SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 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 (IRS 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) 238-3110
Securities registered pursuant to Section 12 (b) of the Act:
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. [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [x].
There were 7,472,805 shares of common stock for the registrant issued
and outstanding as of March 25, 1996. The aggregate market value of
the voting stock, based on the closing price of the stock on the
American Stock Exchange on March 25, 1996, held by nonaffiliates of the
registrant was approximately $44,451,062.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Definitive Proxy Statement for the Annual Meeting of
Stockholders, which will be filed within 120 days after the fiscal
year ended December 31, 1995, is incorporated by reference into
Part III of this Form 10-K.
SC BANCORP
FORM 10-K
INDEX
PAGES
PART I
ITEM 1. Business 1
ITEM 2. Properties 24
ITEM 3. Legal Proceedings 25
ITEM 4. Submission of Matters to a Vote of Security Holders 25
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 25
ITEM 6. Selected Financial Data 26
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
ITEM 8. Financial Statements and Supplementary Data 31
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 54
PART III
ITEM 10. Directors and Executive Officers of the Registrant 54
ITEM 11. Executive Compensation 54
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 54
ITEM 13. Certain Relationships and Related Transactions 54
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 54
Signatures 57
PART I.
ITEM 1. BUSINESS
SC Bancorp is a bank holding company incorporated in California on February 9,
1981, and registered under the Bank Holding Company Act of 1956, as amended
("BHCA"). SC Bancorp conducts operations through its sole subsidiary, Southern
California Bank, a California state-chartered commercial bank. The Company's
executive offices are located at 3800 East La Palma Avenue, Anaheim, California
92807-1798.
References herein 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.
Southern California Bank
Southern California Bank was formed in 1981 through the merger of the Bank of
Downey and the National Bank of Whittier, both founded in 1964. The Bank
provides general commercial banking services to individuals and to small to
medium-sized businesses in its local service areas through its branch network,
which as of December 31, 1995, consisted of 17 branches, 4 of which include
corporate banking centers. The Bank concentrates on marketing to and serving
the needs of individuals and businesses in southeastern Los Angeles County, and
in Orange and San Diego counties.
The Bank's primary credit focus is to serve professionals and middle-market
companies, including manufacturers and service providers with sales of up to $50
million. Current commercial lending activities consist primarily of medium-term
commercial real estate loans secured by commercial properties, working capital
loans, and accounts receivable financing. The Bank's consumer products are
tailored to serve the financing needs of its retail customers, and the
executives and employees of its business clients. Consumer loans consist
primarily of home equity lines of credit, personal lines of credit to high net
worth individuals, and vehicle loans.
The Bank accepts deposits mostly from small to medium-sized businesses and their
employees, high net worth individuals, and other consumers. The Bank's deposit
accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") to
the extent permitted by law. The FDIC is the Bank's principal regulator.
In recent years, the Bank's service area has experienced adverse economic
conditions. Southern California was hit particularly hard by cutbacks in the
defense and aerospace industries, reductions in the growth of international
trade, employment losses due to corporate restructurings and declines in real
estate values. These circumstances have affected some borrowers' ability to
repay loans.
As part of the Company's strategic focus on growth in the Orange County market,
the Company acquired substantially all of the Corporate and Private Banking
Division of Independence One Bank of California, F.S.B. ("IOBC"), during the
second quarter of 1995. The Company also acquired two full-service branch
locations: one in southern Orange County and the other in northern San
Diego County. Later, during the third quarter of 1995, management implemented a
restructuring plan (the "1995 Restructuring") to improve the efficiency and
financial performance of the Bank. The Bank recorded approximately $1.7 million
of losses and other charges in conjunction with the 1995 Restructuring.
During the second and fourth quarters of 1993, the Company acquired certain cash
assets and deposits of American Commerce National Bank from the FDIC, and a
branch centrally located in Downey, California from Community Bank. In
conjunction with these acquisitions, management initiated a consolidation of the
branch network. In the third quarter of 1993, the Company recorded nonrecurring
expenses of approximately $944 thousand for severance expenses, lease
terminations and write-offs of other assets as part of a restructuring plan
(the "1993 Restructuring").
Competition
The banking and financial services business in California generally, and in the
Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Bank competes for loans
and deposits and for financial services customers with other commercial banks,
savings and loan associations, securities and brokerage companies, mortgage
companies, insurance companies, finance companies, money market funds, credit
unions and other nonbank financial service providers. Many of these competitors
are much larger in total assets and capitalization, have greater access to
capital markets and offer a broader array of financial services than the Bank.
In order to compete with the other financial services providers, the Bank
principally relies upon local promotional activities and personal relationships
established by officers,
1
Part I. Item 1 (continued)
directors and employees with its customers, and specialized services tailored to
meet its customers' needs. In those instances where the Bank is unable to
accommodate a customer's needs, the Bank will arrange for those services to be
provided by its correspondents.
Divestitures
During the fourth quarter of 1995, the Company signed agreements to sell its
Signal Hill and City of Industry branches to other financial institutions. The
Company also elected to consolidate its Yorba Linda branch into its Tustin/
La Palma office. These transactions were completed during the first quarter of
1996.
Employees
At December 31, 1995, the Company had 226 full-time equivalent employees, up
from 220 at year-end 1994. Management believes that its relations with its
employees are satisfactory.
Effect Of Governmental Policies And Recent Legislation
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the company on its deposits and its
other borrowings and the interest rate received by the Company on loans extended
to its customers and securities held in the Company's portfolio, comprise the
major portion of the Company's earnings. These rates are highly sensitive to
many factors that are beyond the control of the Company. Accordingly, the
earnings and growth of the company are subject to the influence of local,
domestic and foreign economic conditions, including recession, unemployment and
inflation.
The commercial banking business is not only affected by general economic
conditions, but is also influenced by the monetary and fiscal policies of the
Federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial intermediaries subject to its
reserve requirements and by varying the discount rates applicable to borrowings
by depository institutions. The actions of the Federal Reserve Board in these
areas influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, in the California legislature and
before various bank regulatory and other professional agencies. The Financial
Services Modernization Act recently proposed in the House of Representatives
would generally permit banks to expand activities further into the areas of
securities and insurance, and would reduce the regulatory and paperwork burden
that currently affects banks. Additionally, the proposed legislation would
force the conversion of savings and loan holding companies into bank holding
companies, although unitary savings and loan holding companies authorized to
engage in activities as of January 1, 1995 would be exempted. Similar
legislation has also been proposed in the Senate. In addition, legislation was
recently introduced in Congress that would merge the deposit insurance funds
applicable to commercial banks and savings associations and impose a one-time
assessment on savings associations to recapitalize the deposit insurance fund
applicable to savings associations. The likelihood of any major legislative
changes and the impact such changes might have on the Company are impossible to
predict. See Item 1, Supervision and Regulation, below.
Supervision And Regulation
Bank holding companies and banks are extensively regulated under both federal
and state law. Set forth below is a summary description of certain laws which
relate to the regulation of SC Bancorp and the Bank. The description does not
purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations.
SC Bancorp
SC Bancorp, as a registered bank holding company, is subject to regulation under
the BHCA. SC Bancorp is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may
conduct examinations of SC Bancorp and its subsidiaries.
2
Part I. Item 1 (continued)
The Federal Reserve Board may require that SC Bancorp terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
when the Federal Reserve Board believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial safety,
soundness or stability of any of its banking subsidiaries. The Federal Reserve
Board also has the authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, SC Bancorp must file
written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a bank
holding company and its nonbanking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. Further, SC Bancorp is required by
the Federal Reserve Board to maintain certain levels of capital. See Item 1,
Supervision and Regulation-Capital Standards, below.
SC Bancorp is required to obtain the prior approval of the Federal Reserve Board
for the acquisition of more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank holding
company. Prior approval of the Federal Reserve Board is also required for the
merger or consolidation of SC Bancorp and another bank holding company.
SC Bancorp is prohibited by the BHCA, except in certain statutorily prescribed
instances, from acquiring direct or indirect ownership or control of more than
5% of the outstanding voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks or furnishing services to
its subsidiaries. However, SC Bancorp, subject to the prior approval of the
Federal Reserve Board, may engage in any, or acquire shares of companies engaged
in, activities that are deemed by the Federal Reserve Board to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. In making any such determination, the Federal Reserve Board is
required to consider whether the performance of such activities by SC Bancorp or
an affiliate can reasonably be expected to produce benefits to the public, such
as greater convenience, increased competition or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. The Federal Reserve Board is also empowered to differentiate between
activities commenced DE NOVO and activities commenced by acquisition, in whole
or in part, of a going concern.
Under Federal Reserve Board regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In addition,
it is the Federal Reserve Board's policy that in serving as a source of strength
to its subsidiary banks, a bank holding company should stand ready to use
available resources to provide adequate capital funds to its subsidiary banks
during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both. This doctrine has become known as the "source of strength"
doctrine. Although the United States Court of Appeals for the Fifth Circuit
found the Federal Reserve Board's source of strength doctrine invalid in 1990,
stating that the Federal Reserve Board had no authority to assert the doctrine
under the BHCA, the decision, which is not binding on federal courts outside the
Fifth Circuit, was recently reversed by the United States Supreme Court on
procedural grounds. The validity of the source of strength doctrine is likely
to continue to be the subject of litigation until definitively resolved by the
courts or by Congress.
SC Bancorp is also a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such, SC Bancorp and its subsidiaries are
subject to examination by, and may be required to file reports with, the
California State Banking Department.
Finally, SC Bancorp is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, including but not limited to,
filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
The Bank
The Bank, as a California state chartered bank, is subject to primary
supervision, periodic examination and regulation by the California
Superintendent of Banks ("Superintendent") and the FDIC. If, as a result of an
examination of a bank, the FDIC should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or
other aspects of the bank's operations are unsatisfactory or that the bank or
its management is violating or has violated any law or regulation,
3
Part I. Item 1 (continued)
various remedies are available to the FDIC. Such remedies include the power to
enjoin "unsafe or unsound" practices, to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of the bank, to assess civil monetary penalties,
to remove officers and directors and ultimately to terminate a bank's deposit
insurance, which for a California state-chartered bank would result in a
revocation of the bank's charter. The Superintendent has many of the same
remedial powers.
The deposits of the Bank are insured by the FDIC in the manner and to the extent
provided by law. For this protection, the Bank pays a semiannual statutory
assessment. See Item 1, Supervision and Regulation - Premiums for Deposit
Insurance, below. Although the Bank is not a member of the Federal Reserve
System, it is nevertheless subject to certain regulations of the Federal Reserve
Board.
Various requirements and restrictions under the laws of the State of California
and the United States affect the operations of the Bank. State and federal
statutes and regulations relate to many aspects of the Bank's operations,
including reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices and capital requirements. Further, the Bank is required to
maintain certain levels of capital. See Item 1, Supervision and
Regulation - Capital Standards, below.
Restrictions On Transfers Of Funds To SC Bancorp By The Bank
SC Bancorp is a legal entity separate and distinct from the Bank. SC Bancorp's
ability to pay cash dividends is limited by state law.
There are statutory and regulatory limitations on the amount of dividends which
may be paid to SC Bancorp by the Bank. California law restricts the amount
available for cash dividends by state chartered banks to the lesser of retained
earnings or the bank's net income for its last three fiscal years (less any
distributions to shareholders made during such period). Notwithstanding this
restriction, a bank may, with the prior approval of the Superintendent, pay a
cash dividend in an amount not exceeding the greater of the retained earnings of
the Bank, the net income for such bank's last preceding fiscal year, and the net
income of the bank for its current fiscal year.
The FDIC also has authority to prohibit the Bank from engaging in activities
that, in the FDIC's opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the FDIC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the FDIC and the Federal Reserve Board
have established guidelines with respect to the maintenance of appropriate
levels of capital by banks or bank holding companies under their jurisdiction.
Compliance with the standards set forth in such guidelines and the restrictions
that are or may be imposed under the prompt corrective action provisions of
federal law could limit the amount of dividends which the Bank or SC Bancorp may
pay. The Superintendent may impose similar limitations on the conduct of
California-chartered banks. See Item 1, Supervision and Regulation - Prompt
Corrective Regulatory Action and Other Enforcement Mechanisms and - Capital
Standards, below for a discussion of these additional restrictions on capital
distributions.
At present, substantially all of SC Bancorp's revenues, including funds
available for the payment of dividends and other operating expenses, are from
the proceeds of a stock rights offering conducted by the Company in 1994. At
December 31, 1995, the Bank had $8.6 million in retained earnings available for
the payment of cash dividends.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, SC Bancorp or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of SC Bancorp or other affiliates. Such
restrictions prevent SC Bancorp and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in SC
Bancorp or to or in any other affiliate is limited to 10% of the Bank's capital
and surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). California law also imposes
certain restrictions with respect to transactions involving SC Bancorp and other
controlling persons of the Bank. Additional restrictions on transactions with
affiliates may be imposed on the Bank under the prompt corrective action
provisions of federal law. See Item 1, Supervision and Regulation - Prompt
Corrective Action and Other Enforcement Mechanisms, below.
4
Part I. Item 1 (continued)
Capital Standards
The Federal Reserve Board and the FDIC have adopted risk-based minimum capital
guidelines intended to provide a measure of capital that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. Treasury securities, to 100% for assets with relatively
high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which includes off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, cumulative
preferred stock, long term preferred stock, eligible term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. The federal banking agencies
require a minimum ratio of qualifying total capital to risk-adjusted assets of
8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3%
minimum, or 4% to 5%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency. Because this proposal has only recently been issued,
the Bank currently is unable to predict the impact of the proposal on the Bank
if the policy statement is adopted as proposed.
In January 1995, the federal banking agencies issued a final rule relating to
capital standards and the risks arising from the concentration of credit and
nontraditional activities. Institutions which have significant amounts of their
assets concentrated in high risk loans or nontraditional banking activities and
who fail to adequately manage these risks, will be required to set aside capital
in excess of the regulatory minimums. The federal banking agencies have not
imposed any quantitative assessment for determining when these risks are
significant, but have identified these issues as important factors they will
review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss reserves to classified assets.
The benchmark set forth by such policy statement is the sum of (a) assets
classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of
assets classified substandard; and (d) estimated credit losses on other assets
over the upcoming 12 months.
Federally supervised banks and savings associations are currently required to
report deferred tax assets in accordance with SFAS No. 109. See NOTE 1-
SIGNIFICANT ACCOUNTING POLICIES of the Company's consolidated financial
statements located in Part II, Item 8, of this Form 10-K. The federal banking
agencies recently issued final rules, effective April 1, 1995, which limit the
amount of deferred tax assets that are allowable in computing an institution's
regulatory capital. The standard has been in effect on an interim basis since
March 1993. Deferred tax assets that can be realized for taxes paid in prior
carryback years and from future reversals of
5
Part I. Item 1 (continued)
existing taxable temporary differences are generally not limited. Deferred tax
assets that can only be realized through future taxable earnings are limited for
regulatory capital purposes to the lesser of (i) the amount that can be realized
within one year of the quarter-end report date, or (ii) 10% of Tier 1 Capital.
The amount of any deferred tax in excess of this limit would be excluded from
Tier 1 Capital and total assets and regulatory capital calculations.
Future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of the Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends.
Prompt Corrective Action And Other Enforcement Mechanisms
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final regulations
implementing the prompt corrective action provisions of federal law. An insured
depository institution generally will be classified in the following categories
based on capital measures indicated below:
"WELL CAPITALIZED"
Total risk-based capital of 10%; Tier 1 risk-based capital of 6%; and
Leverage ratio of 5%.
"ADEQUATELY CAPITALIZED"
Total risk-based capital of 8%; Tier 1 risk-based capital of 4%; and
Leverage ratio of 4% (3% if the institution
receives the highest rating from its primary regulator).
"UNDERCAPITALIZED"
Total risk-based capital less than 8%; Tier 1 risk-based capital less
than 4%; or Leverage ratio less than 4% (3% if the
institution receives the highest rating from its primary regulator).
"SIGNIFICANTLY UNDERCAPITALIZED"
Total risk-based capital less than 6%; Tier 1 risk-based capital less
than 3%; or Tier 1 risk-based capital less than 3%.
"CRITICALLY UNDERCAPITALIZED"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from paying management fees to
any controlling persons or, with certain limited exceptions, making capital
distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan
(i) specifies the steps the institution will take to become adequately
capitalized, (ii) is based on
6
Part I. Item 1 (continued)
realistic assumptions and (iii) is likely to succeed in restoring the depository
institution's capital. In addition, each company controlling an
undercapitalized depository institution must guarantee that the institution will
comply with the capital plan until the depository institution has been
adequately capitalized on an average basis during each of four consecutive
calendar quarters and must otherwise provide adequate assurances of performance.
The aggregate liability of such guarantee is limited to the lesser of (a) an
amount equal to 5% of the depository institution's total assets at the time the
institution became undercapitalized or (b) the amount which is necessary to
bring the institution into compliance with all capital standards applicable to
such institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose
any of the additional restrictions or sanctions that it may impose on
significantly undercapitalized institutions if it determines that such action
will further the purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized, or is
undercapitalized and fails to submit, or in a material respect to implement, an
acceptable capital restoration plan, is subject to additional restrictions and
sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
specified activities; (vi) replacement of directors or senior executive
officers; (vii) prohibitions on the receipt of deposits from correspondent
institutions; (viii) restrictions on capital distributions by the holding
companies of such institutions; (ix) required divestiture of subsidiaries by the
institution; or (x) other restrictions as determined by the appropriate federal
banking agency. Although the appropriate federal banking agency has discretion
to determine which of the foregoing restrictions or sanctions it will seek to
impose, it is required to force a sale of voting shares or merger, impose
restrictions on affiliate transactions and impose restrictions on rates paid on
deposits unless it determines that such actions would not further the purpose of
the prompt corrective action provisions. In addition, without the prior written
approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to its senior executive
officers or provide compensation to any of them at a rate that exceeds such
officer's average rate of base compensation during the 12 calendar months
preceding the month in which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository
institution would not be liable to the institution's shareholders or creditors
for consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease and desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted.
Safety And Soundness Standards
In July 1995, the federal banking agencies adopted final guidelines establishing
standards for safety and soundness, as required by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The guidelines set forth
operational and managerial standards relating to internal controls, information
systems and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits.
Guidelines for asset quality and earnings standards will be adopted in the
future. The guidelines establish the safety and soundness standards that the
agencies will use to identify and address problems at insured depository
institutions before capital becomes impaired. If an institution fails to comply
with a safety and soundness standard, the appropriate federal banking agency may
require the institution to submit a compliance plan. Failure to submit a
compliance plan or to implement an accepted plan may result in enforcement
action.
