-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FHO+Ovv2f4PVbi0k6li0XbHvj/Hl+QA6BKQOkc+/PYL/hfHPOcmg0IO30kJAxWiA 2cS58/0rX+ldQCIPjwkm7g== 0000912057-96-009661.txt : 19960517 0000912057-96-009661.hdr.sgml : 19960517 ACCESSION NUMBER: 0000912057-96-009661 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SC BANCORP CENTRAL INDEX KEY: 0000351617 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953585586 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10699 FILM NUMBER: 96564929 BUSINESS ADDRESS: STREET 1: 3800 EAST LAPALMA AVENUE CITY: ANAHEIM STATE: CA ZIP: 92807 BUSINESS PHONE: 7142288200 MAIL ADDRESS: STREET 1: 3800 EAST LAPALM AVENUE CITY: ANAHEIM STATE: CA ZIP: 92807 10-Q 1 10Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT to SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES. [ X ] NO. [ ] There were 7,472,805 shares of common stock for the registrant issued and outstanding as of May 1, 1996. SC BANCORP FORM 10-Q INDEX PAGES PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements A. Consolidated Balance Sheets 1 B. Consolidated Statements of Operations 2 C. Consolidated Statements of Cash Flows 3 D. Notes to Consolidated Financial Statements 4 ITEM 2. Management's Discussion and Analysis of 8 Financial Condition and Results of Operations PART II. OTHER INFORMATION 21 Part I. Item 1 SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK Consolidated Balance Sheets (Dollars in thousands)
March 31, December 31, 1996 1995 - ----------------------------------------------------------------------------------------------------- (Unaudited) (Audited) ASSETS Cash and due from banks $ 28,345 $ 29,088 Federal Funds sold 10,483 - - ----------------------------------------------------------------------------------------------------- Cash and cash equivalents 38,828 29,088 - ----------------------------------------------------------------------------------------------------- Securities available-for-sale, at fair market value (Notes 1 and 2) 83,004 94,030 Loans (Notes 1 and 3) 316,507 316,841 Less: Deferred fee income (502) (531) Allowance for possible loan losses (6,151) (5,734) - ----------------------------------------------------------------------------------------------------- Loans, net 309,854 310,576 - ----------------------------------------------------------------------------------------------------- Premises and equipment, net 8,941 9,734 Other real estate owned, net 2,053 2,073 Accrued interest receivable 2,808 4,297 Other assets 11,695 11,885 - ----------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 457,183 $ 461,683 - ----------------------------------------------------------------------------------------------------- LIABILITIES Deposits: Interest-bearing $ 282,103 $ 276,433 Noninterest-bearing 116,456 130,378 - ----------------------------------------------------------------------------------------------------- Total deposits 398,559 406,811 - ----------------------------------------------------------------------------------------------------- Borrowed funds and other interest-bearing liabilities 9,553 6,407 Accrued interest payable and other liabilities 3,212 2,953 - ----------------------------------------------------------------------------------------------------- Total Liabilities 411,324 416,171 - ----------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock, no par or stated value: 10,000,000 shares authorized; no shares issued or outstanding - - Common stock, no par or stated value: 20,000,000 shares authorized; 7,472,805 shares issued and outstanding at March 31, 1996, and 7,471,505 shares issued and outstanding at December 31, 1995 37,664 37,658 Retained earnings 9,363 8,600 Unrealized loss on available-for-sale securities, net of taxes (1,168) (746) - ----------------------------------------------------------------------------------------------------- Total Shareholders' Equity 45,859 45,512 - ----------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 457,183 $ 461,683 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 1 Part I. Item 1 (continued) SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK Consolidated Statements of Operations (Dollars in thousands, except per share amounts)
Unaudited Three Months Ended March 31, - ----------------------------------------------------------------------------------------------------- 1996 1995 ---- ---- INTEREST INCOME Interest and fees on loans $ 7,378 $ 5,087 Interest on investment securities 1,144 1,753 Interest on Federal funds sold 80 397 - ----------------------------------------------------------------------------------------------------- Total interest income 8,602 7,237 - ----------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits: Interest-bearing demand 394 292 Savings 248 311 Time Certificates of Deposit 2,018 1,719 - ----------------------------------------------------------------------------------------------------- Total interest on deposits 2,660 2,322 - ----------------------------------------------------------------------------------------------------- Other interest expense 306 635 - ----------------------------------------------------------------------------------------------------- Total interest expense 2,966 2,957 - ----------------------------------------------------------------------------------------------------- Net interest income 5,636 4,280 Provision for possible loan losses (Note 3) 280 124 - ----------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 5,356 4,156 - ----------------------------------------------------------------------------------------------------- Noninterest income: Service charges on deposit accounts 386 433 Other fees and charges 610 630 Merchant bankcard income 117 114 Net gain on sales of investment securities 14 - Net loss on sales of fixed assets (1) - Life insurance income 27 407 Other income 134 52 - ----------------------------------------------------------------------------------------------------- Total noninterest income 1,287 1,636 - ----------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 2,649 2,474 Net occupancy, furniture and equipment 1,110 1,143 Professional fees 321 182 Postage and delivery 161 135 Goodwill amoritization 114 53 Telecommunications 112 99 Insurance and assessment 101 313 Merchant bankcard 97 109 Office supplies 80 71 Data processing expense 70 56 Other real estate owned 62 43 Computer software 61 89 Other operating expense 386 495 - ----------------------------------------------------------------------------------------------------- Total noninterest expense 5,324 5,262 - ----------------------------------------------------------------------------------------------------- Income before provision for income taxes 1,319 530 Provision for income taxes 556 185 - ----------------------------------------------------------------------------------------------------- NET INCOME $ 763 $ 345 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 7,472 7,469 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Earnings per share $ 0.10 $ 0.05 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2 Part I. Item 1 SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK Consolidated Statements of Cash Flow (Dollars in thousands)
