UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of the close of business on March 4, 1996: $ 14,662,000
The number of shares of Common Stock outstanding as of the close of business
on March 4, 1996: 3,073,260
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's 1995 Annual Report to Shareholders is incorporated by
reference into Part IV of this Form 10-K.
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.
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.
Under recently enacted revisions to the CRA regulations,
the current CRA assessment is being replaced with a new
evaluation system that would rate institutions based on their
actual performance (rather than efforts) in meeting community
credit needs. Under new regulations, each institution would be
evaluated based on the degree to which it is providing loans (the
leading 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 the institution's capacity,
product offerings and business strategy. 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, denial, originations and
purchases. Institutions would continue to receive one of four
composite ratings: Outstanding, Satisfactory, Needs to Improve or
Substantial Noncompliance. The new rules are going into effect
in stages from July 1995 to January 1997. The Company does not
believe that the new CRA regulations will substantially change
its program and policies designed to meet the needs of its
communities.
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. At January 1, 1996, the
Bank had available for dividends to the Company approximately
$1,370,000 without the approval of the Comptroller.
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 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. Also, the Company submitted a proposed capital infusion
plan. As outlined in the management discussion and analysis and
the notes to the consolidated financial statements, the capital
infusion was successfully completed in 1995.
(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, 1995 exceeded the fully phased-in risk-based
capital adequacy guidelines and the leverage standard.
Capital Components and Ratios at December 31, 1995
(dollars in thousands)
Company Bank
Capital Components
Tier 1 capital $16,726 $13,656
Total capital 18,218 15,017
Risk-weighted assets
and off-balance sheet
instruments 117,967 107,310
Risk-based Capital Ratio
Tier 1 capital 14.18% 12.73%
Total capital 15.43% 13.98%
Leverage Ratio 9.37% 8.43%
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, when the new system became
effective on January 1, 1993, ranged from 0.23% to 0.31%
depending upon the assessment category into which the insured
institution was placed. The Bank's assessment rate increased
significantly under the new system which resulted in an increase
in deposit insurance assessment expense. The rates were reduced
effective July 1, 1995 to a range of .04% to .31% and effective
January 1, 1996 to a range of 0 (with a minimum of $1,000 per
semi-annual period) to .27%.
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. In 1995, the Bank established
its International Department and now offers a full array of such
services, including letters of credit and documentary
collections. Other services, which are offered directly or
through the Bank's correspondent banks, include cash management
consulting and money market investments.
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
$2,300,000 at December 31, 1995), and who are depositors with the
Bank.
The Bank has no foreign loans or highly leveraged
transactions. At December 31, 1995, 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 $2,002,000, or two and two-tenths
percent (2.2%) of gross loans at December 31, 1995. 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 1993 through 1995, 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)Reduction in the level of the loan portfolio resulting
from continuing low demand.
b)Higher than normal loan loss provisions in 1994 and
1993.
c)OREO losses and expenses from higher than normal levels
of OREO properties in 1994 and 1993.
Additionally, the Bank has incurred substantial expense in
connection with legal fees and provision for settlement costs
involving the Pioneer Mortgage Company litigation, which was
settled late in 1995.
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). In 1992,
Bank of America merged with Security Pacific National Bank and in
1994 First Interstate Bank acquired San Diego Trust & Savings
Bank. In 1996, Wells Fargo Bank successfully bid for First
Interstate Bank (completion of the acquisition is scheduled in
1996). 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 4, 1996, the Company and/or the
Bank had one hundred fourteen (114) full-time employees, of whom
ten (10) were executive officers. Four (4) of the executive
officers have entered into employment contracts with the Company.