7
Part I. Item 1 (continued)
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value limits that do
not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be conducted by
either state certified or state licensed appraisers for transactions in excess
of certain amounts. State certified appraisers are required for all
transactions with a transaction value of $1,000,000 or more; for all
nonresidential transactions valued at $250,000 or more; and for "complex" 1-4
family residential properties of $250,000 or more. A state licensed appraiser
is required for all other appraisals. However, appraisals performed in
connection with "federally related transactions" must now comply with the
agencies' appraisal standards. Federally related transactions include the sale,
lease, purchase, investment in, or exchange of, real property or interests in
real property, the financing or refinancing of real property, and the use of
real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
Premiums For Deposit Insurance
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The result of these provisions is that the assessment rate on
deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may not
be less than the amount that would be raised if the assessment rate for all BIF
members were 0.23% of deposits. On August 8, 1995, the FDIC announced that the
designated reserve ratio had been achieved and, accordingly, issued final
regulations adopting an assessment rate schedule for BIF members of 4 to 31
basis points effective on June 1, 1995. On November 14, 1995, the FDIC further
reduced deposit insurance premiums to a range of 0 to 27 basis points effective
for the semi-annual period beginning January 1, 1996.
Under the risk-based assessment system, a BIF member institution such as the
Bank is categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three categories based
on supervisory evaluations by its primary federal regulator (in the Bank's case,
the FDIC). The three supervisory categories are: financially sound with only a
few minor weaknesses (Group A), demonstrates weaknesses that could result in
significant deterioration (Group B), and poses a substantial probability of loss
(Group C). The capital ratios used by the FDIC to define well capitalized,
adequately capitalized and undercapitalized are the same in the FDIC's prompt
corrective action regulations. The BIF assessment rates are summarized below;
assessment figures are expressed in terms of cents per $100 in deposits.
Assessment Rates Effective Through the First Half of 1995
Group A Group B Group C
--------------------------------
Well Capitalized ................. 23 26 29
Adequately Capitalized ........... 26 29 30
Undercapitalized ................. 29 30 31
8
Part I. Item 1 (continued)
Assessment Rates Effective through the Second Half of 1995
Group A Group B Group C
--------------------------------
Well Capitalized .................. 4 7 21
Adequately Capitalized ............ 7 14 28
Undercapitalized .................. 14 28 31
Assessment Rates Effective January 1, 1996
Group A Group B Group C
--------------------------------
Well Capitalized ................ 0* 3 17
Adequately Capitalized ........... 3 10 24
Undercapitalized ................. 10 24 27
*Subject to a statutory minimum assessment of $1,000 per semi-annual period
(which also applies to all other assessment risk classifications).
As a result of the recent acquisition of deposits from IOBC, the Bank maintains
some deposits insured by the Savings Association Insurance Fund ("SAIF")
administered by the FDIC. For these deposits, the assessment rate ranges from
0.23% of deposits for well-capitalized institutions in Subgroup A to 0.31% of
deposits for undercapitalized institutions in Subgroup C.
A number of proposals have recently been introduced in Congress to address the
disparity in bank and thrift deposit insurance premiums. On September 19, 1995,
legislation was introduced and referred to the House Banking Committee that
would, among other things: (i) impose a requirement on all SAIF member
institutions to fully recapitalize the SAIF by paying a one-time special
assessment of approximately 85 basis points on all assessable deposits as of
March 31, 1995, which assessment would be due as of January 1, 1996; (ii) spread
the responsibility for FICO interest payments across all FDIC-insured
institutions on a pro-rata basis, subject to certain exceptions; (iii) require
that deposit insurance premium assessment rates applicable to SAIF member
institutions be no less than deposit insurance premium assessment rates
applicable to BIF member institutions; (iv) provide for a merger of the BIF and
the SAIF as of January 1, 1998; (v) require savings associations to convert to
state or national bank charters by January 1, 1998; (vi) require savings
associations to divest any activities not permissible for commercial banks
within five years; (vii) eliminate the bad-debt reserve deduction for savings
associations, although savings associations would not be required to recapture
into income their accumulated bad-debt reserves; (viii) provide for the
conversion of savings and loan holding companies into bank holding companies as
of January 1, 1998, although unitary savings and loan holding companies
authorized to engage in activities as of September 13, 1995 would have such
authority grandfathered (subject to certain limitations); and (ix) abolish the
OTS and transfer the OTS' regulatory authority to the other federal banking
agencies. The legislation would also provide that any savings association that
would become undercapitalized under the prompt corrective action regulations as
a result of the special deposit premium assessment could be exempted from
payment of the assessment, provided that the institution would continue to be
subject to the payment of semiannual assessments under the current rate schedule
following the recapitalization of the SAIF. The legislation was considered and
passed by the House Banking Committee's Subcommittee on Financial Institutions
on September 27, 1995, and has not yet been acted on by the full House Banking
Committee.
On September 20, 1995, similar legislation was introduced in the Senate,
although the Senate bill does not include a comprehensive approach for merging
the savings association and commercial bank charters. The Senate bill remains
pending before the Senate Banking Committee.
The future of both these bills is linked with that of pending budget
reconciliation legislation since some of the major features of the bills are
included in the Seven-Year Balanced Budget Reconciliation Act. The budget bill,
which was passed by both the House and Senate on November 17, 1995 and vetoed by
the President on December 6, 1995, would: (i) recapitalize the SAIF through a
special assessment of between 70 and 80 basis points on deposits held by
institutions as of March 31, 1995; (ii) provide an exemption to this rule for
weak institutions, and a 20% reduction in the SAIF-assessable deposits of so-
called "Oakar banks;" (iii) expand the assessment base for FICO payments to
include all FDIC-insured institutions; (iv) merge the BIF and SAIF on January 1,
1998, only if no insured depository institution is a savings association on that
date; (v) establish a special reserve for the SAIF on January 1, 1998; and (vi)
prohibit the FDIC from setting semiannual assessments in excess of the amount
needed to maintain the reserve ratio
9
Part I. Item 1 (continued)
of any fund at the designated reserve ratio. The bill does not include a
provision to merge the charters of savings associations and commercial banks.
The Bank acquired deposits from IOBC, a SAIF-insured institution, during the
year; however, the deposits were acquired after the March 31, 1995 special
assessment date contained in the House Banking Committee proposal.
In light of ongoing debate over the content and fate of the budget bill, the
different proposals currently under consideration and the uncertainty of the
Congressional budget and legislative processes in general, management cannot
predict whether any or all of the proposed legislation will be passed, or in
what form. Accordingly, the effect of any such legislation on the Bank cannot
be determined.
Interstate Banking And Branching
In September 1994, the Riegel-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Interstate Act") became law. Under the Interstate Act,
beginning one year after the date of enactment, a bank holding company that is
adequately capitalized and managed may obtain approval under the BHCA to acquire
an existing bank located in another state without regard to state law. A bank
holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not
acquire a state bank in existence for less than a minimum length of time that
may be prescribed by state law except that a state may not impose more than a
five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
In October 1995, California adopted "opt in" legislation under the Interstate
Act that permits out-of-state banks to acquire California banks that satisfy a
five-year minimum age requirement (subject to exceptions for supervisory
transactions) by means of merger or purchases of assets, although entry through
acquisition of individual branches of California institutions and de novo
branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-state
banks in the markets in which the Company operates, although it is difficult to
assess the impact that such increased competition may have on the Company's
operations.
Community Reinvestment Act And Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities. The FDIC has rated the Bank
"satisfactory" in complying with its CRA obligations.
In May 1995, the federal banking agencies issued final regulations which change
the manner in which they measure a bank's compliance with its CRA obligations.
The final regulations adopt a performance-based evaluation system which bases
CRA ratings on an institution's actual lending service and investment
performance rather than the extent to which the institution conducts needs
assessments, documents community outreach or complies with other procedural
requirements. In March 1994, the Federal Interagency Task Force on Fair Lending
issued a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
10
Part I. Item 1
Accounting Changes
Refer to NOTE 1-SIGNIFICANT ACCOUNTING POLICIES of the Company's consolidated
financial statements, located in Part II, Item 8, of this Form 10-K for
discussion of current accounting pronouncements.
Existing And Potential Enforcement Actions
Commercial banking organizations, such as the Bank, and their institution-
affiliated parties, which include SC Bancorp, may be subject to potential
enforcement actions by the Federal Reserve Board, the State Banking Department
and the FDIC for unsafe or unsound practices in conducting their businesses or
for violations of any law, rule, regulation or any condition imposed in writing
by the agency or any written agreement with the agency. Enforcement actions
may include the imposition of a conservator or receiver, the issuance of a
cease-and-desist order that can be judicially enforced, the termination of
insurance of deposits (in the case of a bank), the imposition of civil money
penalties, the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and prohibition orders
against institution-affiliated parties and the imposition of restrictions and
sanctions under the prompt corrective action provisions of the FDIC Improvement
Act. Additionally, a holding company's inability to serve as a source of
strength to its subsidiary banking organizations could serve as an additional
basis for a regulatory action against the holding company.
In late 1993, the Bank was examined by the FDIC. As a result of that
examination, the Bank entered into a Memorandum of Understanding ("MOU") with
the FDIC and California State Banking Department. The MOU required the Bank to
reduce classified assets to specified levels, and to attain a minimum leverage
capital ratio of 7% by November 30, 1994. During 1994, the Company raised
approximately $14.2 million through a common stock rights offering and
substantially reduced problem assets, thereby fully complying with the MOU
requirements. The FDIC and California State Banking Department released the
Bank from the MOU effective February 15, 1995. At December 31, 1995, the
Company's and the Bank's capital ratios met the regulatory guidelines for a well
capitalized institution. See also Management's Discussion of Financial
Condition and Results of Operations ("MD&A") which is included in Part II, Item
7, of this Form 10-K.
The FDIC conducted its most recent examination of the Bank as of May 31, 1995.
The FDIC's report of examination dated October 11, 1995 contained no findings of
a material nature.
The Federal Reserve Bank of San Francisco (the "FRB") conducted its most
recent examination of the Company as of June 30, 1995. The FRB's report of
examination dated December 15, 1995 contained no findings of a material
nature.
Results Of Operations
The following table summarizes key performance indicators pertaining to the
Company's operating results. Certain figures have been adjusted for the
restructuring as indicated. Average balances are computed using daily
balances. Refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") in Part II, Item 7 of this Form
10-K for additional discussion of the Company's operating results.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------
Return on average assets 0.19% 0.67% -0.59%
as adjusted for restructuring items (1) 0.41% - -0.47%
Return on average shareholders' equity 2.14% 6.59% -8.90%
as adjusted for restructuring items (1) 4.62% - -7.06%
Average shareholders' equity to average total assets 8.87% 10.15% 6.61%
Net income (loss) $ 869 $ 2,705 $ (2,733)
Earnings (loss) per share $ 0.12 $ 0.49 $ (0.79)
Total average assets $457,196 $404,504 $464,286
- -------------------------------------------------------------------------------------------
(1) 1995 net income was adjusted to exclude 1995 Restructuring charges of
$1,006 thousand after tax. 1993 net income was adjusted to exclude 1993
Restructuring charges of $566 thousand after tax.
11
Part I. Item 1 (continued)
Net Interest Income
Net interest income is the difference between interest earned on assets and
interest paid on liabilities. Net interest margin is net interest income
expressed as a percentage of average interest-earning assets. The following
table sets forth a comparison of net interest income and net interest margin for
the years indicated.
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
Increase/ Increase/
1995 decrease 1994 decrease 1993
- ----------------------------------------------------------------------------------------------
Interest income $33,396 26.40% $26,420 -11.14% $29,732
Interest expense 12,015 91.35% 6,279 -34.72% 9,619
- ----------------------------------------------------------------------------------------------
Net interest income $21,381 6.16% $20,141 0.14% $20,113
- ----------------------------------------------------------------------------------------------
Net interest margin 5.30% 5.75% 4.82%
- ----------------------------------------------------------------------------------------------
Interest income and expense are affected by changes in the volume and mix of
average interest-earning assets and interest-bearing deposits and other
liabilities, as well as fluctuations in interest rates. The following tables
set forth certain information concerning average interest-earning assets and
average interest-bearing liabilities and the yields and rates thereon. The
tables also set forth a summary of the changes in interest income and interest
expense resulting from changes in average interest rates (rate) and changes in
average assets and liability balances (volume) for the years indicated. Average
balances are average daily balances. Nonaccrual loans are included in total
average loans outstanding.
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
balance Expense Rate balance Expense Rate balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans, net of deferred fees (1) $261,631 $25,960 9.92% $203,507 $18,971 9.32% $235,414 $20,212 8.59%
Investment securities 122,498 6,299 5.14% 139,991 7,166 5.12% 165,283 9,048 5.47%
Federal funds sold and other 19,463 1,137 5.84% 6,480 283 4.37% 16,436 472 2.87%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets/
interest income 403,593 33,396 8.27% 349,978 26,420 7.55% 417,133 29,732 7.13%
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets 53,604 54,526 47,153
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $457,196 $404,504 $464,286
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Deposits $282,574 10,998 3.89% $237,105 $ 5,956 2.51% $287,545 $ 8,200 2.85%
Other interest-bearing liabilities 8,059 1,017 12.62% 5,689 323 5.68% 38,554 1,419 3.68%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/
interest expense 290,633 12,015 4.13% 242,794 6,279 2.59% 326,100 9,619 2.95%
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest bearing liabilities 125,989 120,666 120,895
Shareholders' equity 40,575 41,043 30,710
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $457,196 $404,504 $477,704
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income/net interest margin $21,381 5.30% $20,141 5.75% $20,113 4.82%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans on nonaccrual status of approximately $1.4 million,
$1.6 million, and $7.1 million at December 31, 1995, 1994, and 1993,
respectively. The amount of interest foregone on loans that were on
nonaccrual status were approximately $207 thousand, $93 thousand,
and $550 thousand for the years ended December 31, 1995, 1994, and 1993,
respectively. Interest income on loans includes amortization
of net loan fees of approximately $211 thousand, $629 thousand, and $575
thousand for the years ended December 31, 1995, 1994, and 1993,
respectively. Additionally, net interest (expense) income of ($929)
thousand, $141 thousand, and $251 thousand relating to the interest
rate swap agreements was included in interest income for the years ended
December 31, 1995, 1994, and 1993, respectively.
12
Part I. Item 1 (continued)
(DOLLARS IN THOUSANDS) 1995 and 1994 1994 and 1993
Increase (decrease) Increase (decrease)
due to change in Net due to change in Net
Rate Volume Change Rate Volume Change
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans, net of deferred fees $ 1,614 $ 5,376 $ 6,990 $ 1,498 $ (2,740) $ (1,242)
Investment securities 28 (895) (868) (502) (1,385) (1,888)
Federal funds sold and other 286 568 854 100 (282) (183)
- --------------------------------------------------------------------------------------------------------------------------
Total interest earning assets/interest income 1,928 5,049 6,976 1,095 (4,407) (3,312)
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits 2,952 2,090 $ 5,042 (506) (1,739) $ (2,244)
Other interest-bearing liabilities 716 (23) 693 20 (1,115) (1,096)
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 3,678 2,058 5,736 (486) (2,854) (3,340)
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ (1,750) $ 2,991 $ 1,240 $ 1,581 $ (1,554) $ 28
- --------------------------------------------------------------------------------------------------------------------------
Net interest income increased $1.2 million to $21.4 million for the year ended
December 31,1995, from $20.1 million a year ago. Most of the increase is due to
higher average loan balances, which increased $58.1 million over 1994 largely
due to the purchase of the IOBC and SBA loans. The average balance of Federal
funds sold increased by $13 million and the average balance of investment
securities decreased by $17.5 million compared to 1994. The decrease in
investment securities in 1995 reflects the sale of approximately $27 million of
available-for-sale securities, and the maturity of approximately $6.0 million
and $7.5 million of securities classified as available-for-sale and held-to-
maturity, respectively. Average yields on earning assets for 1995 increased by
72 basis points to 8.27% from 7.55% for 1994. The average yield on loans,
including the effect of the interest rate swaps, was 9.92% for the year ended
December 31,1995, up 60 basis points from 9.32% for 1994. The increase in the
average national prime rate to 8.80% for 1995 from 7.15% for 1994 contributed
to the increase in loan yields.
Net interest income increased slightly, by $28 thousand, in 1994 from $20.1
million in 1993, despite the $67.1 million decrease in average earning assets to
$350.0 million for 1994 from $417.1 million for 1993. The decrease in earning
assets comprises a $25.3 million decrease in investment securities and a $31.9
million decrease in loans. The decrease in investment securities reflects
maturities of $10.3 million.. The decrease in average loan balances in 1994
reflects the Company's efforts to reduce its concentrations in real estate loans
and to reduce the level of nonaccrual loans, which were reduced by $17.4 million
and $5.5 million, respectively. The increase in net interest income for the year
is largely due to higher yields on prime-based loans. The prime rate increased
by 2.5% during 1994, leading to a 73 basis point increase in the average yield
on loans and a 42 basis point increase in the overall yield on earning assets
from 1993.
The Company's net interest margin decreased 45 basis points to 5.30% from 5.75%
for the years ended December 31,1995 and 1994, respectively, despite the
increase in loan yields. The decrease in net interest margin is primarily due
to an increase in interest expense. The increase in interest expense can be
attributed to a $408 thousand nonrecurring interest adjustment during the first
quarter of 1995 relating to the Company's deferred compensation plans, and to
the increase in time certificate of deposit ("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 a deposit promotion in the first quarter of 1995. The average
balance of TCDs increased by $65.9 million to $145.6 million for 1995, from
$79.7 million for 1994. The increase in TCD balances is due to a promotional
TCD program run during the first quarter of 1995 to provide additional funding
for the IOBC acquisition. The average cost of funds on TCDs increased to 5.77%
in 1995 from 3.80% in 1994. The Company lowered the average rates on the
promotional TCDs to 5.89% from 7.20%, and retained approximately 70% of the TCDs
that matured in September 1995. The Company's net interest margin for 1994
increased 93 basis points to 5.75% for 1994 from 4.82% for 1993, largely due
to overall market rate increases during 1994. Interest expense decreased $3.3
million to $6.3 million for 1994 from $9.6 million. This decrease reflects
substantially lower average borrowings of $5.7 million for 1994 as compared to
$38.6 million for 1993.
