EXHIBIT "13"
ANNUAL REPORT TO SHAREHOLDERS
SDNB Financial Corp. Annual Report 1995 cover page.
(Cover page includes four graphics illustrating concepts of Diversification,
International, Community and Branching Out.)
DIVERSIFICATION, GROWTH AND PROFITABILITY SIGNIFY THE SUCCESS OF SDNB
FINANCIAL CORP. IN 1995. WE COMMISSIONED TOM VOSS, A LOCAL SAN DIEGO
ILLUSTRATOR, TO CREATE ART THAT REPRESENTS FOUR AREAS OF ACHIEVEMENT FOR SDNB
FINANCIAL CORP. EACH WORK OF ART DEPICTS A SEGMENT OF OUR GROWTH THROUGH THE
EYES OF THE ARTIST. AS A SUPPORTER OF THE SAN DIEGO COMMUNITY AND THE ARTS,
WE ARE PROUD TO DISPLAY THE ORIGINAL ART IN OUR DOWNTOWN OFFICE.
SELECTED FINANCIAL DATA
1995 1994 1993 1992 1991
FOR THE YEAR, IN THOUSANDS
Total interest income $12,743 $11,818 $11,930 $12,334 $15,116
Net interest income 9,527 8,912 8,571 8,321 8,468
Securities gains, net 11 0 0 25 80
Provision for loan losses 200 1,850 2,950 1,320 1,270
Net income (loss) 212 (159) (2,562) (2,211) (511)
AT YEAR END, IN THOUSANDS
Assets $178,572 $173,185 $170,693 $194,689 $205,232
Deposits 140,409 138,276 138,150 164,739 154,979
Loans, net 90,329 94,910 108,511 130,010 119,817
Investment securities 34,441 27,231 30,227 17,943 15,006
Long term obligations 7,989 10,158 10,379 10,630 10,881
Shareholders' equity 16,686 8,969 9,488 12,050 14,261
PER SHARE
Net income (loss) $0.10 ($0.10) ($1.67) ($1.44) ($0.33)
Cash dividends paid 0.00 0.00 0.00 0.00 0.08
Shareholders' equity 5.43 5.83 6.17 7.83 9.27
LETTER TO OUR SHAREHOLDERS
Dear Shareholders, it is fair to say this was a very significant year!
In 1995, SDNB Financial Corp's vision for expansion and diversification
became a reality. We welcomed 300 new shareholders and gave thanks to 700
existing shareholders who reconfirmed their support by participating in our
capital offering. Our capital grew from $9 million to $16.7 million. We
also refinanced the San Diego National Bank headquarters building,
increasing the book value of each share of stock by 48 cents.
Good news from the bottom line: 1995 brought a significant turn in
profits for the holding company and San Diego National Bank. SDNB Financial
Corp enjoyed earnings of $212,000, a dramatic improvement over 1994's loss
of $159,000. The bank gave a stellar performance with increased earnings of
$989,000, compared to the year-earlier profits of $328,000.
1995 brought to a close the final chapter and costs of the Pioneer
Mortgage Company litigation.
We believed 1995 was ripe for capturing the disgruntled and besieged
victims of the megamerger frenzy going on with San Diego banks. For those
who did not find "bigger to be better," San Diego National Bank offered
itself as the friendly alternative to the corporate indifference of large
banks. While giant banks wrestled for turf and acquisitions, we
concentrated on building our assets by meeting the needs of customers.
Innovative product lines and state-of-the-art banking technologies were
designed to match businesses with industry-sensitive services tailored to
specific types of businesses. For example, we created a package of services
for property management companies and home owners associations to meet their
individual processing needs. In addition to building on our solid customer
following in the legal, medical and accountancy professions, we branched out
into select new areas, like manufacturing and wholesaling.
At the end of the year, we proudly announced our new international
division. Concerned that San Diego would miss the boat without local
financial institution backing to ensure local entrepreneurs the necessary
support to compete, we decided to get involved. This was done with the
recognition that this new area is for serious bankers - bankers who are
willing to do everything it takes to extend themselves in assisting local
companies to enter the global market place.
We are excited by the staff (continued on page 6)
(Graphic picture illustating Diversification & Growth)
Diversification & Growth
1995 WAS A PROSPEROUS YEAR FOR SDNB FINANCIAL CORP. THE ANNUAL HARVEST
BROUGHT DIVERSIFICATION AND GROWTH IN SERVICES, NEW FINANCIAL MARKETS AND
PROFITS. THE MANY DIFFERENT FRUITS OF OUR LABOR WERE REALIZED WHEN WE
OPENED OUR NEW INTERNATIONAL DEPARTMENT AND AN OFFICE IN THE SOUTH BAY.
(Graphic picture illustating International)
International
SDNB FINANCIAL CORP. LOOKED TO THE FUTURE AND PLANTED SEEDS THAT WOULD
ALLOW SAN DIEGO AND THE COMPANY TO PARTICIPATE IN THE EMERGING GLOBAL
ECONOMY. THE NEWLY-OPENED INTERNATIONAL DEPARTMENT NOT ONLY FILLS A VOID IN
SAN DIEGO'S FINANCIAL COMMUNITY, BUT ESTABLISHES OUR PRESENCE IN AN EVOLVING
AND FERTILE MARKET.
(Graphic picture illustating Branching Out)
Branching Out
NEW BRANCHES ARE A FIRST SIGN OF GROWTH. A SIGN OF OUR GROWTH BEGINS WITH
OUR NEW BRANCH IN CHULA VISTA, STRENGTHENING OUR COMMITMENT TO SERVING THE
GREATER SAN DIEGO REGION AND YIELDING NEW BUSINESS OPPORTUNITIES BOTH FOR
THE COMPANY AND THE SOUTH BAY.
(Graphic picture illustating Community)
Community
DEEPLY ROOTED IN THE COMMUNITY AND REMEMBERING THE IMPORTANCE OF GIVING BACK
TO OUR COMMUNITY, THE PEOPLE OF SDNB CONTINUED TO EXPAND SERVICE AND
PARTICIPATION IN BETTERING THE QUALITY OF LIFE IN SAN DIEGO THROUGH
INVOLVEMENT IN SOCIAL AND HEALTH SERVICE ORGANIZATIONS, THE ARTS AND CIVIC
PROGRAMS.
LETTER TO OUR SHAREHOLDERS
Continued from page 1
and resources we have put together, as well as the challenge and opportunity
international banking offers, for both the San Diego business community and
your company.
Our expansion and diversification of product lines, services and
markets culminated with the opening of our new South Bay office, located in
Chula Vista. Always a good customer source for the bank, the timing and
proximity to the international border and developing manufacturing and
wholesale clientele was a perfect fit. We expect great things from this
enthusiastic and energetic office.
The courier service continued to extend our customer reach countywide.
San Diego National Bank and courier banking have become synonymous, setting
the standard for bringing banking to the office.
