EXHIBIT "13"
ANNUAL REPORT TO SHAREHOLDERS
SDNB Financial Corp
1994 Annual Report
(This page also include a graphic of the Company's logo and a photograph
of the San Diego National Bank Building.)
SDNB Financial Corp is the holding company for San Diego National Bank
and San Diego National Bank Building Joint Venture. San Diego National
Bank was established in 1981 to provide San Diego business with an
independent, community bank delivering superb service and competitive
consumer and commercial financial products. Our continuing goal is to
maintain the position as a leading community bank in San Diego County.
We serve our clients in a profitable and ethical manner while helping to
improve the quality of life in our community, America's Finest City.
FINANCIAL HIGHLIGHTS
1990 1991 1992 1993 1994
For the Year, In Thousands
Total interest income $17,213 $15,116 $12,334 $11,930 $11,818
Net interest income 8,912 8,468 8,321 8,571 8,912
Securities gains, net 0 80 25 0 0
Provision for loan losses 635 1,270 1,320 2,950 1,850
Netincome (loss) 740 (511) (2,211) (2,562) (159)
At Year End, In Thousands
Assets $177,704 $205,232 $194,689 $170,693 $173,185
Deposits 144,556 154,979 164,739 138,150 138,276
Loans, net 123,445 119,817 130 010 108,511 94,910
Investment securities 25,856 15,006 17,943 30 227 27 231
Long term obligations 11,038 10 881 10,630 10,379 10,158
Shareholders' equity 14,815 14,261 12 050 9,488 8,969
Per Share, Retroactively Adjusted for Stock Dividends
Net income (loss) $ 0.46 $(0.33) $(1.44) $(1.67) $(0.10)
Cash Dividends paid 0.22 0.08 0.00 0.00 0.00
Shareholders' equity 9.71 9.27 7.83 6.17 5.83
The recessionary grip on the San Diego economy began to show signs of
easing in 1994. Reflecting positive momentum in the local business
sector, SDNB Financial Corp made tremendous gains moving toward
profitability. The loss for the Company was $159,000 in 1994 compared to
a loss of $2,562,000 in 1993. Profits for San Diego National Bank were
$382,000 in 1994 compared to a loss of $1,870,000 in 1993. Through-out
the year, the Company continued to set the standard for community banks.
Investing heavily in the well-being of the business and civic
communities, San Diego National Bank, one of San Diego's remaining
locally-owned financial institutions, dedicated itself to meeting the
challenges of securing a healthier economic environment. Whether it was
working with Mayor Susan Golding and the Greater San Diego Chamber of
Commerce to make the city more receptive to small businesses, or feeding
the hungry at the Rescue Mission, San Diego National Bank was there,
making our community a better place to work and live.
Looking to the future, the Company also invested in current
opportunities for growth and expansion that abound for a well-
capitalized, independent bank holding company with a planned capital
infusion of $6 million. An agreement with two limited partnerships
managed by WHR Management Corp., a New York-based investment firm, to
invest $2.2 million in conjunction with a proposed $3 million rights
offering to existing shareholders, is slowly working its way through the
process of regulatory approval. Upon the successful completion of the
offering to shareholders, WHR will add an additional investment of up to
$1.1 million.
A solid economic foundation requires continual stimulation of new jobs
and businesses. San Diego National Bank has been an active partner and
resource to many innovative projects designed to fuel financial growth
and new business start-up. Among these are the Banker's Small Business
Community Development Corp. of San Diego County, offering lending
assistance to minority, women-owned and other qualified small
businesses; Accion International Foundation, a non-profit economic
development organization, targeted to low-income families trying to
break the cycle of poverty through self-employment; Special Small
Business Investment Corp., and the California Southern Small Business
Development Corp.
San Diego National Bank representatives serve on the loan committee for
the "EMTEK Fund", providing seed capital for emerging technology
companies, and the Rehabilitation Loan Committee of the San Diego
Housing Commission. Bank representatives are active with Lender's
Community Reinvestment Association and other economic development
programs.
(This page also has a halftone graphic of the logo "sdnb")
(Photograph described by the caption below) SDNB supports many companies
and organizations that are involved in tourism. It is one of the key
ingredients in San Diego's economy.
(Photograph described by the caption below)
SDNB Action Squad volunteers lent their hands to United Way's "Hands on
San Diego" project. Here, Denyce Hubbard is painting at one of the local
youth hostels.
(Photograph described by the caption below)
Our commitment to small business is demonstrated by John McNulty's
involvement in the Bankers Small Business Community Development
Corporation (BSB/CDC). It provides financing to minority and women-owned
businesses.
(Photograph described by the caption below)
Cultural organizations such as the San Diego Symphony are important to
any major city. We, at SDNB, do our part to support their activities.
(Photograph described by the caption below)
Our sponsorship of the "Women Who Mean Business" awards was one example
of our commitment to the large number of women who own or operate
successful businesses. Murray Galinson is seen here giving an award to
one of the event's honorees.
(This page also has a halftone graphic of the word "community")
(Photograph described by the caption below)
Many of our staff volunteer each month to serve seniors lunch at the
Senior Community Center of San Diego. Debbie Keeney states it has been a
very rewarding experience.
(Photograph described by the caption below)
Murray Galinson is pictured here with Eddy Rose Riley, the winner of our
holiday card contest. Eddy Rose attends El Toyon Elementary School in
National City, SDNB's "adopted" school.
(Photograph described by the caption below)
Our involvement with the Youth Enterprise Zone (YEZ) enables us to share
our business expertise with high school students who desire to become
entrepreneurs.
(Photograph described by the caption below)
The staff has raised several hundreds of dollars for charities by paying
to dress casual. Recipients of these funds include the American Cancer
Society, March of Dimes, Muscular Dystrophy and San Diego Youth &
Community Services.
(Photograph described by the caption below)
SDNB Board member, Midge Costanza, exhibits her artistic talents to
Wyland, the famous ocean artist. The painting of the wall by Wyland
illustrates our commitment to our environment.
(Photograph described by the caption below)
The Wellness Community, San Diego holds a "duck race" at the Del Mar
Fair each year. The proceeds benefit cancer patients and their families.
Kristy Gregg is one of many of the SDNB staff that volunteers time at
the event.
(Photograph of Charles I. Feurzeig, Chairman of the Board and Murray L.
Galinson, President and Chief Executive Officer)
In response to surveys assessing the needs of small to mid-sized
business owners and professionals, San Diego National Bank initiated
trust, investment and custodial services through Danielson Trust Company
and leasing services through Heritage Leasing Capital.
Corporate downsizing and sale of local businesses to institutions
headquartered outside of San Diego created a void in the charitable and
institutional giving levels. San Diego National Bank employees extended
themselves with personal time and monetary contributions to help fill
the need. Monthly "casual dress days" for employees who donated to
specific charities raised thousands of dollars throughout the year.
SDNB invested in education by contributing expertise and support to
educational institutions such as California Western Law School, San
Diego State University, University of California, San Diego and our
adopted elementary school, El Toyon, in National City. Health was a
major focus for the year. The bank hosted a seminar on health care
reform and its implication for employers and industry professionals. We
sponsored events and raised money for Sharp Rehabilitation Center, the
Wellness Community, San Diego Hospice, Mercy Hospital and the UCSD
Medical Center.
The list of organizations to which San Diego National Bank employees and
board members contribute encompass arts and cultural institutions like
the Museum of Photographic Arts, the Symphony and the Opera. Service and
volunteer organizations like Big Brothers, United Way, American Red
Cross, Junior League, The City Club, Rachel's House, Episcopal Community
Services and many others benefited from SDNB's policy of giving back to
the community and corporate stewardship.
With three women directors on the board, the Company is serious about
women-owned businesses. A goal of recognizing and supplementing the
financial needs of this significant entrepreneurial sector was enhanced
through involvement in many activities. The painting by internationally
famous oceans' artist Wyland on the SDNB Building north wall blossomed
into a week-long community celebration of the California gray whale,
attracting thousands. Now a landmark, this example of public art serves
as a distinguishing symbol of our bank, as well as providing visual
testimony to the spirit San Diego National Bank invests in its
community.
We are proud of our record of achievement and contribution, and the
employees, board members, investors and customers who believe in
community banking and commitment.
/s/Charles I. Feurzeig
CHARLES I. FEURZEIG
CHAIRMAN OF THE BOARD
/s/Murray L. Galinson
MURRAY L. GALINSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(This page also has a halftone graphic of the word "leadership")
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
The results of operations for 1994 reflect a continuation of the
problems of a still depressed economy in which the Company operates. The
Company recorded a loss for 1994 of $159,000 compared to losses of
$2,562,000 and $2,211,000 in 1993 and 1992, respectively. Rising
interest rates in 1994 have contributed substantially to the
improvement. Also included in 1994 is the recovery of previously
expensed legal fees (see "Other Non-Interest Income"). For the past
several years, the Company and the Bank have been adversely affected by
a number of factors emanating primarily from the condition of the
economy in San Diego. These factors, which are more fully described
herein, include:
a. The continued need for high loan loss provisions.
b. OREO losses and expenses from higher than normal levels of the OREO
properties.
c. Reduced net interest margin between 1992 and 1993 as a result of
declining interest rates. An improved
net interest margin in 1994, however, as a result of a sharp increase in
interest rates.
d. Reduction in the level of the loan portfolio resulting from
continuing low loan demand.
Additionally, the Company has incurred substantial expense in connection
with legal fees and provision for additional costs from the Pioneer
Mortgage litigation (see "Other Non-Interest Expenses").
