1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1996
Commission file number 2-76555
SDN BANCORP, INC.
(Exact name of small business issuer in its charter)
Delaware 95-3683748
--------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer or
incorporation or organization) Identification No.)
135 Saxony Road, Encinitas, California 92024-0905
--------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(619) 436-6888
--------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 4,289,272 shares outstanding on August 10, 1996
2
SDN BANCORP, INC.
U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
INDEX
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition - 3
June 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations 5
For the three months ended June 30, 1996 and 1995
Condensed Consolidated Statements of Operations 6
For the six months ended June 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows - 7
For the six months ended June 30, 1996 and 1995
Notes to the Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis or Plan of Operation 12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 20
3
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
SDN BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Condition
June 30, 1996 and December 31, 1995
June 30, December 31,
1996 1995
(Unaudited)
-------------- -----------
Assets
Cash and due from banks $14,163,000 $ 3,640,000
Federal funds sold 5,500,000 2,300,000
------------ ----------
Total cash and cash equivalents 19,663,000 5,940,000
Interest bearing deposits in other
financial institutions 1,606,000 989,000
Held-to-maturity investment securities at
amortized cost, approximate fair value
June 30, 1996 $6,117,000;
December 31, 1995 $7,057,000 6,144,000 7,009,000
Available-for-sale investment securities 42,843,000 -
Loans 125,787,000 38,977,000
Less allowance for loan loss 2,531,000 639,000
----------- ----------
Loans, net 123,256,000 38,338,000
Premises and equipment, net 1,981,000 597,000
Real estate acquired through foreclosure, net 1,957,000 1,411,000
Goodwill 3,685,000 -
Accrued interest receivable and
other assets 4,057,000 1,621,000
------------ -----------
Total assets $205,192,000 $55,905,000
========== =========
See notes to condensed consolidated financial statements.
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SDN BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Condition (Continued)
June 30, 1996 and December 31, 1995
June 30, December 31,
1996 1995
(Unaudited)
------------ ------------
Liabilities and Shareholders' Equity
Deposits:
Demand:
Non-interest bearing $44,182,000 $13,445,000
Interest bearing 17,531,000 10,582,000
Savings:
Regular 23,700,000 4,714,000
Money market 12,923,000 8,558,000
Time:
Under $100,000 80,263,000 11,580,000
$100,000 or more 7,191,000 2,552,000
----------- ----------
Total deposits 185,790,000 51,431,000
Accrued expenses and other liabilities 1,674,000 396,000
Mandatory Convertible Debentures 537,000 537,000
----------- ----------
Total liabilities 188,001,000 52,364,000
Shareholders' equity:
Common stock, $.01 par value,12,000,000
shares authorized 4,289,272 issued and
outstanding at June 30, 1996 43,000 9,000
Additional paid-in capital 20,966,000 7,593,000
Accumulated deficit (3,838,000) (4,061,000)
Unrealized gain on securities
available-for-sale 20,000 -
------------ -----------
Total shareholders' equity 17,191,000 3,541,000
------------ -----------
Total liabilities and shareholders'
equity $205,192,000 $55,905,000
========== ==========
See notes to condensed consolidated financial statements.
5
SDN BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months ended June 30, 1996 and 1995
(Unaudited)
Three Months Ended June 30,
---------------------------
1996 1995
------------ -----------
Interest Income:
Interest and fees on loans $ 3,765,000 $1,037,000
Interest on Federal funds sold 247,000 19,000
Interest on deposits with financial
institutions 25,000 15,000
Interest on investment securities,
substantially all taxable 540,000 73,000
-------------- -----------
Total interest income 4,577,000 1,144,000
Interest Expense:
Deposits 1,729,000 421,000
Other borrowed funds 15,000 57,000
-------------- -----------
Total interest expense 1,744,000 478,000
-------------- -----------
Net interest income 2,833,000 666,000
Provision for loan losses 92,000 40,000
-------------- -----------
Net interest income after
provision for loan losses 2,741,000 626,000
Non-interest income 337,000 130,000
Non-interest expense 2,740,000 1,076,000
-------------- -----------
Net income (loss) before taxes 338,000 (320,000)
Income tax (133,000) -
-------------- -----------
Net income (loss) $205,000 $ (320,000)
======== ========
Income (loss) per common and common
equivalent share $ 0.05 $ (5.95)
Average shares and common stock equivalents 4,289,257 53,728
See notes to condensed consolidated financial statements.
