SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
Commission File No. 0-11117
SDNB FINANCIAL CORP
(Exact name of Registrant as Specified in its Charter)
Incorporated in California - IRS Employer I.D. No. 95-3725079
1420 Kettner Boulevard, San Diego, California 92101
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number including area code: 619-233-1234
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock
Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant as of the close of business
on March 3, 1995: $4,037,000
The number of shares of Common Stock outstanding as of the close of
business on March 3, 1995: 1,538,364
The Registrant's 1994 Annual Report to Shareholders is incorporated by
reference into Part IV of this Form 10-K.
Total number of pages including cover page: 44.
PART I
Item 1. Business.
(a) General Development of Business. SDNB Financial Corp
(the "Company") was organized under the laws of California on April
15, 1982, at the direction of San Diego National Bank (the "Bank") for
the purpose of becoming a bank holding company by acquiring all of the
outstanding capital stock of the Bank, a national banking association.
The Federal Reserve Board ("Reserve Board") approved the Company's
application to become a bank holding company on November 1, 1982, and
continues as the Company's primary regulator.
The Bank was granted its Charter by the Comptroller of the
Currency ("Comptroller") on November 12, 1981, and commenced
operations as a national bank on the same date. The Bank is engaged
in a general commercial banking business through its head office in
San Diego, California. The Comptroller is the Bank's primary
regulator.
Until June 30, 1993, the Company owned SDNB Development Corp
("Devco"), a California corporation, for the purpose of said entity
participating as a joint venture partner in the San Diego National
Bank Building Joint Venture (the "Joint Venture"), a partnership
formed for the purpose of constructing and developing an office
building in downtown San Diego to house the Company and the Bank.
Effective July 1, 1993, the Company merged Devco into itself, thus
assuming the position as Joint Venture partner.
In addition, the Company owns SDNB Mortgage Bankers ("Mortgage"),
a California corporation, for the purpose of said entity engaging in
mortgage banking and brokerage activities pursuant to approval from
the Federal Reserve Bank of San Francisco as permitted by Section
225.25(b)(1) of Regulation Y and Section 4(c)(3) of the Bank Holding
Company Act of 1956. Mortgage has obtained a corporate real estate
broker's license from the California Department of Real Estate.
Mortgage is currently inactive.
(b) Financial Information About Industry Segments. Not
applicable to the Company, which presently operates in only one
business area, banking.
(c) Narrative Description of Business.
1. Supervision and Regulation. The banking industry is
subject to extensive federal regulation and is undergoing significant
change. In 1991, the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") was enacted. FDICIA substantially amended
the Federal Deposit Insurance Act ("FDI Act") and certain other
statutes. Since FDICIA's enactment, the federal bank regulatory
agencies have been in the process of adopting regulations to implement
its statutory provisions. Most of these new regulatory provisions are
now in effect, while others are being phased in over time. FDICIA and
its implementing regulations contain a number of substantial
provisions that likely will have a significant impact on the banking
industry as a whole and potentially could have a material impact upon
the operations and earnings of the Company.
The following discussion summarizes certain aspects of the
banking laws and regulations that affect the Company. Proposals to
change the laws and regulations governing the banking industry are
frequently raised in Congress and before the various bank regulatory
agencies. The likelihood and timing of any changes and the impact
such changes might have on the Company are impossible to determine
with certainty. A change in applicable laws or regulations, or a
change in the way such laws or regulations are interpreted by
regulatory agencies or courts, may have a material impact on the
business of the Company. To the extent that the following information
describes statutory or regulatory provisions, it is qualified entirely
by reference to the particular statutory or regulatory provision.
(a) Bank Holding Company Regulation. As a registered bank
holding company, the Company and its nonbank subsidiaries are subject
to supervision and regulation under the Bank Holding Company Act
("BHCA") by the Reserve Board. The Reserve Board requires regular
reports from the Company and is authorized by the BHCA to make regular
examinations of the Company and its subsidiaries.
Under the BHCA, the Company may not acquire direct or indirect
ownership or control of more than 5% of the voting shares of any
company, including a bank, without the prior approval of the Reserve
Board, except as specifically authorized under the BHCA. The Company
is also subject to regulation under this banking law with respect to
certain acquisitions of domestic banks. Under the BHCA, the Company,
subject to the approval of the Reserve Board, may acquire shares of
nonbanking corporations, the activities of which are deemed by the
Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
The Reserve Board has enforcement powers over bank holding
companies and their nonbanking subsidiaries, among other things to
interdict activities that represent unsafe or unsound practices or
constitute violations of law, rule, regulation, administrative orders
or written agreements with a federal bank regulator. These powers may
be exercised through the issuance of cease-and-desist orders, civil
money penalties and other actions.
Under the Reserve Board's statement of policy with respect to
bank holding company operations, a bank holding company is required to
serve as a source of financial strength to its subsidiary depository
institutions and to commit all available resources to support such
institutions in circumstances where it might not do so absent such
policy. Although this "source of strength" policy has been challenged
in litigation, the Reserve Board continues to take the position that
it has authority to enforce it. For a discussion of circumstances
under which a bank holding company may be required to guarantee the
capital levels or performance of its subsidiary bank, see "Capital
Adequacy" below. The Reserve Board also has the authority to
terminate any activity of a bank holding company that constitutes a
serious risk to the financial soundness or stability of any subsidiary
depository institution or to terminate its control of any bank or
nonbank subsidiaries.
The BHCA currently prohibits the Reserve Board from approving
the acquisition by the Company of any voting shares of, or
substantially all of the assets of, any bank located outside of the
State of California, unless such acquisition specifically is
authorized by the laws of the state in which such bank is located.
However, under recently enacted federal legislation, the restriction
on interstate acquisitions will be abolished effective September 1995,
and thereafter, bank holding companies from any state will be able to
acquire banks and bank holding companies located in any other state,
subject to certain conditions, including nationwide and state imposed
concentration limits. Banks also will be able to branch across state
lines by acquisition, merger or de novo, effective June 1, 1997
(unless state law would permit such interstate branching at an earlier
date), provided certain conditions are met, including that applicable
state law must expressly permit such interstate branching. Since
January 1, 1991, California has allowed nationwide banking on a
reciprocal basis, thus allowing out-of-state banks to acquire
California banks and California banks to acquire banks in other
states.
Bank holding companies and their subsidiary banks are also
subject to the provisions of the Community Reinvestment Act of 1977
("CRA"). Under the terms of the CRA, the Comptroller (or other
appropriate bank regulatory agency) is required in connection with its
examination of a bank to assess such bank's record in meeting the
credit needs of the community served by that bank, including low- and
moderate-income neighborhoods. Further, such assessment is also
required of any bank that has applied, among other things, to merge or
consolidate with, or acquire the assets or assume the liabilities of,
a federally-regulated financial institution, or to open or relocate a
branch office. In the case of a bank holding company applying for
approval to acquire a bank or bank holding company, the Reserve Board
will assess the record of each subsidiary bank of the applicant bank
holding company in considering the application.
As a result of a Presidential initiative, each of the four
federal banking agencies published a notice of proposed rulemaking in
December 1993, and as a result of extensive public comment, published
a revised notice in October 1994 to amend the CRA regulations. Both
the original and revised proposal would replace the current CRA
assessment system with a new evaluation system that would rate
institutions based on their actual performance (rather than efforts)
in meeting community credit needs. Under the revised proposal, each
institution would be evaluated based on the degree to which it is
providing loans (the lending test), branches and other services (the
service test) and investments (the investment test) to low- and
moderate-income areas in the communities it serves, based on the
communities' demographics, characteristics and needs, the
institution's capacity, product offerings and business strategy, and
the performance of the institution and similarly situated
institutions. Each depository institution would have to report to its
federal supervisory agency and make available to the public data on
the geographic distribution of its loan applications, denials,
originations and purchases. Institutions would continue to receive
one of four composite ratings: Outstanding, Satisfactory, Needs to
Improve or Substantial Noncompliance. For the lending, services and
investment tests, however, the Satisfactory category would be divided
into High Satisfactory and Low Satisfactory. An institution that
received a composite rating of Substantial Noncompliance could be
subject to enforcement action. The Company is studying the proposal
and determining whether the regulations, if enacted in their revised
proposed form, would require changes to the CRA action plans of the
Bank.