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)
1995 1994 1993
Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Interest-earning assets
Loans
Commerical 54,290 5,900 10.87% 63,180 5,597 8.86% 78,229 6,601 8.44%
Real estate 36,370 3,903 10.73% 37,082 3,623 9.77% 40,137 3,446 8.59%
Installment 2,932 287 9.79% 3,146 280 8.90% 3,392 357 10.52%
Total loans (including fees) 93,592 10,090 10.78% 103,408 9,500 9.19% 121,758 10,404 8.54%
Investment securities
U.S. Treasury securities 5,770 298 5.16% 4,184 165 3.94% 3,700 129 3.49%
Securities of government agencies 18,803 1,044 5.55% 20,917 1,021 4.88% 14,416 642 4.45%
State and political obligations 2,610 216 8.28% 4,617 397 8.60% 3,332 406 12.18%
Other securities 1,691 103 6.09% 682 39 5.72% 903 55 6.09%
Total investment securities 28,874 1,661 5.75% 30,400 1,622 5.34% 22,351 1,232 5.51%
Certificates of deposit in other banks 2,271 137 6.03% 1,469 63 4.29% 1,494 67 4.48%
Federal Funds Sold 15,547 904 5.81% 18,407 732 3.98% 13,235 364 2.75%
Total interest-earning assets 140,284 12,792 9.12% 153,684 11,917 7.75% 158,838 12,067 7.60%
Noninterest-earning assets
Cash and due from banks 12,864 12,415 12,315
Premises and equipment 10,918 11,408 11,742
Other, less allowance for loan losses 168 143 3,472
Total noninterest-earning assets 23,950 23,966 27,529
TOTAL ASSETS 164,234 177,650 186,367
SELECTED STATISTICAL INFORMATION
DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(IN THOUSANDS)
1995 1994 1993
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 69,160 1,965 2.84% 71,173 1,700 2.39% 64,430 1,452 2.25%
Time deposits 18,542 963 5.19% 22,831 797 3.49% 45,391 1,694 3.73%
Total interest-bearing deposits 87,702 2,928 3.34% 94,004 2,497 2.66% 109,821 3,146 2.86%
Securities sold under repurchase agreements
and federal funds purchased 9,668 255 2.64% 14,603 367 2.51% 7,762 185 2.38%
Short-term debt 1,777 177 9.96% 2,456 209 8.51% 2,393 174 7.27%
Long-term debt 9,963 797 8.00% 10,251 621 6.06% 10,486 673 6.42%
Total interest-bearing liabilities 109,110 4,157 3.81% 121,314 3,694 3.04% 130,462 4,178 3.20%
Noninterest-bearing liabilities
Demand deposits 42,244 46,354 44,265
Other liabilities 969 364 282
Total liabilities 152,323 168,032 175,009
Minority interest in subsidiary 0 0 0
Stockholders' equity 11,911 9,618 11,358
TOTAL LIABILITIES AND
STOCKHOLDERS'EQUITY 164,234 177,650 186,367
Net interest income 8,635 8,223 7,889
Margin analysis
Interest income/earning assets 9.12% 7.75% 7.60%
Interest expense/earning assets 2.96% 2.40% 2.63%
Net interest income/earning assets 6.16% 5.35% 4.97%
<FN>
<F1>
1) All loans are stated net of unearned income.
<F2>
2) Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 34%.
<F3>
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.
<F4>
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, 1995, 1994, and 1993, the Bank had loans on non-accrual status
totaling $6,969, $6,046, and $5,343, respectively. Average balances for loans include these amounts; however,
revenue is recognized on a cash basis for these loans.
<F5>
5) Revenue for loans includes portions of fees recognized as current income of $540, $453, and $532 in 1995, 1994,
and 1993, respectively.
<F6>
6) Expense for short-term debt totaling $144 in 1995, $167 in 1994, and $147 in 1993, and the expense for long-term
debt of $797 in 1995, $621 in 1994, and $673 in 1993, are classified as building operating expense on the
consolidated financial statements.
</FN>
VOLUME/RATE VARIANCE ANALYSIS
1995 COMPARED TO 1994 1994 COMPARED TO 1993 1993 COMPARED TO 1992
Volume Rate Total Volume Rate Total Volume Rate Total
INCREASE (DECREASE) IN INTEREST ON EARNING ASSETS:
Loans
Commercial loans (856) 1,159 303 (1,320) 316 (1,004) (466) 36 (430)
Real estate loans (71) 351 280 (275) 452 177 258 (269) (11)
Installment loans (20) 27 7 (25) (52) (77) (51) 71 20
Total loans (947) 1,537 590 (1,620) 716 (904) (259) (162) (421)
Investment securities
U.S. Treasury securities 73 60 133 18 18 36 (5) (58) (63)
Securities of government agencies (109) 132 23 312 67 379 376 (82) 294
State and political obligations (167) (14) (181) 130 (139) (9) (25) (5) (30)
Other securities 61 3 64 (13) (3) (16) (65) 19 (46)
Total investment securities (142) 181 39 447 (57) 390 281 (126) 155
Certificates of deposit in other bank 42 32 74 (1) (3) (4) (78) (27) (105)
