SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES. [ X ] NO. [ ]
There were 7,480,355 shares of common stock for the registrant issued and
outstanding as of November 1, 1996.
Part I-Financial Information
Item 1. Financial Statements
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
Consolidated Balance Sheets
(Dollars in thousands)
September 30, December 31,
1996 1995
- ------------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS
Cash and due from banks $ 28,956 $ 29,088
Federal funds sold 5,600 --
- ------------------------------------------------------------------------------
Cash and cash equivalents 34,556 29,088
- ------------------------------------------------------------------------------
Securities available-for-sale, at fair
value (Notes 1 and 2) 78,171 94,030
Loans (Notes 1 and 3) 337,023 316,841
Less: Deferred fee income (718) (531)
Allowance for possible loan losses (5,369) (5,734)
- ------------------------------------------------------------------------------
Loans, net 330,936 310,576
- ------------------------------------------------------------------------------
Premises and equipment, net 8,105 9,734
Other real estate owned, net 1,618 2,073
Accrued interest receivable 2,653 4,297
Other assets 11,613 11,885
- ------------------------------------------------------------------------------
TOTAL ASSETS $467,652 $461,683
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- ------------------------------------------------------------------------------
LIABILITIES
Deposits:
Interest-bearing $286,598 $276,433
Noninterest-bearing 123,869 130,378
- ------------------------------------------------------------------------------
Total deposits 410,467 406,811
- ------------------------------------------------------------------------------
Borrowed funds and other interest-bearing
liabilities 6,498 6,407
Accrued interest payable and other liabilities 2,736 2,953
- ------------------------------------------------------------------------------
Total liabilities 419,701 416,171
- ------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, no par or stated
value: 10,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, no par or stated value:
20,000,000 shares authorized; 7,477,805 and
7,471,505 shares issued and outstanding at
September 30, 1996 and December 31, 1995,
respectively. 37,687 37,658
Retained earnings 11,533 8,600
Unrealized loss on available-for-sale
securities, net of taxes (Note 1) (1,269) (746)
- ------------------------------------------------------------------------------
Total shareholders' equity 47,951 45,512
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $467,652 $461,683
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
Part I. Item 1. (continued)
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
- ---------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $7,628 $ 7,090 $22,395 $18,790
Interest on investment securities 1,038 1,618 3,243 5,060
Interest on Federal funds sold 174 88 346 727
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 8,840 8,797 25,984 24,577
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 723 399 1,689 1,031
Savings 230 280 710 884
Time certificates of deposit 1,884 2,313 5,799 6,305
- ---------------------------------------------------------------------------------------------------------------------
Total interest on deposits 2,837 2,992 8,198 8,220
- ---------------------------------------------------------------------------------------------------------------------
Other interest expense 135 116 624 920
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 2,972 3,108 8,822 9,140
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 5,868 5,689 17,162 15,437
Provision for (recovery of) possible loan losses (Note 3) -- 900 (470) 1,224
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 5,868 4,789 17,632 14,213
- ---------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME 1,323 759 3,856 3,732
NONINTEREST EXPENSE:
Salaries and benefits 2,491 2,981 7,669 8,023
Net occupancy, furniture and equipment 946 1,534 3,134 3,876
Other operating expense 1,611 2,318 5,642 6,193
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 5,048 6,833 16,445 18,092
- ---------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 2,143 (1,285) 5,043 (147)
Provision for income taxes 893 (377) 2,110 (14)
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $1,250 $ (908) $ 2,933 $ (133)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 7,477 7,469 7,475 7,469
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.17 $ (0.12) $ 0.39 $ (0.02)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
Part I. Item 1. (continued)
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine months ended
September 30,
(Unaudited)
- -------------------------------------------------------------------------------
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,933 $ (133)
Adjustments to reconcile net income to
net cash provided by operating activities:
(Recovery of) provision for possible loan losses (470) 1,224
Provision for loss on other real estate owned 428 128
Loss (gain) on sale of other real estate owned 1 (46)
Gain on sale of available-for-sale investment
securities (14) --
Net amortization of premiums on investment
securities 691 827
Net amortization of deferred fees and unearned
income on loans 187 (53)
Depreciation and amortization 1,387 1,104
Loss on sale of fixed assets 33 --
Net decrease (increase) in accrued interest
receivable and other assets 1,913 (501)
Net increase (decrease) in accrued interest
payable and other liabilities 246 (979)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 7,335 1,571
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available-for-sale investment
securities 8,549 --
Proceeds from maturities of available-for-sale
investment securities 6,569 5,000
Proceeds from maturities of held-to-maturity
investment securities -- 3,197
Purchase of investment securities (832) --
Purchase of IOBC loans -- (71,576)
Net increase in loans (20,776) (8,138)
Proceeds from sale of fixed assets and other
assets 256 --
Purchase of fixed assets (253) (940)
Proceeds from sale of other real estate owned 622 1,333
- --------------------------------------------------------------------------------
Net cash used in investing activities (5,865) (71,124)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 30 --
Purchase of IOBC interest-bearing deposits -- 14,965
Purchase of IOBC noninterest-bearing deposits -- 19,762
Increase in interest-bearing deposits 10,165 55,771
Decrease in noninterest-bearing deposits (6,509) (3,399)
Increase (decrease) in other borrowings 312 (7,789)
- --------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities 3,998 79,310
- --------------------------------------------------------------------------------
Increase in cash and cash equivalents 5,468 9,757
Cash and cash equivalents, beginning of period 29,088 31,118
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 34,556 $ 40,875
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Unrealized loss on investment securities,
available-for-sale, net of tax $ 524 $ 2,517
Transfers of loans to other real estate owned 699 979
Asset sales offset to restructuring reserve 91 --
Close out of capital lease accounts 118 --
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
3
Part I. Item 1. (continued)
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
Notes to Consolidated Financial Statements
(Unaudited, except for information as of and for the year ended
December 31, 1995)
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
SC Bancorp, a California bank holding company (the "Company"), and its
subsidiary, Southern California Bank, a California state-chartered bank (the
"Bank"), operates 14 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. See the notes to SC Bancorp's consolidated financial
statements contained in the Company's annual report on Form 10-K.
