For immediate release

The Federal Reserve Board today announced its approval of the application of Santa Barbara Bancorp, Santa Barbara, to acquire Citizens State Bank of Santa Paula and thereby acquire Citizens State Bank, both in Santa Paula, and all in California. Attached is the Board's Order relating to this action.

Santa Barbara Bancorp Santa Barbara, California Order Approving the Acquisition of a Bank, the Merger of Banks, and Establishment of Branches

Santa Barbara Bancorp, Santa Barbara ("Bancorp"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval under section 3 of the BHC Act (12 U.S.C. § 1842) to acquire Citizens State Bank of Santa Paula, Santa Paula ("Citizens Bank"), both in California. Bancorp's subsidiary bank, Santa Barbara Bank and Trust, Santa Barbara, California ("SB Bank"), also has requested the Board's approval under section 18(c) of the Federal Deposit Insurance Act (12 U.S.C. § 1828(c)) (the "Bank Merger Act") to merge with Citizens Bank, and under section 9 of the Federal Reserve Act (12 U.S.C. 321) (the "FRA") to establish branches at the existing offices of Citizens Bank set forth in the appendix. Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (62 Federal Register 35,397 (1997)). As required by the Bank Merger Act, reports on the competitive effects of the merger were requested from the United States Attorney General ("Department of Justice"). The time for filing comments has expired, and the Board has considered the proposal and all comments received in light of the factors set forth in section 3(c) of the BHC Act, the Bank Merger Act, and the FRA. Bancorp is the 35th largest depository institution in California, controlling deposits of approximately $1 billion, representing less than 1 percent of total deposits in depository institutions in the state. Citizens Bank is the 252nd largest depository institution in California, controlling approximately $68 million in deposits, representing less than 1 percent of total deposits in depository institutions in the state.1 On consummation of the proposal, Bancorp would remain the 35th largest depository institution and continue to control less than 1 percent of total deposits in depository institutions in the state. SB Bank and Citizens Bank compete directly in the Oxnard-Ventura, California, banking market.2 SB Bank is the eighth largest depository institution in the banking market, controlling deposits of approximately $68 million, representing 2.4 percent of total deposits in depository institutions in the market ("market deposits"). Citizens Bank is the ninth largest depository institution in the Oxnard-Ventura market, controlling deposits of approximately $67.6 million, representing 2.4 percent of market deposits. On consummation of the proposal, SB Bank would become the fifth largest depository institution in the market, controlling deposits of approximately $135.6 million, representing approximately 5 percent of market deposits. Twenty-one competitors would remain in the Oxnard-Ventura banking market. The Herfindahl-Hirschman Index ("HHI") for the banking market would increase by 12 points to 1469.3 The increase in market concentration as measured by the HHI would be well within the Department of Justice Merger Guidelines. The Department of Justice has advised the Board that consummation of the proposal would not likely have any significantly adverse competitive effects in the Oxnard-Ventura banking market or any other relevant banking market. Based on these and all the facts of record, the Board concludes that consummation of the proposal is not likely to have a significantly adverse effect on competition or on the concentration of banking services in the Oxnard-Ventura banking market or any other relevant market. Other Factors The BHC Act and the Bank Merger Act also require the Board, in acting on an application, to consider the financial and managerial resources of the companies and banks involved, the convenience and needs of the communities to be served, and certain other supervisory factors. A. Financial, Managerial, and Other Supervisory Factors The Board has carefully considered the financial and managerial resources and future prospects of Bancorp, SB Bank, and Citizens Bank, and other supervisory factors in light of all the facts of record. The facts include supervisory reports of examination assessing the financial and managerial resources of the organizations, and confidential financial information provided by Bancorp. Based on these and all other facts of record, the Board concludes that all the supervisory factors under the BHC Act and the Bank Merger Act, including the financial and managerial resources and future prospects of the institutions involved, are consistent with approval of the proposal. B. Convenience and Needs Factor The Board also has carefully considered the effect of the proposal on the convenience and needs of the communities to be served in light of all the facts of record. In reviewing convenience and needs considerations, the Board notes that SB Bank provides a range of financial services including mortgage, consumer, agricultural and small business loans. SB Bank also provides financing for affordable housing and community development. Bancorp has indicated that SB Bank plans to continue to offer credit products currently offered by Citizens Bank and may adopt