For SDNB employees, directors and management, service to the community
extended past closing time and beyond banking business. As San Diego's
leading community bank, we invested in the civic, charitable, arts and
culture infrastructure that make up the heart of our community. Time,
expertise and monetary contributions went to more than 100 charities and
organizations.
None of this would have been possible without your faith and vision.
The vision that became reality in 1995 was also the result of top-notch
banking professionals, working together with a collective mission of
excellence and service.
Looking to superior achievements every year, we are pleased to
announce a number of promotions. Robert Horsman has been named President
of San Diego National Bank, and Joyce Chewning, Executive Vice President.
Howard Brotman will join the Board Of Directors of SDNB Financial Corp and
Mark Mandell will be joining the senior management team of the bank, along
with Ron Bird, Senior Vice President and Director of the Business Services
Department.
It was a great year. Thanks to all of you for sharing it with us.
Sincerely,
/s/ Murray L. Galinson
MURRAY L. GALINSON
PRESIDENT AND CEO
(picture of Murray L. Galinson next to his signature)
/s/ Charles I. Feurzeig
CHARLES I. FEURZEIG
CHAIRMAN OF THE BOARD
(picture of Charles I. Feurzeig next to his signature)
MANAGEMENT'S DISCUSSION AND ANALYSIS
SDNB Financial Corp. and Subsidiaries
OVERVIEW
The operations and financial condition of the Company improved substantially
during 1995. The Company recorded a profit in 1995 of $212,000 compared to
losses of $159,000 and $2,562,000 in 1994 and 1993, respectively. In
addition to the return to profitability, the Company also benefited by:
1. A successful capital infusion program which added a net of $5.7
million to capital.
2. Refinancing of the mortgage on the San Diego National Bank Building
which resulted in a gain of $1.46 million credited to shareholders' equity.
3. Settlement of the long standing Pioneer Mortgage litigation against
San Diego National Bank.
4. Opening of the new South Bay Office and International Department of
the Bank.
For the past several years, the Company and the Bank had 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, have included:
a. The continued need for a high loan loss provisions.
b. OREO losses and expenses from higher than normal levels of OREO
property.
c. 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 provisions for settlement costs of the Pioneer
Mortgage litigation (see "Other Non-Interest Expenses").
Loan loss provision and OREO losses and expenses were reduced
dramatically in 1995 and as cited above, the Pioneer Mortgage litigation has
been settled, although there was still substantial expense in 1995.
While the Company reports a profit in 1995 and a much reduced loss in
1994 than in 1993, there can be no assurances of 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
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, 1995, approximately 70% of the Bank's earning assets adjust
immediately to changes in interest rates. Within three months, this
increases to 86% of earning assets. Consequently, the Bank utilizes deposit
liabilities that also adjust relatively quickly. Within the same three-
month period, approximately 92% 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 increased approximately $10.8 million, or 43% from $26.0 million
at December 31, 1994 to $35.8 million at December 31, 1995. Volume of
assets and liabilities have both increased from the year earlier. Increases
of $13.0 million in securities and $4.5 million in deposits are partially
offset by a decrease of $1.2 million in loans within the three month horizon.
During February 1995, the Bank entered into an interest rate swap to
hedge against the effects on income of falling interest rates. If the prime
interest rate falls below eight percent during the life of the contract, the
Bank will receive payments amounting to the difference between the then
existing prime rate and eight percent on the contract amount of $20 million.
These payments continue while the prime interest rate stays below eight
percent or until expiration of the contract, February 3, 1998. This contract
helps to stabilize the Bank's net interest spread which, absent any hedge,
decreases during periods of rapidly falling interest rates. To date, there
have been no payments received under this contract.
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 the year ended December 31, 1995, cash and cash equivalents
increased $3.6 million. Operating activities provided $1.2 million during
the period. Approximately $2.3 million was used by investing activities.
The two major components were net investment of $6.5 million in securities
($27.1 million purchases of securities offset by $20.6 million of sales,
maturities, and calls) and decrease in gross loans totaling $4.3 million.
Financing activities provided $4.7 million during the period. Deposits
increased $2.1 million while borrowings decreased $3.1 million. The
issuance of new stock during the year provided a net amount of $5.7 million.
Liquidity is provided on a daily basis by federal funds sold and on a
longer-term basis by the structuring of 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.
TABLE 1. STATIC GAP SUMMARY
DECEMBER 31, 1995
Immediately Non-rate
Adjustable 1 Day Sensitve
Or 1 Day Through 3 Through 6 Through And Over
(In thousands) Maturity 3 Months 6 Months 12 Months 12 Months Total
Loans (net) 82,630 1,881 982 1,263 5,575 92,331
Investment securities - 22,580 1,963 1,001 8,425 33,969
Certificates of deposit in other banks - - 1,490 793 - 2,283
Federal funds sold 24,700 - - - - 24,700
Total interest earning assets 107,330 24,461 4,435 3,057 14,000 153,283
Non-interest earning assets - - - - 14,367 14,367
Total assets 107,330 24,461 4,435 3,057 28,367 167,650
Deposits:
Savings, NOW accounts and money markets 68,330 - - - - 68,330
Time deposits - 14,762 4,680 3,157 136 22,735
Total deposits 68,330 14,762 4,680 3,157 136 91,065
Securities sold under agreement
to repurchase 12,934 - - - - 12,934
Total interest bearing liabilities 81,264 14,762 4,680 3,157 136 103,999
Non-interest bearing liabities - - - - 50,036 50,036
Shareholders' equity - - - - 13,615 13,615
Total liabilities and shareholders' equity 81,264 14,762 4,680 3,157 63,787 167,650
Interest rate sensitivity gap 26,066 9,699 (245) (100) (35,420)
Cumulative interest rate sensitivity gap 26,066 35,765 35,520 35,420 -
Capital Resources
Since its initial capitalization in 1981, the Company had relied primarily
on internally generated income to fund its growth and provide for depositor
protection. During 1994, the Company concluded that additional capital
would be beneficial and proposed a plan for additional capitalization which
was approved by regulatory authorities on March 9, 1995, and by the
shareholders of the Company on March 17, 1995. The plan encompassed the
following steps:
1. Sale of 510,121 newly issued shares of the Company's Common Stock to
two limited partnerships managed by WHR Management Corp. ("WHR") at $4.34
per share for a gross amount of $2,213,925. This step was completed on
March 28, 1995.
2. A rights offering to existing shareholders and, pursuant to a best-
efforts underwriting agreement, to third parties encompassing 769,582 shares
of newly issued Common Stock at a subscription price of $4.34 per share for
a gross amount of $3,339,986. This step was completed on September 28, 1995.
3. Sale to WHR of an additional 255,193 newly issued shares of Common
Stock at $4.34 per share for a gross amount of $1,107,538. This step was
completed on October 6, 1995.
Additionally, in 1995 the Company issued the following warrants to
purchase shares of Common Stock:
1. A warrant to purchase 37,363 shares at $4.34 per share to Torrey Pines
Securities, Inc. pursuant to a Rights Agent Agreement as further
compensation for its services in connection with the rights offering to
existing shareholders.