The primary assets of the Company consist of the ownership of
the Bank, and through the Joint Venture, a 62% interest in the San
Diego National Bank Building. Various legal limitations affect the
extent to which the Bank may extend credit, pay dividends, or
otherwise supply funds to the Company or the Bank's other affiliates.
In particular, the Bank is subject to certain restrictions imposed by
Federal law on any extensions of credit to the Company or, with
certain exceptions, other affiliates. Such restrictions prohibit the
Company or such other affiliates from borrowing from the Bank unless
the loans are secured by specified collateral. Further, such secured
loans and investments by the Bank are limited to 10% of the Bank's
capital and surplus in the case of the Company or to any other such
affiliate and 20% of the Bank's capital and surplus as to the Company
and all such affiliates in the aggregate.
In addition, there are certain limitations on the payment of
dividends to the Company by the Bank. In general, the Bank may pay
dividends out of its net profits. However, the prior approval of the
Comptroller is required if the total of all dividends declared by the
Bank in any calendar year will exceed the Bank's net profits for that
year combined with its retained net profits for the preceding two
years. The Bank had a net loss of approximately $1.49 million for
1993 and 1994 combined. Until the effects of that loss are overcome,
the Bank will be precluded from paying dividends to the Company
without such approval.
In addition, the Comptroller and the Federal Deposit Insurance
Corporation ("FDIC") have authority to prohibit a bank from engaging
in an unsafe or unsound practice in conducting its business. The
payment of dividends, depending upon the financial condition of the
bank in question, could be deemed to constitute such an unsafe or
unsound practice, and the regulatory agencies have indicated their
view that it generally would be an unsafe and unsound practice to pay
dividends except out of current operating earnings.
Finally, under FDICIA, an insured depository institution is
prohibited from making any capital distribution to its owner,
including any dividend, if, after making such distribution, the
depository institution fails to meet the required minimum level for
any relevant capital measure, including the risk-based capital
adequacy and leverage standards discussed below.
The Company and the Federal Reserve Bank of San Francisco
("Reserve Bank") entered into an agreement on November 20, 1992,
pursuant to which the Company has submitted the proposed capital
infusion plan outlined in the management discussion and analysis to
improve the financial condition of the Company, the Bank and the Joint
Venture. Management and the Board continue to pursue completion of
the measures outlined to the Reserve Bank. Under the terms of the
agreement the Company must obtain the approval of the Reserve Bank
prior to the declaration of any cash dividends or the incurrence of
debt, other than in the ordinary course of business, and the Company
must give notice to the Reserve Bank prior to adding or replacing a
director or a senior executive officer.
(b) Capital Adequacy. The Reserve Board and the
Comptroller have adopted risk-based capital adequacy guidelines for bank
holding companies and banks under their supervision. Under the
guidelines the so-called "Tier 1 capital" and "total capital" as a
percentage of risk weighted assets and certain off-balance sheet
instruments must be at least 4% and 8%, respectively.
The Reserve Board and the Comptroller have also imposed a
leverage standard to supplement their risk based ratios. This
leverage standard focuses on a banking institution's ratio of Tier 1
capital to average total assets adjusted for goodwill and certain
other items. Under these guidelines, banking institutions that meet
certain criteria, including excellent asset quality, high liquidity,
low interest rate exposure and good earnings, and have received the
highest regulatory rating must maintain a ratio of Tier 1 capital to
total assets of at least 3%. Institutions not meeting these criteria,
as well as institutions with supervisory, financial or operational
weaknesses, along with those experiencing or anticipating significant
growth are expected to maintain a Tier l capital to total assets ratio
equal to at least 4% to 5%.
As reflected in the following table, the risk-based capital
ratios and leverage ratios of the Company and the Bank as of December
31, 1994 exceeded the fully phased-in risk-based capital adequacy
guidelines and the leverage standard.
Capital Components and Ratios at December 31, 1994
(dollars in thousands)
Company Bank
Capital Components
Tier 1 capital $9,329 $11,667
Total capital 10,868 13,081
Risk-weighted assets
and off-balance sheet
instruments 123,142 113,106
Risk-based Capital Ratio
Tier 1 capital 7.59% 10.35%
Total capital 8.85% 11.61%
Leverage Ratio 5.33% 7.09%
FDICIA requires each federal banking agency, including the
Reserve Board, to revise its risk-based capital standards, in order to
ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risk of nontraditional
activities, as well as reflect the actual performance and expected
risk of loss on multifamily mortgages. The federal banking agencies
in September 1993 issued proposed rules whereby exposures to interest
rate risk would be measured as the effect that a specified change in
market interest rates would have on the net economic value of a bank.
This economic perspective considers the effect that changing market
interest rates may have on the value of a bank's assets, liabilities,
and off-balance-sheet positions. Institutions with interest rate risk
exposure in excess of a threshold level would be required to hold
additional capital proportionate to that risk. The Company is
studying these latest proposals but cannot assess at this point the
impact the proposals would have on the Company's capital requirements.
The Reserve Board, the FDIC, the Comptroller and the Office of
Thrift Supervision have issued a final rule amending the risk-based
capital guidelines to take account of concentration of credit risk and
the risk of non-traditional activities. The final rule amends each
agency's risk-based capital standards by explicitly identifying
concentration of credit risk and the risk arising from non-traditional
activities, as well as an institution's ability to manage those risks,
as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. This final rule
has not materially impacted the Company's capital requirements, but
there can be no assurance that the adoption of other proposals
implementing FDICIA will not have an adverse impact on the Company's
capital requirements.
Bank regulators and legislators continue to indicate their
desire to raise capital requirements applicable to banking
organizations beyond current levels. However, management is unable to
predict whether and when higher capital requirements would be imposed
and if so, at what levels and on what schedule.
FDICIA substantially revised the bank regulatory and funding
provisions of the FDI Act and made revisions to several other federal
banking statutes. Among other things, FDICIA required the federal
banking agencies to take "prompt corrective action" in respect to
depository institutions that do not meet minimum capital requirements.
FDICIA established five capital tiers: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized". A depository
institution's capital tier will depend upon where its capital levels
are in relation to various relevant capital measures, which will
include a risk-based capital measure and a leverage ratio capital
measure, and certain other factors.
Under the implementing regulations adopted by the federal
banking agencies, a bank is considered "well capitalized" if it has
(i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1
risk-based capital ratio of 6% of greater, (iii) a leverage ratio of
5% or greater and (iv) is not subject to any order or written
directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank is defined as one
that has (i) a total-risk-based capital ratio of 8% or greater, (ii) a
Tier 1 risk-based capital ratio of 4% or greater and (iii) a leverage
ratio of 4% or greater (or 3% or greater in the case of a bank with a
composite CAMEL rating of 1). A bank is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of
less than 6%, (ii) a Tier 1 risk-based capital ratio of less than 4%
or (iii) a leverage ratio of less than 4% (or 3% or greater in the
case of a bank with a composite CAMEL rating of 1), (B) "significantly
undercapitalized" if the bank has (i) a total risk-based capital ratio
of less than 6%, or (ii) a tier 1 risk-based capital ratio of less
than 3% or (iii) a leverage ratio of less than 3% and (C) "critically
undercapitalized" if the bank has a ratio of tangible equity to total
assets equal to or less than 2%. The Reserve Board may reclassify a
"well capitalized" bank as "adequately capitalized" or subject an
"adequately capitalized" or "undercapitalized" institution to the
supervisory actions applicable to the next lower capital category if
it determines that the bank is in an unsafe or unsound condition or
deems the bank to be engaged in an unsafe or unsound practice and not
to have corrected the deficiency. The Bank currently meets the
definition of a "well capitalized" institution.