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SDN BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Six months ended June 30, 1996 and 1995
(Unaudited)
Six Months Ended June 30,
-----------------------------------------
1996 1995
-------------- --------------
Interest Income:
Interest and fees on loans $ 4,684,000 $2,107,000
Interest on Federal funds sold 296,000 47,000
Interest on deposits with financial institutions 37,000 30,000
Interest on investment securities,
substantially all taxable 626,000 138,000
-------------- -----------
Total interest income 5,643,000 2,322,000
Interest Expense:
Deposits 2,021,000 826,000
Other borrowed funds 31,000 110,000
-------------- -----------
Total interest expense 2,052,000 936,000
-------------- -----------
Net interest income 3,591,000 1,386,000
Provision for loan losses 127,000 100,000
-------------- -----------
Net interest income after
provision for loan losses 3,464,000 1,286,000
Non-interest income 499,000 264,000
Non-interest expense 3,602,000 2,000,000
-------------- -----------
Net income (loss) before taxes 361,000 (450,000)
Income tax (138,000) -
-------------- -----------
Net income (loss) $223,000 $ (450,000)
======== ========
Income (loss) per common and common
equivalent share $ 0.08 $ (8.38)
Average shares and common stock equivalents 2,666,920 53,728
See notes to condensed consolidated financial statements.
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SDN BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1996 and 1995
(Unaudited)
For six months ended June 30,
----------------------------
1996 1995
----------------- ------------
Operating Activities:
Net income (loss) $ 223,000 $ (450,000)
Adjustments to reconcile net loss to net
cash used by operating activities:
Provision for loan losses and real estate
acquired through foreclosure 127,000 100,000
Loss (gain) on sale of real estate acquired
through foreclosure (76,000) 70,000
Depreciation and amortization 19,000 98,000
Decrease (increase) in other assets (237,000) 55,000
Decrease in other liabilities (151,000) (102,000)
----------------- -----------
Net cash used by operating activities (95,000) (229,000)
Investing Activities:
Decrease (increase) in interest bearing deposits
with other financial institutions (20,000) 189,000
Purchases of investment securities (24,027,000) (1,500,000)
Proceeds from sales and maturities of
investment securities 17,867,000 1,608,000
Net decrease (increase) in loans (682,000) 3,909,000
Purchases of premises and equipment (337,000) (4,000)
Proceeds from the sale of premises and equipment 48,000 -
Proceeds from sale of real estate acquired
through foreclosures 1,394,000 213,000
Capital expenditures for other real estate owned (310,000) -
Purchase of Liberty National Bank, net of cash
received 7,283,000 -
----------------- ---------
Net cash provided by investing activities 1,216,000 4,415,000
Financing Activities:
Net decrease in deposits (805,000) (2,873,000)
Issuance of common stock 13,407,000 -
------------------ ---------
Net cash provided by financing activities 12,602,000 (2,873,000)
------------------ -----------
Net Increase in cash and cash equivalents 13,723,000 1,313,000
Cash and cash equivalents at beginning of period 5,940,000 2,842,000
----------------- ----------
Cash and cash equivalents at end of period $19,663,000 $4,155,000
========== ========
See notes to condensed consolidated financial statements.
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SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Noncash transactions-
Other real estate sold and financed
by the bank - $115,000
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. The accompanying
financial information has been prepared in accordance with the Securities and
Exchange Commission rules and regulations for quarterly reporting and
therefore does not necessarily include all information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles. The interim financial data is
unaudited; however, in the opinion of Management, the interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair statement of the results for the interim periods. This information
should be read in conjunction with the Annual Report of SDN Bancorp, Inc.
("Bancorp" or the "registrant") on Form 10-K for the year ended December 31,
1995.
NOTE 2 - EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year and dilutive
common stock equivalents by using the treasury stock method. The weighted
average number of common shares used to compute earnings per share were
4,289,257 and 2,666,920 for the three and six months ended June 30, 1996,
respectively, and 53,728 for the three and six months ended June 30, 1995.