2. A warrant to purchase 150,000 shares at a price of $5.44 per share to
PKH Kettner Investors, LLC as additional consideration for granting a loan
secured by a first trust deed on the Bank Building.
The net proceeds from the sale of Common Stock have been used for
general corporate purposes which include the following:
1. $250,000 loan to San Diego National Bank Building Joint Venture
("Joint Venture") which in turn made a partial payment on a note (the "PV
Note") owed to PVCC, Inc. which was secured by a second trust deed on the
Bank Building. PVCC, Inc. is a corporation controlled by Charles I.
Feurzeig, chairman of the Company's Board of Directors.
2. $630,000 to pay off Company notes payable which included $390,000 due
to officers and/or directors of the Company.
3. $1,125,640 to purchase customer notes from the Bank, at par, which
were then assigned to the Joint Venture, which in turn assigned the notes to
PVCC, Inc. as further payment of the PV Note.
4. $1,188,172, which along with $8,000,000 in proceeds of a new note
secured by a first trust deed on the Bank Building, to refinance the Bank
Building, paying $8,579,000 to WHR (and realizing a prepayment discount of
$1,579,000) and $524,360 to pay the balance of the PV Note.
5. $1,000,000 additional invested in San Diego National Bank.
The remaining proceeds will be used for general corporate purposes,
which may include investments in or extensions of credit to the Company's
subsidiaries, reduction of existing debt, or financing possible future
acquisitions of other banking institutions or related businesses.
At the present time, the Company does not have any specific plans,
agreements or understandings, written or oral, pertaining to the proposed
acquisition of any banking institution or related business.
As a national bank subject to the regulation of the Office of the
Comptroller of the Currency (the "Comptroller"), the Bank is subject to
legal limitations on the source and amount of dividends it is permitted to
pay to the Company. The approval of the Comptroller is required for any
dividend by a national bank if the total of all dividends declared by the
bank in any calendar year would exceed the total of its net profits, as
defined by the Comptroller, for that year, combined with its retained net
profits for the preceding two years. As of January 1, 1996, the Bank had
available for dividends approximately $1,370,000 without the approval of the
Comptroller. The payment of dividends by the Bank may also be affected by
other factors, such as requirements for the maintenance of adequate
capital. In addition, the Comptroller and the Federal Deposit Insurance
Corporation (the "FDIC") are authorized to determine under certain
circumstances relating to the financial condition of a national bank whether
the payment of dividends would be an unsafe or unsound banking practice and
to prohibit payment thereof. Finally, under the Federal Deposit Insurance
Corporation Improvement Act ("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
under "Capital" below.
The Company and the Federal Reserve Bank of San Francisco ("Reserve
Bank") entered into an agreement on November 20, 1992, pursuant which the
Company must obtain the approval of the Reserve Bank prior to, among other
actions, the declaration of any cash dividends.
The Comptroller 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 capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized or
critically undercapitalized. Under the Comptroller's 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. As of December 31,
1995, the Bank was considered "well capitalized".
The Federal Reserve Board ("Reserve Board"), as the regulatory body of
the Company, has capital ratio requirements. Under the Reserve Board's
Capital Adequacy Guidelines, 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.
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 other certain 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 this 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 1 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 regulatory risk-based capital adequacy
guidelines and the leverage standard.
Capital Components and Ratios
December 31, 1995 December 31, 1994
(dollars in thousands) Company Bank Company Bank
Capital Components:
Tier 1 Capital $16,726 $13,656 $9,329 $11,667
Total Capital 18,207 15,006 10,868 13,081
Risk-weighted assets
and off-balance
sheet instruments 117,967 107,310 122,833 112,672
Tier 1 risk-based:
Actual 14.18% 12.73% 7.59% 10.35%
Required 4.00% 6.00% 4.00% 6.00%
Excess 10.18% 6.73% 3.59% 4.35%
Total risk-based:
Actual 15.43% 13.98% 8.85% 11.61%
Required 8.00% 10.00% 8.00% 10.00%
Excess 7.43% 3.98% 0.85% 1.61%
Leverage:
Actual 9.37% 8.43% 5.33% 7.09%
Required 5.00% 5.00% 5.00% 5.00%
Excess 4.37% 3.43% .33% 2.09%
Investment Securities
As reflected in the consolidated financial statements and in the
accompanying notes thereto, the investment portfolio of the Bank has
recovered a substantial portion of the loss in market value experienced in
1994. That loss was due to higher interest rates during 1994, compounded by
adverse market conditions for "structured notes" and other derivative
securities. Management believes that there is sufficient current liquidity
and available sources of liquidity to allow all structured notes (which are
issued by United States government agencies) to mature as scheduled and thus
avoid realization of any material amount of loss due to decline in market
value.
Net Interest Income/Net Interest Margin
Net interest income for 1995 was $9,527,000 compared to $8,912,000 for
1994 and $8,571,000 for 1993, which represents increases of 7% and 4%,
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:
1995 1994 1993
NET INTEREST SPREAD
Yield on average earnings assets
(taxable equivalent) 9.12% 7.75% 7.60%
Cost of funds 2.29% 1.89% 2.11%
Net interest spread 6.83% 5.86% 5.49%
TABLE 2. 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>
Since the vast majority of the Bank's loans (91% at December 31, 1995)
are at variable rates, changes in the prime interest rate impact the yield
shown above. The Wall Street Prime interest rate during this period was as
follows:
1995 1994 1993
High 9.00% 8.50% 6.00%
Low 8.50% 6.00% 6.00%
Average 8.83% 7.14% 6.00%
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, including:
1. The reduction of average loan balances, which began in 1993, continued
during 1995, resulting in a substantial decrease in interest earned based on
volume.
2. The amount of time deposits has declined from $45.3 million average in
1993 to $18.5 million average in 1995. The decline in time deposits is
attributable to two major factors:
a. In response to slowing loan demand, the Bank priced "money desk"
certificates of deposit unattractively, assuring that those funds already in
the Bank would be withdrawn at maturity.
b. 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.
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. 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.
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.
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.
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 following chart 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 chart.) Also, many
of the Bank's loans are collateralized (84% were collateralized at December
31, 1995), and that collateral can improve the recovery on troubled loans.
Loans reported as non-performing at December 31:
(in thousands) 1995 1994 1993
CURRENT AND NONCURRENT
Non-accrual loans 6,969 6,046 5,343
Restructured loans (still accruing) 1,364 2,316 3,162
Loans 90 days past due 93 20 481
8,426 8,382 8,986
Other real estate owned 181 268 1,050
Total 8,607 8,650 10,036
NONCURRENT
Non-accrual loans 3,160 1,276 3,373
Restructured loans (still accruing) 0 0 0
Loans 90 days past due 93 20 481
3,253 1,296 3,854
Other real estate owned 181 268 1,050
Total 3,434 1,564 4,904
Loans reported as nonperforming
but which are current, as a
percentage of total loans reported
as nonperforming 61% 82% 51%
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 $712,500 (in addition to the $750,000 the insurer had
previously advanced toward the Bank's settlement with the plaintiffs) which
was credited to miscellaneous other operating income.