While the Company reports a much reduced loss in 1994 than in the prior
three years, there can be no assurances that the factors noted above, or
other factors, will not continue to adversely impact the Company and the
Bank. Discussion of the individual elements of the Company's operations
is contained in subsequent sections of this report.
Liquidity and Asset/Liability Management
Monitoring of the Bank's interest rate sensitivity and liquidity is the
responsibility of the Asset/Liability Management Committee (ALM), which
reports directly to the Management Committee. It is Management's
philosophy that ALM manage the Bank's balance sheet to provide the
highest possible returns while maintaining an acceptable amount of
interest-rate risk and adequate liquidity.
By the nature of its commercial/wholesale focus, the Bank has moderate
interest-rate risk exposure in a declining-rate environment. This
phenomenon can be seen in the "Static Gap Summary" (Table 1). At
December 31, 1994, approximately 75% of the Bank's earning assets adjust
immediately to changes in interest rates. Within three months, this
increases to 84% of earning assets. Consequently, the Bank utilizes
deposit liabilities that also adjust relatively quickly. Within the same
three-month period, approximately 95% of the Bank's interest-bearing
liabilities (mostly deposits) adjust to current rates.
The Bank's cumulative gap position at the three month repricing interval
has remained relatively constant from December 31, 1993 to December 31,
1994; however, the gap at the one day interval has narrowed by 37%. This
shift is explained by two factors. First, the Bank was able to increase
lower rate, immediately repricable deposits by $11.6 million during
1994. Second, securities sold under repurchase agreements increased by
$5.2 million in the one-day maturity time frame. Because of these
increases and slowing loan demand, ALM was able to price "money desk"
certificates of deposit unattractively, assuring that those funds
already in the Bank would be withdrawn at maturity. Money desk funds
reduced from a peak of over $14 million in 1993 to under $1 million at
December 31, 1994, accounting for the bulk of the decrease in
certificates of deposit.
The Bank's liquidity needs are projected by comparing anticipated
funding needs against current resources and anticipated deposit growth.
Any current surplus of funds is invested to maximize income while
maintaining safety and providing for future liquidity. During 1994, cash
and cash equivalents increased $20.3 million. Federal funds sold
increased by $17.7 million as a consequence of ALM's preference to keep
investment maturities short in the rising interest rate environment of
1994. Approximately $3 million was provided by operating activities,
despite a small net loss on the consolidated statement of operations.
The bulk of the increase in cash and cash equivalents, $14.2 million,
was provided by investing activities. Of this amount, $11.5 million was
due to a decrease in gross loans. Maturities of investment securities
outpaced new purchases by $2.6 million during the year. An additional
$3.1 million was provided by financing activities, mainly the increase
in securities sold under repurchase agreements. Liquidity is provided on
a daily basis by federal funds sold and on a longer-term basis by
structuring the Bank's investment portfolio to provide a steady stream
of maturing issues. Additionally, the Bank may raise additional funds
from time to time through money desk operations or via the sale of loans
to another institution.
The Bank has never purchased high-yield securities or participated in
highly-leveraged transactions.
See "Capital Resources" for a discussion of other factors that could
affect liquidity.
TABLE 1. STATIC GAP SUMMARY
DECEMBER 31, 1994
Immediately Non-rate
Adjustable 1 Day 3 6 Sensitive
Or 1 Day Through Through Through And Over
(In thousands) Maturity 3 Months 6 Months 12 Months 12 Months Total
Loans (net) 87,630 3,498 1,357 665 3,908 97,058
Investment securities - 9,558 1,004 2,759 13,910 27,231
Certificates of deposit in other banks - 688 693 - - 1,381
Federal funds sold 24,000 - - - - 24,000
Total interest earning assets 111,630 13,744 3,054 3,424 17,818 149,670
Non-interest earning assets - - - - 12,954 12,954
Total assets 111,630 13,744 3,054 3,424 30,772 162,624
Deposits:
Savings, NOW accounts and
money markets 74,717 - - - - 74,717
Time deposits - 12,908 3,220 1,533 239 17,900
Total deposits 74,717 12,908 3,220 1,533 239 92,617
Securities sold under agreement
to repurchase 12,285 - - - - 12,285
Total interest bearing liabilities 87,002 12,908 3,220 1,533 239 104,902
Non-interest bearing liabilities - - - - 46,415 46,415
Shareholders' equity - - - - 11,307 11,307
Total liabilities and
shareholders' equity 87,002 12,908 3,220 1,533 57,961 162,624
Interest rate sensitivity gap 25,153 836 (166) 1,891 (27,714)
Cumulative interest rate sensitivity gap 25,153 25,989 25,823 27,714 -
Capital Resources
Since its initial capitalization in 1981, the Company had relied
primarily on internally generated income to fund its growth and provide
depositor protection. In July 1994, the Company announced that it had
signed a letter of intent whereby two limited partnerships managed by
WHR Management Corp. ("WHR") would invest $4 million in the Company's
common stock. Subsequent discussions with regulatory authorities have
led to a reduction to $2.2 million in the amount of the initial
investment by WHR in order to avoid WHR being considered a bank holding
company. In conjunction with the investment by WHR, the Company plans a
$3 million "rights offering" to existing shareholders. Upon completion
of the rights offering, WHR will invest an additional $1.1 million, or
such lesser amount so that after such investment WHR would hold an
aggregate of 24.9% of the outstanding common stock of the Company,
taking into account the shares issued in the rights offering. The
transactions are subject to approval by regulatory authorities and by
the Company's shareholders at the Annual Meeting of Shareholders
scheduled for March 17, 1995. The Company anticipates that the funds
raised would be used to provide capital to the Bank to finance future
expansion, including possible acquisitions, and to reduce the
obligations of the San Diego National Bank Building Joint Venture
("Joint Venture").
In a separate but related transaction, WHR purchased the existing first
mortgage loan on the building and modified its terms (see "Subsidiary
Data"). As disclosed in the notes to the consolidated financial
statements, the Bank is temporarily precluded from paying dividends to
the Company. As further disclosed, the Company merged SDNB Development
Corp into itself effective July 1, 1993, thereby allowing cash flow from
the Joint Venture to come directly to the Company. During 1994, the
Joint Venture cash flow provided the Company with sufficient funds to
meet its normal ongoing obligations but was not sufficient to allow the
payment of cash dividends, which would also require approval of the
Federal Reserve Bank of San Francisco under terms of an agreement dated
November 20, 1992. There can be no assurance that the Joint Venture cash
flow will continue to provide the Company with sufficient funds to meet
ongoing obligations.
Investment Securities
As reflected in the consolidated financial statements and in the
accompanying notes thereto, the investment portfolio of the Bank has
been negatively impacted by the decline in the bond market caused by
higher interest rates compounded by the impact on the market of the
"structured" or derivative securities. Though the Bank held no bonds
issued by Orange County, California, or any of its political
subdivisions, the general market conditions have led to declines in
value of securities both in the available for sale and held to maturity
categories. Management believes, however, that there is sufficient
liquidity and available sources of liquidity to allow all such notes
(which are fully guaranteed by United States government
instrumentalities as to principal) to mature and thus avoid realization
of any material amount of the presently unrealized losses.
Net Interest Income / Net Interest Margin
Net interest income for 1994 was $8,912,000 compared to $8,571,000 for
1993 and $8,321,000 for 1992, which represents increases of 4% and 3%,
respectively. Net interest income is determined by the spread of
earnings on assets over the cost of funds. The three-year history is
shown in the following chart:
1994 1993 1992
NET INTEREST SPREAD
Yield on average earnings assets
(taxable equivalent) 7.75% 7.60% 7.99%
Cost of funds 1.89% 2.11% 2.57%
Net interest spread 5.86% 5.49% 5.42%
The Wall Street Prime interest rate rose from 6% at the beginning of
1994 to 8.5% at the end of the year, averaging 7.14% for the year. The
rate had remained at 6% during all of 1993 after averaging 6.25% in
1992. In addition to interest rates, changes in the volumes of assets
and liabilities also affect net interest income. The volume/rate
variance analysis (Table 2) shows the change in net interest income that
is attributable to changes in volume versus changes in rates. As
reflected in Table 2, net interest spread is affected by several
factors:
a) Since the vast majority of the Bank's loans (92% at December 31,
1994), are at variable rates, the changes in the prime interest rate
described above resulted in the decrease in interest earned based on
rate between 1992 and 1993, and the sharp increase between 1993 and
1994.
b) The reduction in average loan balances, which began in 1993,
continued during 1994, resulting in a substantial decrease in interest
earned based on volume.
c) The amount of time certificates has declined from $50 million at
the
end of 1992 to $18 million at December 31, 1994. This outflow was
partially offset by increases in money market accounts on which the Bank
pays a lower rate of interest. The decline in time certificates is
attributable to two major factors:
1. The reduction in "money desk" certificates is described previously
(see "Liquidity and Asset/Liability Management").
2. Continuing depositors have apparently chosen to shift to the more
flexible money market accounts as the interest rate differential between
those accounts and time certificates diminished.
