SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, no par value 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 [ ].
There were 7,488,615 shares of common stock for the registrant issued
and outstanding as of March 14, 1997. The aggregate market value of
the voting stock, based on the $10.75 closing price of the Company's
common stock on the American Stock Exchange on March 14, 1997 as
reported on Bloomberg, held by nonaffiliates of the registrant was
approximately $73,926,793.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The registrant's annual report to shareholders relating to the fiscal
year ended December 31, 1996 is incorporated by reference into Part
II. Item 7. of this form 10-K. The registrant's definitive proxy
statement for the 1997 annual meeting of shareholders, which will be
filed within 120 days after the fiscal year ended December 31, 1996,
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 25
ITEM 3. Legal Proceedings 26
ITEM 4. Submission of Matters to a Vote of Shareholders 26
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Shareholder Matters 26
ITEM 6. Selected Financial Data 27
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 28
ITEM 8. Financial Statements and Supplementary Data 28
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 28
PART III
ITEM 10. Directors and Executive Officers of the Registrant 28
ITEM 11. Executive Compensation 28
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management 28
ITEM 13. Certain Relationships and Related Transactions 28
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 28
PART I. ITEM 1. BUSINESS
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained under "Business," such as statements concerning the
potential for future losses relating to nonaccrual and delinquent loans and the
adequacy of the allowance for loan losses, are forward looking statements (as
such term is defined in the Securities Exchange Act of 1934, as amended).
Because such forward-looking statements include risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements.
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, wholly-owned,
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, 1996, consisted of 14 branches, 3 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 is also active in loan
participation purchases and sales. Its primary focus in this area is to manage
potential credit risk by borrower, industry and concentration. 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 Company became a member of the Federal Reserve
System on July 1, 1996. The Company's primary regulator is now the Federal
Reserve Board.
The Company completed the sale of its Signal Hill and City of Industry branches
to other financial institutions and the consolidation of its Yorba Linda branch
into its Tustin/La Palma office during the first quarter of 1996. The
agreements to sell these branches were signed in the fourth quarter of 1995.
As part of the Company's strategic focus on growth, it acquired certain assets
and assumed certain liabilities of Independence One Bank of California, F.S.B.
("IOBC"), during the second quarter of 1995. As part of the IOBC transaction,
the Company acquired a full-service branch in southern Orange County and opened
a full-service branch in northern San Diego County to support the expansion of
its market area. 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 $944,000 for severance expenses, lease terminations
and write-offs of other assets as part of a restructuring plan (the "1993
Restructuring").
1
Part 1. Item 1. (continued)
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,
technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Bank competes for loans,
deposits and customers for financial services 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, personal relationships established by officers, 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 may arrange for those services to be provided by its
correspondents. The Bank has 14 offices located in Los Angeles, Orange and San
Diego counties.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended to
its customers and securities held in the Bank's portfolio comprises 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 SC Bancorp and the Bank are subject to the influence of
domestic and foreign economic conditions, including inflation, recession and
unemployment.
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 institutions 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. Management of the
Company cannot accurately predict the nature and impact of any future changes in
monetary policies.
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 services
providers. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
services providers are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
Management of the Company cannot predict the likelihood of any major legislative
changes and the impact such changes might have on SC Bancorp and the Bank. See
"-Supervision and Regulation."
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.
The Federal Reserve Board may require that SC Bancorp terminate an activity or
terminate control of or liquidate or divest certain of its 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
2
Part 1. Item 1. (continued)
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
"-Capital Standards."
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. In 1996, the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (the "Budget Act") eliminated the requirement
that bank holding companies seek Federal Reserve Board approval before engaging
DE NOVO in permissible nonbanking activities listed in Regulation Y, which
governs bank holding companies, if the holding company and its lead depository
institution are well-managed and well-capitalized and certain other criteria
specified in the statute are met. For purposes of determining the capital
levels at which a bank holding company shall be considered "well-capitalized"
under this section of the Budget Act and Regulation Y, the Federal Reserve Board
adopted as an interim rule, risk-based capital ratios (on a consolidated basis)
that are, with the exception of the leverage ratio (which is lower), the same as
the levels set for determining that a state member bank is well capitalized
under the provisions established under the prompt corrective action provisions
of federal law. See "-Prompt Corrective Action and Other Enforcement
Mechanisms."
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.
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 and member of the Federal Reserve
System, is subject to primary supervision, periodic examination and regulation
by the California Superintendent of Banks (the "Superintendent") and the Federal
Reserve
3
Part 1. Item 1. (continued)
Board. If, as a result of an examination of a bank, the Federal Reserve Board
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, various remedies are available to the
Federal Reserve Board. 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:-Premiums for Deposit Insurance. Because the Bank's deposits
are insured by the FDIC, the Bank is also subject to certain FDIC rules and
regulations.
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 "-Capital Standards."
RESTRICTIONS ON TRANSFERS OF FUNDS TO THE COMPANY BY THE BANK
SC Bancorp is a legal entity separate and distinct from the Bank. 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
made to shareholders by the Bank or by any majority- owned subsidiary of the
Bank during such period). Notwithstanding this restriction, a bank may, with
the prior approval of the Superintendent, make a distribution to its
shareholders in an amount not exceeding the greatest of the retained earnings of
the bank, net income for such bank's last fiscal year or the net income of the
bank for its current year.
As a Federal Reserve Board member bank, there are separate limitations imposed
under applicable Federal Reserve Board regulations with respect to the Bank's
ability to pay dividends to SC Bancorp. In particular, the prior approval of
the Federal Reserve Board is required if the total of all dividends declared by
a Federal Reserve Board member bank in any calendar year exceeds the bank's net
income (as defined) for that year combined with its retained net income (as
defined) for the preceding two years, less any transfer to surplus or to a fund
for the retirement of preferred stock. Such authority may be delegated to the
local Federal Reserve Bank under certain circumstances.
The Federal Reserve Board and the Superintendent also have authority to prohibit
the Bank from engaging in activities that, in the Federal Reserve Board's or the
Superintendent'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 Federal Reserve Board or the
Superintendent could assert that the payment of dividends or other payments
might, under some circumstances, be considered such an unsafe or unsound
practice. Further, the Federal Reserve Board has 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. See "-Prompt Corrective
Regulatory Action and Other Enforcement Mechanisms and Capital Standards" 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, is, and
will continue to be, primarily dividends paid by the Bank. At December 31,
1996, the Bank had $13.1 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
4
Part 1. Item 1. (continued)
limited to an amount not to exceed 10% of the value of the Bank's capital stock
and surplus (as defined by federal regulations) and any such secured loans and
investments are limited to an amount not to exceed in the aggregate, 20% of the
value of the Bank's capital stock 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 "-Prompt
Corrective Regulatory Action and Other Enforcement Mechanisms."
CAPITAL STANDARDS
The Federal Reserve Board has 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 commercial 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 of, among other things:
(i) common stockholders' equity capital (includes common stock and related
surplus, and undivided profits); (ii) noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies), including any
related surplus; and (iii) minority interests in certain subsidiaries, less most
intangible assets. Tier 2 capital consists of: (i) a limited amount of the
allowance for possible loan and lease losses; (ii) cumulative perpetual
preferred stock; (iii) perpetual preferred stock (and any related surplus); and
(iv) term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements in 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 risked-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 must
be 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 June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the bank's capital adequacy. A bank with
material weaknesses in its risk management process or high levels of exposure
relative to its capital will be directed by the agencies to take corrective
action. Such actions will include recommendations or directions to raise
additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
This policy statement augments the August 1995 regulations adopted by the
federal banking agencies which addressed risk-based capital standards for
interest rate risk.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses ("ALLL") 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. This amount is neither a "floor" nor
a "safe harbor" level for an institution's ALLL.
Federally supervised banks and savings associations are currently required to
report deferred tax assets in accordance with SFAS No. 109. The federal banking
agencies issued final rules, which became effective April 1, 1995, governing
banks and bank holding companies, which limit the amount of deferred tax assets
that are allowable in computing an institution's regulatory capital.
5
Part 1. Item 1. (continued)
Deferred tax assets that can be realized for taxes paid in prior carryback years
and from future reversals of 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, based on projected taxable income for that year 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, 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.
The following table presents the amounts of regulatory capital and the capital
ratios for the Bank, compared to its minimum regulatory capital requirements as
of December 31, 1996:
December 31, 1996
----------------
Actual Minimum
Capital
Amount Ratio Requirement
------ ----- -----------
(In thousands)
Leverage ratio $44,970 9.51% 4.0%
Tier 1 risk-based ratio $44,970 10.68% 4.0%
Total risk-based ratio $49,917 11.86% 8.0%
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. In accordance with federal law, each federal banking agency has
promulgated 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. An insured
depository institution will be classified in the following categories based, in
part, on the capital measures indicated below:
"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED"
------------------ ------------------------
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"UNDERCAPITALIZED" "SIGNIFICANTLY UNDERCAPITALIZED"
------------------ --------------------------------
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio 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 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 a
significantly undercapitalized 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
6
Part 1. Item 1. (continued)
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
receiving notice, or is deemed to have notice, that the institution is
undercapitalized. The appropriate federal banking agency cannot accept a capital
plan unless, among other things, it determines that the plan: (i) specifies: (a)
the steps the institution will take to become adequately capitalized; (b) the
levels of capital to be attained during each year in which the plan will be in
effect; (c) how the institution will comply with the restrictions or
requirements then in effect under Section 38 of the Federal Deposit Insurance
Act; and (d) the types and levels of activities in which the institution will
engage; (ii) is based on realistic assumptions and is likely to succeed in
restoring the depository institution's capital; and (iii) would not appreciably
increase the risk (including credit risk, interest-rate risk, and other types of
risk) to which the institution is exposed. 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 average during each of four
consecutive calendar quarters and must otherwise provide appropriate 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 corrective 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 or sanctions 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: (i) force a sale of shares
or obligations of the bank, or require the bank to be acquired by or combine
with another institution; (ii) impose restrictions on affiliate transactions and
(iii) 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. See
"-Potential Enforcement Actions."
SAFETY AND SOUNDNESS STANDARDS
Effective 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. These standards are designed to
identify potential safety-and-soundness concerns and ensure that action is taken
to address those concerns before they pose a risk to the deposit insurance
funds. The standards relate to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
asset growth; (v) earnings; and (vi) compensation, fees and benefits. If a
federal banking agency determines
7
Part 1. Item 1. (continued)
that an institution fails to meet any of these standards, the agency may require
the institution to submit to the agency an acceptable plan to achieve compliance
with the standard. In the event the institution fails to submit an acceptable
plan within the time allowed by the agency or fails in any material respect to
implement an accepted plan, the agency must, by order, require the institution
to correct the deficiency. Effective October 1, 1996, the federal banking
agencies promulgated safety and soundness regulations and accompanying
interagency compliance guidelines on asset quality and earnings standards.
These new guidelines provide six standards for establishing and maintaining a
system to identify problem assets and prevent those assets from deteriorating.
The institution should: (i) conduct periodic asset quality reviews to identify
problem assets; (ii) estimate the inherent losses in those assets and establish
reserves that are sufficient to absorb estimated losses; (iii) compare problem
asset totals to capital; (iv) take appropriate corrective action to resolve
problem assets; (v) consider the size and potential risks of material asset
concentrations; and (vi) provide periodic asset reports with adequate
information for management and the board of directors to assess the level of
asset risk. These new guidelines also set forth standards for evaluating and
monitoring earnings and for ensuring that earnings are sufficient for the
maintenance of adequate capital and reserves. 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.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC has adopted final regulations implementing a risk-based premium system
required by federal law. On November 14, 1995, the FDIC issued regulations
that establish a new assessment rate schedule ranging from $0.0 per $100 of
deposits to $0.27 per $100 of deposits applicable to members of the Bank
Insurance Fund ("BIF"). To determine the risk-based assessment for each
institution, the FDIC will categorize an institution as well capitalized,
adequately capitalized or undercapitalized based on its capital ratios using the
same standards used by the FDIC for its prompt corrective action regulations. A
well-capitalized institution is generally one that has at least a 10% total
risk-based capital ratio, a 6% Tier 1 risk-based capital ratio and a 5% Tier 1
leverage capital ratio. An adequately capitalized institution will generally
have at least an 8% total risk-based capital ratio, a 4% Tier 1 risk-based
capital ratio and a 4% Tier 1 leverage capital ratio. An undercapitalized
institution will generally be one that does not meet either of the above
definitions. The FDIC will also assign each institution to one of three
subgroups based upon reviews by the institution's primary federal or state
regulator, statistical analyses of financial statements and other information
relevant to evaluating the risk posed by the institution. 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 BIF assessment rates are set forth below for institutions based on their
risk- based assessment categorization.
