SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT to SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1995. Commission File Number 0-11046
SC BANCORP
(Exact name of registrant as specified in its charter)
California 95-3585586
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3800 E. La Palma Ave., Anaheim, California 92807-1798
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 228-8200
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES. [ X ] NO. [ ]
There were 7,468,505 shares of common stock for the registrant issued and
outstanding as of August 1, 1995.
SC BANCORP
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGES
Item 1. Financial Statements
A. Consolidated Balance Sheets 1
B. Consolidated Statements of Operations 2
C. Consolidated Statements of Cash Flows 3
D. Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. OTHER INFORMATION
Part I.
Item 1. Financial Statements
SC BANCORP AND ITS SUBSIDIARY SOUTHERN CALIFORNIA BANK
Consolidated Balance Sheets
(In thousands)
June 30, December 31,
1995 1994
----------- -----------
(Unaudited)
ASSETS
Cash and due from banks $ 36,878 $ 31,118
Federal funds sold 4,000
--------- ---------
Cash and cash equivalents 40,878 31,118
--------- ---------
Securities held-to-maturity, at amortized cost:
fair value 1995 - $54,819; 1994-$54,680 (Note 2) 56,644 60,023
Securities available-for-sale, at fair value: (Note 2) 69,880 71,858
Loans (Note 3) 286,569 207,688
Less: Deferred fee income (449) (298)
Allowance for possible loan losses (Note 3) (5,584) (5,318)
--------- ---------
Net loans 280,536 202,072
--------- ---------
Premises and equipment, net 10,244 10,254
Other real estate owned, net 5,401 5,837
Accrued interest receivable 4,940 4,330
Other assets 11,655 13,063
--------- ---------
Total Assets $ 480,178 $ 398,555
========= =========
LIABILITIES
Deposits:
Interest-bearing $ 292,655 $ 221,919
Noninterest-bearing 134,383 118,020
--------- ---------
Total deposits 427,038 339,939
--------- ---------
Borrowed funds 5,832 13,621
Accrued interest payable and other liabilities 2,172 3,151
--------- ---------
Total Liabilities 435,042 356,711
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par or stated value: 10,000,000
shares authorized; no shares issued or outstanding
Common stock, no par or stated value: 20,000,000
shares authorized; 7,468,505 shares issued and
outstanding in 1995 and 1994, respectively 37,643 37,643
Retained earnings 8,506 7,731
Unrealized loss on available-for-sale securities, net of tax (1,013) (3,530)
--------- ---------
Total Shareholders' Equity 45,136 41,844
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 480,178 $ 398,555
========= =========
See Notes to Consolidated Financial Statements.
1
SC BANCORP AND ITS SUBSIDIARY SOUTHERN CALIFORNIA BANK
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------
1995 1994 1995 1994
------------ ------------ ----------- -----------
INTEREST INCOME:
Interest and fees on loans (Note 3) $ 6,613 $ 4,767 $ 11,700 $ 9,232
-------- -------- -------- --------
Interest on investment securities (Note 2):
U.S. Treasury and other U.S. government agencies 1,689 1,769 3,442 3,581
Interest on federal funds sold 242 26 639 51
-------- -------- -------- --------
Total interest income 8,544 6,562 15,781 12,864
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits:
Interest-bearing demand 340 329 632 673
Savings 293 401 604 823
Time 2,274 681 3,993 1,460
-------- -------- -------- --------
Total interest on deposits 2,907 1,411 5,229 2,956
Other interest expense 169 81 804 154
-------- -------- -------- --------
Total interest expense 3,076 1,492 6,033 3,110
-------- -------- -------- --------
Net interest income 5,468 5,070 9,748 9,754
Provision for (recovery of) possible loan losses (Note 3) 200 (850) 324 (850)
-------- -------- -------- --------
Net interest income after provision for possible
losses on loans 5,268 5,920 9,424 10,604
-------- -------- -------- --------
Other income:
Service charges on deposit accounts 410 441 843 875
Other fees and charges 992 1,074 1,817 2,247
Net gain on sale of investments (Note 2) 17
Net gain (loss) on sale of OREO and fixed assets 29 (26) 46 735
Other 107 407 172
-------- -------- -------- --------
Total other income 1,431 1,596 3,113 4,046
-------- -------- -------- --------
Other expenses:
Salaries and employee benefits 2,678 2,445 5,220 4,827
Occupancy, furniture and equipment 1,175 1,159 2,270 2,259
Professional fees 600 506 921 926
Office supplies 274 239 508 495
Data processing 192 274 415 521
FDIC assessment 216 255 432 510
Goodwill amortization 101 53 154 106
Other real estate owned 272 1,042 333 1,072
Other operating expense 583 816 1,146 1,514
-------- -------- -------- --------
Total other expenses 6,091 6,789 11,399 12,230
-------- -------- -------- --------
Income before provision for income taxes 608 727 1,138 2,420
Provision for income taxes 178 309 363 1,036
-------- -------- -------- --------
NET INCOME $ 430 $ 418 $ 775 $ 1,384
======== ======== ======== ========
Weighted average number of shares outstanding 7,469 3,556 7,469 3,513
======== ======== ======== ========
Earnings Per Share $ 0.06 $ 0.12 $ 0.10 $ 0.39
======== ======== ======== ========
See Notes to Consolidated Financial Statements
2
SC BANCORP AND ITS SUBSIDIARY SOUTHERN CALIFORNIA BANK
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
1995 1994
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 775 $ 1,384
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for (recovery of) possible loan losses 324 (850)
Provision for loss on other real estate owned 128 882
Net gain on sale of OREO (46) (67)
Net gain on sale of investments (17)
Net amortization of premiums on HTM investments 182 905
Net amortization of premiums on AFS investments 645
Net amortization of deferred fees and unearned income on loans (53) (21)
Depreciation and amortization 1,104 1,084
Gain on sale of fixed and other assets (453)
(Increase) decrease in accrued interest receivable
and other assets (501) 1,387
(Decrease) increase in accrued interest payable and
other liabilities (979) 1,730
------ -------
Net cash provided by operating activities 1,579 5,964
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale 5,244
Proceeds from maturities of securities held-to-maturity 3,197 6,080
Proceeds from maturities of securities available-for-sale 5,000
Purchase of securities available-for-sale (5)
Purchase of IOBOC loans (71,576)
Net (increase) decrease in loans (8,138) 148
Net proceeds from sale of OREO properties 1,333 1,707
Purchase of fixed assets (940) (649)
Proceeds from sale of fixed assets 995
------ -------
Net cash (used in) provided by investing activities (71,129) 13,525
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from rights offering 14,187
Purchase of IOBOC interest-bearing deposits 14,965
Purchase of IOBOC noninterest-bearing deposits 19,762
Net increase (decrease) in interest-bearing deposits 55,771 (26,519)
Net (decrease) increase in noninterest-bearing deposits (3,399) 9,220
Net decrease in other borrowed funds (7,789) (1,176)
------ -------
Net cash provided by (used in) financing activities 79,310 (4,288)
------ -------
Net increase in cash and cash equivalents 9,760 15,201
Cash and cash equivalents at January 1 31,118 23,564
------ -------
Cash and cash equivalents at June 30 $40,878 $ 38,765
------ -------
------ -------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Transfers of loans to other real estate owned $ 979 $ 3,684
Change in deferred tax asset-FASB #115 1,144 1,275
Unrealized loss on securities available-for-sale, net of tax 2,517 2,391
3
SC BANCORP AND ITS SUBSIDIARY SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, except for information as of and for the year ended
December 31, 1994)
NOTE 1 - BASIS OF PRESENTATION
References to the "Company" are to SC Bancorp and Southern California
Bank on a consolidated basis. References to "SC Bancorp" are to SC
Bancorp on an unconsolidated basis, and references to the "Bank" are
to Southern California Bank. See notes to the consolidated financial
statements presented in SC Bancorp's 1994 Annual Report on Form 10-K.