TABLE 2. VOLUME/RATE VARIANCE ANALYSIS
1994 compared to 1993 1993 compared to 1992 1992 compared to
1991
Volume Rate Total Volume Rate Total Volume Rate Total
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>
Loans and Allowance and Provision for Loan Losses
Management employs a "migration analysis method" to establish the
required amount of loan loss allowance. This process tracks realized
loan losses back through the prior two years to estimate loss exposure
on the classified and unclassified loan portfolios. Additionally, loss
experience is tracked in pools of loans with similar characteristics to
estimate the loss exposure unique to various loan types. The measured
loss exposure is then applied to the current loan portfolio and further
adjusted for "qualitative factors" such as:
Changes in the trends of the volume and severity of past due and
classified loans; and trends in the volume of non-accrual loans,
troubled debt restructurings and other loan modifications;
Changes in the nature and volume of the portfolio;
Changes in the experience, ability, and depth of lending management
and staff;
Changes in lending policies and procedures, including underwriting
standards and collections, charge-offs and recovery practices;
Changes in national and local economic and business conditions and
developments, including the condition of various market segments;
The existence and effect of any concentrations of credit, and
changes in the level of such concentrations;
Changes in the quality of the loan review system and the degree of
oversight by the Board of Directors; and
The effect of external factors such as competition and legal and
regulatory requirements on the level of estimated credit losses in the
current portfolio.
This method of establishing loan loss reserves complies with the
policies of the Office of the Comptroller of the Currency as reflected
in Banking Circular 201, revised, dated February 20, 1992, and in
Banking Bulletin 93-60, dated December 21, 1993. The Company began
testing this new method during 1992 and comparing its results to results
reached by the previously existing procedures employed by the Company.
The test proved that the two methods were comparable, and the Company
adopted the new migration analysis method during 1993.
Evaluation and classification of problem loans is an ongoing process
involving grading by loan officers, evaluation by the credit
administration department of the Bank, and a review on a regular basis
by an independent loan review firm. Additionally, in response to the
problems in the economy and increases in the level of classified loans,
in 1993 the Bank established a Special Assets Department to deal solely
with problem loans including identification, modification where
appropriate, and early recognition of loss potential. As is reflected in
the following chart, the introduction of the Special Assets Department
has resulted in improved early recognition of problem loans and
opportunity to restructure them, thereby increasing the amount of loans
reported as nonperforming (both those that are current in payment and
those that are not current), but improving the collection record on such
loans. The migration analysis adequately recognizes the loss potential
included in those credits.
LOANS REPORTED AS NONPERFORMING
AT DECEMBER 31,
(in thousands) 1994 1993 1992
CURRENT AND NONCURRENT
Non-accrual loans 6,046 5,343 1,918
Restructured loans (still accruing) 2,316 3,162 0
Loans 90 days past due 20 481 248
8,382 8,986 2,166
Other real estate owned 268 1,050 2,091
Total 8,650 10,036 4,257
1994 1993 1992
NONCURRENT
Non-accrual loans 1,276 3,373 1,223
Restructured loans (still accruing) 0 0 0
Loans 90 days past due 20 481 248
1,296 3,854 1,471
Other real estate owned 268 1,050 2,091
Total 1,564 4,904 3,562
Loans reported as nonperforming but
which are current, as a percentage of
total loans reported as nonperforming 82% 51% 51%
Accordingly, the Company believes its method for establishing the loan
loss allowance is sound. But no method, however valid, can consistently
predict future events with complete accuracy. In recent years, several
factors used by the Bank to establish loan loss allowances have been
subject to considerable volatility, and this in turn has affected the
volatility of nonperforming loans, charge-offs, and the coverage ratio.
In addition, the Bank's method of reporting, particularly its
conservative listing of loans as nonperforming, is not always an
accurate indicator of actual future losses for several reasons. These
issues are explained in greater detail below.
The economy in San Diego suffered a sharp downturn in recent years,
particularly in the real estate market. The Bank is a community bank
with a relatively small loan portfolio comprised of mostly
commercial/real estate loans that tend to be individually larger in
amount than loans made by retail banks. As a result of these and other
factors, the Bank can experience large swings in nonperforming loans,
charge-offs, and the coverage ratio when one or a few loans are
transferred from one category to another. These factors are not reasons
for changing a valid method of determining loan loss allowances and are
not always accurate predictors of losses, but they do have short-term
effects on those allowances and related reported figures.
Significant components of the loan loss charge-offs in 1994 ($1.2
million of a total of $2.4 million) and in 1993 ($660,000 of a total of
$2.7 million) were attributable in each year to a single loan which
became a problem loan late in the year. In both cases, the Bank
responded with a partial charge-off, consistent with its conservative
reporting of problem loans. The changing levels of nonperforming loans
from December 31, 1992 to December 31, 1993, also provide an excellent
example of the volatility of non-performing loans. During 1993, a single
large real estate loan was transferred into the nonperforming category
as a result of financial problems experienced by the borrower directly
on account of the troubled real estate market in San Diego; that loan
accounted for $2.5 million of the total increase of $5.8 million in
nonperforming loans for the period but the loan was completely collected
by the end of 1994. Another $4.4 million of the increase was due to
conservative reporting as the result of the establishment of the Special
Assets Department and the early recognition of potentially problem
loans: restructured but accruing loans increased by $3.1 million (from
zero) and non-accrual but current loans increased by $1.3 million (from
$700,000).
Similar factors explain the decrease in nonperforming loans in 1992
compared to 1991 by $5.4 million, from $9.6 million to $4.2 million.
Approximately 89% of this decrease is attributable to the Bank's
aggressive efforts to work off problems that had been created in prior
years from the depressed real estate market. In 1992, the Bank sold more
than one-half of its Other Real Estate Owned ($2.8 million of a total of
$5.4 million) and reduced its over-90 day past due loans by $2.0 million
through diligent administration.
What this demonstrates, among other things, is that the conservative
reporting of nonperforming loans is a useful management tool, but it is
not always a good predictor of loan losses (nor is it intended to be)
and there is no direct correlation between nonperforming loans and the
proper level of loan loss reserves (nor should there be). As the
foregoing chart dramatically shows, a significant portion of the loans
reported as "nonperforming" are in fact performing in that payments on
those loans are current. (See the percentages in the final line of the
foregoing chart.) Also, many of the Bank's loans are collateralized (86%
were collateralized at December 31, 1994), and that collateral can
affect the recovery on troubled loans, of course. For example, the
complete repayment on the $2.5 million loan referred to above was
attributable to realization on the collateral.
For these reasons, Management believes that the migration analysis is
the proper method of establishing the loan loss allowance, even though
it may result in a short-term effect on the relationship between
reported non-performing loan amounts and the balance in the allowance.
Activity in the allowance for loan losses is described in the notes to
the consolidated financial statements.
Management believes that any loans classified for regulatory purposes as
loss, doubtful, substandard or special mention do not represent or
result from trends or uncertainties which Management reasonably expects
will materially impact future operating results, liquidity or capital
resources, or represent material credits about which Management is aware
of any information which causes Management to have serious doubts as to
the ability of the borrowers to comply with the loan repayment terms.
Accordingly, Management believes that the allowance for loan losses is
properly established and adequate in amount.
Management is concerned, however, that recent increases in the prime
interest rate, particularly in late 1994 and early 1995, and the
possibility of further increases, will negatively impact the future cash
flow of borrowers of "mini-perm" real estate loans and their ability to
service the debt. Management estimates that as much as $11.5 million in
such loans at December 31, 1994 could be subject to such impact.
Management has begun a pro-active program to enter into modification
agreements, where necessary, to keep such loans performing. Such
modifications may include capping, reducing or deferring future interest
payments. If the proposed modifications covered all such loans, the Bank
would be forgoing future income of approximately $58,000 annually for
each one-half percent of interest not charged.
Miscellaneous Other Operating Income
During 1994, the Bank and its directors' and officers' insurer settled
their dispute regarding the Bank's legal and settlement costs in the
Pioneer Mortgage federal class action and state court cases (see notes
to consolidated financial statements). Under the terms of the
settlement, the insurer paid the Bank $713,000 (in addition to the
$750,000 the insurer had previously advanced toward the Bank's
settlement with the plaintiffs) which has been credited to miscellaneous
other operating income.
No directors or officers have been named as defendants in the remaining
claims alleged in the Pioneer Liquidating Corporation complaint.
Management does not anticipate any further insurance recovery to result.
Other Non-Interest Expenses
Included in other non-interest expenses are the following:
Legal fees and settlement costs (and provisions therefor) in connection
with the Pioneer Mortgage Company and Pioneer Liquidating Corporation
litigation:
In 1994 $ 504,000
In 1993 $ 592,000
In 1992 $1,455,000
Matters pertaining to the federal class action and state court cases
resulting from the 1991 Pioneer Mortgage Company litigation, including
the Bank's claim against its insurer, have been settled. The 1993
litigation brought by Pioneer Liquidating Corporation remains before the
court and, although settlement discussions have been initiated, no
agreement has been reached. Management is unable to predict whether
such settlement will be achieved but has recorded a $250,000 provision
for additional costs in connection therewith (included in 1994 expenses
above). The case is scheduled for trial in November 1995.
If such costs exceed the amount that has been reserved, the result would
have a detrimental effect on the Company's financial results in 1995.
Additionally, should the settlement efforts fail, the Company can expect
a continuation of abnormally high legal fees as the litigation winds its
way through the legal system.
Other Real Estate Owned ("OREO") losses and expenses:
In 1994 $ 462,000
In 1993 $ 754,000
In 1992 $1,257,000
OREO property, which peaked at approximately $5 million in 1991,
continued to decline in 1994 (to $268,000 at December 31, 1994) as
Management instituted vigorous efforts to dispose of repossessed
property. A new property was repossessed early in 1995 with a book value
of approximately $550,000. Management is unable to predict if there will
be other repossessions in the future but intends to continue to dispose
of such properties as quickly as is prudent.
Miscellaneous expense in 1993 includes provision for a loss in the
amount of $500,000 due to an unfavorable arbitration decision which
required the Bank to rescind the 1988 sale of a single family residence
which it had taken in foreclosure in 1987. The property was resold in
1994.