Other Non-Interest Expenses
Included in other non-interest expenses are the following:
1. Legal fees and settlement costs (and provisions therefor) in
connection with the Pioneer Mortgage Company and Pioneer Liquidating
Corporation litigation:
In 1995 $988,000
In 1994 $504,000
In 1993 $592,000
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 was settled in 1995.
2. Other Real Estate Owned ("OREO") losses and expenses:
In 1995 $129,000
In 1994 $462,000
In 1993 $754,000
OREO property, which peaked at approximately $5 million in 1991,
continued to decline in 1995 (to $181,000 at December 31, 1995) as
Management continued vigorous efforts to dispose of repossessed property.
Management expects that there will be other repossessions in the future but
intends to continue to dispose of such properties as quickly as is prudent.
3. 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 $989,000 in 1995 and $382,000 in
1994 compared to a loss of $1,870,000 in 1993. Return on average assets
(ROA) was 0.65%, 0.23%, and (1.07%), respectively. Return on average equity
(ROE) was $8.07%, 3.20%, and (14.65%), respectively. The reasons for the
change in Bank earnings have been enumerated in the preceding pages.
See notes to the consolidated financial statements and "Capital
Resources" 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 $1,947,000, $2,046,000, and
$2,048,000 in 1995, 1994, and 1993, respectively, resulting in pre-
consolidation pre-tax losses of $769,000, $447,000, and $453,000,
respectively. Depreciation and amortization expenses were $601,000,
$636,000, and $640,000 in 1995, 1994 and 1993, respectively. The increased
loss in 1995 is attributable primarily to the reduced revenues (see
discussion below) and increased interest payable to the Company on advances
used to pay down the building mortgage loans, which is eliminated from the
financial statements in consolidation (see "Capital Resources").
At the beginning of the Joint Venture, the limited partners' share of
its losses were charged against the investment capital accounts of the
limited partners. During 1990, these capital accounts reached zero,
requiring the Company to absorb additional operating losses of approximately
$288,000 in 1995, $168,000 in 1994 and $194,000 in 1993 which would
otherwise have been charged to the limited partners. In 1995, the limited
partners' cumulative share of the operating losses absorbed by the Company
was reduced by their share of the gain on the prepayment discount on the
mortgage (see below; approximately $562,000) resulting in net losses
absorbed by the Company of $1,017,000 as of December 31, 1995.
There is substantial amount of vacant office space in downtown San Diego.
A recent study indicated that the downtown occupancy level was approximately
79% (29th lowest among 31 U.S. cities included in the 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 negotiated for lower current rental rates in exchange for
extensions of their leases. At the end of 1995, the 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%.
In November 1994, the then existing first mortgage loan on the building
was purchased by the two limited partnerships managed by WHR Management
Corp. which subsequently purchased the Company's stock (see "Capital
Resources"). 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 of
$1,579,000 from face value resulting in a net gain, after expenses and taxes
of $1,457,000. Because the mortgage was held by a related party, the gain
has been credited directly to shareholders' equity.
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.
Interest rates began to fall during 1995 after rising in 1994. Should
interest rates continue to 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 these and other interest-
bearing accounts.
CONSOLIDATED BALANCE SHEETS
SDNB Financial Corp. and Subsidiaries
December 31,
(dollars in thousands) 1995 1994
ASSETS
Cash and due from banks $ 13,440 $11,936
Interest bearing deposits in other banks 2,780 1,381
Investment securities held-to-maturity 7,408 17,321
Investment securities available-for-sale 27,033 9,910
Federal funds sold 24,700 24,000
Loans 92,331 97,058
Less allowance for loan losses 2,002 2,148
Net loans 90,329 94,910
Premises and equipment, net 10,975 11,089
Other real estate owned 181 268
Accrued interest receivable and other assets 1,726 2,370
$ 178,572 $173,185
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 49,505 $45,693
Interest bearing 90,904 92,583
Total deposits 140,409 138,276
Securities sold under agreement to repurchase 12,934 12,285
Accrued interest payable and other liabilities 554 953
Notes payable 7,989 12,702
Total liabilities 161,886 164,216
Commitments and contingencies (notes 9, 10 and 11)
Shareholders' equity:
Common stock, no par value; authorized
15,000,000 shares, issued and outstanding
3,073,260 in 1995 and 1,538,364 in 1994 20,314 14,585
Accumulated deficit (3,587) (5,256)
Net unrealized holding losses on
available-for-sale securities (41) (360)
Total shareholders' equity 16,686 8,969
$178,572 $173,185
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
SDNB Financial Corp. and Subsidiaries
Years ended December 31,
(dollars in thousands except per share amounts) 1995 1994 1993
Interest Income:
Interest and fees on loans $10,090 $9,500 $10,404
Interest on federal funds sold 904 732 364
Interest on investment securities:
Taxable 1,655 1,394 899
Exempt from federal income tax 94 192 263
Total interest income 12,743 11,818 11,930
Interest Expense:
Deposits 2,928 2,497 3,146
Short-term borrowings 288 409 213
Total interest expense 3,216 2,906 3,359
Net interest income 9,527 8,912 8,571
Provision For Loan Losses 200 1,850 2,950
Net interest income after provision
for loan losses 9,327 7,062 5,621
Other Operating Income:
Security gains, net 11 0 0
Building income 903 1,067 1,088
Miscellaneous 816 1,580 1,017
Total other operating income 1,730 2,647 2,105
Other Operating Expenses:
Salaries and employee benefits 4,056 3,630 3,371
Occupancy 532 492 486
Building operating expenses, including interest
expense of $941, $788, and $820
for 1995, 1994 and 1993, respectively 2,422 2,296 2,310
Other non-interest expenses 3,830 3,447 4,355
Total other operating expenses 10,840 9,865 10,522
Income (loss) before income tax
and cumulative effect of accounting change 217 (156) (2,796)
Income Tax 5 3 0
Income (loss) before cumulative effect
of accounting change 212 (159) (2,796)
Cumulative Effect of Accounting
Change ($0.15 Per Share) 0 0 234
Net income (loss) $ 212 $(159) $(2,562)
Net income (loss) per share $ 0.10 $(0.10) $ (1.67)
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SDNB Financial Corp. and Subsidiaries
Net unrealized
holding losses in
For years ended December 31, 1995, 1994 and 1993 Common Accumulated available-for-sale
(dollars in thousands) Stock Deficit securities Total
Balances at January 1, 1993 $ 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
Proceeds from issuance of common stock, 1,534,896
shares issued at $4.34/share less associated
costs of $932. A warrant to purchase 37,363
shares of common stock at $4.34 per share until
September 29, 1997 was issued to Torrey Pines
Securities, Inc. which acted as underwriter in
the stock offering. 5,729 0 0 5,729
Gain on early payment of loan (Note 22) 0 1,457 0 1,457
Net change in fair value of available-for-sale
securities 0 0 319 319
Net income 0 212 0 212
Balances at December 31, 1995 $ 20,314 $( 3,587) ($ 41) $ 16,686
<FN>
<F1>
The accompanying notes are an integral part of the financial statements.