The Company's accounting and reporting policies conform to generally
accepted accounting principles prescribed for bank holding companies
and banks, and predominant banking industry practice. The interim
period financial statements are unaudited. It is the opinion of
Company management that all adjustments consisting of normal,
recurring accruals necessary for a fair presentation of the results of
operations have been reflected therein. Results for the period ending
June 30, 1995 are not necessarily indicative of results that may be
expected for any other interim period or for the year as a whole.
SECURITIES:
At June 30, 1995, the Company's available-for-sale portfolio had a net
unrealized loss of $1,730,200. The tax-effected reduction to
shareholders' equity at June 30, 1995, was $1,012,900. In January
1995, the FDIC issued a final rule excluding unrealized holding gains
and losses on available-for-sale debt securities from the calculation
of Tier 1 capital.
LOANS:
The Company adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan", and
Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures-
An Amendment of FASB Statement No. 114", effective January 1, 1995.
The Company has determined that the combined effect of adoption of
Statements No. 114 and No. 118 is immaterial to the consolidated
financial statements due to the Company's pre-existing methodology for
calculation of its allowance for possible loan losses, which is based
on the value of the underlying collateral of "impaired" loans, as
defined by Statement No. 114.
4
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in debt
securities are as follows:
June 30, 1995
----------------------------------------------
(In thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
HELD-TO-MATURITY: Cost Gains (Losses) Value
--------- ---------- ---------- ---------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 59 $ $ $ 59
Mortgage-backed securities 56,585 (1,825) 54,760
--------- ---------- ---------- ----------
Total $ 56,644 $ 0 $ (1,825) $ 54,819
========= ========== ========== ==========
June 30, 1995
----------------------------------------------
(In thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
AVAILABLE-FOR-SALE: Cost Gains (Losses) Value
--------- ---------- ---------- ---------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 71,610 $ 2 $ (1,732) $ 69,880
========== ========== ========== =========
December 31, 1994
----------------------------------------------
(In thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
HELD-TO-MATURITY: Cost Gains (Losses) Value
--------- ---------- ---------- ---------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 59 $ $ $ 59
Mortgage-backed securities 59,964 (5,343) 54,621
--------- ---------- ---------- ---------
Total $ 60,023 $ 0 $ (5,343) $ 54,680
========= ========== ========== =========
December 31, 1994
----------------------------------------------
(In thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
HELD-FOR-SALE: Cost Gains (Losses) Value
--------- ---------- ---------- ---------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 77,249 $ 2 $ (5,393) $ 71,858
========= ========== ========== =========
Investment securities with a carrying value of $21,562,000 and
$22,318,000 were pledged to secure public deposits and as collateral
for other borrowings at June 30, 1995 and December 31, 1994,
respectively.
5
The amortized cost and estimated fair value of debt securities at June
30, 1995, by contractual maturities, are shown below. Expected
maturities will differ from contractual maturities, particularly with
respect to mortgage-backed securities, because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
(In thousands) Held-to-Maturity Available-for-Sale
---------------- ------------------
Estimated Estimated
JUNE 30, 1995: Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- ---------- ---------
Due in one year or less $ $ $ 1,006 $ 1,007
Due after one year
through five years 40,869 39,629 70,604 68,873
Due after five years
through ten years 15,716 15,131
Due after ten years 59 59
--------- --------- ---------- ---------
Total $ 56,644 $ 54,819 $ 71,610 $ 69,880
========== ========= ========== =========
6
NOTE 3-LOANS
Loans by category are summarized below:
(In thousands) June 30, December 31,
1995 Percent 1994 Percent
---------- ------- --------- -------
Commercial and industrial $ 125,971 43.95% $ 79,369 38.22%
Real estate, construction 1,367 0.48% 30 0.01%
Real estate, mortgage 102,034 35.61% 83,712 40.31%
Consumer 57,197 19.96% 44,577 21.46%
---------- ------ --------- ------
Gross loans 286,569 100.00% 207,688 100.00%
Deferred fee income (449) (298)
Allowance for possible
loan losses (5,584) (5,318)
---------- ---------
Net Loans $ 280,536 $ 202,072
========== =========
The following table summarizes the balances and changes in allowance for
possible loan losses:
Six Months
Ended
June 30, December 31,
1995 1994
---------- ---------
Average balance of loans
outstanding $ 237,295 $ 203,760
========== =========
Loan balance at the end
of period 286,569 207,688
========== =========
Allowance at the
beginning of period 5,318 10,800
Charge-offs:
Commercial and industrial 602 2,004
Real estate 326 3,453
Consumer 264 362
---------- ---------
Total charge-offs 1,192 5,819
Recoveries:
Commercial and industrial 309 915
Real estate 62 214
Consumer 146 58
---------- ---------
Total recoveries 517 1,187
Net charge-offs 675 4,632
Provision (recovery) charged
(credited) to expense 324 (850)
Reserve on purchased loans 617 0
---------- ---------
Allowance at the end of period $ 5,584 $ 5,318
========== =========
Ratio of allowance for loan
losses to loans outstanding
at end of period 1.95% 2.56%
Ratio of allowance for loan
losses to nonperforming loans
at end of period 279.20% 329.90%
Ratio of net charge-offs to
average loans outstanding
during the period 0.28% 2.27%
Loans on nonperforming status were approximately $2,000,000 and
$6,146,000 at June 30, 1995 and 1994, respectively. Interest income
that would have been collected on these loans, had they performed in
accordance with their original terms, was approximately $124,900 and
$275,000 for the six months ended June 30, 1995 and 1994,
respectively.