The interim period financial statements are unaudited. It is the opinion of
Company management that all adjustments consisting of normal, recurring accruals
necessary for a fair presentation of the results of operations have been
reflected therein. Results for the period ending September 30, 1996 are not
necessarily indicative of results that may be expected for any other interim
periods or for the year as a whole.
SECURITIES:
At September 30, 1996, the Company's available-for-sale portfolio had a net
unrealized loss of $2.2 million. The tax-effected reduction to shareholders'
equity at September 30, 1996, was $1.3 million. In January 1995, the FDIC
issued a final rule excluding unrealized holding gains and losses on available-
for-sale debt securities from the calculation of Tier 1 capital.
LOANS:
The Company adopted 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. The Company's recorded investment in impaired loans
at September 30, 1996 was $7.2 million. The Company's allowance for possible
loan losses at September 30, 1996 includes $1.5 million related to impaired
loans.
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 values, 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.
4
Part I. Item 1. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities as of
September 30, 1996 and December 31, 1995 are as follows:
(DOLLARS IN THOUSANDS) September 30, 1996
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ------------ ----------
AVAILABLE-FOR-SALE
U.S. Treasury securities and
obligations of U.S.
government agencies $ 33,097 $ -- $ (456) $ 32,641
Mortgage-backed securities 45,208 -- (1,712) 43,496
FHLB and FRB stock 2,034 -- -- 2,034
- --------------------------------------------------------------------------------
Total $ 80,339 $ -- $(2,168) $ 78,171
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) December 31, 1995
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ------------ ----------
AVAILABLE-FOR-SALE:
U.S. 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
- --------------------------------------------------------------------------------
Investment securities with a carrying value of $15.7 million and $18.6 million
were pledged to secure public deposits and as collateral for other borrowings at
September 30, 1996 and December 31, 1995, respectively.
The amortized cost and estimated fair value of debt securities at September 30,
1996 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.
(DOLLARS IN THOUSANDS) Maturing in
- ------------------------------------------------------------------------------------------------------------------------------------
Over one Over five
One year year through years through Over
SEPTEMBER 30, 1996 or less five years ten years ten years Total
------------ -------------- -------------- ----------- ------------
Available-for-sale, amortized cost $ 15,453 $ 56,098 $ 8,709 $ 79 $ 80,339
Available-for-sale, estimated fair value $ 15,375 $ 54,267 $ 8,450 $ 79 $ 78,171
Proceeds from sales of investment securities during the first quarter of 1996
were $8.5 million. A gross gain of $14 thousand was realized on the sale.
There were no sales of investment securities during the third quarter of 1996.
5
Part I. Item 1. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
Loans by category are summarized below:
September 30, December 31,
(DOLLARS IN THOUSANDS) 1996 Percent 1995 Percent
- -----------------------------------------------------------------------------------------------------------------
Commercial $ 153,422 45.52% $ 147,230 46.47%
Real estate, construction 5,622 1.67% 4,416 1.39%
Real estate, mortgage 108,100 32.08% 107,662 33.98%
Consumer 69,879 20.73% 57,533 18.16%
- -----------------------------------------------------------------------------------------------------------------
Gross loans 337,023 100.00% 316,841 100.00%
---------- ----------
---------- ----------
Deferred fee income (718) (531)
Allowance for possible loan losses (5,369) (5,734)
- ------------------------------------------------------------------ ------------
Loans, net $ 330,936 $ 310,576
- ------------------------------------------------------------------ ------------
- ------------------------------------------------------------------ ------------
No industry constitutes a concentration in the Company's loan portfolio. In
April 1995, the Company purchased approximately
$72 million of floating rate commercial, real estate and consumer loans from
Independence One Bank of California, FSB ("IOBC").
The following table summarizes the balances and changes in the allowance for
possible loan losses for the periods indicated:
September 30, December 31, September 30, December 31,
(DOLLARS IN THOUSANDS) 1996 1995 1995 1994
- ----------------------------------------------- ---------------------------- ----------------------------
Average balance of gross loans outstanding $ 318,456 $ 261,631 $ 253,506 $ 203,760
- ----------------------------------------------- ---------------------------- ----------------------------
- ----------------------------------------------- ---------------------------- ----------------------------
Gross loan balance at end of period $ 337,023 $ 316,841 $ 278,699 $ 207,688
- ----------------------------------------------- ---------------------------- ----------------------------
- ----------------------------------------------- ---------------------------- ----------------------------
Allowance at beginning of period $ 5,734 $ 5,318 $ 5,318 $ 10,800
Charge-offs:
Commercial 80 834 734 2,004
Real estate 138 1,227 1,207 3,453
Consumer 152 587 500 362
- ----------------------------------------------- ---------------------------- ----------------------------
Total charge-offs 370 2,648 2,441 5,819
Recoveries:
Commercial 416 587 421 915
Real estate 22 129 64 214
Consumer 37 192 151 58
- ----------------------------------------------- ---------------------------- ----------------------------
Total recoveries 475 908 636 1,187
Net (recoveries) charge-offs (105) 1,740 1,805 4,632
Provision (recovery) charged (credited) to expense (470) 1,539 1,224 (850)
Allowance on purchased loans - 617 617 0
- ----------------------------------------------- ---------------------------- ----------------------------
Allowance at end of period $ 5,369 $ 5,734 $ 5,354 $ 5,318
- ----------------------------------------------- ---------------------------- ----------------------------
- ----------------------------------------------- ---------------------------- ----------------------------
6
Part I. Item 1. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (CONTINUED)
September 30, December 31, September 30, December 31,
(DOLLARS IN THOUSANDS) 1996 1995 1995 1994
- ---------------------------------------------- ----------------------------- ----------------------------
Ratio of allowance for loan losses to loans
outstanding at end of period 1.59% 1.81% 1.92% 2.56%
Ratio of allowance for loan losses to
nonaccrual loans at end of period 232.12% 414.01% 292.73% 329.90%
Ratio of annualized net charge-offs to
average loans -0.04% 0.67% 0.95% 2.27%
Loans on nonaccrual status were $2.3 million and $1.8 million, respectively at
September 30, 1996 and 1995. Interest income that would have been collected on
these loans had they performed in accordance with their original terms was
approximately $149 thousand and $167 thousand, for the nine months ended
September 30, 1996 and 1995, respectively.
