets.
In various places throughout this discussion, comparisons will be made
between ratios for the Company and for its FDIC peers. For 1995, the
peer group generally is all FDIC banks with an asset size of $1 billion
to $10 billion, and the information set forth above is reported in or
calculated from information reported in the FDIC Quarterly Banking
Profile, Third Quarter 1995, which is the latest issue available. This
publication also reports some statistics by all banks within a
geographical region. When relevant, the statistic for the Western region
is cited. The publication does not report some of the statistics cited
in this analysis by the separate size-based peer groups or by
geographical region. In these instances, the figure cited is for all
FDIC banks regardless of size.
The peer information for the dividend payout ratio is reported in the
Bank Holding Company Performance Report received from the FRB for the
3rd Quarter of 1995.
NOTE B
For Tables 2 and 4, the yield on tax-exempt state and municipal
securities has been computed on a taxable equivalent basis. To compute
the taxable equivalent yield for these securities one must first add to
the actual interest earned an amount such that if the resulting total
were fully taxed, the after-tax income would be equivalent to the actual
tax-exempt income. This taxable equivalent income is then divided by the
average balance to obtain the taxable equivalent yield. The dollar
amount of the adjustment is shown at the bottom of Table 2 as "Taxable
equivalent income included in interest income from nontaxable securities
and loans."
NOTE C
For purposes of Table 2, loans in a nonaccrual status are included in
the computation of average balances in their respective loan categories.
NOTE D
For purposes of the amounts in Table 3 relating to the volume and rate
analysis of net interest margin, the portion of the change in interest
earned or paid that is attributable to changes in rate is computed by
multiplying the change in interest rate by the prior year's average
balance. The portion of the change in interest earned or paid that is
attributable to changes in volume is computed by multiplying the change
in average balances by the prior year's interest rate. The portion of
the change that is not attributable either solely to changes in volume
or changes in rate is prorated on a weighted basis between volume and
rate.
NOTE E
For purposes of Tables 2 and 3, non-origination loan fees and net
origination fees amortized in accordance with Statement of Financial
Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases, are included in interest income.
NOTE F
In Table 1, the net deferred loan origination, commitment, and extension
fees and the allowance for loan losses are included in the column titled
"Noninterest bearing or non-repricing items."
Santa Barbara Bancorp and Subsidiaries
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the
Board of Directors
We have audited the accompanying consolidated balance sheets of SANTA
BARBARA BANCORP (a California corporation) and Subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial
statements are the responsibility of Santa Barbara Bancorp's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Santa
Barbara Bancorp and Subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and cash flows for each of the three
years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As explained in the Accompanying Notes to the consolidated financial
statements, the Company adopted Statement of Financial Accounting
Standards No. 109 effective January 1, 1993 and Statement of Financial
Accounting Standards No. 115 effective December 31, 1993.
handwritten signature:
Arthur Andersen LLP
Los Angeles, California
February 2, 1996
Santa Barbara Bancorp
and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31
1995 1994
Assets:
Cash and due from banks (Note 5) $ 74,746 $ 69,630
Federal funds sold 65,000 15,000
Total cash and cash equivalents 139,746 84,630
Securities (approximate market value of $375,093
in 1995 and $382,090 in 1994) (Notes 1 and 2):
U.S. Treasury obligations 197,812 243,493
U.S. agency obligations 76,889 53,954
State and municipal securities 82,376 89,512
Equity securities 488 --
Total securities 357,565 386,959
Bankers' acceptances 139,294 80,594
Loans (Note 3) 558,801 499,431
Less: allowance for loan losses (Note 4) 12,349 12,911
Net loans 546,452 486,520
Premises and equipment, net (Note 6) 8,149 7,391
Accrued interest receivable 7,981 8,130
Other assets (Notes 1 and 8) 13,174 13,392
Total assets $1,212,361 $1,067,616
Liabilities:
Deposits (Note 7):
Noninterest bearing demand deposits $ 158,122 $ 147,085
Interest bearing deposits 895,898 809,632
Total deposits 1,054,020 956,717
Securities sold under agreements to repurchase
and Federal funds purchased (Note 10) 51,316 9,487
Other borrowings (Note 11) 1,210 1,000
Accrued interest payable and
other liabilities (Notes 8, 13, and 15) 4,818 6,452
Total liabilities 1,111,364 973,656
Commitments and contingencies (Note 16)
Shareholders' equity (Notes 9 and 13):
Common stock -- no par value, $0.67 stated value; shares
authorized: 20,000; shares issued and outstanding:
7,679 in 1995 and 7,689 in 1994 5,119 5,126
Surplus 39,191 39,683
Unrealized gain (loss) on securities
available-for-sale net of tax (Notes 1 and 2) (179) (1,496)
Retained earnings 56,866 50,647
Total shareholders' equity 100,997 93,960
Total liabilities and shareholders' equity $1,212,361 $1,067,616
The accompanying notes are an integral part of these consolidated balance sheets.
CONSOLIDATED STATEMENTS
OF INCOME Santa Barbara Bancorp
and Subsidiaries
Year Ended December 31
1995 1994 1993
Interest income:
Interest and fees on loans $ 52,649 $ 46,816 $ 43,032
Interest on securities:
U.S. Treasury obligations 12,447 16,495 16,848
U.S. Agency obligations 3,680 2,085 226
State and municipal securities 6,973 7,232 6,772
Equity securities 14 -- --
Interest on Federal funds sold 3,131 772 795
Interest on bankers' acceptances 3,294 1,500 760
Total interest income 82,188 74,900 68,433
Interest expense:
Interest on deposits (Note 7) 32,035 24,008 21,566
Interest on securities sold under agreements to
repurchase and Federal funds purchased (Note 10) 1,474 878 728
Interest on other borrowings (Note 11) 74 81 68
Total interest expense 33,583 24,967 22,362
Net interest income 48,605 49,933 46,071
Provision for loan losses (Notes 1 and 4) 9,924 6,257 6,150
Net interest income after provision for loan losses 38,681 43,676 39,921
Other operating income (Note 12):
Service charges on deposit accounts 4,255 3,183 2,825
Trust fees (Note 1) 7,020 6,449 6,588
Other service charges, commissions and fees 5,959 4,077 3,793
Net loss on sales and calls of securities (Notes 1, 2 and 8) (99) (1,191) (47)
Other income 553 566 943
Total other operating income 17,688 13,084 14,102
Other operating expense:
Salaries and other compensation 18,402 16,300 15,332
Employee benefits (Note 13) 4,253 4,849 4,309
Net occupancy expense (Notes 6 and 16) 4,257 3,528 2,990
Equipment rental, depreciation and maintenance (Note 6) 2,611 2,247 1,816
Net cost of operating other real estate (Note 1) 31 (485) 1,151
Other operating expense (Note 12) 12,415 12,852 11,738
Total other operating expense 41,969 39,291 37,336
Income before provision for income taxes 14,400 17,469 16,687
Provision for income taxes (Note 8) 3,985 4,518 4,377
Net income before cumulative effect
of accounting changes 10,415 12,951 12,310
Cumulative effect of accounting changes (Notes 1 and 15) -- -- 620
Net income $ 10,415 $ 12,951 $ 12,930
Earnings per share before cumulative effect
of accounting changes $1.36 $1.69 $1.58
Cumulative effect of accounting changes -- -- 0.08
Earnings per share $1.36 $1.69 $1.66
The accompanying notes are an integral part of these consolidated statements.
Santa Barbara Bancorp
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY and Subsidiaries
Unrealized
Gain (Loss) on
Securities
Surplus Available-
Common Stock Net of for-Sale Retained
Shares Amount ESOP Loan (Notes 1 & 2) Earnings Total
Balance,
January 1, 1993 7,769 $ 5,179 $ 39,589 -- $ 32,377 $ 77,145
Exercise of employee
stock options 76 51 861 -- -- 912
Retirement of
common stock (248) (165) (3,293) -- -- (3,458)
Cash dividends declared
at $0.47 per share -- -- -- -- (3,621) (3,621)
Unrealized gain on securities
available-for-sale -- -- -- $ 683 -- 683
Reduction in
ESOP liability -- -- 1,400 -- -- 1,400
Net income -- -- -- -- 12,930 12,930
Balance,
December 31, 1993 7,597 5,065 38,557 683 41,686 85,991
Exercise of employee
stock options 150 100 2,116 -- -- 2,216
Retirement of
common stock (58) (39) (990) -- -- (1,029)
Cash dividends declared
at $0.52 per share -- -- -- -- (3,990) (3,990)
Changes in unrealized gain
on securities
available-for-sale -- -- -- (2,179) -- (2,179)
Net income -- -- -- -- 12,951 12,951
Balance,
December 31, 1994 7,689 5,126 39,683 (1,496) 50,647 93,960
Exercise of employee
stock options 87 58 1,220 -- -- 1,278
Retirement of
common stock (97) (65) (1,712) -- -- (1,777)
Cash dividends declared
at $0.55 per share -- -- -- -- (4,196) (4,196)
Changes in unrealized gain
(loss) on securities
available-for-sale -- -- -- 1,317 -- 1,317
Net income -- -- -- -- 10,415 10,415
Balance,
December 31, 1995 7,679 $ 5,119 $ 39,191 $ (179) $ 56,866 $ 100,997
The accompanying notes are an integral part of these consolidated statements.