7
NOTE 4 - PURCHASE OF LOANS AND DEPOSITS
On April 30, 1995, the Bank acquired substantially all of the
corporate and private banking loans and deposits from Independence One
Bank of California, F.S.B. (IOBOC). The loans purchased included
approximately $72 million of floating rate commercial, real estate and
consumer loans. The purchase price for the loans and deposits
acquired was $39,437,400. Funds for the acquisition were generated
through a $5,000,000 capital contribution from SC Bancorp, and a
certificate of deposit promotion program held during the first quarter
of 1995. Pro forma financial information on the loans and deposits
acquired is provided below:
(IN THOUSANDS) BALANCE ANNUALIZED
APRIL 30, 1995 YIELD
-------------- -----------
Loans
Commercial $ 37,227 10.01%
Real Estate 16,761 10.02%
Construction 912 10.14%
Consumer 17,497 9.97%
-------------- -----------
Total gross loans 72,397 10.01%
-------------- ===========
Deferred fees (204)
Allowance for loan losses (617)
--------------
Net loans $ 71,576
==============
Deposits
Interest-bearing $ 14,965 2.39%
Noninterest-bearing 19,762
--------------
Total deposits $ 34,727
==============
The Bank recorded an intangible asset of approximately $2 million
relating to the loans and deposits acquired. The
intangible is being amortized over a period of seven years.
Reference can be made to Form 8-K and Form 8-K/A Current Reports for
additional information on the acquisition transaction.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding
commitments to extend credit which are not reflected in the
accompanying consolidated financial statements. The Company does not
anticipate losses as a result of these transactions. Commercial and
standby letters of credit total approximately $4,122,000 and
$4,516,000 at June 30, 1995 and December 31, 1994, respectively.
In addition, the Company had unfunded loan commitments of $73,296,000
and $48,250,000 at June 30, 1995 and December 31, 1994, respectively.
The Company acquired approximately $32,500,000 of unfunded loan commitments
from IOBOC on April 30, 1995.
The Company uses the same credit policies in making commitments and
conditional obligations as it does in extending loan facilities to
customers. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company 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 income-producing commercial properties.
8
In the third quarter of 1993 and first quarter of 1994, the Company entered
into two interest rate swap agreements to reduce the impact of changes in
interest rates on its floating rate loan portfolio. At June 30, 1995, the
Company had outstanding one interest rate swap agreement with a commercial
bank, having a total notional principal amount of $50 million (Swap #1) and
one interest rate swap agreement with a broker dealer, having a notional
principal amount of $25 million (Swap #2). The agreements reduce the
Company's exposure to declines in prime lending rates by artificially
lengthening $75 million of the Company's prime-based loans while shortening
$75 million in liabilities. Swap #1 was entered into in September of 1993.
The terms of the agreement require that the Company pay interest quarterly
based on 3-month LIBOR and receive a fixed rate of 4.865% semi-annually. The
agreement matures in September 1998. Swap #2 was entered into in January
1994. The terms of the agreement require that the Company pay interest based
on 3-month LIBOR in arrears. The LIBOR rate is determined at the end of the
payment period rather than at the beginning. The Company receives a fixed
rate of 5.04% semi-annually through the January 1997 maturity date. The
Company accrues monthly interest income and expense on the swaps, the net of
which is included in income on loans. For the period ending June 30, 1995,
net interest expense of $524,100 from the swap agreements is included in
interest income on loans in the consolidated statements of operations. The
Company is required to pledge collateral on the transaction. U.S. Agency
notes having a market value of approximately $9,475,300 were pledged as
collateral as of June 30, 1995. The Company is exposed to credit loss in the
event of nonperformance by the counterparty to the agreement. However, the
Company does not anticipate nonperformance by the counterparty.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion represents information about the results of
operations, financial condition, liquidity and capital resources of
SC Bancorp and its subsidiary, Southern California Bank (together, the
"Company"). This information should be read in conjunction with the
1994 consolidated financial statements of the Company and the notes
thereto and the accompanying quarterly unaudited consolidated
financial statements and notes thereto.
OVERVIEW
The Company reported net income of $430,000 for the second quarter of
1995 compared to $418,000 for the second quarter of 1994. Net
income for the first six months of 1995 was $775,000, compared to $1.4
million for the same period in 1994. The previous year's results
include a $448,000 gain on the sale of the Company's headquarters
building, a $215,000 gain on the sale of loans, and a $850,000
reversal of previously recorded allowance for possible loan losses.
The reduction in the allowance for possible loan losses was due to a
decline in classified assets and improvement in overall asset quality.
Year-to-date earnings for 1995 include a nonrecurring adjustment to
interest expense for deferred compensation plans of $408,000. This
expense is offset by a $407,000 benefit payment received on corporate
owned life insurance which is reflected in noninterest income.
Net interest income was $5.5 million for the three months ended June 30,
1995 compared to $5.1 million for the three months ended June 30,
1994. Year-to-date net interest income of $9.7 million was
comparable to 1994, however, the Company's net interest margin
decreased to 4.97% for the six months ended June 30, 1995 compared to
5.64% for the prior year. The decrease in the net interest margin can
be attributed to the adjustment recorded on the Company's deferred
compensation plans, and the increased interest expense associated with
the certificate of deposit (TCD) promotion program that provided
funding for the IOBOC transaction. Management expects the net
interest margin to increase during the second half of the year with
the addition of the IOBOC loans and the maturity of the promotion
TCD's. New deposit promotion programs to replace the maturing TCD's
with lower rate deposits are underway.
9
Noninterest income was $1.4 million and $1.6 million for the three months
ended June 30, 1995 and 1994, respectively. Noninterest income was $3.1
million and $4.0 million for the six months ended June 30, 1995 and 1994,
respectively. Noninterest income for the first half of 1994 included
nonrecurring gains on the sale of assets as discussed above. Other fees and
charges also declined compared to the prior year due to a reduction in
merchant bankcard fee income.
Operating expenses decreased from $6.8 million for the three months
ended June 30, 1994 to $6.1 million for the three months ended June 30,
1995. Operating expenses also decreased for the six months ended
June 30, 1995 and 1994 from $12.2 million to $11.4 million,
respectively. The decrease in operating expense largely occurred in
the OREO and merchant bankcard expense categories.
Total assets at June 30, 1995 are $480.2 million, an increase of
20.5% from $398.6 million at year-end 1994. Total deposits at June 30,
1995 were $427 million, an increase of 25.6% from $339.9 million
at year-end 1994.