All per share amounts for the six months ended June 30, 1995 have been
restated to give effect to the one for twenty-one reverse stock split and the
26,864 common stock dividend declared during September 1995.
The assumed conversion of the mandatory convertible debentures
("Debentures") is anti-dilutive for the periods ended June 30, 1996 and 1995.
Therefore, primary income and loss per share and income and loss per share
assuming full dilution are the same for both periods.
NOTE 3 - MERGER
On March 31, 1996, completed its acquisition (the "Liberty Acquisition")
of Liberty National Bank ("Liberty") for approximately $15.1 million in cash
as contemplated by the October 26, 1995 Agreement and Plan of Merger by and
among the registrant, Liberty, and Dartmouth Capital Group, L.P., a Delaware
limited partnership ("the Partnership") and the registrant's controlling
shareholder. Liberty is headquartered in Huntington Beach, California and had
total assets of approximately $149 million prior to the Liberty Acquisition.
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As of March 27, 1996, the Partnership invested approximately $13.4
million in the registrant to fund the Liberty Acquisition. In exchange for
that investment, the registrant issued a total of 3,392,405 additional shares
of Common Stock at a price per share of $3.95, the registrant's book value per
share as of December 31, 1995. At the Partnership's direction the registrant
issued 1,764,000 of those shares of Common Stock, in the aggregate, to certain
limited partners of the Partnership (the "Direct Holders") and the remaining
1,628,405 shares of Common Stock directly to the Partnership. Giving effect
to the issuance of those shares to fund the Liberty Acquisition, the
Partnership owns 48.0% of the Common Stock and the Direct Holders own, in the
aggregate, 50.75% of the Common Stock.
The Liberty Acquisition was accounted for using the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations". Under this method of accounting, the purchase price
was allocated to the assets acquired and deposits and liabilities assumed
based on their fair values as of the acquisition date. The consolidated
financial statements include the operations of Liberty from the date of
acquisition. Goodwill arising from the transaction totaled approximately $3.8
million and is being amortized over ten years on a straight line basis.
The following table sets forth selected unaudited pro forma combined
financial information of Bancorp and Liberty for six months ended June 30,
1996 and 1995. The pro forma operating data reflects the effect of the
acquisition of Liberty as if it was consummated at the beginning of each
period presented. The pro forma results are not necessarily indicative of the
results that would have occurred had the acquisition been in effect for the
full years presented, nor are they necessarily indicative of the results of
future operations.
Pro Forma Combined for
Six Months Ended June 30,
------------------------------
1996 1995
(Unaudited) (Unaudited)
--------------- --------------
Interest Income $9,157,000 $8,575,000
Interest Expense 3,494,000 3,539,000
--------------- --------------
Net interest income 5,663,000 5,036,000
Provision for loan losses 157,000 250,000
--------------- --------------
Net interest income after
provision for loan losses 5,506,000 4,786,000
Non-interest income 619,000 1,380,000
Non-interest expense 5,404,000 5,910,000
--------------- --------------
Net income before taxes 721,000 256,000
Income tax 284,000 274,000
--------------- --------------
Net income (loss) $ 437,000 $ (18,000)
========= ========
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On April 23, 1996, Bancorp entered into an Agreement and Plan of
Reorganization with Commerce Security Bank ("Commerce") that provides for
Bancorp's acquisition of Commerce (the "Commerce Acquisition") for a
combination of cash and stock. As of June 30, 1996, Commerce Security had
total assets of $228.2 million and total shareholders' equity of $16.3
million. The Commerce Acquisition is expected to be accounted for using the
purchase method of accounting for business combinations. The completion of
the Commerce Acquisition is subject to receipt of all regulatory and
shareholder approvals.
NOTE 4 - LONG LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (FAS) No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which
Bancorp adopted as required on January 1, 1996. Pursuant to this Statement,
companies are required to investigate potential impairments of long-lived
assets, certain identifiable intangibles, and associated goodwill, on an
exception basis, when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized when the sum of the expected future net
cash flows is less than the carrying amount of the asset. The adoption of FAS
121 did not have a significant impact on Bancorp's financial position or
results of operations.
[THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This information should be read in conjunction with the consolidated
financial statements and the notes thereto included in Item 1 of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 1995 contained in the
1995 Annual Report of SDN Bancorp, Inc. ("Bancorp") on Form 10-K.
Except for the historical information contained herein, the following
discussion contains forward looking statements that involve risks and
uncertainties. Bancorp's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not specifically limited to, changes in regulatory climate,
shifts in interest rate environment, change in economic conditions of various
markets Bancorp serves, as well as the other risks detailed in this section,
and in the sections entitled Results of Operations and Liquidity and Capital
Resources, and those discussed in Bancorp's Form 10-K for the year ended
December 31, 1995.
SUMMARY
Bancorp owns 100% of San Dieguito National Bank ("SDNB"). Additionally,
as of March 31, 1996, the registrant completed the Liberty Acquisition as
described in the footnotes to the accompanying consolidated condensed
financial statements. The acquisition of Liberty was accounted for using the
purchase method of accounting for business combinations . Accordingly, the
following discussion relates to the operating results of SDNB for the six
months ended June 30, 1996 and the operating results of Liberty for the three
months ended June 30, 1996 and the financial condition of both Liberty and
SDNB (collectively the "Banks").
On April 23, 1996, Bancorp entered into an Agreement and Plan of
Reorganization with Commerce Security Bank ("Commerce") that provides for
Bancorp's acquisition of Commerce (the "Commerce Acquisition") for a
combination of cash and stock. As of June 30, 1996, Commerce had total assets
of $228.2 million and total shareholders' equity of $16.3 million. The
Commerce Acquisition is expected to be accounted for using the purchase method
of accounting for business combinations.
The Commerce Acquisition is subject to approval by the Board of
Governors of the Federal Reserve System (the "FRB") and to the approval of the
Superintendent of Banks of the State of California (the "Superintendent").
The Federal Reserve Bank of San Francisco, acting under authority delegated to
it by the FRB, approved the Commerce Acquisition on July 22, 1996. Prior to
the date of this quarterly report application has been made with the
Superintendent with respect to the Commerce Acquisition but the Superintendent
has not yet ruled on that application.
The Commerce Acquisition will not proceed until all regulatory approvals
required to consummate the Commerce Acquisition have been obtained, such
approvals are in full force and effect and all statutory waiting periods in
respect thereof have expired. There can be no assurance that the remaining
approvals necessary to complete the Commerce Acquisition will be obtained. If
such approvals are received, there can be no assurance as to the date of such
approvals or the absence of any litigation challenging such approvals. The
Commerce
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Acquisition is also subject to receipt of shareholder approvals and to the
satisfaction of other customary closing conditions.
FINANCIAL CONDITION
Total assets of Bancorp at June 30, 1996 were $205.1 million compared to
total assets of $55.9 million at December 31, 1995. The increase in total
assets since December 31, 1995 is attributed primarily to the assets of
Liberty, acquired on March 31, 1996, that had total assets of $149.9 million
at June 30, 1996. Total earning assets of Bancorp at June 30, 1996 were
$181.9 million compared to total earning assets of $49.3 million at December
31, 1995. Earning assets increased primarily due to the Liberty Acquisition.
Liberty had total earning assets of $135.3 million at June 30, 1996.
Total loans of Bancorp at June 30, 1996 were $125.8 million compared to
$39.0 million at December 31, 1995. Loans acquired in the Liberty Acquisition
account for the increase in total loans, loans at Liberty at June 30, 1996
were $86.5 million. The Bank's four largest lending categories are: (i)
commercial real estate loans; (ii) other loans secured by real estate; (iii)
commercial loans and (iv) loans to individuals. At June 30, 1996, these
categories accounted for approximately 53%, 20%, 17% and 10% of total loans,
respectively.
Included among the Banks' portfolio of loans are SBA loans made by the
Banks guaranteed by the United States Government to the extent of 75% to 90%
of the principal and interest due on such loans. Liberty and SDNB are active
in originating this type of loan. Liberty generally sells the government
guaranteed portion of these loans to participants in the secondary market and
retains servicing responsibilities and the unguaranteed portion of the loans
while SDNB generally retains the entire loan for its own portfolio. Liberty
may in the future retain a greater portion of these loans as more loans may be
made for construction purposes for which Liberty holds the entire principal
until completion of the project and then sells the government guaranteed
portion.