Subsidiary Data
San Diego National Bank The Bank earned $382,000 in 1994 compared to
losses of $1,870,000 in 1993 and $1,363,000 in 1992. Return on average
assets (ROA) was 0.23%, (1.07%) and (0.78%), respectively. Return on
average equity (ROE) was 3.20%, (14.65%) and (10.05%), respectively. The
reasons for the change in Bank earnings have been enumerated in the
preceding pages.
See notes to the consolidated financial statements for information
regarding the Bank's capital ratios.
San Diego National Bank Building Joint Venture The Joint Venture
recorded pre-consolidation gross building revenues of $2,046,000,
$2,048,000 and $1,994,000 in 1994, 1993 and 1992, respectively,
resulting in pre-consolidation, pre-tax losses of $447,000, $453,000 and
$723,000, respectively. Depreciation and amortization expenses were
$636,000, $640,000 and $692,000 in 1994, 1993 and 1992, respectively.
At the beginning of the Joint Venture, the limited partners' share of
its losses was charged against the investment capital accounts of the
limited partners. During 1990 these capital accounts reached zero,
requiring the Company to absorb additional losses of approximately
$168,000 in 1994, $171,000 in 1993 and $275,000 in 1992 which would
otherwise have been charged to the limited partners. The cumulative
amount of such absorbed additional losses is $1,282,000 through December
31, 1994.
There is a substantial amount of vacant office space in downtown San
Diego. A recent study indicated that the downtown vacancy rate was
approximately 23% (36th highest among 47 U.S. cities included in the
survey) and rental rates were ranked 35th lowest in the same survey.
This creates a highly competitive rental market, generally requiring the
granting of generous lease concessions and/or low rental rates to obtain
new tenants or retain existing ones. Some tenants with limited time
remaining on existing leases have begun negotiating for lower current
rental rates in exchange for extensions of their leases. Management
anticipates a gradual reduction in rental income as existing leases
expire and new leases are written at substantially lower rates. At the
end of 1994, the building was approximately 90% leased, although
concessions to some tenants who are not utilizing all of their leased
premises would reduce the effective occupancy to approximately 82%.
In November 1994, the existing first mortgage loan on the building was
purchased by the two limited partnerships managed by WHR Management
Corp. which propose to purchase the Company's stock (see "Capital
Resources"). In January 1995, the Joint Venture and WHR entered into a
modification agreement which reduces the debt service requirement to
$800,000 per year, all allocable to interest. Prior to such
modification, the annual debt service requirement was $823,000 allocable
first to interest at a rate equal to 2.25% over the 11th District Cost
of Funds (which interest rate changed monthly). Pursuant to the terms of
the original trust deed (absent the modification), due to projected
increase in the benchmark interest rates, annual payments of debt
service were projected to increase on May 1, 1995, to approximately
$917,000. Further, the modification allows prepayment of the loan on
April 1, 1995, for $7,708,000 (assuming all interest payments have been
made); on January 1, 1996, for $8,691,000; and quarterly thereafter at
amounts which increase by approximately $373,000 each quarter. On April
1, 1997, the outstanding principal balance will be due and payable if
not previously prepaid.
Additionally, the Joint Venture anticipates entering into a modification
agreement to make a partial payment of $250,000 on the second trust deed
note payable to Pacific View Construction, Inc. ("PV note") out of the
proceeds of the stock issuance referred to in other sections of
management's discussion and analysis. The PV note would be further
modified to fix the interest rate at 10% per annum and extend the due
date to April 1, 1997. It is anticipated that the Company will also
purchase customer notes from the Bank in the amount of approximately
$1,100,000 (par) and assign such notes to the Joint Venture. The Joint
Venture would then assign the notes as payment against the PV note
balance. The result of such transaction would be to further reduce the
Joint Venture's debt service requirements.
The first and second mortgage notes described above would both mature on
April 1, 1997. Management intends to pursue all opportunities to
refinance the property at, or prior to, that time. Such a refinancing,
or ultimately a possible sale of the building, would depend upon market
conditions. Management is unable to predict the market conditions which
will exist in 1997.
Business Environment
Through the 1990's economic recovery of San Diego and the entire
Southern California area has lagged behind that of the nation as a
whole. As discussed earlier, a rising interest rate environment in 1994
has resulted in an increase in the Bank's net interest spread. Should
interest remain at this relatively high level, there could be a
beneficial effect to the Company. Conversely, should interest rates
decline, net interest spread will be negatively impacted. The majority
of the Bank's variable rate loans adjust on the day that a rate
reduction is made. The offsetting reduction in interest paid on deposits
is delayed until certificates of deposit mature and, additionally,
competitive pressure from savings institutions and non-bank money funds
may inhibit reduction in rates paid on other interest-bearing accounts.
CONSOLIDATED BALANCE SHEETS
SDNB Financial Corp and Subsidiaries
December 31,
(dollars in thousands) 1994 1993
Assets
Cash and due from banks $ 11,936 $ 9,044
Interest bearing deposits in other banks 1,381 1,682
Federal funds sold 24,000 6,300
Investment securities 27,231 30,227
Loans 97,058 111,033
Less allowance for loan losses 2,148 2,522
Net loans 94,910 108,511
Premises and equipment, net 11,089 11,742
Other real estate owned 268 1,050
Accrued interest receivable and other assets 2,370 2,137
$173,185 $170,693
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 45,693 $ 41,113
Interest bearing 92,583 97,037
Total deposits 138,276 138,150
Securities sold under agreement to repurchase 12,285 9,273
Accrued interest payable and other liabilities 953 1,019
Notes payable 12,702 12,763
Total liabilities 164,216 161,205
Commitments and contingencies (notes 10 and 11)
Shareholders' equity:
Common stock, no par value; authorized
15,000,000 shares, issued and outstanding
1,538,364 in 1994 and 1993 14,585 14,585
Accumulated deficit (5,256) (5,097)
Net unrealized holding losses on
available-for-sale securities (360) 0
Total shareholders' equity 8,969 9,488
$173,185 $170,693
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
SDNB Financial Corp and Subsidiaries
Years ended December 31,
(dollars in thousands except per share amounts) 1994 1993 1992
Interest Income:
Interest and fees on loans $ 9,500 $10,404 $10,825
Interest on federal funds sold 732 364 408
Interest on investment securities:
Taxable 1,394 899 825
Exempt from federal income tax 192 263 276
Total interest income 11,818 11,930 12,334
Interest Expense:
Deposits 2,497 3,146 3,869
Short-term borrowings 409 213 144
Total interest expense 2,906 3,359 4,013
Net interest income 8,912 8,571 8,321
Provision for Loan Losses 1,850 2,950 1,320
Net interest income after
provision for loan losses 7,062 5,621 7,001
Other Operating Income:
Security gains, net 0 0 25
Building income 1,067 1,088 1,108
Miscellaneous 1,580 1,017 1,117
Total other operating income 2,647 2,105 2,250
Other Operating Expenses:
Salaries and employee benefits 3,630 3,371 3,568
Occupancy 492 486 511
Building operating expenses, including
interest expense of $788, $820 and $988
for 1994, 1993 and 1992, respectively 2,296 2,310 2,558
Other non-interest expenses 3,447 4,355 5,304
Total other operating expenses 9,865 10,522 11,941
Loss before income tax (benefit) and
cumulative effect of accounting change (156) (2,796) (2,690)
Income Tax (Benefit) 3 0 (479)
Loss before cumulative effect
of accounting change (159) (2,796) (2,211)
Cumulative Effect of Accounting
Change ($0.15 Per Share) 0 (234) 0
Net loss $ (159) $(2,562) $(2,111)
Net loss per share $(0.10) $(1.67) $(1.44)
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SDNB Financial Corp and Subsidiaries
Net unrealized
holding losses
For years ended on available-
December 31, 1994, 1993 and 1992 Common Accumulated for-sale
(dollars in thousands) Stock Deficit securities Total
Balances at January 1, 1992 $14,585 $(324) $0 14,261
Net loss 0 (2,211) 0 (2,211)
Balances at December 31, 1992 $14,585 $(2,535) $0 $12,050
Net loss 0 (2,562) 0 (2,562)
Balances at December 31, 1993 $14,585 $(5,097) $0 $ 9,488
Effect of adopting Statement of
Financial Accounting Standards
No. 115, Accounting for
Certain Investments in Debt
and Equity Securities
("SFAS No. 115"), on
January 1, 1994 0 0 (10) (10)
Net change in fair value of
available-for-sale securities 0 0 (350) (350)
Net loss 0 (159) 0 (159)
Balances at December 31, 1994 $14,585 $(5,256) $(360) $8,969
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASHFLOWS
SDNB Financial Corp and Subsidiaries
Years ended December 31,
(dollars in thousands) 1994 1993 1992
Operating Activities:
Net loss $ (159) $(2,562) $(2,211)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for loan losses 1,850 2,950 1,320
Provision for depreciation and
amortization 1,332 1,102 1,168
Cumulative effect of accounting change 0 (234) 0
Amortization of investment security
discounts (65) (84) (47)
Other expense not utilizing(providing) cash 175 106 (76)
Unearned loan fees 104 (5) (26)
Taxes refundable (30) 477 (86)
Interest receivable and other assets (144) (691) 465
Interest payable and other liabilities (66) 545 (74)
Total adjustments 3,156 4,166 2,644
Net cash provided by
operating activities 2,997 1,604 433
Investing Activities:
Proceeds from maturities of held
for investment securities 0 10,699 16,971
Proceeds from maturities of
held-to-maturity securities 9,443 0 0
Proceeds from maturities of
available-for-sale securities 6,927 0 0
Proceeds from sales of held
for investment securities 0 0 250
Purchases of held for
investment securities 0 (23,037) (20,204)
Purchases of held-to-maturity securities (8,847) 0 0
Purchases of available-for-sale
securities (4,950) 0 0
Net change in gross loans 11,508 18,549 (11,513)
Proceeds from sale of OREO properties 889 1,041 2,896
Purchases of OREO properties (520) 0 0
Purchases of premises and equipment (232) (221) (343)
Net cash provided (used) by
investing activities 14,218 7,031 (11,943)
Financing Activities:
Funds received for customer
security purchases 0 0 (18,000)
Net change in deposits 126 (26,589) 9,760
Net change in short-term borrowings 3,172 4,619 474
Payments of long-term borrowings (222) (251) (251)
Net cash provided (used) by
financing activities 3,076 (22,221) (8,017)
Change in cash and cash equivalents 20,291 (13,586) (19,527)
Cash and cash equivalents at
beginning of year 17,026 30,612 50,139
Cash and cash equivalents at
end of year $37,317 $17,026 $30,612
For the purpose of the statement of cash flows, the Company considers
cash and cash equivalents to be as follows at December 31,
1994 1993 1992
Cash and due from banks $11,936 $ 9,044 $16,824
Interest-bearing deposits in other banks 1,381 1,682 2,188
Federal funds sold 24,000 6,300 11,600
Totals $37,317 $17,026 $30,612
Supplemental cash flow information: 1994 1993 1992
Cash Paid For:
Interest $ 3,661 $ 4,163 $ 4,995
Income Taxes $ 3 $ 0 $ 0
Non-cash items: transfer of
loans to OREO $ 0 $ 739 $ 0
The accompanying notes are an integral part of the consolidated
financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. Summary of Significant Accounting Policies
The accounting and reporting policies of SDNB Financial Corp (the
"Company") and subsidiaries are in accordance with generally accepted
accounting principles and conform to general practices within the
banking industry. The following is a summary of the more significant
policies:
Basis of Presentation All dollar amounts are presented in thousands
unless otherwise indicated.