CONSOLIDATED STATEMENTS OF Santa Barbara Bancorp
CASH FLOWS and Subsidiaries
Increase (decrease) in cash and cash Year Ended December 31
equivalents (Note 1): 1995 1994 1993
Cash flows from operating activities:
Net income $ 10,415 $ 12,951 $ 12,930
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 2,041 1,614 1,143
Provision for loan losses 9,924 6,257 6,150
Provision (benefit) for deferred income taxes 795 (1,724) (122)
Net (recovery) writedown on other real estate owned (40) (821) 139
Net amortization of discounts and premiums for
securities and bankers' acceptances (1,038) (6,523) (4,165)
Net change in deferred loan origination fees and costs 102 736 139
(Increase) decrease in accrued interest receivable 149 (902) 664
Increase (decrease) in accrued interest payable 334 296 (101)
Net loss on sales and calls of securities 99 1,191 47
(Increase) decrease in service fees
and other income receivable 140 (23) (697)
Decrease in income taxes payable (181) (214) (74)
Other operating activities (1,113) 816 (524)
Net cash provided by operating activities 21,627 13,654 15,529
Cash flows from investing activities:
Proceeds from sales, calls, and maturities
of securities (Note 2) 168,731 307,256 128,818
Purchase of securities (Note 2) (136,320) (309,622) (119,904)
Proceeds from sale or maturity of bankers' acceptances 118,332 62,970 35,175
Purchase of bankers' acceptances (176,856) (79,380) (62,969)
Net increase in loans made to customers (72,520) (39,374) (7,541)
Disposition of property from defaulted loans 383 3,436 15,511
Purchase or investment in premises and equipment (2,799) (2,362) (2,699)
Net cash used in investing activities (101,049) (57,076) (13,609)
Cash flows from financing activities:
Net increase in deposits 97,303 90,464 16,878
Net increase (decrease) in borrowings
with maturities of 90 days or less 41,829 (10,668) (5,827)
Proceeds from issuance of common stock (Note 9) 454 1,187 728
Payments to retire common stock (Note 9) (953) -- (3,274)
Dividends paid (4,095) (3,877) (3,538)
Net cash provided by financing activities 134,538 77,106 4,967
Net increase in cash and cash equivalents 55,116 33,684 6,887
Cash and cash equivalents at beginning of period 84,630 50,946 44,059
Cash and cash equivalents at end of period $ 139,746 $ 84,630 $ 50,946
Supplemental disclosure:
Interest paid during the year $ 33,917 $ 24,671 $ 22,463
Income taxes paid during the year $ 3,110 $ 6,102 $ 4,355
Non-cash additions to other real estate owned (Note 1) $ 1,446 $ 265 $ 18,496
Non-cash transaction for net addition to (release from) senior
debt on OREO upon foreclosure (disposal) of properties $ 209 $ (327) (353)
The accompanying notes are an integral part of these consolidated statements.
1. SUMMARY OF SIGNIFICANT POLICIES
Nature of Operations
SANTA BARBARA BANCORP (the "Company") is a bank holding company
organized under the laws of California. Its principal subsidiary, Santa
Barbara Bank & Trust (the "Bank") provides a full range of commercial
banking and trust management services to individuals and business
enterprises. Its offices are located in Central and Southern Santa
Barbara County and in Western Ventura County. The banking services
include making commercial, consumer, and commercial and residential real
estate loans. Deposits are accepted for checking, interest-bearing
checking ("NOW"), money-market, savings, and time accounts. The bank
also offers safe deposit boxes; travelers checks, money orders, and
cashiers checks; and escrow services. A wide range of wealth management
services are offered through the Bank's Trust and Investment Services
division. The Company's other subsidiary, SBBT Service Corporation,
provides correspondent services to other local area financial
institutions.
Basis of Presentation
The accounting and reporting policies of the Company and its
subsidiaries are in accordance with generally accepted accounting
principles ("GAAP") and conform to practices within the banking
industry. The consolidated financial statements include the accounts of
the Company and its subsidiaries, after eliminating significant
intercompany balances and transactions.
The preparation of consolidated financial statements in accordance with
GAAP requires Management to make certain estimates and assumptions which
affect the amounts of reported assets and liabilities as well as
contingent assets and liabilities as of the date of these financial
statements. These estimates and assumptions also affect the reported
amounts of revenues and expenses during the reporting period(s).
Although Management believes these estimates and assumptions to be
reasonably accurate, actual results may differ.
Securities
Debt obligations of the U.S. Treasury, U.S. agencies, and of states and
municipalities are purchased with the intent to hold to maturity.
However, the Company occasionally sells securities prior to maturity in
order to limit losses if interest rates rise, or to restructure the
portfolio to better match the maturity and interest rate characteristics
of liabilities.
The Company implemented Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities
("SFAS 115"), as of December 31, 1993. This statement requires the
Company to classify its securities into one of three categories.
Securities for which the Company has the positive intent and ability to
hold until maturity are classified as held-to-maturity securities.
Securities which might be sold prior to maturity because of interest
rate changes, to meet liquidity needs, or to better match the repricing
characteristics of funding sources are classified as available-for-sale.
If the Company were to purchase securities principally for the purpose
of selling them in the near term for a gain, they would be classified as
trading securities. The Company holds no securities that should be
classified as trading securities.
In accordance with the provisions of SFAS 115, the Company's securities
classified as held-to-maturity are carried at amortized historical cost.
This is the purchase price increased by the accretion of discounts or
decreased by the amortization of premiums using the effective interest
method. Discount is accreted and premium is amortized over the period to
maturity of the related securities, or to an earlier call date, if
appropriate.
The interest income from securities that are classified as available-
for-sale is recognized in the same manner as for securities that are
classified as held-to-maturity, including the accretion of discounts and
the amortization of premiums. However, unlike the securities that are
classified held-to-maturity, securities classified available-for-sale
are reported on the consolidated balance sheets for the years ended
December 31, 1995 and 1994 at their fair value. The net unrecognized
gain or loss for these securities is reported on the consolidated
balance sheets as a separate component of equity, net of the tax effect.
Loans, Fees, and Allowance for Loan Losses
Loans are carried at amounts advanced to the borrowers less principal
payments collected. Interest on loans is accrued on a simple interest
basis, except where serious doubt exists as to the collectibility of the
loan, in which case the accrual of income is discontinued and
uncollected income is subtracted from interest earned.
Loan origination and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life
of the loan as an adjustment to the interest earned. The net
unrecognized fees represent unearned revenue, and they are reported as
reductions of the loan principal outstanding, or additions to the loan
principal if the deferred costs are greater than deferred fees.
The Company implemented Statements of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan ("SFAS 114") and
No. 118, Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures ("SFAS 118") on January 1, 1995. The
pronouncements apply to certain types of loans made by the Company and
require the Company to establish a valuation allowance for any of those
loans which are impaired. A loan is to be identified as impaired when it
is probable that interest and principal will not be collected according
to the contractual terms of the loan agreement.
The amount of the valuation allowance for impaired loans is determined
by comparing the recorded investment in each loan with its value
measured by one of three methods: (1) the expected future cash flows are
estimated and then discounted at the effective interest rate; (2) by the
loan's observable market price if it is of a kind for which there is a
secondary market; or (3) by valuing the underlying collateral. A
valuation allowance is established for any amount by which the recorded
investment exceeds the value of the impaired loan. If the value of the
loan as determined by one of the above methods exceeds the recorded
investment in the loan, no valuation allowance for that loan is
established.
The provisions of SFAS 114 permit the valuation allowance for impaired
loans to be determined on a loan-by-loan basis or by aggregating loans
with similar risk characteristics. Because the number of loans
classified as impaired is relatively small and because special factors
apply to each, the Company has determined the valuation allowance as of
December 31, 1995 on a loan-by-loan basis.
When a borrower is not making payments as contractually required by the
note, the Company must decide whether it is appropriate to continue to
accrue interest. The criteria used in making this decision are very
similar to the definition of impairment. Therefore, the Company expects
that most impaired loans will be on nonaccrual status. As with other
nonaccrual loans, any uncollected interest for impaired loans is written
off against interest income from other loans of the same type in the
current period and no further interest income is recognized until all
recorded amounts of principal are recovered in full or until
circumstances have changed such that the loan is no longer regarded as
impaired.