The government guaranteed portion of the SBA loans are sold at a
premium, a portion of which is immediately recognized as income. The
remaining premium, representing estimated normal servicing fees or a yield
adjustment on the portion of the SBA loan retained by the Banks, is deferred
and recognized as income over the estimated life of the loan. Deferred SBA
servicing fees for Liberty were approximately $1.6 million at June 30, 1996.
The total SBA loan portfolio serviced by Liberty at June 30, 1996 was
approximately $140.7 million and included in this amount was approximately
$32.4 million representing the portion of the SBA loans retained by Liberty.
The total SBA loan portfolio serviced by SDNB at June 30, 1996 was
approximately $4.8 million and included in this amount was approximately
$4.2 million representing the portion of the SBA loans retained by SDNB.
Total investments of Bancorp at June 30, 1996 were $56.1 million
compared to $10.3 million at December 31, 1995. Investment securities
increased largely due to the Liberty Acquisition, investments at Liberty at
June 30, 1996 were $48.8 million. The investment portfolio is largely
comprised of U.S. government and municipal securities, Federal funds sold and
certificates of deposits held at other depository institutions. U.S.
government and municipal securities were $49.0 million, or 87.3% of the total
portfolio, of which $6.1 million are held to maturity and $42.8 million are
available for sale. Federal funds sold and certificates of deposit
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were $5.5 million and $1.6 million, respectively, or 9.8% and 2.9% of the
total portfolio, respectively.
Total deposits were $185.8 million at June 30, 1996 compared to $51.4
million at December 31, 1995. The increase in total deposits since December
31, 1995 is attributed to the addition of Liberty's deposits that were $136.1
million at June 30, 1996. Non-interest bearing demand accounts were $44.2
million, or 23.8% of total deposits, at June 30,1996. Interest bearing
deposits are comprised of interest bearing demand accounts, regular savings
accounts, money market accounts, time deposits of under $100,000 and time
deposits of $100,000 or more which were $17.5 million, $23.7 million, $12.9
million, $80.3 million and $7.2 million, respectively, or 9.4%, 12.8%, 6.9%,
43.2% and 3.9% of total deposits, respectively.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996
For the three months ended June 30, 1996, Bancorp had net income of
$205,000 compared to a net loss of $320,000 for the same period in 1995. The
improvement in 1996 earnings over the same period in 1995 is primarily
attributable to the acquisition of Liberty, for which the results of
operations for the three months ended June 30, 1996 are included in the
Bancorp results of operations for the three months ended June 30, 1996.
Compared to the prior year results, the improvements stem from a combination
of increased net interest income of approximately $2.1 million and non-interest
income of approximately $207,000 partially offset by increased loan
loss provision of $52,000, non-interest expense of approximately $1.7 million
and provision for taxes of $133,000.
Net Interest Income and Net Interest Margin
Net interest income was approximately $2.7 million for the three months
ended June 30, 1996, an increase of $2.1 million over the same period in 1995.
An increase in interest and fee income of approximately $3.4 million partially
offset by increased interest expense of $1.3 million contributed to this
earnings improvement.
Loans, the largest component of earning assets, increased to an average
balance of $122.8 million for the three months ended June 30, 1996 from $42.4
million for the three months ended June 30, 1995, with an average yield of
10.6% and 10.0%, respectively. Investments in securities and Federal funds
sold rose to an average of $61.4 million for the three months ended June 30,
1996 from an average of $7.0 million for the three months ended June 30,
1995, with an average yield of 5.3% and 6.2%, respectively. Further, loan
fee income increased to $85,000 for the three months ended June 30, 1996
compared to $26,000 for the same period in 1995. The yield on earning assets
declined to 8.8% for the three months ended June 30, 1996 from 9.5% for the
same period in 1995. The decline in yield on earning assets can largely be
attributed to a shift in the mix of loans as a percent of earning assets where
the percent of average loans to average earning assets during the three months
ended June 30, 1996 declined to 66.7% from the 85.9% for the same period in
1995. Additionally, the average prime rate (the rate to which the majority of
rates the Banks' loans are indexed) during the three months ended June 30,
1996 was 8.25% compared to 9.00% for the same period in 1995.
Average interest-bearing deposits increased to $150.1 million for the
three months ended
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June 30, 1996 from $44.1 million for the same period in 1995.