The consolidated financial statements include the accounts of SDNB
Financial Corp and all entities which are more than 50% owned, directly
or indirectly, including San Diego National Bank (the "Bank"), 100%
owned, the Company's principal subsidiary. All significant inter-company
items are eliminated.
Investment Securities The Company implemented Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities ("SFAS No. 115") effective January 1, 1994. The
impact of adoption was immaterial. SFAS No. 115 was issued in May 1993
and addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all
investments in debt securities. Investments are to be classified in
three categories and accounted for as follows:
Classification Accounting
Held-to-maturity Reported at amortized cost
Trading securities Reported at fair value; unrealized gains and
losses included in net income
Available-for-sale Reported at fair value; unrealized gains and
losses included as a separate component of
shareholders' equity
Prior to adoption of SFAS No. 115, due to Management's intent and
ability to hold to maturity, all securities in the investment portfolio
were classified as held for investment and were stated at cost, adjusted
for amortization of premiums and accretion of discounts. Such
amortization and accretion were recognized as adjustments to interest
income on investment securities. Realized gains or losses, if any, are
determined using the specific identification method.
Loans Interest on loans is credited to income based on the principal
amount outstanding. Loans are placed on non-accrual when a reasonable
doubt exists as to the collectibility of interest or principal. Loan
fees received, to the extent they exceed origination costs, are deferred
and amortized over the expected loan term.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS No. 114"). In October 1994, the FASB amended
SFAS No. 114 with Statement of Accounting Standards No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosures ("SFAS No. 118"). The provisions of the statements are
effective for fiscal years beginning after December 15, 1994 and are
applicable to all creditors and to all loans that are individually and
specifically evaluated for impairment, uncollateralized as well as
collateralized. They require that impaired loans be measured at either:
(1) the present value of expected future cash flows by discounting those
cash flows at the loan's effective rate; (2) the loan's observable
market price; or (3) the fair market value of the collateral of the
loan. In general, these statements are not applicable to large groups
of smaller-balance loans that are collectively evaluated for impairment
such as credit card, residential mortgage an/or consumer installment
loans. SFAS No. 118 provides for specific disclosure requirements
related to impaired loans, including: (1) policy for recognizing
interest income on impaired loans; (2) how cash receipts are recorded;
and (3) average balance of impaired loans during periods presented and
related amount of interest income recognized during the time within the
period that the loans were impaired. At this time, management does not
expect that adoption of SFAS No. 114 and SFAS No. 118 will have a
material effect on the financial statements of the Bank.
Allowance for Loan Losses An allowance for loan losses is maintained at
the level deemed appropriate by management to provide for known and
inherent risks in the loan portfolio. The allowance is based on a
continuing review of the portfolio, past loan loss experience, current
economic conditions which may affect the borrowers' ability to pay, and
the underlying collateral value of the loans. Loans which are deemed to
be uncollectible are charged off and deducted from the allowance. The
provision for loan losses and recoveries on loans previously charged off
are added to the allowance.
The allowance for possible loan losses is based on estimates, and
ultimate losses may vary from the current estimates. These estimates are
reviewed periodically and, as adjustments become necessary, they are
reported in earnings in the periods in which they become known.
Premises and Equipment Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is charged to operating expense
using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are capitalized and amortized to
operating expense over the term of the respective lease or the estimated
useful life of the improvement, whichever is shorter. When assets are
sold or retired, the assets and accumulated depreciation are removed
from the accounts. Gains or losses on disposals are credited or charged
to income.
Other Real Estate Owned ("OREO") OREO property is accounted for at the
lower of the recorded investment in the loan satisfied or its appraised
value at the time of
transfer to the OREO category. Investment in loan satisfied is the
unpaid balance of the loan increased by accrued and uncollected
interest, unamortized premium, and loan acquisition costs, if any, and
decreased by previous direct write-down, finance charges, and
unamortized discount, if any. Any excess of the recorded investment in
the loan satisfied over the appraised value of the property is charged
against the allowance for loan losses. Legal fees and direct costs of
acquiring the property and costs of carrying the property subsequent to
recording as OREO are expensed as incurred. Any reduction in the value
of the property subsequent to its being recorded as OREO is charged
directly to expense and is recorded as an allowance. The allowance for
OREO at December 31, 1994 and 1993 was $20 and $389, respectively.
Income Taxes The Company files a consolidated federal income tax return
and a combined California state franchise tax return with its
subsidiaries. Amounts equal to tax benefits of those companies having
taxable losses or credits are reimbursed by those companies which incur
tax liabilities. Any excess of alternative minimum tax over regular tax
determined on a consolidated basis will be borne by the parent company.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"), which requires the use of the liability method in the computation
of income tax expense and current and deferred income taxes payable.
Under SFAS No. 109, income tax expense consists of taxes payable for the
year and the changes during the year in deferred tax assets and
liabilities. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each
year end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Prior to
1993, the provision for income taxes was based on income and expenses
included in the accompanying statement of operations. Differences
between taxes so computed and taxes payable under applicable statutes
and regulations were classified as deferred taxes arising from timing
differences.
Net Loss Per Share Net loss per share for 1994, 1993 and 1992, during
which stock options were not dilutive, are based on 1,538,364 shares
outstanding.
NOTE 2: Cash and Due from Banks
The Bank is required to maintain reserves with the Federal Reserve Bank.
Reserve requirements are based on a percentage of deposit liabilities.
The average amounts held at the Federal Reserve Bank for the years ended
December 31, 1994 and 1993 were approximately $1,371 and $1,059,
respectively.
NOTE 3: Investment Securities
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1994:
Available for sale:
U.S Government agencies $ 9,997 $ 0 $ (360) $ 9,637
Federal Reserve Bank stock 273 0 0 273
$10,270 $ 0 $ (360) $ 9,910
Held to maturity:
U.S. Treasury $ 1,998 $ 0 $ (45) $ 1,953
U.S. Government agencies 11,397 0 (602) 10,795
States and municipalities 3,176 0 (33) 3,143
Other 750 0 0 750
$17,321 $ 0 $ (680) $16,641
December 31, 1993:
Held for investment:
U.S. Treasury $ 6,004 $ 4 $ 0 $ 6,008
U.S. Government agencies 19,588 0 (58) 19,530
States and municipalities 4,362 171 0 4,533
Other 0 0 0 0
Federal Reserve Bank stock 273 0 0 273
$30,227 $ 175 $ (58) $30,344
The scheduled maturities of investment securities as of December 31,
1994 and 1993 are as follows:
Estimated
Amortized Market
Cost Value
December 31, 1994:
Available for sale:
Due in one year or less $ 2,002 $ 1,977
Due after one year through five years 7,995 7,660
Due after five years through ten years 0 0
Federal Reserve Bank stock 273 273
$10,270 $ 9,910
Held to maturity:
Due in one year or less $ 4,237 $ 4,208
Due after one year through five years 7,966 7,501
Due after five years through ten years 5,118 4,932
$17,321 $16,641
Investment securities with a carrying value of $3,276 and $1,827 at
December 31, 1994 and 1993, respectively, were pledged as security for
public deposits and other purposes.