Federal funds sold (127) 299 172 172 196 368 19 (63) (44)
Total interest income change (1,174) 2,049 875 (1,002) 852 (150) (37) (378) (415)
INCREASE (DECREASE) IN INTEREST PAID ON LIABILITIES:
Interest on deposits
Savings, NOW accounts,
and money markets (49) 314 265 158 90 248 (194) (279) (473)
Other domestic time deposits (170) 336 166 (794) (103) (897) 76 (326) (250)
Total interest on deposits (219) 650 431 (636) (13) (649) (118) (605) (723)
Securities sold under agreement to repurchase
and federal funds purchased (129) 17 (112) 171 11 182 101 (60) 41
Short-term debt (64) 32 (32) 5 30 35 29 (10) 19
Long-term debt (18) 194 176 (15) (37) (52) (20) (140) (160)
Total interest expense change (430) 893 463 (475) (9) (484) (8) (815) (823)
Net change in net interest income (744) 1,156 412 (527) 861 334 (29) 437 408
<FN>
<F1>
Note: Change in interest income or expense can be attributed to (a) changes in volume (change in volume times old rate), (b)
changes in rate (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
1995 1994
(Book Value) (Book Value)
December 31, 1995 and 1994:
Available-For-Sale:
U.S. Treasuries 13,515 0
Average maturity (in years) 0.12 0
U.S. Government agencies 12,773 9,637
Average maturity (in years) 1.62 2.11
Other securities 472 0
Average maturity (in years) 0.00 0
FRB Stock 273 273
27,033 9,910
Held-To-Maturity:
U.S. Treasuries 1,000 1,998
Average maturity (in years) 0.08 0.83
U.S. Government agencies 4,021 11,397
Average maturity (in years) 2.39 2.74
States and municipalities 1,637 3,176
Average maturity (in years) 1.36 3.43
Other bonds and notes 750 750
Average maturity (in years) 3.58 4.58
7,408 17,321
1993
(Book Value)
December 31, 1993:
Held-For-Investment:
U.S. Treasuries 6,004
Average maturity (in years) 0.47
U.S. Government agencies 19,588
Average maturity (in years) 3.72
States and municipalities 4,362
Average maturity (in years) 2.69
FRB Stock 273
30,227
INVESTMENT SECURITIES
MATURITY IN YEARS
Under 1 1 to 5 5 to 10 Over 10 Total
Available-For-Sale:
U.S. Treasuries 13,515 0 0 0 13,515
Weighted average interest rate 5.44% 0.00% 0.00% 0.00% 5.44%
U.S. Government agencies 1,799 10,974 0 0 12,773
Weighted average interest rate 5.51% 5.61% 0.00% 0.00% 5.60%
Other securities 472 0 0 0 472
Weighted average interest rate 5.52% 0.00% 0.00% 0.00% 5.52%
FRB Stock 0 0 0 273 273
Weighted average interest rate 0.00% 0.00% 0.00% 6.00% 6.00%
15,786 10,974 0 273 27,033
Held-To-Maturity:
U.S. Treasuries 1,000 0 0 0 1,000
Weighted average interest rate 4.37% 0.00% 0.00% 0.00% 4.37%
U.S. Government agencies 1,000 2,000 1,021 0 4,021
Weighted average interest rate 6.87% 5.15% 7.07% 0.00% 6.07%
States and municipalities * 1,000 637 0 0 1,637
Weighted average interest rate 4.66% 5.70% 0.00% 0.00% 5.06%
Other bonds and notes 0 500 250 0 750
Weighted average interest rate 0.00% 7.30% 8.50% 0.00% 7.70%
3,000 3,137 1,271 0 7,408
<FN>
<F1>
* Taxable equivalent yield based upon 34% Federal Income Tax rate.
</FN>
LOAN PORTFOLIO
LOAN TYPE
Real Estate Real Estate Installment Lease
Commercial Construction Mortgage and Consumer Financing Total
Totals at year-end:
1995 54,372 5,618 29,332 2,873 136 92,331
1994 57,613 5,750 31,461 2,234 0 97,058
1993 67,087 8,995 32,099 2,852 0 111,033
1992 85,377 12,717 30,721 3,306 0 132,121
1991 81,120 12,682 23,751 4,275 0 121,828
Maturities at the end of 1995:
1 year or less 43,330 5,245 2,679 2,065 33 53,352
1 - 5 years 10,333 24 23,984 801 103 35,245
after 5 years 709 349 2,669 7 0 3,734
Outstanding loans at the end
of 1995 which are due after
one year earn interest as follows:
Fixed rate 1,120 0 3,527 520 103 5,270
Adjustable rate 9,922 373 23,126 288 0 33,709
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:
1995 1994 1993 1992 1991
Non-accrual loans 6,969 6,046 5,343 1,918 2,442
Restructured loans (still accruing) 1,364 2,316 3,162 0 0
Loans 90 days past due 93 20 481 248 2,238
8,426 8,382 8,986 2,166 4,680
Other real estate owned 181 268 1,050 2,091 4,987
Total 8,607 8,650 10,036 4,257 9,667
<FN>
<F1>
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, 1995, if non-accrual loans had been
current and in accordance with their original terms, is approximately $819. Interest
actually recognized for those loans was $589. Non-accrual loans totaling $5,561 in 1995,
$1,144 in 1994, $1,196 in 1993, $521 in 1992 and $326 in 1991 were also classified as
restructured loans.