Additionally, the average rate paid on these deposits increased to 4.6% during
the three months ended June 30, 1996 compared to 3.9% during the same period
in 1995. Further, as a result of the recapitalization of Bancorp that
occurred in September 1995, other borrowing declined to $537,000 with an
average rate of 11.3% from $1.9 million at an average rate of 11.8%. The
average rate paid on interest-bearing liabilities was 3.7% for the three
months ended June 30, 1996 compared to 4.3% for the same period in 1995. This
decrease represents an overall increase in rates paid on deposit liabilities
and offset by a change in the mix of interest bearing liabilities.
As a result of these forgoing factors, the average yield on earning
assets decreased to 5.0% for the three months ended June 30, 1996 compared to
5.5% for the same period in 1995.
Allowance and Provision for Loan Losses
The allowance for loan losses represents the amounts which have been set
aside for the specific purpose of absorbing losses which may occur in the
Banks' loan portfolio. The provision for loan losses is an expense charged
against operating income and added to the allowance for loan losses.
Management of the Banks continue to carefully monitor the allowance for loan
losses in relation to the size of the Banks' loan portfolio and known risks or
problem loans.
The allowance for loan losses at Bancorp was approximately $2.5 million
at June 30, 1996 compared to approximately $639,000 at December 31, 1995. The
increase in the allowance for loan losses is primarily attributable to the
Liberty Acquisition where Liberty's allowance at March 31, 1996 was
approximately $1.8 million. During the three months ended June 30, 1996, the
provision for loan losses was $92,000, loan charge-offs were $33,000 and
recoveries were $79,000. The allowance for loan losses for Bancorp
represented 2.0% of net loans at June 30, 1996 and 1.6% at December 31, 1995.
Non-Interest Income
Non-interest income for the three months ended June 30, 1996 was $337,
000 compared to $130,000 for the same period in 1995. Non-interest income from
Liberty for the quarter, approximately $134,000, is primarily attributable to
this improvement in non-interest income. Additionally, SDNB received an
insurance settlement of approximately $70,000 during the quarter that accounts
for most of the balance of this improvement.
Non-Interest Expenses
Non-interest expense for the three months ended June 30, 1996 was
approximately $2.7 million, an increase of $1.6 million from $1.1 million for
the same period in 1995. Non-interest expense at Liberty for the three
months ended June 30, 1996 was approximately $1.8 million that was partially
offset by improvements in non-interest expense at SDNB. The majority of this
improvement at SDNB occurred in the area of other expenses of approximately
$160,000 related primarily to foreclosure costs and the costs associated with
foreclosed properties. Additionally, SDNB had reduced costs for salaries and
benefits due to staffing reductions of approximately $87,000 partially offset
by an increase in occupancy expense of approximately $55,000 associated with a
one time mark-to-market adjustment of $61,000 made in conjunction with the
16
sub-leasing of space in SDNB's Encinitas office.
Provision for Income Taxes
As a result of the earnings for the three months ended June 30, 1996, a
$133,000 provision for income taxes was made where there was no provision for
income tax made for the same period in 1995.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996
For the six months ended June 30, 1996, Bancorp had net income of
$223,000 compared to a net loss of $450,000 for the same period in 1995. The
improvement in 1996 earnings over the same period in 1995 is primarily
attributable to the acquisition of Liberty, for which the results of
operations for the three months ended June 30, 1996 are included in the
Bancorp results of operations for the six months ended June 30, 1996.
Compared to the prior year results the improvements stem from a combination of
increased net interest income of approximately $2.2 million and non-interest
income of approximately $235,000 partially offset by increased loan loss
provision of $27,000, non-interest expense of approximately $1.6 million and
provision for taxes of $138,000.
Net Interest Income and Net Interest Margin
Net interest income was approximately $3.6 million for the six months
ended June 30, 1996, an increase of $2.2 million over the same period in 1995.
An increase in interest and fee income of approximately $3.3 million partially
offset by increased interest expense of $1.1 million contributed to this
earnings improvement.