There are some loans that are classified as impaired because of doubt
regarding collectibility of interest and principal according to the
contractual terms, but which are both fully secured by collateral and
current in their interest and principal payments. These impaired loans
are not classified as nonaccrual.
The Company also provides an allowance for losses for (1) loans that are
not covered by SFAS 114 and SFAS 118; (2) loans which while covered by
the statements, are not identified as impaired; and (3) losses inherent
in loans of all types which have not been specifically identified as of
the period end. The valuation allowance determined in accordance with
SFAS 114 and the allowance for other loan losses are reported together
as Allowance for Loan Loss in the accompanying consolidated balance
sheet as of December 31, 1995 and in Note 4. The allowance for loan
losses is maintained at a level considered adequate to provide for
losses that can reasonably be anticipated. However, the allowance is
based on estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in earnings in the periods in which
they become known.
Implementing SFAS 114 and SFAS 118 has not had a material impact on the
financial statements of the Company. Under the procedures followed
before implementation, the loans that have been identified as impaired
during 1995 would have had a portion of the general allowance for loan
loss allocated to them in an amount approximately the same as that
established under the provisions of these statements.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is charged against income over the
estimated useful lives of the assets, usually by the use of accelerated
methods in the early years, switching to the straight-line method in
later years. Leasehold improvements are amortized over the terms of the
leases or the estimated useful lives of the improvements, whichever is
shorter. Generally, the estimated useful lives of other items of
premises and equipment are as follows:
Buildings and improvements 10-25 years
Furniture and equipment 5-7 years
Income Taxes
The Company is required to use the accrual method of accounting for tax
return purposes as well as for financial reporting purposes. However,
there are several items of income and expense which are recognized in
different periods for tax return purposes than for financial reporting
purposes. Appropriate provisions have been made in the financial
statements for deferred taxes in recognition of these temporary
differences.
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109") as of the beginning of 1993.
The statement requires an asset and liability approach for financial
accounting and reporting for income taxes, a change from the prior
approach. The effect on income for the years prior to adoption had to be
recognized by either of two means. The first was by recognizing the
effect on all prior years as a cumulative effect from a change in
accounting principle in the year of adoption. The second was by
restating the financial statements for one or more prior years to
conform to the provisions of the statement, with the effect on earlier
years that were not restated being recognized as a cumulative effect in
the earliest year restated. The Company elected to implement the
statement by the first means, and consequently recognized a gain in 1993
of $620,000 as the cumulative effect of a change in accounting
principle.
Trust Fees
Trust fees for customary services are generally based on the market
value of customer assets, and an estimate of the fees is accrued
monthly. Fees for unusual or infrequent services are recognized when the
fee can be determined.
Earnings Per Share
Earnings per common share are based on the weighted average number of
shares outstanding during each year retroactively restated for stock
dividends and stock splits. Subsequent to December 31, 1995, but prior
to the publication of these statements, the Board of Directors of the
Company declared a 3-for-2 stock split. In situations such as this,
Securities and Exchange Commission rules require the restatement of the
numbers of shares and earnings per share in the annual report as if the
split had occurred before the end of the year. Consequently, restated
for the 3-for-2 stock split, the weighted average number of shares
outstanding used in computing earnings per share was 7,677,057 in 1995,
7,646,839 in 1994, and 7,783,623 in 1993. The only potential common
stock equivalents for the Company are shares issuable on the exercise of
outstanding options. Even if all of the outstanding stock options had
been exercised, there would be no material dilutive effect for any of
the years presented and therefore they have been excluded from the
computation.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and Federal funds sold. Federal funds are sold
for only one day at a time.
Postretirement Health Benefits
The Company provides eligible retirees with postretirement health care
and dental benefit coverage. These benefits are also provided to the
spouses and dependents of retirees on a shared cost basis. Benefits for
retirees and spouses are subject to deductibles, copayment provisions,
and other limitations. The expected cost of such benefits is charged to
expense during the years that the employees render service.
Other Real Estate Owned
Other real estate owned ("OREO") represents real estate acquired through
foreclosure or deed in lieu of foreclosure. OREO is carried at the lower
of the outstanding balance of the loan before acquisition or its fair
value less estimated costs to sell. If the outstanding balance of the
loan is greater than the fair value less estimated disposal costs at the
time of the acquisition, the difference is charged-off against the
allowance for loan loss. Any senior debt to which other real estate
owned is subject is included in the carrying amount of the property and
an offsetting liability is reported along with other borrowings.
During the time the property is held, all related carrying costs are
expensed as incurred and additional decreases in the fair value are
charged to other operating expense in the period in which they become
known. Expenditures related to improvements are capitalized to the
extent that they are realizable through increases in the fair value of
the properties. Increases in the fair value may be recognized as
reductions of OREO operating expense to the extent that they represent
recoveries of amounts previously written-down. Gains in excess of the
fair value at the time of foreclosure are recognized only when the
property is sold.
OREO that has been acquired through foreclosure or deed in lieu was
$1,785,000 and $856,000 as of December 31, 1995 and 1994, respectively.
Reclassifications
Certain amounts in the 1994 and 1993 financial statements have been
reclassified to be comparable with classifications used in the 1995
financial statements.
2. SECURITIES
A summary of debt securities at December 31, 1995 and 1994 is as
follows:
(in thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1995:
Held-to-maturity:
U.S. Treasury
obligations $ 97,528 $ 775 $ -- $ 98,303
U.S. agency
obligations 51,826 983 (143) 52,666
State and
municipal
securities 82,376 15,913 -- 98,289
231,730 17,671 (143) 249,258
Available-for-sale:
U.S. Treasury
obligations 100,090 316 (122) 100,284
U.S. agency
obligations 25,026 37 -- 25,063
Equity
securities 488 -- -- 488
125,604 353 (122) 125,835
$357,334 $ 18,024 $ (265) $375,093
1994:
Held-to-maturity:
U.S. Treasury
obligations $195,354 $ 69 $ (12,189) $183,234
U.S. agency
obligations 14,654 -- (999) 13,655
State and
municipal
securities 89,512 9,727 (1,477) 97,762
299,520 9,796 (14,665) 294,651
Available-for-sale:
U.S. Treasury
obligations 48,812 12 (685) 48,139
U.S. agency
obligations 41,024 -- (1,724) 39,300
89,836 12 (2,409) 87,439
$389,356 $ 9,808 $ (17,074) $382,090
In November, 1995, the Financial Accounting Standards Board ("the FASB")
issued a guide to implementing SFAS 115. The guide permitted holders of
debt securities a onetime opportunity to transfer securities from their
held-to-maturity classification to available-for-sale without calling
into question the holder's ability and intent to hold to maturity any
securities still classified as held-to-maturity. Under this "window-of-
opportunity," the Company transferred securities with an amortized cost
of $144 million, from the held-to-maturity classification to available-
for-sale. The unrealized gains and losses on these securities totaled
$683,000 and $986,000, respectively. $94 million of these reclassified
securities were sold prior to December 31, 1995.
The amortized cost and estimated fair value of debt securities at
December 31, 1995 and 1994, by contractual maturity, are shown in the
next table. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
(in thousands) Held-to- Available-
Maturity for-Sale Total
1995:
Amortized cost:
In one year or less $ 32,414 $ 55,135 $ 87,549
After one year
through five years 151,560 69,981 221,541
After five years
through ten years 21,823 -- 21,823
After ten years 25,933 -- 25,933
Equity securities -- 488 488
$231,730 $125,604 $357,334
Estimated market value:
In one year or less $ 32,522 $ 55,172 $ 87,694
After one year
through five years 158,803 70,175 228,978
After five years
through ten years 27,978 -- 27,978
After ten years 29,955 -- 29,955
Equity securities -- 488 488
$249,258 $125,835 $375,093
1994:
Amortized cost:
In one year or less $ 17,220 $ 33,992 $ 51,212
After one year
through five years 225,648 55,844 281,492
After five years
through ten years 35,798 -- 35,798
After ten years 20,854 -- 20,854
$299,520 $ 89,836 $389,356
Estimated market value:
In one year or less $ 17,694 $ 33,816 $ 51,510
After one year
through five years 214,105 53,623 267,728
After five years
through ten years 43,063 -- 43,063
After ten years 19,789 -- 19,789
$294,651 $ 87,439 $382,090
During 1994 and 1995, the Company transferred four of its U.S. agency
securities from available-for-sale classification to held-to-maturity.
The securities, when purchased in 1993 and 1994, had one or more call
dates. The terms of the securities provided that if they were not
called, the interest rate on the securities would increase, or "step
up," consequently the bonds are termed "step bonds." At the time of
purchase, interest rates were such that Management expected that they
would be called. When interest rates increased during 1994, it would
have been more expensive for the issuer to refinance the debt at current
interest rates and none of the securities has been called. With
circumstances changed, Management decided to classify them as held-to-
maturity. The notes were transferred at their fair value. This was
$4,802,000 for the one transferred in 1994 and $29,296,000 for the ones
transferred in 1995. The unrealized loss on the first security at the
time of transfer was $187,000 and for the three later ones was $704,000.