</FN>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SDNB Financial Corp. and Subsidiaries
Years ended December 31,
(dollars in thousands) 1995 1994 1993
OPERATING ACTIVITIES:
Net income (loss) $ 212 $(159) $(2,562)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Provision for loan losses 200 1,850 2,950
Provision for depreciation and amortization 1,279 1,332 1,102
Cumulative effect of accounting change 0 0 (234)
Amortization of investment security discounts (240) (65) (84)
Other expense not utilizing (providing) cash 173 175 106
Unearned loan fees 157 104 (5)
Taxes refundable 33 (30) 477
Interest receivable and other assets (807) (144) (691)
Interest payable and other liabilities (399) (66) 545
Total adjustments 396 3,156 4,166
Net cash provided by operating activities 608 2,997 1,604
INVESTING ACTIVITIES:
Proceeds from maturities of held for
investment securities 0 0 10,699
Proceeds from maturities of
held-to-maturity securities 6,504 9,443 0
Proceeds from called held-to-maturity securities,
including gross realized gains of $10 1,802 0 0
Proceeds from maturities of
available-for-sale securities 6,993 6,927 0
Proceeds from sales of available-for-sale securities,
including gross realized gains of $1 5,324 0 0
Purchases of held for investment securities 0 0 (23,037)
Purchases of held-to-maturity securities (2,000) (8,847) 0
Purchases of available-for-sale securities (25,097) (4,950) 0
Net change in gross loans 4,320 11,508 18,549
Proceeds from OREO properties 556 889 1,041
Purchases of OREO properties 0 (520) 0
Purchases of premises and equipment (737) (232) (221)
Net cash provided (used)
by investing activites (2,335) 14,218 7,031
FINANCING ACTIVITIES:
Net change in deposits 2,133 126 (26,589)
Net change in short-term borrowings (1,894) 3,172 4,619
Proceeds from issuance of long-term debt,
net of associated costs of $48 7,952 0 0
Payments of long-term borrowings (8,590) (222) (251)
Proceeds from issuance of common stock 6,661 0 0
Payments of costs associated with issuance
of common stock (932) 0 0
Net cash provided (used)
by financing activities 5,330 3,076 (22,221)
Change in cash and cash equivalents 3,603 20,291 (13,586)
Cash and cash equivalents at beginning of year 37,317 17,026 30,612
Cash and cash equivalents at end of year $40,920 $37,317 $17,026
For the purpose of the statement of cash flows, the Company considers cash and
cash equivalents to be as follows at December 31, 1995 1994 1993
Cash and due from banks $13,440 $11,936 $9,044
Interest-bearing deposits in other banks 2,780 1,381 1,682
Federal funds sold 24,700 24,000 6,300
Totals $40,920 $37,317 $17,026
Supplemental cash flow information: 1995 1994 1993
CASH PAID FOR:
Interest $4,316 $3,661 $4,163
Income Taxes $1 $3 $0
Non-cash items: transfer of loans to OREO $553 $0 $739
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
SDNB Financial Corp. and Subsidiaries
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 preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and iabilities and disclosure
of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the
reporting period(s). Actual results differ from those estimates. 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 companies 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. On November 15, 1995, the Financial Accounting Standards Board
("FASB") authorized a one-time transfer between classifications which was
required to be made no later than December 31, l995. Pursuant to such
authority, the Bank transferred securities with an amortized cost of $3.8
million and an unrealized loss of $19 thousand from "held to maturity" to
"available for sale."
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. Loan fees received, to the extent they exceed
origination costs, are deferred and amortized over the expected loan term.
Effective January 1, 1995, the Company implemented Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS No. 114") as amended by Statement of Financial
Accounting Standards No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures ("SFAS No. 118"). Under SFAS No.
114, a loan is considered impaired, based on current information and events,
if it is probable the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. The measurement of impaired loans is generally
based on the present value of expected future cash flows discounted at the
historical effective interest rate, except that collateral dependent loans
are measured for impairment based on the fair value of the collateral.
Adoption of SFAS No. 114 did not have a material effect on the Company's
financial statements.
Loans are placed on non-accrual when a reasonable doubt exists as to
the collectibility of interest or principal. Loans may be returned to
accrual status when all principal and interest amounts contractually due
are reasonably assured of repayment in an acceptable period of time, and
there is a sustained period of repayment performance (generally a minimum of
six months) by the borrower.
While a loans is classified as non-accrual and the future
collectibility of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash basis. In the case of
a partially charged-off loan, interest income is limited to that which would
have been recognized on the remaining recorded loan balance. Cash interest
receipts in excess of that amount are recorded as recoveries to the
allowance for loan losses until prior charge-offs have been fully recovered.
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, less estimated selling
costs. Investment in the 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, 1995 and 1994 was $14 and
$20, 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.
EARNINGS PER SHARE Net income per share for 1995 is based on 2,197,615
weighted average shares outstanding. Net loss per share for 1994 and 1993
are based on 1,538,364 shares outstanding.
EMPLOYEE STOCK COMPENSATION PLANS In October 1995, the FASB issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS No. 123"). Under the provisions of SFAS No. 123,
the Company is encouraged, but not required, to measure compensation costs
related to its employee stock compensation plans under the fair value
method. Under this method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service
period, which is usually the vesting period. If the Company elects not to
recognize compensation expense under this method it is required to disclose
the pro forma net income and earnings per share effects based on the SFAS No.
123 fair value methodology. SFAS No. 123 applies to financial statements
for fiscal years beginning after December 15, 1995. Earlier implementation
is permitted. The Company will implement the requirements of SFAS No. 123
in 1996 and will only adopt the disclosure provisions of this statement.
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, 1995 and 1994 were approximately $1,706 and
$1,371, respectively.
NOTE 3: INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities
are summarized as follows at December 31, 1995:
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
DECEMBER 31, 1995:
Available for sale:
U.S. Treasury $13,532 $0 $(17) $13,515
U.S. Government agencies 12,797 28 (52) 12,773
Other 472 0 0 472
Federal Reserve Bank stock 273 0 0 273
$27,074 $28 $(69) $27,033
Held to maturity:
U.S. Treasury $1,000 $0 $(2) $998
U.S. Government agencies 4,021 10 (61) 3,970
States and municipalities 1,637 6 (12) 1,631
Other 750 0 0 750
$7,408 $16 $(75) $7,349
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
Estimated
Amortized Market
Cost Value
DECEMBER 31, 1995:
Available for sale:
Due in one year or less $15,804 $15,786
Due after one year through five years 10,997 10,974
Due after five years through ten years 0 0
Federal Reserve Bank stock 273 273
$27,074 $27,033
Held to maturity:
Due in one year or less $3,000 $2,997
Due after one year through five years 3,137 3,082
Due after five years through ten years 1,271 1,270
$7,408 $7,349
Investment securities with a carrying value of $3,778 and
$3,276 at December 31, 1995 and 1994, respectively, were pledged
as security for public deposits and other purposes.