NOTE 4-COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments to
extend credit which are not reflected in the accompanying consolidated financial
statements. The Company does not anticipate losses as a result of these
transactions. However, the commitments are a component of the estimate of the
allowance for possible loan losses. Commercial and standby letters of credit
totaled approximately $7.0 million and $4.3 million at September 30, 1996, and
December 31, 1995, respectively. In addition, the Company had unfunded loan
commitments of $110.6 million and $85.0 million at September 30, 1996 and
December 31, 1995, respectively.
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.
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
September 30, 1996, 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 securities broker 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. Net interest expense of $424 thousand and
$751 thousand related to the swap agreements is included in interest income for
the nine months ended September 30, 1996 and 1995, respectively. The Company is
required to pledge collateral on the swaps. U.S. Agency notes having a fair
value of approximately $5.3 million were pledged as collateral for the
agreements as of September 30, 1996. 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.
7
PART I.
ITEM 2. 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 1995 consolidated
financial statements of the Company and the notes thereto, and the accompanying
quarterly unaudited consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
The Company reported net income of $1.2 million for the third quarter of 1996
compared to a net loss of $908 thousand for the third quarter of 1995. Net
income for the third quarter of 1996 reflects the cost savings associated with
the sale of two branches and the consolidation of a third branch earlier in the
year. The net loss for the third quarter of 1995 reflects $1.7 million pretax
of restructuring charges associated with a restructuring plan announced during
the quarter ("1995 Restructuring"), and $600 thousand pretax of additional loan
loss provisions related to a few specifically identified commercial real estate
loans.
Net income for the first nine months of 1996 was $2.9 million compared to a loss
of $133 thousand for the same period in 1995. Year-to-date net income for the
current year includes a full nine months of operating revenues and expenses for
the private and corporate banking business acquired from Independence One Bank
of California, FSB ("IOBC") on April 30, 1995. Year-to-date net income for 1995
also includes the restructuring charges discussed above, a $408 thousand
nonrecurring adjustment to interest expense related to the Company's deferred
compensation plan, and a $407 thousand benefit payment received on corporate-
owned life insurance.
The following table summarizes key performance indicators pertaining to the
Company's operating results:
Three months ended Nine months ended
September 30, September 30,
- ---------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------
Return on average assets (1) 1.07% -0.76% 0.86% -0.04%
as adjusted for restructuring charges (2) 0.08% 0.26%
Return on average shareholders' equity (1) 10.61% -7.96% 8.49% -0.41%
as adjusted for restructuring charges (2) 0.86% 2.66%
Net income $ 1,250 $ (908) $ 2,933 $ (133)
Earnings per share $ 0.17 $ (0.12) $ 0.39 $ (0.02)
Total average assets $ 465,615 $ 472,612 $ 458,092 $ 455,093
- -------------------------------------------------
(1) Annualized
(2) Restructuring charges:
Loss on securities $ 620 $ 620
Loss on fixed assets 109 109
Noninterest expense 948 948
------------ ------------
Total 1,677 1,677
------------ ------------
Restructuring charges net of taxes $ 1,006 $ 1,006
------------ ------------
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
tables provides information concerning average interest-earning assets and
interest-bearing liabilities and the yields and rates thereon for the periods
indicated. They also provide a summary of the changes in interest income and
interest expense resulting from changes in average interest rates (rate) and
8
Part I. Item 2 (continued)
changes in average balances (volume). Average balances are average daily
balances. Nonaccrual loans are included in total average loans outstanding.
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended 1996 and 1995
- ---------------------------------------------------------------------------------------------------------
September 30, 1996 September 30, 1995 Increase (decrease)
-----------------------------------------------------------------
Average Yield/ Average Yield/ due to change in Net
(DOLLARS IN THOUSANDS) Balance Interest Rate(1) Balance Interest Rate(1) Rate Volume Change
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Loans, net of deferred fees (2) $ 324,659 $ 7,628 9.35% $ 285,502 $ 7,090 9.85% $ (373) $ 911 $ 138
Investment securities 81,786 1,038 5.05% 126,071 1,618 5.09% (13) (568) (580)
Federal funds sold and other 13,219 174 3.23% 5,880 88 5.95% (12) 97 86
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning 419,685 8,839 8.38% 417,453 8,797 8.36% 13 29 42
assets/interest income
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets 45,930 55,159
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $465,615 $ 472,612
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' equity
Interest-bearing deposits $ 287,309 $ 2,837 3.93% $ 291,075 $ 2,992 4.08% $ (115) $ (40) $ (155)
Other interest-bearing liabilities 6,633 135 8.09% 5,405 116 8.51% (6) 25 19
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 293,941 2,971 4.02% 296,481 3,108 4.18% (109) (28) (137)
liabilities/interest expense
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 124,815 130,882
Shareholders' equity 46,859 45,250
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 465,615 $ 472,612
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income/net interest
margin $ 5,868 5.56% $ 5,680 5.41% $ 150 $ 29 $ 179
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Annualized.
The Company's net interest income was $5.9 million for the three months ended
September 30, 1996, compared to $5.7 million for the three months ended
September 30, 1995. The net interest margin increased to 5.56% for the third
quarter of 1996, compared to 5.41% for the prior year.