NOTE 4. Loans and Related Allowance for Loan Losses
At December 31, 1994 and 1993 loans consist of the following:
1994 1993
Commercial $ 57,808 $ 67,175
Real estate 37,534 41,419
Installment 2,239 2,858
Unearned loan fees (523) (419)
$ 97,058 $111,033
In the normal course of business, the Bank has made loans to certain
executive officers and directors or entities with which these
individuals are associated under terms consistent with the Bank's
general lending policies. In October, 1990, the Bank discontinued
further lending to such persons or entities (except for cash secured
loans) beyond the maturity of existing loans. Exception to this policy
was granted to one director where the amounts of loans outstanding are
less than the amounts outstanding when the policy was adopted. The
activity for such loans outstanding is as follows:
Balance at Balance
Beginning at End
of Year Additions Collections of Year
Year ended
December 31, 1994 $ 272 $ 91 $ 186 $ 177
Year ended
December 31, 1993 $ 295 $ 300 $ 323 $ 272
A summary of the activity in the allowance for loan losses is as
follows:
1994 1993 1992
Balance at beginning of year $2,522 $2,111 $2,011
Provision charged to operating expenses 1,850 2,950 1,320
Loans charged off (2,362) (2,716) (1,575)
Recoveries 138 177 355
Balance at end of year $2,148 $2,522 $2,111
As of December 31, 1994 and 1993, restructured loans were $3,460 and
$4,318, respectively. Of these totals, $2,316 and $3,162 were accruing
at December 31, 1994 and 1993, respectively. The difference between
interest income recorded as restructured and interest income that would
have been recorded if not restructured was immaterial.
NOTE 5: Premises and Equipment
Premises and equipment at December 31, 1994 and 1993 are summarized as
follows:
1994 1993
Building $11,708 $11,711
Furniture, fixtures and equipment 2,855 2,681
Leasehold improvements 4,356 4,339
18,919 18,731
Less accumulated depreciation and amortization 7,830 6,989
$11,089 $11,742
NOTE 6: Deposits
The year-end balances for deposits by major classification are as
follows:
1994 1993
Non-interest bearing demand $ 45,693 $ 41,113
Interest bearing demand 69,839 59,563
Savings 4,844 3,531
Time deposits of $100 or more 10,474 16,988
Other time deposits 7,426 16,955
$138,276 $138,150
Interest expense on deposits was comprised of the following:
1994 1993 1992
Interest bearing demand $1,623 $1,373 $1,822
Savings 77 79 103
Time deposits of $100 or more 347 725 1,131
Other time deposits 450 969 813
$2,497 $3,146 $3,869
Domestic time deposits over $100 at December 31, 1994 mature in the
following periods:
Time All Other
Certificates Time
of Deposit Deposits
Three months or less $6,808 $532
Over three through six months 2,024 203
Over six through twelve month 501 206
Over twelve months 200 0
$9,533 $941
NOTE 7: Notes Payable
Notes payable consist of the following:
1994 1993
Note payable to two limited partnerships,
managed by WHR (see Note 22) bearing
interest at the average cost of funds for
eleventh district savings and loans (4.04% at
December 31, 1994) plus 2.25%. The loan is
collateralized by the bank building and is due
April 1, 1997. In January 1995 the terms of
this note were modified. The agreement fixes
the annual payments at $800 payable
monthly entirely to interest. The modification
also allows prepayment of the loan on April 1,
1995, for $7,708 (assuming all interest
payments have been made); on January 1, 1996,
for $8,691 and quarterly thereafter at amounts
which increase approximately $373 each quarter. $10,158 $10,379
Note payable to a corporation (which is owned
by a member of the Company's Board of
Directors); bearing interest at prime (8.50% at
December 31, 1994) plus 1.5% due January 4,
1995. The note is collateralized by a junior lien
on the bank building. Management is currently
negotiating a modification and extension. 1,900 1,900
Notes payable to individuals (officers and/or
directors of the Company) bearing interest at
prime (8.50% at December 31, 1994) plus .5%
due June 30, 1995. The notes are unsecured. 390 290
Notes payable to individuals bearing interest at
prime (8.50% at December 31, 1994) plus 1%
due June 30, 1995. The notes are unsecured. 240 150
Notes payable to a corporation bearing interest at
8.25% due May 9, 1995. The note is unsecured. 14 44
$12,702 $12,763
NOTE 8: Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS No. 109"), as of January 1, 1993. The
cumulative effect of this change in accounting for income taxes
increased 1993 net income by $234 ($0.15 per share) and is reported
separately in the consolidated statement of operations. Prior financial
statements have not been restated to apply the provisions of SFAS No.
109.
The components of income tax (benefit) attributable to continuing
operations for the years ended December 31 are as follows:
1994 1993 1992
Current:
Federal $0 $0 $(566)
State 3 0 3
Total current 3 0 (563)
Deferred:
Federal 0 0 84
State 0 0 0
Total deferred 0 0 84
Income tax expense (benefit) $3 $0 $(479)
Income tax expense (benefit) attributable to operations differs from the
amounts computed using the federal statutory income tax rate as a result
of the following at December 31:
1994 1993 1992
Computed expected taxes $ (57) $(951) $(915)
California franchise tax, net of
federal income tax benefit 0 0 (1)
Nontaxable interest income (113) (84) (91)
Alternative minimum tax 0 0 28
Net operating loss carryback
limitations 0 0 497
Adjustment of the valuation
allowance 168 1,003 0
Other 5 32 3
Income tax expense (benefit) $ 3 $ 0 $(479)
The components of net deferred taxes at December 31, 1994 and 1993 are
as follows:
December Deferred December
31, (Expense) 31,
1993 Benefit 1994
OREO gains/losses $ 104 $(542) $(438)
Joint venture (360) 47 (313)
Bad debt allowance 612 (239) 373
Deferred compensation 21 (7) 14
Land lease 158 5 163
Depreciation (176) 27 (149)
Miscellaneous 30 0 30
Net operating loss 1,415 877 2,292
Net deferred tax asset 1,804 168 1,972
Valuation allowance (1,804) (168) (1,972)
$ 0 $ 0 $ 0
At December 31, 1994, the Company has net operating loss ("NOL")
carryforwards for Federal tax purposes of approximately $4,991, to
offset future Federal taxable income. The Company also has NOL
carryforwards for California Franchise Tax purposes of approximately
$5,991, of which 50% is available to offset future state taxable income,
subject to the limitations below. The Federal NOLs begin to expire in
2007 and the California NOLs begin to expire in 1997.
For state tax purposes, no net operating loss deduction may be claimed
for taxable years beginning in the 1991 and 1992 calendar years. In
addition, the current state law does not permit carryovers after 1997.
The Company also has Alternative Minimum Tax credits for financial
reporting purposes to offset future federal taxes of approximately $48.
Current tax statutes impose substantial limitations under certain
circumstances on the use of carryforwards upon the occurrence of an
"ownership change". An ownership change can result from the issuance of
equity securities by the Company, purchases of the Company's securities
in the secondary market or a combination of the foregoing.
NOTE 9: Lease Commitments
At December 31, 1994, minimum rental payments due under the Company's
operating leases having initial or remaining non-cancelable lease terms
in excess of one year are as follows:
1995 $ 1,151
1996 960
1997 866
1998 866
1999 866
Thereafter 18,594
$23,303
Total minimum lease payments include $7,522 of rental payments to the
Joint Venture (the Company's 62%-owned subsidiary) for various lease
terms extending to 2005. The other primary component of the minimum
lease payments is the Joint Venture's rental payments under a 99 year
ground lease.
Total rental expense under operating leases, including amounts paid to
the Joint Venture, was $1,289 in 1994, $1,259 in 1993, $1,155 in 1992.
There are no contingent rental payments applicable to any of the leases.
All leases provide that the Company pay taxes, maintenance, insurance
and certain other operating expenses applicable to the leased premises
in addition to the monthly minimum payments. Certain of the leases
contain renewal clauses at the option of the lessee.
NOTE 10: Contingencies
In the ordinary course of business, there are outstanding various
commitments to extend credit and guarantees, as well as certain claims
resulting from law suits, which are not reflected in the accompanying
consolidated financial statements. Management does not believe that
these items will have a material adverse affect on the consolidated
financial condition of the Company.
In addition, in January 1993, the Bank was named as a defendant in an
adversary proceeding in Bankruptcy Court filed by Pioneer Liquidating
Corporation ("PLC") successor to six bankrupt Pioneer Mortgage Company
entities ("Pioneer"). Investors in Pioneer had previously filed suit
against the Bank. That Pioneer litigation was settled in 1992. The PLC
case has subsequently been transferred to the United States District
Court. The PLC complaint, which does not specify the amount of damages,
alleges that the Bank and five other banks received preferential
payments and voidable transfers from Pioneer prior to the filing of the
Chapter 11 petition in January, 1991. The attorneys for PLC have alleged
recoverable transfers from the Bank in excess of $14 million but have
stated informally that they are seeking recovery of approximately $1.75
million. Of the $1.75 million, the sum of $250 would be in cash with the
balance in the form of charged off Bank loans. PLC and the Bank have
been engaged in ongoing settlement negotiations, however, as yet no
resolution has been reached. As of December 31, 1994, the Bank has set
aside a provision of $250 for resolution of this litigation.
In December 1991, the Bank filed suit against its Directors' and
Officers' liability insurer, alleging that the insurer had breached the
insurance contract and acted in bad faith by refusing to pay the Bank's
defense and settlement costs in connection with the Pioneer investor
lawsuits. During 1994, the Bank and its insurer settled their dispute.
Under the terms of the settlement, the insurer paid the Bank $713 (in
addition to the $750 the insurer had previously advanced towards the
Bank's settlement with the investors), which has been credited to
miscellaneous other operating income.
NOTE 11: Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments may include loan commitments,
interest rate exchange contracts, and standby letters of credit. The
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated
financial statements. To date, the Bank only has loan commitments and
letters of credit. The Bank has never participated in interest rate
contracts.