NOTE 4. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
At December 31, 1995 and 1994 loans consist of the following:
1995 1994
Commercial $54,628 $57,808
Real estate 35,192 37,534
Installment 2,877 2,239
Unearned loan fees (366) (523)
$92,331 $97,058
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. Exceptions to this policy were granted to one director
where the amounts of loans outstanding are less than the amounts outstanding
when the policy was adopted and to another whose guarantee of a loan was
made prior to his becoming a director.
A summary of the activity in the allowance for loan losses is as
follows:
1995 1994 1993
Balance at beginning of year $2,148 $2,522 $2,111
Provision charged to operating expenses 200 1,850 2,950
Loans charged off (655) (2,362) (2,716)
Recoveries 309 138 177
Balance at end of year $2,002 $2,148 $2,522
As of December 31, 1995 and 1994, restructured loans were $6,925 and
$3,460, respectively. Of these totals, $1,364 and $2,316 were accruing at
December 31, 1995 and 1994, respectively. The difference between interest
income recorded as restructured and interest income that would have been
recorded if not restructured was immaterial.
As of December 31, 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 totaled
$5,422. Of this total , $1,265 related to loans with no valuation
allowance, either because the loans have been partially written down
through charge-offs or because collateral value exceeds contractual amounts
due. The remaining $4,157 related to to loans with a valuation allowance
of $241. For the year ended December 31, 1995, the average recorded
investment in impaired loans was approximately $2,951. The Company
recognized $212 of interest on impaired loans (during the portion of the
year they were impaired) all of which represents income recognized using a
cash basis method of accounting during the time within the year the loans
were impaired.
NOTE 5: PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1995 and 1994 are summarized
as follows:
1995 1994
Building $11,705 $11,708
Furniture, fixtures and equipment 2,936 2,855
Leasehold improvements 4,010 4,356
18,651 18,919
Less accumulated depreciation
and amortization 7,676 7,830
$10,975 $11,089
NOTE 6: DEPOSITS
The year-end balances for deposits by major classification are as follows:
1995 1994
Non-interest bearing demand $ 49,505 $ 45,693
Interest bearing demand 64,185 69,839
Savings 3,982 4,844
Time deposits of $100 or more 12,748 10,374
Other time deposits 9,989 7,526
$140,409 $138,276
Interest expense on deposits was comprised of the following:
1995 1994 1993
Interest bearing demand $1,873 $1,623 $1,373
Savings 92 77 79
Time deposits of $100 or more 471 347 725
Other time deposits 492 450 969
$2,928 $2,497 $3,146
Domestic time deposits over $100 at December 31, 1995 mature in the
following periods:
Time Certificates All Other
of Deposit Time Deposits
Three months or less $6,167 $201
Over three through six months 3,360 200
Over six through twelve months 2,498 0
Over twelve months 0 322
$12,025 $723
NOTE 7: NOTES PAYABLE
Notes payable consist of the following:
1995 1994
Note payable to a limited liability company
payable in monthly installments of $76 which
include interest at 9.8%. The loan is
collateralized by the bank building and is due
December 1, 2005. As additional consideration for
the loan the Company issued warrants to purchase
150,000 shares of Common Stock at $5.44 per share
until November 30, 1999. $7,989 $0
Note payable to two limited partnerships, managed
by WHR Management Corp. (owner of 24.9% of the
Company's Common Stock) paid November 29, 1995 at a
discount (see Note 22). 0 10,158
Note payable to a corporation (which is owned by a
member of the Company's Board of Directors); paid
November 29, 1995. 0 1,900
Notes payable to individuals (officers and/or
directors of the Company)paid September 30, 1995. 0 390
Notes payable to individuals paid March 31, 1995. 0 240
Notes payable to a corporation paid May 9, 1995. 0 14
$7,989 $12,702
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.
The components of income tax expense attributable to continuing
operations for the years ended December 31, are as follows:
1995 1994 1993
Current:
Federal $2 $0 $0
State 3 3 0
Total current 5 3 0
Deferred:
Federal 0 0 0
State 0 0 0
Total deferred 0 0 0
Income tax expense $5 $3 $0
Income tax expense attributable to operations differs from the
amounts computed using the federal statutory income tax rate as a result
of the following at December 31:
1995 1994 1993
Computed expected taxes $74 $(57) $(951)
California franchise tax,net
of federal income tax benefit 3 0 0
Nontaxable interest income (30) (113) (84)
Alternative minimum tax 2 0 0
Net operating loss (57) 0 0
Adjustment of the valuation
allowance 0 168 1,003
Other 13 5 32
Income tax expense $5 $3 $0
The components of net deferred taxes at December 31, 1995 and 1994
are as follows:
Deferred
December (Expense) December
31,1994 Benefit 31,1995
OREO gains/losses ($438) $483 $45
Joint venture (313) 28 (285)
Bad debt allowance 373 94 467
Deferred compensation 14 2 16
Land lease 163 (114) 49
Depreciation (149) (49) (198)
Miscellaneous 30 37 67
Net operating loss 2,292 (1,071) 1,221
Debt refinance 0 622 622
AMT credit carryforward 0 148 148
Net deferred tax asset 1,972 180 2,152
Valuation allowance (1,972) (180) (2,152)
$0 $0 $0
At December 31, 1995, the Company has net operating loss ("NOL")
carryforwards for Federal tax purposes of approximately $3,083, to offset
future Federal taxable income. The Company also has NOL carryforwards for
California Franchise Tax purposes of approximately $4,944, 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.
The Company also has Alternative Minimum Tax credits for financial
reporting purposes to offset future federal taxes of approximately $148.
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, 1995, 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:
1996 $ 1,122
1997 1,029
1998 1,033
1999 1,033
2000 988
Thereafter 17,994
$ 23,199
Total minimum lease payments include $6,787 of rental payments to
the Joint Venture (the Company's 62%-owned subsidiary). 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 was $1,337 in 1995,
$1,289 in 1994, and $1,259 in 1993. 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 or property 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 effect on the consolidated
financial condition of the Company.
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 of 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 to PLC and the Feurzeig Entities
paid $1,050 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 plus a return equal to the rate of 9.5% per year on the
unpaid portion of such $1,050.
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. Should the
collections exceed $1,050 plus the return referred to above, the
Feurzeig Entities have agreed to pay to the Bank 50% of such excess
collections.
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 financial
statements.
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
totaled $84,076 at December 31, 1995. The total contract amounts of
financial instruments with off-balance sheet risk at December 31 are
as follows:
1995 1994
LOAN COMMITMENTS:
Variable rate $42,667 $48,140
Fixed rate 707 431
Letters of credit 2,633 1,997
$46,007 $50,568
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.