"Undercapitalized" depository institutions, among other things,
are subject to growth limitations, are prohibited, with certain
exceptions, from making capital distributions, are limited in their
ability to obtain funding from a Federal Reserve Bank and are required
to submit a capital restoration plan. The federal banking agencies
may not accept a capital plan without determining, among other things,
that the plan is based on realistic assumptions and is likely to
succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the
depository institution's parent holding company must guarantee that
the institution will comply with such capital restoration plan and
provide appropriate assurance of performance. If a depository
institution fails to submit an appropriate plan, including if the
holding company refuses or is unable to make the guarantee described
in the previous sentence, it is treated as if it is "significantly
undercapitalized". Failure to submit or implement an acceptable
capital plan also is grounds for the appointment of a conservator or a
receiver. "Significantly undercapitalized" depository institutions
may be subject to a number of additional requirements and
restrictions, including orders to sell sufficient voting stock to
become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Moreover,
the parent holding company of a significantly undercapitalized
depository institution may be ordered to divest itself of the
institution or of nonbank subsidiaries of the holding company.
"Critically undercapitalized" institutions, among other things, are
prohibited from making any payments of principal and interest on
subordinated debt, and are subject to the appointment of a receiver or
conservator.
FDICIA directed, among other things, that each federal banking
agency prescribe standards for depository institutions and depository
institution holding companies relating to internal controls,
information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth,
compensation, a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value
to book value for publicly traded shares and other standards as they
deem appropriate. The Reserve Board adopted such standards in 1993.
FDICIA also contains a variety of other provisions that may
affect the operations of the Company, including new reporting
requirements, regulatory standards for real estate lending, "truth in
savings" provisions, limitations on the amount of purchased mortgage
servicing rights and purchased credit card relationships includable in
Tier 1 capital, and the requirement that a depository institution give
90 days' prior notice to customers and regulatory authorities before
closing any branch. FDICIA also contains a prohibition on the
acceptance or removal of brokered deposits by depository institutions
that are not "well capitalized" or are "adequately capitalized" and
have not received a waiver from the FDIC.
(c) FDIC Deposit Insurance Assessments. As an institution
insured by the Bank Insurance Fund ("BIF"), the Bank is subject to
FDIC deposit insurance assessments. Under current law, as amended by
FDICIA, the insurance assessment to be paid by BIF-insured
institutions shall be specified in a schedule required to be issued by
the FDIC that specifies, at semi-annual intervals, target reserve
ratios designed to increase the reserve ratio to 1.25% of estimated
insured deposits (or such higher ratio as the FDIC may determine in
accordance with the statute) in 15 years. FDICIA also authorizes the
FDIC to impose one or more special assessments in any amounts deemed
necessary to enable repayment of amounts borrowed by the FDIC from the
Treasury Department. The FDIC set an assessment rate for the BIF of
0.195% for periods prior to June 30, 1992, and an assessment rate of
0.23% effective on June 30, 1992. Consistent with FDICIA, on
September 15, 1992, the FDIC approved the implementation of a risk-
based deposit premium assessment system under which each depository
institution is placed in one of nine assessment categories based on
the institution's capital classification under the prompt corrective
action provisions described above and whether such institution is
considered by its supervisory agency to be financially sound or to
have supervisory concerns. The assessment rates under the new system
range from 0.23% to 0.31% depending upon the assessment category into
which the insured institution is placed. The new assessment system
became effective January 1, 1993. The Bank's assessment rate
increased significantly under the new system which resulted in an
increase in deposit insurance assessment expense. The FDIC has
announced that it estimates that the target reserve ratio will be
achieved during 1995 and that assessment rates could be reduced
significantly. If the estimates prove accurate, there would be a
beneficial effect on the results of operations.
A significant increase in the assessment rate or a special
additional assessment with respect to insured deposits, however, could
have an adverse impact on the results of operations and capital of the
Bank.
(d) Governmental Policies. The earnings of the Company are
significantly affected by the monetary and fiscal policies of
governmental authorities, including the Reserve Board. Among the
instruments of monetary policy used by the Reserve Board to implement
these objectives are open-market operations in U.S. Government
securities and Federal funds, changes in the discount rate on member
bank borrowings and changes in reserve requirements against member
bank deposits. These instruments of monetary policy are used in
varying combinations to influence the overall level of bank loans,
investments and deposits, and the interest rates charged on loans and
paid for deposits. The Reserve Board frequently uses these
instruments of monetary policy, especially its open-market operations
and the discount rate, to influence the level of interest rates and to
affect the strength of the economy, the level of inflation or the
price of the dollar in foreign exchange markets. The monetary
policies of the Reserve Board have had a significant effect on the
operating results of banking institutions in the past and are expected
to continue to do so in the future. It is not possible to predict the
nature of future changes in monetary and fiscal policies, or the
effect which they may have on the Company's business and results of
operations.
(e) Other Legislative Initiatives. From time to time, various
proposals are introduced in the United States Congress and before
various bank regulatory authorities which would alter the powers of,
and restrictions on, different types of banking organizations and
which would restructure part or all of the existing regulatory
framework for banks, bank holding companies and other financial
institutions.
Moreover, a number of other bills have been introduced in
Congress which would further regulate, deregulate or restructure the
financial services industry. It is not possible to predict whether
these or any other proposals will be enacted into law or, even if
enacted, the effect which they may have on the Company's business and
results of operations.
2. Business of the Bank. The Bank focuses primarily upon
wholesale commercial banking operations, emphasizing the needs of
small and medium size business firms and corporations and the personal
banking needs of business executives and professional persons located
in the Bank's immediate service area. The Bank's marketing strategy
stresses its local ownership and commitment to service community
business needs.
Because the Bank's primary service area is comprised largely of
commercial and professional businesses, the Bank places particular
emphasis on banking services appropriate to serve the financial
requirements of these business sectors. The Bank concentrates on
business with commercial, industrial and professional customers in
connection with both loans and deposits. In addition, the Bank seeks
business from manufacturing and industrial corporations in San Diego
County for whom it can provide financing and other banking needs. The
Bank believes that the attraction of such businesses or large personal
accounts enables it to provide professional, efficient and
personalized banking services on an effective basis. The Bank also
offers courier services, collection services, notary public services,
money market certificates of deposit, letters of credit and other
customary bank services to its business customers.
On September 13, 1988, the Bank was granted trust powers by the
Comptroller. The trust department, specializing in self-directed
employee benefit plans, began active operations in 1989. In 1992, the
Bank, citing failure of the department to achieve profitable
operations, discontinued operations and transferred the Bank's
fiduciary responsibilities to another institution. In 1994, the Bank
entered into an agreement with Danielson Trust Company ("Danielson")
under which Danielson will provide trust and related services to Bank
customers.
In addition to offering a comprehensive array of general banking
services, the Bank offers specialized services to certain businesses
that have been identified by the Bank's management as key sources of
deposits and loans. These services, which are offered directly or
through the Bank's correspondent banks, include cash management
consulting and money market investments. The Bank also offers
directly, or through correspondent banks, certain international
services, such as letters of credit and documentary collections.
As a corollary and supplement to its wholesale banking
operations, the Bank provides a full range of retail commercial
banking services, including checking and savings accounts, safe
deposit boxes, traveler's checks, and cashier's checks. The Bank
issues credit cards through third parties and is a merchant depository
for cardholder drafts.
The Bank engages in a full range of lending activities. The
types of credit made available are:
Business Loans and Lines of Credit
Business acquisition and expansion
Equipment and vehicle financing
Working capital
Accounts receivable and inventory financing
Standby letters of credit
SBA and CSSBDC guaranteed loans
Consumer Loans and Lines of Credit
Personal loans (secured and unsecured)
Personal property loans (automobiles, boats, airplanes,
recreational vehicles, mobile homes)
Home equity loans (secured by 1-4 family dwellings)
Home improvement loans (secured and unsecured)
Home equity lines of credit (secured by deed of trust on 1-4
family dwellings)
Personal lines of credit (Ready Money-unsecured lines attached
to a checking account)
Real Estate Financing
Mini-perm loans for commercial and multi-family property
Residential and commercial land loans
Development, interim construction and rehabilitation loans for
commercial, 1-4 family and multi-family property
HUD guaranteed loans
The commercial lending (business loans and lines of credit) is
directed primarily at businesses whose demands for funds fall within
the Bank's unsecured lending limit (approximately $2,100,000 at
December 31, 1994), and who are depositors with the Bank.
The Bank has no foreign loans or highly leveraged transactions.