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
*Assessment figures are expressed in terms of cents per $100 of
deposits.
On September 30, 1996, Congress passed the Budget Act which capitalized the
Savings Association Insurance Fund ("SAIF") through a special assessment on
SAIF-insured deposits and required banks to share in part of the interest
payments on the Financing Corporation ("FICO") bonds which were issued to help
fund the federal government costs associated with the savings and loan crisis of
the late 1980's. The special thrift SAIF assessment was set at $0.657 per $100
insured by the thrift funds as of March 31, 1995. Effective January 1, 1997,
for the FICO payments, SAIF-insured deposits will be assessed at the rate of
$0.0648 per $100 of domestic deposits, and BIF-insured deposits will be assessed
at the rate of $0.013 per $100 of domestic deposits. Full pro rata sharing of
the FICO interest payments takes effect on January 1, 2000.
The federal banking regulators are also authorized to prohibit depository
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from SAIF to BIF for the purpose of evading thrift
assessment rates. The Budget Act also prohibits the FDIC from setting premiums
under the risk-based schedule above the amount needed to meet the designated
reserve ratio (currently 1.25%).
8
Part 1. Item 1. (continued)
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Act"). 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 is not
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 or bank holding companies. 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.
The Interstate Act is likely to increase competition in the Company's market
areas especially from larger financial institutions and their holding companies.
It is difficult to assess the impact such likely increased competition will have
on the Company's operations.
Under the Interstate Act, the extent of a commercial bank's ability to branch
into a new state will depend on the law of the state. In October 1995,
California adopted an early "opt in" statute 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 its 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.
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, activities 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.
In connection with its assessment of CRA performance, the Federal Reserve
Board assigns a rating of "outstanding," "satisfactory," "needs to improve"
or "substantial noncompliance." Based on an examination conducted during the
third quarter of 1996, the Bank was rated satisfactory.
9
Part 1. Item 1. (continued)
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 FDIC and the
Superintendent 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 the 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. Neither SC Bancorp nor the Bank
currently are subject to any such enforcement actions.
ACCOUNTING CHANGES
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange.
This statement also requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair value at the date of the
transfer. Furthermore, this statement requires that debtors reclassify
financial assets pledged as collateral, and that secured parties recognize those
assets and their obligation to return them in certain circumstances in which the
secured party has taken control of those assets. In addition, the statement
requires that a liability be derecognized if and only if either (a) the debtor
pays the creditor and is relieved of its obligation for the liability or (b) the
debtor is legally released from being the primary obligor under the liability
either judicially or by the creditor. Accordingly, a liability is not
considered extinguished by an in-substance defeasance. SFAS 125 is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Management does not believe that the application of this
statement will have a material impact on the Company's financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation." This statement establishes a fair value based method of
accounting for stock-based compensation plans and encourages, but does not
require, companies to adopt that method of accounting for all of their employee
stock compensation plans. Under the fair value based method, compensation cost
is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock. The statement
does require that Companies electing not to adopt the fair value accounting
method disclose the pro forma effect on net income and earnings per share if the
fair value method had been applied. These pro forma disclosures are contained
in NOTE 10-SHAREHOLDERS' EQUITY of the Company's consolidated financial
statements, which are located in Part 11. Item 8. of this form 10-K. The
accounting and disclosure requirements of this Statement are effective for the
Bank's fiscal year ending December 31, 1996.
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing
Rights." SFAS 122 amendes certain provisions of SFAS No. 65 "Accounting for
Certain Mortgage Banking Activities" to require that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. A mortgage banking
enterprise that acquires mortgage servicing rights through either the purchase
or origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair value, if it is practicable to estimate
those fair values. If it is not practicable to estimate those fair values, the
entire cost of the acquisition should be allocated to the mortgage loans only.
SFAS 122 is effective for the fiscal year covered by this annual report.
Adoption of this pronouncement did not have a material impact on the Company's
financial statements.
10
Part 1. Item 1. (continued)
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. An impairment loss shall be measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. After an
impairment is recognized, the reduced carrying amount of the asset shall be
accounted for as its new cost. SFAS No. 121 is effective for the fiscal year
covered by this annual report. Adoption of this statement did not have a
material impact on the Company's financial statements.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 prescribes the recognition criterion for
loan impairment and the measurement methods for certain impaired loans and loans
whose terms are modified in troubled debt restructurings. SFAS No. 114 states
that a loan is impaired when it is probable that a creditor will be unable to
collect all principal and interest amounts due according to the contracted terms
of the loan agreement. A creditor is required to measure impairment by
discounting expected future cash flows at the loan's effective interest rate, or
by reference to an observable market price, or by determining that foreclosure
is probable. SFAS No. 114 also clarifies the existing accounting for in-
substance foreclosures by stating that a collateral-dependent real estate loan
would be reported as real estate owned only if the lender had taken possession
of collateral.
SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing methods
for recognizing interest income on an impaired loan. To accomplish that, it
eliminated the provisions in SFAS No. 114 that described how a creditor should
report income on an impaired loan. SFAS No. 118 did not change the provisions
in SFAS No. 114 that require a creditor to measure impairment based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the observable market price of
the loan or the fair value of the collateral if the loan is collateral
dependent. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to
require information about the recorded investments in certain impaired loans and
about how a creditor recognizes interest income related to those impaired loans.
The Company adopted SFAS No. 114 and No. 118 for the year ended December 31,
1995. Adoption of this statement has not had a material impact on the Company's
financial statements.
RESULTS OF OPERATIONS
The following table summarizes key performance indicators pertaining to the
Company's operating results. Certain figures for 1995 have been adjusted for
the 1995 Restructuring as indicated. Average balances are computed using daily
balances. Refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations" from the Company's 1996 annual report to shareholders
incorporated by reference into 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,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Return on average assets 0.96% 0.19% 0.67%
as adjusted for restructuring items (1) - 0.41% -
Return on average shareholders' equity 9.40% 2.14% 6.59%
as adjusted for restructuring items (1) - 4.62% -
Average shareholders' equity to average
total assets 10.23% 8.87% 10.15%
Net income $ 4,455 $ 869 $ 2,705
Earnings per share $ 0.60 $ 0.12 $ 0.49
Total average assets $ 463,084 $ 457,196 $ 404,504
- --------------------------------------------------------------------------------
(1) 1995 net income was adjusted to exclude 1995 Restructuring charges of
$1,006 thousand after tax.
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
11
Part I. Item 1 (continued)
interest income and net interest margin for the years indicated.
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
Increase/ Increase/
1996 (decrease) 1995 (decrease) 1994
- --------------------------------------------------------------------------------
Interest income $ 34,967 4.70% $ 33,396 26.40% $ 26,420
Interest expense 11,727 (2.40%) 12,015 91.35% 6,279
- --------------------------------------------------------------------------------
Net interest income $ 23,240 8.69% $ 21,381 6.16% $ 20,141
- --------------------------------------------------------------------------------
Net interest margin 5.58% 5.30% 5.75%
- --------------------------------------------------------------------------------
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 asset and liability balances (volume) for the years indicated. The
changes in interest income and interest expense attributable to the rate/volume
variance are allocated to the rate and volume variances based upon the absolute
value of each of those variances as a percentage of the sum of the absolute
values of the individual rate and volume variances. Average balances are
average daily balances. Nonaccrual loans are included in total average loans
outstanding.
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
balance Expense Rate balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans, net of deferred fees (1) $ 321,843 $ 30,145 9.37% $ 261,631 $ 25,961 9.92%
Investment securities 83,607 4,256 5.09% 122,498 6,298 5.14%
Federal funds sold and other 10,670 566 5.30% 19,463 1,137 5.84%
- --------------------------------------------------------------------------------------------------------------------------
Total interest earning assets/interest income 416,121 34,967 8.40% 403,593 33,396 8.27%
- --------------------------------------------------------------------------------------------------------------------------
Other assets 15,106 15,291
- --------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets 46,963 53,604
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 463,084 $ 457,196
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 282,952 $ 11,090 3.92% $ 282,574 $ 10,998 3.89%
Other interest-bearing liabilities 9,756 637 6.53% 8,059 1,017 12.62%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 292,708 11,727 4.01% 290,633 12,015 4.13%
- --------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 122,998 125,988
Shareholders' equity 47,379 40,575
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 463,084 $ 457,196
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/NET INTEREST MARGIN $ 23,240 5.58% $ 21,381 5.30%
- --------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------
1994
- --------------------------------------------------------------------------------------------
Average Income/ Yield/
balance Expense Rate
- --------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans, net of deferred fees (1) $ 203,507 $ 18,970 9.32%
Investment securities 139,991 7,167 5.12%
Federal funds sold and other 6,480 283 4.37%
- --------------------------------------------------------------------------------------------
Total interest earning assets/interest income 349,978 26,420 7.55%
- --------------------------------------------------------------------------------------------
Other assets 18,858
- --------------------------------------------------------------------------------------------
Noninterest earning assets 54,526
- --------------------------------------------------------------------------------------------
Total assets $ 404,504
- --------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 237,105 $ 5,956 2.51%
Other interest-bearing liabilities 5,689 323 5.68%
- --------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 242,794 6,279 2.59%
- --------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 120,666
Shareholders' equity 41,043
- --------------------------------------------------------------------------------------------
Total liabilities and equity $ 404,504
- --------------------------------------------------------------------------------------------
NET INTEREST INCOME/NET INTEREST MARGIN $ 20,141 5.75%
- --------------------------------------------------------------------------------------------
(1) Includes loans on nonaccrual status of approximately $2.8 million,
$1.4 million and $1.6 million at December 31, 1996, 1995 and 1994,
respectively. Interest income foregone on loans that were on
nonaccrual status was $253,000, $207,000 and $93,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. Interest income
on loans includes amortization of net loan fees of approximately $1.0
million, $790,000 and $628,000 for the years ended December 31, 1996,
1995 and 1994, respectively. Additionally, net interest (expense)
income of ($563,000), ($929,000) and $141,000 relating to the interest
rate swap agreements was included in interest income from loans for
the years ended December 31, 1996, 1995 and 1994, respectively.
12
Part 1. Item 1. (continued)
1996 and 1995 1995 and 1994
Increase (decrease) Increase (decrease)
due to change in Net due to change in Net
(DOLLARS IN THOUSANDS) Rate Volume Change Rate Volume Change
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans, net of deferred fees (1) $ (1,521) $ 5,705 $ 4,184 $ 1,288 $ 5,703 $ 6,991
Investment securities (62) (1,980) (2,042) 30 (899) (869)
Federal funds sold and other (97) (474) (571) 123 731 854
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets/interest income (1,680) 3,251 1,571 1,441 5,535 6,976
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits 77 15 92 3,738 1,304 5,042
Other interest-bearing liabilities (562) 183 (380) 517 177 694
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense (485) 197 (288) 4,255 1,481 5,736
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/NET INTEREST MARGIN $ (1,195) $ 3,054 1,859 $ (2,814) $ 4,054 1,240
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income increased $1.9 million to $23.2 million for the year ended
December 31,1996, from $21.4 million for the year ended December 31, 1995. The
increase for 1996 is primarily due to higher average loan balances, which
increased by $60.2 million over 1995. The average balance of Fed funds sold
decreased by $8.8 million and the average balance of investment securities
decreased by $38.9 million compared to 1995. Proceeds from the sale and
maturity of available-for-sale securities totaling $17.2 million during 1996
were used to fund loan growth. In addition, the Company sold approximately $27
million of available-for-sale securities during the third quarter of 1995 to
fund loan growth. The average yield on total earning assets for 1996 increased
by 13 basis points to 8.40% from 8.27% for 1995; however, the average yield on
loans, including the effect of the interest rate swaps, decreased by 55 basis
points to 9.37% from 9.92% for 1995. The decrease can be attributed to the
decrease in the prime rate and other market rates, and to competitive pricing
pressures on commercial and consumer loan products. The national prime rate
remained at 8.25% through the end of the year following a decrease from 8.50% on
January 31, 1996. The average prime rate for 1995 was 8.80%.
Net interest income increased to $21.4 million for the year ended December 31,
1995, from $20.1 million for the year ended December 31, 1994. Average loan
balances for 1995 increased by $58.1 million over the prior year largely due to
the purchase of loans from IOBC and the purchase of approximately $20.0 million
of SBA loans. The average yield on total 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, increased to 9.92% for 1995
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.
The Company's net interest margin increased to 5.58% for the year ended December
31, 1996 from 5.30% for the year ended December 31, 1995. The increase in the
net interest margin for 1996 can be attributed to the increase in loans as a
percentage of total earning assets and to a reduction in the Company's cost of
funds. The Company's overall cost of funds for 1996 decreased by approximately
12 basis points from 1995 primarily due to the managed reduction in higher-rate
certificate of deposit ("TCD") balances raised prior to the IOBC transaction.