The following table summarizes key performance indicators pertaining
to the Company's operating results. Average balances are computed
using daily averages.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1995 1994
------------- ----------- ------------- ----------
Return on average assets (1) 0.37% 0.42% 0.35% 0.69%
Return on average shareholders' equity (1) 3.96% 5.88% 3.62% 9.79%
Net earnings (loss) $ 430 $ 418 $ 775 $ 1,384
Net earnings (loss) per share $ 0.06 $ 0.12 $ 0.10 $ 0.39
Total average assets $ 466,971 $ 397,837 $ 446,330 $ 402,320
<FN>
----------------
(1) Shown on an annualized basis
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1995
NET INTEREST INCOME
The primary component of the Company's operating income is net
interest income, which is the difference between interest and fees on
interest-earning assets and interest paid on funds acquired to support
those assets. Net interest income when expressed as a percentage of
total average interest-earning assets, is referred to as the net
interest margin. The following table sets forth a comparison of net
interest income and net interest margin for the periods indicated.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------- ------------------------------------
(IN THOUSANDS) 1995 1994 CHANGE 1995 1994 CHANGE
---------- ---------- ----------- ---------- ----------- ----------
Interest income $ 8,544 $ 6,562 30.20% $ 15,781 $ 12,864 22.68%
Interest expense 3,076 1,492 106.17% 6,033 3,110 93.99%
---------- ---------- --------- ---------- ----------- ----------
Net interest income $ 5,468 $ 5,070 7.85% $ 9,748 $ 9,754 -0.06%
========== ========== ========= ========== =========== ==========
Net interest margin 5.34% 5.88% 4.97% 5.64%
======== ========= ========= =========
10
The Company's net interest income is affected by the amount and mix of
interest-earning assets and interest-bearing liabilities. It is also
affected by changes in yields earned on assets and rates paid on
deposits and other borrowed funds. The following table provides
average balance and yield information for interest-earning assets and
interest-bearing liabilities. Average balances are computed using
daily balances.
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1994
-------------------------------------- --------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------- ----------- ---------- ----------- ----------- ----------
ASSET
Interest-earning assets:
Federal funds sold $ 21,657 $ 639 5.90% $ 3,062 $ 51 3.33%
Investment securities 129,911 3,442 5.30% 139,734 3,581 5.13%
Gross loans (1) 237,295 11,700 9.94% 206,413 9,232 9.07%
----------- ----------- ---------- ----------- ----------- ----------
Total interest-earning assets $ 388,863 $ 15,781 8.18% $ 349,209 $ 12,864 7.47%
----------- ----------- ---------- ----------- ----------- ----------
Noninterest-earning assets 57,467 53,111
----------- -----------
Total assets $ 446,330 $ 402,320
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing DDA and
savings deposits $ 132,342 $ 1,236 1.88% $ 165,910 $ 1,496 1.83%
Time certificates of deposit 138,247 3,993 5.82% 83,083 1,460 3.56%
Borrowed funds and
other liabilities 11,313 804 14.33% 7,182 154 4.35%
----------- ----------- ---------- ----------- ----------- ----------
Total interest-bearing liabilities $ 281,902 $ 6,033 4.32% $ 256,175 $ 3,110 2.46%
----------- ----------- ---------- ----------- ----------- ----------
Noninterest-bearing deposits 118,429 115,485
Other liabilities 2,824 2,153
Shareholders' equity 43,175 28,507
----------- -----------
Total liabilities and
shareholders' equity $ 446,330 $ 402,320
=========== ===========
Net interest income $ 9,748 $ 9,754
=========== ===========
Net interest margin 4.97% 5.64%
========== ==========
<FN>
--------------
(1) Includes loans on nonaccrual status of approximately $2 million
and $6.7 million at June 30, 1995 and 1994, respectively. Interest
income on loans includes net loan fees amortized to income of
$361,400 and $15,000 for the six months ended June 30, 1995 and
1994, respectively. Additionally, net interest expense of
$524,100 and $346,000 relating to the interest rate swap agreements
was included in interest income on loans for the six months ended
June 30, 1995 and 1994, respectively.
The $39.7 million increase in average earning assets between June 30,
1995 and June 30, 1994 is primarily due to the loans purchased from
IOBOC. The pricing and yields on the acquired loans is comparable to
the Bank's existing portfolio. Funds raised through the deposit
promotions during the first quarter of 1995 were invested in Fed Funds
until the loan purchase was completed on April 30, 1995. The
increase in the national prime rate from 7.25% at June 30, 1994 to
9.00% at June 30, 1995 contributed to the increase in loan yields.
The average yield on loans, excluding the effect of the interest rate
swaps, was 10.45% for the six months ended June 30, 1995, up 104 basis
points from 9.41% for the same period in 1994.
The Company's net interest margin for the six months ended June 30,
1995 decreased compared to the same period in 1994 despite an increase
in earning assets and loan yields due to an increase in interest
expense. The increase in interest expense can be attributed to a
$408,000 non recurring interest adjustment relating to the Company's
deferred compensation plans, and to the increase in TCD balances and
rates compared to the prior year. The increase in deposit rates can
be attributed to the increase in overall market rates from the prior
year, and to the higher rates offered through the deposit
11
promotion. The average balance of TCD's increased by $55.2 million to $138.2
million at June 30, 1995, from $83.1 million at June 30, 1994. The average
cost of funds on TCD's increased from 3.56% in 1994 to 5.82% for the six
months ended June 30, 1995. The cost of funds is expected to decline as the
promotion TCD's mature and are replaced with lower rate accounts. The
national prime rate decreased by 25 basis points to 8.75% in early July.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $324,000 in the
first half of 1995. Gross loan charge-offs totaled $1,192,000, and
recoveries totaled $517,000 during this period. The net increase in
the allowance for loan losses from $5,318,000 at year-end 1994 to
$5,584,000 at June 30, 1995, also reflects the addition of $617,000
relating to the purchase of IOBOC loans. Nonperforming loans
increased from $1,601,000 at year-end 1994 to $2,000,000 at June 30,
1995. Net loan charge-offs for the first six months of 1994 were
$1,598,000. The Company reduced the allowance for possible loan
losses by $850,000 in the second quarter of 1994 due to a reduction,
through sale, of classified loans outstanding at
June 30, 1994 and to an overall improvement in asset quality.
NONINTEREST INCOME
The following table sets forth the major components of noninterest
income for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
(IN THOUSANDS) 1995 1994 1995 1994
------- ------- ------- -------
Service charges on deposit accounts $ 410 $ 441 $ 843 $ 875
Other fees and charges 992 1,074 1,817 2,247
Net gain on sale of investments 17
Net gain on sale of OREO and fixed assets 29 (26) 46 735
Other 107 407 172
------- ------ ------ ------
Total $1,431 $1,596 $3,113 $4,046
======= ====== ====== ======
Noninterest income decreased to $3.1 million for the first six months
of 1995 from $4.0 million for the same period in 1994. The decrease
in other fees and charges is largely due to a decline in merchant
bankcard income. The Bank's largest merchant customer left the Bank
during the third quarter of 1994. The reduction in merchant bankcard
activity led to a corresponding decrease in merchant bankcard expense.