At December 31, 1994, approximately fifty-nine percent (59%) of the
Bank's total loans were commercial, a majority of which are written
with an original maturity of 90 to 180 days. Real estate loans,
including interim construction and mini-perm, comprised approximately
thirty-eight percent (38%) of the portfolio, with an average maturity
of nine to eighteen months for interim construction loans and five
years for the mini-perm loans. The balance of the loans are
installment and consumer loans. Most of the loans bear adjustable
interest rates, which change with the Bank's base rate. The Bank's
loan loss reserve was approximately $2,148,000, or two and two-tenths
percent (2.2%) of gross loans at December 31, 1994. The Bank intends
to maintain the loan loss reserve at a level sufficient to absorb
charge-offs from unexpected and adverse economic developments.
The Bank's investment portfolio includes United States government
and agency investments, state and municipal bonds, bankers
acceptances, certificates of deposit and other miscellaneous
investments.
A majority of the Bank's deposits are derived from customers who
have other account relationships with the Bank. The Bank has never
used money brokers to secure deposits. The Bank's deposits are
comprised of time certificates of deposit, demand accounts (including
interest bearing demand accounts) and savings deposits (including
money market savings).
During the years 1992 through 1994, the Company and the Bank have
been adversely affected by a number of factors emanating primarily
from the condition of the economy in San Diego. These factors, more
fully described in management's discussion and analysis and in the
statistical information which follows include:
a) Higher than normal loan loss provisions.
b) OREO losses and expenses from higher than normal levels of
OREO properties.
c) Reduction in net interest margins between 1992 and 1993 as a
result of declining interest rates.
d) Reduction in the level of the loan portfolio resulting from
continuing low demand.
Additionally, the Bank has incurred substantial expense in
connection with legal fees and provision for additional costs
involving the Pioneer Mortgage Company litigation.
Competition. The Bank competes with other commercial banks,
savings and loan associations, finance companies, money market funds,
credit unions, insurance companies and brokerage firms. Many of the
regulations and limitations imposed upon account balances and interest
rates were eliminated by the Depository Institutions Deregulation and
Monetary Control Act of 1980. Savings and loan associations, credit
unions and other business concerns were allowed to offer traditional
banking services as a result of the Garn-St. Germain Depository
Institutions Act of 1982 (the "Garn Act"). Among other provisions,
the Garn Act enabled federally insured institutions to offer a new
account similar to and directly competitive with money market
accounts. Over the years following passage of the Garn Act, these
changes have impacted the Bank's competition for deposits and the
corresponding cost of deposits and have also resulted in a greater
portion of the Bank's deposits being subject to rate changes.
The Bank also competes for deposits with other institutions, such
as brokerage firms and credit card companies, which offer alternative
investment vehicles, such as money market funds, as well as
traditional banking services, such as check access to money market
funds and check advances on credit card accounts. In 1989, the Bank
initiated the Executive Money Market account, designed to be
competitive with accounts offered by securities firms. Other entities
(both public and private) seeking to raise capital through the
issuance and sale of debt or equity securities also compete with the
Bank in the acquisition of deposits.
As stated previously, nationwide reciprocal interstate banking
became effective in California on January 1, 1991 (after having been
allowed on a regional basis since 1987). This was preceded in 1990 by
the acquisition by larger California institutions of three independent
banks in the San Diego area. Additionally, in 1992, Bank of America
merged with Security Pacific National Bank and in 1993 First
Interstate Bank successfully bid for San Diego Trust & Savings Bank
(completion of the transaction occurred early in 1994). Management
and the Board of Directors believe that the reduction in the number of
the independent banks represents a business development opportunity
for the Bank to obtain customers who would prefer to do business with
a locally-based bank rather than one headquartered elsewhere.
The Company has formed a Strategic Planning Committee which is
studying the Bank's position in the marketplace as affected by the
developments cited above. The Committee reports periodically to the
Board.
3. Employees. As of March 3, 1995, the Company and/or the
Bank had ninety-nine (99) full-time employees, of whom eight (8) were
executive officers. Six (6) of the executive officers have entered
into employment contracts with the Company or the Bank. None of the
Company's or the Bank's employees is covered by a collective
bargaining agreement and the Company believes that its relationship
with its employees is satisfactory.
4. Statistical Disclosure. Following is the statistical
disclosure required for bank holding companies.
SELECTED STATISTICAL INFORMATION
DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(IN THOUSANDS)
1994 1993 1992
Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Interest-earning assets
Loans
Commerical 63,180 5,597 8.86% 78,229 6,601 8.44% 83,755 7,031 8.39%
Real estate 37,082 3,623 9.77% 40,137 3,446 8.59% 37,252 3,457 9.28%
Installment 3,146 280 8.90% 3,392 357 10.52% 3,938 337 8.56%
Total loans (including fees) 103,408 9,500 9.19% 121,758 10,404 8.54% 124,945 10,825 8.66%
Investment securities
U.S. Treasury securities 4,184 165 3.94% 3,700 129 3.49% 3,791 192 5.06%
Securities of government agencies 20,917 1,021 4.88% 14,416 642 4.45% 6,242 348 5.58%
State and political obligations 4,617 397 8.60% 3,332 406 12.18% 3,535 436 12.33%
Other securities 682 39 5.72% 903 55 6.09% 2,019 101 5.00%
Total investment securities 30,400 1,622 5.34% 22,351 1,232 5.51% 15,587 1,077 6.91%
Certificates of deposit in other banks 1,469 63 4.29% 1,494 67 4.48% 3,150 172 5.46%
Federal Funds Sold 18,407 732 3.98% 13,235 364 2.75% 12,621 408 3.23%
Total interest-earning assets 153,684 11,917 7.75% 158,838 12,067 7.60% 156,303 12,482 7.99%
Noninterest-earning assets
Cash and due from banks 12,415 12,315 13,421
Premises and equipment 11,408 11,742 12,577
Other, less allowance for loan losses 143 3,472 4,403
Total noninterest-earning assets 23,966 27,529 30,401
TOTAL ASSETS 177,650 186,367 186,704
SELECTED STATISTICAL INFORMATION
DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(IN THOUSANDS)
1994 1993 1992
Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and
money markets 71,173 1,700 2.39% 64,430 1,452 2.25% 72,211 1,925 2.67%
Time deposits 22,831 797 3.49% 45,391 1,694 3.73% 43,624 1,944 4.46%
Total interest-bearing deposits 94,004 2,497 2.66% 109,821 3,146 2.86% 115,835 3,869 3.34%
Securities sold under repurchase agree-
ments and federal funds purchased 14,603 367 2.51% 7,762 185 2.38% 4,034 144 3.57%
Short-term debt 2,456 209 8.51% 2,393 174 7.27% 2,001 155 7.75%
Long-term debt 10,251 621 6.06% 10,486 673 6.42% 10,750 833 7.75%
Total interest-bearing liabilities 121,314 3,694 3.04% 130,462 4,178 3.20% 132,620 5,001 3.77%
Noninterest-bearing liabilities
Demand deposits 46,354 44,265 41,106
Other liabilities 364 282 501
Total liabilities 168,032 175,009 174,227
Minority interest in subsidiary 0 0 0
Stockholders' equity 9,618 11,358 12,477
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 177,650 186,367 186,704
Net interest income 8,223 7,889 7,481
Margin analysis
Interest income/earning assets 7.75% 7.60% 7.99%
Interest expense/earning assets 2.40% 2.63% 3.20%
Net interest income/earning assets 5.35% 4.97% 4.79%
<FN>
1)All loans are stated net of unearned income.
2)Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 34%.
3)These averages reflect the consolidated assets and liabilities of SDNB Financial Corp and subsidiaries.
The averages for San Diego National Bank are calculated on a daily basis. The average for SDNB Financial Corp and other
subsidiaries are calculated on a quarterly basis.
4)Non-accrual loans - Loans are placed on non-accrual status when a reasonable doubt exists as to the collectibility of interest
or principal. As of December 31, 1994, 1993 and 1992, the Bank had loans on non-accrual status totaling $6,046, $5,343, and
$1,918, respectively. Average balances for loans include these amounts; however, revenue is recognized on a cash basis for
these loans.