The average rate paid on TCD accounts decreased to 5.36% for 1996 from 5.77% for
1995. The reduction in the average rate paid on TCD accounts was partially
offset by an increase of approximately 53 basis points in the average rate paid
on other interest-bearing transaction and savings accounts. The increase in the
rate paid on these accounts can be attributed to increased competition for
deposits in the Company's market area. Other interest expense in 1995 included
a $408,000 nonrecurring adjustment recorded on the Company's deferred
compensation plans.
The Company's net interest margin for the year ended December 31, 1995 decreased
to 5.30% from 5.75% for the year ended December 31, 1994. The increase in the
average yield on loans for 1995 (discussed above) was offset by higher funding
costs related to the deposit promotion program that raised funds for the IOBC
transaction. The average balance of TCDs increased to $145.6 million for 1995
from $79.7 million for 1994. The average rate paid on TCDs increased to 5.77%
for 1995 from 3.80% for 1994. Other interest expense for 1995 included the
previously-mentioned adjustment relating to the Company's deferred compensation
plans.
PROVISION FOR POSSIBLE LOAN LOSSES
The Company recorded a $470,000 recovery of the provision for possible loan
losses, a $1.5 million provision and a $850,000
13
Part I. Item 1 (continued)
recovery of the provision for the years ended December 31, 1996, 1995 and 1994,
respectively. The reduction in the loan loss provision for 1996 is based on
management's assessment of the adequacy of the allowance for possible loan
losses. This assessment includes consideration of factors specific to
individual loans as well as economic conditions and historical loss experience.
Net loan charge-offs for 1996 were 0.10% of total loans compared to 0.67% of
total loans for 1995 and 2.28% of total loans for 1994. The $1.5 million
provision recorded in 1995 included $900,000 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 provision for the quarter
included $600,000 relating to two commercial real estate loans. The reduction
to the provision recorded in 1994 was based on management's determination that
an excess existed in the allowance for possible loan losses following the
upgrade of several classified loans and a significant decrease in net loan
charge-offs from 1993 levels. The allowance for possible loan losses was 1.42%,
1.81% and 2.56% of gross loans outstanding at December 31, 1996, 1995 and 1994,
respectively. Additional information is provided in 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
1996 1995 Restructure 1995 Net 1994
- -------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 1,406 $ 1,727 $ - $ 1,727 $ 1,754
Other fees and charges 2,769 2,542 - 2,542 2,637
Merchant bankcard income 523 518 - 518 1,249
Net gain (loss) on sales of investment securities 14 (620) (620) - 17
Net gains on sales of loans - 145 - 145 215
Net gain (loss) on sales of fixed assets (28) (87) (109) 22 409
Life insurance income 124 510 - 510 58
Other income 358 278 - 278 344
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 5,166 $ 5,013 $ (729) $ 5,742 $ 6,683
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest income decreased to $5.2 million for 1996, from $5.7 million, net of
restructuring activity, for 1995, and $6.7 million for 1994. A decrease in
service charge income in 1996 from the prior year was largely offset by
increases in other deposit-related fees. The sale of two branches and the
consolidation of a third branch in early 1996 contributed to the slight decline
in total deposit income. Noninterest income for 1995 included a $407,000
benefit payment on a corporate-owned life insurance policy. The 1995
Restructuring loss of $729,000 included the previously-discussed $620,000 loss
on the sale of investment securities, and a $109,000 loss on the sale of fixed
assets from the two branches sold. Merchant bankcard income decreased to
$518,000 for 1995 from $1.2 million in 1994. The Company's largest merchant
customer left during the third quarter of 1994. The reduction in merchant
bankcard activity led to a corresponding decrease in merchant bankcard expense.
Noninterest income in 1994 also included gains on sales of loans and sale of the
Company's headquarters facility of approximately $215,000 and $414,000,
respectively.
14
Part 1. Item 1 (continued)
NONINTEREST EXPENSE
The following table provides a breakdown of the Company's noninterest expense by
category, net of restructuring charges, for the years indicated:
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
1996 1995 Restructure 1995, Net 1994
----------- ----------- ----------- ----------- ----------
Salaries and employee benefits $ 10,147 $ 10,405 $ 179 $ 10,226 $ 9,518
Net occupancy, furniture and equipment 4,056 5,127 256 4,871 4,678
Professional and legal fees 1,676 1,288 86 1,202 1,476
Other real estate owned 439 219 - 219 1,832
Postage and delivery 624 586 - 586 543
Goodwill amortization 505 821 427 394 211
Advertising and promotions 472 530 - 530 426
Merchant bankcard 424 475 - 475 1,013
Telecommunications 351 481 - 481 352
Software 340 395 395 214
Office supplies 305 391 - 391 402
Data processing 291 253 - 253 235
FDIC assessment and other insurance 273 857 - 857 1,442
Other operating expense 1,325 1,465 - 1,465 1,493
- ---------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 21,228 $ 23,293 $ 948 $ 22,343 $ 23,835
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Noninterest expense as a %
of average total assets 4.58% 4.89% 5.89%
The Company reported noninterest expense of $21.2 million, $22.3 million, net of
restructuring charges, and $23.8 million for the years ended December 31, 1996,
1995 and 1994, respectively. Salaries and benefits expense for 1996 decreased
by approximately $258,000 from 1995. Total full-time equivalent staff ("FTE"),
a staff count that includes a fractional equivalent for part-time staff,
decreased to 211 at December 31, 1996 from 226 at December 31, 1995. The
reduction in FTE is due to the 1995 Restructuring and selected additional staff
reductions. Occupancy expense for 1996 decreased by $815,000 from the prior
year, net of restructuring charges, following the 1995 Restructuring. FDIC
insurance expense decreased to $53,000 in 1996 from $498,000 in 1995 and $1.0
million in 1994 due to reductions in the FDIC assessment rate. The decreases in
1996 noninterest expense from 1995 were partially offset by a $388,000 increase
in professional and legal fees. The increase in professional fees includes
approximately $105,000 associated with outsourcing the Company's internal audit
function. The $948,000 of restructuring charges reflected in noninterest
expense for 1995 included: (1) staff reductions resulting from the sale of two
branches and the consolidation of a third branch - $179,000; (2) closure of an
administrative facility and write off of lease obligations on branch sales -
$256,000; (3) accruals for legal and professional fees relating to the branch
sale transactions - $86,000; and (4) write-off of $427,000 of goodwill
associated with one of the branches sold. It was originally anticipated that 20
positions would be eliminated in conjunction with the 1995 Restructuring. Eight
of the staff displaced were placed in other positions with the Company. The
amount of termination benefits charged against the $179,000 reserve established
when the restructuring program was announced totaled $147,000. The remaining
reserve of $32,000 was reversed.
Noninterest expense for 1995, net of restructuring charges, decreased to $22.3
million from $23.8 million for 1994. An increase in salary and benefits expense
due to the addition of staff to service the loans and deposits purchased from
IOBC, was offset by decreases in OREO, merchant bankcard (refer to the
discussion of merchant bankcard income above) and FDIC insurance expense.
FTE increased to 226 at December 31, 1995 from 222 at December 31, 1994.
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 consolidation, on a larger average earning
assets base. Noninterest expense as a percentage of average total assets
decreased to 4.58% for 1996 from 4.89% for 1995 and 5.89% for 1994.
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,
- --------------------------------------------------------------------------
1996 1995 1994
--------- --------- ---------
OREO income $ (104) $ (95) $ -
OREO holding expenses 200 316 655
writedowns and provisions for losses 428 128 1,182
net (gains) from sales (85) (130) (5)
- --------------------------------------------------------------------------
OREO expense, net $ 439 $ 219 $ 1,832
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
OREO expense increased to $439,000 for 1996 from $219,000 for 1995. The
increase was due to additional valuation reserves taken on one OREO property
that was sold during the fourth quarter of 1996. Five OREO properties were sold
during the year, resulting in a net gain of $85,000. Two properties remained in
OREO at December 31, 1996. OREO expense decreased to $219,000 for 1995 from
$1.8 million for 1994. Most of the decrease is due to lower charges for
writedowns of OREO properties.
FINANCIAL CONDITION
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 $1.5 million were maintained in the form of deposits with the
Federal Reserve Bank at December 31,1996.
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. As a
member of the Federal Reserve Bank and the Federal Home Loan Bank, the Company
is required to hold stock in those institutions. The decrease in the balance of
investment securities due to sales and maturities is discussed in "NET INTEREST
INCOME" above.
The Company currently classifies its entire securities portfolio as available-
for-sale in order to maintain flexibility in managing the portfolio and in
responding to changing business and market conditions. While the Company
currently has no plans to liquidate securities in the portfolio, it has sold
securities in previous years. The likelihood that securities would be sold in
the future and the potential for losses to be realized remains uncertain. In
the event that securities held as available-for-sale were sold at a loss, any
loss would be reflected in the results of operations on an after-tax basis.
However, there would be no expected impact on the Company's financial condition,
given that the securities are carried at their estimated fair value, net of any
unrealized loss.
The unrealized loss on securities held as available-for-sale increased to $1.5
million at December 31, 1996 from $1.3 million at year-end 1995. The unrealized
loss on mortgage-backed securities increased from $910,000 to $1.2 million over
the same period, despite a reduction in the amortized cost of this portfolio
from $52.1 million to $43.1 million, reflecting the general increase in relevant
market interest rates, which had a modest negative impact on the market value of
these securities.
Additional information is provided in NOTE 1-SIGNIFICANT ACCOUNTING POLICIES and
NOTE 3-INVESTMENT SECURITIES of the Company's consolidated financial statements
which are located in Part II. Item 8. of this Form 10-K.
16
Part I. Item 1. (continued)
The following table sets forth the maturity distribution of the Company's
investment securities at December 31, 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 $ 5,002 $ - $ - $ 79 $ 5,081
U.S. Agency securities 14,832 12,768 - - 27,600
Mortgage-backed securities 8,253 33,599 - - 41,852
- -----------------------------------------------------------------------------------------------------
Total $ 28,087 $ 46,367 $ - $ 79 $ 74,533
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
LOANS
The Company provides a full range of credit products designed to meet the credit
needs of borrowers in its market area. The Company engages in medium-term
commercial real estate loans secured by commercial properties, commercial loans,
term financing, SBA loans, loan participations, 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. The Company also offers construction loan
products principally for entry level housing and owner-user commercial
industrial properties.
The following table sets forth the amount of loans by type for the years
indicated:
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 % 1995 % 1994 % 1993 % 1992 %
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $ 160,633 46.17% $ 147,230 46.47% $ 79,369 38.22% $ 73,220 34.47% $ 88,761 34.37%
Real estate, construction 8,544 2.46% 4,416 1.39% 30 0.01% 1,991 0.94% 8,935 3.46%
Real estate, mortgage 105,123 30.22% 107,662 33.98% 83,712 40.31% 99,190 46.70% 117,280 45.41%
Consumer 73,564 21.15% 57,533 18.16% 44,577 21.46% 38,006 17.89% 43,271 16.76%
- -----------------------------------------------------------------------------------------------------------------------------------
Gross loans 347,864 100.00% 316,841 100.00% 207,688 100.00% 212,407 100.00% 258,247 100.00%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Deferred fee income (689) (531) (298) (274) (625)
Allowance for possible
loan losses (4,947) (5,734) (5,318) (10,800) (6,859)
- -------------------------------------- --------- --------- --------- ---------
Loans, net $ 342,228 $ 310,576 $ 202,072 $ 201,333 $ 250,763
- -------------------------------------- --------- --------- --------- ---------
- -------------------------------------- --------- --------- --------- ---------
No industry constitutes a concentration in the Bank's loan portfolio.
COMMERCIAL LOANS. The balance of commercial loans increased to $160.6 million,
or 46.17%, of total loans at December 31, 1996 from $147.2 million, or 46.47%,
of total loans at December 31, 1995. Growth in unsecured and asset-based
commercial loan balances totaling $23.2 million for the year was partially
offset by a $8.6 million decrease in commercial real estate loans. Most of the
Company's commercial borrowers 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 60% 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 December 31, 1996, $40.6 million, or 11.67%, of total loans
were secured by accounts receivable as compared to $29.5 million, or 9.31%, of
loans at December 31, 1995. Commercial loans secured by real estate comprise
$14.4 million, or 4.15%, of total loans at December 31, 1996, compared to $20.5
million, or 6.48%, of loans at December 31, 1995. In 1994, the Company began
participating in government-insured lending programs, including SBA loans. At
December 31, 1996, the Company had $20.2 million of SBA loans outstanding.