13
Part I. Item 1 (continued)
Provision For Possible Loan Losses
The Company recorded a provision for possible loan losses of $1.5 million for
1995, a net credit of $850 thousand to the provision for possible loan losses in
1994, and a $11.8 million provision in 1993. The $1.5 million of provisions
recorded in 1995 includes $900 thousand booked in the third quarter. The Company
performed an extensive review of its loan portfolio with regard to collateral
adequacy during the third quarter. The third quarter provision includes $600
thousand relating to two commercial real estate loans. Net loan charge-offs were
$1.7 million for the year. The allowance for possible loan losses was 1.81% of
gross loans outstanding, and 414.01% of nonaccrual loans outstanding at December
31, 1995, respectively.
The credit to the provision for possible loan losses recorded in 1994 was based
on management's determination that an excess existed in the allowance for
possible loan losses due to the following factors: substantial provisions had
been recorded during 1993, several previously classified loans had been
upgraded, and there had been a significant decrease in the level of net loan
charge-offs between 1994 and 1993. Accordingly, $850 thousand was reversed from
the allowance for possible loan losses in the second quarter of 1994, and no
provisions were recorded for the remainder of the year. Net loan charge-offs
were $4.6 million for 1994. The allowance for possible loan losses was 2.56% of
gross loans outstanding, and 329.88% of nonaccrual loans outstanding at December
31, 1994, respectively.
The substantial provision for loan losses in 1993 was necessitated by high
levels of nonperforming and classified loans and charge-offs. The charge-offs
were concentrated in commercial real estate mortgage loans and commercial loans
to borrowers secured by junior liens. Net loan charge-offs were $7.8 million for
1993. The allowance for possible loan losses was 5.08% of gross loans
outstanding, and 152.53% of nonaccrual loans outstanding at December 31, 1993,
respectively. Refer to NOTE 4-LOANS of the Company's consolidated financial
statements which are included in Part II, Item 8, of this Form 10-K.
Noninterest Income
The following table sets forth the major components of noninterest income, net
of restructuring activity, for the years indicated:
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1993
1995 Restructure 1995, Net 1994 1993 Restructure Net 1993
---- ----------- --------- ---- ---- ----------- --------
Service charges on deposit accounts $ 1,727 $ 1,727 $ 1,754 $ 1,779 $ 1,779
Other fees and charges 2,542 - 2,542 2,637 3,162 3,162
Merchant bankcard income 518 518 1,249 1,631 1,631
Net gain (loss) on sales of investment securities (620) (620) - 17 7,074 7,074 -
Net gains on sales of loans 145 - 145 215 - -
Net gain (loss) on sales of fixed assets (87) (109) 22 409 4 4
Life insurance income 510 - 510 58 49 49
Other income 278 - 278 361 244 244
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 5,013 $ (729) $ 5,742 $ 6,700 $ 13,943 $ 7,074 $ 6,869
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest income, net of restructuring activity, decreased to $5.7 million for
1995, from $6.7 million for 1994, and $6.9 million for 1993. Current year
restructuring losses of $729 thousand include the previously-discussed $620
thousand loss on the sale of investment securities, and a $109 thousand loss on
the sale of fixed assets at the two branches being sold. The remaining
decrease in noninterest income resulted from lower merchant bankcard fee
revenues, partially offset by an increase in life insurance income which
included a benefit payment of $407 thousand.
Noninterest income in 1994 included gains on sales of loans and sale of the
Company's headquarters facility of approximately $215 thousand and $414
thousand, respectively.
Noninterest income in 1993 included approximately $7.1 million of gains on sales
of investment securities from the 1993 Restructuring of the Company's investment
securities portfolio.
Noninterest Expense
The following table provides a breakdown of the Company's noninterest expense by
category, net of restructuring charges:
14
Part I. Item 1 (continued)
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1993
1995 Restructure 1995, Net 1994 1993 Restructure 1993 Net
---- ----------- --------- ---- ---- ----------- --------
Salaries and employee benefits $ 10,723 $ 179 $ 10,544 $ 9,763 $ 10,743 $ 275 $ 10,468
Occupancy, furniture and equipment 5,273 256 5,017 4,666 5,129 555 4,574
Professional fees 1,740 86 1,654 1,882 1,583 - 1,583
Telecommunications 481 - 481 352 318 - 318
Office supplies 391 - 391 436 470 114 356
Data processing 502 - 502 449 448 - 448
Merchant card expense 475 - 475 1,013 1,424 - 1,424
FDIC assessment 498 - 498 1,006 888 - 888
Insurance 348 - 348 436 399 - 399
Goodwill amortization 821 427 394 211 167 - 167
Other real estate owned 219 - 219 1,832 2,897 - 2,897
Advertising and business development 772 - 772 613 576 - 576
Postage and delivery 586 - 586 543 415 - 415
Other operating expense 464 - 464 650 567 - 567
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 23,293 $ 948 $ 22,343 $23,852 $ 26,024 $ 944 $ 25,080
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense as a %
of average total assets 4.89% 5.90% 5.40%
The Company reported noninterest expense of $23.3 million, $23.9 million, and
$26.0 million for the years ended December 31, 1995, 1994 and 1993,
respectively. The current year's expense included $948 thousand of restructuring
charges for (1) staff reductions including branch sales - $179 thousand; (2)
closure of an administrative facility and write off of lease obligations on
branch sales - $256 thousand; (3) accruals for legal and professional fees
anticipated for the branch sale transactions - $86 thousand; and (4) write-off
of $427 thousand of goodwill associated with one of the branches being sold. As
adjusted for restructuring charges, noninterest expense for 1995 was $22.3
million as compared to approximately $23.9 for 1994. The net decrease reflects
decreases in the FDIC assessment, net expenses for other real estate owned
("OREO"), and merchant bankcard expenses offset by increases in salaries and
benefits, occupancy, and goodwill amortization due to the IOBC purchase.
Noninterest expense decreased $1.2 million to $23.9 million for 1994 from $25.1
million for 1993 which is net of $944 thousand of restructuring charges related
to branch closures and consolidations. Most of the decreases were reflected in
salaries and benefits, occupancy, furniture and equipment, net expenses for
OREO, and merchant bankcard expenses, offset by increases in professional fees
and FDIC assessment.
The Company has improved its operating efficiencies and achieved lower
noninterest expense, as adjusted for the expenses and losses of the
restructuring plan, and the branch consolidations, on a larger average earning
assets base. As adjusted, noninterest expense as a percentage of average total
assets has decreased to 4.89% in 1995 from 5.90% in 1994. Noninterest expense
as a percentage of average total assets increased to 5.90% in 1994 from 5.40% in
1993.
The increase in salaries and benefits after adjusting for restructuring charges,
for the year ended December 31,1995 compared to the previous year, is primarily
due to the addition of the IOBC corporate banking staff, partly offset by
reductions in staffing elsewhere in the organization. The Company had 230 and
220 full-time equivalent staff at December 31, 1995 and 1994, respectively.
Salaries and benefits decreased by approximately $705 thousand after adjusting
for $275 thousand related to branch consolidations in 1993 to $9.8 million for
the year ended December 31, 1994, from $10.5 million for the year ended December
31, 1993, largely as a result of staff reductions from branch consolidations. At
December 31, 1994, the Company had 220 full-time equivalent employees, down from
244 at year-end 1993.
15
Part I. Item 1 (continued)
The following table sets forth the components of the Company's OREO expense for
the years indicated:
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
OREO income $ (95) $ - $ -
OREO holding expenses 316 655 151
Writedowns and provisions for losses 128 1,182 2,487
Net (gains)/losses from sales (130) (5) 259
- ---------------------------------------------------------------------------
OREO expense, net $ 219 $ 1,832 $ 2,897
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
OREO expense decreased by $1.6 million to $219 thousand for 1995, from $1.8
million in the previous year. Most of the decrease for the year is reflected in
lower charges for writedowns of OREO properties, and from lower holding costs.
Seven OREO properties were sold during the year, resulting in a net gain of $130
thousand. OREO expense for 1994 decreased approximately $1.1 million from $2.9
million for 1993 to $1.8 million for 1994. The decrease resulted from lower
OREO writedowns, offset by slightly higher OREO holding costs.
Financial Condition
Additional discussion of the Company's financial condition is provided in the
MD&A in Part II, Item 7, of this Form 10-K.
Cash And Cash Equivalents
Cash and cash equivalents consist of cash on hand, deposits at correspondent
banks and overnight investment of excess cash balances as 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 $3.0 million were maintained in the form of deposits with the
Federal Reserve Bank at December 31,1995.
Investment Securities
The Company's securities portfolio includes U.S. Treasury securities and U.S.
federal agency securities, most of which are mortgage-backed securities. The
Company reclassified its entire held-to-maturity portfolio to the available-for-
sale category in December, 1995 under the special one-time exemption authorized
by the Financial Accounting Standards Board. The decrease in the balance of
investment securities due to sales and maturities is discussed in Item 1-Net
Interest Income above. Reference may also be made to NOTE 1-SIGNIFICANT
ACCOUNTING POLICIES AND NOTE 3-INVESTMENT SECURITIES of the Company's
consolidated financial statements located in Part II, Item 8, of this Form 10-K.
The following table sets forth the maturity distribution of the Company's
investment securities at December 31, 1995:
Maturing in
- -------------------------------------------------------------------------------------------------------
Over one Over five
One year year through years through Over
or less five years ten years ten years Total
- -------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities $ - $ 5,085 $ - $ 74 $ 5,159
U.S. Agency securities - 36,876 - - 36,876
Mortgage-backed securities 7,872 41,907 2,216 - 51,995
- --------------------------------------------------------------------------------------------------------
Total $ 7,872 $ 83,868 $ 2,216 $ 74 $ 94,030
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
16
Part I. Item 1 (continued)
LOANS
The following table sets forth the amount of loans by type for the years
indicated:
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 % 1994 % 1993 % 1992 % 1991 %
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $147,230 46.47% $79,369 38.22% $73,220 34.47% $88,761 34.37% $101,762 33.71%
Real estate, construction 4,416 1.39% 30 0.01% 1,991 0.94% 8,935 3.46% 21,777 7.21%
Real estate, mortgage 107,662 33.98% 83,712 40.31% 99,190 46.70% 117,280 45.41% 127,323 42.18%
Consumer 57,533 18.16% 44,577 21.46% 38,006 17.89% 43,271 16.76% 51,020 16.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross loans 316,841 100.00% 207,688 100.00% 212,407 100.00% 258,247 100.00% 301,882 100.00%
------- ------- ------- ------- --------
------- ------- ------- -------
Deferred fee income (531) (298) (274) (625) (918)
Allowance for possible loan losses (5,734) (5,318) (10,800) (6,859) (4,575)
- ----------------------------------------------- --------- --------- ---------- -----------
Loans. net $310,576 $202,072 $201,333 $250,763 $ 296,389
- ----------------------------------------------- --------- --------- ---------- ------------
- ----------------------------------------------- --------- --------- ---------- ------------
No industry constitutes a concentration in the Bank's loan portfolio
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 loans secured by commercial properties, commercial loans,
term financing, SBA loans, and consumer loans principally in the form of home
equity lines of credit, vehicle loans, and personal lines of credit to high net
worth individuals. Additionally, the Company has added construction loan
products principally for entry level housing and owner-user commercial
industrial properties. Construction loans outstanding at December 31,1995, were
$4,416,000.
Please refer to NOTE 4-LOANS in the Company's consolidated financial statements
included in Part II, Item 8, of this Form 10-K as a basis for the following
discussion of changes in the Company's loan portfolio from December 31, 1994 to
December 31, 1995.
COMMERCIAL LOANS. Commercial loans totaled $147.2 million or 46.47% of total
loans and $79.4 million or 38.22% of total loans at December 31, 1995 and
December 31, 1994, respectively. Most of the increase of $67.8 million resulted
from the purchase of $37.4 million of commercial loans from IOBC in the second
quarter of 1995, and $29.2 million of loan purchases, principally SBA loans,
during the fourth quarter of 1995. As adjusted for the purchased loans,
commercial loans increased $38.7 million or 48.7% from year-end 1994. Most of
the Bank's commercial borrowers and customers are small to medium-sized
businesses and professionals. Most of the commercial loans are short term, are
reviewed and renewed annually, and bear a floating rate of interest.
Approximately 65% of the commercial loan portfolio is collateralized.
Collateral for these loans consists of accounts receivable, inventories,
equipment, and other business assets, including real estate. At December
31,1995, $29.5 million or 9.31% of total loans were secured by accounts
receivable as compared to $26.0 or 12.53% of loans at December 31, 1994.
Commercial loans secured by real estate were $18.9 million or 5.97% at December
31,1995, as compared to $13.7 million or 6.60% of loans at December 31, 1994.
In 1994, the Company began participating in government-insured lending programs,
including SBA loans. At December 31,1995, the Company reported $22.8 million of
SBA loans.
REAL ESTATE, CONSTRUCTION LOANS. Real estate construction loans comprised $4.4
million or 1.39% of outstanding loans at December 31, 1995. Construction loans
were not part of the Bank's previous market strategy. However, during the first
quarter of 1995, the Bank created a Real Estate Industries Department and
appointed an experienced real estate lender to manage the department. Going
forward, the Bank plans to conservatively enter the recovering real estate
market and to offer construction financing on quality projects.
REAL ESTATE, MORTGAGE LOANS. Real estate mortgage loans comprised $107.7
million or 33.98% of the total loan portfolio at December 31,1995, as compared
to $83.7 million or 40.31% of the total loans outstanding at year end 1994.
Approximately $16.8 million of real estate loans were purchased from IOBC.
Therefore, adjusted real estate loans have increased $7.2 million or 0.97% since
1994. This decrease resulted from deliberate actions by the Bank's management
to reduce the concentration of real estate loans in the Bank's loan portfolio.
During 1994, the Bank limited new real estate loans to existing borrowers who
were owner/users or to new borrowers who provided a new major banking
relationship, and demonstrated adequate cash flows. All new real estate
borrowers must provide financial reporting that meets FDICIA standards and the
loans must have conservative loan to value ratios. Approximately 80% of the
Bank's real estate loans are secured by first trust deeds; and approximately 50%
are to owner/users.
CONSUMER LOANS. Approximately $57.5 million or 18.16% of the loan portfolio was
made up of consumer loans at December 31,1995. At December 31,1995, $28.0
million or 8.85% of total loans were comprised of home equity loans and home
equity lines
17
Part I. Item 1 (continued)
of credit. Vehicle loans comprised approximately $18.0 million of outstanding
consumer loans at December 31,1995. Approximately $4.8 million of consumer
loans outstanding at December 31,1995, consisted of a successful new loan
product designed for high net worth individuals which was acquired from IOBC and
has been integrated into the Bank's portfolio of products. The levels of
consumer loans at period ends may fluctuate and may not necessarily be
representative of average levels experienced during the respective periods due
to the timing of advances and payments made on such loans by borrowers.
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 and nonaccrual loans) at December 31, 1995 based
on remaining scheduled principal repayments:
Maturing in
- --------------------------------------------------------------------------------------
Over one
One year year through Over
or less five years five years Total
- --------------------------------------------------------------------------------------
(GROSS LOANS, IN THOUSANDS)
Commercial $ 82,784 $38,900 $24,775 $146,459
Real estate, construction 3,346 1,070 - 4,416
Real estate, mortgage 26,078 59,945 21,025 107,048
- --------------------------------------------------------------------------------------
Total $112,208 $99,915 $45,800 $257,923
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
The following table sets forth information on sensitivity to changes in
interest rates for the Company's loan portfolio (excluding consumer and
nonaccrual loans) at December 31, 1995:
Repricing in
- --------------------------------------------------------------------------------------
Over one
One year year through Over
or less five years five years Total
- --------------------------------------------------------------------------------------
(GROSS LOANS, IN THOUSANDS)
Fixed interest rates $ 21,949 $ 42,728 $ 21,655 $ 86,332
Variable interest rates 171,591 - - 171,591
- --------------------------------------------------------------------------------------
Total $ 193,540 $ 42,728 $ 21,655 $ 257,923
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
The amounts reported in the categories in the tables do not reflect loan
prepayments or other factors which may cause the loans to react in different
degrees and at different times to changes in market interest rates.
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.
Nonaccrual loans decreased to $1.4 million at December 31, 1995 from $1.6
million at December 31, 1994. The percentage of nonaccrual loans to total
loans decreased to 0.44% from 0.78% during the same period. Interest income
that would have been collected on these loans had they performed in
accordance with their original terms, was approximately $207 thousand, $93
thousand and $550 thousand for the years ended December 31, 1995, 1994 and
1993, respectively.
18
Part I. Item 1 (continued)
In the third quarter of 1994, the Company negotiated a bulk sale of assets which
totaled $6.8 million. This sale included $2.9 million in nonaccrual loans and
$630 thousand in OREO properties. The cash proceeds from the sale approximated
the book value of the loans after a charge-off of $2.8 million was taken against
the existing allowance for loan losses.
The following table provides the balance of the Company's nonaccrual loans as of
the dates indicated. The Company has no loans past due 90 days or more and
still accruing interest:
- ---------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans (1) $ 1,385 $ 1,612 $ 7,081 $ 7,426 $ 11,234
Nonaccrual loans as a percentage of
total gross loans 0.44% 0.78% 3.33% 2.88% 3.72%
- --------------------------------------
- --------------------------------------
(1) Includes loans with modified terms of $125thousand, $100
thousand and $1.4 million as of the years ended December 31,
1995, 1994 and 1993, respectively.
Nonaccrual loans by category are summarized below:
- ---------------------------------------------------------------------
December 31, 1995 1994 1993
- ---------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $ 620 $ 283 $ 1,269
Real estate, construction - - -
Real estate, mortgage 615 930 5,789
Consumer 150 399 23
- ---------------------------------------------------------------------
Total nonaccrual loans $ 1,385 $ 1,612 $ 7,081
- ---------------------------------------------------------------------
Delinquent loans (past due 30 to 89 days) by category are summarized below:
- ---------------------------------------------------------------------
December 31, 1995 1994 1993
- ---------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $ 548 $ 998 $ 696
Real estate, construction - - -
Real estate, mortgage 503 2,089 1,239
Consumer 411 416 436
- ---------------------------------------------------------------------
Total delinquent loans $ 1,462 $ 3,503 $ 2,371
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
The levels of delinquent loans may fluctuate and may not necessarily be
representative of levels experienced during the respective periods due to the
variability of the timing of payments made on such loans by borrowers.
Management cannot predict the extent to which the changes in the current
economic environment may impact the Company's loan portfolio. Furthermore, the
Company's primary regulators review the loan portfolio as an integral component
of their regular examinations of the Company, and their assessment of specific
credits may affect the level of the Company's problem assets. Accordingly,
there can be no assurance that other loans will not become nonaccrual, potential
problem credits or delinquent loans in the future.
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.