The remainder of the decrease in noninterest income can be attributed
to nonrecurring items. The Company received a benefit payment of
$407,000 on corporate owned life insurance in the first quarter of
1995. The Company recorded a $448,000 gain on sale of its head office
facility and gains totaling $282,000 on the sale of problem assets in
the first half of 1994.
12
NONINTEREST EXPENSE
The following table sets forth information by category on the
Company's noninterest expense for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
(IN THOUSANDS) 1995 1994 1995 1994
------ ------ ------- -------
Salaries and employee benefits $2,678 $2,445 $ 5,220 $ 4,827
Occupancy, furniture and equipment 1,175 1,159 2,270 2,259
Professional fees 600 506 921 926
Office supplies 274 239 508 495
Data processing 192 274 415 521
FDIC assessment 216 255 432 510
Goodwill amortization 101 53 154 106
Other real estate owned 272 1,042 333 1,072
Other operating expense 583 816 1,146 1,514
------ ------ ------- -------
Total $6,091 $6,789 $11,399 $12,230
====== ====== ======= =======
The $831,000 decrease in noninterest expense for the six months ended
June 30, 1995 compared to the same period in 1994 is primarily due to
decreases in OREO and merchant bankcard expenses. OREO expense
decreased by $739,000 and merchant bankcard expense decreased by
$228,000 compared to the first six months of 1994. The decrease in
OREO expense is due to a reduction in OREO writedowns. The decrease
in merchant bankcard expense is due to a decline in merchant card
activity following the departure of a significant merchant customer.
The following table summarizes the components of salaries and
employee benefits for the years indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
(IN THOUSANDS) 1995 1994 1995 1994
------ ------ ------ ------
Officer and employee salaries $2,126 $1,958 $4,021 $3,950
Payroll taxes 183 161 399 362
Medical and other benefits 369 326 800 515
------ ------ ------ ------
Total $2,678 $2,445 $5,220 $4,827
====== ====== ====== ======
The increase in salaries for the three and six month periods ended June 30,
1995 compared to the previous year is due to the addition of staff to service
the loans and deposits acquired from IOBOC. The Company acquired two new
corporate banking offices, in Orange County and La Jolla, and opened a new
retail branch in Orange County. The Company also plans to open a retail
branch in La Jolla during the third quarter of this year. The staff
additions as of June 30, 1995 included twelve corporate banking staff and
five branch staff. The Company had 242 and 225 full-time equivalent staff
at June 30, 1995 and 1994, respectively. The increase in other benefits
expense for the six months ended June 30, 1995 is primarily due to an
increase in incentives paid.
13
The following table sets forth the components of OREO expense for the
periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
(IN THOUSANDS) 1995 1994 1995 1994
------- -------- -------- --------
Provision for OREO writedowns $128 $ 882 $128 $ 882
OREO holding expenses 144 160 205 190
---- ------ ---- ------
Total $272 $1,042 $333 $1,072
==== ====== ==== ======
The balance of OREO decreased from $7.3 million at June 30, 1994 to
$5.4 million at June 30, 1995. The decrease in OREO is primarily
due to net sales totaling $1.5 million, and a $300,000 increase in the
valuation reserve on one OREO property.
FINANCIAL CONDITION
The following table provides a comparison of assets and liabilities in
the Company's consolidated statements of financial condition for the
dates indicated:
JUNE 30, 1995 DEC 31, 1994 AMOUNT PERCENT
(IN THOUSANDS) BALANCE BALANCE CHANGE CHANGE
------------- ------------ ------ -------
ASSETS:
Cash and cash equivalents $ 40,878 31,118 $ 9,760 31.36%
Investment securities 126,524 131,881 (5,357) (4.06%)
Loans, net 280,536 202,072 78,464 38.83%
Premises and equipment, net 10,244 10,254 (10) (0.10%)
Other real estate owned, net 5,401 5,837 (436) (7.47%)
Accrued interest receivable 4,940 4,330 610 14.09%
Other assets 11,655 13,063 (1,408) (10.78%)
-------- ------- ------ -------
Total assets $480,178 398,555 $81,623 20.48%
======== ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand deposits $134,383 118,020 $16,363 13.86%
Interest-bearing demand and savings deposits 135,621 147,302 (11,681) (7.93%)
Time certificates of deposit 157,034 74,617 82,417 110.45%
-------- ------- ------- --------
Total deposits 427,038 339,939 87,099 25.62%
-------- ------- ------- --------
Borrowed funds 5,832 13,621 (7,789) (57.18%)
Other liabilities 2,172 3,151 (979) (31.07%)
Shareholders' equity 45,136 41,844 3,292 7.87%
-------- ------- ------- --------
Total liabilities and shareholders' equity $480,178 398,555 $81,623 20.48%
======== ======= ======= ========
TOTAL ASSETS
Total assets increased by $81.6 million, or 20.5%, from $398.6 million
at year-end 1994 to $480.2 million at June 30, 1995. The increase in assets
was largely due to the purchase of loans from IOBOC.
14
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, deposits at
correspondent banks and Federal funds sold. The Company maintains
balances at correspondent banks adequate to cover daily inclearings
and other charges. In accordance with Federal regulations, reserve
balances of $4,709,000 were maintained in the form of deposits with
the Federal Reserve Bank at June 30, 1995.
LOANS
The Company provides a full range of credit products designed to meet
the credit needs of borrowers in its service area. The Company
engages in medium-term commercial real estate lending secured by
industrial and income producing properties, commercial lending to
borrowers for working capital and accounts receivable financing, and
consumer lending principally in the form of home equity lines of
credit and vehicle financing. Additionally, the Company has added
construction loan products principally for entry level housing and
owner-user commercial industrial properties. Construction loans
outstanding at June 30, 1995 were $1,367,000.
The overall composition of the Company's loan portfolio by credit
concentration expressed as a percentage of total loans at June 30,
1995 and December 31, 1994 is provided below:
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
Real estate 35% 40%
Commercial
Unsecured 15% 12%
Asset based (A/R) 11% 13%
Business assets 9% 6%
Secured by real estate 8% 7%
Other 1%
--- ---
Total commercial 44% 38%
Consumer
Equity lines 9% 12%
Auto 4% 4%
Other 8% 6%
--- ---
Total consumer 21% 22%
--- ---
Total loans 100% 100%
=== ===
The increased concentration in commercial loans is directly
attributable to the purchase of loans from IOBOC.