Commercial loans increased to $147.2 million, or 46.47% , of loans at December
31, 1995 from $79.4 million, or 38.22%, of loans at December 31, 1994. The
$67.8 million increase in loans includes 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.
REAL ESTATE, CONSTRUCTION LOANS. Real estate construction loans comprise $8.5
million, or 2.46%, of outstanding loans at December 31, 1996. The increase from
$4.4 million, or 1.39%, of total loans at December 31, 1995 is the result of
the Company's modest expansion of its construction loan activity. Construction
loans were $30,000, or 0.01%, of loans at December 31, 1994. The Company's
construction loan products are primarily targeted to developers of quality
entry-level housing projects and to existing borrowers who are owner/users of
commercial industrial property.
17
Part I. Item 1 (continued)
REAL ESTATE, MORTGAGE LOANS. Real estate mortgage loans comprise $105.1
million, or 30.22%, of the total loan portfolio at December 31,1996, down
slightly from $107.7 million, or 33.98%, of total loans outstanding at year end
1995. Real estate mortgage loans were $83.7 million, or 40.31%, of total loans
at December 31, 1994. The increase in mortage loan balances for 1995 was
primarily due to the purchase of $16.8 million of real estate loans from IOBC.
Commercial real estate loans comprise the majority of the Company's mortgage
loan portfolio. New real estate loans are generally made only to existing
borrowers who are owner/users or to new borrowers who provide a major new
banking relationship and demonstrate adequate cash flows. All new real estate
borrowers must provide financial reporting that meets FDICIA standards and the
loans must meet the Company's underwriting standards. The majority of the
Company's real estate loans are secured by first trust deeds; and approximately
50% are to owner/users.
CONSUMER LOANS. Consumer loans increased to $73.6 million, or 21.15%, of the
loan portfolio at December 31, 1996 from $57.5 million, or 18.16%, of total
loans at December 31, 1995. Consumer loans were $44.6 million, or 21.46%, of
total loans at December 31, 1994. The increase of $16.1 million from 1995
occurred primarily in unsecured lines of credit to high net worth borrowers.
The Company added this loan product in mid-1995 following the purchase of loans
from IOBC. At December 31, 1996, the consumer loan portfolio included $27.9
million of home equity loans and home equity lines representing 8.01% of total
loans; auto and RV loans totaling $20.0 million, or 5.74%, of total loans; and
lines of credit totaling $18.8 million, or 5.41%, of total loans. 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, 1996 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 $ 83,589 $ 53,652 $ 21,993 $ 159,234
Real estate, construction 3,791 1,277 3,476 8,544
Real estate, mortgage 18,996 62,208 22,471 103,676
--------------------------------------------------------------------------
Total $ 106,376 $ 117,138 $ 47,940 $ 271,454
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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, 1996:
Repricing in
---------------------------------------------------------------------------
Over one
One year year through Over
or less five years five years Total
---------------------------------------------------------------------------
(GROSS LOANS, IN THOUSANDS)
Fixed interest rates $ 15,639 $ 46,839 $ 17,158 $ 79,636
Variable interest rates 191,818 - - 191,818
--------------------------------------------------------------------------
Total $ 207,457 $ 46,839 $ 17,158 $ 271,454
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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
18
Part I. Item 1 (continued)
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 increased to $2.8 million, or 0.82%, of total loans at December
31, 1996 from $1.4 million, or 0.44%, of total loans at December 31, 1995. The
increase in nonaccrual loans in 1996 is primarily due to one real estate loan.
Nonaccrual loans were $1.6 million, or 0.78%, of total loans at December 31,
1994. Interest income that would have been collected on nonaccrual loans had
they performed in accordance with their original terms, was approximately
$253,000, $207,000, $93,000, $550,000 and $371,000 for the years ended December
31, 1996, 1995, 1994, 1993 and 1992, respectively.
The following table provides the balance of the Company's nonaccrual loans as of
the dates indicated. The Company had one loan of $193,000 that was past due
over 90 days and still accruing interest at December 31, 1996. The principal
and interest on the loan are guaranteed by the Small Business Administration.
The Company anticipates full payment of the amounts due. The Company had no
loans past due 90 days or more that were still accruing interest at December 31,
1995, 1994, 1993 and 1992.
- -------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans (1) $ 2,846 $ 1,385 $ 1,612 $ 7,081 $ 7,426
Nonaccrual loans as a percentage of
total gross loans 0.82% 0.44% 0.78% 3.33% 2.88%
- -------------------------------------------------------------------------------------------------
(1) Includes loans with modified terms of $5.5 million, $125,000, $100,000
and $1.4 million for the years ended December 31, 1996, 1995, 1994 and
1993, respectively.
Nonaccrual loans by category are summarized below:
- ----------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $ 1,316 $ 620 $ 283 $ 1,269 $ 4,000
Real estate, construction - - - - 231
Real estate, mortgage 1,447 615 930 5,789 2,956
Consumer 84 150 399 23 239
- ----------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 2,846 $ 1,385 $ 1,612 $ 7,081 $ 7,426
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Delinquent loans (past due 30 to 89 days) by category are summarized below:
- ----------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $ 1,273 $ 548 $ 998 $ 696 $ 4,160
Real estate, construction - - - - -
Real estate, mortgage 414 503 2,089 1,239 9,638
Consumer 1,125 411 416 436 520
- ----------------------------------------------------------------------------------------------------------------
Total delinquent loans $ 2,813 $ 1,462 $ 3,503 $ 2,371 $ 14,318
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Percentage of total gross loans:
Nonaccrual loans 0.82% 0.44% 0.78% 3.33% 2.88%
Nonaccrual and delinquent loans 1.63% 0.90% 2.46% 4.45% 8.42%
19
Part I. Item 1 (continued)
The increase in delinquent commercial loans to $1.3 million at December 31, 1996
from $548,000 at year-end 1995 is due to a limited number of purchased SBA
loans. The principal and interest on SBA loans is fully guaranteed. Management
does not expect to incur a loss on these loans. The increase in delinquent
consumer loans to $1.1 million at December 31, 1996 from $411,000 at December
31, 1995 is primarily due to purchased real estate loans secured by second trust
deeds. These loans are government insured and are serviced by a third party.
The reported delinquencies can largely be attributed to the delay between the
receipt of payment by the servicer and the remittance of the payment to the
Company. Management does not expect to incur a loss of principal or interest on
these loans.
The level 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.
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.
20
Part I. Item 1. (continued)
The following table provides a summary of net charge-offs for the years
indicated:
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Average balance of gross loans outstanding $ 321,843 $ 261,631 $ 203,507 $ 235,414 $ 282,991
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Gross loan balance at December 31, $ 347,864 $ 316,841 $ 207,688 $ 207,688 $ 212,407
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance at January 1, $ 5,734 $ 5,318 $ 10,800 $ 6,859 $ 4,575
Charge-offs:
Commercial 422 834 2,004 3,704 2,560
Real estate 279 1,227 3,453 4,488 4,146
Consumer 168 587 362 381 462
- ----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 869 2,648 5,819 8,573 7,168
Recoveries:
Commercial 477 587 915 607 195
Real estate 21 129 215 4 -
Consumer 54 192 57 153 185
- ----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 552 908 1,187 764 380
Net charge-offs 317 1,740 4,632 7,809 6,788
(Recovery) provision (credited) charged to expense (470) 1,539 (850) 11,750 9,072
Allowance on purchased loans - 617 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance at December 31, $ 4,947 $ 5,734 $ 5,318 $ 10,800 $ 6,859
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------------
Ratio of allowance for loan losses to loans
outstanding at December 31, 1.42% 1.81% 2.56% 5.20% 3.23%
Ratio of allowance for loan losses to
nonaccrual loans at December 31, 173.84% 414.01% 329.88% 152.53% 92.36%
Ratio of net charge-offs to average loans 0.10% 0.67% 2.28% 3.32% 2.40%
Net loan charge-offs were $317,000, or 0.10%, of average outstanding loans for
1996 a decrease from $1.7 million, or 0.67%, of average loans for 1995, and $4.6
million, or 2.28%, of average loans for 1994. Net charge-offs for 1994 include
$2.8 million related to nonaccrual loans that were sold during the third quarter
of that year. Net charge-offs were $7.8 million and $6.8 million for 1993 and
1992, respectively. The higher level of net charge-offs recorded by the Company
in 1992, 1993 and 1994 reflect the economic downturn and declining real estate
values experienced in the Company's market area during the early 1990s. The
decrease in net charge-offs in 1995 and 1996 is reflective of the continued
improvement in the quality of the Company's loan portfolio and of the general
economic recovery in Southern California.
The following table sets forth the allocation of the allowance for possible loan
losses by category as of the dates indicated:
- ----------------------------------------------------------------------------------------------------------------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
December 31, 1996 to total loans 1995 to total loans 1994 to total loans
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $ 1,280 46.17% $ 1,821 46.47% $ 1,406 38.22%
Real estate, construction 77 2.46% 43 1.39% 10 0.01%
Real estate, mortgage 2,483 30.22% 2,172 33.98% 2,366 40.31%
Consumer 465 21.15% 660 18.16% 592 21.46%
Unallocated 643 - 1,038 - 944 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 4,947 100.00% $ 5,734 100.00% $ 5,318 100.00%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
21
Part I. Item 1 (continued)
- ----------------------------------------------------------------------------------------------------
Percent of loans Percent of loans
in each category in each category
December 31, 1993 to total loans 1992 to total loans
- ----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $ 2,563 34.47% $ 2,972 34.37%
Real estate, construction 139 0.94% 249 3.46%
Real estate, mortgage 4,415 46.70% 3,070 45.41%
Consumer 381 17.89% 568 16.76%
Unallocated 3,302 - - -
- ----------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 10,800 100% $ 6,859 100%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
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. Loans are evaluated for impairment on an individual basis with the
exception of consumer loans, which are evaluated collectively. Specific
reserves related to impaired loans 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. Further discussion of the
Company's policies relating to impaired loans is proivded in NOTE 1-SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES of the Company's consolidated financial
statements, which are located in Part II. Item 8. of this Form 10-K.
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, less the estimated costs of disposal, 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:
1996 1995 1994
- -------------------------------------------------------------------------------------
(Dollars in thousands)
Balance, January 1 $ 2,073 $ 5,837 $ 6,133
Additions 699 1,923 3,585
Sales (4,215) (5,689) (2,699)
Valuation and other adjustments 1,979 2 (1,182)
- -------------------------------------------------------------------------------------
Balance, December 31 $ 536 $ 2,073 $ 5,837
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
The OREO portfolio at December 31, 1996 consisted of 2 properties totaling
$536,000. The Bank is actively marketing these properties.
DEPOSITS
The following table sets forth the distribution of average deposit balances and
the average rates paid thereon for the years indicated:
For the years ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average % Average Average % Average Average %
balance Rate of total balance Rate of total balance Rate of total
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Demand deposits(1) $119,570 29.70% $123,815 30.47% $118,044 33.24%
NOW/MMDA 95,098 2.58% 23.63% 81,815 1.77% 20.13% 78,860 1.73% 22.20%
Savings 44,273 2.11% 11.00% 55,204 2.08% 13.58% 78,558 1.99% 22.12%
TCDs 143,582 5.36% 35.67% 145,555 5.77% 35.82% 79,687 3.80% 22.44%
- ----------------------------------------------------------------------------------------------------------------------------------
Total average deposits $402,522 100.00% $406,389 100.00% $355,149 100.00%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(1) The Company purchased approximately $19.8 million of noninterest bearing
demand deposits from IOBC in the second quarter of 1995. Following the
purchase, IOBC demand deposits 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.
22
Part I. Item 1. (continued)
Average demand deposits decreased to $119.6 million, or 29.70%, of total
deposits for 1996 from $123.8 million, or 30.47%, of total deposits for 1995.
Factors contributing to the decrease in demand balances for 1996 include the
reduction of three branches from the prior year, and to growth in a cash
management product offered to commercial customers that provides for the
overnight investment of funds. Average demand deposits were $118.0 million, or
33.24%, of total deposits for 1994.
Average NOW/MMDA accounts increased to $95.1 million, or 23.63%, of total
deposits for 1996 from $81.8 million, or 20.13%, of total deposits for 1995.
The increase can be attributed to targeted product promotions. Average NOW/MMDA
accounts for 1994 were $78.9 million, or 22.20%, of total deposits. The Company
acquired $12.2 million of NOW/MMDA accounts from IOBC on April 30, 1995.
Average TCD balances were $143.6 million, or 35.67%, of total deposits for 1996
and $145.6million, or 35.82% , of total deposits for 1995. Average TCD balances
were $79.7, or 22.44%, of total deposit for 1994. The increase in TCD balances
for 1995 can be attributed to a promotional TCD program that was run during the
first quarter of 1995 to obtain funding for the IOBC transaction. The program
proved to be highly successful, procuring in excess of $70 million in 7 to 12
month TCDs. The Company retained 65%-75% of these balances as they matured at
average rates significantly lower than the rates offered through the initial
promotional program.