19
Part I. Item 1 (continued)
Management performs a comprehensive analysis of the loan portfolio and its
current allowance for loan losses on a regular basis 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. A sudden and sustained
increase in interest rates could have an adverse impact of borrowers' ability to
repay. 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. Reference may be made to NOTE 4-LOANS of the
Company's consolidated financial statements, which are located in Part II, Item
8, of this Form 10-K, for additional detail concerning activity in the allowance
for possible loan losses, including loan charge-offs and recoveries.
The following table provides a summary of net charge-offs for the years
indicated:
- ---------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Net charge-offs $ 1,740 $ 4,632 $ 7,809 $ 6,788 $ 1,393
Ratio of net charge-offs to
average loans outstanding 0.67% 2.28% 3.32% 2.40% 0.46%
- --------------------------------------------------------------------------------------------------------------
Net charged-off loans were $1.7 million or .67% of average outstanding loans
for 1995 compared to 2.28%, 3.32%, 2.40% and 0.46% of average loans for 1994,
1993,1992 and 1991, respectively. This trend represents a continuing
improvement in the Company's loan portfolio quality following the economic
recession of the early 1990s.
Of the $4.6 million in net charged-off loans for 1994, $2.8 million were related
to the $6.8 million bulk loan and OREO sales that occurred in the third quarter.
Exclusive of the bulk loan sale, net charged off loans for 1994 would have been
0.88% of outstanding loans.
The following table sets forth the allocation of the allowance for possible loan
losses by category as of the dates indicated:
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 % 1994 % 1993 %
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $ 1,821 31.76% $ 1,406 38.20% $ 2,563 34.50%
Real estate, construction 43 0.75% to 0.00% 139 0.90%
Real estate, mortgage 2,172 37.87% 2,366 40.30% 4,415 46.70%
Consumer 660 11.52% 592 21.50% 381 17.90%
Unallocated 1,038 18.10% 944 - 3,302 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total allowance for possible loan losses $ 5,734 100.00% $ 5,318 100.00% $ 10,800 100.00%
- ----------------------------------------------------------------------------------------------------------------------------------
Management establishes specific reserves where necessary, according to the
criteria for loans deemed to be impaired under the guidance of SFAS No. 114 and
No. 118. These amounts are included in the allowance for loan losses shown
above. The remainder of the allowance is general in nature and is available for
the loan portfolio in its entirety.
20
Part I. Item 1 (continued)
Other Real Estate Owned
OREO primarily includes properties acquired through foreclosure or through full
or partial satisfaction of loans. The difference between the fair value of the
real estate collateral and the loan balance at the time of transfer to OREO is
reflected in the allowance for possible loan losses as a 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. Routine
holding costs, net of any income and net gains and losses on disposal, are
reported as noninterest expense. Activity in OREO for the years indicated is as
follows:
- ---------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Balance, January 1 $ 5,837 $ 6,133 $ 6,318
Additions 1,923 3,585 7,648
Sales (5,689) (2,699) (4,726)
Valuation and other adjustments 2 (1,182) (3,107)
- ---------------------------------------------------------------------
Balance, December 31 $ 2,073 $ 5,837 $ 6,133
- ---------------------------------------------------------------------
The OREO portfolio at December 31, 1995, consisted of 4 properties totaling $2.1
million. The Bank is actively marketing these properties.
DEPOSITS
The following table sets forth the distribution of average deposits and the
rates paid thereon for the years indicated:
For the years ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average % Average Average % Average Average %
balance Rate of total balance Rate of total balance Rate of total
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Demand deposits (1) $123,815 30.47% $118,044 33.24% $118,066 29.11%
NOW/MMDA 81,815 1.77% 20.13% 78,860 1.73% 22.20% 78,216 1.90% 19.28%
Savings 55,204 2.08% 13.58% 78,558 1.99% 22.12% 93,950 2.38% 23.16%
TCDs 145,555 5.77% 35.82% 79,687 3.80% 22.44% 115,379 3.88% 28.45%
- -----------------------------------------------------------------------------------------------------------------------------------
Total average deposits $406,389 100.00% $355,149 100.00% $405,611 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) The Company purchased approximately $19.8 million of noninterest bearing
demand deposits from IOBC in the second quarter of 1995. Since the
purchase, IOBC demand deposits have decreased $7.4 million, primarily due
to a reduction in balances maintained by a large commercial customer. Most
of the IOBC customer base has been retained. Demand deposits, net of the
effects of the IOBC purchase, have remained flat since 1994.
NOW/MMDA and savings accounts have decreased $29.4 million or 20.0% since 1994,
after adjusting for the acquired IOBC deposits. Much of the decrease represents
a shift in the Company's deposit mix as customers have transferred lower
yielding savings and MMDA balances into higher rate certificates of deposit,
which have increased 92.8% since December 31, 1994, on an adjusted basis.
During the first quarter of 1995, the Company introduced a promotional TCD
program. This program proved to be highly successful, procuring in excess of
$70 million in 7 to 12 month TCDs. The majority of the TCDs, approximately
$52.6 million, matured during August and September, 1995. The Company retained
$36.2 million or about 70% of the maturing TCDs at an average rate of 5.89%,
with maturities ranging from 7 months to 15 months. Approximately another $20
million of promotional TCDs will mature by February 1996.
21
Part I. Item 1 (continued)
The following table sets forth the maturities of the Company's time certificates
of deposit outstanding at the dates indicated:
December 31, 1995 Maturing in
- ----------------------------------------------------------------------------------------------------------------------------------
Over three Over six
Three months months through months through Over
or less six months twelve months twelve months Total
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Under $ 100,000 $ 32,926 $ 28,532 $ 31,492 $ 7,034 $ 99,984
$100,000 and over 20,183 13,587 9,260 3,118 46,148
- ----------------------------------------------------------------------------------------------------------------------------------
Total time certificates of deposit $ 53,109 $ 42,119 $ 40,752 $ 10,152 $ 146,132
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1994 Maturing in
- ----------------------------------------------------------------------------------------------------------------------------------
Over three Over six
Three months months through months through Over
or less six months twelve months twelve months Total
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Under $ 100,000 $ 16,467 $ 9,541 $ 9,905 $ 9,497 $ 45,410
$100,000 and over 15,556 6,249 4,532 2,620 28,957
- ----------------------------------------------------------------------------------------------------------------------------------
Total time certificates of deposit $ 32,023 $ 15,790 $ 14,437 $ 12,117 $ 74,367
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Other Borrowed Funds
Other borrowed funds consist of overnight federal funds purchased, Treasury tax
and loan notes ("TT&L"), obligations under securities repurchase agreements, and
the principal portions of capitalized lease obligations, obligations to senior
lienholders for certain OREO properties, and deferred compensation liabilities.
Other borrowed funds decreased by $7.4 million to $6.4 million at December 31,
1995 from $13.8 million at year end 1994. Other borrowed funds increased to
$13.8 at December 31, 1994 from $8.7 million at year end 1993 because of
overnight Federal funds purchased at year end. The borrowed money was used to
fund new loans at December 31, 1994. The maximum balance of Federal funds
purchased and TT&L borrowings outstanding during 1994 was $8.0 million and $6.4
million, respectively. The average balance of and average rate paid on Federal
funds purchased and TT&L borrowings for 1994 were $620 thousand and 4.49%, and
$3.4 million and 3.17%, respectively. Refer to NOTE 8-BORROWED FUNDS AND OTHER
INTEREST-BEARING LIABILITIES of the Company's consolidated financial statements
located in Part II, Item 8, of this Form 10-K.
Asset/Liability Management
The objective of asset/liability management is to manage and control the
Company's exposure to interest rate fluctuations while maintaining adequate
levels of liquidity and capital. 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 interest rates for different asset and liability products
offered by depository institutions respond differently to changes in the
interest rate environment, the gap between rate sensitive assets and rate
sensitive liabilities can only be used as a general indicator of interest rate
sensitivity.
The following gap repricing table sets forth information concerning the
Company's rate sensitive assets and rate sensitive liabilities, including the
off-balance sheet amounts for interest rate swaps, as of December 31,1995. Such
assets and liabilities are classified by the earlier of maturity or repricing
date in accordance with their contractual terms. Certain shortcomings are
inherent in the method of analysis presented in the following gap table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees and at different times
to changes in market interest rates. Also, loan prepayments and changes in the
mix or level of deposits could cause the interest sensitivities to vary from
those which appear in the table.
22
Part I. Item 1 (continued)
Three months One year
Three months through through Over
or less twelve months five years five years Total
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Federal funds sold $ - $ - $ - $ - $ -
Investment securities 1,964 5,904 82,886 3,276 94,030
Loans(l) 202,904 25,351 58,063 29,138 315,456
Interest rate swaps - - 75,000 - 75,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 204,868 $ 31,255 $ 215,949 $ 32,414 $ 484,486
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing demand and
savings deposits $ 130,301 $ - $ - $ - $ 130,301
Time certificates of deposit 53,109 82,871 10,140 12 146,132
Other borrowings and interest-
bearing liabilities 4,883 - - 1,524 6,407
Interest rate swaps 75,000 - - - 75,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 263,293 $ 82,871 $ 10,140 $ 1,536 $ 357,840
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (58,425) $ (51,616) $ 205,809 $ 30,878
Cumulative interest rate sensitivity (58,425) (110,041) 95,768 126,646
Cumulative interest rate sensitivity gap
as a percentage of total interest-
earning assets -12.06% -22.71% 19.77% 26.14%
- -------------------
(1) Loans exclude nonaccrual loans of $1,385
At December 31,1995, the Company's rate sensitive balance sheet was shown to be
in a negative gap position over a one year horizon. The cumulative gap between
assets and liabilities that reprice within 12 months was -$110.0 million or -
22.71% of assets. After one year, the gap turns positive. The table above
implies that the Company's earnings would be reduced in the short-term if
interest rates rise, or in other words that the Company is liability sensitive.
However, although the Company exhibits 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 asset sensitive in such
period. This tendency 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. More than 70% of the entire loan portfolio
reprices within one year.
In addition to utilizing the repricing gap table above in managing its interest
rate risk, the company performs a quarterly income simulation analysis. This
simulation analysis provides a dynamic evaluation of the Company's balance sheet
and income statement under varying yield curve scenarios, providing an estimate
of both the dollar amount and percentage change in net interest income under
various changes in interest rates. The income simulation analysis conducted as
of December 31, 1995, indicates that the Company remains moderately asset-
sensitive. Thus, a rising rate environment would tend to lead to an increase in
net interest income, while a falling rate environment would tend to lead to a
decrease in net interest income.
In order to stabilize the Company's net interest income with respect to changing
rates, the Company entered into a $50 million 5-year interest rate swap
agreement in September 1993 ("Swap #1") and a $25 million 3-year interest rate
swap agreement in January 1994 ("Swap #2"). The terms of these swap agreements
require the Company to pay a floating rate of interest tied to three-month
LIBOR, and to receive fixed rates of interest of 4.87% and 5.04% for Swap #1 and
Swap #2, respectively. The Company's combined break-even point on both swap
agreements is approximately 4.92%. Since the fourth quarter of 1994, three-month
LIBOR has
23
Part I. Item 1 (continued)
exceeded the Company's break-even point, so that interest expense on the swap
agreements has exceeded interest income. Net interest expense on the swaps for
the year ended December 31,1995, was $929 thousand, as compared to net interest
income of $141 thousand for the year ended December 31, 1994.
Liquidity
Refer to the MD&A in Part II, Item 7, of this Form 10-K for a discussion of the
Company's liquidity.
Capital Resources
Refer to the MD&A in Part II, Item 7, of this Form 10-K for detail on the
Company's and Bank's capital resources.
ITEM 2 PROPERTIES
The Company owns the following properties:
The Bellflower branch office, located at 17046 Bellflower Boulevard,
Bellflower, California. This 2,924 square foot facility houses the
Bank's Bellflower branch.
The Brea branch office, located at 275 West Central Avenue, Brea,
California. This 5,300 square foot facility houses the Bank's Brea
branch.
The Downey Main branch office, located at 10990 Downey Avenue, Downey,
California. This 8,795 square foot facility houses the Bank's Downey
branch and its Los Angeles County Business Banking group.
The Orange branch office, located at 303 West Katella Avenue, Orange,
California. This 20,966 square foot facility houses the Bank's Orange
branch.
The Santa Fe Springs branch office, located at 13372 East Telegraph
Road, Santa Fe Springs, California. This 7,300 square foot facility
houses the Bank's Santa Fe Springs branch.
The Uptown Whittier branch office, located at 12802 East Hadley
Street, Whittier, California. This 5,460 square foot facility houses
the Bank's Uptown Whittier branch.
The Whittier branch office, located at 13525 West Whittier Boulevard,
Whittier, California. This 9,000 square foot facility houses the
Bank's Whittier branch.
The Company leases the following properties:
The Company leases 44,259 square feet for its operations center
offices, located at 16420 Valley View Avenue, La Mirada, California.
The Company leases 4,000 square feet for the Bank's Yorba Linda branch
office, located at 17490 East Yorba Linda Boulevard, Yorba Linda,
California.
The Company leases 10,463 square feet for its executive offices,
located at 3800 East La Palma Avenue, Anaheim, California. This
location also houses the Bank's Tustin/La Palma branch.
The Company leases 6,000 square feet at 5799 E. La Palma Avenue, Anaheim
Hills, California.
The Company leases 441 square feet for its Anaheim Pavilions
Supermarket branch office, located at 8010 Santa Ana Canyon Road,
Anaheim Hills, California.
The Company leases 4,000 square feet for its Catalina branch office,
located at 303 Crescent Avenue, Avalon, California, on Santa Catalina
Island.
24
Part I. Item 2 (continued)
The Company leases 6,500 square feet for its City of Industry branch
office, located at 18261 - 63 Gale Avenue, City of Industry, California.
The Company leases 6,980 square feet for its Huntington Beach branch
office, located at 9042 Garfield Avenue, Huntington Beach, California.
The Company leases 411 square feet for its La Habra branch office,
located at Smith's Food and Drug King Market, 2101 West Imperial
Highway, La Habra, California.
The Company leases 3,025 square feet for its Signal Hill branch office,
located at 2501 Cherry Avenue, Signal Hill, California.
The Company leases 9,495 square feet for its Laguna Hills branch office,
located at 24061 Calle de la Plata, Laguna Hills, California. This
location also houses its Orange County Corporate Banking Center.
The Company leases 3,471 square feet for its La Jolla branch office,
located at 4180 La Jolla Village Drive, Suite 125, La Jolla, California.
The Company leases 2,100 square feet for its San Diego Corporate Banking
Center, located at 4180 La Jolla Village Drive, Suite 430, La Jolla,
California.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation involving various aspects of its
business. As of the date of this Form 10-K, it is management's opinion after
consulting with legal counsel that none of the pending litigation will have a
material adverse impact on the consolidated financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of 1995.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the American Stock Exchange ("AMEX") under the
symbol, "SCK". The following table sets forth the high and low closing sale
prices on a per share basis for the Common Stock as reported by the AMEX for the
periods indicated:
The Company had approximately 610 shareholders of record of its common stock as
of March 1, 1996.
High Low
-------------------------------------------------------------------
1994 First quarter $6 $4 3/4
Second quarter 5 3/8 4 1/4
Third quarter 5 1/8 4 5/8
Fourth quarter 5 3 3/4
1995 First quarter 5 1/4 4 5/16
Second quarter 5 1/4 4 5/8
Third quarter 6 5/8 4 3/4
Fourth quarter 6 1/8 5 7/16
1996 First quarter (through March 25, 1996) 6 3/4 6 1/16
On March 25, 1996 the last reported sales price per share for the Company's
stock was $6 1/2.
25
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
As of or for the year ended December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Interest income $ 33,396 $ 26,420 $ 29,732 $ 35,915 $ 39,440
Interest expense 12,015 6,279 9,619 13,665 17,678
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 21,381 20,141 20,113 22,250 21,762
Provision for loan losses 1,539 (850) 11,750 9,072 2,888
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 19,842 20,991 8,363 13,178 18,874
- ------------------------------------------------------------------------------------------------------------------------------
Net gains (losses) on sales of securities (620) 17 7,074 2,395 40
Noninterest income 5,633 6,683 6,869 5,605 5,225
Noninterest expense 23,293 23,852 26,024 23,712 20,648
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,562 3,839 (3,718) (2,534) 3,491
Provision for income taxes (benefits) 693 1,134 (1,026) (1,131) 1,089
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change
in accounting principle 869 2,705 (2,692) (1,403) 2,402
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle - - (41) - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 869 $ 2,705 $ (2,733) $ (1,403) $ 2,402
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Earnings per Share and Stock Data:
Net income (loss) $ 0.12 $ 0.49 $ (0.79) $ (0.40) $ 0.69
Cash dividends declared - - - - 0.20
Book value (1) 6.09 5.60 8.21 8.99 9.40
Weighted average shares outstanding (2) 7,472,805 5,507,000 3,468,505 3,468,505 3,468,505
Balance Sheet Data (year end balances):
Investment securities $ 94,030 $ 71,858 $ 149,543 $ 164,546 $ 112,812
Loans, net 310,576 202,072 201,333 250,763 296,389
Total assets 461,683 398,555 407,889 464,229 460,886
Total deposits $ 406,811 $ 339,939 $ 368,388 $ 402,892 $ 410,756
Shareholders' equity 45,512 41,844 28,462 31,195 32,598
Asset Quality:
Nonaccrual loans (3) $ 1,385 $ 1,612 $ 7,081 $ 7,426 $ 11,234
OREO 2,073 5,837 6,133 6,318 258
Asset Quality Ratios:
Net charge-offs to average gross loans 0.67% 2.28% 3.32% 2.40% 0.46%
Nonaccrual loans to year-end gross loans 0.44% 0.78% 3.33% 2.88% 3.72%
Nonperforming assets to year-end assets (4) 0.75% 1.87% 3.24% 2.96% 2.49%
Allowance for possible loan losses to year-end
gross loans 1.81% 2.56% 5.08% 2.66% 1.52%
Allowance for possible loan losses to nonaccrual loans 414.01% 329.88% 152.53% 92.36% 40.72%
Selected Performance Ratios:
Return on average assets 0.19% 0.67% -0.59% -0.30% 0.55%
Return on average shareholders' equity 2.14% 6.59% -8.90% -4.42% 7.41%
Average shareholders' equity to average assets 8.87% 10.15% 6.61% 6.73% 7.42%
Dividend payout ratio 0.00% 0.00% 0.00% 0.00% 28.88%
Noninterest expense to average assets 5.09% 5.90% 5.61% 5.03% 4.79%
Net interest margin (5) 5.30% 5.75% 4.82% 5.27% 5.73%
Company Capital Ratios:
Leverage 9.08% 10.74% 6.09% 6.30% 6.60%
Tier 1 risk-based capital 10.75% 15.72% 8.89% 9.10% 8.40%
Total capital 12.01% 16.98% 10.18% 10.60% 9.70%
Bank Capital Ratios:
Leverage 8.59% 8.86% 6.09% 6.30% 6.60%
Tier 1 risk-based capital 10.14% 12.96% 8.89% 9.10% 8.40%
Total capital 11.39% 14.22% 10.18% 10.60% 9.70%
- --------------------------------------------------------------------------
(1) All book value per share data are based on the number of shares outstanding
at year end
(2) Excludes the effect of stock options as common stock equivalents as such
effect was antidilutive for 1992 and 1993, and immaterial for 1991, 1994
and 1995.