- -----------------------------------------------------------------------------------------------------------------------------------
Nine months ended 1996 and 1995
- ---------------------------------------------------------------------------------------------------------
September 30, 1996 September 30, 1995 Increase (decrease)
-----------------------------------------------------------------
Average Yield/ Average Yield/ due to change in Net
(DOLLARS IN THOUSANDS) Balance Interest Rate(1) Balance Interest Rate(1) Rate Volume Change
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans, net of deffered fees(2) $ 317,911 $ 22,395 9.44% $ 253,164 $ 18,790 9.22% $ (443) $6,048 $3,605
Investment securities 85,059 3,243 5.11% 130,976 2,060 5.17% (18) (1,758) (1,817)
Federal funds sold and other 8,702 346 5.34% 16,400 727 5.93% (67) (314) (381)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning
assets/interest income 411,672 25,984 8.46% 400,540 24,577 8.20% 750 657 1,407
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets 46,420 54,553
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 458,092 $ 455,093
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Interest-bearing deposits $ 279,489 $ 8,198 3.93% $ 277,418 $ 8,220 3.96% $ (52) $ 30 $ (22)
Other interest-bearing liabilities 11,743 624 7.13% 9,439 920 13.03% (386) 90 (296)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities/interest expense 291,232 8,822 4.06% 286,857 9,140 4.26% (380) 62 (318)
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 120,726 124,366
Shareholders' equity 46,134 43,867
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 458,092 $ 455,090
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income/net interest margin $ 17,162 5.59% $ 15,437 5.15% $ 1,302 $ 423 $1,725
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Annualized.
(2) Includes loans on nonaccrual status of approximately $2.3 million and $1.8
million at September 30, 1996 and 1995, respectively. The amount of
interest income foregone on loans that were on nonaccrual status was
approximately $149 thousand and $167 thousand for the nine months ended
September 30, 1996 and 1995, respectively. Interest income on loans
includes amortization of net loan fees of approximately $694 thousand and
$569 thousand for the nine months ended September 30, 1996 and 1995,
respectively. Additionally, net interest expense of $424 thousand and $751
thousand relating to the interest rate swap agreements was included in
interest income from loans for the nine months ended September 30, 1996 and
1995, respectively.
Net interest income was $17.2 million for the nine months ended September 30,
1996, compared to $15.4 million for the comparable period for the prior year.
The net interest margin increased to 5.59% for the first nine months of 1996
from 5.15% for the
9
Part I. Item 2. (continued)
comparable period of the prior year. The increase in the net interest margin is
attibutable in part to a change in the earning asset mix that includes a higher
proportion of loans to investment securities, and to a decrease in funding
costs. On a year-to-date basis, average loans increased to 77% of total average
earning assets for the current year from 63% of average earning assets a year
ago. The increase was largely due to the $72 million of loans acquired from
IOBC on April 30, 1995. The decrease in investment securities reflects the sale
of $27 million of investment securities during the third quarter of 1995, and
the sale of $8.5 million of U.S. agency securities during the first quarter of
1996. The decrease in funding costs compared to the prior year is due to the
fact that higher rate certificates of deposit raised prior to the IOBC
transaction have largely been replaced with lower cost deposits. The average
rate paid on certificates of deposit decreased to 5.40% for the nine months
ended September 30, 1996 from 5.85% for the nine months ended September 30,
1995. Interest expense for 1995 also included a $408 thousand nonrecurring
adjustment on the Company's deferred compensation plans.
The average yield on earning assets for the nine months ended September 30, 1996
increased to 8.46% from 8.20% for the comparable period of the prior year. This
increase occurred despite an approximately 59 basis point decrease in the
average prime rate for the first nine months of 1996 compared to the same period
in 1995. The Company's overall funding costs decreased approximately 20 basis
points from the prior year due to the reasons discussed above.
PROVISION FOR POSSIBLE LOAN LOSSES
There were no additions to the provision for possible loan losses during the
third quarter of 1996. Loan charge-offs and recoveries for the quarter were
$31 thousand and $73 thousand, respectively. Nonaccrual loans increased to $2.3
million at September 30, 1996 from $1.4 million at December 31, 1995. The
increase is due to two loans to the same borrower that had previously been
reported as restructured. The ratio of the allowance for possible loan losses
to total loans decreased to 1.59% at September 30, 1996 from 1.81% at December
31, 1995. Refer to NOTE 3-LOANS of the Company's consolidated financial
statements which are included in Part I, Item 1, of this Form 10-Q.
The Company recorded a $470 thousand reduction to the provision for possible
loan losses for the first nine months of 1996 compared to a $1.2 million
provision for the comparable period of 1995. Year-to-date loan charge-offs and
recoveries for the current year were $370 thousand and $475 thousand,
respectively, representing a year-to-date net recovery of $105 thousand. Year-
to-date charge-offs and recoveries for the same period of the prior year were
$2.4 million and $636 thousand, respectively, representing a year-to-date net
charge-off of $1.8 million.
NONINTEREST INCOME
The following tables set forth the major components of noninterest income for
the periods indicated:
Three Months Ended
(DOLLARS IN THOUSANDS) September 30,
- --------------------------------------------------------------------------------
1996 1995 Restructuring 1995, Net
Service charges on deposit accounts $ 294 $ 449 -- $ 449
Other fees and charges 796 668 -- 668
Merchant bankcard income 144 145 -- 145
Net gain (loss) on sales of securities -- (620) (620) --
Net gains on sales of loans -- 148 -- 148
Net loss on sales of fixed assets (9) (107) (109) 2
Life insurance income 32 53 -- 53
Other income 66 23 -- 23
- --------------------------------------------------------------------------------
Total noninterest income $ 1,323 $ 759 $ (729) $1,488
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Noninterest income was $1.3 million and $759 thousand for the three months ended
September 30, 1996 and 1995, respectively.
Noninterest income for the third quarter of 1995 includes a $620 loss on sales
of investment securities incurred in conjunction with the 1995 Restructuring.
10
Part I. Item 2. (continued)
NONINTEREST INCOME
Nine Months Ended
(DOLLARS IN THOUSANDS) September 30,
- --------------------------------------------------------------------------------
1996 1995 Restructuring 1995, Net
Service charges on deposit accounts $ 1,058 $ 1,292 $ -- $ 1,292
Other fees and charges 2,061 1,968 -- 1,968
Merchant bankcard income 387 382 382
Net gain on sales of investment
securities 14 (620) (620) --
Net gains on sales of loans 148 148
Net loss on sales of fixed assets (33) (107) (109) 2
Life insurance income 85 460 -- 460
Other income 284 209 -- 209
- --------------------------------------------------------------------------------
Total noninterest income $ 3,856 $ 3,732 $ (729) $ 4,461
- --------------------------------------------------------------------------------
Year-to-date noninterest income was $3.9 million in 1996 compared to $3.7
million for the same period in 1995. In addition to the loss on sales of
securities, year-to-date noninterest income for 1995 included a $407 thousand
benefit payment on a corporate-owned life insurance policy. Service charge
income for the first nine months of 1996 was $234 thousand below the comparable
period of the prior year due to competitive pricing on commercial accounts.