The following table sets forth the maturities of the Company's time certificates
of deposit outstanding at the dates indicated:
December 31, 1996 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 $ 31,750 $ 20,563 $ 19,700 $ 9,565 $ 81,577
$100,000 and over 41,016 9,170 11,097 2,373 63,656
- ----------------------------------------------------------------------------------------------------------------------------------
Total time certificates of deposit $ 72,766 $ 29,733 $ 30,797 $ 11,938 $ 145,233
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER BORROWED FUNDS
Other borrowed funds 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 other borrowed funds was $8.1 million, $6.4 million and $13.8
million at December 31, 1996, 1995 and 1994, respectively. Additional
discussion of the Company's borrowing arrangements is located in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" from the Company's annual report to shareholders incorporated by
reference into Part II. Item 7. of this Form 10-K, and in 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 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.
23
Part I. Item 1. (continued)
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, 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.
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 $ 3,800 $ - $ - $ - $ 3,800
Investment securities - 19,834 48,608 8,148 76,590
Loans (1) 230,190 23,160 64,327 27,341 345,018
Interest rate swaps 25,000 50,000 75,000
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 258,990 $ 42,994 $ 162,935 $ 35,489 $ 500,408
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing demand and
savings deposits $ - $ 25,954 $ 100,933 $ 17,303 $ 144,190
Time certificates of deposit 72,837 60,475 11,921 - 145,233
Other borrowings and interest-
bearing liabilities 6,940 1,156 - 8,096
Interest rate swaps 75,000 75,000
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 154,777 $ 87,585 $ 112,854 $ 17,303 $ 372,519
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 104,213 $ (44,591) $ 50,081 $ 18,186
Cumulative interest rate sensitivity gap 104,213 59,622 109,703 127,889
Cumulative interest rate sensitivity gap
as a percentage of total interest-
earning assets 20.83% 11.91% 21.92% 25.56%
- -----------------------------------
(1) Loans exclude nonaccrual loans of $2,846.
At December 31,1996, the Company's rate-sensitive balance sheet was shown to be
in a positive gap position on a cumulative basis for all time periods reported.
The cumulative gap between assets and liabilities that reprice within 12 months
was $59.6 million, or 11.91%, of rate-sensitive assets. The cumulative positive
gap for all time periods is $127.9 million, or 25.56%, of rate-sensitve assets.
The table above implies that the Company is moderately asset-sensitive and that
its earnings would increase 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 yield curve scenarios, providing an estimate
of both the dollar amount and percentage change in net interest income under
various changes in interest rates. Based on the income simulation analysis
conducted as of December 31, 1996, 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
24
Part I. Item 1 (continued)
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, the
three-month LIBOR has exceeded the Company's break-even point, so that
interest expense on the swap agreements has exceeded interest income. Net
interest income (expense)on the swaps for the years ended December 31, 1996,
1995 and 1994 was ($563,000),($929,000) and $141,000.
EMPLOYEES
The Company had 211 full-time equivalent employees at December 31, 1996. Full-
time equivalent employees include full-time employees plus part-time employees
expressed as a fractional equivalent of full-time employees based on the number
of hours worked. For example, a part-time employee who works 20 hours a week
would equal 0.5 full-time equivalent staff. Management believes that its
relations with its employees are satisfactory.
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 Corporate Banking Center.
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 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 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.
The Company leases 6,980 square feet for its Huntington Beach branch
office, located at 9042 Garfield Avenue, Huntington Beach, California.
25
Part I. Item 2 (continued)
The Company leases 411 square feet for its La Habra branch office,
located at the Vons Supermarket, 2101 West Imperial Highway, La Habra,
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 or operations 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 1996.
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 531 shareholders of record of
its common stock as of March 14, 1997.
(SHARE PRICES IN DOLLARS) High Low
- -------------------------------------------------------------------------------------
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 6 3/4 6 1/16
Second quarter 7 1/8 6 3/8
Third quarter 7 6 3/16
Fourth quarter 9 7/8 7
1997 First quarter (through March 14, 1997) 11 3/4 9 3/8
On March 14, 1997 the last reported sales price per share for the Company's
stock was $10.75.
26
ITEM 6. SELECTED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------------------------
As of or for the year ended December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Interest income $ 34,967 $ 33,396 $ 26,420 $ 29,732 $ 35,915
Interest expense 11,727 12,015 6,279 9,619 13,665
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 23,240 21,381 20,141 20,113 22,250
Provision for loan losses (470) 1,539 (850) 11,750 9,072
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 23,710 19,842 20,991 8,363 13,178
- ----------------------------------------------------------------------------------------------------------------------------------
Net gains (losses) on sales of securities 14 (620) 17 7,074 2,395
Noninterest income 5,152 5,633 6,666 6,869 5,728
Noninterest expense 21,228 23,293 23,835 26,024 23,835
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 7,648 1,562 3,839 (3,718) (2,534)
Provision for income taxes (benefits) 3,193 693 1,134 (1,026) (1,131)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change
in accounting principle 4,455 869 2,705 (2,692) (1,403)
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle - - - (41) 0
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,455 $ 869 $ 2,705 $ (2,733) $ (1,403)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE AND STOCK DATA:
Net income (loss) $ 0.60 $ 0.12 $ 0.49 $ (0.79) $ (0.40)
Cash dividends declared $ - $ - $ - $ - $ -
Book value (1) $ 6.67 $ 6.09 $ 5.60 $ 8.21 $ 8.99
Weighted average shares outstanding (2) 7,476,464 7,468,760 5,507,000 3,468,505 3,468,505
BALANCE SHEET DATA (YEAR END BALANCES):
Investment securities $ 76,590 $ 94,030 $ 131,881 $ 149,543 $ 164,546
Loans, net 342,228 310,576 202,072 201,333 250,763
Total assets 476,013 461,779 398,555 407,889 464,229
Total deposits 415,326 406,811 339,939 368,388 402,892
Shareholders' equity 49,919 45,512 41,844 28,462 31,195
ASSET QUALITY:
Nonaccrual loans $ 2,846 $ 1,385 $ 1,612 $ 7,081 $ 7,426
OREO 536 2,073 5,837 6,133 6,318
ASSET QUALITY RATIOS:
Net charge-offs to average gross loans 0.10% 0.67% 2.28% 3.32% 2.40%
Nonaccrual loans to year-end gross loans 0.82% 0.44% 0.78% 3.33% 2.88%
Nonperforming assets to year-end assets (3) 0.71% 0.75% 1.87% 3.24% 2.96%
Allowance for possible loan losses to year-end
gross loans 1.42% 1.81% 2.56% 5.08% 2.66%
Allowance for possible loan losses to
nonaccrual loans 173.84% 414.01% 329.88% 152.53% 92.36%
SELECTED PERFORMANCE RATIOS:
Return on average assets 0.96% 0.19% 0.67% (0.59%) (0.30%)
Return on average shareholders' equity 9.40% 2.14% 6.59% (8.90%) (4.42%)
Average shareholders' equity to average assets 10.23% 8.87% 10.15% 6.61% 6.73%
Dividend payout ratio 0.00% 0.00% 0.00% 0.00% 0.00%
Noninterest expense to average assets 4.58% 5.09% 5.90% 5.61% 5.03%
Net interest margin (4) 5.58% 5.30% 5.75% 4.82% 5.27%
COMPANY CAPITAL RATIOS:
Leverage 9.97% 9.08% 10.74% 6.09% 6.30%
Tier 1 risk-based capital 11.20% 10.75% 15.72% 8.89% 9.10%
Total capital 12.37% 12.01% 16.98% 10.18% 10.60%
BANK CAPITAL RATIOS:
Leverage 9.51% 8.59% 8.86% 6.09% 6.30%
Tier 1 risk-based capital 10.68% 10.14% 12.96% 8.89% 9.10%
Total capital 11.86% 11.39% 14.22% 10.18% 10.60%
- -----------------------------------
(1) Book value per share data is 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 the years presented.
(3) Includes nonaccrual loans and other real estate acquired by the Bank
through foreclosure.
(4) Computed on a tax-equivalent basis for 1992. The Company had no
investments in tax-exempt municipal securities for 1996, 1995, 1994 and
1993.
27
Part II. (continued)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Incorporated by reference to pages 7-11 of the Company's 1996 annual report to
shareholders which pages are filed as Exhibit 13.1 to this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are listed in Item 14(a) and
are submitted at the end of this Form 10-K.
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
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's
definitive Proxy Statement which will be filed within 120 days after the
Company's fiscal year ended December 31, 1996 (the "1997 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 1997 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 from the section entitled "Certain
Relationships and Related Transactions" of the 1997 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 1997 Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following consolidated financial statements of the Company and
subsidiary are filed as part of this Annual Report.
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995, and 1994
28
Part IV. Item 14. (continued)
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994
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.
(a)(3) Exhibits
3(i).1 SC Bancorp Articles of Incorporation (f)
3(i).2 Certificate of Amendment to SC Bancorp Articles of Incorporation dated
May 9, 1995(g)
3(ii).1 Amended and Restated Bylaws of SC Bancorp
4.1 Specimen Common Stock Certificate(a)
4.2 SC Bancorp 1989 Stock Option Plan(d)
4.3.1 Amended and restated Southern California Bank Employee Retirement
Plan(c)
4.3.2 First amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.3 Second amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.4 Third amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.5 Fourth amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.4 SC Bancorp Executive Deferral Plan (IV)(d)
4.5 Southern California Bank Executive Incentive Compensation Plans for
1994(a)
4.6 Southern California Bank Executive Incentive Compensation Plans for
1995(g)
4.7 Southern California Bank Executive Incentive Compensation Plans for
1996
10.1 Sublease between SC Bancorp and Denny's, dated December 24, 1992, for
office space in La Mirada, California(b)
10.2 Lease between Southern California Bank and Robert Stein, dated
September 1, 1981, amended June 19, 1990, for office space in Avalon,
California(c)
10.3 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(a)
10.4 Lease between Southern California Bank and Tustin-La Palma Business
Center, dated July 8, 1993 for office space in Anaheim, California(a)
10.5 License Agreement between Southern California Bank and The Vons
Companies, Inc., dated December 18, 1992 for supermarket space in
Anaheim Hills, California(a)
10.6 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(h)
10.7 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(g)
10.8 Sublease between Southern California Bank and Citicorp Savings, dated
November 30, 1995 for office space in La Jolla, California(g)
10.9 Lease between Southern California Bank and Regents Park Financial
Centre, Ltd., dated October 25, 1995 for
office space in La Jolla, California(g)
10.10 Forward lease between Southern California Bank and Regents Park
Financial Centre, Ltd., dated October 25, 1995 for
office space in La Jolla, California(g)
10.11 License Agreement between Southern California Bank and The Vons
Companies, Inc., dated February 22, 1996 for supermarket space in La
Habra, California(h)
10.12 Employment Agreement between SC Bancorp and Southern California Bank
and Larry D. Hartwig, dated January 1, 1997
10.13 Employment Agreement between SC Bancorp and Southern California Bank
and David A. McCoy, dated February 25, 1992
10.14 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and David A. McCoy, dated January 1, 1997
10.15 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and Bruce W. Roat, dated January 1, 1997
29
Part IV. Item 14 (continued)
10.16 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and Ann E. McPartlin, dated January 1,
1997
10.17 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and M. V. Cummings, dated January 1, 1997
10.18 Form of Indemnification Agreement entered into with each Executive
Officer and Director of SC Bancorp(a)
10.19 Form of Indemnification Agreement entered into with each Executive
Officer and Director of Southern California Bank(a)
13.1 Pages 7-11 of the Company's 1996 annual report to shareholders
21.0 Subsidiaries of the Registrant(e)
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,
1997 appearing in the Annual Report on Form 10-K of SC Bancorp for the
year ended December 31, 1996.
27.1 Financial Data Schedule
(b) The Company filed the following reports on Form 8-K during the fourth
quarter of 1996:
None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) 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) 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.
(c) 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.
(d) This exhibit is contained in SC Bancorp's Proxy Statement, filed with
the Commission on on March 23, 1990, (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 31,1994, filed with the Commission on
March 30, 1995, (Commission File No. 0-11046) and incorporated herein
by reference.
(f) 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.
(g) 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.
(h) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10-
Q for the period ended September 30, 1996, filed with the Commission
on November 14, 1996, (Commission File No. 0-11046) and incorporated
herein by reference.