5)Revenue for loans includes portions of fees recognized as current income of $453, $532, and $511 in 1994, 1993, and 1992,
respectively.
6)Expense for short-term debt totaling $167 in 1994, $147 in 1993, and $155 in 1992, and the expense for long-term debt of $621 in
1994, $673 in 1993, and $833 in 1992, are classified as building operating expense on the consolidated financial statements.
</FN>
VOLUME/RATE VARIANCE ANALYSIS
1994 compared to 1993 1993 compared to 1992 1992 compared to 1991
Volume Rate Total Volume Rate Total Volume Rate Total
Increase (Decrease) in Interest on Earning Assets:
Loans
Commercial loans (1,320) 316 (1,004) (466) 36 (430) 783 (1,518) (735)
Real estate loans (275) 452 177 258 (269) (11) (717) (549) (1,266)
Installment loans (25) (52) (77) (51) 71 20 59 (125) (66)
Total loans (1,620) 716 (904) (259) (162) (421) 125 (2,192) (2,067)
Investment securities
U.S. Treasury securities 18 18 36 (5) (58) (63) 61 (46) 15
Securities of government agencies 312 67 379 376 (82) 294 (313) (179) (492)
State and political obligations 130 (139) (9) (25) (5) (30) (124) (10) (134)
Other securities (13) (3) (16) (65) 19 (46) (31) (43) (74)
Total investment securities 447 (57) 390 281 (126) 155 (407) (278) (685)
Certificates of deposit in other banks (1) (3) (4) (78) (27) (105) 5 (44) (39)
Federal funds sold 172 196 368 19 (63) (44) 175 (212) (37)
Total interest income change (1,002) 852 (150) (37) (378) (415) (102) (2,726) (2,828)
Increase (Decrease) in Interest Paid on Liabilities:
Interest on deposits
Savings, NOW accounts, and money markets 158 90 248 (194) (279) (473) 177 (1,407) (1,230)
Other domestic time deposits (794) (103) (897) 76 (326) (250) (285) (1,019) (1,304)
Total interest on deposits (636) (13) (649) (118) (605) (723) (108) (2,426) (2,534)
Securities sold under agreement to repurchase
and federal funds purchased 171 11 182 101 (60) 41 (16) (85) (101)
Short-term debt 5 30 35 29 (10) 19 0 (44) (44)
Long-term debt (15) (37) (52) (20) (140) (160) (20) (216) (236)
Total interest expense change (475) (9) (484) (8) (815) (823) (144) (2,771) (2,915)
Net change in net interest income (527) 861 334 (29) 437 408 42 45 87
<FN>
Note: Change in interest income or expense can be attributed to (a) changes in volume (change in volume times old rate),
(b) changes in rates (change in rate times old volume),and (c) changes in rate/volume (change in rate times the change
in volume). The rate/volume variances are allocated proportionally between the rate and the volume variances based
on their absolute values.
</FN>
INVESTMENT SECURITIES
1994
(Book Value)
December 31, 1994:
Available-For-Sale:
U.S. Government agencies 9,637
Average maturity (in years) 2.11
FRB Stock 273
9,910
Held-To-Maturity:
U.S. Treasuries 1,998
Average maturity (in years) 0.83
U.S. Government agencies 11,397
Average maturity (in years) 2.74
States and municipalities 3,176
Average maturity (in years) 3.43
Other bonds and notes 750
Average maturity (in years) 4.58
17,321
1993 1992
(Book Value) (Book Value)
December 31, 1993 and 1992:
Held-For-Investment:
U.S. Treasuries 6,004 1,004
Average maturity (in years) 0.47 0.50
U.S. Government agencies 19,588 11,677
Average maturity (in years) 3.72 3.56
States and municipalities 4,362 3,250
Average maturity (in years) 2.69 4.11
Other bonds and notes 0 1,739
Average maturity (in years) 0 1.87
FRB Stock 273 273
30,227 17,943
MATURITY IN YEARS
Under 1 1 to 5 5 to 10 Over 10 Total
Available-For-Sale:
U.S. Government agencies 1,977 7,660 0 0 9,637
Weighted average interest rate 5.15% 5.92% 0.00% 0.00% 5.76%
FRB Stock 0 0 0 273 273
Weighted average interest rate 0.00% 0.00% 0.00% 6.00% 6.00%
1,977 7,660 0 273 9,910
Held-To-Maturity:
U.S. Treasuries 1,001 997 0 0 1,998
Weighted average interest rate 4.00% 4.37% 0.00% 0.00% 4.18%
U.S. Government agencies 2,986 4,300 4,111 0 11,397
Weighted average interest rate 5.40% 4.66% 5.64% 0.00% 5.21%
States and municipalities *<F1> 250 2,169 757 0 3,176
Weighted average interest rate 8.48% 5.95% 8.77% 0.00% 6.82%
Other bonds and notes 0 500 250 0 750
Weighted average interest rate 0.00% 4.68% 8.00% 0.00% 5.79%
4,237 7,966 5,118 0 17,321
<FN>
<F1>
* Taxable equivalent yield based upon 34% Federal Income Tax rate.
</FN>
LOAN PORTFOLIO LOAN TYPE
Real Estate Real Estate Installment
Commercial Construction Mortgage and Consumer Total
Totals at year-end:
1994 57,613 5,750 31,461 2,234 97,058
1993 67,087 8,995 32,099 2,852 111,033
1992 85,377 12,717 30,721 3,306 132,121
1991 81,120 12,682 23,751 4,275 121,828
1990 70,752 23,758 27,241 3,193 124,944
Maturities at the end of 1994:
1 year or less 47,207 5,612 11,788 1,141 65,748
1- 5 years 10,119 138 18,108 1,079 29,444
after 5 years 287 0 1,565 14 1,866
Outstanding loans at the end
of 1994 which are due after
one year earn interest as follows:
Fixed rate 465 0 2,491 406 3,362
Adjustable rate 9,941 138 17,182 687 27,948
RISK ELEMENTS
Nonperforming assets consist of non-accrual loans, restructured loans, past due loans and other real estate owned. Non-accrual
loans are loans on which interest recognition has been suspended until realized because of doubts as to the borrower's ability
to repay principal or interest. Restructured loans are loans where the terms have been altered to provide a reduction or
deferral of interest or principal because of a deterioration in the borrower's financial position. Past due loans are
accruing loans that are contractually past due 90 days or more as to interest or principal payments. The following summarizes
the nonperforming assets at December 31:
1994 1993 1992 1991 1990
Non-accrual loans 6,046 5,343 1,918 2,442 215
Restructured loans (still 2,316 3,162 0 0 0
Loans 90 days past due 20 481 248 2,238 1,595
8,382 8,986 2,166 4,680 1,810
Other real estate owned 268 1,050 2,091 4,987 0
Total 8,650 10,036 4,257 9,667 1,810
<FN>
1) Non-accrual - Loans are placed on non-accrual when a reasonable doubt exists as to the collectibility
of interest or principal. Gross interest income that would have been recorded for the year ended
December 31, 1994, if non-accrual loans had been current and in accordance with their original terms,
is approximately $682. Interest actually recognized for those loans was $643. Non-accrual loans
totaling $1,196 in 1993, $521 in 1992 and $326 in 1991 were also classified as restructured loans.