Other fees and charges relating to deposit accounts includes NSF, stop payment
and wire fees. Other income includes check printing upcharge income, sundry
operating recoveries and miscellaneous income.
NONINTEREST EXPENSE
The following tables provide detail of the Company's noninterest expense by
category for the periods indicated:
11
Part I. Item 2. (continued)
Three Months Ended
(DOLLARS IN THOUSANDS) September 30,
- -----------------------------------------------------------------------------
1996 1995 Restructuring 1995, Net
Salaries and employee benefits $ 2,491 $ 2,981 $ 179 $ 2,802
Net occupancy, furniture and
equipment 946 1,565 256 1,309
Legal 172 241 -- 241
Other real estate owned 40 142 -- 142
Professional fees 205 315 86 229
Postage and delivery 153 150 -- 150
Miscellaneous 118 78 -- 78
Advertising and promotion 93 118 -- 118
Goodwill amortization 135 552 427 125
Merchant bankcard expense 111 132 -- 132
Professional and community 46 (54) -- (54)
Telecommunications 76 125 -- 125
Stationery and supplies 59 128 -- 128
Data processing 76 65 -- 65
Software 99 100 -- 100
Other operating expense 228 195 -- 195
- -----------------------------------------------------------------------------
Total noninterest expense $ 5,048 $ 6,833 $ 948 $ 5,885
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Annualized noninterest expense
as a % of average earning assets 4.79% 6.49% 5.59%
Noninterest expense for the third quarter of 1996 decreased to $5.0 million from
$5.9 million for the third quarter of 1995 net of restructuring charges. Total
noninterest expense for the third quarter of 1995 included $948 thousand of
restructuring charges relating to the sale of two branches, closure of a third
branch and the closure of an administrative facility in Anaheim. These
transactions were finalized during the first quarter of 1996. Salary and
benefits expense has been favorably impacted by the reduction in the number of
full-time equivalent staff to 210 at September 30, 1996 from 235 at September
30, 1995. Net occupancy expense for the third quarter of 1996 was $946 thousand
compared to $1.3 million net of restructuring charges for the same period in
1995 The reduction in ongoing occupancy expense can be attributed to the
reduced number of locations following the restructuring.
12
Part I. Item 2. (continued)
NONINTEREST EXPENSE
Nine Months Ended
(DOLLARS IN THOUSANDS) September 30,
- -----------------------------------------------------------------------------
1996 1995 Restructuring 1995, Net
---- ---- ------------- ---------
Salaries and employee benefits $ 7,669 $ 8,282 $ 179 $ 8,103
Net occupancy, furniture and
equipment 3,134 3,608 256 3,352
Legal 812 597 -- 597
Professional fees 566 562 86 476
Other real estate owned 522 387 -- 387
Postage and delivery 468 433 -- 433
Goodwill amortization 370 706 427 279
Miscellaneous 354 283 -- 283
Advertising and promotion 321 331 -- 331
Merchant bankcard expense 314 354 -- 354
Telecommunications 273 343 -- 343
Stationery and supplies 222 288 -- 288
Data processing 223 180 -- 180
Software 221 267 -- 267
Other operating expense 976 1,471 -- 1,471
--------- --------- -------- ---------
$16,445 $18,092 $ 948 $17,144
--------- --------- -------- ---------
--------- --------- -------- ---------
Annualized noninterest expense
as a % of average earning assets 5.34% 6.04% 5.72%
Noninterest expense for the nine months ending September 30, 1996 was $16.4
million compared to $17.1 million net of restructuring charges for the
comparable period of 1995. Current year noninterest expense reflects the impact
of the 1995 Restructuring, and includes a full nine months of expenses
associated with the two corporate banking offices and two branches added
following the IOBC transaction during the second quarter of 1995. The decrease
in other operating expense to $976 thousand from $1.5 million for the prior year
is largely due to a $362 thousand reduction in FDIC deposit insurance premiums.
Certain categories of noninterest expense increased over the prior year. The
increase in legal and professional fees is due in part to fees associated with
evaluating potential acquisition opportunities. Current year professional fees
also include fees associated with outsourcing the Company's internal audit
function. The increase in year-to-date OREO expense over the prior year is
primarily due to valuation reserves taken to facilitate the disposition of one
property. The sale of this property closed on October 30, 1996 resulting in a
$87 thousand gain.
The Company has improved its ongoing operating efficiencies on a larger earning
asset base. Year-to-date noninterest expense for the first nine months of 1996
as a percentage of average earning assets has decreased to 5.34% from 5.72% net
of restructuring charges for a year ago.
FINANCIAL CONDITION
Total assets at September 30, 1996 were $467.7 million, an increase of $6.0
million from $461.7 million at December 31, 1995. Net loan balances increased
to $330.9 million at September 30, 1996 from $310.6 million at December 31,
1995. Total deposits increased to $410.5 million at September 30, 1996 from
$406.8 million at December 31, 1995. The increase in deposit balances was
achieved despite the sale of two branches with deposits totaling approximately
$7.5 million during the first quarter of 1996.
13
Part I. Item 2. (continued)
The following table provides a summary comparison of assets and liabilities
in the Company's consolidated balance sheets and the percentage change in
these balances for the dates indicated:
September 30, December 31, Amount Percent
(DOLLARS IN THOUSANDS) 1996 1995 Change Change
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 34,556 $ 29,088 $ 5,468 18.80%
Securities available-for-sale, at fair value 78,171 94,030 (15,859) -16.87%
Loans, net 330,936 310,576 20,360 6.56%
Premises and equipment, net 8,105 9,734 (1,629) -16.74%
Other real estate owned, net 1,618 2,073 (455) -21.95%
Accrued interest receivable 2,653 4,297 (1,644) -38.26%
Other assets 11,613 11,885 (272) -2.29%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 467,652 $ 461,683 $ 5,969 1.29%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 123,869 $ 130,378 $ (6,509) -4.99%
Interest-bearing demand & savings deposits 148,512 130,301 18,211 13.98%
Time certificates of deposit 138,086 146,132 (8,046) -5.51%
- ----------------------------------------------------------------------------------------------------
Total deposits 410,467 406,811 3,656 0.90%
- ----------------------------------------------------------------------------------------------------
Borrowed funds and other
interest-bearing liabilities 6,498 6,407 91 1.42%
Accrued interest payable and other liabilities 2,736 2,953 (217) -7.35%
Total shareholders' equity 47,951 45,512 2,439 5.36%
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $ 467,652 $ 461,683 $ 5,969 1.29%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
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. The Company's reserve requirement with the
Federal Reserve Bank was $10.0 million at September 30, 1996.