(3) Includes loans with modified terms of $125 thousand in 1995, $100 thousand
in 1994, and $1.4 million in 1993. The Company has no loan 90 days past
due and still accruing interest.
(4) Includes nonaccrual loans, other real estate acquired by the Bank through
foreclosure or deed-in-lieu of foreclosure, and loans classified as
in-substance foreclosure.
(5) Computed on tax-equivalent basis for 1992 and 1991. The Company had no
investments in tax-exempt municipal securities for 1995, 1994 and 1993.
26
PART II.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The following discussion presents 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 audited consolidated
financial statements of the Company and the notes thereto, and the accompanying
quarterly unaudited consolidated financial statements and notes thereto.
Reference is also made to Item 1 of the Company's annual report on Form 10-K,
which provides certain additional financial information regarding the Company.
Copies of the Form 10-K are available without charge on written request directed
to Southern California Bank, Finance Department, P.O. Box 588, La Mirada, CA
90637-0588.
Two significant events impacting operating results for 1995 were the acquisition
of the corporate and private banking loans and deposits of Independence One Bank
of California, F.S.B. ("IOBC") on April 30, 1995, and the 1995 Restructuring in
the third quarter discussed below. The Bank acquired $72.4 million in loans
and $34.7 million of deposits from IOBC. Funds for the acquisition were
generated through a $5.0 million capital infusion from SC Bancorp and the TCD
promotion held during the first quarter of 1995. Reference is made to the
registrant's Form 8-K/A, dated April 30, 1995, copies of which are available on
request as noted above, for additional discussion of the IOBC transaction. The
1995 Restructuring involved the sale of two branches, consolidation of selected
operations, reductions in staff and securities sales. The goal of the
restructuring was to improve operating efficiencies and to provide additional
liquidity for future loan growth.
Results Of Operations
The Company reported net income of $869 thousand for 1995 compared to net income
of $2.7 million for 1994, and a net loss of $2.7 million for 1993. Net income
for 1995 reflects approximately $1.7 million of restructuring charges and losses
before tax, a $600 thousand additional loan loss provision specific to the
collateral valuation on two commercial real estate loans also recorded in the
third quarter, and a $408 thousand nonrecurring adjustment to interest expense
in the first quarter for deferred compensation plans. These expenses and losses
are partially offset by a $407 thousand gain in the first quarter resulting from
a benefit payment received on corporate owned life insurance which is reflected
in noninterest income; a refund of FDIC insurance premiums of approximately $239
thousand which is reported in noninterest expense as an offset to insurance
premium expense; and a gain on sale of loans of approximately $145 thousand
which is also reported in noninterest income. The previous year's results
include a $448 thousand gain on the sale of the Company's headquarters building,
a $215 thousand gain on the sale of loans, and a $850 thousand reversal of
previously recorded allowance for possible loan losses. The net loss during
1993 was primarily attributable to large provisions for loan losses and
writedowns of OREO, reduced interest income due to a change in balance sheet
composition from higher-yielding loans to investment securities, and
approximately $960 thousand of nonrecurring expenses recorded for branch
consolidations in conjunction with the 1993 Restructuring.
Net interest income increased $1.2 million to $21.4 million for the year ended
December 31,1995, from $20.1 million a year ago. Most of the increase was due
to higher average loan balances, which increased $58.1 million over 1994 largely
due to the purchase of the IOBC loans as well as guaranteed portions of SBA
loans. Net interest income increased slightly, by $28 thousand, in 1994 from
$20.1 million in 1993, despite the $67.1 million decrease in average earning
assets to $350.0 million for 1994 from $417.1 million for 1993. Yields on prime-
based loans, however, increased as a result of increases in the national prime
rate of nearly 2.5% during 1994.
Although net interest income increased $1.2 million from 1994, the Company's
net interest margin decreased to 5.30% for the year ended December 31, 1995,
compared to 5.75% for the prior year and 4.82% for 1993. The decrease in the
net interest margin can be attributed to higher interest expense due to an
adjustment recorded on the Company's deferred compensation plans and increased
interest expense associated with the TCD program that provided funding for the
IOBC transaction. Most of these TCDs matured in September 1995, and many were
renewed at significantly lower rates. The increase in the net interest margin
for 1994 as compared to 1993 reflects the significant increases in market rates
during 1994.
27
Part II. Item 7 (continued)
Noninterest income was $5.0 million, $6.7 million, and $13.9 million for the
years ended December 31, 1995, 1994, and 1993, respectively. As part of the
1995 Restructuring, the Company sold approximately $27.0 million of its
investment securities classified as available-for-sale and realized a loss of
approximately $620 thousand. Other fee income also declined compared to the
prior year due to reductions in merchant bankcard fee income. Noninterest
income for 1994 included nonrecurring gains on the sale of assets as discussed
above. Noninterest income in 1993 included approximately $7.1 million in gains
on sales of securities from the restructuring of the Company's investment
securities portfolio.
Operating expenses, excluding 1995 restructuring charges of $948 thousand,
decreased from $23.9 million for the year ended December 31, 1994, to $22.3
million for the year ended December 31, 1995. The decrease in operating expense
largely occurred in the OREO, FDIC assessment and merchant bankcard expense
categories. Operating expenses, excluding 1993 restructuring charges of $944
thousand for branch consolidations, decreased $1.2 million from $25.1 million
for the year ended December 31, 1993 to $23.9 million for the year ended
December 31, 1994. Most of the decreases were in salaries and benefits,
occupancy, furniture and equipment, OREO, and merchant bankcard expenses.
Total assets at December 31,1995, were $461.7 million, an increase of 15.8% from
$398.6 million at year-end 1994. Total deposits at December 31,1995, were
$406.8 million, an increase of 19.7% from $339.9 million at year-end 1994. The
increase in assets is primarily attributable to the IOBC loan purchase, and to
SBA loan purchases completed during the last quarter of 1995. Approximately half
of the increase in deposits resulted from the IOBC purchase, with the remaining
increase coming from the promotional TCD program in the first quarter of 1995.
The following table provides a summary comparison of assets and liabilities in
the Company's consolidated balance sheets and the percentage distribution of
these items for the dates indicated:
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Balance % Balance % Balance %
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 29,088 6.3% $ 31,118 7.8% $ 23,564 5.8%
Investment securities 94,030 20.4% 131,881 33.1% 149,543 36.7%
Loans, net 310,576 67.3% 202,072 50.7% 201,333 49.3%
Prentises and equipment, net 9,734 2.1% 10,254 2.6% 10,096 2.5%
Other real estate owned, net 2,073 0.4% 5,837 1.4% 6,133 1.5%
Accrued interest receivable 4,297 0.9% 4,330 1.1% 3,971 1.0%
Other assets 11,885 2.6% 13,063 3.3% 13,249 3.2%
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 461,683 100.0% $ 398,555 100.0% $ 407,889 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 130,378 28.2% $ 118,020 29.6% $ 107,861 26.4%
Interest-bearing demand
& savings deposits 130,301 28.2% 147,552 37.0% 171,056 41.9%
Time certificates of deposit 146,132 31.7% 74,367 18.7% 89,471 22.0%
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 406,811 88.1% 339,939 85.3% 368,388 90.3%
- ------------------------------------------------------------------------------------------------------------------------------
Borrowed funds and other
interest-bearing liabilities 6,407 1.4% 13,771 3.5% 8,533 2.1%
Accrued interest payable
and other liabilities 2,953 0.6% 3,001 0.7% 2,506 0.6%
Total Shareholders' Equity 45,512 9.9% 41,844 10.5% 28,462 7.0%
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $ 461,683 100.0% $ 398,555 100.0% $ 407,889 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
28
Part II. Item 7 (continued)
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. The Company's liquid assets consist of cash and cash
equivalents, and investment securities, excluding those pledged as collateral.
It is the Company's policy to maintain a liquidity ratio (liquid assets to
liabilities) of between 20% and 40%, and to limit gross loans to no more than
85% of deposits. At December 31,1995, the Company's ratios were well within
these guidelines: the liquidity ratio was 25.3% and the loan to deposit ratio
was 77.9%.
The Company maintains short-term sources of funds to meet periodic planned and
unplanned increases in loan demand and deposit withdrawals and maturities. The
initial source of liquidity is the excess funds sold daily to other banks in the
form of Federal funds. Besides cash and cash equivalents, the Company maintains
a portion of its investment securities portfolio as available-for-sale.
Available-for-sale securities can be sold in response to liquidity needs or used
as collateral under reverse repurchase agreements. As part of its restructuring
plan, the Company liquidated a portion of its available-for-sale investment
securities portfolio during the year ended December 31, 1995. These securities
sales were undertaken to provide a funding source for loan growth, and to
strengthen the Bank's funding mix. The Company's liquid assets were $101.3
million at December 31,1995, compared to $125.3 million at December 31, 1994.
Secondary sources of liquidity include reverse repurchase agreements to borrow
cash for short to intermediate periods of time using the Company's available-
for-sale securities as collateral and Federal funds lines of credit that allow
the Company to temporarily borrow an aggregate of up to $25.0 million from three
commercial banks. At December 31,1995, the Company had approximately $81.7
million in unpledged securities that could be used for reverse repurchase
agreements. 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. Secondary sources of liquidity also include short-
term borrowings at the Federal Reserve Bank and the Federal Home Loan Bank.
Capital Resources
The Company and its bank subsidiary are subject to risk-based capital
regulations adopted by the federal banking regulators in January 1990. These
guidelines are used to evaluate capital adequacy, and are based on an
institution's asset risk profile and off balance sheet exposures, such as unused
loan commitments and standby letters of credit. The regulations require that a
portion of total capital be core, or Tier 1, capital consisting of common
shareholders' equity and perpetual preferred stock, less goodwill and certain
other deductions, with the remaining, or Tier 2, capital consisting of other
elements, primarily subordinated debt, mandatory convertible debt, and
grandfathered senior debt, plus the allowance for loan losses, subject to
certain limitations. As of December 1992, the risk-based capital rules were
further supplemented by a leverage ratio, defined as Tier 1 capital divided by
quarterly average assets after certain adjustments. The minimum leverage ratio
is 3 percent for banking organizations that do not anticipate significant growth
and have well-diversified risk (including no undue interest rate exposure),
excellent asset quality, high liquidity, and good earnings. Other banking
organizations not in this category are expected to have ratios of at least 4 to
5 percent, depending on their particular condition and growth plans. Higher
capital ratios can be mandated by the regulators if warranted by the particular
circumstances or risk profile of a banking organization. In the current
regulatory environment, banking companies must stay well capitalized, as defined
in the banking regulations, in order to receive favorable regulatory treatment
on acquisitions and favorable risk-based deposit insurance assessments.
Management seeks to maintain capital ratios in excess of the regulatory
minimums. Prior to December 1994, the Bank was required to attain a minimum
leverage ratio of 7.0% under the conditions of a Memorandum of Understanding
("MOU") the Bank entered into with the FDIC and the California State Banking
Department in November 1993. The FDIC and State Banking Department released the
Bank from the MOU effective February 15, 1995. As of December 31, 1995, the
capital ratios of the Company and the Bank exceeded the well capitalized
thresholds prescribed in the rules.
29
Part II. Item 7 (continued)
The following table sets forth the Company's and the Bank's risk-based capital
and leverage ratios at December 31, 1995:
Company Bank
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Amount % Amount %
- ----------------------------------------------------------------------------------------------------------------
Leverage ratio $ 42,126 9.08% $ 39,727 8.59%
Regulatory minimum 18,552 4.00% 18,493 4.00%
Excess 23,574 5.08% 12,234 4.59%
Risk-based ratios
Tier 1 capital $ 42,126 (a) 10.75% (b) $ 39,727 (a) 10.14% (b)
Tier 1 minimum 15,671 4.00% (c) 15,671 4.00% (c)
Excess 26,455 6.75% 24,056 6.14%
Total capital $ 47,034 (d) 12.01% (b) $ 44,634 (d) 11.39% (b)
Total capital minimum 31,342 8.00% 31,342 8.00%
Excess 15,692 4.01% 13,292 3.39%
- ----------------------------------------------------------------------------------------------------------------
(a) Includes common shareholders' equity (excluding unrealized losses on
available-for-sale securities) less goodwill. The Tier 1 capital ratio is
adjusted for the disallowed portion of deferred tax assets, if applicable.
(b) Risk-weighted assets of $391.7 million were used to compute these
percentages.
(c) Insured institutions, such as the Bank, must maintain a leverage ratio of
4% or 5%, 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 categorized adequately
capitalized or well-capitalized, respectively.
(d) Tier 1 capital plus the allowance for loan losses, limited to 1.25% of
total risk-weighted assets.
30
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1995 1994
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 29,088 $ 31,118
Federal funds sold- - -
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 29,088 31,118
- ---------------------------------------------------------------------------------------------------------------
Securities held-to-maturity, at amortized cost:
fair value 1994 - $54,680 (Note 3) - 60,023
Securities available-for-sale, at fair value (Note 3) 94,030 71,858
Loans (Notes 4 and 16) 316,841 207,688
Less: Deferred fee income (531) (298)
Allowance for possible loan losses (5,734) (5,318)
- ---------------------------------------------------------------------------------------------------------------
Loans, net 310,576 202,072
- ---------------------------------------------------------------------------------------------------------------
Premises and equipment, net (Note 5) 9,734 10,254
Other real estate owned, net (Note 6) 2,073 5,837
Accrued interest receivable 4,297 4,330
Other assets 11,885 13,063
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 461,683 $ 398,555
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits: (Note 7)
Interest-bearing $ 276,433 $ 221,919
Noninterest-bearing 130,378 118,020
- ---------------------------------------------------------------------------------------------------------------
Total deposits 406,811 339,939
- ---------------------------------------------------------------------------------------------------------------
Borrowed funds and other interest-bearing liabilities (Note 8) 6,407 13,771
Accrued interest payable and other liabilities 2,953 3,001
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities 416,171 356,711
- ---------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note I 1) - -
SHAREHOLDERS' EQUITY (NOTES 10 AND 15)
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; 7,471,505 shares issued and outstanding at
December 31, 1995, and 7,468,505 shares issued and
outstanding at December 31, 1994 37,658 37,643
Retained earnings 8,600 7,731
Unrealized loss on available-for-sale securities, net of taxes (746) (3,530)
- ---------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 45,512 41,844
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 461,683 $ 398,555
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
Part II. Item 8 (continued)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 25,960 $ 18,971 $ 20,212
Interest on investment securities 6,299 7,166 9,054
Interest on Federal funds sold 1,137 283 466
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 33,396 26,420 29,732
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 1,451 1,363 1,487
Savings 1,150 1,564 2,240
Time certificates of deposit 8,397 3,029 4,473
- ------------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 10,998 5,956 8,200
- ------------------------------------------------------------------------------------------------------------------------------
Other interest expense 1,017 323 1,419
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 12,015 6,279 9,619
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 21,381 20,141 20,113
Provision for (recovery of) possible loan losses (Note 3) 1,539 (850) 11,750
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 19,842 20,991 8,363
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 1,727 1,754 1,779
Other fees and charges 2,542 2,637 3,162
Merchant bankcard income 518 1,249 1,631
Net (loss) gain on sales of investment securities (620) 17 7,074
Other gains on sales of assets, net 58 624 4
Other income 788 419 293
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 5,013 6,700 13,943
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 10,723 9,763 10,743
Net occupancy, furniture and equipment 5,273 4,666 5,129
Professional fees 1,740 1,882 1,583
Telecommunications 481 352 318
Office supplies 391 436 470
Data processing 502 449 448
Merchant bankcard 475 1,013 1,424
FDIC assessment 498 1,006 888
Insurance 348 436 399
Goodwill amortization 821 211 167
Other real estate owned 219 1,832 2,897
Advertising and promotion 772 613 576
Postage and delivery 586 543 415
Other operating expense 464 650 567
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 23,293 23,852 26,024
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (benefits) 1,562 3,839 (3,718)
Provision for income taxes (benefits) 693 1,134 (1,026)
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change in accounting principle 869 2,705 (2,692)
Cumulative effect of change in accounting principle, net of tax - - (41)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 869 $ 2,705 $(2,733)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 7,469 5,507 3,469
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share $ 0.12 $ 0.49 $ (0.79)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
Part II. Item 8 (continued)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS AND SHARES OUTSTANDING IN THOUSANDS)
UNREALIZED LOSS
ON AVAILABLE-FOR
COMMON STOCK RETAINED SALE SECURITIES,
SHARES AMOUNT EARNINGS NET OF TAX TOTAL
- --------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1993 3,469 $ 23,436 $ 7,759 $ - $ 31,195
Net loss (2,733) (2,733)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 3,469 23,436 5,026 - 28,462
Common stock issued 4,000 14,207 14,207
Unrealized loss on available-for-sale securities (3,530) (3,530)
Net income 2,705 2,705
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 7,469 37,643 7,731 (3,530) 41,844
Common stock issued 3 15 15
Unrealized loss on available-for-sale securities 2,784 2,784
Net income 869 869
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 7,472 $ 37,658 $ 8,600 $ (746) $ 45,512
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
33
Part II. Item 8 (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 869 $ 2,705 $ (2,733)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Loss (gain) on sale of available-for-sale investment securities 620 (17) (7,074)
Net amortization of premiums on investment securities 2,165 1,695 2,319
Provision for (recovery of) possible loan losses 1,539 (850) 11,750
Gain on sale of loans (145) (215) -
Net amortization of deferred fees and unearned income on loans 29 24 (351)
Depreciation and amortization 2,876 2,106 2,053
Gain on sale of fixed assets and other assets (1) (409) (4)
Provision for loss on other real estate owned 128 1,182 2,487
(Gain)/loss on sale of other real estate owned (130) (5) 258
(Benefit) provision for income taxes (541) 1,492 (1,344)
Increase in accrued interest receivable and other assets (404) (16) (4,479)
(Decrease)/increase in accrued interest payable and other liabilities (198) 645 (1,046)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,807 8,337 1,836
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available-for-sale investment securities 26,860 5,245 310,669
Proceeds from sale of investment securities held-for-sale - - 57,535
Proceeds from maturities of available-for-sale investment securities 6,000 10,295 5,596
Proceeds from maturities of held-to-maturity investment securities 7,530 - -
Purchase of investment securities available-for-sale (1,206) (4,946) (282,445)
Purchase of investment securities held-to-maturity - - (71,597)
Proceeds from sale of loans 2,084 - -
Purchase of IOBOC loans (71,576) - -
Purchase of other loans (26,432) - -
Loans funded, net of payments received (15,823) (3,283) 30,474
Proceeds from sale of fixed assets and other assets 1 932 20
Purchase of Fixed assets (1,535) (2,576) (3,856)
Proceeds from sale of other real estate owned 5,689 2,704 4,581
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (68,408) 8,371 50,977
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Rights Offering - 14,207 -
Proceeds from exercise of stock options 15 - -
Purchase of IOBOC interest-bearing deposits 14,965 - -
Purchase of IOBOC noninterest-bearing deposits 19,762 - -
(Decrease)/increase in demand deposits, NOW and savings accounts (36,853) (13,344) 11,158
Increase/(decrease) in time certificates of deposit 68,998 (15,105) (46,666)
(Decrease)/increase in other borrowings (7,316) 5,088 (17,641)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 59,571 (9,154) (53,149)
- ---------------------------------------------------------------------------------------------------------------------------------
(Decrease)/increase in cash and cash equivalents (2,030) 7,554 (336)
Cash and cash equivalents, beginning of period 31,118 23,564 23,900
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 29,088 $ 31,118 $ 23,564
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
34
Part II. Item 8 (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Unrealized loss on investment securities available-for-sale, net of tax $ 2,784 $ 3,530 $ -
Transfer of loans to OREO 1,821 3,585 7,557
Assumption of senior liens on OREO 102 - 91
Transfer of held-to-maturity securities to available-for-sale 51,991 - -
Transfer of held-to-maturity securities to held-for-sale - - 11,227
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
35
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
SC Bancorp, a bank holding company (the "Company"), and its subsidiary, Southern
California Bank, a California state-chartered bank (the "Bank"), operates 17
branches in Southern California. The Company's primary source of revenue is
providing loans to customers, who are predominantly small and mid-sized
businesses. The accounting and reporting policies of the Company conform to
generally accepted accounting principles and general practices within the
banking industry. The following are descriptions of the more significant of
these policies:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
the Bank. All material intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS:
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
For cash flow reporting purposes, cash and due from banks and Federal funds sold
are considered cash and cash equivalents.