</FN>
SUMMARY OF LOAN LOSS EXPERIENCE
1994 1993 1992 1991 1990
Allowance for loan losses (as of Jan. 1) 2,522 2,111 2,011 1,499 1,407
Losses charged-off
Commerical 2,211 2,277 1,294 722 506
Real estate construction 0 20 120 0 0
Real estate mortgage 0 264 101 56 162
Installment 151 155 60 70 14
Total loans charged-off 2,362 2,716 1,575 848 682
Recoveries of losses previously charged-off
Commerical 121 144 299 81 139
Real estate construction 0 0 0 0 0
Real estate mortgage 10 4 50 0 0
Installment 7 29 6 9 0
Total recoveries 138 177 355 90 139
Net loans charged-off 2,224 2,539 1,220 758 543
Additions charged to operating expense 1,850 2,950 1,320 1,270 635
Allowance for loan losses (as of Dec. 31) 2,148 2,522 2,111 2,011 1,499
Average loans outstanding 103,897 121,758 124,945 123,490 115,663
Ratio of net charge-offs to average
loans outstanding 2.14% 2.09% 0.98% 0.61% 0.47%
ALLOWANCE FOR LOAN LOSSES BY CATEGORY
1994 1993 1992 1991 1990
Percent of Percent of Percent of Percent of Percent of
loans in each loans in each loans in each loans in each loans in each
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
Commerical 1,635 59.4% 1,862 60.4% 1,304 64.5% 1,417 66.6% 800 56.6%
Real estate construction 49 5.9% 57 8.1% 101 9.6% 96 10.4% 226 19.0%
Real estate mortgage 80 32.4% 206 28.9% 222 23.4% 196 19.5% 213 21.8%
Installment 62 2.3% 93 2.6% 25 2.5% 30 3.5% 28 2.6%
Unallocated 322 NA 304 NA 459 NA 272 NA 232 NA
Total 2,148 100.0% 2,522 100.0% 2,111 100.0% 2,011 100.0% 1,499 100.0%
<FN>
1) Beginning in 1993, the Bank evaluates the adequacy of its allowance for loan losses using a "migration analysis" of net charge-
offs to classified loans. Certain loans are segregated by management and reserved specifically based on potential loss
exposure. The remainder of the loans in the portfolio are segregated into significant pools. Potential loss exposure is
determined by creating a loss experience percentage for loans with similar characteristics and quality. These percentages are
applied to the Bank's current portfolio to estimate the amount of future losses. The Bank also makes a provision for undrawn
commitments and letters of credit. This quantitative analysis is supplemented with a provision based on qualitative factors
including but not limited to trends in volume and severity of past due and classified loans and trends in the volume of
nonaccural loans troubled debt-restructurings and other loan modifications, trends in the nature and volume of the portfolio,
experience ability and depth of lending management and staff, trends in lending policies and procedures including underwriting
standards and collection charge-off and recovery practices, national and local economic and business conditions and developments
including the condition of various market segments, existence and effect of any concentrations of credit and changes in the
level of such concentrations, quality of the institution's loan review system and the degree of oversight by the institution's
board of directors, effect of external factors such as competition and legal and regulatory requirements on the level of
estimated credit losses in the institution's current portfolio. The reserve balance represents the aggregate of these
allocations.
Prior to 1993, the Bank evaluated the adequacy of its allowance for loan losses on an individual loan basis. In determining
the adequacy of the allowance, management evaluated each loan with regard to creditworthiness of the borrower, sources of
repayment, general and industry specific economic conditions, and collateral . The bank reserved non-classified on a percentage
basis related to past loss experience. Loans determined to be of higher than normal risk were assigned a higher reserve amount
based upon possible loss exposure. The reserve balance for the years 1990 - 1992 were the aggregate of those allocations.
</FN>
DEPOSITS
1994 1993 1992
Average Average Average
Outstanding Yield Outstanding Yield Outstanding Yield
Demand 46,354 0.00% 44,265 0.00% 41,106 0.00%
Interest-bearing demand 14,496 1.48% 14,280 1.47% 13,884 2.09%
Savings 56,677 2.63% 50,150 2.48% 58,327 2.81%
Time deposits 22,831 3.49% 45,391 3.73% 43,624 4.46%
At December 31, 1994, time deposits in amounts of $100,000 or more had a maturity breakdown as follows (in thousands):
Time All
Certificates Other
of Deposit Time
3 months or less 6,808 532
Over 3 through 6 months 2,024 203
Over 6 through 12 months 501 206
Over 12 months 200 -
9,533 941
RETURN ON EQUITY AND ASSETS
1994 1993 1992
Return on assets (0.09)% (1.37)% (1.18)%
(Net income divided by average total assets)
Return on equity (1.65)% (22.56)% (17.72)%
(Net income divided by average equity)
Equity to assets 5.41% 6.09% 6.68%
(Average equity divided by average total assets)
Dividend payout ratio 0.00% 0.00% 0.00%
(Dividends per share divided by net income per share)
SHORT-TERM BORROWINGS
1994 1993 1992
Securities sold under repurchase agreements
and federal funds sold
a) Outstanding at end of period 12,285 9,273 4,698
b) Average interest rate, end of period 2.78% 2.16% 2.68%
c) Maximum outstanding during period 18,614 12,393 6,273
d) Approximate average amount
outstanding during period 14,603 7,762 4,034
e) Weighted average interest rate 2.51% 2.38% 3.57%
Short-term debt
a) Outstanding at end of period 2,544 2,384 2,340
b) Average interest rate, end of period 9.19% 7.36% 7.28%
c) Maximum outstanding during period 2,554 2,448 2,340
d) Approximate average amount
outstanding during period 2,456 2,393 2,001
e) Weighted average interest rate 8.51% 7.27% 7.75%
Item 2. Properties.
The Company owned no properties directly at December 31, 1994.
The Company's executive offices and the Bank's executive offices and
banking facilities are located at 1420 Kettner Boulevard, San Diego,
California 92101 (the "Bank Building"), which is owned by the Joint
Venture. In January 1982, the Bank executed a 99-year ground lease,
which was subsequently assumed by the Joint Venture, for
approximately 27,000 square feet of undeveloped real property located
at the site. The Company's wholly-owned subsidiary, Devco, was the
50% joint venturer with a limited partnership, Kettner Building
Associates, Ltd. ("KBA"), in the ownership and operation of the Bank
Building. As previously stated, effective July 1, 1993, Devco was
merged into the Company and the Company assumed the partnership
ownership. Commencing in 1985 and continuing into 1987, the Company
(through Devco) acquired the 10% general partnership interest and a
14% limited partnership interest in KBA. The only activity of KBA is
its 50% interest in the Joint Venture. Therefore, the acquisition of
the partnership interests increased the Company's combined interest in
the Bank Building to approximately 62% at December 31, 1987.
On March 3, 1987, the Joint Venture obtained long-term financing
from Home Fed Bank. The Home Fed loan in the original amount of
$11,250,000 was payable in monthly installments with an adjustable
interest rate (as described below) and matures in 1997. During 1993,
Resolution Trust Corporation, as successor to Home Fed, sold the loan
as a part of a package to an investment group.
In November 1994, the Home Fed note was purchased by the two
limited partnerships managed by WHR Management Corp. ("WHR") which
propose to purchase the Company's stock (see management discussion and
analysis). In January 1995, the Joint Venture and WHR entered into a
modification agreement. This agreement reduces the debt service
requirement to $800,000 per year, all allocable to interest. Prior to
such modification, the annual debt service requirement was $823,000
allocable first to interest at a rate equal to 2.25% over the 11th
District Cost of Funds (which interest rate changed monthly).
Pursuant to the terms of the original trust deed (absent the
modification), due to projected increase in the benchmark interest
rates, annual payments of debt service were projected to increase on
May 1, 1995, to approximately $917,000. Further, the modification
also allows prepayment of the loan on April 1, 1995, for $7,708,000
(assuming all interest payments have been made); on January 1, 1996,
for $8,691,000; and quarterly thereafter at amounts which increase by
approximately $373,000 each quarter. On April 1, 1997, the
outstanding principal balance will be due and payable if not
previously prepaid.
On January 4, 1994, the Joint Venture executed a new note to
Pacific View Construction Company Inc. ("Pacific View") a corporation
controlled by Charles I. Feurzeig, Chairman of the Board of the
Company. On January 4, 1988, the Joint Venture had obtained a $2
million loan from Pacific View, the proceeds of which were used to
retire existing debt of the Joint Venture and to provide reserves for
tenant improvements and negative cash flows. The loan, which is
secured by a second trust deed on the Bank Building, was paid down by
$100,000 in 1993. The Joint Venture anticipates entering into a
modification agreement to make a partial payment of $250,000 on the
note out of the proceeds of the stock issuance referred to in
management's discussion and analysis. The note would be further
modified to fix the interest rate at 10% per annum and extend the due
date to April 1, 1997. It is anticipated that the Company will also
purchase customer notes from the Bank in the amount of approximately
$1,100,000 (par) and assign such notes to the Joint Venture. The
Joint Venture would then assign the notes as payment against the note
balance.