15
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table sets forth the maturity distribution of the
Company's loan portfolio (excluding consumer loans) at
June 30, 1995, based on remaining scheduled principal repayments:
MATURING IN
--------------------------------------
OVER ONE
ONE YEAR THROUGH OVER
(In thousands) OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- -------- -------- --------
Real estate mortgage $ 19,718 $ 67,348 $ 14,968 $102,034
Commercial 83,704 33,669 8,598 125,971
Construction 275 1,092 1,367
-------- -------- -------- --------
Total $103,697 $102,109 $ 23,566 $229,372
======== ======== ======== ========
The following table sets forth sensitivity of the amounts due to changes in
interest rates for the Company's loan portfolio (excluding consumer loans) at
June 30, 1995:
MATURING IN
--------------------------------------
OVER ONE
ONE YEAR THROUGH OVER
(In thousands) OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- -------- -------- --------
Loans:
With fixed interest rates $ 17,764 $ 46,969 $ 11,260 $ 75,993
With variable interest rates 85,933 55,140 12,306 153,379
-------- -------- -------- --------
Total 103,697 102,109 23,566 229,372
======== ======== ======== ========
ASSET QUALITY
NONACCRUAL, PAST DUE AND MODIFIED LOANS
The Company recognizes income principally on the accrual basis of
accounting. In determining income from loans, the Company generally
adheres to a policy of not accruing interest on loans on which a
default of principal or interest has existed for a period of 90 days
or more. The Company's policy is to assign nonaccrual status to a
loan if either (i) principal or interest payments are past due in
excess of 90 days, unless the loan is both well secured and in the
process of collection; or (ii) the full collection of interest or
principal becomes uncertain, regardless of the length of past due
status. When a loan reaches "nonaccrual" status, any interest accrued
on such a loan is reversed and charged against current income.
16
The following table sets forth the amount of the Company's
nonperforming loans (which are nonaccrual) as of the dates indicated.
At June 30, 1995, the Company had no loans past due 90 days or more
and still accruing interest.
JUNE 30, DECEMBER 31,
(In thousands) 1995 1994
------ ------
Nonperforming loans (1) $2,000 $1,612
Nonperforming loans as a percentage of
total loans 0.70% 0.78%
<FN>
--------------
(1) Includes loans with modified terms of $1.5 million at June 30, 1995.
The Company performs a quarterly collateral adequacy analysis on all real
estate and other secured loans. Loans totaling $4.2 million had been
identified as impaired as of June 30, 1995, in accordance with the provisions
of FASB statements No. 114 and No. 118. These loans have been reported in
the statements of condition at their net realizable values. All
nonperforming loans are classified as impaired.
The following table sets forth the amount of the Company's nonperforming
loans by type at the dates indicated:
JUNE 30, DECEMBER 31,
(In thousands) 1995 1994
------ ------
Nonperforming loans:
Real estate mortgage $ 1,352 $ 930
Commercial 407 283
Consumer 241 399
Construction
-------- -------
Total loans $ 2,000 $ 1,612
======== =======
DELINQUENT LOANS
The following table sets forth information relating to loans which were
delinquent 30 to 89 days at the dates indicated:
JUNE 30, DECEMBER 31,
(In thousands) 1995 1994
------ ------
Delinquent loans:
Real estate mortgage $ $ 2,089
Commercial 406 998
Consumer 834 416
------- -------
Total loans $ 1,240 $ 3,503
======= =======
Delinquencies as a percentage of total loans 0.43% 1.69%
Total delinquent loans and nonperforming loans
as a percentage of total loans 1.13% 2.46%
17
ALLOWANCE FOR POSSIBLE LOAN LOSSES
A certain degree of risk is inherent in the extension of credit. Management
has adopted a policy to maintain the allowance for possible loan and lease
losses at a level considered by management to be adequate to absorb estimated
known and inherent risks in the existing portfolio.
Management performs a comprehensive analysis of the loan portfolio on a
regular basis and its current allowance for loan losses to determine that
loans are currently protected according to financial and collateral standards
deemed acceptable. The allowance for possible loan losses represents
management's recognition of the assumed risks of extending credit and the
quality of the loan portfolio. The allowance is management's estimate, which
is inherently uncertain and depends on the outcome of future events. The
evaluation of the quality of the loan portfolio considers the borrower's
management, financial condition, cash flow and repayment program, as well as
the existence of collateral and guarantees. External business and economic
factors beyond the borrower's control, combined with the Company's previous
loan loss experience, are considered in management's evaluation of the
allowance for possible loan losses. In addition, the bank regulatory
authorities, as an integral part of their examination process, periodically
review the Company's allowance for possible loan losses and may recommend
additions to the allowance based on their assessment of information available
to them at the time of their examination.
When it is determined that additions are required, additions to the allowance
are made through charges to operations and are reflected in the statements of
operations as a provision for loan losses. Loans which are deemed to be
uncollectible are charged to the allowance. Subsequent recoveries, if any,
are credited back to the allowance.
OTHER REAL ESTATE OWNED
Real estate acquired in satisfaction of loans are transferred to the OREO
portfolio at estimated fair values, less any estimated disposition costs.
The difference between the fair value of the real estate collateral and the
loan balance at the time of transfer is reflected as a loan charge-off. Any
subsequent declines in the fair value of the OREO property after the date of
transfer, are recorded through a provision for writedowns on OREO. All such
OREO writedowns, as well as any provisions for estimated selling and holding
expenses, are included in noninterest expense. Net gains and losses from the
disposition of OREO properties are included in other noninterest income.
Activity in OREO for the periods indicated is as follows:
SIX MONTHS
ENDED YEAR ENDED
(In thousands) JUNE 30, DECEMBER 31,
-------- ---------
1995 1994
-------- ---------
Other real estate owned:
Balance, beginning of period $ 5,837 $ 6,133
Additions 979 3,585
Sales (1,487) (2,699)
Valuation and other adjustments 72 (1,182)
------- --------
Balance, end of period $ 5,401 $ 5,837
======= ========
The OREO portfolio at June 30, 1995, consisted of four OREO properties
totaling $5.4 million. Two of the four properties were in escrow as of June
30, 1995. The current sales prices exceed the combined book value of these
assets. Subsequent to quarter end, one sale escrow closed resulting in a
loss of approximately $68,200. The Company is actively marketing the
remaining OREO properties.
18
DEPOSITS
Total deposits increased by $87.1 million, or 25.6%, from $339.9 million at
year-end 1994 to $427.0 million at June 30, 1995. Noninterest-bearing
deposits increased $16.4 million, and interest-bearing deposits increased
$70.7 million from year-end 1994. The increase in deposits is due to the
funding raised for the IOBOC loan and deposit purchase. TCD's increased from
22.0% of total deposits at year-end 1994, to 35.5% of total deposits at June
30, 1995.