30
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of SC Bancorp and
its subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Los Angeles, California
January 24, 1997
Deloitte & Touche, LLP
31
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
- ---------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (Note 2) $ 29,968 $ 29,088
Federal funds sold 3,800 -
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents 33,768 29,088
- ---------------------------------------------------------------------------------------------------------
Securities available-for-sale, at fair value (Note 3) 74,533 92,825
Investment in Federal Home Loan Bank stock, at cost 1,450 1,205
Investment in Federal Reserve Bank stock, at cost 607 -
Loans (Notes 4 and 16) 347,864 316,841
Less: Deferred fee income (689) (531)
Allowance for possible loan losses (4,947) (5,734)
- ---------------------------------------------------------------------------------------------------------
Loans, net 342,228 310,576
- ---------------------------------------------------------------------------------------------------------
Premises and equipment, net (Note 5) 7,740 9,734
Other real estate owned, net (Note 6) 536 2,073
Accrued interest receivable 3,931 4,297
Other assets 11,220 11,981
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 476,013 $ 461,779
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits: (Note 7)
Interest-bearing $ 289,423 $ 276,433
Noninterest-bearing 125,903 130,378
- ---------------------------------------------------------------------------------------------------------
Total deposits 415,326 406,811
- ---------------------------------------------------------------------------------------------------------
Borrowed funds and other interest-bearing liabilities (Note 8) 8,096 6,407
Accrued interest payable and other liabilities 2,672 3,049
- ---------------------------------------------------------------------------------------------------------
Total Liabilities 426,094 416,267
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 11) - -
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; 7,486,375 shares issued and outstanding at
December 31, 1996, and 7,471,505 shares issued and
outstanding at December 31, 1995 37,738 37,658
Retained earnings 13,055 8,600
Unrealized loss on available-for-sale securities, net of taxes (874) (746)
- ---------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 49,919 45,512
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 476,013 $ 461,779
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 30,145 $ 25,960 $ 18,971
Interest on investment securities 4,256 6,299 7,166
Interest on Federal funds sold 566 1,137 283
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 34,967 33,396 26,420
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 2,457 1,451 1,363
Savings 932 1,150 1,564
Time certificates of deposit 7,701 8,397 3,029
- ------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 11,090 10,998 5,956
- ------------------------------------------------------------------------------------------------------------------------
Other interest expense 637 1,017 323
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 11,727 12,015 6,279
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 23,240 21,381 20,141
(Recovery of) provision for possible loan losses (Note 4) (470) 1,539 (850)
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 23,710 19,842 20,991
- ------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 1,406 1,727 1,754
Other fees and charges 2,769 2,542 2,637
Merchant bankcard income 523 518 1,249
Net gain (loss) on sales of available-for-sale investment securities 14 (620) 17
Other (loss) gain on sale of assets, net (28) 58 624
Other income 482 788 402
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 5,166 5,013 6,683
- ------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 10,147 10,405 9,518
Net occupancy, furniture and equipment 4,056 5,127 4,678
Professional and legal fees 1,676 1,288 1,476
Other real estate owned 439 219 1,832
Postage and delivery 624 586 543
Goodwill amortization 505 821 211
Advertising and promotion 472 530 426
Merchant bankcard 424 475 1,013
Telecommunications 351 481 352
Software 340 395 214
Office supplies 305 391 402
Data processing 291 253 235
FDIC assessment and other insurance 273 857 1,442
Other operating expense 1,325 1,465 1,493
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 21,228 23,293 23,835
- ------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 7,648 1,562 3,839
Provision for income taxes 3,193 693 1,134
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,455 $ 869 $ 2,705
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 7,476 7,469 5,507
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.60 $ 0.12 $ 0.49
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS AND SHARES OUTSTANDING IN THOUSANDS)
UNREALIZED (LOSS)/
GAIN ON AVAILABLE-FOR-
COMMON STOCK RETAINED SALE SECURITIES,
SHARES AMOUNT EARNINGS NET OF TAX TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 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 gain 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
Common stock issued 14 80 80
Unrealized loss on available-for-sale securities (128) (128)
Net income 4,455 4,455
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 7,486 $ 37,738 $ 13,055 $ (874) $ 49,919
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,455 $ 869 $ 2,705
Adjustments to reconcile net income to net cash provided
by operating activities:
(Recovery of) provision for possible loan losses (470) 1,539 (850)
Provision for loss on other real estate owned 428 128 1,182
Gain on sale of other real estate owned (85) (130) (5)
(Gain) loss on sale of available-for-sale investment securities (14) 620 (17)
Net amortization of premiums on investment securities 907 2,165 1,695
Gain on sale of loans - (145) (215)
Net amortization of deferred fees and unearned income on loans 158 29 24
Depreciation and amortization 2,311 2,876 2,106
Loss (gain) on sale of fixed assets and other assets 28 (1) (409)
Provision (benefit) for deferred income taxes 1,371 (541) 1,492
Increase in accrued interest receivable and other assets (659) (404) (16)
(Decrease) increase in accrued interest payable and other liabilities (417) (198) 645
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,013 6,807 8,337
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available-for-sale investment securities 8,549 26,860 5,245
Proceeds from maturities of available-for-sale investment securities 8,632 6,000 10,295
Proceeds from maturities of held-to-maturity investment securities - 7,530 -
Purchase of investment securities available-for-sale, FHLB and FRB stock (856) (1,206) (4,946)
Proceeds from sale of loans - 2,084 -
Purchase of IOBC loans - (71,576) -
Purchase of other loans (5,185) (26,432) -
Loans funded, net of payments received (26,854) (15,823) (3,283)
Proceeds from sale of premises and equipment and other assets 199 1 932
Purchase of premises and equipment (245) (1,535) (2,576)
Proceeds from sale of other real estate owned 1,791 5,689 2,704
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (13,969) (68,408) 8,371
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Rights Offering - - 14,207
Proceeds from exercise of stock options 80 15 -
Purchase of IOBC interest-bearing deposits - 14,965 -
Purchase of IOBC noninterest-bearing deposits - 19,762 -
Increase (decrease) in interest-bearing deposits 12,990 68,998 (15,105)
Decrease in noninterest-bearing deposits (4,475) (36,853) (13,344)
Increase (decrease) in other borrowings 2,041 (7,316) 5,088
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 10,636 59,571 (9,154)
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,680 (2,030) 7,554
Cash and cash equivalents, beginning of period 29,088 31,118 23,564
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 33,768 $ 29,088 $ 31,118
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Unrealized loss (gain) on investment securities available-for-sale, net of tax $ 128 $ (2,784) $ 3,530
Transfer of loans to other real estate owned 699 1,821 3,585
Assumption of senior liens on other real estate owned - 102 -
Transfer of held-to-maturity securities to available-for-sale - 51,991 -
Close out of capital lease accounts 118 - -
Asset sales offset to restructuring reserve 88 - -
- -----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SC Bancorp, a bank holding company (the "Company"), and its subsidiary, Southern
California Bank, a California state-chartered bank (the "Bank"), operate 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. 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 amounts of assets and liabilities and
disclosures 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, amounts due from banks, and short-term
investments with maturities of less than three months 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 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
consolidated statements of operations 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, 1996 and 1995, the Company's available-for-sale
portfolio had a net unrealized loss of $1.5 million and $1.3 million,
respectively. The tax-effected reduction to shareholders' equity at December
31, 1996 and 1995 was $874,000 and $746,000, respectively.
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 lives of the securities.
In December 1995, the Company reclassified its entire held-to-maturity
investment portfolio to the available-for-sale category under a special one-time
exemption authorized by the Financial Accounting Standards Board ("FASB") that
allowed companies to reclassify their investment securities portfolio
categories. 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 $910,000 at December 31, 1995.
STOCK OF FEDERAL HOME LOAN BANK OF SAN FRANCISCO:
As a member of the Federal Home Loan Bank of San Francisco ("FHLB"), the Bank is
required to own common stock in the FHLB
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
based upon a percentage of one of the following balances: residential mortgage
loans, total assets, or the outstanding balance of FHLB advances, whichever is
greater.
STOCK OF FEDERAL RESERVE BANK OF SAN FRANCISCO:
As a member of the Federal Reserve System, the Bank is required to own common
stock in the Federal Reserve Bank of San Francisco ("FRB") based upon a
percentage of capital and surplus at the time of initial membership.
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. 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. Statement No. 114 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. Loans
are evaluated for impairment on an individual basis with the exception of
consumer loans, which are aggregated and evaluated collectively. 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 was
based on the value of the underlying collateral of "impaired" loans, as defined
by SFAS No. 114.
All loans on nonaccrual are considered to be impaired; however, not all impaired
loans are on nonaccrual status. Impaired loans on accrual status must meet the
following criteria: all payments must be current and the loan underwriting must
support the debt service requirements. Factors that contribute to a performing
loan being classified as impaired include: a below market interest rate,
delinquent taxes and debts to other lenders that cannot be serviced out of
existing cash flow.
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 status 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 unearned 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 lives 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
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the lower of cost or fair value
less estimated costs of disposal 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.
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 portion of a deferred
tax asset will not be realized, the statement requires a valuation allowance to
be recorded.
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. The weighted
average number of shares used for calculating earnings per share was 7,476,000,
7,469,000 and 5,507,000 for 1996, 1995 and 1994, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS:
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This Statement requires that long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, or
disposed of, be reviewed for impairment based on the fair value of the assets.
Furthermore, this statement requires that certain long-lived assets and
identifiable intangibles to be disposed of, be reported at the lower of carrying
amount or fair value less estimated disposal costs.
The Company has determined that the impact of this Statement on its operations
and financial position is not material for the year ended December 31, 1996.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, but does not require companies to record compensation expense
for stock-based employee compensation at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Accordingly,
compensation expense for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. The pro forma effects on net
income if the Company had adopted the fair value accounting provisions of SFAS
No. 123 are disclosed in Note 10.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES:
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities, and is applied
prospectively to financial statements for fiscal years beginning after December
31, 1996. In 1996, the FASB also issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," which defers
for one year the effective date of certain provisions within SFAS No. 125. The
Company does not believe that the impact on its operations and financial
position will be material upon adoption of SFAS 125 or SFAS No. 127.
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 a settlement accounting basis and
are 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 $1.4 million and $3.0 million at December 31, 1996 and
1995, respectively. These funds are included in Cash and Due from Banks in the
accompanying consolidated balance sheets.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities as of
December 31, 1996 and 1995 are as follows:
(DOLLARS IN THOUSANDS) DECEMBER 31, 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 $ 32,967 $ - $ (285) $ 32,682
Mortgage-backed securities 43,060 - (1,209) 41,851
--------- ---------- ---------- ---------
Total $ 76,027 $ - $ (1,494) $ 74,533
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
(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 U.S. government agencies $ 42,036 $ - $ (363) $ 41,673
Mortgage-backed securities 52,062 - (910) 51,152
--------- ---------- ---------- ---------
Total $ 94,098 $ - $ (1,273) $ 92,825
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Investment securities with a carrying value of $15.5 million and $18.6 million
were pledged to secure public deposits and as collateral for other borrowings at
December 31, 1996 and 1995, respectively.
The amortized cost and estimated fair value of debt securities at December 31,
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.
Maturing in
- -----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Over one Over five
One year year through years through Over
DECEMBER 31, 1996 or less five years ten years ten years Total
---------- ------------ ---------- --------- --------
Available-for-sale, amortized cost $ 28,141 $ 47,807 $ - $ 79 $ 76,027
Available-for-sale, estimated fair value $ 28,087 $ 46,367 $ - $ 79 $ 74,533
Proceeds from sales of investments in securities during 1996, 1995 and 1994 were
$8.5 million, $26.9 million and $5.2 million, respectively. Gross gains of
$14,000 and $17,000 were realized on those sales in 1996 and 1994, respectively.
Gross losses of $620,000 were realized on the sales in 1995. No gross gains
were realized from sales in 1995, and no gross losses were realized from sales
in 1996 and 1994.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 4 - LOANS
Loans outstanding at December 31, 1996 and 1995, are summarized as follows:
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 % 1995 %
- ---------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $ 160,633 46.17% $ 147,230 46.47%
Real estate, construction 8,544 2.46% 4,416 1.39%
Real estate, mortgage 105,123 30.22% 107,662 33.98%
Consumer 73,564 21.15% 57,533 18.16%
- ---------------------------------------------------------------------------------------------------------
Gross loans 347,864 100.00% 316,841 100.00%
------- -------
------- -------
Deferred fee income (689) (531)
Allowance for possible loan losses (4,947) (5,734)
- ------------------------------------------------------------ -----------
Loans, net $ 342,228 $ 310,576
- ------------------------------------------------------------ -----------
- ------------------------------------------------------------ -----------
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. Real estate values in California have
generally stabilized in the Bank's market area. Management believes that the
level of the allowance for possible loan losses as of December 31, 1996, is
adequate to absorb losses inherent in the loan portfolio.