The Bank has leased the ground floor and the mezzanine of the
Bank Building, which constitutes approximately 26,000 square feet, and
the Company has leased a portion of the seventh floor, which
constitutes approximately 12,000 square feet. The ground floor and
mezzanine lease term is for 20 years, commencing May 1985, with an
option for the Bank to renew on the same terms for two consecutive
seven-year periods following the expiration of the initial term. The
base rent paid by the Bank is currently $2.24 per square foot per
month, subject to annual upward cost-of-living adjustments limited to
an increase of 5% of the base rent for each year and 15% of the base
rent for each five year period. The base rent includes all taxes,
utilities, insurance, maintenance and operational common area expenses
(the "pass-through expenses"). If the pass-through expenses exceed in
any year the sum of $5.00 per square foot, the Bank pays such excess.
The lease also provides for a right of first refusal in favor of the
Bank on not less than one full leasable floor (approximately 17,000
square feet) as the same shall become available for lease within the
Bank Building.
The seventh floor lease term is five years and seven months
commencing September 1990, with an option to renew for two consecutive
five year terms. The base rate is currently $1.98 per square foot per
month, subject to annual upward cost-of-living adjustments and pass-
through expense similar to the Bank lease.
The Company and the Bank believe the leased space at 1420 Kettner
Boulevard (including the right of first refusal space) will be
adequate for their needs for the foreseeable future.
At December 31, 1994, the Bank Building was approximately 90%
leased, although concessions to some tenants who are not utilizing all
of their leased premises would reduce the effective occupancy to
approximately 82%.
Item 3. Legal Proceedings.
In January 1993, the Bank was named as a defendant in an
adversary proceeding in Bankruptcy Court filed by Pioneer Liquidating
Corporation ("PLC") successor to six bankrupt Pioneer Mortgage Company
entities ("Pioneer"). Investors in Pioneer had previously filed suit
against the Bank. That Pioneer litigation was settled in 1992. The
PLC case has been transferred to the United States District Court.
The PLC complaint, which does not specify the amount of damages,
alleges that the Bank and five other banks received preferential
payments and voidable transfers from Pioneer prior to the filing of
the Chapter 11 petition in January 1991. The attorneys for PLC have
alleged recoverable transfers from the Bank in excess of $14 million
but have stated informally that they are seeking recovery of
approximately $1.75 million. Of the $1.75 million, the sum of
$250,000 would be in cash with the balance in the form of charged off
Bank loans. PLC and the Bank have been engaged in ongoing settlement
negotiations, however, as yet no resolution has been reached. As of
December 31, 1994, the Bank has set aside a provision of $250,000 for
resolution of this litigation.
In December 1991, the Bank filed suit against its Directors' and
Officers' liability insurer, alleging that the insurer had breached
the insurance contract and acted in bad faith by refusing to pay the
Bank's defense and settlement costs in connection with the Pioneer
investor lawsuits. During 1994 the Bank and its insurer settled their
dispute. Under the terms of the settlement, the insurer paid the Bank
$713,000 (in addition to the $750,000 the insurer had previously
advanced towards the Bank's settlement with the investors) which has
been credited to miscellaneous other operating income.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter of 1994.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
(a) Market Information. Since October 6, 1987, the
Company's Common Stock has been listed on the National Association of
Securities Dealers ("NASDAQ") National Market System. There is only a
limited market for the Company's Common Stock.
Stock Price Information
Period 1994 1993
First Quarter
Low $ 2.50 $ 3.50
High 3.25 4.00
Second Quarter
Low 2.50 3.50
High 3.25 4.38
Third Quarter
Low 2.50 2.50
High 4.75 4.00
Fourth Quarter
Low 3.00 2.50
High 4.75 3.38
(b) Holders. As of March 3, 1995, the Company's outstanding
shares of Common Stock were held by approximately 700 shareholders of
record (including those through broker/nominees).
(c) Dividends. There were no stock or cash dividends declared in
1994 or 1993.
As discussed earlier (page 6) the Bank is presently precluded
from paying dividends to the Company. As a result, the Company must
rely on distributions from the Joint Venture to pay its expenses. It
is anticipated that it is possible to do so until such time as the
Bank may be able to resume dividend payments.
Item 6. Selected Financial Data.
Consolidated Financial Highlights
Incorporated by reference - see inside front cover of the 1994
Annual Report to Shareholders.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Incorporated by reference - see pages 5 to 11 of the 1994
Annual Report to Shareholders.
Item 8. Financial Statements and Supplementary Data.
Incorporated by reference - see pages 12 to 22 of the 1994
Annual Report to Shareholders.
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosures.
None
PART III
Item 10. Directors and Executive Officers of Registrant.
Positions Held With the Company
And Principal Occupation During
Name Age Past Five Years
Howard W. Brotman 65 Senior Vice President and Chief
Financial Officer of the Company and
the Bank, from before 1990 to present;
Secretary of the Company, February
1993 to present.
Joyce I. Chewning 48 Senior Vice President of the Company,
January 1994 to present; Senior Vice
President, Operations of the Bank from
before 1990 to present.
Margaret "Midge" Costanza 62 Director of the Company since
June, 1993; Partner, Martin &
Costanza, presentation skills
trainers, from before 1990 to present;
Political Consultant-Congresswoman
Lynn Schenk and State Treasurer
Kathleen Brown, 1993 to November,
1994; Campaign Coordinator, California
Democratic State Central Committee and
Boxer for Senate Committee, 1991 to
1992; Executive Director, Search
Alliance, a health research
organization, 1990 to 1991.
Charles I Feurzeig 83 Chairman of the Board of the Company
since 1982; Owner and operator of
commercial shopping centers; President
of Pacific View Construction, Co.,
Inc., developer of homes, from before
1990 to present.
Murray L. Galinson 57 Director of the Company since 1982;
President and Chief Executive Officer
of the Company and the Bank from
before 1990 to present.
Karla J. Hertzog 44 Director of the Company since
February, 1992; President of TOPS
Personnel Service, Inc., a temporary
personnel agency, from before 1990 to
present.
Robert B. Horsman 48 Director of the Company since 1991;
Executive Vice President of the
Company, January 1994 to present;
Executive Vice President of the Bank
from before 1990 to present.
Gail Jensen-Bigknife 44 Senior Vice President of the Bank from
before 1990 to present.
Positions Held With the Company
And Principal Occupation During
Name Age Past Five Years
Mark P. Mandell 44 Director of the Company since January,
1992. Attorney-at-law from before
1990 to present; Vice President and
Legal Counsel, Square One Development
Corporation, commercial real estate
developers, from before 1990 to
present.
Richard Nance 50 Senior Vice President of the Bank from
before 1990 to present.
Debra Perkins 40 Vice President/Compliance of the Bank
from before 1990 to present.
Connie M. Reckling 46 Vice President/Human Resources of the
Bank, 1990 to present.
Patricia L. Roscoe 51 Director of the Company since 1990;
Chairman of Patti Roscoe & Associates,
Inc. and Roscoe/Cottrell, Inc.,
destination management companies, from
before 1990 to present.
Julius H. Zolezzi 65 Director of the Company since 1982;
President of Zolezzi Enterprises,
Inc., which owns fishing vessels and
of Embarcadero Marine, Inc., a
supplier of diesel fuel, from before
1990 to present.
Item 11. Executive Compensation
Long-Term
Annual Compensation Compensation
Name and Principal
Position Year Salary Bonus Option Awards
Murray L. Galinson 1994 $174,050 $0 $ 0
President/CEO 1993 167,700 0 35,003
1992 167,700 0 0
Robert B. Horsman 1994 $113,300 $0 $ 0
Executive Vice President 1993 109,200 0 27,548
1992 107,600 0 0
Joyce Chewning
Senior Vice President 1994 $102,440 0 $ 0
1993 97,940 0 10,099
1992 93,596 0 0
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Potential Realizable
Value of Assumed
Annual Rates of Stock
Options % of Total Price Appreciation
Granted Options Granted Option Term
<F1> To Employees In Exercise Expiration ------------------
Officer <F2> Fiscal Year Price Date @5% @10%
- ------- ------- ----------- ------ ------- ------------------
Murray L. Galinson None
Robert B. Horsman None
Joyce Chewning None
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Acquired Value Options at Fiscal Year End - at Fiscal Year End -
Officer on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ------- -------------- -------- ---------------------------- -------------------------
Murray L. Galinson None None E 27,489 None
U 35,003 None
Robert B. Horsman None None E 11,585 None
U 27,548 None
Joyce Chewning None None U 19,099 None
Director Compensation.