Under the provisions of SFAS 115, the sum of these amounts (net of tax
effect) remained in the special component of equity for unrealized gains
and losses on securities available-for-sale to be amortized over the
remaining term of the securities. The tax effect is reported as a
portion of the deferred tax asset in Note 8.
As of December 31, 1995, two have reached their final steps at 4.50% and
6.61%. The first has one remaining call date. The other two notes,
currently earning 5.15% and 5.00%, each have two more call dates in
1996, with step-ups of 1.00% at each call date if they are not called.
Only the interest rate on these notes is contingent, all principal is
paid at maturity unless at a sooner call date. There is no circumstance
under which the interest rates paid on these notes will decline. At
current interest rate levels, the step-up rates are close to what would
appear to make it advantageous for the issuers to call the notes at the
next available call. However, such other considerations as costs of
refinancings and other circumstances unknown to the Company, may lead
the issuers to leave the notes outstanding.
The proceeds received from sales or calls of debt securities and the
gross gains and losses that were recognized for the years ended December
31, 1995 and 1994 are shown in the next table. Because the
identification of the securities as held-to-maturity or available-for-
sale under the provisions of SFAS 115 did not take place until December
31, 1993, it is not possible to distinguish to which portfolio the
proceeds, gains, and losses from sales or calls that occurred during the
year of 1993 relate. Consequently, the amounts for 1993 relate to the
whole portfolio. Similarly, in the Consolidated Statements of Cash Flow,
the proceeds from sales, maturities, and calls, and the purchases of
securities, are reported only for the entire securities portfolio.
(in thousands) Gross Gross
Proceeds Gains Losses
1995
Held-to-maturity:
Calls $ 13,071 -- --
Available-for-sale:
Sales $ 93,342 $ 683 $ 760
Calls $ 21,020 -- $ 22
1994
Held-to-maturity:
Calls $ 3,295 -- --
Available-for-sale:
Sales $138,799 $ 5 $ 1,196
1993
Total portfolio
Sales $ 9,975 $ 1 $ 48
Calls $ 8,283 -- --
The Company was required in 1995 to purchase stock in the FRB as a
condition of becoming a member. The shares purchased are reported as
equity securities.
Securities with a book value of approximately $286,547,000 at December
31, 1995 and $161,050,000 at December 31, 1994 were pledged to secure
public funds, trust deposits and other borrowings as required or
permitted by law.
3. LOANS
The loan portfolio consists of the following:
(in thousands) December 31
1995 1994
Real estate loans:
Residential $142,143 $108,923
Non-residential 179,272 145,928
Construction 20,846 26,695
Commercial, industrial,
and agricultural 144,011 148,396
Home equity lines 34,597 32,573
Consumer 28,494 27,319
Municipal tax-exempt
obligations 7,573 7,831
Other 1,865 1,766
$558,801 $499,431
The amounts above are shown net of deferred loan origination,
commitment, and extension fees of $2,139,000 for 1995 and of $2,038,000
for 1994.
Refund Anticipation Loans
The Company makes tax refund anticipation loans. Taxpayers desiring to
receive their income tax refunds early borrow from the Company and the
Internal Revenue Service later sends the refund to the Company. The
funds advanced are generally paid within several weeks. Therefore, the
costs to process the loans are greater in comparison to the cost of
funds than they are for other types of loans. Consequently, the Company
has a set fee for this service which does not vary by the amount of
funds advanced or the length of time that the loan is outstanding.
Nonetheless, the fees are reported in the statements of income as
interest income, and totaled $3,253,000 for 1995, $4,791,000 for 1994,
and $1,048,000 for 1993. The loans are all made during the tax filing
season of January through April of each year. Any loans for which
repayment has not been received after 90 days from the expected payment
date are charged off. Consequently, there were no refund anticipation
loans included in the above table of outstanding loans at December 31,
1995 or 1994.
Impaired Loans
The following table discloses information about the loans classified as
impaired under the provisions of SFAS 114 and SFAS 118 and the valuation
allowance related to them as of and for the year ended December 31, 1995
(in thousands):
Loans identified as impaired $ 13,295
Impaired loans for which a valuation
allowance has been determined $ 13,295
Impaired loans for which no valuation
allowance has been determined $ --
Amount of valuation allowance $ 4,766
Average amount of recorded investment
in impaired loans for the year $ 22,149
Interest recognized during the period
for loans identified as impaired
at December 31, 1995 $ 246
Interest received in cash during the
period for loans identified as
impaired at December 31, 1995 $ 221
The valuation allowance disclosed above is included in the allowance for
loan loss reported in the following note.
4. ALLOWANCE FOR LOAN LOSSES
The following summarizes the changes in the allowance for loan losses:
(in thousands) Year ended December 31
1995 1994 1993
Balance, beginning of year $12,911 $10,067 $ 9,353
Tax refund anticipation loans:
Provision for losses 2,863 2,890 118
Recoveries on
loans previously
charged-off 383 672 62
Loans charged-off (4,402) (3,030) (650)
All other loans:
Provision for losses 7,061 3,367 6,032
Recoveries on
loans previously
charged-off 733 458 370
Loans charged-off (7,200) (1,513) (5,218)
Balance, end of year $12,349 $12,911 $10,067
The ratio of losses to total loans made from the tax refund anticipation
loans are higher than arise from other loans. For these loans, the
provision for loan loss, the loans charged-off, and the loans recovered
are reported separately from the corresponding amounts for all other
loans.
5. CASH AND DUE FROM BANKS
Included within cash and due from banks are the reserves that all
depository institutions are required by law to maintain on transaction
deposits. The average cash reserve balances required by the Federal
Reserve Bank to be maintained by the Bank were approximately $19.4
million in 1995 and $18.5 million in 1994.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
(in thousands) December 31
1995 1994
Land $ 1,282 $ 1,282
Buildings and improvements 4,412 4,294
Leasehold improvements 6,340 5,369
Furniture and equipment 12,843 11,167
Total cost 24,877 22,112
Accumulated depreciation
and amortization (16,728) (14,721)
Net book value $ 8,149 $ 7,391
Depreciation and amortization on fixed assets included in other
operating expenses totaled $2,041,000 in 1995, $1,614,000 in 1994, and
$1,143,000 in 1993.
7. Deposits
Deposits consisted of the following:
(in thousands) December 31
1995 1994
Noninterest-
bearing deposits $ 158,122 $147,085
Interest bearing deposits:
NOW accounts 148,027 142,639
Money market 427,198 355,581
deposit accounts
Other savings deposits 94,124 113,074
Time certificates of
$100,000 or more 76,438 63,556
Other time deposits 150,111 134,782
Total deposits $1,054,020 $956,717
Interest expense by deposit type consisted of:
(in thousands) Year ended December 31
1995 1994 1993
Interest on deposits:
NOW accounts $ 1,476 $ 1,294 $ 1,436
Money market 16,736 10,387 6,245
deposit accounts
Other savings deposits 2,347 3,033 3,812
Time certificates of
$100,000 or more 2,974 2,366 2,910
Other time deposits 8,502 6,928 7,163
Total $32,035 $24,008 $21,566
8. INCOME TAXES
The provisions (benefits) for income taxes related to operations, the
tax benefit related to stock options that is credited directly to
shareholders' equity, and the change in the method of accounting for
taxes described in Note 1 are as follows:
The current provision for income taxes includes credits of $41,000,
$495,000, and $19,000 related to net securities losses for 1995, 1994,
and 1993, respectively.
Although not affecting the total provision, actual income tax payments
may differ from the amounts shown as current as a result of the final
determination as to the timing of certain deductions and credits.
The total tax provision differs from the Federal statutory rate of 34
percent for the reasons shown in the table at the top of the next
column.
(in thousands) Year ended December 31
1995 1994 1993
Tax provision at Federal
statutory rate 34.0% 34.0% 34.0%
Interest on securities exempt
from Federal taxation (16.4)% (14.4)% (14.5)%
State income taxes, net of
Federal income tax benefit 7.8% 7.1% 6.7%
ESOP dividends deductible as
an expense for tax purposes (1.0)% (0.8)% (0.8)%
Other, net 3.0% 0.0% 0.9%
Actual tax provision 27.7% 25.9% 26.3%
Because certain items of income and expense are not recognized in the
same year in the financial statements of the Company as in its Federal
and California tax returns, deferred assets and liabilities are created.
As of December 31, 1995 and 1994, included within other assets on the
balance sheet are net deferred tax assets of $6,334,000 and $8,066,000,
respectively. The net deferred tax assets as of December 31, 1995 and
1994 and the change in the tax effect of the principal temporary
differences for the year ending that date are disclosed in the table at
the bottom of this page.