SECURITIES:
The Company's securities portfolio includes U.S. Treasury and U.S. federal
agency securities, most of which are mortgage-backed securities. The Company
has classified its investment securities as held-to-maturity or as available-
for-sale; the Company has no trading account assets.
Securities are classified as available-for-sale when the Company intends to hold
the securities for an indefinite period of time but not necessarily to maturity.
Any decision to sell a security classified as available-for-sale would be based
on various factors, including significant movements in interest rates, changes
in the maturity mix of the Company's assets and liabilities, liquidity demands,
regulatory capital considerations, and other similar factors. Securities
classified as available-for-sale are reported at their fair values. Unrealized
holding gains and losses on securities available-for-sale are reported, net of
tax, as a separate component of shareholders' equity. Realized gains and losses
from the sales of available-for-sale securities are reported separately in the
statements of operations. The cost basis of available-for-sale securities is
recorded using the specific identification method.
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. At December 31, 1995, the Company's available-for-sale portfolio had a
net unrealized loss of $1.3 million. The tax-effected reduction to
shareholders' equity at December 31, 1995, was $746 thousand.
Securities are classified as held-to-maturity when the Company has both the
intent and ability to hold the securities to maturity on a long-term basis.
Securities held-to-maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts to maturity or, in the case of mortgage-
backed securities, over the estimated life of the securities.
Ordinarily, transfers of securities from held-to-maturity to available-for-sale
are not permitted. However, under a special one-time exemption authorized by
the Financial Accounting Standards Board that allowed companies to reclassify
their investment securities portfolio categories, the Company reclassified its
entire held-to-maturity investment portfolio to the available-for-sale category
in December 1995. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, held-to-maturity investment securities were
transferred to available-for-sale at their fair market values. The net result
of the transfer was an aggregate unrealized net loss of $910 thousand at
December 31, 1995.
LOANS-ALLOWANCE FOR POSSIBLE LOAN LOSSES AND INCOME RECOGNITION:
A certain degree of risk is inherent in the extension of credit. Credit losses
arise primarily from the loan portfolio, but may also be derived from other
credit-related sources, including commitments to extend credit, guarantees, and
standby letters of credit.
36
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Actual credit losses and other charges, net of recoveries, are deducted from the
allowance for possible loan losses. Other charges to the allowance primarily
include amounts related to loan foreclosures at the time of transfer to other
real estate owned. A provision for possible loan losses, which is a charge
against earnings, is added to the allowance based on management's assessment of
certain factors including, but not necessarily limited to, estimated losses from
loans and other credit arrangements; general economic conditions; deterioration
in pledged collateral; historical loss experience; and trends in portfolio
volume, maturity, composition, delinquencies, and nonaccruals.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS 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. This statement prescribes that a loan is impaired
when it is probable that the creditor will be unable to collect all contractual
principal and interest payments under the terms of the loan agreement. This
statement generally requires impaired loans to be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, or as an expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The Company has
determined that the combined effect of adoption of SFAS No. 114 and No. 118 was
immaterial to the consolidated financial statements due to the Company's pre-
existing methodology for calculating its allowance for possible loan losses,
which is based on the value of the underlying collateral of "impaired" loans, as
defined by SFAS No. 114.
Impaired loans include loans placed on nonaccrual status. Nonaccrual loans are
those which are past due 90 days as to either principal or interest, or earlier
when payment in full of principal or interest is not expected. When a loan is
placed on nonaccrual status, interest accrued but not received is reversed
against interest income. Thereafter, interest income is no longer recognized
and the full amount of all payments received, whether principal or interest, are
applied to the principal balance of the loan. A nonaccrual loan may be restored
to an accrual basis when principal and interest payments are current, and full
payment of principal and interest is expected.
Loans are generally carried at the principal amount outstanding, net of unearned
discounts and deferred fees. Purchased loans are generally carried at the
principal amount outstanding, net of any unamortized discounts or premiums.
Interest on loans, other than installment loans, is calculated using the simple
interest method. Interest income on discounted loans is generally recognized
over the estimated life of the loans based on methods that approximate the
interest method. Net deferred loan origination fees are amortized to interest
income over the contractual lives of the related loans using the interest
method.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation and
amortization computed on a straight-line basis over the estimated useful lives
of the assets or the lease terms. Sublease rental income is reported in
noninterest expense. Net gains and losses on disposal or retirement of premises
and equipment are reported in net gains and losses on sales of assets.
OTHER REAL ESTATE OWNED:
Other real estate owned ("OREO") is recorded at fair value at the time of
foreclosure. Initial losses on properties acquired through foreclosure are
treated as credit losses at the time of transfer to OREO. Routine holding
costs, net of any income and net gains and losses on disposal, are reported in
the consolidated statements of operations as noninterest expense. Allowances
for OREO losses are recorded for any subsequent declines in fair values.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS:
Goodwill represents the excess of the purchase price over the estimated fair
value of identifiable net assets acquired. The Company amortizes goodwill over
its estimated useful life, not to exceed 15 years.
Core deposit intangibles are amortized using the straight-line method based on
the estimated runoff of the related deposits. Other identifiable intangible
assets are amortized using the interest method or on a straight-line basis over
their estimated periods of benefit. Goodwill and identifiable intangible assets
are reported as part of other assets.
37
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES:
The Company files a consolidated Federal income tax return and a combined
California state franchise tax return. Deferred income taxes, which are
reported with other assets, result from the recognition of income and expense
items in different periods for tax and financial reporting purposes.
SFAS No. 109, "Accounting for Income Taxes," requires an asset and liability
approach for determining the amount of income taxes for financial reporting. A
current or deferred tax liability or asset is measured based on the amount of
taxes calculated at the current effective tax rates or refundable currently or
in future years. If it is more likely than not that any of a deferred tax
asset will not be realized, the statement requires a valuation allowance to be
recorded.
The Company adopted SFAS No. 109 as of January 1, 1993. As a result of this
adoption, a cumulative effect adjustment of $41 thousand was recorded in 1993.
EARNINGS PER SHARE:
The computation of earnings per share is based on the weighted average number of
shares and common stock equivalents outstanding during the year. Outstanding
stock options were not considered common stock equivalents for 1995 or 1993
because they had an antidilutive effect; outstanding stock options were also not
included as common stock equivalents for 1994 because their effect was
immaterial.
STOCK-BASED COMPENSATION:
The Company maintains a stock option plan for the benefit of its executives. In
1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
which encourages companies to account for stock-based compensation awards at
their fair values at the date the awards are granted. This statement does not
require the application of the fair value method and allows the continuance of
the current accounting method, which requires accounting for stock-based
compensation awards at their intrinsic value, if any, as of the grant date.
The accounting and disclosure requirements of this statement are effective for
financial statements at various dates beginning after December 15, 1995. The
Company has elected not to adopt the fair value provisions of this statement.
INTEREST RATE SWAP AGREEMENTS:
The Company has entered into two interest rate swap agreements in the management
of its interest rate exposure. Revenue or expense associated with these
agreements, which are intended to convert the interest-rate characteristics of
interest-bearing assets, are accounted for on an accrual basis and recognized as
an adjustment to interest income, based on the interest rates currently in
effect for such contracts.
RECLASSIFICATIONS:
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Withdrawal and usage restrictions exist on a portion of the funds of the
Company, the majority of which arise from the requirements of the Federal
Reserve Board to maintain a certain average balance. Such restricted funds
amounted to approximately $3.0 million and $3.5 million at December 31, 1995 and
1994, respectively. These funds are included in Cash and Due from Banks in the
accompanying consolidated balance sheets.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities as of
December 31, 1995, and 1994, are as follows:
(DOLLARS IN THOUSANDS) DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ----------- ---------
AVAILABLE-FOR-SALE:
US Treasury securities and obligations
of US government agencies $ 42,036 $ - $ (363) $ 41,673
Mortgage-backed securities 52,062 - (910) 51,152
FHLB stock 1,205 - - 1,205
- -----------------------------------------------------------------------------------------------------------
Total $ 95,303 $ - $ (1,273) $ 94,030
===========================================================================================================
(DOLLARS IN THOUSANDS) DECEMBER 31, 1994
- -----------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ----------- ---------
HELD-TO-MATURITY:
US Treasury securities and obligations
of US government agencies $ 59 $ - $ - $ 59
Mortgage-backed securities 59,964 $ - (5,343) 54,621
- -----------------------------------------------------------------------------------------------------------
Total $ 60,023 $ - $ (5,343) $ 54,680
===========================================================================================================
(DOLLARS DECEMBER 31, 1994
- -----------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ----------- ---------
AVAILABLE-FOR-SALE:
US Treasury securities and obligations
of US government agencies $ 77,249 $ 2 $ (5,393) $ 71,858
- -----------------------------------------------------------------------------------------------------------
Total $ 77,249 $ 2 $ (5,393) $ 71,858
===========================================================================================================
Investment securities with a carrying value of $18.6 million and $22.3 million
were pledged to secure public deposits and as collateral for other borrowings as
required by law at December 31, 1995 and 1994, respectively.
The amortized cost and estimated fair value of debt securities at December 31,
1995 by contractual maturities are shown in the following table. 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.
39
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
Maturing in
- ------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Over one Over five
One year year through years through Over
DECEMBER 31, 1995 or less five years ten years ten years Total
-------- ------------ ------------- --------- ---------
Available-for-sale, amortized cost $ - $ 86,283 $ 7,815 $ 1,205 $ 95,303
Available-for-sale, estimated fair value $ - $ 85,233 $ 7,592 $ 1,205 $ 94,030
- ------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of investments in securities during 1995, 1994 and 1993 were
$26.9 million, $5.2 million, and $368.2 million, respectively. Gross gains of
$17 thousand, and $7.1 million were realized on those sales in 1994 and 1993,
respectively. Gross losses of $620 thousand and $54.0 thousand were realized on
the sales in 1995 and 1993, respectively; no gross gains were realized from
sales in 1995, and no gross losses were realized from sales in 1994.
NOTE 4 - LOANS
Loans outstanding at December 31, 1995, and 1994, are summarized as follows:
- --------------------------------------------------------------------------------
December 31. 1995 % 1994 %
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $147,230 46.47% $ 79,369 38.22%
Real estate, construction 4,416 1.39% 30 0.01%
Real estate, mortgage 107,662 33.98% 83,712 40.31%
Consumer 57,533 18.16% 44,577 21.46%
- --------------------------------------------------------------------------------
Gross loans 316,841 100.00% 207,688 100.00%
------ ------
------ ------
Deferred fee income (531) (298)
Allowance for possible loan losses (5,734) (5,318)
- -------------------------------------------------- --------
Loans, net $310,576 $202,072
- -------------------------------------------------- --------
- -------------------------------------------------- --------
No industry constitutes a concentration in the Bank's loan portfolio.
The Bank commonly accepts real estate as abundance of collateral in extending
credits for commercial purposes. Real estate mortgage loans generally comprise
medium-term loans secured by first or second deeds of trust on real estate
located in the state of California. The Bank's lending area formerly
experienced adverse economic conditions that have resulted in declines in real
estate values. These factors adversely affected some borrowers' ability to
repay loans. Although management believes the level of the allowance for
possible loan losses as of December 31, 1995, is adequate to absorb losses
inherent in the loan portfolio, additional declines in real estate values and
the general economy may result in increasing losses that cannot be reasonably
predicted at this date.
40
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 4 - LOANS (CONTINUED)
The changes in the allowance for possible loan losses are as follows:
(DOLLARS IN THOUSANDS) 1995 1994 1993
- --------------------------------------------------------------------------------
Average balance of gross loans outstanding $261,631 $203,507 $ 235,414
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Gross loan balance at December 31. $316,841 $207,688 $ 212,402
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Allowance at January 1, $ 5,318 $ 10,800 $ 6,859
Charge-offs:
Commercial 834 2,004 3,704
Real estate 1,227 3,453 4,488
Consumer 587 362 381
- --------------------------------------------------------------------------------
Total charge-offs 2,648 5,819 8,573
Recoveries:
Commercial 587 915 607
Real estate 129 215 4
Consumer 192 57 153
- --------------------------------------------------------------------------------
Total recoveries 908 1,187 764
Net charge-offs 1,740 4,632 7,809
Provision (recovery) charged (credited)
to expense 1,539 (850) 11,750
Allowance on purchased loans 617 - -
- --------------------------------------------------------------------------------
Allowance at December 31 - $5,734 $5,318 $10,800
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ratio of allowance for loan losses to loans
outstanding at December 3 1, 1.81% 2.56% 5.08%
Ratio of allowance for loan losses to
nonaccrual loans at December 3 1, 414.01% 329.88% 152.53%
Ratio of net charge-offs to average loans 0.67% 2.28% 3.32%
Loans on nonaccrual status were approximately $1.4 million, $1.6 million and
$7.1 million at December 31, 1995, 1994 and 1993, respectively. Interest income
that would have been collected on these loans had they performed in accordance
with their original terms, was approximately $207 thousand, $93 thousand, and
$550 thousand for the years ended December 31, 1995, 1994 and 1993,
respectively. At December 31, 1995, the Bank had classified $1.5 million of its
loans as impaired with a specific reserve of $143 thousand determined in
accordance with SFAS No. 114. The average recorded investment in impaired loans
during the year ended December 31, 1995 was $3.2 million. The Bank collected
cash totaling $1.3 million on impaired loans during the same period.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 5 - PREMISES AND EQUIPMENT
The following schedule sets forth the cost and accumulated depreciation and
amortization of premises and equipment at December 31, 1995 and 1994:
(DOLLARS in thousands) 1995 1994
- --------------------------------------------------------------------------------
Land $ 2,122 $ 2,122
Buildings and improvements:
Owned 3,688 3,688
Capital leases 401 384
Furniture, fixtures, and equipment 11,810 10,689
Leasehold improvements 5,598 5,524
- --------------------------------------------------------------------------------
Total 23,619 22,407
Less: accumulated depreciation and
amortization (13,885) (12,153)
- --------------------------------------------------------------------------------
Premises and equipment, net $ 9,734 $ 10,254
- --------------------------------------------------------------------------------
Depreciation was approximately $2.1 million, $1.9 million, and $1.9 million
for the years ended December 31, 1995, 1994 and 1993. The Bank's former head
office facility was sold in 1994, which resulted in a gain of $414 thousand.
NOTE 6 - OTHER REAL ESTATE OWNED
The components of other real estate owned (OREO) at December 31, 1995 and 1994
are as follows:
(DOLLARS in THOUSANDS) 1995 1994
- --------------------------------------------------------------------------------
Other real estate owned - foreclosure $ 4,243 $ 6,003
Insubstance foreclosure (a) - 2,595
- --------------------------------------------------------------------------------
4,243 8,598
Less: allowance for losses and selling expenses (2,170) (2,761)
- --------------------------------------------------------------------------------
Other real estate owned - net $ 2,073 $ 5,837
- --------------------------------------------------------------------------------
(a) Insubtance foreclosures are those in which the Bank controls the
collateral even though formal foreclosure proceedings have not been
instituted against the borrower.
The changes in the allowance for OREO losses and selling expenses for the years
ended December 31, 1995 and 1994
were as follows:
(DOLLARS IN THOUSANDS) 1995 1994
- --------------------------------------------------------------------------------
Balance at January 1, $2,761 $1,770
Provisions charged to expense 128 1,182
Sales, charge-offs (719) (191)
- --------------------------------------------------------------------------------
Balance, December 31, $2,170 $2,761
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Time certificates of deposit in denominations of $100,000 or more totaled $46.4
million and $29.2 million as of December 31, 1995 and 1994, respectively, of
which approximately $891 thousand represented brokered deposits at year end
1994. Interest paid on deposit accounts totaled $10.7 million, $6.2 million,
and $8.5 million in 1995, 1994, and 1993, respectively.