The following table sets forth the distribution of average deposits and the
rates paid thereon for the periods indicated:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------------- ---------------------------
1995 1994
----------------------------- ---------------------------
AVERAGE % OF AVERAGE % OF
(In thousands) BALANCE RATE TOTAL BALANCE RATE TOTAL
------ ---- ----- -------- ---- ------
Noninterest-bearing
demand deposits $118,429 30.44% $118,06 32.58%
Interest-bearing demand
and savings deposit 97,149 1.70% 24.97% 121,338 1.60% 33.48%
Money market deposits 35,194 2.43 9.05% 43,039 2.30 11.88%
Time certificates of deposit 138,247 5.86 35.54% 79,937 3.80 22.06%
-------- ------ --------- ---- ------
Total $389,019 100.00% $ 362,380 100.00%
======== ======= ========= ======
The following table sets forth the maturities of the Company's TCDs
outstanding at the dates indicated:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------------- ---------------------------
1995 1994
----------------------------- ---------------------------
$100,000 $100,000
UNDER AND UNDER AND
(In thousands) $100,000 OVER $100,000 OVER
-------- -------- -------- ----------
Three months or less $ 65,092 $ 32,850 $ 16,467 $ 15,806
Over three months through
six months 10,598 4,484 9,541 6,249
Over six months and through
twelve months 24,478 9,820 9,905 4,532
Over twelve months 7,010 2,702 9,497 2,620
---------- --------- --------- ---------
Total $ 107,178 $ 49,856 $ 45,410 $ 29,207
========== ========= ========= =========
ASSET/LIABILITY MANAGEMENT
The objective of asset/liability management is to manage interest rate risk,
liquidity risk and credit risk to reduce the Company's exposure to interest
rate fluctuations. The Company seeks to achieve this objective by matching
its interest sensitive assets and liabilities, and maintaining the maturity
and repricing of these assets and liabilities at appropriate levels given the
interest rate environment. Generally, if rate sensitive assets exceed rate
sensitive liabilities, the net interest income will be positively impacted
during a rising rate environment and negatively impacted during a declining
rate environment. When rate sensitive liabilities exceed rate sensitive
assets, the net interest income will generally be positively impacted during
a declining rate environment and negatively impacted during a rising rate
environment. However, because
19
interest rates for different asset and liability products offered by
depository institutions respond differently to changes in the
interest rate environment, the gap is only a general indicator of
interest rate sensitivity.
In addition to utilizing the repricing gap table below in managing its
interest rate risk, the Company also performs a quarterly interest
rate simulation. This simulation provides the Company with an
estimate of both the dollar amount and percentage change in net
interest income under various interest rate scenarios. Under each
interest rate scenario, the Company projects its net interest income,
factoring in the amount and timing of repricings and maturities on its
assets and liabilities. In the various rate scenarios, the Company
projects certain lags in the repricing of its interest rates on its
interest-bearing liabilities.
The following table sets forth information concerning the Company's
rate sensitive assets and rate sensitive liabilities as of
June 30, 1995. Such assets and liabilities are classified by the
earlier of maturity or repricing date.
THREE THROUGH ONE YEAR OVER
MONTHS TWELVE THROUGH FIVE
(IN THOUSANDS) OR LESS MONTHS FIVE YEARS YEARS TOTAL
-------- ------- ---------- ------- -------
INTEREST-EARNING ASSETS:
Federal funds sold $ 4,000 $ 0 $ 0 $ 0 $ 4,000
Investment securities 2,638 4,896 114,591 6,119 128,244
Loans 184,056 24,040 59,920 15,691 283,707
Interest rate swap 0 0 75,000 0 75,000
--------- -------- -------- ------- --------
Total interest-earning assets $ 190,694 $ 28,936 $249,511 $21,810 $490,951
========= ======== ======== ======= ========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand and savings deposits $ 135,621 $ 0 $ 0 $ 0 $ 135,621
Time certificates of deposit 97,942 49,380 9,689 23 157,034
Other borrowings and other int.-bearing liabs. 6,950 0 0 0 6,950
Interest rate swap 75,000 0 0 0 75,000
--------- -------- -------- ------- --------
Total interest-bearing liabilities $ 315,513 $ 49,380 $ 9,689 $ 23 $ 374,605
========= ======== ======== ======= ========
Interest rate sensitivity gap $(124,819) $(20,444) $239,822 $21,787
Cumulative interest rate sensitivity gap (124,819) (145,263) 94,559 116,346
Cumulative interest rate sensitivity gap as a
percentage of total interest-earning assets: (65.46%) (76.18%) 49.59% 61.01%
Although the Company has a negative cumulative interest rate
sensitivity gap as a percentage of total interest-earning assets in
the one year or less horizon, management believes that the company is
modestly asset sensitive in this period. This conclusion is primarily
due to the Company's core deposits, which are capable of being
repriced currently and are therefore classified in the "three months
or less" category, but which management believes respond similarly to
long-term deposits. By including these core deposits in the over one-
year repricing categories in the gap table above, the Company would be
asset sensitive. This asset sensitivity also stems from the size of
the Company's variable rate loan portfolio. Approximately 65% of the
entire loan portfolio reprices within one year. The size of this
variable rate portfolio has negatively impacted the Company's net
interest income in the declining interest rate environment in 1992 and
1993.
In order to stabilize the Company's net interest income with regard to
changing rates, the Company entered into a $50 million 5-year interest
rate swap in September 1993 and a $25 million 3-year interest rate
swap agreement in January 1994. The terms of these swap agreements
require that the Company pay a floating rate of interest tied to
LIBOR, and receive a
20
fixed rate of 4.87% and 5.04% for swap #1 and swap #2, respectively.
Due to the nature of the interest rate swap agreements, changes in
interest rates impact both the market value and net income realized on
these agreements. In the rising rate environment experienced in 1994,
the market value of these swap agreements diminished. Additionally,
the spread between interest paid and interest received on the swap
agreements compressed and reversed itself so that interest expense on
the swap agreements currently exceeds interest income. The Company's
combined breakeven point on both swap agreements is approximately
4.92%. If LIBOR remains at its July 31, 1995 level of 5.81%, it is
anticipated that the swaps will decrease loan income by approximately
$0.9 million in 1995. However, the increases in market interest rates
that have negatively impacted the swap agreements have also led to
increases in the yield of the loan portfolio. The Company estimates
that the loss in earnings from an increase in LIBOR on the $75.0
million swap agreements would be more than offset by a similar basis
point increase on the Company's $185 million variable rate loan
portfolio. As of June 30, 1995, the Company's interest rate
simulation projects that if rates increase 100 basis points (and the
Company's deposit liabilities lag by historical repricing increments),
overall, by year-end 1995, net interest income will increase by
approximately 1% over currently estimated net interest income, which
assumes a level interest rate environment.
The Company's held-to-maturity investment portfolio consists primarily
of mortgage-backed securities, with final maturities principally of
four to six years. Typically, in a declining rate environment, the
Company would be exposed to prepayment risk which could have a
negative effect on the yield on these investments and on overall net
interest income. In a rising rate environment, these securities would
not likely experience significant prepayments, and therefore would not
negatively impact overall earnings. However, because these are fixed
rate mortgage-backed securities, an increase in interest rates would
result in a decrease in the market value of these types of securities.