Loans, the largest component of earning assets, increased to an average
balance of $80.2 million for the first six months of 1996 from $43.3 million
for the first six months of 1995, with an average yield of 10.4% and 8.4%
respectively. Investments in securities and Federal funds sold rose to an
average of $35.9 million for the first six months of 1996 from an average of
$7.3 million for the first six months of 1995, with an average yield of 5.4%
and 5.9% respectively. Further, loan fee income increased to $142,000 for the
first six months of 1996 compared to $56,000 for the same period in 1995. The
yield on earning assets declined to 8.9% for the first six months of 1996 from
9.2% for the same period in 1995. The decline in yield on earning assets can
largely be attributed to a shift in the mix of loans as a percent of earning
assets where the percent of average loans to average earning assets during the
first six months of 1996 declined to 69.1% from 85.8% for the same period in
1995. Additionally, the average prime rate (the rate to which the majority of
rates the Banks' loans are indexed) during the six months ended June 30, 1996
was 8.29% compared to 9.09% for the same period in 1995.
Average interest-bearing deposits increased to $94.6 million for the six
months ended June 30, 1996 from $44.9 million for the same period in 1995.
Additionally, the average rate paid on these deposits increased to 4.3% during
the first six months in 1996 compared to 3.7% during the first six months in
1995. Further, as a result of the recapitalization of Bancorp that occurred
in September 1995, other borrowing declined to $537,000 with an average rate
of 11.4% from $1.9 million at an average rate of 11.7%. The average rate paid
on interest-bearing liabilities was 3.4% for the first six months of 1996
compared to 4.0% for the same period in
17
1995. This decrease represents an overall increase in rates paid on deposit
liabilities offset by a change in the mix of interest bearing liabilities.
As a result of these forgoing factors, the average yield on earning
assets decreased to 5.3% for the first six months of 1995 from 5.5% for the
same period in 1995.
Allowance and Provision for Loan Losses
The allowance for loan losses represents the amounts which have been set
aside for the specific purpose of absorbing losses which may occur in the
Banks' loan portfolio. The provision for loan losses is an expense charged
against operating income and added to the allowance for loan losses.
Management of the Banks continue to carefully monitor the allowance for loan
losses in relation to the size of the Banks' loan portfolio and known risks or
problem loans.
The allowance for loan losses at Bancorp was approximately $2.5 million
at June 30, 1996 compared to approximately $639,000 at December 31, 1995. The
increase in the allowance for loan losses is primarily attributable to the
Liberty Acquisition where Liberty's allowance at March 31, 1996 was
approximately $1.8 million. During the first six months of 1996, the
provision for loan losses was $127,000, loan charge-offs were $69,000 and
recoveries were $91,000. The allowance for loan losses for Bancorp
represented 2.0% of net loans at June 30, 1996 and 1.6% at December 31, 1995.
Non-Interest Income
Non-interest income for the six months ended June 30, 1996 was $499,000
compared to $264,000 for the same period in 1995. Non-interest income at
Liberty for the quarter, approximately $134,000, and an insurance settlement
of approximately $70,000 received during the quarter by SDNB, are primarily
attributable to this improvement in non-interest income. Additionally,
increases in various deposit related income and other non-interest income
accounts for the balance of this improvement.
Non-Interest Expenses
Non-interest expense for the six months ended June 30, 1996 was
approximately $3.6 million, an increase of $1.6 million from $2.0 million for
the same period in 1995. Non-interest expense at Liberty for the three
months ended June 30, 1996 was approximately $1.8 million that was partially
offset by improvements in non-interest expense at SDNB. The majority of this
improvement at SDNB occurred in the area of other expenses of approximately
$174,000 related primarily to foreclosure costs and the costs associated with
foreclosed properties. Additionally, SDNB had reduced costs for salaries and
benefits due to staffing reductions of approximately $141,000 partially offset
by an increase in premises expense of approximately $67,000 associated with a
one time mark-to-market adjustment of $61,000 made in conjunction with the
sub-leasing of space in SDNB's Encinitas office.
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Provision for Income Taxes
As a result of the earnings for the first six months of 1996, a $138,000
provision for income taxes was made where there was no provision for income
tax made in the first six months of 1995.