The tax effect of the unrealized loss on securities available for sale
is recorded directly to equity. Therefore, it is a component of the
deferred tax asset or liability, the change in which does not impact the
tax provision. Hence there is no entry in the columns labled "Tax
Effect" in the table below for the change.
Tax Tax
(in thousands) Components Effect Components Effect Components
1995 1995 1994 1994 1993
Deferred tax assets:
Allowance for loan loss $ 4,626 $ (740) $ 5,366 $ 1,375 $ 3,991
State taxes 450 (317) 767 114 653
Loan fees 444 (578) 1,022 403 619
Depreciation 956 265 691 386 305
Post retirement benefits 587 86 501 (84) 585
Other real estate owned -- -- -- (143) 143
Nonaccrual interest 220 191 29 15 14
Other 231 190 41 37 4
7,514 (903) 8,417 2,103 6,314
Valuation allowance -- -- -- -- --
Total deferred tax
assets 7,514 (903) 8,417 2,103 6,314
Deferred tax liabilities:
Loan costs 505 105 400 88 312
Accretion on securities 499 (64) 563 140 423
Federal effect of state
tax asset 281 (171) 452 152 300
Other 22 22 -- (1) 1
Total deferred
tax liabilities 1,307 (108) 1,415 379 1,036
Net deferred tax asset
before unrealized gains
and losses on
securities 6,207 (795) 7,002 1,724 5,278
Unrealized gain on
securities -- -- (481)
Unrealized loss on
securities 127 1,064 --
Net deferred tax asset $ 6,334 $ (795) $ 8,066 $ 1,724 $ 4,797
Management believes a valuation allowance is not needed to reduce any
deferred tax asset because there is sufficient taxable income within the
carryback periods or expected to be generated from operations to realize
all material amounts.
9. SHAREHOLDERS' EQUITY
The Company has three stock option plans. These plans offer key
employees and directors an opportunity to purchase shares of the
Company's common stock. The first is the Directors Stock Option Plan,
established in 1986 for directors of the Company. Only non-qualified
options may be granted under this plan. The second is the Restricted
Stock Option Plan for employees established in January, 1992. Either
incentive or non-qualified options may be granted under this plan. Stock
acquired by the exercise of options granted under this plan may not be
sold for five years after the date of the grant or two years after the
date options are exercised, whichever is later. The third plan is the
Stock Option Plan for employees established in 1983. All options
approved under this plan have been granted and the plan is active now
only for the exercise of options held by employees.
The following information is presented concerning the stock option plans
as of December 31, 1995, 1994, and 1993 (adjusted for stock splits and
stock dividends):
Per Share
Options Price Ranges
1995
Granted 92,394 $16.33 to $19.83
Exercised 87,051 $9.52 to $17.00
Cancelled and expired 18,091 $10.33 to $16.67
Outstanding
at end of year 666,516 $9.21 to $19.83
Range of
expiration dates 7/02/96 to 5/20/2002
Exercisable
at end of year 411,883 $9.21 to $19.00
Shares available
for future grant 243,458
1994
Granted 84,702 $14.00 to $19.00
Exercised 149,839 $9.52 to $14.00
Cancelled and expired 67,095 $4.88 to $17.08
Outstanding
at end of year 679,263 $9.21 to $19.00
Exercisable
at end of year 358,677 $9.21 to $17.00
1993
Granted 243,903 $12.67 to $14.33
Exercised 76,310 $9.21 to $12.96
Cancelled and expired 9,808 $10.16 to $13.30
Outstanding
at end of year 811,496 $4.88 to $14.33
Exercisable
at end of year 403,033 $4.88 to $14.04
All options outstanding were granted with an option price set at 100% of
the market value of the Company's common stock on the date of the grant.
The grants for most of the employee options specify that they are
exercisable in cumulative 20% annual installments and will expire 5
years from the date of grant. The Board has granted some options which
are exercisable in cumulative 10% annual installments and expire 10
years from the date of grant. The options granted under the directors'
plan are exercisable in 6 months.
The option plans permit employees and directors to pay the exercise
price of options they are exercising with shares of stock they already
own. The owned shares are surrendered to the Company at current market
value. Shares with a current market value of $824,000, $1,011,000, and
$184,000 were surrendered in the years ended December 31, 1995, 1994,
and 1993, respectively. These surrendered shares are included with other
retire shares in the Consolidated Statements of Changes in Shareholders'
Equity.
In October 1995, the FASB issued Statement of Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS 123"). Under the
accounting method that has been in effect prior to the effective date of
this statement, if options are granted at an exercise price equal to the
market value of the stock at the time of the grant, no compensation
expense is recognized. SFAS 123 establishes a second accounting method
for employee stock options under which issuers would record compensation
expense for the "fair value" of the options at the time of the grant.
This compensation expense is based on option models that attribute value
to the options based on the length of their term, the volatility of the
stock price in past periods, and other factors. Under this method, the
Company would recognize compensation expense regardless of whether the
officer or director exercised the options. In SFAS 123, the FASB has
indicated its preference for the new method in SFAS, however, the
statement permits entities to retain the prior method. The Company
believes that the prior method better reflects the motivation for its
issuance of stock options--that they are incentives for future
performance rather than compensation for past performance. In adopting
SFAS 123 on January 1, 1996, the Company has chosen to continue to
account for its stock option plans in accordance with the prior method.
SFAS 123 requires entities that elect to retain the prior method to
present pro forma disclosures of net income and earnings per share as if
the new method had been applied. The Company will include these
disclosures with its financial statements for the year ending December
31, 1996.
In October 1993, the Company offered to purchase about 4.8% of the then
outstanding shares of common stock from its shareholders. Provision was
made in the offer to purchase additional tendered shares at the
Company's option. At the close of the offer on November 15, 1993, about
3.0% of the outstanding shares were purchased by the Company. The
purchase of $3.3 million was financed from operating funds paid by the
Bank to the Company as a dividend. These shares were outstanding for
most of 1993. This resulted in a higher balance of weighted average
shares outstanding for 1993 used in the computation of earnings per
share than in 1994 and 1995.
In March 1990, the Company's Employee Stock Ownership Plan ("ESOP")
purchased 289,406 shares (adjusted for stock dividends) from the
Company. The purchase of the shares by the ESOP was financed partially
by a loan from another commercial bank. This loan was guaranteed by the
Company. Generally accepted accounting principles require that the
outstanding amount of such a loan be shown on the Company's balance
sheet both among liabilities and as an offset to shareholders' equity.
Interest and principal payments were made by the ESOP from dividends
received on Company stock held for employees and from funds received
from the Company as part of its regular contribution to employee
retirement plans. The balance of the note at December 31, 1992 was
$1,400,000. This remaining balance was paid in January 1993, and this
transaction is reported in the Consolidated Statements of Changes in
Shareholders' Equity for the year ended December 31, 1993.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS
PURCHASED
The Company sells certain of its securities under agreements to
repurchase at a later date at a set price. The following information is
presented concerning these transactions:
(dollars in thousands) Year ended December 31
1995 1994 1993
Weighted average interest
rate at year-end 4.53% 4.57% 2.68%
Weighted average interest
rate for the year 5.01% 3.26% 2.90%
Average outstanding
for the year $10,153 $ 9,355 $12,220
Maximum outstanding
at any month-end
during the year $21,900 $12,525 $16,274
Amount outstanding
at end of year $21,900 $ 3,461 $ 7,641
The Bank purchased Federal funds from correspondent banks as detailed in
the next table:
(dollars in thousands) Year ended December 31
1995 1994 1993
Weighted average interest
rate at year-end 5.75 % 5.75 % 2.91 %
Weighted average interest
rate for the year 5.79 % 4.01 % 2.93 %
Average outstanding
for the year $16,649 $14,276 $12,732
Maximum outstanding
at any month-end
during the year $29,416 $21,206 $27,151
Amount outstanding
at end of year $29,416 $ 6,026 $12,514
11. OTHER BORROWINGS
Included in other borrowings are Treasury Tax and Loan demand notes
issued to the U.S. Treasury and miscellaneous other borrowings such as
the senior debt on other real estate owned as explained in Note 1. There
was $210,000 in such senior debt at December 31, 1995, but none at
December 31, 1994.
During the course of 1995 and 1994, the Company borrowed funds for
liquidity purposes from the discount window at the Federal Reserve Bank,
but there were no such borrowings at December 31 of either year.
12. OTHER OPERATING INCOME AND EXPENSE
The largest items included in other service charges, commissions, and
fees, are listed in the table below. The gains on loan sales arise
primarily from the recognition of origination fees that have not been
amortized by the time of sale. The refund transfer fees are earned for
the electronic transmission of tax refunds to customers or to their tax
preparer to facilitate earlier receipt of the refund. The credit card
rebate is a fee paid by the purchaser of the Company's credit card
portfolio for the continuing use of the cards by the Company's
customers.