The changes in the allowance for possible loan losses are as follows:
(DOLLARS IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Average balance of gross loans outstanding $ 321,843 $ 261,631 $ 203,507
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Gross loan balance at December 31, $ 347,864 $ 316,841 $ 207,688
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Allowance at January 1, $ 5,734 $ 5,318 $ 10,800
Charge-offs:
Commercial 422 834 2,004
Real estate 279 1,227 3,453
Consumer 168 587 362
- --------------------------------------------------------------------------------------------------------------
Total charge-offs 869 2,648 5,819
Recoveries:
Commercial 477 587 915
Real estate 21 129 215
Consumer 54 192 57
- --------------------------------------------------------------------------------------------------------------
Total recoveries 552 908 1,187
Net charge-offs 317 1,740 4,632
(Recovery) provision (credited) charged
to expense (470) 1,539 (850)
Allowance on purchased loans - 617 -
- --------------------------------------------------------------------------------------------------------------
Allowance at December 31, $ 4,947 $ 5,734 $ 5,318
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 4 - LOANS (CONTINUED)
1996 1995 1994
--------------------------------
Ratio of allowance for loan losses to loans
outstanding at December 31, 1.42% 1.81% 2.56%
Ratio of allowance for loan losses to
nonaccrual loans at December 31, 173.84% 414.01% 329.88%
Ratio of net charge-offs to average loans 0.10% 0.67% 2.28%
At December 31, 1996 and 1995, the Bank had classified $7.1 million and $1.5
million, respectively, of its loans as impaired with specific reserves of $1.6
million and $143,000, respectively, as determined in accordance with SFAS No.
114, as amended by SFAS No. 118. The average recorded investment in impaired
loans during the years ended December 31, 1996 and 1995, was approximately $5.3
million and $3.2 million, respectively. Interest income recognized on impaired
loans during 1996 and 1995 was $359,000 and $260,000, of which $342,000 and
$260,000, respectively, was collected in cash.
NOTE 5 - PREMISES AND EQUIPMENT
The following schedule sets forth the cost and accumulated depreciation and
amortization of premises and equipment at
December 31, 1996 and 1995:
(DOLLARS IN THOUSANDS) December 31,
------------------------------------------------------------------
1996 1995
------------------------------------------------------------------
Land $ 2,122 $ 2,122
Buildings and improvements:
Owned 5,092 3,688
Capital leases - 401
Furniture, fixtures, and equipment 7,132 11,810
Leasehold improvements 3,146 5,598
------------------------------------------------------------------
Total 17,492 23,619
Less: accumulated depreciation and
amortization (9,752) (13,885)
------------------------------------------------------------------
Premises and equipment, net $ 7,740 $ 9,734
------------------------------------------------------------------
------------------------------------------------------------------
Depreciation expense was approximately $1.8 million, $2.1 million, and $1.9
million for the years ended December 31, 1996,
1995 and 1994. The Bank's former head office facility was sold in 1994, which
resulted in a gain of $414,000.
NOTE 6 - OTHER REAL ESTATE OWNED
The components of other real estate owned (OREO) at December 31, 1996 and 1995
are as follows:
(DOLLARS IN THOUSANDS) December 31,
--------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------
Other real estate owned - foreclosure $ 625 $ 4,243
Less: allowance for losses and selling expenses (89) (2,170)
--------------------------------------------------------------------------
Other real estate owned - net $ 536 $ 2,073
--------------------------------------------------------------------------
--------------------------------------------------------------------------
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 6 - OTHER REAL ESTATE OWNED (CONTINUED)
The changes in the allowance for OREO losses and selling expenses for the years
ended December 31, 1996 and 1995 were as follows:
(DOLLARS IN THOUSANDS) December 31,
------------------------------------------------------------------
1996 1995
------------------------------------------------------------------
Balance, January 1 $ 2,170 $ 2,761
Provisions charged to expense 428 128
Sales (2,509) (719)
------------------------------------------------------------------
Balance, December 31 $ 89 $ 2,170
------------------------------------------------------------------
------------------------------------------------------------------
NOTE 7 - DEPOSITS
Time certificates of deposit in denominations of $100,000 or more totaled $64.0
million and $46.4 million as of December 31, 1996 and 1995, respectively.
Interest paid on deposit accounts totaled $11.2 million, $10.7 million, and $6.2
million in 1996, 1995 and 1994, respectively.
NOTE 8 - BORROWED FUNDS AND OTHER INTEREST-BEARING LIABILITIES
Borrowed funds and other interest-bearing liabilities at December 31, 1996 and
1995 were as follows:
(DOLLARS IN THOUSANDS) December 31,
--------------------------------------------------------------
1996 1995
--------------------------------------------------------------
Federal funds purchased $ 1,852 $ -
Treasury, tax and loan (TT&L) 5,088 4,883
Deferred compensation 1,156 1,165
Capital lease obligations - 257
Other - 102
--------------------------------------------------------------
$ 8,096 $ 6,407
--------------------------------------------------------------
--------------------------------------------------------------
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
$623,000, $548,000 and $294,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------
Current:
Federal $ 1,564 $ 1,045 $ (360)
State 258 189 2
- ---------------------------------------------------------------------
Total current 1,822 1,234 (358)
- ---------------------------------------------------------------------
Deferred:
Federal 758 (320) 1,811
State 613 (221) (319)
- ---------------------------------------------------------------------
Total deferred 1,371 (541) 1,492
- ---------------------------------------------------------------------
Total provision $ 3,193 $ 693 $ 1,134
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
The federal income tax provision for the years ended December 31, 1996, 1995 and
1994 differs from the statutory corporate rate of 35% as follows:
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------
Rate reconciliation
Tax benefit at statutory rate $ 2,676 35.00% $ 547 35.00% $ 1,305 35.00%
Tax-exempt municipal interest (7) -0.09% (7) -0.48% (8) -0.21%
State franchise tax, net of federal benefit 575 7.51% 125 7.98% (211) -5.66%
Officer life insurance (40) -0.53% (167) -10.71% (11) -0.29%
Goodwill 40 0.52% 196 12.53% 54 1.45%
Other (51) -0.66% (1) 0.02% 5 0.13%
- -----------------------------------------------------------------------------------------------------------------------------
$ 3,193 41.75% $ 693 44.34% $ 1,134 30.42%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Federal income and California state franchise taxes paid totaled $3.4 million,
$865,000 and $152,000 in 1996, 1995 and 1994, respectively.
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:
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 9 - INCOME TAXES (CONTINUED)
(DOLLARS IN THOUSANDS) DECEMBER 31,
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Deferred Tax Assets
Bad debt reserve $ - $ 1,347
Deferred compensation 953 955
Effect of state taxes on federal liability 85 -
Unrealized loss on securities 619 528
Depreciation 514 582
Other 562 709
- -------------------------------------------------------------------------------
Gross deferred tax asset 2,733 4,121
- -------------------------------------------------------------------------------
Deferred Tax Liabilities
Bad debt reserve (137) -
Deductible prepaid expense (301) (301)
Effect of state taxes on federal liability - (209)
Other (84) (121)
- -------------------------------------------------------------------------------
Gross deferred tax liability (522) (631)
- -------------------------------------------------------------------------------
Total deferred tax asset $ 2,211 $ 3,490
Valuation allowance - -
- -------------------------------------------------------------------------------
Net deferred tax asset $ 2,211 $ 3,490
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No valuation allowance was required under SFAS No. 109 for federal or state
purposes as of December 31, 1996 or 1995, because management expects deferred
tax assets to be fully realized as an offset against future taxable income
exclusive of reversing temporary differences and carryforwards, 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.
On January 23, 1997, the Company declared a $0.05 per share cash dividend to be
paid to shareholders of record at the close of business on February 6, 1997.
The dividend will be paid on February 20, 1997.
STOCK OPTIONS
The Company's stock option plan (the "Plan") provides for the granting of
options to directors and full-time salaried officers and management level
employees to purchase shares of the Company's common stock at option prices per
share at a price equal to the fair market value of the common stock on the date
that each option is granted. Options granted pursuant to the Plan are intended
to qualify as Incentive Stock Options within the meaning of Section 422A of the
Internal Revenue Code of 1986, or Non-Qualified Stock Options ("NQSO") as
determined upon the grant of each option. The options outstanding at December
31, 1996 are all NQSOs. Options granted under the Plan have a maximum life of
ten years. The options become exercisable in installments of 20% beginning on
the date of grant and 20% upon each anniversary date of the original grant. The
total shares available under the Company's stock option plan are 650,000.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes the activity relating to the Company's stock
options for the years indicated.
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
No. of Weighted-Avg. No. of Weighted-Avg. No. of Weighted-Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------- --------------- ------- --------------- ------- ---------------
Balance, January 1 472,100 $ 6.81 379,650 $ 6.54 235,250 $ 7.59
Options granted 138,250 6.93 174,750 5.00 152,200 4.99
Options exercised (14,870) 5.40 (3,000) 4.88 - -
Options expired (36,540) 6.15 (79,300) 6.46 (7,800) 8.20
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31 558,940 $ 6.23 472,100 $ 6.81 379,650 $ 6.54
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-average grant date
fair value of options granted
during the year $ 4.37 $ 3.12 $ 3.18
The fair market value of options granted during 1996 and 1995 was estimated
using the Black-Scholes option-pricing model. The following assumptions were
incorporated into the valuation calculation: an option contract life of 10
years, a stock price volatility of 39.71% based on daily market prices for the
preceding five year period, the stock pays no dividends and a risk-free interest
rate equivalent to the 10-year Treasury rate on the date of each grant. The
weighted-average risk-free rate for options granted during 1996 is 6.87%.
The table below provides the range of exercise prices, weighted-average exercise
prices and weighted-average remaining contractual lives for options outstanding
at December 31, 1996.
Options Outstanding Options Exercisable
--------------------------------------------------------- -----------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
-------------------------------------------------------------------------------------------------------------------
$4.50 to $5.19 259,350 8.1 years $ 5.03 125,060 $ 5.02
$6.00 to $7.63 274,340 7.6 years 6.91 150,592 6.89
$10.10 to $11.87 25,250 3.3 years 11.30 25,250 11.30
-------------------------------------------------------------------------------------------------------------------
$4.50 to $11.87 558,940 7.6 years $ 6.23 300,902 $ 6.48
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option and purchase plans.
Accordingly, no compensation cost has been recognized for its stock option plan.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant dates for awards under the plan consistent with
the method of SFAS No. 123, the Company's net income and earnings per share for
the years ended 1996 and 1995 would have been reduced to the pro forma amounts
indicated below:
1996 1995
Net Income to Common Shareholders --------------------------
As reported $ 4,455 $ 869
Pro forma $ 4,400 $ 834
Net Income per common and common
share equivalent
As reported $ 0.60 $ 0.12
Pro forma $ 0.59 $ 0.11
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 $4.1 million and $4.3 million at December 31, 1996 and
1995, respectively. In addition, the Company had unfunded loan commitments of
$110.5 million and $85.0 million at December 31, 1996 and 1995, respectively.
All of the commitments outstanding at December 31, 1996 represent unfunded loans
which bear a floating interest rate.
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 and does
not use them for trading purposes. At December 31, 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 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 interest income on loans.
For the years ended December 31, 1996, 1995, and 1994, net interest income or
(expense) of ($563,000), ($929,000), and $141,000 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.