During 1994, Mr. Feurzeig was paid $1,000 per board meeting
and $150 per committee meeting. All other non-employee directors were
paid $500 per board meeting and $75 per committee meeting.
Executive Employment Agreements.
On February 12, 1993, the Company entered into new employment
agreements, comparable to previous agreements, with Murray L.
Galinson, Robert B. Horsman and Joyce Chewning, which continue through
December 31, 1995. The agreements provide for base salaries of
$167,700, $109,200 and $93,500, respectively, with adjustments on
January 1 of each year during the term at the discretion of the Board
of Directors, but in no event will the adjusted salary be less than
the preceding year. For 1995, beginning salaries (subject to possible
mid-year adjustment) have been set at $180,605 for Mr. Galinson,
$117,598 for Mr. Horsman and $106,229 for Ms. Chewning. The
agreements also provide for normal employee perquisites, participation
in the other compensation plans and for extension of employment for
three years from the date of a "change of control" of the Company or
the Bank.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth those shareholders known to the
Company who owned beneficially or of record more than 5% of the Common
Stock of the Company on March 3, 1995.
Name of Amount and Nature
Beneficial of Beneficial Percent (1)
Owner Ownership (1) of Common Stock (2)
Charles I Feurzeig 332,164 (3) 18.9
1420 Kettner Blvd.
San Diego, CA 92101
Murray L. Galinson 172,400 (4)(6) 9.8
1420 Kettner Blvd.
San Diego, CA 92101
Deferred Savings Plan of 84,074 4.8 (7)
the San Diego National Bank
401(k) Plan
1420 Kettner Blvd.
San Diego, CA 92101
The following table sets forth information as to outstanding
shares of the Company's Common Stock beneficially owned by each
director of the Company as of March 3, 1995, and by all directors and
executive officers of the Company and the Bank as a group. Except as
indicated, the persons named have sole voting power and sole
investment power over the amount of shares shown.
Name of Amount and Nature
Beneficial of Beneficial Percent (1)
Owner Ownership (1) Common Stock (2)
Margaret Costanza 200 *
Charles I. Feurzeig 332,164 (3) 18.9
Murray L. Galinson 172,400 (4)(6) 9.8
Karla J. Hertzog 200 *
Robert B. Horsman 18,436 (6) 1.1
Mark P. Mandell 200 *
Patricia L. Roscoe 16,051 1.0
Julius H. Zolezzi 56,448 3.2
All Executive Officers
and Directors as a group 626,249 35.7
(14 persons) (3) (4) (5) (6)
(1) All percentages and share amounts in these sections were
calculated on the basis of outstanding securities, plus shares
issuable pursuant to vested stock options. Includes shares owned
beneficially and of record, directly or indirectly, together with
associates. Also includes shares held by or on behalf of minor
and/or adult children and family trusts.
(2) Asterisk indicates percentage of less than 1%.
(3) Includes 70,640 shares held by Balboa Crest, a partnership of
which Mr. Feurzeig is a general partner.
(4) Includes 85,358 shares held as trustee/custodian.
(5) Includes 164,614 shares issuable to directors and executive
officers pursuant to vested stock options.
(6) Does not include shares owned by the Deferred Savings Plan of the
San Diego National Bank 401(k) Plan attributable to executive
officers' vested interests therein.
(7) The Deferred Savings Plan of the San Diego National Bank 401(k)
Plan holds 5.5% of currently outstanding stock if vested options
are not included in the outstanding stock.
Item 13. Certain Relationships and Related Transactions.
The Bank had banking transactions in the ordinary course of
its business with the Company and its subsidiaries, directors,
executive officers, and their associates, on the same terms, including
interest rates and collateral on loans, as those prevailing at the
same time for comparable transactions with other customers of the
Bank, and which do not, in the opinion of management, involve more
than the normal risks of collectability or present other unfavorable
features. Under federal law, additional restrictions are placed upon
the aggregate amount of, and other terms and conditions of, loans to
executive officers, directors and principal shareholders. The maximum
aggregate available amount of all such loans and credit extensions to
all directors and officers of the Bank at December 31, 1994, together
with their associates, was approximately $367,000 (constituting
approximately 4% of the Company's equity capital). The actual
aggregate balance outstanding on all such loans and credit extensions
at December 31, 1994 was $177,000. In October 1990, the Bank Board
adopted a policy of eliminating further lending to executive officers
and directors (except for cash-secured loans) beyond the maturity of
the existing debt. An exception to this policy was granted to one
director where the amounts of the loans outstanding are less than the
amounts outstanding when the policy was adopted.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
1. Financial statements Page*
Consolidated Balance Sheets at December 31,
1994 and 1993. 12
Consolidated Statements of Operations for each of
the three years in the period ended
December 31, 1994. 13
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended
December 31, 1994. 14
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 31,
1994. 15
Notes to Consolidated Financial Statements. 16-22
Report of Independent Accountants. 23
*Refers to respective page numbers of Annual Report to
Shareholders for the year ended December 31, 1994 which is
incorporated by reference.
2. Financial statement schedules.
All schedules are omitted because they are not applicable
or the required information is shown in the financial
statements or notes thereto.
3. Exhibits (listed by numbers corresponding to the Exhibit
Table of Item 601 of Regulation S-K).
(a) 3 (a) Restated Articles of Incorporation of the Company
and amendment -incorporated by reference from 1988
Form 10-K.
(b) Bylaws of the Company as amended through May 18,
1988 - incorporated by reference from 1988 Form
10-K.
10. (a) (1) Company's 1984 Stock Option Plan, as amended -
incorporated by reference from 1992 Form 10-K.
(2) The Company's 1994 Stock Option Plan.
(b) Employment contracts of certain executive officers
- incorporated by reference from 1992 Form 10-K.
(c) Sample indemnification agreements with directors
and officers - incorporated by reference from 1988
Form 10-K.
13. Annual Report to Shareholders.
22. Subsidiaries of the Registrant.
23. (a) Consent of Independent Accountants.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by the Company
during the fourth quarter of its fiscal year ended
December 31, 1994.
(c) Exhibits required by Item 601 of Regulation S-K and not
incorporated by reference are attached.
(d) Not applicable.
SIGNATURES
Pursuant to the Requirements of Section 13 or Section 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SDNB FINANCIAL CORP
Dated: March 17, 1995 By: /s/Murray L. Galinson
Murray L. Galinson
President and Chief Executive Officer
By: /s/Howard W. Brotman
Howard W. Brotman
Senior Vice President, Secretary
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signatures Title Date
/s/Charles I. Feurzeig Chairman of the Board March 17, 1995
CHARLES I. FEURZEIG and Director
/s/Murray L. Galinson President, Chief March 17, 1995
MURRAY L. GALINSON Executive Officer and
Director
/s/Margaret Costanza Director March 17, 1995
MARGARET COSTANZA
/s/Karla J. Hertzog Director March 17, 1995
KARLA J. HERTZOG
/s/Robert B. Horsman Director March 17, 1995
ROBERT B. HORSMAN
/s/Mark P. Mandell Director March 17, 1995
MARK P. MANDELL
/s/ Patricia L. Roscoe Director March 17, 1995
PATRICIA L. ROSCOE
/s/Julius H. Zolezzi Director March 17, 1995
JULIUS H. ZOLEZZI
/s/Howard W. Brotman Senior Vice President, March 17, 1995
HOWARD W. BROTMAN Secretary and Chief
Financial Officer
INDEX OF EXHIBITS
Exhibit Number
10 (a) (2) SDNB Financial Corp 1994 Stock Option Plan
13 Annual Report to Shareholders.
22 Subsidiaries of Registrant.
23 (a) Consent of Independent Accountants.