Of the amounts included in other operating expense, the largest items in
1995 were credit card clearing fees and consultant expense. Consultants
include the Company's independent accountants, attorneys, and other
management consultants used for special projects. In 1993 and 1994, FDIC
deposit insurance premiums were the largest item. During 1995, however,
the FDIC Bank Insurance Fund reached the statutory maximum and the FDIC
reduced the premium expense for the second half of the year to a very
low rate and refunded the excess paid in the first half of the year.
The amounts for these income and expense categories included in the
statements of income are as follows:
(in thousands) Year ended December 31
1995 1994 1993
Income items:
Draft processing $ 2,146 $ 2,011 $ 2,104
Gains on loan sales 53 126 548
Escrow fees 228 331 311
Refund transfer fees 1,629 24 8
Loan broker fees 300 -- --
Safe deposit fees 249 235 204
Credit card rebate 216 326 93
Expense items:
FDIC assessments $ 45 $ 1,982 $ 1,891
Credit card clearing fees 1,159 1,575 1,757
Consultant expense 803 702 730
13. EMPLOYEE BENEFIT PLANS
The Company has two defined-contribution profit sharing plans. The first
is the Incentive and Investment and Salary Savings Plan. This plan has
two components. The first component, the Incentive and Investment Plan,
was established in 1966, and provides for contributions by the Company
in accordance with a formula. The formula defines the contribution as
10% of pre-tax profits prior to this employer contribution, reduced by
the matching contributions paid to the Salary Savings component of the
Plan and the contributions made to the ESOP. In 1993, the Company
contributed an extra amount to the ESOP for the purpose of paying off
the loan it incurred for the purchase of stock. Consequently, no
contribution was made to the Incentive and Investment portion of the
plan. In 1994 and 1995, all profit-sharing contributions in excess of
the 401(k) employer match were directed to the Incentive and Investment
Plan.
The other component, the Salary Savings Plan, is authorized under
Section 401(k) of the Internal Revenue Code. An employee may defer up to
10% of pre-tax salary in the plan up to a maximum dollar amount set each
year by the Internal Revenue Service. Effective January 1, 1994, the
Company matches 100% of the first 3% of the employee's deferral and 50%
of the next 3%, but not more than 4.5% of the employee's total
compensation. Through 1993, the Company had matched 50% of the
employee's deferral up to 6% of the employee's compensation. This led to
a maximum match of 3%. In 1995, 1994, and 1993 the employer's matching
contributions were $597,000, $554,000, and $287,000, respectively.
The second plan is the ESOP, which was initiated in January 1985. As of
December 31, 1995, the ESOP held 782,265 shares at an average cost of
$9.09 per share.
In 1993, the Company made contributions to the ESOP of $1,404,000.
$1,400,000 of the contribution was used to pay off the remaining balance
of the note and $4,000 was used for the payment of interest.
Total contributions to the profit sharing plans were $1,294,000 in 1995,
$1,884,000 in 1994, and $1,691,000 in 1993.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments ("SFAS 107") requires companies to
disclose the fair value of those financial instruments for which it is
practicable to estimate that value and the methods and significant
assumptions used to estimate those fair values. This must be done
irrespective of whether or not the instruments are recognized on the
balance sheets of the Company. In the case of financial instruments for
which it is not practicable to estimate the fair value, the Company is
required to disclose information pertinent to estimating the fair value
such as interest rates and maturity, and also state the reasons why it
is not practicable to estimate fair value.
In SFAS 107, the FASB states that the "[f]air values of financial
instruments depict the market's assessment of the present value of net
future cash flows directly or indirectly embodied in them, discounted to
reflect both current interest rates and the market's assessment of the
risk that the cash flows will not occur." The information about fair
value is said to better enable "investors, creditors, and other users to
assess the consequences of an entity's investment and financing
strategies, that is, to assess its performance."
Nonetheless, there are several factors which users of these financial
statements should keep in mind regarding the fair values disclosed in
this note. First, the statement acknowledges that there are
uncertainties inherent in the process of estimating the fair value of
financial instruments. Secondly, the statement covers only financial
instruments, not other assets like premises, the fair value of which
might differ significantly from the amounts at which they are carried in
an entity's financial statements. Thirdly, the Company must exclude from
its estimate of the fair value of deposit liabilities any consideration
of its on-going customer relationships which provide stable sources of
investable funds. Lastly, the statement does not address means of
evaluating an entity's performance in areas other than the management of
financial instruments, for example the ability to generate noninterest
income and the control of noninterest expense. For these reasons, users
are advised not to regard the disclosure of the fair market value of
financial instruments as in any way equivalent to a valuation of the
Company as a whole.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
Cash
The face value of cash is its fair value.
Securities and bankers' acceptances
For securities and bankers' acceptances, fair value equals quoted market
price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Because of the implementation of SFAS 115 as explained in Note 1, a
portion of the securities portfolio is carried at fair value.
Loans
The fair value of loans is estimated by discounting the future
contractual cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. These contractual cash flows are adjusted to
reflect estimates of uncollectible amounts.
Deposit liabilities
The fair value of demand deposits, money market accounts, and savings
accounts is the amount payable on demand as of December 31 of each year.
The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
Repurchase agreements, Federal funds purchased, and other borrowings
For these short-term instruments, the carrying amount is a reasonable
estimate of their fair value.
Commitments to extend credit, standby letters of credit, and financial
guarantees written
The fair value of guarantees and letters of credit is based on fees
currently charged for similar agreements. The Company seldom charges
fees for loan commitments. The Company does not believe that these
commitments have a fair value within the context of SFAS 107 because
generally fees are not being charged, the use of the commitment is at
the option of the potential borrower, and the commitments are being
written at rates comparable to current market rates.
The Company has no financial instruments covered by the statement for
which it is not practicable to estimate a fair value.
The carrying amount and estimated fair values of the Company's financial
instruments as of December 31, 1995 and 1994 are as follows:
Carrying
(in thousands) Amount Fair Value
As of December 31, 1995:
Financial assets:
Cash and due from banks $ 74,746 $ 74,746
Federal funds sold 65,000 65,000
Securities available-for-sale 125,835 125,835
Securities held-to-maturity 231,730 249,258
Bankers' acceptances 139,294 139,302
Loans 546,452 549,640
Financial liabilities:
Deposits 1,054,020 1,057,495
Repurchase agreements,
Federal funds purchased,
and other borrowings 52,526 52,526
Unrecognized financial
instruments:
Commitments to
extend credit -- --
Standby letters of credit -- 167
As of December 31, 1994:
Financial assets:
Cash and due from banks $ 69,630 $ 69,630
Federal funds sold 15,000 15,000
Securities available-for-sale 87,439 87,439
Securities held-to-maturity 299,520 294,651
Bankers' acceptances 80,594 80,510
Loans 486,520 483,632
Financial liabilities:
Deposits 956,717 957,478
Repurchase agreements,
Federal funds purchased,
and other borrowings 10,487 10,487
Unrecognized financial
instruments:
Commitments to
extend credit -- --
Standby letters of credit -- 166
15. Other Postretirement Benefits
With the adoption of Statement of Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions
("SFAS 106") as of the beginning of 1992, the Company recognizes the net
present value of the estimated future cost of providing health insurance
benefits to retirees as those benefits are earned rather than when paid.
To formalize the terms for the provision of these benefits, the Company
established the Retiree Health Plan.
Under the provisions of the Retiree Health Plan, all eligible retirees
may purchase health insurance coverage through the Company. The cost of
this coverage is that amount which the Company pays under the basic
coverage plan provided for current employees. Based on a formula
involving date of retirement, age at retirement, and years of service
prior to retirement, the Plan provides that the Company will contribute
a portion of the cost for the retiree, varying from 60% to 100% at the
time the employee retires, with the stipulation that the cost of the
portion paid by the Company shall not increase by more than 5% per year.
The statement defines the Company's accumulated postretirement benefit
obligation ("APBO"). This obligation is the actuarial net present value
of the obligation for fully eligible plan participants' expected
postretirement benefits plus the portion of the expected postretirement
benefit obligation for other active plan participants attributed to
service as an employee.
This obligation must be remeasured each year because it changes with
each of the following factors: 1) the number of employees working for
the Company; 2) the average age of the employees working for the
Company; 3) increases in expected health care costs; 4) the amount of
earnings anticipated on plan assets; and 5) prevailing interest rates.