The Bank's exposure to credit loss in the event of non-performance by
the other party for loan commitments and letters of credit is
represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Bank has no
significant concentrations of credit risk with any individual
counterparty or groups of counterparties to originate loans. The Bank's
lending is concentrated in San Diego County. Variable rate loans
totalled $89,124 at December 31, 1994. The total contract amounts of
financial instruments with off-balance sheet risk at December 31 are as
follows:
1994 1993
Loan Commitments:
Variable rate $48,140 $37,745
Fixed rate 431 259
Letters of credit 1,997 1,758
$50,568 $39,762
Since many of the loan commitments may expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on Management's
credit evaluation of the counterparty. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment,
and residential and income-producing properties. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
NOTE 12: Employee Benefit Plans
The Bank maintains a Profit Sharing Plan and Deferred Savings Plan for
the benefit of all employees. Contributions to the Profit Sharing Plan
are made at the discretion of the Board. The Deferred Savings Plan
provides a 401(k) plan for which the Bank may make discretionary
matching contributions on a percentage basis. The Bank accrued nothing
under the plans in the years 1992 through 1994.
NOTE 13: Availability of Funds from Subsidiaries
Funds available for the payment of dividends by the Company would be
obtained from the Bank and the Joint Venture.
There are legal limitations on the ability of the Bank to provide funds
for the Company. Under federal banking law, dividends declared by the
Bank in any calendar year may not, without the approval of the
Comptroller of the Currency, exceed its net income, as defined, for that
year combined with its retained net income for the preceding two years.
Until the effects of the 1993 loss is overcome, the Bank will be
precluded from paying dividends without such approval. Federal banking
law also restricts the Bank from extending credit to the Company in
excess of 10% of capital stock and surplus, as defined, of the Bank.
Any such extensions of credit are subject to strict collateral
requirements.
As further described in Note 16, the Company merged SDNB Development
Corp into itself as of July 31, 1993. The purpose in doing so was to
allow cash flow currently being generated by the Joint Venture to come
directly into the Company. During 1994, Joint Venture cash flow provided
the Company with sufficient funds to meet its normal ongoing obligations
but was not sufficient to allow payment of dividends, which would also
require approval of the Federal Reserve Bank of San Francisco under
terms of an agreement dated November 20, 1992.
NOTE 14: Stock Options
The Company had a 1984 Stock Option Plan which provided for the granting
of options to directors, executives and other key employees. The Company
had reserved 600,000 shares for issuance under the plans. Options were
granted under the plan at a price not less than the fair market value of
the Company's common stock on the date of grant. The options are
exercisable in increments over a number of years as determined by the
Board of Directors. The plan expired September 10, 1994.
At December 31, 1994, there were non-qualified options outstanding for
168,294 shares at purchase prices ranging from $3.25 to $7.94 per share
and incentive options outstanding for 268,952 shares at purchase prices
ranging from $3.25 to $11.13 per share. There were options exercisable
under the plans for 217,167 shares at December 31, 1994. The Board of
Directors has adopted a 1994 Stock Option Plan with provisions similar
to the expired plan, subject to approval by the shareholders.
NOTE 15: Lease Income
The Joint Venture (the Company's 62%-owned subsidiary) is the lessor of
the Building in which the Bank has its main office. The lease term is 20
years. Certain of the Building leases contain renewal clauses at the
option of the lessees. At December 31, 1994, minimum lease payments to
be received by the Joint Venture on non-cancelable operating leases are
as follows:
1995 $ 1,636
1996 1,228
1997 1,059
1998 883
1999 899
Thereafter 4,728
$10,433
NOTE 16: Investment in Joint Venture
The Company's wholly-owned subsidiary, SDNB Development Corp ("Devco")
was the general partner with a 62% interest in a joint venture with a
limited partnership, Kettner Building Associates, Ltd. ("KBA"), in the
ownership and operation of the Building in which the Company has its
headquarters. On July 1, 1993, Devco was merged into the Company and the
Company became the general partner.
The results of operations attributable to the Company's controlling
interest in the Joint Venture are included in consolidated results of
operations with an appropriate allocation to the minority interest, the
remaining limited partners in KBA. During 1990, however, the allocation
exhausted the contributed capital of the remaining limited partners and
the Company began absorbing the entire loss.
NOTE 17: Parent Company Information
The following financial information represents the condensed balance
sheets of SDNB Financial Corp (parent company only) as of December 31,
1994 and 1993, and the related condensed statements of income and cash
flows for each of the three years in the period ended December 31, 1994.
Condensed Balance Sheets 1994 1993
Assets
Cash in San Diego National Bank $ 30 $ 14
Investment in San Diego
National Bank 11,307 11,284
Investment in SDNB Building
Joint Venture (3,375) (2,935)
Investment in SDNB Mortgage
Bankers 6 7
Note receivable from Joint Venture 1,413 1,448
Other assets 462 237
$ 9,843 $10,055
Liabilities and Shareholders' Equity
Liabilities:
Due to subsidiaries for income
taxes $ 32 $ 4
Other liabilities 212 123
Notes payable 630 440
Total Liabilities $ 874 $ 567
Shareholder's equity:
Common Stock, no par value;
authorized 15,000,000 shares,
issued 1,558,364 in 1993 and
in 1992 14,585 14,585
Accumulated deficit (5,256) (5,097)
Net unrealized holding losses on
available-for-sale securities (360) 0
Total shareholders' equity 8,969 9,488
$ 9,843 $10,055
Condensed Statements
of Operations 1994 1993 1992
Management income $ 41 $ 21 $ 0
Interest income 136 66 3
Rental income 225 218 164
Total income 402 305 167
Operating expenses 498 433 352
Loss before income taxes and
equity in undistributed loss
of subsidiaries and cumulative
effect of accounting change (96) (128) (185)
Allocated income tax (1) 0 0
Loss before equity in undistributed
loss of subsidiaries and cumulative
effect of accounting change (97) (128) (185)
Equity in undistributed loss of
subsidiaries (62) (2,313) (2,026)
Loss before cumulative effect of
accounting change (159) (2,441) (2,211)
Cumulative effect of accounting
change 0 (121) 0
Net loss $ (159) $(2,562) $(2,211)
Condensed Statements
of Cash Flows 1994 1993 1992
Operating Activities:
Net loss $ (159) $ (2,562) $ (2,211)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Net change in taxes payable (30) (600) (86)
Provision for depreciation and
amortization 4 6 1
Cumulative effect of accounting
change 0 (121) 0
Net change in other assets (267) 16 (4)
Net change in other liabilities 59 50 (82)
Loss of wholly-owned
subsidiaries 62 2,434 2,026
Total adjustments (172) 1,785 1,855
Net cash used by operating
activities (331) (777) (356)
Investing Activities:
Purchase of leasehold
improvements 0 30 0
Payments from subsidiaries 100 173 0
Net cash provided by investing
activities 100 203 0
Financing Activities:
Proceeds from short-term
borrowings 275 440 0
Repayments of short-term
borrowings (85) 0 0
Proceeds from advances from
subsidiaries 83 488 425
Repayment of advances from
subsidiaries (26) (516) 0
Net cash provided by financing
activities 247 412 425
Increase (decrease) in cash 16 (162) 69
Cash at beginning of year 14 176 107
Cash at end of year $ 30 $ 14 $ 176
NOTE 18: Disclosures About Fair Value of Financial Instruments
In 1992, the Company adopted SFAS 107 which requires the disclosure of
the estimated fair value of its financial instruments. The following
methods and assumptions were used to estimate the fair value of the
other classes of financial instruments for which it is practice to
estimate that value. Carrying value approximates fair value for cash and
due from banks, federal funds sold and securities sold under agreements
to repurchase.
Interest Bearing Deposits in Other Banks For privately placed
certificates of deposit, all of which mature within 90 days, carrying
value approximates fair value. Investment Securities Fair value equals
quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
Loans Fair value for variable rate loans is determined by using the
present value of cash flows discounted from the first repricing
opportunity. For fixed rate loans, the cash flows to maturity are
discounted to achieve the present value. In each case, the discount rate
is equal to the rate at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposit Liabilities The fair value of demand deposits, savings
accounts, NOW accounts and money market accounts is the amount payable
on demand at the reporting date. The fair value of certificates of
deposit is estimated using the rates currently offered for deposits of
similar remaining maturities.
Acceptances Outstanding and Commercial Letters of Credit Settlement
value approximates fair value.
Notes Payable Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate fair value
of existing debt.
Commitments, Guarantees and Standby Letters of Credit The fair values
approximate the carrying amounts which are comprised of unamortized fee
income.
Carrying amount Fair value
Financial Assets:
Cash and due from banks $ 11,936 $ 11,936
Interest bearing deposits in other banks 1,381 1,381
Investment securities 27,231 26,551
Federal funds sold 24,000 24,000
Loans 97,058
Less allowance for loan losses 2,148
Net loans $ 94,910 $ 94,490
Financial Liabilities:
Deposits:
Non-interest bearing $ 45,693 $ 45,693
Interest bearing 92,583 92,451
Total deposits $138,276 $138,144
Securities sold under agreements to repurchase $ 12,285 $ 12,285
Notes payable 12,702 11,803
Unrecognized Financial Instruments:
Acceptances outstanding and commercial
letters of credit $ 766
Commitments, guarantees and standby
letters of credit $ 210
NOTE 19: Miscellaneous Operating Income
Miscellaneous operating income consists of the following:
1994 1993 1992
Fiduciary activity fees $ 0 $ 0 $ 14
Service charge on deposits 633 737 743
Other service charges 149 165 173
OREO income 55 93 155
Other 743 22 29
$1,580 $1,017 $1,114
NOTE 20: Other Non-Interest Expenses
Other non-interest expenses consist of the following:
1994 1993 1992
Data Processing $ 223 $ 239 $ 214
FDIC insurance premiums and
OCC assessments 442 487 400
Professional fees 506 758 1,081
Provision for litigation settlement 250 150 500
Loan and collection expense 330 318 538
OREO expense 59 168 757
Losses on OREO property 403 586 500
Miscellaneous 1,234 1,649 1,314
$3,447 $4,355 $5,304
NOTE 21: Capital Ratios
The Comptroller of the Currency ("OCC") has established a framework for
supervisory requirements of national banks based upon capital ratios.