Cash and cash equivalents increased $5.5 million to $34.6 million at September
30, 1996 from $29.1 million at December 31, 1995. The increase is due to a $5.6
million investment in overnight Federal funds sold. There were no Federal funds
sold at December 31, 1995.
INVESTMENT SECURITIES
The Company's securities portfolio includes U.S. Treasury securities and U.S.
government agency securities, most of which are mortgage-backed securities. The
Company reclassified it 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.
14
Part I. Item 2. (continued)
The following table sets forth the maturity distribution of the Company's
investment securities at their estimated fair values at
September 30, 1996:
Maturing in
- -----------------------------------------------------------------------------------------------------------
Over one Over five
One year year through years through Over
(DOLLARS IN THOUSANDS) or less five years ten years ten years Total
- -----------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 5,012 $ -- $ -- $ 79 $ 5,091
U.S. government agency securities 10,363 17,187 2,034 -- 29,584
Mortgage-backed securities -- 37,080 6,416 -- 43,496
- -----------------------------------------------------------------------------------------------------------
Total $ 15,375 $ 54,267 $ 8,450 $ 79 $ 78,171
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
LOANS
The Company provides a full range of credit products designed to meet the credit
needs of borrowers in its service area. The Company engages in medium-term
commercial real estate 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 loans to high net worth individuals.
Additionally, the Company offers construction loan products principally for
entry level housing and owner-user commercial industrial properties.
Refer to NOTE 3-LOANS of the Company's consolidated financial statements which
are included in Part 1. Item 1. of this Form 10-Q for a comparison of loans by
category at September 30, 1996 and December 31, 1995.
COMMERCIAL LOANS. Commercial loans totaled $153.4 million, or 45.5%, of total
loans and $147.2 million, or 46.5%, of total loans at September 30, 1996 and
December 31, 1995, respectively. 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 or renewed annually, and bear a
floating rate of interest. Approximately 64% of the commercial loan portfolio
is secured. Collateral for these loans consists of accounts receivable,
inventories, equipment and other business assets, including real estate. At
September 30, 1996, $38.1 million, or 11.3%, of total loans were secured by
accounts receivable as compared to $29.5 million, or 9.3%, of loans at December
31, 1995. Commercial loans secured by real estate comprised $18.4 million, or
5.5%, of total loans at September 30, 1996, compared to $18.9 million, or 6.0%,
of loans at December 31, 1995. In 1995, the Company began participating in
government-insured lending programs, including SBA loans. At September 30,
1996, the Company had $20.4 million of SBA loans.
REAL ESTATE CONSTRUCTION LOANS. Real estate construction loans increased to
$5.6 million, or 1.7%, of total loans at September 30, 1996 compared to $4.4
million, or 1.4%, of total loans at December 31, 1995.
REAL ESTATE MORTGAGE LOANS. Real estate mortgage loans comprise $108.1 million,
or 32.1%, of the total loan portfolio at September 30, 1996 compared to $107.7
million, or 34.0%, of the total loans outstanding at December 31, 1995.
Approximately $16.8 million of such real estate loans were purchased from IOBC.
Company management continues to monitor the concentration of real estate loans
in the loan portfolio. New real estate loans are made only to existing
borrowers who are owner/users or to new borrowers who provide a new major
banking relationship and demonstrate 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 $69.9 million, or 20.7%, of the loan portfolio is
consumer loans at September 30, 1996. This represents an increase from the $58
million, or 18.2%, of the loan portfolio it comprised at December 31, 1995. The
consumer loan portfolio includes $28.4 million of home equity loans and home
equity lines of credit representing 8.4% of total loans. Vehicle loans comprise
approximately $20.0 million, or 5.9%, of total loans at September 30, 1996. 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.
15
Part I. Item 2. (continued)
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 September 30, 1996 based
on remaining scheduled principal repayments:
Maturing in
- -----------------------------------------------------------------------------------
Over one
One year year through Over
(DOLLARS IN THOUSANDS) or less five years five years Total
- -----------------------------------------------------------------------------------
Commercial $ 77,468 $ 47,846 $ 27,398 $ 152,712
Real estate, construction 2,590 795 2,237 5,622
Real estate, mortgage 23,823 58,959 23,835 106,617
- -----------------------------------------------------------------------------------
Total $ 103,881 $ 107,600 $ 53,470 $ 264,951
- -----------------------------------------------------------------------------------
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 September 30, 1996:
Maturity or Repricing in
- -----------------------------------------------------------------------------------
Over one
One year year through Over
(DOLLARS IN THOUSANDS) or less five years five years Total
- -----------------------------------------------------------------------------------
Fixed interest rates $ 18,454 $ 39,356 $ 18,041 $ 75,851
Variable interest rates 189,064 36 -- 189,100
- -----------------------------------------------------------------------------------
Total $ 207,518 $ 39,392 $ 18,041 $ 264,951
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
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.