In addition, because the obligation is measured on a net present value
basis, the passage of each year brings the eventual payment of benefits
closer, and therefore causes the obligation to increase. The following
table shows the amount of the APBO, the fair value of the plan assets
held by the Retiree Health Plan, and the accrued postretirement benefit
cost as of December 31, 1995 and 1994:
(in thousands) December 31
1995 1994
Retirees eligible for benefits $ (805) $ (512)
Dependents eligible for benefits (420) (274)
Active employees fully eligible (645) (368)
Active employees not fully
eligible (1,409) (1,009)
Accumulated postretirement
benefit obligation (3,279) (2,163)
Fair value of plan assets 2,560 2,162
Accumulated postretirement
benefit obligation in excess of
plan assets (719) (1)
Unrecognized prior service cost 6 8
Unrecognized net (gain) loss 278 (230)
Accrued postretirement benefit cost $ (435) $ (223)
The accrued postretirement benefit costs of $435,000 and $223,000 are
included within accrued interest payable and other liabilities in the
consolidated balance sheets for December 31, 1995 and 1994,
respectively.
Each year the Company is required to recognize a portion of the change
in the APBO. This portion is called the net periodic postretirement
benefit cost (the "NPPBC"). The NPPBC, included with the cost of other
benefits in the Consolidated Statements of Income is made up of several
components as shown in the next table.
(in thousands) Year ended December 31
1995 1994 1993
Service cost $ 148 $ 252 $ 165
Interest cost 185 231 185
Return on assets (120) (149) (127)
Amortization cost -- 56 --
Net periodic post-
retirement cost $ 213 $ 390 $ 223
The first component is service cost, which is the net present value of
the portion of the expected postretirement benefit obligation for active
plan participants attributed to service for that year. The second is
interest cost, which is the increase in the accumulated postretirement
benefit obligation that results from the passage of another year. That
is, because the benefit obligation for each employee is one more year
closer to being paid, the net present value increases. The third
component, return on assets, is the income earned on any investments
that have been set aside to fund the benefits. This return is an offset
to the other components.
The fourth component, amortization cost, arises because significant
estimates and assumptions about interest rates, trends in health care
costs, employee turnover, and earnings on assets are used in measuring
the APBO each year. Actual experience may differ from the estimates and
assumptions may change. Both of these cause increases or decreases in
the APBO or the value of plan assets. In the last several years, changes
in the discount rate used in measuring the APBO at one year-end and the
NPPBC for the next year have had significant impact. The following table
discloses the discount rates that have and will be used:
For Determining
For Measuring the NPPBC for
Discount the APBO at the Year Ended
Rate Used December 31 December 31
8.90% 1992 1993
7.12% 1993 1994
8.73% 1994 1995
7.06% 1995 1996
The discount rate is selected each year by reference to the current
rates of investment grade corporate bonds. Higher discount rates lower
the APBO at the end of the year and the NPPBC to be recognized for the
following year, while lower rates raise both.
Rather than the whole amount of the change in the APBO being recognized
in the year after it arises, the statement provides for gains or losses
arising from these changes in experience and/or assumptions to be
recognized through amortization over the average remaining service lives
of the employees. Amortization over time is used because many of these
changes may be partially or fully reversed in subsequent years as
further changes in experience and/or assumptions occur.
At the time of implementing the statement, the Company fully recognized
the net present value of the benefits earned by employees for prior
service. Had the Company not recognized this amount, a portion of it
would be included in the NPPBC as a fifth component.
Among the significant estimates or assumptions used in determining the
APBO are the rate of earnings on assets which will be available to
offset the other components and the annual increase in medical insurance
premiums. While the discount rate used in the present value computation
of the APBO has fluctuated with market rates, the Company has continued
to use 7.0% as its estimate of the long-term rate of return on plan
assets. As noted above, the Retiree Health Plan provides for the
Company's contribution for insurance premiums to be limited to an annual
increase of 5%. Should insurance premiums increase at a higher rate, the
retirees will need to contribute a larger portion of the total premium
cost. Therefore, 5% has been set as the assumed cost trend rate for
health care. Because of this limitation, an increase in the actual cost
of health care will have no impact on the APBO.
Under the provisions of SFAS 106, employers are allowed wide discretion
as to whether and how they set aside funds to meet the obligation they
are recognizing. Under the provisions of the current Internal Revenue
Code, only a portion of this funding may be deducted by the employer.
The funded status of the plan is shown in the previous table as the
excess of the APBO over plan assets.
The Company established a Voluntary Employees' Beneficiary Association
("VEBA") to hold the assets that will be used to pay the benefits for
participants of the plan other than key executive officers. Most of the
plan assets have been invested in insurance policies on the lives of
various employees of the Company.
The current funding policy of the Company is to contribute assets to the
VEBA sufficient to pay the costs of current medical premiums of retirees
and the costs of the life insurance premiums. Proceeds from the life
policies payoffs will fund benefits and premiums in the future.
As of December 31, 1995, the VEBA was underfunded by $420,000. The APBO
related to the key employees of $299,000 is totally unfunded.
16. COMMITMENTS AND CONTINGENCIES
The Company leases several office locations and substantially all of the
office leases contain multiple five-year renewal options and provisions
for increased rentals, principally for property taxes and maintenance.
As of December 31, 1995, the minimum rentals under non-cancelable leases
for the next five years and thereafter are as follows:
(in thousands) Year ended Non-cancelable
December 31 lease expense
1996 $ 2,318
1997 2,247
1998 2,244
1999 1,839
2000 1,445
Thereafter 5,040
$15,133
Total net rentals for premises included in other operating expenses are
$2,127,000 in 1995, $1,801,000 in 1994, and $1,552,000 in 1993.
The Company is currently leasing space from a partnership in which a
director has an interest. The original terms of the lease were
negotiated with the assistance of two independent, outside appraisers,
and the lease was approved by the Board of Directors of the Company. The
Company exercised its option to renew the lease in 1989. In 1994, the
Company renegotiated the lease to receive other rights such as
additional lease option periods and a right of first refusal to purchase
the building if it is offered for sale. The nominal monthly rent
increased to obtain these benefits, but the actual outlay was reduced in
order for the Company to be reimbursed for advancing the partnership's
share of seismic improvements made to the leased property in 1994. The
above schedule of lease commitments includes the terms of the current
agreement. Management believes the terms of the revised lease are
comparable with terms which would be available with unaffiliated third
parties and the terms were also approved by the Company's Board of
Directors.
In the normal course of business to meet the financing needs of its
customers, the Company is a party to financial instruments with "off-
balance sheet" risk. These financial instruments consist of commitments
to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. The Company almost never charges fees in connection with loan
commitments. Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a
third party. The Company charges a fee for these letters of credit.
The standby letters of credit involve, to varying degrees, exposure to
credit risk in excess of the amounts recognized in the statement of
financial position. This risk arises from the possibility of the failure
of the customer to perform according to the terms of a contract that
would cause a draw on a standby letter of credit by a third party. To
minimize the risk, the Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The decision as to whether collateral should be required is
based on the circumstances of each specific commitment or conditional
obligation. Because of these practices, Management does not anticipate
any significant losses will arise from such draws.
Changes in market rates of interest for those few commitments and
undisbursed loans which have fixed rates of interest represent a
possible cause of loss by the contractual requirement to lend money at a
rate that is no longer as great as the market rate at the time the loan
is funded. To minimize this risk, if rates are quoted in a commitment,
they are generally stated in relation to the Company's base lending rate
which varies with prevailing market interest rates. Fixed-rate loan
commitments are not usually made for more than 3 months.
The maximum exposure to credit risk is represented by the contractual
notional amount of those instruments. As of December 31, 1995 and 1994,
the contractual notional amount of these instruments are as follows:
(in thousands) December 31,
1995 1994
Standby letters of credit $ 12,623 $ 9,093
Loan commitments 46,996 25,941
Undisbursed loans 12,793 13,795
Unused consumer credit lines 53,759 45,866
Unused credit lines 73,779 69,384
$199,950 $164,079
Since many of the commitments are expected to expire without being drawn
upon, the amounts above do not necessarily represent future cash
requirements.
The Company has concentrated its lending activity almost exclusively
with customers within Santa Barbara and Ventura Counties. The business
customers are in widely diversified industries, and there is a large
consumer component to the portfolio. The largest concentration of loans
is to real estate developers, but the nature of the properties is quite
varied: 1-4 family residential, multifamily residential, and commercial
buildings of various kinds. Continued increases in interest rates may
cause delay in the sale or lease of some of these properties, and the
Company has considered this in evaluating the adequacy of the allowance
for loan loss.
The Company has a trust department that has fiduciary responsibility for
the assets that it holds on behalf of its trust customers. These assets
are not owned by the Company and accordingly are not reflected in the
accompanying consolidated balance sheets.
The Company is involved in various litigation of a routine nature which
is being handled and defended in the ordinary course of the Company's
business. In the opinion of management, the resolution of this
litigation will not have a material impact on the Company's financial
position.
17. SANTA BARBARA BANCORP
Santa Barbara Bancorp is the parent company and sole owner of the Bank.