U.S. Agency notes having a fair value of approximately $5.2 million were pledged
as collateral for the agreements as of December 31, 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. The following table summarizes the characteristics of the swap
agreements as of December 31, 1996:
Notional Interest Rate Interest Rate Unrealized Estimated Maturity
(DOLLARS IN THOUSANDS) Amount Paid Received Loss Fair Value Date
- ---------------------------------------------------------------------------------------------------------------------------
Swap #1 $50,000 3-mo LIBOR 4.865% $ 899 $ (899) September 14, 1998
Swap #2 $25,000 3-mo LIBOR 5.04% $ 1 $ (1) January 7, 1997
(in arrears)
LEASE COMMITMENTS:
The Company leases parcels of land and buildings under operating leases, which
require the Company to pay all normal property taxes, insurance, and
maintenance. The Company had no capital leases at December 31, 1996. At
December 31, 1995, the Company had one building lease with an amortized cost of
$123,000 recorded as a capital lease and included in premises and equipment in
the accompanying consolidated balance sheets. The capital lease was terminated
during the first quarter of 1996. The costs associated with terminating the
lease are included in the accompanying consolidated statement of operations for
1995. Net rent expense for the years ended 1996, 1995 and 1994 was
approximately $800,000, $1.2 million and $900,000, respectively.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum payments required under noncancellable leases with initial or
remaining terms of one year or more are as follows as of December 31, 1996:
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------
Operating
YEARS ENDING DECEMBER 31, Leases
-----------------------------------------------------------------
1997 $ 783
1998 792
1999 933
2000 938
2001 951
Thereafter 6,161
-----------------------------------------------------------------
Total minimum payments $ 10,558
-----------------------------------------------------------------
-----------------------------------------------------------------
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 $30.0
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 a party to routine litigation involving various aspects of its
business. In the opinion of management, none of the pending litigation at
December 31, 1996 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 $129,000, $139,000, and $108,000 in 1996,
1995 and 1994, 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 $177,000, $648,000 and $174,000 in 1996, 1995 and 1994,
respectively. The deferred compensation liability at December 31, 1996 and 1995
was approximately $2.1 million, of which $1.2 million represented principal and
was classified with other interest-bearing liabilities in the accompanying
consolidated balance sheets. Approximately $948,000 and $946,000 represented
accrued interest payable at December 31, 1996 and 1995, respectively, and was
classified as accrued interest payable on 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 $3.5 million and $3.0 million at December 31, 1996 and
1995, respectively.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 13-PARENT COMPANY ONLY INFORMATION
BALANCE SHEETS
DECEMBER 31,
- --------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------------------------
ASSETS
Cash $ 2,041 $ 2,305
Other assets 296 95
Investment in Southern California Bank 47,721 43,113
- --------------------------------------------------------------------------------------------------
Total Assets $ 50,058 $ 45,513
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 139 $ 1
Shareholders' Equity:
Common stock 37,738 37,658
Retained earnings 13,055 8,600
Unrealized loss on available-for-sale securities, net of tax (874) (746)
- --------------------------------------------------------------------------------------------------
Total Shareholders' Equity 49,919 45,512
- --------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 50,058 $ 45,513
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
INCOME
Interest income $ 63 $ 108 $ 93
Dividend income from subsidiary - - 163
- ----------------------------------------------------------------------------------------------------------------------
Total income 63 108 256
- ----------------------------------------------------------------------------------------------------------------------
EXPENSE
Management fees 90 66 24
Other professional fees 328 281 26
Other expenses 129 - 91
- ----------------------------------------------------------------------------------------------------------------------
Total expense 547 347 141
- ----------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and equity in undistributed
earnings of subsidiary (484) (239) 115
(Benefit) provision for income taxes (201) (99) -
Equity in undistributed earnings of subsidiary 4,738 1,009 2,590
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,455 $ 869 $ 2,705
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 13-PARENT COMPANY ONLY INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 4,455 $ 869 $ 2,705
Adjustments to reconcile net income to net cash
used in operating activities:
(Increase) decrease in other assets (199) 43 (43)
Undistributed earnings of subsidiary (4,738) (1,009) (2,753)
Increase (decrease) in other liabilities 138 (94) -
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities (344) (191) (91)
- -------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Dividends received from subsidiary - - 163
Additional investment in subsidiary - (5,000) (6,810)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities - (5,000) (6,647)
- -------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 80 15 14,207
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 80 15 14,207
- -------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (264) (5,176) 7,469
Cash, January 1 2,305 7,481 12
- -------------------------------------------------------------------------------------------------
Cash, December 31 $ 2,041 $ 2,305 $ 7,481
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
NOTE 14 - CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 Quarter Ended
- -----------------------------------------------------------------------------------------------------------
31-Dec 30-Sep 30-Jun 31-Mar
- -----------------------------------------------------------------------------------------------------------
Interest income $ 8,983 $ 8,840 $ 8,542 $ 8,602
Interest expense 2,905 2,972 2,884 2,966
- ----------------------------------------------------------------------------------------------------------
Net interest income 6,078 5,868 5,658 5,636
- ----------------------------------------------------------------------------------------------------------
(Recovery of) provision for possible loan losses - - (750) 280
Net gains on sales of securities - - - 14
Noninterest income 1,310 1,323 1,246 1,273
Noninterest expense 4,783 5,048 6,073 5,324
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 2,605 2,143 1,581 1,319
- -----------------------------------------------------------------------------------------------------------
Provision for income taxes 1,083 893 661 556
- -----------------------------------------------------------------------------------------------------------
Net income $ 1,522 $ 1,250 $ 920 $ 763
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Net income per share $ 0.20 $ 0.17 $ 0.12 $ 0.10
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Stock Data
Common stock price range: (1)
High 9 7/8 7 7 1/8 6 3/4
Low 7 6 3/16 6 3/8 6 1/16
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 14 - CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
(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 losses on sales of securities - (620) - -
Noninterest income 1,281 1,379 1,337 1,636
Noninterest expense 5,202 6,833 5,997 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
(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 stock as reported by the AMEX for
the periods indicated.
NOTE 15 - REGULATORY MATTERS
The Company became a member of the Federal Reserve System effective July 1,
1996. The Company's primary regulator is now the Federal Reserve Board.
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
following table) 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, 1996, 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 categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. As of December 31, 1996, the
Bank continued to meet the requirements to be categorized as well-capitalized,
maintaining total risk-based, Tier I risk-based and Tier I leverage ratios as
set forth in the following table.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 15-REGULATORY MATTERS (CONTINUED)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
DOLLARS IN THOUSANDS Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996:
Total Capital (1) $ 49,917 11.86% $ 33,676 8.00% $ 42,095 10.00%
Tier 1 Capital (1) $ 44,970 10.68% $ 16,838 4.00% $ 25,257 6.00%
Leverage Capital (2) $ 44,970 9.51% $ 18,908 4.00% $ 23,635 5.00%
As of December 31, 1995:
Total Capital (1) $ 44,634 11.39% $ 31,342 8.00% $ 39,170 10.00%
Tier 1 Capital (1) $ 39,727 10.14% $ 15,671 4.00% $ 23,502 6.00%
Leverage Capital (2) $ 39,727 8.59% $ 18,493 4.00% $ 23,115 5.00%
(1) Ratio of Total and Tier 1 capital to risk-weighted assets.
(2) Ratio of Tier 1 capital to average assets.
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, $2.0 million, and $2.5
million as of December 31, 1996, 1995, and 1994, respectively. New loans
granted in 1996 and 1995 were $490,000 and $714,000, respectively; repayments
were $581,000, $1.1 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 except
marketable securities with quoted market prices, the fair value estimates
presented herein are not necessarily indicative of the amounts the Company could
have realized in sales transactions at either December 31, 1996 or 1995. The
estimated fair value amounts for 1996 and 1995 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.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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, 1996 DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(DOLLARS IN THOUSANDS) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $ 33,768 $ 33,768 $ 29,088 $ 29,088
Investments:
Securities available-for-sale 74,533 74,533 92,825 92,825
Investment in Federal Home Loan Bank stock, at cost 1,450 1,450 1,205 1,205
Investment in Federal Reserve Bank stock, at cost 607 607 - -
Loans, net (excludes nonaccrual loans):
Commercial 159,118 160,112 146,609 147,595
Real estate, construction 8,429 8,469 4,416 4,451
Real estate, mortgage 103,289 104,565 107,048 109,379
Consumer 73,493 73,995 57,383 58,427
Less: Allowance for possible loan losses 4,947 4,947 5,734 5,734
Accrued interest receivable 3,931 3,931 4,297 4,297
- ---------------------------------------------------------------------------------------------------------------------------------
Total financial assets $ 453,671 $ 456,483 $ 437,137 $ 441,533
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Deposits:
Deposits payable on demand $ 270,093 $ 270,093 $ 260,679 $ 260,679
Deposits with fixed maturities 145,233 145,347 146,132 146,663
Short-term borrowings 6,940 6,940 4,883 4,883
- ---------------------------------------------------------------------------------------------------------------------------------
Total financial liabilities $ 422,266 $ 422,380 $ 411,694 $ 412,225
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swap agreements in a net payable position $ - $ (900) $ - $ (1,070)
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, accrued interest receivable, 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
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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. The fair values of nonaccrual loans
with recorded book values of $2.8 million and $1.4 million at December 31,
1996 and 1995, 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.
55
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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: May 9, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Larry D. Hartwig
- ------------------------------ Chief Executive Officer, May 9, 1997
Larry D. Hartwig President and Director
(Principal Executive Officer)
/s/ Bruce Roat
- ------------------------------ Executive Vice President, May 9, 1997
Bruce Roat Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ H. A. Beisswenger
- ------------------------------ Chairman of the Board May 9, 1997
H. A. Beisswenger
/s/ N. Keith Abbott
- ------------------------------ Director May 9, 1997
N. Keith Abbott
/s/ Robert C. Ball
- ------------------------------ Director May 9, 1997
Robert C. Ball
56
/s/ James E. Cunningham
- ------------------------------ Director May 9, 1997
James E. Cunningham
/s/ William C. Greenbeck
- ------------------------------ Director May 9, 1997
William C. Greenbeck
/s/ Irving J. Pinsky
- ------------------------------ Director May 9, 1997
Irving J. Pinsky
/s/ Peer A. Swan
- ------------------------------ Director May 9, 1997
Peer A. Swan
/s/ Donald E. Wood
- ------------------------------ Director May 9, 1997
Donald E. Wood
57
Exhibit Index
- --------------------------------------------------------------------------------
Exhibit Description Page
No. No.
- --------------------------------------------------------------------------------
3(i).1 SC Bancorp Articles of Incorporation (f)
3(i).2 Certificate of Amendment to SC Bancorp Articles of Incorporation dated
May 9, 1995(g)
3(ii).1 Amended and Restated Bylaws of SC Bancorp
4.1 Specimen Common Stock Certificate(a)
4.2SC Bancorp 1989 Stock Option Plan(d)
4.3.1 Amended and restated Southern California Bank Employee Retirement
Plan(c)
4.3.2 First amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.3 Second amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.4 Third amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.5 Fourth amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.4 SC Bancorp Executive Deferral Plan (IV)(d)
4.5 Southern California Bank Executive Incentive Compensation Plans for
1994(a)
4.6 Southern California Bank Executive Incentive Compensation Plans for
1995(g)
4.7 Southern California Bank Executive Incentive Compensation Plans for
1996
10.1 Sublease between SC Bancorp and Denny's, dated December 24, 1992, for
office space in La Mirada, California(b)
10.2 Lease between Southern California Bank and Robert Stein, dated
September 1, 1981, amended June 19, 1990, for office space in Avalon,
California(c)
10.3 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(a)
10.4 Lease between Southern California Bank and Tustin-La Palma Business
Center, dated July 8, 1993 for office space in Anaheim, California(a)
10.5 License Agreement between Southern California Bank and The Vons
Companies, Inc., dated December 18, 1992 for supermarket space in
Anaheim Hills, California(a)
10.6 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(h)
10.7 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(g)
10.8 Sublease between Southern California Bank and Citicorp Savings, dated
November 30, 1995 for office space in La Jolla, California(g)
10.9 Lease between Southern California Bank and Regents Park Financial
Centre, Ltd., dated October 25, 1995 for office space in La Jolla,
California(g)
10.10 Forward lease between Southern California Bank and Regents Park
Financial Centre, Ltd., dated October 25, 1995 for office space in La
Jolla, California(g)
10.11 License Agreement between Southern California Bank and The Vons
Companies, Inc., dated February 22, 1996 for supermarket space in La
Habra, California(h)
10.12 Employment Agreement between SC Bancorp and Southern California Bank
and Larry D. Hartwig, dated January 1, 1997
10.13 Employment Agreement between SC Bancorp and Southern California Bank
and David A. McCoy, dated February 25, 1992
10.14 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and David A. McCoy, dated January 1, 1997
10.15 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and Bruce W. Roat, dated January 1, 1997
10.16 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and Ann E. McPartlin, dated January 1,
1997
10.17 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and M. V. Cummings, dated January 1, 1997
58
Exhibit Index (continued)
10.18 Form of Indemnification Agreement entered into with each Executive
Officer and Director of SC Bancorp(a)
10.19 Form of Indemnification Agreement entered into with each Executive
Officer and Director of Southern California Bank(a)
13.1 Pages 7-11 of the Company's 1996 annual report to shareholders
21.0 Subsidiaries of the Registrant(e)
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,
1997 appearing in the Annual Report on Form 10-K of SC Bancorp for the
year ended December 31, 1996.
27.1 Financial Data Schedule
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) 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) 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.
(c) 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.
(d) This exhibit is contained in SC Bancorp's Proxy Statement, filed with
the Commission on on March 23, 1990, (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 31,1994, filed with the Commission on
March 30, 1995, (Commission File No. 0-11046) and incorporated herein
by reference.
(f) 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.
(g) 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.
(h) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10-
Q for the period ended September 30, 1996, filed with the Commission
on November 14, 1996, (Commission File No. 0-11046) and incorporated
herein by reference.
59