portions of Citizen Bank's program for helping to meet community credit needs into SB Bank's program after consummation of the proposal. Moreover, Bancorp expects that the acquisition of Citizens Bank would strengthen SB Bank's ability to provide financial services throughout the combined service areas, including service areas comprised primarily of low- and moderate-income ("LMI") individuals and small businesses. The Board also has long held that consideration of the convenience and needs factor includes a review of the records of the relevant depository institutions under the Community Reinvestment Act (12 U.S.C. § 2901 et seq.) ("CRA"). The CRA performance records of the institutions involved are reviewed below in light of all the facts of record, including comments received on the proposal. CRA Performance Examinations As provided in the CRA, the Board evaluates the convenience and needs factor in light of examinations of the CRA performance records of the relevant institutions by their primary federal supervisor. An institution's most recent CRA performance evaluation is a particularly important consideration in the applications process because it represents a detailed on-site evaluation of the institution's overall record of performance under the CRA by its primary federal supervisor.4 SB Bank received a "satisfactory" rating from the Federal Reserve Bank of San Francisco ("Reserve Bank") at its most recent examination for CRA performance, as of July 15, 1996 ("SB Bank Examination"). Citizens Bank received an "outstanding" rating from the Reserve Bank at its most recent examination for CRA performance, as of March 10, 1997. CRA Performance Record of SB Bank Lending. Examiners considered the overall lending activities of SB Bank to be very responsive to community credit needs. They noted that LMI census tracts comprised 37 percent of the bank's delineated community and that 41 percent of its loans were made to borrowers with zip codes in LMI areas during the period from July 1994 to July 1996 covered by the SB Bank Examination. Examiners also considered the geographic distribution of SB Bank's loans to be good and favorably noted that 92 percent of the bank's loans were made within its delineated community. The SB Bank Examination concluded that residential mortgage lending to LMI borrowers in the bank's delineated community was particularly difficult because of the high cost of housing in Santa Barbara County. To address housing-related credit needs, SB Bank offers a number of residential mortgage products5 and actively participates in programs that provide affordable housing to LMI individuals. Overall, the bank estimates that it made 17 loans totaling approximately $22.6 million to 9 affordable housing organizations and developers since 1996. The bank has, for example, provided financing to the Santa Barbara Housing Authority totaling approximately $5.9 million since 1996. In addition, SB Bank has made approximately $1 million in loans since 1996 through the Santa Barbara County Home Buyers Assistance Program for the South Coast Region. SB Bank also is affiliated with the Coastal Housing Partnership which offers a loan program with flexible underwriting guidelines called the Housing for Employees Loan Program. Since 1996, the bank has made 65 loans, totaling approximately $1.6 million through the program. SB Bank also provides financing to other developers specializing in the construction of affordable housing for LMI individuals in Santa Barbara and Ventura Counties.6 The SB Bank Examination also concluded that the bank was very responsive to the credit needs of small businesses. One SB Bank product, for example, offered small business loans in amounts less than $35,000 within 24 hours after completion of a one-page application. In addition, the bank's Community Banking Group focused on the credit needs of small businesses with less than $1 million in gross revenues. Examiners found that SB Bank made more than 1,000 commercial loans, totaling approximately $17.3 million, for amounts of less than $100,000, and 12 loans, totaling $11.1 million, for agricultural purposes, during the examination period. The SB Examination noted that although loans secured by mixed-use property were difficult to obtain in the community, SB Bank made 5 such loans totaling $2.5 million. In addition, examiners noted that the bank made 17 loans, totaling approximately $652,000 to start-up businesses.7 In 1996, SB Bank originated 696 small business loans, totaling approximately $52.4 million. SB Bank also made business development loans through its affiliation with the California Coastal Rural Development Corporation,8 and participated in a number of small business organizations, including Women's Economic Ventures, Santa Barbara Hispanic Chamber of Commerce, and Ventura County Economic Development. Marketing and Ascertainment. The SB Examination found that the bank's marketing program informed all segments of the community of general financial products and services offered, including those that had been developed to address identified community credit needs. Moreover, examiners considered the bank's ascertainment efforts to be satisfactory in light of management's regular contact with various community organizations and its formal call program. The examiners reported that senior management satisfactorily