During February 1995, the Bank entered into an interest rate swap
to hedge against the effects of falling interest rates on income. If
the prime interest rate falls below eight percent during the life of the
contract, the Bank will receive payments amounting to the difference
between the then existing prime rate and eight percent on the contract
amount of $20 million. These payments continue while the prime interest
rate stays below eight percent or until expiration of the contract,
February 3, 1998. The Bank's exposure to credit loss in the event of
non-performance of the counterparty is represented by the amount of
these payments, which is presently undeterminable.
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 $59
under the plans in 1995. No accrual was made for the years 1994 and
1993.
NOTE 13: AVAILABILITY OF FUNDS FROM SUBSIDIARIES
Funds available for the payment of dividends by the Company would be
obtained from the Bank.
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.
At January 1, 1996, the Bank had available for dividends to the Company
approximately $1,370 without approval of the Comptroller. 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.
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.
NOTE 14: STOCK OPTIONS
In 1994 the Board of Directors adopted the "1994 Stock Option Plan"
("1994 Plan"), which was approved by the Company's shareholders on
March 17, 1995. The Company has reserved 400,000 shares for issuance
under the plan. Options are 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 but not to exceed 10 years and
expire three months after termination of employment or cessation of
affiliation as a director. The plan expires September 10, 2004, as to
any shares not at the time subject to option. Options can, depending on
the circumstances of issuance, be either incentive stock options, which
are qualified under provisions of the Internal Revenue Code for certain
tax-advantaged treatment, or non-qualified options.
The 1994 Plan replaced a similar plan, the "1984 Stock Option Plan"
("1984 Plan") which had expired.
As of December 31, 1995, there were non-qualified options
outstanding under the 1984 Plan for 168,294 shares at exercise prices
ranging from $3.25 to $7.94 per share and Incentive Stock Options
outstanding for 250,401 shares at exercise prices ranging from $3.25 to
$11.13 per share.
As of December 31, 1995, there were non-qualified options
outstanding under the 1994 Plan for 98,000 shares at a price of $6.00
per share and Incentive Stock Options outstanding for 67,000 shares at
prices ranging from $3.25 to $6.00 per share.
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, 1995, minimum lease payments to
be received by the Joint Venture on non-cancelable operating leases are
as follows:
1996 $ 1,724
1997 1,471
1998 1,302
1999 1,199
2000 1,155
Thereafter 3,800
$10,651
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,
1995 and 1994, and the related condensed statements of income and cash
flows for each of the three years in the period ended December 31, 1995.
CONDENSED BALANCE SHEETS 1995 1994
ASSETS
Cash in San Diego National Bank $142 $30
Interest bearing deposits in other banks 497 0
Investment securities available-for-sale 472 0
Investment in San Diego National Bank 13,615 11,307
Investment in SDNB Building Joint Venture (2,647) (3,375)
Investment in SDNB Mortgage Bankers 6 6
Note receivable from Joint Venture 4,558 1,413
Other assets 119 462
$16,762 $9,843
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Due to subsidiaries for income taxes $7 $32
Other liabilities 69 212
Notes payable 0 630
Total Liabilities $76 $874
Shareholder's equity:
Common Stock, no par value; authorized
15,000,000 shares, issued 3,073,260
in 1995 and 1,538,364 in 1994 20,314 14,585
Accumulated Deficit (3,587) (5,256)
Net unrealized holding losses on
available-for-sale securities (41) (360)
Total shareholders' equity 16,686 8,969
$16,762 $9,843
CONDENSED STATEMENTS
OF OPERATIONS 1995 1994 1993
Management income $39 $41 $21
Interest income 311 136 66
Rental income 198 225 218
Total income 548 402 305
Operating expenses 584 498 433
Loss before income taxes and equity in
undistributed income (loss) of subsidiaries
and cumulative effect of accounting change (36) (96) (128)
Allocated income tax 21 (1) 0
Loss before equity in undistributed
income (loss) of subsidiaries and cumulative
effect of accounting change (15) (97) (128)
Equity in undistributed income (loss)
of subsidiaries 227 (62) (2,313)
Income (loss) before cumulative effect of
accounting change 212 (159) (2,441)
Cumulative effect of accounting change 0 0 (121)
Net income (loss) $212 $(159) $(2,562)
CONDENSED STATEMENTS
OF CASH FLOWS 1995 1994 1993
OPERATING ACTIVITIES:
Net income (loss) $212 $(159) $(2,562)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Net change in taxes payable 0 (30) (600)
Provision for depreciation and amortization 15 4 6
Cumulative effect of accounting changes 0 0 (121)
Net change in other assets 345 (267) 16
Net change in other liabilities (148) 59 50
(Income) loss of wholly-owned subsidiaries (227) 62 2,434
Total adjustments (15) (172) 1,785
Net cash provided (used) by operating activities 197 (331) (777)
INVESTING ACTIVITIES:
Purchase of investment activities (3,336) 0 0
Sales of investment securities 2,864 0 0
Purchase of leasehold improvements 0 0 30
Advances to subsidiaries (4,161) 0 0
Payments from subsidiaries 0 100 173
Net cash provided (used) by
investing activities (4,633) 100 203
FINANCING ACTIVITIES
Proceeds from short-term borrowings 0 275 440
Repayments of short-term borrowings (630) (85) 0
Proceeds from advances from subsidiaries 0 83 488
Repayment of advances from subsidiaries (54) (26) (516)
Proceeds from issuance of common stock 5,729 0 0
Payments for costs associated with
issuance of common stock (932) 0 0
Net cash provided by financing activities 5,045 247 412
Increase (decrease) in cash 609 16 (162)
Cash at beginning of year 30 14 176
Cash at end of year $639 $30 $14
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, fair value is estimated using the rates
currently offered for deposits of similar remaining maturities.
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. Non-accrual loans are discounted based on cash flows
including principal repayment only at maturity.
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.
Interest Rate Contracts The fair value approximates the carrying
amount which represents remaining unamortized contract price.