</FN>
SUMMARY OF LOAN LOSS EXPERIENCE
1995 1994 1993 1992 1991
Allowance for loan losses
(as of Jan. 1) 2,148 2,522 2,111 2,011 1,499
Losses charged-off
Commerical 619 2,211 2,277 1,294 722
Real estate construction 0 0 20 120 0
Real estate mortgage 0 0 264 101 56
Installment 36 151 155 60 70
Lease financing 0 0 0 0 0
Total loans charged-off 655 2,362 2,716 1,575 848
Recoveries of losses previously charged-off
Commerical 276 121 144 299 81
Real estate construction 0 0 0 0 0
Real estate mortgage 0 10 4 50 0
Installment 33 7 29 6 9
Lease financing 0 0 0 0 0
Total recoveries 309 138 177 355 90
Net loans charged-off 346 2,224 2,539 1,220 758
Additions charged to
operating expense 200 1,850 2,950 1,320 1,270
Allowance for loan losses
(as of Dec. 31) 2,002 2,148 2,522 2,111 2,011
Average loans outstanding 92,376 103,897 121,758 124,945 123,490
Ratio of net charge-offs to average
loans outstanding 0.37% 2.14% 2.09% 0.98% 0.61%
ALLOWANCE FOR LOAN LOSSES BY CATEGORY
1995 1994 1993 1992 1991
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
Commerical 933 57.6% 1,635 59.4% 1,862 60.4% 1,304 64.5% 1,417 66.6%
Real estate construction 25 6.1% 49 5.9% 57 8.1% 101 9.6% 96 10.4%
Real estate mortgage 293 33.1% 80 32.4% 206 28.9% 222 23.4% 196 19.5%
Installment 12 3.1% 62 2.3% 93 2.6% 25 2.5% 30 3.5%
Lease financing 1 0.1% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
Unallocated 738 NA 322 NA 304 NA 459 NA 272 NA
Total 2,002 100.0% 2,148 100.0% 2,522 100.0% 2,111 1 00.0% 2,011 100.0%
<FN>
<F1>
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 loans 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
1995 1994 1993
Average Average Average
Outstanding Yield Outstanding Yield Outstanding Yield
Demand 42,244 0.00% 46,354 0.00% 44,265 0.00%
Interest-bearing demand 14,166 1.52% 14,496 1.48% 14,280 1.47%
Savings 54,994 3.18% 56,677 2.63% 50,150 2.48%
Time deposits 18,542 5.19% 22,831 3.49% 45,391 3.73%
At December 31, 1995, 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 6,167 201
Over 3 through 6 months 3,360 200
Over 6 through 12 months 2,498 0
Over 12 months 0 322
12,025 723
RETURN ON EQUITY AND ASSETS
1995 1994 1993
Return on assets 0.13% (0.09)% (1.37)%
(Net income divided by average total assets)
Return on equity 1.68% (1.65)% (22.56)%
(Net income divided by average equity)
Equity to assets 7.69% 5.41% 6.09%
(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
1995 1994 1993
Securities sold under repurchase agreements
and federal funds sold
a) Outstanding at end of period 12,934 12,285 9,273
b) Average interest rate, end of period 2.66% 2.78% 2.16%
c) Maximum outstanding during period 14,333 18,614 12,393
d) Approximate average amount
outstanding during period 9,668 14,603 7,762
e) Weighted average interest rate 2.64% 2.51% 2.38%
Short-term debt
a) Outstanding at end of period 0 2,544 2,384
b) Average interest rate, end of period 0.00% 9.19% 7.36%
c) Maximum outstanding during period 2,544 2,554 2,448
d) Approximate average amount
outstanding during period 1,777 2,456 2,393
e) Weighted average interest rate 9.96% 8.51% 7.27%
Item 2. Properties.