responded to local input regarding community credit needs and the changing marketplace. SB Bank established a Hispanic Marketing Committee to focus on the credit needs of Hispanic residents within its delineated community. In 1996, the bank made 116 small business loans, totaling $4.9 million, in the seven census tracts with the largest Hispanic populations in bank's delineated community. In addition, SB Bank has Spanish-speaking employees in 19 of its 21 branches, with 46 of its 224 employees available for Spanish-speaking customers.9 SB Bank also stated that it would more prominently display brochures in Spanish that describe the products and services available in all its branches. Branch Locations. The SB Bank Examination found that SB Bank's branches were readily accessible to all segments of SB Bank's community, that office hours and services were tailored toward the convenience and needs of the community, and that the bank periodically reviewed the effectiveness of its branches. Since the SB Bank Examination, the bank's branch closing policies have been modified to include the consideration of the impact of a branch closing on the community before closing the branch. SB Bank has not closed a branch since it was chartered 37 years ago, and it does not anticipate branch closings as a result of the proposal.10 Comments on the proposal. The Board has carefully reviewed comments contending that SB Bank's efforts in lending and outreach to LMI and minority residents, particularly Hispanic residents, are inadequate.11 These concerns are based, in large measure, on data filed by SB Bank under the Home Mortgage Disclosure Act (12 U.S.C. 2801 et seq.) ("HMDA").12 The Board has reviewed the 1994, 1995, and 1996 HMDA data reported by SB Bank in light of the comments. These data reflect some disparities in the rate of loan originations, denials, and applications by racial group or income level. The Board is concerned when the record of an institution indicates such disparities, and believes that all banks are obligated to ensure that their lending practices are based on criteria that ensure not only safe and sound lending, but also equal access to credit by creditworthy applicants regardless of race. The Board recognizes, however, that HMDA data alone provide an incomplete measure of an institution's lending in its community because these data cover only a few categories of housing-related lending. Moreover, HMDA data provide only limited information about the covered loans.13 HMDA data, therefore, have limitations that make the data an inadequate basis, absent other information, for concluding that an institution has engaged in illegal lending discrimination. In light of the limitations of HMDA data, the Board has carefully reviewed other information, particularly examination reports that provide an on-site evaluation of compliance with the fair lending laws by SB Bank. The SB Examination found no evidence of prohibited discrimination or illegal credit practices, and found the bank to be in substantial compliance with antidiscrimination laws and regulations.14 The record also indicates that SB Bank has taken a number of steps to ensure compliance with the fair lending laws. Examiners found, for example, that the board of directors and senior management have developed adequate policies and training programs supporting nondiscrimination in lending and credit activities. As a part of these programs, bank personnel receive periodic training in fair lending policy and compliance bulletins and articles regarding fair lending issues. Conclusion on Convenience and Needs Considerations The Board has carefully considered all the facts of record, including the public comments received, responses to those comments, and the CRA performance records of SB Bank and Citizens Bank, including relevant reports of examination.15 Based on a review of the entire record, and for the reasons discussed in this order, the Board has concluded that convenience and needs considerations, including the CRA records of performance of SB Bank and Citizens Bank, are consistent with approval of this proposal. C. FRA Factors SB Bank also has applied under section 9 of the FRA to establish branches at the offices of Citizens Bank listed in the appendix. The Board has considered the factors it is required to consider when reviewing applications for establishing branches pursuant to the FRA and, for the reasons discussed in this order, finds those factors to be consistent with approval. Conclusion For these reasons, and in light of all the other facts of record, the Board has determined that the application should be, and hereby is, approved.16 The Board's approval is expressly conditioned on compliance with all the commitments made in connection with the applications. The commitments relied on by the Board in reaching this decision shall be deemed to be conditions imposed in writing by the Board in connection with its findings and decision, and, as such, may be enforced in proceedings under applicable law. The transactions shall not be consummated before the fifteenth calendar day following the effective date of this order, or later than three months after the effective date of this order, unless such period is extended for good cause by the Board or by the Federal Reserve Bank of San Francisco, acting pursuant to delegated authority.