16
Part I. Item 2. (continued)
Nonaccrual loans by category are summarized below:
September 30, December 31,
(DOLLARS IN THOUSANDS) 1996 1995
--------------------------------------------------------------
Commercial $ 710 $ 620
Real estate, construction -- --
Real estate, mortgage 1,483 615
Consumer 120 150
--------------------------------------------------------------
Total nonaccrual loans $ 2,313 $ 1,385
--------------------------------------------------------------
--------------------------------------------------------------
Delinquent loans (past due 30 to 89 days and still accruing interest) by
category are summarized below:
September 30, December 31,
(DOLLARS IN THOUSANDS) 1996 1995
---------------------------------------------------------------
Commercial $ 123 $ 548
Real estate, construction -- --
Real estate, mortgage -- 503
Consumer 273 411
---------------------------------------------------------------
Total delinquent loans $ 396 $ 1,462
---------------------------------------------------------------
---------------------------------------------------------------
Percentage of total gross loans:
Nonaccrual loans 0.69% 0.44%
Delinquent loans, still accruing interest 0.12% 0.46%
Nonaccrual and delinquent loans 0.80% 0.90%
ALLOWANCE FOR POSSIBLE LOAN LOSSES
A certain degree of risk is inherent in the extension of credit. Management has
adopted a policy to maintain the allowance for possible loan and lease losses at
a level considered by management to be adequate to absorb estimated known and
inherent risks in the existing portfolio.
Management performs a comprehensive analysis of the loan portfolio on a regular
basis and its current allowance for loan losses to determine if loans are
currently protected according to financial and collateral standards deemed
acceptable. The allowance for possible loan losses represents management's
recognition of the assumed risks of extending credit and the quality of the loan
portfolio. The allowance is management's estimate, which is inherently
uncertain and depends on the outcome of future events. The evaluation of the
quality of the loan portfolio considers the borrower's management, financial
condition, cash flow and repayment program, as well as the existence of
collateral and guarantees. External business and economic factors beyond the
borrower's control, combined with the Company's previous loan loss experience,
are considered in management's evaluation of the allowance for possible loan
losses. In addition, 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. Refer to NOTE 3-LOANS of the Company's
consolidated financial statements which are included in Part I. Item 1. of this
Form 10-Q for additional information concerning activity in the allowance for
possible loan losses, including charge-offs and recoveries. The provision for
possible loan losses is discussed above in Item 2.
17
Part I. Item 2. (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 or losses on disposal, are
reported in noninterest expense. Activity in OREO for the periods indicated is
as follows:
Nine months
Ended Year Ended
September 30, December 31,
(DOLLARS IN THOUSANDS) 1996 1995
------------------------------------------------------------------
Balance, beginning of period $2,073 $ 5,837
Additions 699 1,923
Sales (673) (5,689)
Valuation and senior liens (481) 2
------------------------------------------------------------------
Balance, end of period $1,618 $ 2,073
------------------------------------------------------------------
------------------------------------------------------------------
At September 30, 1996, the OREO portfolio consisted of three properties. One
property having a net book value of $1.1 million was sold on October 30, 1996.
A gain of $87 thousand was recognized on this sale. The Company is actively
marketing the remaining properties.
DEPOSITS
Total deposits at September 30, 1996 were $410.5 million, a $3.7 million
increase from $406.8 million at December 31, 1995, 1996.
The following table sets forth the distribution of average deposits and the
rates paid thereon for the periods indicated:
Nine Months Ended Year Ended
September 30, 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------
Average Average
(DOLLARS IN THOUSANDS) Balance Rate (1) % of total Balance Rate % of total
- ---------------------------------------------------------------------------------------------------------------------
Demand deposits $ 117,459 29.58% $ 123,815 30.47%
NOW/MMDA 90,307 2.50% 22.75% 81,815 1.77% 20.13%
Savings 45,134 2.10% 11.37% 55,204 2.08% 13.58%
TCDs 144,048 5.38% 36.30% 145,555 5.77% 35.82%
- ---------------------------------------------------------------------------------------------------------------------
Deposits $ 396,947 100.00% $ 406,389 100.00%
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
(1) Annualized.
The decrease in average demand deposit balances to $117.5 million at September
30, 1996 from $123.8 million at December 31, 1995 can be attributed to the use
of investment sweep accounts by selected business customers and to the sale of
two branches during the first quarter of 1996.
The reduction in the average rate paid on time certificates of deposit to 5.38%
for the nine months ending September 30, 1996 from 5.77% for 1995, is due in
part to the maturity of the higher rate accounts raised prior to the IOBC
transaction. These accounts have largely been replaced with lower cost
deposits.
18
Part I. Item 2. (continued)
The following table sets forth the maturities of the Company's time certificate
of deposit accounts at the dates indicated:
September 30, 1996
Maturing in
- -------------------------------------------------------------------------------------------------
Over three Over six
Three months months Over
months through through twelve
(DOLLARS IN THOUSANDS) or less six months twelve months months Total
- -------------------------------------------------------------------------------------------------
Under $100,000 $ 27,602 $ 25,310 $ 22,309 $ 8,522 $ 83,743
$100,000 and over 29,194 10,687 11,095 3,367 54,343
- -------------------------------------------------------------------------------------------------
Total $ 56,796 $ 35,997 $ 33,404 $ 11,889 $ 138,086
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
December 31, 1995
Maturing in
- -------------------------------------------------------------------------------------------------
Over three Over six
Three months months Over
months through through twelve
(DOLLARS IN THOUSANDS) or less six months twelve months months Total
- -------------------------------------------------------------------------------------------------
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 $ 53,109 $ 42,119 $ 40,752 $ 10,152 $ 146,132
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
BORROWED FUNDS AND OTHER INTEREST-BEARING LIABILITIES
Borrowed funds and other interest-bearing liabilities consist of overnight
Federal funds purchased, Treasury, tax and loan notes ("TT&L"), obligations
under securities repurchase agreements, the principal portions of capitalized
lease obligations, obligations to senior lienholders for certain OREO properties
and deferred compensation liabilities. The balance of borrowed funds and other
interest-bearing liabilities increased slightly to $6.5 million at September 30,
1996 from $6.4 million at December 31, 1995.
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 rate-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 September 30, 1996.
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.