The Company owned no properties directly at December 31,
1995. 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 in the original amount of
$11,250,000 (the "Loan"). During 1993, Resolution Trust
Corporation, as successor to Home Fed, sold the Loan to an
investment group as a part of a package.
In November 1994, the Loan was purchased by the two limited
partnerships managed by WHR Management Corp. ("WHR") which
subsequently purchased some of the Company's stock (see
management discussion and analysis and notes to the consolidated
financial statements). In January 1995, the Joint Venture and
WHR entered into a modification agreement which, inter alia,
allowed for prepayment of the Loan at a discount. On November
30, 1995 the Loan was paid off at a discount from face value of
$1,579,000 resulting in a net gain, after expenses and taxes, of
$1,457,000. Because the Loan was held by a related party, the
gain has been credited directly to shareholders' equity.
The Bank Building was refinanced with a new loan from PKH
Kettner Investors, LLC ("PKH") in the initial principal of $8
million, collateralized by a first deed of trust. The loan is
payable in monthly installments of $76,145 which include interest
at 9.8% per annum and is all due and payable December 1, 2005.
As additional consideration for the loan, the Company issued to
PKH a warrant to purchase 150,000 shares of the Company's common
stock at a price of $5.44 per share (the average of the bid and
ask prices on the day prior to the closing of the loan) until
November 30, 1999. A member of PKH, Mr. Sol Price, is a
principal shareholder of Price Enterprises, Inc. Murray L.
Galinson, President, Chief Executive Officer and a Director of
the Company and Vice Chairman, Chief Executive Officer and a
Director of the Bank, serves as a Director of Price Enterprises,
Inc.
On January 4, 1988, the Joint Venture obtained a $2
million loan from PVCC, Inc. ("PVCC") a corporation controlled
by Charles I. Feurzeig, Chairman of the Board of the Company.
The proceeds of the loan were used to retire existing debt of the
Joint Venture and to provide reserves for tenant improvements and
negative cash flows. The loan was fully paid November 29, 1995.
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
$2.30 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 $2.00
per square foot per month, subject to annual upward cost-of-
living adjustments and pass-through expense similar to the Bank
lease.
The Bank is also renting additional space in the building on
a month-to-month basis. The Company and the Bank believe the
space at 1420 Kettner Boulevard (including the right of first
refusal space) will be adequate for their needs for the
foreseeable future.
The Bank has leased property for its South Bay office at 398
H Street, Chula Vista, California. The lease term is seven years
from November 1, 1995 with three options to extend of seven years
each. Monthly rental is $6,900 for the first year and escalates
4% each year thereafter. The Bank is responsible for all
operating expenses except for major repairs.
At December 31, 1995, the Bank Building was approximately
98% leased, although concessions to some tenants who are not
utilizing all of their leased premises would reduce the effective
occupancy to approximately 93%.
Item 3. Legal Proceedings.
In January 1993, the Bank was named as a defendant in an
adversary proceeding filed by Pioneer Liquidating Corporation
("PLC"), successor to six bankrupt Pioneer Mortgage Company
entities (collectively, "Pioneer") in the Bankruptcy Court for
the Southern District of California. Investors in Pioneer had
previously filed suit against the Bank, which litigation was
settled in 1992. The PLC case was settled with the final
settlement agreement approved by the Federal District Court for
the Southern District of California on November 29, 1995.
A preliminary agreement between the Bank and PLC
contemplated that the Bank would make payment to PLC on execution
of the settlement agreement and assign to PLC certain charged-off
loans, without recourse. The preliminary agreement further
provided that after being given credit for the payment by the
Bank and the collections on the assigned charged-off loans,
payment of the remaining balance of the total settlement amount
was to be guaranteed by Charles I. Feurzeig, Chairman of the
Board of the Company, and PVCC, Inc., a corporation controlled by
Mr. Feurzeig (collectively, the "Feurzeig Entities"). Such
guarantee was being given by the Feurzeig Entities for
consideration independent of Mr. Feurzeig's investment in the
Company.
Subsequent negotiations led to the settlement agreement
approved by the Court whereby the Bank paid $600,000 to PLC and
the Feurzeig Entities paid $1,050,000 to PLC upon execution of
the settlement agreement and the Feurzeig Entities took the place
of PLC with respect to assignment of the charged-off loans. In
consideration of the modification of the original list of charged-
off loans to eliminate certain loans which had been only
partially charged-off, the Bank agreed to assign additional newly
charged-off loans (90 days after charge-off) to the Feurzeig
Entities, until the first to occur of:
a) Five years after the date of the settlement agreement;
or
b) Such time as the Feurzeig Entities have collected on
such loans $1,050,000 plus a return equal to the rate of 9.5% per
year on the unpaid portion of such $1,050,000.