42
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 8 - BORROWED FUNDS AND OTHER INTEREST-BEARING LIABILITIES
Borrowed funds and other interest-bearing liabilities at December 31, 1995 and
1994 were as follows:
(DOLLARS IN THOUSANDS) 1995 1994
- --------------------------------------------------------------------------------
Federal funds purchased $ - $ 8,000
Treasury, tax and loan (TT&L) 4,883 4,584
Deferred compensation 1,165 1,037
Capital lease obligations 257 150
Other 102
- --------------------------------------------------------------------------------
$ 6,407 $ 13,771
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TT&L balances fluctuate based on the amounts deposited by customers and the
amounts called for payment by the Federal Reserve Bank. The Bank's limit on its
TT&L at the Federal Reserve Bank is $6.0 million. Any amounts in excess of this
limit will generally be automatically withdrawn by the Federal Reserve Bank the
following day.
Interest paid on borrowed funds and other interest-bearing liabilities totaled
$400 thousand, $294 thousand, and $1.5 million for the years ended December 31,
1995, 1994 and 1993, respectively.
NOTE 9 - INCOME TAXES
The provision for income taxes (benefits) consists of the following:
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Current - State $ 189 $ 2 $ 1
Current - Federal 1,045 (360) 317
- --------------------------------------------------------------------------------
1,234 (358) 318
- --------------------------------------------------------------------------------
Deferred - State (221) (319) 219
Deferred - Federal (320) 1,811 (1,563)
- --------------------------------------------------------------------------------
$ (541) $1,492 $ (1,344)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Provision for income taxes (benefits) $ 693 $1,134 $ (1,026)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A reconciliation of the provision for income taxes to the amounts computed by
applying the Federal statutory tax rate of 35% for 1995, 1994 and 1993 follows:
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
1995 1994 1993
Amount % Amount % Amount %
- --------------------------------------------------------------------------------------------------------------
RATE RECONCILIATION
Federal tax, based on statutory rate $ 547 35.00% $1,305 35.00% $(1,301) 35.00%
Tax-exempt municipal interest (7) -0.45% (8) -0.21% (8) 0.22%
State franchise tax, net of federal
income tax benefits 125 8.00% (211) -5.66% 145 -3.90%
Officer life insurance (167) -10.71% (11) -0.29% (16) 0.43%
Goodwill 196 12.55% 54 1.45% - 0.00%
Other (1) -0.02% 5 0.13% 154 -4.14%
- --------------------------------------------------------------------------------------------------------------
Provision for income taxes (benefits)/effective tax rate $ 693 44.37% $1,134 30.42% $(1,026) 27.60%
- --------------------------------------------------------------------------------------------------------------
Federal income and California state franchise taxes paid totaled $865 thousand,
$152 thousand and $1.4 million in 1995, 1994 and 1993, respectively.
43
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 9 - INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and tax credit carryforwards. The components of the Company's net deferred tax
asset are as follows:
(DOLLARS IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Deferred Tax Asset
Allowances not currently deductible $ 1,347 $ 1,938
Deferred compensation 955 689
Unrealized loss on securities 528 1,860
Depreciation 582 568
Other 709 98
- --------------------------------------------------------------------------------
Gross deferred tax asset 4,121 5,153
- --------------------------------------------------------------------------------
Deferred Tax Liability
Deductible prepaid expense (301) (389)
Effect of state taxes on federal liability (209) (270)
Other (121) (219)
- --------------------------------------------------------------------------------
Gross deferred tax liability (631) (878)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 3,490 $ 4,275
- --------------------------------------------------------------------------------
No valuation allowance under SFAS No. 109 was required for federal or state
purposes as of December 31, 1995 or 1994, because management expects deferred
tax assets to be fully realized as an offset against reversing temporary
differences (which create net future tax liabilities), or through loss
carrybacks.
NOTE 10 - SHAREHOLDERS' EQUITY
COMMON STOCK
During the second quarter of 1994, the Company successfully completed a rights
offering which resulted in the issuance of an additional 4.0 million shares of
common stock at $4.00 per share. Net proceeds of $14.2 million were realized on
this offering after issuance costs of approximately $1.8 million.
STOCK OPTIONS
The total shares available under the Company's stock option plan are 650
thousand.
The following table summarizes the activity relating to the Company's stock
options for the years indicated.
- --------------------------------------------------------------------------------
(NUMBER of SHARES) 1995 1994 1993
- --------------------------------------------------------------------------------
Balance, January 1 379,650 235,250 125,500
Options granted 174,750 152,200 115,500
Options exercised (3,000) - -
Options expired (79,300) (7,800) (5,750)
- --------------------------------------------------------------------------------
Balance, December 31 472,100 379,650 235,250
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares exercisable 219,720 160,970 89,450
Exercise price $4.50-$11.87 $4.88-$11.87 $6.00-$11.87
44
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 11 - COMMITMENTS AND CONTINGENCIES
CREDIT EXTENSION:
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. However, the commitments are a component of the estimate of the
allowance for possible loan losses. Commercial and standby letters of credit
totaled approximately $4.3 million and $4.5 million at December 31, 1995 and
1994, respectively. In addition, the Company had unfunded loan commitments of
$85 million and $49.1 million at December 31, 1995 and 1994, respectively. All
of the commitments outstanding at December 31, 1995, represent unfunded loans
which bear a floating rate of interest.
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.
INTEREST RATE SWAPS:
The Company has entered into two interest rate swap agreements to reduce the
impact of changes in interest rates on its floating rate loan portfolio. At
December 31, 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 were
intended to reduce the Company's exposure to declines in prime lending rates by
artificially converting $75 million of the Company's prime-based loans to fixed
rates for the duration of the agreements. Swap #1 was entered into in September
1993. The terms of the first agreement require the Company to pay interest
quarterly based on three-month LIBOR and to receive interest semi-annually at a
fixed rate of 4.865%. The agreement matures in September 1998.
Swap #2 was entered into in January 1994. The terms of the second agreement
require the Company to pay interest quarterly based on three-month LIBOR in
arrears, and to receive interest semi-annually at a fixed rate of 5.04% 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
years ended December 31, 1995, 1994, and 1993, net interest income or (expense)
of ($929 thousand), $141 thousand, and $251 thousand 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 transactions.
US Agency notes having a fair value of approximately $7.4 million were pledged
as collateral for the agreements as of December 31, 1995. The Company is
exposed to credit loss in the event of nonperformance by the counterparties to
the agreements. However, the Company does not anticipate nonperformance by the
counterparties. The following table summarized the characteristics of the swap
agreements as of December 31, 1995:
Interest Rate Swaps:
Notional Interest Rate Interest Rate Unrealized Maturity
(DOLLARS IN THOUSANDS) Amount Paid Received Loss Date
- -------------------------------------------------------------------------------------------------
Swap #1 $50,000 3-mo LIBOR 4.865% $700 September, 1998
Swap #2 $25,000 3-mo LIBOR 5.04% $370 January, 1997
(in arrears)
LEASE COMMITMENTS:
At December 31, 1995, one building lease with an amortized cost of $122.5
thousand was recorded as a capital lease and included in Premises and Equipment
in the accompanying consolidated balance sheets. The Company also leases
parcels of land and buildings under operating leases, which require the Company
to pay all normal property taxes, insurance, and maintenance. Net rent expense
for the years ended 1995, 1994 and 1993 was approximately $1.2 million, $0.9
million, and $1.4 million, respectively. The amounts recorded in 1995 and 1993
45
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
included approximately $256 thousand and $400 thousand for restructuring
charges on facilities which were closed or consolidated.
Future minimum payments required under noncancellable leases with initial or
remaining terms of one year or more are as follows as of December 31, 1995:
- --------------------------------------------------------------------------------
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES TOTAL
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1996 $ 52 $ 836 $ 888
1997 52 762 814
1998 52 734 786
1999 52 892 944
2000 52 901 953
Thereafter 135 2,496 2,631
- --------------------------------------------------------------------------------
Total minimum payments $395 $6,621 $7,016
- --------------------------------------------------------------------------------
Less amount representing interest 141
- --------------------------------------------------------------------------------
Present value of minimum payments $254
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The capital lease obligation has been included in borrowed funds in the
accompanying consolidated balance sheets. The payments shown above for
operating leases take into consideration only one lease option that the Company
intends to exercise. The Company has options to extend several of its other
operating leases. However, because it is uncertain whether or not these other
options will be exercised, payments for those option periods have been excluded.
BORROWING ARRANGEMENTS:
In the event that the Company experiences a temporary liquidity shortage, it has
available other sources of liquidity, including reverse repurchase arrangements
to borrow cash for short to intermediate periods of time using the Company's
available-for-sale investment securities as collateral, Federal funds lines of
credit that allow the Company to temporarily borrow an aggregate of up to $25.0
million from three commercial banks, and short-term borrowing lines of credit at
the Federal Reserve Bank and Federal Home Loan 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.
LITIGATION:
The Company is party to routine litigation involving various aspects of its
business. In the opinion of management, none of the pending litigation at
December 31, 1995 would have a material adverse impact on the consolidated
financial condition or operations of the Company.
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan that covers substantially all full-time employees.
It permits voluntary contributions by employees, a portion of which is matched
by the Company. The plan may acquire Company shares on the open market as part
of the Company's matching contribution. The Company's expenses relating to its
contributions to the 401(k) plan were $139 thousand, $108 thousand, and $80
thousand in 1995, 1994 and 1993, respectively.
The Company has established deferred compensation plans which permit certain
directors and management employees to defer portions of their compensation and
earn interest at a predetermined amount above a specified interest rate index on
the deferred amounts. Interest expense incurred on deferred balances was
approximately $648 thousand, $174 thousand, and $176 thousand
46
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 12 - EMPLOYEE BENEFIT PLANS (CONTINUED)
in 1995, 1994 and 1993, respectively. The deferred compensation liability at
December 31, 1995 and 1994 was approximately $2.1 million and $1.5 million,
respectively, of which $1.2 million and $1.0 million represented principal and
was classified with other interest-bearing liabilities in the accompanying
consolidated balance sheets. Approximately $946 thousand and $483 thousand
represented accrued interest payable at December 31, 1995 and 1994,
respectively, and was classified as accrued interest payable and other
liabilities in the accompanying consolidated balance sheets. In conjunction
with the plans, the Company has purchased life insurance policies on the
participants with the Company as beneficiary. The cash surrender values of
the life insurance policies were included in other assets in the accompanying
consolidated balance sheets totaling approximately $3.0 million and $2.7 million
at December 31, 1995 and 1994, respectively.
NOTE 13-PARENT COMPANY ONLY INFORMATION
(DOLLARS IN THOUSANDS) DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
Assets: 1995 1994
- ---------------------------------------------------------------------------------------------------------
Cash $ 2,305 $ 7,481
Other assets - 43
Investment in Southern California Bank 43,113 34,320
- ---------------------------------------------------------------------------------------------------------
Total Assets $ 45,418 $ 41,844
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------
Liabilities: $ (94) $ -
Shareholders' Equity
Common stock 37,658 37,643
Retained earnings 8,600 7,731
Unrealized loss on available-for-sale securities, net of tax (746) (3,530)
- ---------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 45,512 41,844
- ---------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 45,418 $ 41,844
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
Income: 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Income from management fees $ - $ - $ 23
Other management income - - 152
Interest income 108 93 -
Dividend income from subsidiary - 163 140
- ---------------------------------------------------------------------------------------------------------
Total income 108 256 315
- ---------------------------------------------------------------------------------------------------------
Expense:
- ---------------------------------------------------------------------------------------------------------
Management fees 66 24 23
Other professional fees 281 26 134
Other expenses - 91 158
- ---------------------------------------------------------------------------------------------------------
Total expense 347 141 315
- ---------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in undistributed
earnings (losses) of subsidiary (239) 115 -
Provision for income taxes (benefits) (99) -
Equity in undistributed earnings (losses) of subsidiary 1,009 2,590 (2,733)
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 869 $ 2,705 $ (2,733)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
47
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 13-PARENT COMPANY ONLY INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities: 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 869 $ 2,705 $ (2,733)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Decrease (increase) in other assets 43 (43) -
Undistributed (earnings) loss of subsidiary (1,009) (2,753) 2,593
Decrease in other liabilities (94) - -
- ---------------------------------------------------------------------------------------------------------
Net cash used in operating activities (191) (91) (140)
- ---------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Dividends received from subsidiary - 163 140
Additional investment in subsidiary (5,000) (6,810) -
- ---------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (5,000) (6,647) 140
- ---------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 15 14,207 -
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 15 14,207 -
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (5,176) 7,469 -
Cash, January 1 7,481 12 12
- ---------------------------------------------------------------------------------------------------------
Cash, December 31 $ 2,305 $ 7,481 $ 12
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
48
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 14 - QUARTERLY INFORMATION (UNAUDITED)
---------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 Quarter Ended
31-Dec 30-Sep 30-Jun 31-Mar
- ------------------------------------------------------------------------------------
Interest income $ 8,819 $ 8,796 $ 8,544 $ 7,237
Interest expense 2,875 3,107 3,076 2,957
- ------------------------------------------------------------------------------------
Net interest income 5,944 5,689 5,468 4,280
- ------------------------------------------------------------------------------------
Provision for possible loan losses 314 900 200 124
Net gains (losses) on sales of
securities - (620) - -
Noninterest income 926 1,218 1,382 1,636
Noninterest expense 4,847 6,672 6,042 5,262
- ------------------------------------------------------------------------------------
Income (loss) before income
taxes 1,709 (1,285) 608 530
- ------------------------------------------------------------------------------------
Provision for income taxes (benefits) 707 (377) 178 185
- ------------------------------------------------------------------------------------
Net income (loss) $ 1,002 $ (908) $ 430 $ 345
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Net income (loss) per share $ 0.13 $ (0.12) $ 0.06 $ 0.05
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Stock Data
Common stock price range: (1)
High 6 1/8 6 5/8 5 1/4 5 1/4
Low 5 7/16 4 3/4 4 5/8 4 5/16
----------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 Quarter Ended
- -------------------------------------------------------------------------------------
31 -Dec 30-Sep 30-Jun 31-Mar
- -------------------------------------------------------------------------------------
Interest income $ 6,782 $ 6,774 $ 6,562 $ 6,302
Interest expense 1,585 1,584 1,492 1,618
- ------------------------------------------------------------------------------------
Net interest income 5,197 5,190 5,070 4,684
- ------------------------------------------------------------------------------------
Provision for possible loan losses - - (850) -
Net gains
on sales of securities - - - 17
Noninterest income 1,202 1,587 1,593 2,301
Noninterest expense 5,800 5,957 6,786 5,309
- ------------------------------------------------------------------------------------
Income before
income taxes 599 820 727 1,693
- ------------------------------------------------------------------------------------
Provision for income taxes (benefits) (220) 318 309 727
- ------------------------------------------------------------------------------------
Net income $ 819 $ 502 $ 418 $ 966
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Net income per share $ 0.11 $ 0.07 $ 0.12 $ 0.28
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Stock Data
Common stock price range: (1)
High 5 5 1/8 5 3/8 6
Low 3 3/4 4 5/8 4 1/4 4 3/4
(1) The Common Stock is listed on the American Stock Exchange ("AMEX") under
the symbol, "SCK". The preceding table sets forth the high and low closing
prices on a per share basis for the Common as reported by the AMEX for the
periods indicated.
49
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 15 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
the regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1995, that the
Bank meets all capital adequacy requirements to which it is subject. As of
December 31, 1995, the most recent notification from the Federal Deposit
Insurance Corporation, the Bank's primary regulator, categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the Bank's capital rating category.
The actual capital amount and ratios for the Company and the Bank are presented
in the table below:
- ---------------------------------------------------------------------------------------
DECEMBER 31, 1995 1994
- ---------------------------------------------------------------------------------------
WELL CAPITALIZED
COMPANY BANK COMPANY BANK REQUIREMENT*
- ---------------------------------------------------------------------------------------
Leverage capital ratio 9.08% 8.59% 10.74% 8.86% 5.00%
Tier I risk-based capital ratio 10.75% 10.14% 15.72% 12.96% 6.00%
Total risk-based capital ratio 12.01% 11.39% 16.98% 14.22% 10.00%
*Requirements to be well capitalized under Prompt Corrective Action Provisions.
NOTE 16 - TRANSACTIONS WITH DIRECTORS & OFFICERS
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with its directors, principal
officers, their immediate families, and affiliated companies in which they are
principal shareholders. Any such transactions are on the same terms, including
interest rates and collateral requirements, as those prevailing at the time for
comparable transactions with others. These related parties were indebted to the
Company for loans totaling approximately $2.0 million, $2.5 million, and $4.3
million as of December 31, 1995, 1994, and 1993, respectively. New loans
granted in 1995, 1994 and 1993 were $714 thousand, $0.4 million, and $0.7
million, respectively; repayments were $1.1 million, $2.0 million, and $0.7
million, respectively.
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the Company's
financial instruments. However, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates presented herein are not necessarily indicative of the amounts
the Company could have realized in a sales transactions at either December 31,
1995 or 1994. The estimated fair value amounts for 1995 and 1994 have been
measured as of their respective year ends, and have not been reevaluated or
updated for purposes of these consolidated financial statements subsequent to
those respective dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year end.
50
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS(CONTINUED)
The following information should not be interpreted as an estimate of the fair
value of the entire company since a fair value calculation is only required for
a limited portion of the Company's assets.
December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
- ------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 29,088 $ 29,088 $ 31,118 $ 31,118
Investments:
Securities held-to-maturity - - 60,023 54,680
Securities available-for-sale 94,030 94,030 71,858 71,858
Loans (excludes nonaccrual loans and
deferred fee income):
Commercial 146,609 147,595 77,028 74,109
Real estate, construction 4,416 4,451 30 30
Real estate 107,048 109,379 80,579 77,437
Consumer 57,383 58,427 43,511 42,171
Less: Allowance for possible loan
losses 5,734 5,734 5,318 5,318
- ------------------------------------------------------------------------------------
Total financial assets $432,840 $437,236 $358,829 $346,085
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Deposits payable on demand $260,679 $260,679 $265,572 $265,572
Deposits with fixed maturities 146,132 146,663 74,367 74,047
- ------------------------------------------------------------------------------------
Total financial liabilities $406,811 $407,342 $339,939 $339,619
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swap agreements - (1,070) - (6,244)
This disclosure of fair value amounts does not include the fair values of any
intangible assets, such as core deposit intangibles, or loan servicing rights.
The carrying values of certain financial instruments approximated their fair
values. These financial instruments include cash and due from banks, interest-
bearing deposits in banks, federal funds sold and purchased, customers'
acceptance liability, certain other assets, demand deposits, other short-term
borrowings, acceptances outstanding, and other liabilities that are considered
financial instruments. Carrying values were assumed to approximate fair values
for these financial instruments because they are short term in nature and their
recorded amounts approximate fair values or are receivable or payable on demand.