The same is true for all of the Company's fixed rate investments. Due
to the short duration of the entire portfolio; however, the Company
does not currently anticipate any significant financial impact as a
result of any market value depreciation on its portfolio.
LIQUIDITY
Liquidity management involves the Company's ability to meet the cash
flow requirements of its customers who may be depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Liquidity involves both
assets and liabilities of the Company. The Company's liquid assets
consist of cash and cash equivalents, and investment securities,
excluding those pledged as collateral and those classified as held-to-
maturity. Asset liquidity is generated through the maturity or
liquidation of assets. Liability liquidity arises from diverse
deposit accounts with varying maturities and from secondary funding
sources. It is the Company's policy to maintain a liquidity ratio
(liquid assets to liabilities) of between 25% and 50%. At June 30,
1995, the Company's liquidity ratio was 33.1%, compared to a liquidity
ratio of 41.7% at June 30, 1994.
At June 30, 1995, noninterest-bearing demand deposit accounts
represented 31.5% of total deposits outstanding, as compared with
33.3% at June 30, 1994. In an effort to address any potential
fluctuations in the Company's deposit base, management seeks to limit
loans to no more than 75% to 85% of deposits. At June 30, 1995, the
ratio of gross loans to deposits was 67.1%. In the event that the
Company should experience a significant short-term decline in deposits
or a sudden increase in loan demand, the Company would utilize its
secondary sources of funding and liquidity. These secondary sources
include available Federal funds purchased through correspondent banks
up to $20.0 million and short-term borrowing at the Federal Reserve
Bank. Federal funds arrangements with correspondent banks are subject
to the terms of the individual arrangements and may be terminated at
the discretion of the correspondent bank. In an effort to meet its
ongoing liquidity needs, the Company has invested in short-term
mortgage-backed securities to hold to maturity. These securities
provide consistent, periodic principal and interest payments to the
Company. Despite these funding sources, the Company may find it
necessary, for liquidity reasons, to liquidate a portion of its
available-for-sale investment portfolio.
CAPITAL RESOURCES
Management seeks to maintain capital adequate to support anticipated
asset growth and credit risks and to ensure that the Company is within
established regulatory guidelines and industry standards. The 1992
risk-based capital guidelines adopted by the Federal Reserve Board and
FDIC require the Company and the Bank to maintain certain minimum
ratios of
21
capital to risk-weighted assets. On May 1, 1995, SC Bancorp made a
captial contribution of $5,000,000 to the Bank to
provide additional funding for the Bank's purchase of loans and
deposits from IOBOC.
The following table sets forth the Company's and the Bank's risk-based
capital and leverage ratios at June 30, 1995.
COMPANY BANK
-------------------- -------------------
(IN THOUSANDS) AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------- ---------- -------- -----------
Leverage Ratio (1) $41,605 8.91% $39,095 8.37%
Minimum regulatory requirement 18,679 4.00% 18,679 4.00%
Excess over the minimum requirement 22,926 4.91% 20,416 4.37%
Risk-based ratios:
Tier 1 capital (2) $41,605 11.66%(5) $39,095 10.95%(5)
Tier 1 capital minimum requirement 14,277 4.00%(3) 14,277 4.00%(3)
Excess over the minimum requirement 27,328 7.66% 24,818 6.95%
Total capital (4) $46,081 12.91%(5) $43,570 12.21%(5)
Total capital minimum requirement 28,555 8.00% 28,555 8.00%
Excess over the minimum requirement 17,526 4.91% 15,015 4.21%
<FN>
(1) Tier 1 capital divided by average assets for the three monthss
ended June 30, 1995. Under current rules, a minimum
leverage ratio of 3% is required for institutions having a
composite rating of one under the CAMEL rating system. All
other institutions are required to maintain leverage ratios of
at least 4%. Insured institutions such as the Bank must
maintain a leverage capital ratio of 4% to be considered
"adequately capitalized" or 5% to be considered "well
capitalized" under the prompt corrective action provisions of
the FDIC Improvement Act.
(2) Includes common shareholders' equity (excluding unrealized losses
on available-for-sale debt securities) less goodwill.
The Tier 1 capital ratio is adjusted for the disallowed portion
of deferred tax assets, if applicable.
(3) Insured institutions such as the Bank must maintain a Tier 1
Capital ratio of at least 4% or 6% and a total capital ratio
of at least 8% or 10% in order to be considered "adequately
capitalized" or "well capitalized", respectively, under the
prompt corrective action provisions of the FDIC Improvement Act.
(4) Tier 1 capital plus the allowance for loan losses (limited to
1.25% of total risk-weighted assets).
(5) Risk weighted assets of $356.9 million were used to compute these
percentages.
22
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 Vote of Security Holders
SC Bancorp held its annual meeting of shareholders on April 18, 1995.
James E. Cunningham, Irving J. Pinsky and Donald E. Wood were elected
directors for a term of three years. The following persons also
continued as directors after the meeting: Robert C. Ball, H.A.
Beisswenger, LeGrande Coates, Jr., William C. Greenbeck, Larry D.
Hartwig and Peer A. Swan.
6,429,037 votes were cast for, no votes cast against and 221,366
withheld for Mr. Cunningham. 6,422,010 votes were cast for, no votes
cast against and 228,393 withheld for Mr. Pinsky. 6,288,697 votes
were cast for, no votes cast against and 361,706 withheld for Mr.
Wood.
Shareholders also voted to amend Article Six of the Company's Articles
of Incorporation to eliminate the preemptive rights of shareholders.
3,586,273 votes were cast for and 796,486 votes were cast against the
proposal. There were 307,895 abstentions and 1,959,749 broker non-
votes.
In addition, shareholders voted to ratify the appointment of Deloitte
& Touche LLP as SC Bancorp's auditors for 1995. 6,303,199 votes were
cast for and 61,512 cast against the appointment of Deloitte & Touche
LLP. There were 285,692 abstentions.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
Number Exhibit
10.1 Amendment to Employment Agreement, dated July 18, 1995
between SC Bancorp and Southern California Bank and Larry D.
Hartwig
(b) Reports on Form 8-K
Date of Report on Form 8-K: April 30, 1995. Items Reported: Items 2
and 7, acquisition of certain assets and assumption of certain
liabilities of Independence One Bank of California, F.S.B.
Date of Report on Form 8-K/A: April 30, 1995. Items Reported:
Amendment of Items 2 and 7, acquisition of certain assets and
assumption of certain liabilities of Independence One Bank of
California, F.S.B.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: August 9, 1995 SC BANCORP
(Registrant)
By: /s/ BRUCE W. ROAT
------------------------
Bruce W. Roat
E.V.P./C.F.O.
(Principal Financial and
Accounting Officer)
24