Pursuant to the settlement agreement the Feurzeig Entities
do not have recourse or a claim against the Bank should the
collections on the assigned charged-off loans amount to less than
$1,050,000. Should collections exceed $1,050,000 plus the return
referred to above, the Feurzeig Entities have agreed to pay to
the Bank 50% of such excess collections.
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 1995.
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 1995 1994
First Quarter
Low $3.25 $ 2.50
High 4.25 3.25
Second Quarter
Low 3.625 2.50
High 4.25 3.25
Third Quarter
Low 3.50 2.50
High 4.50 4.75
Fourth Quarter
Low 4.50 3.00
High 6.25 4.75
(b) Holders. As of March 4, 1996, the Company's
outstanding shares of Common Stock were held by approximately
1,000 shareholders of record (including those through
broker/nominees).
(c) Dividends. There were no stock or cash dividends
declared in 1995 or 1994.
Item 6. Selected Financial Data.
Consolidated Financial Highlights
Incorporated by reference - see inside front cover of
the 1995 Annual Report to Shareholders.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Incorporated by reference - see pages 7 to 12 of the 1995
Annual Report to Shareholders.
Item 8. Financial Statements and Supplementary Data.
Incorporated by reference - see pages 13 to 23 of the 1995
Annual Report to Shareholders.
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures.
None.
PART III
The information required under PART III, Items 10, 11, 12 and 13,
has been omitted from this Report because the Company intends to
file with the Securities and Exchange Commission, not later than
120 days after the close of its fiscal year, a definitive proxy
statement prepared pursuant to Regulation 14A, which will contain
such information and which information is hereby incorporated by
reference.
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
1. Financial statements Page*
Consolidated Balance Sheets at December 31,
1995 and 1994. 13
Consolidated Statements of Operations for each of
the three years in the period ended December
31, 1995. 14
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended
December 31, 1995. 15
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 31,
1995. 16
Notes to Consolidated Financial Statements. 17-23
Report of Independent Accountants. 24
*Refers to respective page numbers of Annual
Report to Shareholders for the year ended December 31,
1995 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 - incorporated by
reference from 1995 Form 10-K.
(b) Employment contracts of certain executive officers.
(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
A report on Form 8-K was filed on December 5, 1995
reporting settlement of litigation against the Bank.
(c) Exhibits required by Item 601 of Regulation S-K and not
incorporated by reference are attached.
(d) Not applicable.
27. Financial Data Schedule (submitted only in electronic
format and omitted from paper copies pursuant to
Paragraph (c)(v) of Regulation S-K (17 CFR 220.601(c)(v))
and Note 2 to Paragraph (c)(1)(vi) of Regulation S-K
(17 CFR 229.601(c)(1)(vi))).
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 27, 1996 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
Chairman of the Board March , 1996
CHARLES I. FEURZEIG and Director
/s/Murray L. Galinson President, Chief March 27, 1996
MURRAY L. GALINSON Executive Officer and
Director
/s/ Douglas E. Barnhart Director March 27, 1996
DOUGLAS E. BARNHART
/s/Margaret Costanza Director March 27, 1996
MARGARET COSTANZA
/s/Karla J. Hertzog Director March 27, 1996
KARLA J. HERTZOG
/s/Robert B. Horsman Director March 27, 1996
ROBERT B. HORSMAN
/s/Mark P. Mandell Director March 27, 1996
MARK P. MANDELL
/s/ Patricia L. Roscoe Director March 27, 1996
PATRICIA L. ROSCOE
/s/Julius H. Zolezzi Director March 27, 1996
JULIUS H. ZOLEZZI
/s/Howard W. Brotman Director, Senior Vice March 27, 1996
HOWARD W. BROTMAN President, Secretary and
Chief Financial Officer
INDEX OF EXHIBITS
Exhibit Number
10 (b) Employment contracts of certain executive officers.
13 Annual Report to Shareholders.
22 Subsidiaries of Registrant.
23 (a) Consent of Independent Accountants.
27 Financial Data Schedule (submitted only in electronic
format and omitted from paper copies pursuant to
Paragraph (c)(v) of Regulation S-K (17 CFR 220.601(c)(v))
and Note 2 to Paragraph (c)(1)(vi) of Regulation S-K
(17 CFR 229.601(c)(1)(vi))).