Based upon this framework, a bank's capitalization is defined as well as
capitalized, adequately capitalized, significantly undercapitalized or
critically capitalized. As of December 31, 1994, the Bank's capital
ratios were 7.09% and 11.61% for tier 1 capital and risk weighted
capital, respectively. Under the OCC framework, a bank is well
capitalized if its ratios are greater than or equal to 6% and 10% for
tier 1 capital and risk weighted capital, respectively.
The Federal Reserve Bank, as the regulatory body of the Company, has
capital ratio requirements providing that all bank holding companies
should meet a minimum ratio of qualifying total capital to weighted-risk
assets of 8 percent, of which at least 4.0 percentage points should be
in the form of tier 1 capital. At December 31, 1994, the Company's
capital ratios were 5.33% and 8.85% for tier 1 capital and risk weighted
capital, respectively.
NOTE 22: Subsequent Event
On January 31, 1995, the Company entered into a stock purchase agreement
whereby two limited partnerships managed by WHR Management Corp. ("WHR")
will purchase 510,121 shares of newly issued common stock for
approximately $2.2 million. In conjunction with the investment by WHR,
the Company plans a $3 million "rights offering" to existing
shareholders. Upon completion of the rights offering, WHR will invest up
to an additional $1.1 million. The transactions are subject to approval
by regulatory authorities and by the Company's shareholders.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of SDNB Financial Corp
We have audited the accompanying consolidated balance sheets of SDNB
Financial Corp and subsidiaries (the "Company") as of December 31, 1994
and 1993, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SDNB Financial Corp and subsidiaries at December 31, 1994 and 1993, the
consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
As discussed in note 10 to the consolidated financial statements, a
subsidiary of the Company is a defendant in a lawsuit in which the
amount of damages sought has not yet been specified. While the ultimate
outcome of the litigation cannot presently be determined, the Company
recorded a provision for this matter based on ongoing settlement
negotiations. No further provision for liability, if any, that may
result upon final resolution of this matter has been made in the
accompanying financial statements.
As discussed in notes 1 and 8 to the consolidated financial statements,
the Company changed its method of accounting for income taxes effective
January 1, 1993.
/s/Coopers & Lybrand L.L.P.
San Diego, California
February 17, 1995
INVESTOR RELATIONS INFORMATION
Availability of Form 10-K
The Company will furnish, without charge, upon written request of any
shareholder, a copy of the Company's annual report to the Securities and
Exchange Commission on Form 10-K (including financial statements and
financial statement schedules, but without exhibits) for the fiscal year
ended December 31, 1994. Requests should be addressed to:
Howard W. Brotman, Secretary
SDNB Financial Corp
Post Office Box 12605
San Diego, CA 92112-3605
Direct Mailing to "Street Name" Holders
Shareholders who have certificates of SDNB Financial Corp common stock
held in brokerage accounts or otherwise not in their own names should
receive the Company's annual reports from their brokers or other record
holders.
If you are such a shareholder and desire to receive those and other
reports directly from SDNB Financial Corp at the same time as record
holders, please contact in writing:
Howard W. Brotman, Secretary
SDNB Financial Corp
Post Office Box 12605
San Diego, CA 92112-3605
Independent Accountants
Coopers & Lybrand L. L. P.
402 West Broadway
San Diego, CA 92101
Stock Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Stock Information
Since October 6, 1987 the Company's common stock has been listed on the
NASDAQ National Market System. There is only a limited market for the
Company's common stock.
The Company had approximately 700 shareholders as of December 31, 1994.
Price Information by Period
1994 1993
First quarter
Low $ 2.50 $ 3.50
High 3.25 4.00
Second quarter
Low 2.50 3.50
High 3.25 4.38
Third quarter
Low 2.50 2.50
High 4.75 4.00
Fourth quarter
Low 3.00 2.50
High 4.75 3.38
Dividend Information
There were no stock or cash dividends declared in 1994 or 1993.
Common Stock Listing
The Company's common stock trades on The Nasdaq Stock Market under the
symbol: SDNB.
THE PEOPLE OF SDNB
Board of Directors
Margaret (Midge) Costanza
Partner, Martin & Costanza Communications
Charles I. Feurzeig
Chairman of the Board, SDNB Financial Corp;
President, Pacific View Construction Co., Inc.
Murray L. Galinson
President, Chief Executive Officer,
SDNB Financial Corp and San Diego National Bank
Karla J. Hertzog
President, TOPS Total Personnel Services, Inc.
Robert B. Horsman
Executive Vice President,
SDNB Financial Corp and San Diego National Bank
Mark P. Mandell
Attorney-at-Law
Patricia L. Roscoe
Chairman, Patti Roscoe & Associates, Inc. and Roscoe/Cottrell, Inc.
Julius H. Zolezzi
President, Zolezzi Enterprises
Officers of SDNB Financial Corp
Murray L. Galinson
President, Chief Executive Officer
Robert B. Horsman
Executive Vice President
Howard W. Brotman
Senior Vice President, Secretary, Chief Financial Officer
Joyce Chewning
Senior Vice President
San Diego National Bank Business Advisory Council
John L. Baldwin
President, Baldwin Pacific Corp.
Betty Byrnes
Medical Administrator
Shlomo Caspi
President, Caspi, Inc. & Caspi Enterprises
Marvin Cohen
Architect
Michael H. Dessent
Dean, California Western School of Law
Norman Eisenberg, CPA
Eisenberg & Bonk
James T. Gianulis
President, Pacific Income Properties, Inc.
Wayne L. Hanson
President, Cygnus Corp.
Warren O. Kessler, MD
Hillcrest Urological Medical Group
Edward Mendelsohn
President, ESM & Associates
Rebecca Newman
Real Estate Broker
James S. Nierman
Real Estate Investor
Gordon W. Parkman
President, Parkman Realty Corp.
Reint Reinders
President, San Diego Convention and Visitors Bureau
Winifred Reno
Owner, The Plantry
Nancy L. Scott
President, Capital Equities of La Jolla
Brad Shuman
President, Imprinted Products, Inc.
C. Randolph Strada
President, First San Diego Co., Inc.
William Verbeck
President, WNV, Inc.
Arnold Winston
President, BancCorp Companies, Inc.
San Diego National Bank Senior Management Committee
Murray L. Galinson
President, Chief Executive Officer
Robert B. Horsman
Executive Vice President
Howard W. Brotman
Senior Vice President, Chief Financial Officer
Joyce Chewning
Senior Vice President, Operations
San Diego National Bank Officers
Gail Jensen-Bigknife
Senior Vice President, Real Estate Loans
Richard Nance
Senior Vice President, Credit Administration
Nancy A. Aul
Vice President, Commercial Banking Group, Main Office Assistant Manager
Ronald P. Bird
Director of Business and Community Development
Paul D. Fowle
Vice President, Commercial Banking Group
Pamela A. McMahon
Vice President, Corporate Banking Group Manager
John McNulty
Vice President, Corporate Banking Group
Debra Perkins
Vice President, Compliance
Connie M. Reckling
Vice President, Human Resources
Roger Remnant
Vice President, Real Estate Loans
Dawn Y. Serafen
Vice President, Operations
John G. Weaver
Vice President, Commercial Banking Group
Kaye Hobson
Assistant Vice President, Finance
Julius J. Kukta
Assistant Vice President, Corporate Banking Group
Eric W. Larson
Assistant Vice President, Finance
JoAnn Piper
Assistant Vice President, Deposit Services
Carol A. States
Assistant Vice President, Commercial Banking Group
Barbara J. Bellini
Administrative Officer
Daryl Durham
EDP Manager
Linda Eggen
Real Estate Administrative Officer
Kristan V. Gregg
Administrative Officer
Jim Martinez
Administrative officer
Susie Mummery
Administrative Officer
Jacqueline M. Murphy
Operations Officer
Susan Ohlendorf
Operations Officer
William D. Scheffel
Financial Analyst
Thomas S. Sperla
Special Assets Manager
Cynthia Velez
Operations Officer
(This page consists of a photograph of the Board of Directors as
described by the caption below.)
Board of Directors
(top row, standing)
Karla J. Hertzog
President, TOPS Total Personnel Services, Inc.
Mark P. Mandell
Attorney-at-Law
Murray L. Galinson
President, Chief Executive Officer,
SDNB Financial Corp and San Diego National Bank
Robert B. Horsman
Executive Vice President,
SDNB Financial Corp and San Diego National Bank
Patricia L. Roscoe
Chairman, Patti Roscoe & Associates, Inc. and Roscoe/Cottrell, Inc.
(front row, sitting)
Margaret (Midge) Costanza
Partner, Martin & Costanza Communications
Charles I. Feurzeig
Chairman of the Board, SDNB Financial Corp;
President, Pacific View Construction Co., Inc.
(not pictured)
Julius H. Zolezzi
President, Zolezzi Enterprises
SDNB Financial Corp
1420 Kettner Boulevard
San Diego, California
92101
(619)231-4989
San Diego National Bank is a member of FDIC and an Equal Housing Lender