Fair value amounts of investment securities were based on quoted market prices.
For purposes of these fair value calculations, the aggregate fair value of the
loan portfolio, excluding nonaccrual loans, was adjusted by a related portion of
the allowance for possible loan losses. That portion of the allowance for
possible loan losses primarily represents the credit risk associated with loans
that reprice within relatively short time frames. The fair values of loans that
do not reprice within relatively short time frames were calculated using
discounted cash flow models based on the maturities of the loans. The discount
rates, which were based on market interest rates for similar types of loans,
incorporated adjustments for credit risk.
51
Part II. Item 8 (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of nonaccrual loans with recorded book values of $1.4 million
and $1.6 million at December 31, 1995 and 1994, respectively, were not estimated
because it was not practical to reasonably estimate the amount or timing of
future cash flows for such loans. The fair market values of the interest rate
swap agreements are based on quoted market prices.
For deposits with defined maturities, the fair values were calculated using
discounted cash flow models based on market interest rates for different product
types and maturity dates for which the deposits were held.
The fair value of loan commitments is not material to the financial statements
taken as a whole.
52
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of SC Bancorp and
its subsidiary as of December 31, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of SC Bancorp and its subsidiary at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
Los Angeles, California
January 24, 1996
/S/ Deloitte & Touche, LLP
53
PART II.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers is incorporated by
reference from the sections entitled "Nominees for Election as Directors: and
"Compliance with Section 16(a) of the Exchange Act" of the Company's definitive
Proxy Statement which will be filed within 120 days after the Company's fiscal
year ended December 31, 1995 (the "1996 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management remuneration and transactions is incorporated
by reference from the sections entitled "Executive Compensation", "Information
About the Board of Directors and Committees of the Board", and "Compensation
Committee Interlocks and Insider Participation" of the 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference form the section entitled "Certain
Relationships and Related Transactions" of the 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Information concerning certain relationships and related party transactions is
incorporated by reference from the section entitled "Certain Relationships and
Related Transactions" of the 1996 Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following consolidated financial statements of SC Bancorp and
subsidiary are filed as part of this Annual Report.
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994, and 1993
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994, and 1993
Notes to Consolidated Financial Statements
SC Bancorp (parent only) financial statements - Note 13
(a)(2) All other financial statement schedules are omitted because they are
not applicable, not material or because the information is included in
the consolidated financial statements or notes thereto.
54
PART IV. ITEM 14 (CONTINUED)
(a)(3) Exhibits
2.1 Real Estate Purchase Agreement dated February 28, 1994, between
Southern California Bank and Downey Community Hospital Foundation (a)
2.2 Asset Purchase and Liability Assumption Agreement between Southern
California Bank and Independence One Bank of California, F.S.B., dated
January 18, 1995 (g)
2.3 Deposit Purchase Agreement between Southern California Bank and Home
Bank dated October 10, 1995
2.4 Deposit Purchase Agreement between Southern California Bank and
Preferred Bank dated November 14, 1995
3(i).1 SC Bancorp Articles of Incorporation dated February 5, 1981, as
amended (h)
3(i).2 Amendment to SC Bancorp Articles of Incorporation dated May 9, 1995
3(ii).1 Bylaws as amended through March 25, 1996
4.1 Specimen Common Stock Certificate
4.2 SC Bancorp 1989 Stock Option Plan (February 1990)*(f)
4.3.1 Amended and restated Southern California Bank Employee Retirement Plan
dated January 1, 1992*(d)
4.3.2 First amendment to the amended and restated Southern California Bank
Employee Retirement Plan*
4.3.3 Second amendment to the amended and restated Southern California Bank
Employee Retirement Plan*
4.3.4 Third amendment to the amended and restated Southern California Bank
Employee Retirement Plan*
4.3.5 Fourth amendment to the amended and restated Southern California Bank
Employee Retirement Plan*
4.4 SC Bancorp Executive Deferral Plan (IV) (February 1990)*(f)
4.5 Southern California Bank Executive Incentive Compensation Plans for
1994 (December 1993)*(b)
4.6 Southern California Bank Executive Incentive Compensation Plans for
1995*
10.1 Sublicense Agreement between Southern California Bank and National
Commerce Bank Services, Inc., dated October 22, 1992 for
supermarket space in La Habra, California (c)
10.2 Sublease between SC Bancorp and Denny's, dated December 24, 1992 for
office space in La Mirada, California (c)
10.3 Lease between Southern California Bank and Robert Stein, dated
September 1, 1981, amended June 19, 1990, for office space in Avalon,
California (d)
10.4 Lease between Southern California Bank and Commonwealth Equity Trust,
dated December 17, 1990 for office space in Signal Hill, California
(d)
10.5 Lease between SC Bancorp and Forest Lawn Company and Western Empire
Savings and Loan Association, dated August 18, 1983, amended January
3, 1991, for office space in Yorba Linda, California (d)
10.6 Assignment of lease between Southern California Bank and Garfield
Bank, dated December 27, 1985, amended January 1, 1987, for office
space in Huntington Beach, California (b)
10.7 Lease between Southern California Bank and Tustin-La Palma Business
Center, dated July 8, 1993, for office space in Anaheim, California
(b)
10.8 Lease between Southern California Bank and Dicker-Warmington
Properties, dated as of January 1, 1990 for office space in City of
Industry, California (b)
10.9 License Agreement between Southern California Bank and The Vons
Companies, Inc., dated December 18, 1992 for supermarket space in
Anaheim Hills, California (b)
10.10 Consent to assignment of sublease and sublease between Southern
California Bank, Bank of America, NTSA, and The Taj dated May 12, 1995
for office space in Laguna Hills, California
10.11 Sublease between Southern California Bank and Citicorp Savings, dated
November 30, 1995 for office space in La Jolla, California
10.12 Lease between Southern California Bank and Regents Park Financial
Centre, Ltd., dated October 25, 1995 for office space in La Jolla,
California.
10.13 Forward lease between Southern California Bank and Regents Park
Financial Centre, Ltd., dated October 25, 1995 for office space in La
Jolla, California.
10.14 Employment Security Agreement between SC Bancorp and Larry D.
Hartwig, dated January 1, 1995*(g)
10.15 Amendment to Employment Security Agreement between SC Bancorp and
Larry D. Hartwig dated July 18, 1995*(i)
10.16 Employment Security Agreement between SC Bancorp and David A. McCoy,
dated February 25, 1992*(c)
10.17 Amendment to Employment Security Agreement between SC Bancorp and
David A. McCoy dated November 21, 1995*
10.18 Employment Security Agreement between SC Bancorp and Bruce W. Roat,
dated March 17, 1995*(g)
10.19 Amendment to Employment Security Agreement between SC Bancorp and
Bruce W. Roat, dated November 21, 1995*
10.20 Employment Security Agreement between SC Bancorp and Mark B.
Metzinger, dated May 1, 1995*
55
PART IV. ITEM 14 (CONTINUED)
10.21 Amendment to Employment Security Agreement between SC Bancorp and Mark
B. Metzinger dated November 21, 1995*
10.22 Employment Security Agreement between Southern California Bank and Ann
E. McPartlin, dated September 15, 1994*(g)
10.23 Amendment to Employment Security Agreement between SC Bancorp and Ann
E. McPartlin, dated November 21, 1995*
10.24 Employment Security Agreement between Southern California Bank and M.
V. Cummings, dated September 15, 1994*(g)
10.25 Amendment to Employment Security Agreement between SC Bancorp and M.
V. Cummings, dated November 21, 1995*
10.26 Form of Indemnification Agreement entered into with each Executive
Officer and Director of SC Bancorp(b)
10.27 Form of Indemnification Agreement entered into with each Executive
Officer and Director of Southern California Bank(b)
21.0 Subsidiaries of the Registrant(g)
23.1 Consent of the Company's independent auditor (Deloitte & Touche, LLP)
to the incorporation by reference in the Registration Statement of SC
Bancorp on Form S-8 (No. 33-38666) of their report dated January 24,
1996 appearing in the Annual Report on Form 10-K of SC Bancorp for the
year ended December 31, 1995.
27.1 Financial Data Schedule
(b) The Company filed the following reports on Form 8-K during the fourth
quarter of 1995:
None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Management contracts or compensatory plans or arrangements required to
be filed as exhibits pursuant to Item 14(c) of Form 10-K.
(a) This exhibit is contained in SC Bancorp's Registration Statement on
Form S-2, Amendment No. 1, filed with the Commission on April 28,
1994, (Commission File No. 33-76274), and incorporated herein by
reference.
(b) This exhibit is contained in SC Bancorp's Registration Statement on
Form S-2, filed with the Commission on March 9, 1994, (Commission File
No. 33-76274), and incorporated herein by reference.
(c) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31, 1992, filed with the Commission on
March 30, 1993, (Commission File No. 0-11046) and incorporated herein
by reference.
(d) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31, 1991, filed with the Commission on
March 30, 1992, (Commission File No. 0-11046) and incorporated herein
by reference.
(e) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31, 1990, filed with the Commission on
April 1, 1991, (Commission File No. 0-11046) and incorporated herein
by reference.
(f) This exhibit is contained in SC Bancorp's Proxy Statement, filed with
the Commission on March 23, 1990, (Commission File No. 0-11046) and
incorporated herein by reference.
(g) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31, 1994, filed with the Commission on
March 30, 1995, (Commission File No. 0-11046) and incorporated herein
by reference.
(h) This exhibit is contained in SC Bancorp's Quarterly Report on Form
10-Q for the period ended March 31, 1995, filed with the Commission on
May 15, 1995, (Commission File No. 0-11046) and incorporated herein by
reference.
(i) This exhibit is contained in SC Bancorp's Quarterly Report on Form
10-Q for the period ended June 30, 1995, filed with the Commission on
August 15, 1995, (Commission File No. 0-11046) and incorporated herein
by reference.
56
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.
SC BANCORP
By: /s/LARRY D. HARTWIG
-------------------
Larry D. Hartwig
Chief Executive Officer and President
Date: March 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
/S/LARRY D. HARTWIG Chief Executive Officer, March 25, 1996
- -------------------- President and Director
Larry D. Hartwig (Principal Executive Officer)
/S/BRUCE W. ROAT Executive Vice President, March 25, 1996
- -------------------- Chief Financial Officer
Bruce W. Roat (Principal Financial and
Accounting Officer)
/S/H.A. BEISSWENGER Chairman of the Board March 25, 1996
- -------------------
H.A. Beisswenger
/S/H. KEITH ABBOTT Director March 25, 1996
- ------------------
H. Keith Abbott
/S/ROBERT C. BALL Director March 25, 1996
- -------------------
Robert C. Ball
57
/s/ James E. Cunningham Director March 25, 1996
- -------------------------
James E. Cunningham
/s/ William C. Greenbeck Director March 25, 1996
- -------------------------
William C. Greenbeck
/s/ Irving J. Pinsky Director March 25, 1996
- -------------------------
Irving J. Pinsky
/s/ Peer A. Swan Director March 25, 1996
- -------------------------
Peer A. Swan
/s/ Donald E. Wood Director March 25, 1996
- -------------------------
Donald E. Wood
Exhibit Index
- ------------------------------------------------------------------------------
Exhibit Description Page
No. No.
- ------------------------------------------------------------------------------
2.1 Real Estate Purchase Agreement dated February 28, 1994,
between Southern California Bank and Downey Community
Hospital Foundation(a)
2.2 Asset Purchase and Liability Assumption Agreement between
Southern California Bank and Independence One Bank of
California, F.S.B., dated January 18, 1995(g)
2.3 Deposit Purchase Agreement between Southern California Bank
and Home Bank dated October 10, 1995
2.4 Deposit Purchase Agreement between Southern California Bank
and Preferred Bank dated November 14, 1995
3(i).1 SC Bancorp Articles of Incorporation as previously amended(h)
3(i).2 Amendment to SC Bancorp Articles of Incorporation dated
May 9, 1995
3(ii).1 Bylaws, as amended through March 25,1996
4.1 Specimen Common Stock Certificate(b)
4.2 SC Bancorp 1989 Stock Option Plan (February 1990)(f)
4.3.1 Amended and restated Southern California Bank Employee
Retirement Plan dated January 1, 1992(d)
4.3.2 First amendment to the amended and restated Southern
California Bank Employee Retirement Plan
4.3.3 Second amendment to the amended and restated Southern
California Bank Employee Retirement Plan
4.3.4 Third amendment to the amended and restated Southern
California Bank Employee Retirement Plan
4.3.5 Fourth amendment to the amended and restated Southern
California Bank Employee Retirement Plan
4.4 SC Bancorp Executive Deferral Plan (IV) (February 1990)(f)
4.5 Southern California Bank Executive Incentive Compensation
Plans for 1994 (December 1993)(b)
4.6 Southern California Bank Executive Incentive Compensation
Plans for 1995
10.1 Sublicense Agreement between Southern California Bank and
National Commerce Bank Services, Inc., dated October 22,
1992 for supermarket space in La Habra, California(c)
10.2 Sublease between SC Bancorp and Denny's, dated December 24,
1992 for office space in La Mirada, California(c)
10.3 Lease between Southern California Bank and Robert Stein,
dated September 1, 1981, amended June 19, 1990, for office
space in Avalon, California(d)
10.4 Lease between Southern California Bank and Commonwealth
Equity Trust, dated December 17, 1990 for office space in
Signal Hill, California(d)
10.5 Lease between SC Bancorp and Forest Lawn Company and Western
Empire Savings and Loan Association, dated August 18, 1983,
amended January 3, 1991, for office space in Yorba Linda,
California(d)
10.6 Assignment of lease between Southern California Bank and
Garfield Bank, dated December 27, 1985, amended January 1,
1987, for office space in Huntington Beach, California(b)
10.7 Lease between Southern California Bank and Tustin-La Palma
Business Center, dated July 8, 1993 for office space in
Anaheim, California(b)
10.8 Lease between Southern California Bank and Dicker-Warmington
Properties, dated as of January 1, 1990 for office space in
City of Industry, California(b)
10.9 License Agreement between Southern California Bank and
The Vons Companies, Inc., dated December 18, 1992 for
supermarket space in Anaheim Hills, California(b)
10.10 Consent to assignment of sublease and sublease between
Southern California Bank, Bank of America, NTSA, and
The Taj dated May 12, 1995 for office space in Laguna
Hills, California
10.11 Sublease between Southern California Bank and Citicorp
Savings, dated November 30, 1995 for office space in
La Jolla, California
10.12 Lease between Southern California Bank and Regents Park
Financial Centre, Ltd., dated October 25, 1995 for office
space in La Jolla, California
10.13 Forward lease between Southern California Bank and Regents
Park Financial Centre, Ltd., dated October 25,1995 for
office space in La Jolla, California
10.14 Employment Security Agreement between SC Bancorp and Larry D.
Hartwig, dated January 1, 1995(g)
10.15 Amendment to Employment Security Agreement between SC Bancorp
and Larry D. Hartwig, dated July 18, 1995(i)
10.16 Employment Security Agreement between SC Bancorp and David A.
McCoy, dated February 25, 1992(c)
10.17 Amendment to Employment Security Agreement between SC Bancorp
and David A. McCoy dated November 21, 1995
10.18 Employment Security Agreement between SC Bancorp and Bruce W.
Roat, dated March 17, 1995(g)
Exhibit Index (continued)
10.19 Amendment to Employment Security Agreement between SC Bancorp
and Bruce W. Roat, dated November 21, 1995
10.20 Employment Security Agreement between SC Bancorp and Mark B.
Metzinger, dated May 1, 1995
10.21 Amendment to Employment Security Agreement between SC Bancorp
and Mark B. Metzinger dated November 21, 1995
10.22 Employment Security Agreement between Southern California Bank
and Ann E. McPartlin, dated September 15, 1994(g)
10.23 Amendment to Employment Security Agreement between SC Bancorp
and Ann E. McPartlin, dated November 21, 1995
10.24 Employment Security Agreement between Southern California Bank
and M. V. Cummings, dated September 15, 1994(g)
10.25 Amendment to Employment Security Agreement between SC Bancorp
and M. V. Cummings, dated November 21, 1995
10.26 Form of Indemnification Agreement entered into with each
Executive Officer and Director of SC Bancorp(b)
10.27 Form of Indemnification Agreement entered into with each
Executive Officer and Director of Southern California Bank(b)
21.0 Subsidiaries of the Registrant(g)
23.1 Consent of the Company's independent auditor (Deloitte & Touche,
LLP) to the incorporation by reference in the Registration
Statement of SC Bancorp on Form S-8 (No. 33-38666) of their
report dated January 24, 1996 appearing in the Annual Report
on Form 10-K of SC Bancorp for the year ended December 31, 1995
27.1 Financial Data Schedule
- ------------------------------------------------------------------------------
(a) This exhibit is contained in SC Bancorp's Registration
Statement on Form S-2, Amendment No. 1, filed with the
Commission on April 28, 1994, (Commission File No. 33-76274),
and incorporated herein by reference.
(b) This exhibit is contained in SC Bancorp's Registration
Statement on Form S-2, filed with the Commission on March 9,
1994, (Commission File No. 33-76274), and incorporated herein
by reference.
(c) This exhibit is contained in SC Bancorp's Annual Report on
Form 10-K for the year ended December 31, 1992, filed with
the Commission on March 30, 1993, (Commission File No. 0-11046)
and incorporated herein by reference.
(d) This exhibit is contained in SC Bancorp's Annual Report on
Form 10-K for the year ended December 31, 1991, filed with
the Commission on March 30, 1992, (Commission File No. 0-11046)
and incorporated herein by reference.
(e) This exhibit is contained in SC Bancorp's Annual Report on
Form 10-K for the year ended December 31, 1990, filed with
the Commission on April 1, 1991, (Commission File No. 0-11046)
and incorporated herein by reference.
(f) This exhibit is contained in SC Bancorp's Proxy Statement,
filed with the Commission on March 23, 1990, (Commission
File No. 0-11046) and incorporated herein by reference.
(g) This exhibit is contained in SC Bancorp's Annual Report on
Form 10-K for the year ended December 31, 1994, filed with
the Commission on March 30, 1995, (Commission File No. 0-11046)
and incorporated herein by reference.
(h) This exhibit is contained in SC Bancorp's Quarterly Report on
Form 10-Q for the period ended March 31, 1995, filed with the
Commission on May 15, 1995, (Commission File No. 0-11046)
and incorporated herein by reference.
(i) This exhibit is contained in SC Bancorp's Quarterly Report on
Form 10-Q for the period ended June 30, 1995, filed with the
Commission on August 15, 1995, (Commission File No. 0-11046)
and incorporated herein by reference.