By order of the Board of Governors,17 effective August 21, 1997. (signed) Jennifer J. Johnson Jennifer J. Johnson Deputy Secretary of the Board

Appendix Branches of SB Bank to be established at Citizens Bank locations: 1. 948 East Main Street, Santa Paula, California 93060 2. 537 West Harvard Boulevard, Santa Paula, California 93060 3. 316 Central Avenue, Fillmore, California 93015

Footnotes 1 In this context, depository institutions include commercial banks, savings banks, and savings associations. State deposit, market share, and rank data are as of June 30, 1996, and incorporate structural changes through May 1997. Market share data are based on a calculation in which the deposits of thrift institutions are included at 50 percent. The Board previously has indicated that thrift institutions have become, or have the potential to become, significant competitors of commercial banks. See WM Bancorp, 76 Federal Reserve Bulletin 788 (1990); National City Corporation, 70 Federal Reserve Bulletin 743 (1984). Thus, the Board has regularly included thrift deposits in the calculation of market share on a 50-percent weighted basis. See, e.g., First Hawaiian Inc., 77 Federal Reserve Bulletin 52 (1991). 2 The Oxnard-Ventura banking market is approximated by the Oxnard-Ventura RMA and the towns of Fillmore, Ojai, Piru, Port Hueneme and Santa Paula, all in California. 3 Under the revised Department of Justice Merger Guidelines, 49 Federal Register 26,823 (June 29, 1984), a market in which the post-merger HHI is between 1000 and 1800 is considered to be moderately concentrated. The Department of Justice has informed the Board that a bank merger or acquisition generally will not be challenged (in the absence of other factors indicating anticompetitive effects) unless the post-merger HHI is at least 1800 and the merger increases the HHI by more than 200 points. The Department of Justice has stated that the higher than normal HHI thresholds for, screening bank mergers for anticompetitive effects implicitly recognize the competitive effect of limited-purpose lenders and other nondepository financial entities. 4 The Statement of the Federal Financial Supervisory Agencies Regarding the Community Reinvestment Act ("Agency CRA Statement") provides that a CRA examination is an important and often controlling factor in the consideration of an institution's CRA record, and that reports of these examinations will be given great weight in the applications process. 54 Federal Register 13,742, 13,745 (1989). 5 Examiners noted that SB Bank offered 50 different residential mortgage loans and had made 496 mortgage loans totaling $103 million during the examination period. Examiners concluded that SB Bank's overall lending levels reflect responsiveness to the community's credit needs. 6 SB Bank has operated in Ventura County for approximately two years and would expand its presence in the county through the acquisition of Citizens Bank. SB Bank has developed programs for LMI residents in Ventura County similar to the programs offered in Santa Barbara County. 7 SB Bank estimates that since 1996, the bank made 14 business development loans totaling approximately $698,000 to 13 small businesses. 8 Examiners noted that SB Bank made 13 small business loans totaling $1 million in affiliation with this non-profit small business development organization. 9 The two branches without Spanish speaking employees are located in areas with small Hispanic populations. 10 The Board previously has noted that federal banking law addresses branch closings by specifically requiring an insured depository institution to provide notice to the appropriate regulatory agency prior to closing a branch. See section 42 of the Federal Deposit Insurance Corporation Act (12 U.S.C. § 1831r-1), as implemented by the Joint Policy Statement Regarding Branch Closing (58 Federal Register 49,083 (1993)). The statute, however, does not authorize the federal regulators to prevent the closing of any branch. Similarly, the BHC Act and the Bank Merger Act do not make approval of a proposal contingent on an applicant's commitment to keep open all branches of the resulting institution. Instead, branch closings resulting from a proposed acquisition are reviewed insofar as they affect the general availability of bank services and offices as one of the several factors the Board considers in assessing the effect of the acquisition on the convenience and needs of the community to be served. See Westamerica Bank, 83 Federal Reserve Bulletin 614 (1997). 11 The commenters are The California Reinvestment Committee, the Santa Clara Valley Citizens for Economic Vitality and the Board of Supervisors of Ventura County. The Board also has received submissions from commenters and SB Bank regarding information provided to the commenters by SB Bank after the close of the comment period. The comments discuss efforts by commenters to resolve issues raised in their timely comments through commitments to increase lending to affordable housing projects, small businesses, community development projects, and to increase other CRA-related activities. Although the Board has indicated in previous orders and in the Agency CRA Statement that communication by depository institutions with community groups provides a valuable method of assessing and determining how best to address the credit needs of the community, the Board concludes that the substance of the comments does not involve matters required to be considered by the Board. Neither the CRA nor the Agency CRA Statement require an insured depository institution to enter into commitments with community representatives. In reviewing an application under the BHC Act and the Bank Merger Act, the CRA and the Agency CRA Statement instead require the Board to focus on the established record of performance of the institutions involved and the programs and policies that the institutions have in place to assist in meeting the credit needs of their entire communities. In this case, the facts of record indicate that SB Bank has programs to help meet the credit needs of its community. 