CAPITAL RESOURCES
As of March 27, 1996, the Partnership invested approximately $13.4
million in the registrant to fund the Liberty Acquisition. In exchange for
that investment, the registrant issued a total of 3,392,405 additional shares
of Common Stock at a price per share of $3.95, the registrant's book value per
share as of December 31, 1995. At the Partnership's direction the registrant
issued 1,764,000 of those shares of Common Stock, in the aggregate, to certain
limited partners of the Partnership (the "Direct Holders") and the remaining
1,628,405 shares of Common Stock directly to the Partnership. Giving effect
to the issuance of those shares to fund the Liberty Acquisition, the
Partnership owns 48.0% of the Common Stock and the Direct Holders own, in the
aggregate, 50.75% of the Common Stock.
Current risk-based regulatory capital standards generally require banks
and holding companies to maintain a ratio of "core" or "Tier 1" capital
(consisting principally of common equity) to risk-weighted assets of at least
4%, a ratio of Tier 1 capital to adjusted total assets (leverage ratio) of at
least 3% and a ratio of total capital (which includes Tier 1 capital plus
certain forms of subordinated debt, a portion of the allowance for loan losses
and preferred stock) to risk-weighted assets of at least 8%. Risk-weighted
assets are calculated by multiplying the balance in each category of assets
according to a risk factor which ranges from zero for cash assets and certain
government obligations to 100% for some types of loans, and adding the
products together.
As of March 31, 1996, Bancorp's combined leverage ratio was 6.5%, the
Tier 1 risk-weighted capital ratio was 10.1%, and the total risk-weighted
capital ratio was 11.8%. Liberty's and SDNB's leverage ratio, Tier 1
risk-weighted capital ratio, and total risk-weighted capital ratios were 5.9%,
9.2%, 10.4% and 6.5%, 9.3%, 10.5% respectively, on June 30, 1996. Bancorp,
Liberty and SDNB were well capitalized as of June 30, 1996 for federal
regulatory purposes.
Bancorp has agreed to fund the Commerce Acquisition in part by raising
not less than $15.3 million of additional equity through the sale of Bancorp
common stock. The Partnership has agreed to purchase up to $16.0 million of
common stock at a price per share of $3.95 in connection with the Commerce
Acquisition.
LIQUIDITY
The asset-liability management process determines the size and
composition of the balance sheet and focuses on the management of liquidity
and interest rate risk. The purpose of liquidity and balance sheet management
is to ensure that funds are available to meet customer needs, meet the
financial commitments of the Banks, and to reduce the Banks' exposure to
changing interest rates.
19
The Banks manage liquidity from both sides of the balance sheet through
the coordination of the relative maturities of its assets and liabilities.
The Banks enhance their liquidity through the ability to raise additional
funds in money markets through Federal funds lines, repurchase agreements and
selling of a specified portion of its securities (securities available for
sale). The Banks maintain a level of liquidity that is considered adequate to
meet current needs. Liquid assets include cash and due from banks, Federal
funds sold, and securities available for sale. At June 30, 1996, liquid
assets totaled approximately $62.5 million, or 30.5% of total assets, which
compares to $5.9 million, or 10.6% of total assets, at December 31, 1995.
At June 30, 1996 the Banks had net repriceable liabilities (a "negative
gap") as measured at one year of approximately $17.8 million or 8.6% of total
assets. The Banks had net repriceable assets (a "positive gap") as measured
at a 90-day time horizon of approximately $24.4 million, or 11.8% of total
assets. With a positive gap, a bank would anticipate higher net yields over
the near term in a rising rate environment and lower net yields in a declining
rate environment. Conversely, with a negative gap, a bank would anticipate
lower net yields over the near term in a rising rate environment and higher
net yields in a declining rate environment.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
1) Reorganization Agreement signed with Commerce Security Bank to
form a new holding company into which both companies will merge,
dated April 23, 1996
21
SDN BANCORP, INC. AND SUBSIDIARIES
U.S. SECURITIES AND EXCHANGE COMMISSION FORM 10-QSB
SIGNATURES
Pursuant to the requirements of the U.S. Securities Exchange Act of 1934, the
Issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SDN BANCORP, INC.
DATE: August 14, 1996 /s/ Robert P. Keller
------------------------------------------
Robert P. Keller
President and Chief Executive Officer
DATE: August 14, 1996 /s/ Curt A. Christianssen
-----------------------------------------
Curt A. Christianssen
Senior Vice President and Chief Financial Officer