However, there are legal limitations on the amount of dividends which
may be paid by the Bank to the Company. At December 31, 1995, the Bank
could have declared dividends of approximately $28.9 million to the
Company. Federal law also restricts the Bank from extending credit to
the Company by making any such extensions of credit subject to strict
collateral requirements. The condensed financial statements of the
parent company only are presented on this and the following page.
SANTA BARBARA BANCORP
(Parent Company Only)
INCOME STATEMENTS
(in thousands)
Year ended December 31
1995 1994 1993
Equity in earnings of subsidiaries:
Undistributed $ 5,680 $10,356 $ 7,102
Dividends 4,686 2,500 5,780
Interest income 6 7 7
Miscellaneous expenses (131) (153) (215)
Income tax benefit 174 241 256
Net income $10,415 $12,951 $12,930
SANTA BARBARA BANCORP
(Parent Company Only)
BALANCE SHEETS
(in thousands)
December 31
1995 1994
Cash $ 346 $ 204
Investment in and advances to subsidiaries 101,723 94,726
Notes receivable 54 55
Other assets 5 1
Total assets $102,128 $ 94,986
Dividends payable $ 1,131 $ 1,025
Other liabilities -- 1
Total liabilities 1,131 1,026
Common stock 5,119 5,126
Surplus 39,191 39,683
Unrealized loss on securities available-for-sale (179) (1,496)
Retained earnings 56,866 50,647
Total shareholders' equity 100,997 93,960
Total liabilities and shareholders' equity $102,128 $ 93,986
SANTA BARBARA BANCORP
(Parent Company Only)
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31
1995 1994 1993
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Interest received $ 6 $ 7 $ 8
Cash paid to suppliers and others (131) (153) (215)
Income tax benefit 174 241 256
Net cash provided by operating activities 49 95 49
Cash flows from investing activities:
Net decrease in loans made to customers 1 1 3
Proceeds from sale of OREO -- -- 400
Distributed earnings of subsidiaries 4,686 2,500 5,780
Net cash provided by investing activities 4,687 2,501 6,183
Cash flows from financing activities:
Proceeds from issuance of common stock 454 1,187 728
Payments to retire common stock (953) -- (3,274)
Dividends paid (4,095) (3,877) (3,538)
Net cash used in financing activities (4,594) (2,690) (6,084)
Net increase (decrease) in cash and cash equivalents 142 (94) 148
Cash and cash equivalents at beginning of period 204 298 150
Cash and cash equivalents at end of period $ 346 $ 204 $ 298
1995 1994 1993
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 10,415 $ 12,951 $ 12,930
Adjustments to reconcile net
income to net cash provided by
operating activities:
Earnings from subsidiaries (10,366) (12,856) (12,882)
Accretion of discount related
to notes receivable -- (1) --
Decrease in interest receivable -- 1 1
Net cash provided by operating activities $ 49 $ 95 $ 49
Selected Annual and Quarterly Santa Barbara Bancorp
Financial Data (unaudited) and Subsidiaries
(amounts in thousands except Increase
per share amounts) 1995 (Decrease) 1994 1993 1992 1991
RESULTS OF OPERATIONS:
Interest income $ 82,188 $ 7,288 $ 74,900 $ 68,433 $ 72,916 $ 78,382
Interest expense 33,583 8,616 24,967 22,362 28,777 39,906
Net interest income before
provision for loan losses 48,605 (1,328) 49,933 46,071 44,139 38,476
Provision for loan losses 9,924 3,667 6,257 6,150 4,650 3,900
Other operating income 17,688 4,604 13,084 14,102 13,062 12,953
Non-interest expense:
Staff expense 22,655 1,506 21,149 19,641 18,521 17,434
Other operating expense 19,314 1,172 18,142 17,695 16,560 15,563
Income before income taxes and
effect of accounting change 14,400 (3,069) 17,469 16,687 17,470 14,532
Provision for income taxes 3,985 (533) 4,518 4,377 4,912 3,824
Income before effect of
accounting change 10,415 (2,536) 12,951 12,310 12,558 10,708
Effect of accounting change -- -- -- (620) 858 --
Net income $ 10,415 $ (2,536) $ 12,951 $ 12,930 $ 11,700 $ 10,708
PER SHARE DATA: (1)
Average shares outstanding 7,677 30 7,647 7,784 7,773 7,795
Net income $1.36 ($0.33) $1.69 $1.66 $1.51 $1.37
Cash dividends declared $0.55 $0.03 $0.52 $0.47 $0.38 $0.31
FINANCIAL CONDITION:
Total assets $1,212,361 $144,745 $1,068,261 $ 979,143 $961,239 $907,182
Total deposits $1,054,020 $ 97,303 $ 956,717 $ 866,253 $849,375 $800,622
Long-term debt (3) $ -- $ -- $ -- $ -- $ 1,400 $ 2,600
Net shareholders' equity (2) $ 100,997 $ 7,037 $ 93,960 $ 85,991 $ 77,145 $ 67,215
OPERATING AND CAPITAL RATIOS:
Average total shareholders'
equity to average total assets 9.10% 0.24% 8.86% 8.72% 8.06% 7.73%
Rate of return on average:
Total assets 0.96% (0.31%) 1.27% 1.34% 1.26% 1.24%
Total shareholders' equity (2) 10.60% (3.73%) 14.33% 15.41% 15.58% 16.07%
Net shareholders' equity (2) 10.60% (3.73%) 14.33% 15.42% 16.01% 16.86%
(1) Adjusted for stock splits and stock dividends
(2) Total shareholders' equity does not include the reduction to equity for
the ESOP loan; net shareholders' equity is reduced by the loan amount.
(3) Includes $0, $0, $0, $1,400, and $2,600 for 1995, 1994, 1993, 1992, and 1991,
respectively, for debt owed by the ESOP which was guaranteed by the Company.
1995 Quarters 1994 Quarters
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Total assets $1,212,361 $1,118,064 $1,068,261 $1,067,616 $1,042,589 $1,042,589 $1,018,751 $1,001,475
Net interest income
(tax equivalent
basis --Note A) $12,612 $12,233 $12,192 $15,480 $12,674 $12,528 $12,873 $16,137
Net income $3,429 $1,717 $2,293 $2,976 $3,261 $2,996 $3,177 $3,517
Per Share Data: (1)
Net income
per share $0.45 $0.23 $0.30 $0.38 $0.43 $0.39 $0.41 $0.46
Range of stock prices:
High $20.67 $22.33 $18.50 $17.67 $19.50 $20.00 $18.08 $17.42
Low $19.42 $18.00 $17.08 $16.17 $16.50 $15.75 $14.00 $14.00
Cash dividends
declared $0.15 $0.14 $0.13 $0.13 $0.13 $0.13 $0.13 $0.13
IN MEMORIUM:
George H. Clyde
1918-1996
A founding member of the Bank Board of Directors
The members of the Board of Directors
extend a cordial invitation to attend the
Annual Meeting of Shareholders
to be held Tuesday, April 23, 1996 at 2 PM
at the Lobero Theatre in Santa Barbara.
To Our Shareholders:
Our communications with you is important to us. Throughout the year we
will continue to mail our publications summarizing pertinent information
about the Bank and its financial performance.
Shareholders with inquiries about stock ownership, changes of address,
transfer or re-registration activity, dividend payments, etc., may call
or write to me for information. Securities analysts, portfolio managers,
representatives of financial institutions or other interested parties
seeking financial and operating information are also invited to contact
me for information about the Bank.
Best Wishes,
Clare M. McGivney, Ph. D.
Assistant Vice President,
Corporate Services Administrator, and
Assistant Corporate Secretary
Santa Barbara Bancorp
1021 Anacapa St. (or) P.O. Box 1119
Santa Barbara, CA 93102
(805) 564-6302
Concept and Design: H. George Kallusky, SBB&T, Vice President
Typography: Karyn Young Designs
Lithography: Haagen Printing and Offset
Photography: Wm. B. Dewey Photography
Line Drawing Art: Brennen McElhaney
Front Cover: OAK TREE COUNTRY, oil, 12" x 16"
Ted Goerschner, original member of Oil Painters of America
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Santa Barbara Bank & Trust, a California corporation,
doing business under name of Santa Barbara Bank & Trust
SBBT Service Corporation, a California corporation,
doing business under name of SBBT Service Corporation
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 2, 1996, included in this Form 10-K. It should be
noted that we have not audited any financial statements of Santa Barbara
Bancorp and Subsidiaries subsequent to December 31, 1995, or performed
any audit procedures subsequent to the date of our report.
(Handwritten signature)
ARTHUR ANDERSEN LLP
Los Angeles, California
February 2, 1996
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated February 2, 1996, incorporated by
reference in this Form 10-K, into Santa Barbara Bancorp's previously
filed Form S-8 Registration Statements File Nos. 33-5493, 2-83293 and
33-43560 and 33-48724.
(Handwritten signature)
ARTHUR ANDERSEN LLP
Los Angeles, California
March 27, 1996