12 Commenters also maintain SB Bank should establish a branch in Piru, California, to serve the unmet banking needs of the LMI residents in this small rural community. As discussed above, the SB Bank Examination found that the bank's branches were readily accessible to all segments of SB Bank's community. Moreover, SB Bank would acquire and keep open a branch of Citizens Bank located in Fillmore, California, which is approximately seven miles from Piru. The record indicates that residents in this area of California regularly drive to work in Valencia and Ventura which are located 10 miles and 33 miles, respectively, from Piru. In this light, Piru residents would continue to have reasonable access to banking services from SB Bank after consummation of the proposal. 13 These data, for example, do not provide a basis for an independent assessment of whether an applicant who was denied credit was, in fact, creditworthy. Credit history problems and excessive debt levels relative to income -- reasons most frequently cited by a credit denial -- are not available from HMDA data. 14 Commenters point out that examiners noted widespread violations of technical provisions of Regulation C and HMDA in the SB Examination. In considering the overall managerial record and convenience and needs factor in this case, the Board has carefully reviewed these violations in light of information regarding the type and scope of the violations, the response of SB Bank to the findings, and additional supervisory information. The Board concludes that SB Bank's response adequately addresses the issues raised by examiners at this time. If future examinations by the Reserve Bank indicate that additional steps are necessary, the Board retains sufficient supervisory authority to require corrective action. 15 Commenters contend that SB Bank's CRA performance rating should have been less than satisfactory in light of certain remarks made by examiners in the SB Examination. Commenters also maintain that the acquisition of Citizens Bank by a bank with a lower CRA performance rating raises concerns about the possible adverse impact the acquisition will have on the community currently served by Citizens Bank. Although the SB Bank Examination noted some areas in which bank could improve its CRA performance, the examiners rated the bank's overall performance as "satisfactory." In addition, SB Bank has initiated measures that satisfactorily respond to the examiners' comments. Moreover, SB Bank's record of CRA performance indicates that the convenience and needs of the communities currently served by Citizens Bank would continue to be served after consummation of the proposal in a manner consistent with the requirements of the BHC Act, the Bank Merger Act, and the CRA. 16 Commenters have requested that the Board hold a public hearing or meeting on this proposal. Section 3(b) of the BHC Act does not require the Board to hold a public hearing on an application unless the appropriate supervisory authority for the bank to be acquired makes a timely written recommendation of denial of the application. In this case, the Board has not received such a recommendation from any state or federal supervisory authority. In addition, neither the Bank Merger Act nor the FRA require a public meeting on an application. Under its rules, the Board also may, in its discretion, hold a public hearing or meeting on an application or notice to clarify factual issues related to the proposal and to provide an opportunity for testimony. See 12 C.F.R. 225.25(a)(2), 262.3(e), and 262.25(d). The Board has carefully considered commenters' requests for a hearing or meeting in light of all the facts of record. In the Board's view, commenters have had ample opportunity to submit views, and have, in fact, provided written submissions that have been considered by the Board in acting on this proposal. The requests fail to demonstrate why these written submissions do not adequately present commenters' allegations. After a careful review of all the facts of record, the Board has concluded that these requests fail to identify any genuine dispute about facts that are material to the Board's decision or any other basis on which a hearing or meeting would be warranted. Based on all the facts of record, the Board has determined that a public hearing or meeting is not necessary to clarify the factual record in the proposal, and is not otherwise warranted in this case. Accordingly, the request for a public hearing or meeting on the proposal is hereby denied. 17 Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Kelley, Phillips, and Meyer.

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1997 Orders on banking applications