Carrying amount Fair value
FINANCIAL ASSETS:
Cash and due from banks $13,440 $13,440
Interest bearing deposits in other banks 2,780 2,782
Investment securities held-to-maturity 7,408 7,349
Investment securities available-for-sale 27,033 27,033
Federal funds sold 24,700 24,700
Loans 92,331
Less allowance for loan losses 2,002
Net loans 90,329 90,312
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing $49,505 $49,505
Interest bearing 90,904 90,922
Total deposits 140,409 140,427
Securities sold under agreements
to repurchase 12,934 12,934
Notes payable 7,989 7,989
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Acceptances outstanding and commercial
letters of credit $785
Commitments, guarantees and standby
letters of credit $128
Interest rate contracts $ 27
NOTE 19: MISCELLANEOUS OPERATING INCOME
Miscellaneous operating income consists of the following:
1995 1994 1993
Service charge on deposits $ 583 $ 633 $ 737
Other service charges 162 149 165
OREO income 44 55 93
Other 27 743 22
$ 816 $1,580 $1,017
NOTE 20: OTHER NON-INTEREST EXPENSES
Other non-interest expenses consist of the following:
1995 1994 1993
Data Processing $ 210 $ 223 $ 239
FDIC insurance premiums and
OCC assessments 273 442 487
Professional fees 865 506 758
Provision for litigation settlement 350 250 150
Loan and collection expense 416 330 318
OREO expense 52 59 168
Losses on OREO property 77 403 586
Miscellaneous 1,587 1,234 1,649
$3,830 $3,447 $4,355
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
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized or critically undercapitalized. As of December 31,
1995, the Bank's capital ratios were 12.73% and 13.98% 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 ("FRB"), as the regulatory body of the
Company, has capital ratio requirements. Under the FRB Capital Adequacy
Guidelines, 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, 1995, the Company's capital ratios were 14.18% and
15.43% for tier 1 capital and risk weighted capital, respectively.
NOTE 22: GAIN ON EARLY PAYMENT OF LOAN
In January 1995, the note payable to the two limited partnerships
managed by WHR Management Corp. was modified to provide for a discount
for early payment. In November 1995, the note was paid in full.
Because the transaction was with a related party, the gain, $1,457, net
of expenses and income taxes, has been credited directly to
shareholders' equity.
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 the subsidiaries (the "Company") as of December 31,
1995 and 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of 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, 1995 and 1994,
the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
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 5, 1996
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, 1995. 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 1,000 shareholders as of December 31, 1995.
Price Information By 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
Dividend Information
There were no stock or cash dividends declared in 1995 or 1994.
Common Stock Listing
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol: SDNB.
BOARD OF DIRECTORS
SDNB Financial Corp.
(Individual pictures of SDNB Financial Corp. Board of Directors. From left
to right (top row) Charles I. Feurzig, Douglas E. Barnhart, Howard W.
Brotman, Julius H. Zolezzi, Karla Hertzog, (bottom row) Mark P. Mandell,
Margaret "Midge" Costanza, Murray L. Galinson, Patricia L. Roscoe and Robert
B. Horsman.)
(Group picture of SDNB Senior Management Team (from left to right): Robert
B. Horsman, Murray L. Galinson, Ronald P. Bird, Mark P. Mandell, Joyce
Chewning-Johnson, Howard W. Brotman.)
Board of Directors
Douglas E. Barnhart Howard W. Brotman
Chief Executive Officer, Director,
Douglas E. Barnhart, Inc. SDNB Financial Corp.
Senior Vice President,
San Diego National Bank
Margaret "Midge" Costanza Charles I. Feurzeig
Partner, Chairman of the Board,
Martin & Costanza SDNB Financial Corp;
Communications President,
PVCC, Inc.
Murray L. Galinson Karla J. Hertzog
Chief Executive Officer, President,
San Diego National Bank TOPS Total Personnel Services,
President, Chief Executive Officer, Inc.
SDNB Financial Corp.
Robert B. Horsman Mark P. Mandell
President, Attorney-at-Law
San Diego National Bank
Patricia L. Roscoe Julius H. Zolezzi
Chairman, President,
Patti Roscoe & Associates, Inc. Zolezzi Enterprises
Officers of SDNB Financial Corp.
Murray L. Galinson Robert B. Horsman
President, President,
Chief Executive Officer San Diego National Bank
Howard W. Brotman Joyce Chewning-Johnson
Senior Vice President, Secretary, Executive Vice President
Chief Financial Officer
San Diego National Bank
Business Advisory Council
John L. Baldwin Betty Byrnes
President, Medical Administrator
Baldwin Pacific Corp.
Shlomo Caspi Marvin Cohen
President, Architect
Caspi, Inc. & Caspi Enterprises
Michael H. Dessent Norman Eisenberg, CPA
Dean, Eisenberg & Bonk
California Western School Of Law
James T. Gianulis Wayne L. Hanson
President, President,
Pacific Income Properties, Inc. Cygnus Corp.
Warren O. Kessler, M.D. Ed Mendelsohn
Hillcrest Urological President,
Medical Group ESM & Associates
Rebecca Newman James S. Nierman
Real Estate Broker Real Estate Investor
Gordon W. Parkman Reint Reinders
President, President,
Parkman Realty Corp. San Diego Convention and
Visitors Bureau
Winifred Reno Nancy L. Scott
Owner, President,
The Plantry Capital Equities of La Jolla
C. Randolph Strada William Verbeck
President, President,
First San Diego Co.,Inc. WNV, Inc.
Arnold Winston
President,
BancCorp Companies, Inc.
San Diego National Bank
Senior Management Committee
Murray L. Galinson Robert B. Horsman
Chief Executive Officer President
Joyce Chewning-Johnson Howard W. Brotman
Executive Vice President Senior Vice President,
Chief Financial Officer
Ronald P. Bird Mark P. Mandell
Senior Vice President, Director of Strategic Planning
Director of Business Services and Business Development
San Diego National Bank Officers
Gail Jensen-Bigknife Richard Nance
Senior Vice President, Senior Vice President,
Real Estate Department Credit Administration
Nancy A. Aul Paul A. Fairweather
Vice President, Vice President,
Commercial Banking Group Commercial Banking Group,
Manager
Julius J. Kukta Eric W. Larson
Vice President, Vice President,
Corporate Banking Group Finance
Rafael Martinez Pamela A. McMahon
Vice President, Vice President, Manager,
International Banking Corporate Banking Group
John K. McNulty Debra Perkins
Vice President, Vice President,
Business Development Manager Compliance
Connie M. Reckling Roger Remnant
Vice President, Vice President
Human Resources Real Estate Department
Carlos Rivera Dawn Serafin
Vice President, Vice President,
Lending Manager, Operations
South Bay Office
Margherita Stutz John G. Weaver
Vice President, Vice President,
Corporate Banking Group Commercial Banking Group
Don R. Wolfe Kristy Gregg
Vice President, Assistant Vice President,
Corporate Administration Community Relations Manager
Kaye Hobson JoAnn Piper
Assistant Vice President, Assistant Vice President,
Finance Business Services
Carol A. States Cynthia Velez
Assistant Vice President, Assistant Vice President,
Commercial Banking Group Operations
Willie Armas Barbara J. Bellini
Operations Officer Operations Officer
Daryl Durham Linda Eggen
EDP Manager Real Estate Administration
Officer
Susie Mummery Jacqueline M. Murphy
Administrative Officer Operations Officer
Susan Ohlendorf William D. Scheffel
Operations Officer, Corporate Banking Lending Officer
Bankcard Services
Thomas S. Sperla Mary Beth Wilder
Special Assets Manager Financial Analyst
SDNB Financial Corp., 1420 Kettner Boulevard, San Diego, CA 92101,
(619) 231-4989
SAN DIEGO NATIONAL BANK is a member of FDIC and an Equal Housing Lender