19
Part I. Item 2. (continued)
Over three Over one
Three months year
months through through Over
(DOLLARS IN THOUSANDS) or less twelve months five years five years Total
- ---------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Federal funds sold $ 5,600 $ -- $ -- $ -- $ 5,600
Investment securities -- 15,375 54,267 8,529 78,171
Gross Loans (1) 212,662 38,078 55,390 28,580 334,710
Interest rate swap -- 25,000 50,000 -- 75,000
- ---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $218,262 $78,453 $159,657 $37,109 $493,481
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Interest-bearing demand and
savings deposits $ -- $ 26,732 $103,958 $ 17,821 $148,512
Time certificates of deposit 56,796 69,401 11,889 -- 138,086
Other borrowings and interest-
bearing liabilities 5,327 1,171 -- -- 6,498
Interest rate swap 75,000 -- -- -- 75,000
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $137,123 $ 97,304 $115,847 $ 17,821 $368,096
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 81,139 $(18,851) $ 43,810 $ 19,288
Cumulative interest rate sensitivity gap 81,139 62,288 106,098 125,385
Cumulative interest rate sensitivity gap
as a percentage of total interest-
earning assets 16.44% 12.62% 21.50% 25.41%
- -------------------------------------------------------
(1) Excludes nonaccrual loans of $2.3 million.
At September 30, 1996, the Company's rate-sensitive balance sheet was shown to
be in a positive gap position over a one-year horizon. The gap between assets
and liabilities that reprice within 12 months was $62.3 million or 12.62% of
assets. The table above implies that the Company is moderately asset-sensitive
and that its earnings would increase in the short-term if interest rates rise.
Repricing of the Company's interest-bearing demand and savings deposits
generally lags repricing on the Company's variable rate loan portfolio. These
core deposits tend to be fairly stable over time and exhibit a low sensitivity
to changes in interest rates. In preparing the gap table, management
distributes core deposit balances across the maturity ranges in accordance with
regulatory guidelines in order to incorporate these characteristics of its core
deposits.
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 scenarios, providing an estimate of both the
dollar amount and percentage change in net interest income under various changes
in interest rates. Based on this income simulation analysis, the Company has
tended to be moderately asset-sensitive. Thus, a rising rate environment would
tend to lead to a moderate increase in net interest income.
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 loans to no more than 85% of
deposits. At September 30, 1996, the Company's ratios were within these
guidelines: the liquidity ratio was 22.2% and the loan to deposit ratio was
82.9%.
20
Part I. Item 2. (continued)
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.
The Company's liquid assets were $90.4 million at September 30, 1996, a decrease
of $10.7 million from December 31, 1995. The decrease can be attributed to the
reduction in deposits resulting from the managed reduction of the promotional
certificates of deposit raised prior to the IOBC acquisition and to the sale of
two branches during the first quarter of 1996.
Secondary sources of liquidity include reverse repurchase arrangements 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 $30 million from three
commercial banks. At September 30, 1996, the Company had approximately $62.5
million in unpledged securities that could be used to secure borrowings such as
reverse repurchase agreements. During the three months ended September 30,
1996, the largest amount of funds so borrowed was $9.7 million. 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.
Federal funds purchases of up to $5.0 million were borrowed during the quarter
ended September 30, 1996.
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 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 possible 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 meeting these standards 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. As of September 30, 1996, the capital ratios of the
Company and the Bank exceeded the well-capitalized thresholds prescribed in the
rules.
21
Part I. Item 2. (continued)
The following table sets forth the Company's and the Bank's leverage and risk-
based capital ratios at September 30, 1996:
Company Bank
- ----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Amount % Amount %
- ----------------------------------------------------------------------------------------------------
Leverage ratio $ 45,469 9.83% $ 43,197 9.34%
Regulatory minimum 18,497 4.00% (c) 18,497 4.00% (c)
Excess 26,972 5.83% 24,700 5.34%
Risk-based ratios
Tier 1 capital $ 45,459 (a) 10.90% (b) $ 43,197 (a) 10.36% (b)
Tier 1 minimum 16,678 4.00% (c) 16,678 4.00% (c)
Excess 28,781 6.90% 26,519 6.36%
Total capital $ 50,673 (d) 12.15% (b) $ 48,411 (d) 11.61% (b)
Total capital minimum 33,356 8.00% 33,356 8.00% (c)
Excess 17,317 4.15% 15,055 3.61%
- ----------------------------------------------------------------------------------------------------
(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 $417 million were used to compute these
percentages.
(c) Insured institutions, such as the Bank, must maintain a leverage capital
ratio of at least 4% or 5%, a Tier 1 captial 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.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Index
- --------------------------------------------------------------------------------
Exhibit Description
No.
- --------------------------------------------------------------------------------
3(i).1 SC Bancorp Articles of Incorporation as previously amended(a)
3(i).2 Amendment to SC Bancorp Articles of Incorporation dated May 9, 1995(b)
3(ii).1 Bylaws, as amended through March 25, 1996(b)
4.1 Specimen Common Stock Certificate(b)
4.2 SC Bancorp 1989 Stock Option Plan (February 1990)(c)
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(b)
4.3.3 Second amendment to the amended and restated Southern California Bank
Employee Retirement Plan(b)
4.3.4 Third amendment to the amended and restated Southern California Bank
Employee Retirement Plan(b)
4.3.5 Fourth amendment to the amended and restated Southern California Bank
Employee Retirement Plan(b)
4.4 SC Bancorp Executive Deferral Plan (IV) (February 1990)(c)
4.5 Southern California Bank Executive Incentive Compensation Plans for
1994 (December 1993)(e)
4.6 Southern California Bank Executive Incentive Compensation Plans for
1995(b)
10.1 First amendment to license agreement between Southern California Bank
and The Vons Companies, Inc. dated December 18, 1992, for supermarket
space in Anaheim Hills, California.
10.2 License agreement between Southern California Bank and The Vons
Companies, Inc. dated February 22, 1996, for supermarket space in
La Habra, California.
27.1 Financial Data Schedule
- --------------------------------------------------------------------------------
(a) 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.
(b) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31, 1995 filed with the Commission on
March 29, 1996, (Commission File No. 0-11046) and incorporated herein
by reference.
(c) 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.
(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 Registration Statement on
Form S-2, filed with the Commission on March 9, 1994, (Commission File
No. 33-76274), and incorporated herein by reference.
- ---------------
(b) Reports filed on Form 8-K
None filed during the third quarter of 1996.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: 8 November, 1996 SC BANCORP
(Registrant)
By: /S/ Bruce Roat
-----------------------------
Bruce Roat
E.V.P./C.F.O.
(Principal Financial and
Accounting Officer)
24