Unaudited Three Months Ended March 31, - --------------------------------------------------------------------------------------------------------------- 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 763 $ 345 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 280 124 Provision for loss on other real estate owned 20 - Gain on sale of other real estate owned - (17) Gain on sale of available-for-sale investment securities (14) - Net amortization of premiums on investment securities 244 397 Net amortization of deferred fees and unearned income on loans (29) (39) Depreciation and amortization 493 527 Loss on sale of fixed asset and other assets 1 - Decrease in accrued interest receivable and other assets 1,979 2,084 Decrease in accrued interest payable and other liabilities 350 544 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating expenses 4,087 3,965 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of availbale-for-sale investment securities 8,549 - Proceeds from maturities of available-for-sale investment securities 1,709 1,565 Purchase of investment securities (184) - Net decrease (increase) in loans 471 (6,862) Proceeds from sale of fixed assets and other assets 184 - Purchase of fixed assets (94) (449) Proceeds from sale of other real estate owned - 74 - --------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 10,635 (5,672) - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 6 - Decrease in demand deposits, NOW and savings accounts (13,922) (20,594) Increase in time certificates of deposit 5,670 80,377 Increase/(decrease) in other borrowed funds 3,264 (9,722) - --------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (4,982) 50,061 - --------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 9,740 48,354 Cash and cash equivalants, beginning of period 29,088 31,118 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalants, end of period $ 38,828 $ 79,472 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS Unrealized loss on investment securities, available-for-sale, net of tax $ 422 $ 1,230 Transfers of loans to OREO - 69 Assumptions of senior liens on OREO - 57 Asset sales offset to restructuring reserve 91 - Close out of capital lease accounts 118 - - ---------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 Part I. Item 1 (continued) SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK Notes to Consolidated Financial Statements (Unaudited, except for information as of and for the year ended December 31, 1995) NOTE 1-SIGNIFICANT ACCOUNTING POLICIES SC Bancorp, a bank holding company (the "Company"), and its subsidiary, Southern California Bank, a California state-chartered bank (the "Bank"), operates 14 branches in Southern California. The Company's primary source of revenue is providing loans to customers who are predominantly small and mid-sized businesses. The accounting and reporting policies of the Company conform to generally accepted accounting principles and general practices within the banking industry. See the notes to SC Bancorp's consolidated financial statements contained in the Company's annual report on Form 10-K. The interim period financial statements are unaudited. It is the opinion of Company management that all adjustments consisting of normal, recurring accruals necessary for a fair presentation of the results of operations have been reflected therein. Results for the period ending March 31, 1996 are not necessarily indicative of results that may be expected for any other interim periods or for the year as a whole. SECURITIES: At March 31, 1996, the Company's available-for-sale portfolio had a net unrealized loss of $2.0 million. The tax-effected reduction to shareholders' equity at March 31, 1996, was $1.2 million. In January 1995, the FDIC issued a final rule excluding unrealized holding gains and losses on available-for-sale debt securities from the calculation of Tier 1 capital. LOANS: The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures-An Amendment of FASB Statement No. 114," effective January 1, 1995. The Company's recorded investment in impaired loans at March 31, 1996 was $5.9 million. The Company's allowance for possible loan losses at March 31, 1996 includes $1.3 million related to impaired loans. 4 Part I. Item 1 (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2-INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities as of March 31, 1996 and December 31, 1995 are as follows:
(DOLLARS IN THOUSANDS) March 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 $ 33,346 $ - $ (575) $ 32,771 Mortgage-backed securites 50,264 - (1,420) 48,845 FHLB Stock 1,389 - - 1,389 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 84,999 $ - $ (1,995) $ 83,004 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
(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 securites 52,062 - (910) 51,152 FHLB Stock 1,205 - - 1,205 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 95,303 $ - $ (1,273) $ 94,030 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
Investment securities with a carrying value of $17.0 million and $18.6 million were pledged to secure public deposits and as collateral for other borrowings at March 31, 1996 and December 31, 1995, respectively. The amortized cost and estimated fair value of debt securities at March 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.
(DOLLARS IN THOUSANDS) Maturing in - ------------------------------------------------------------------------------------------------------------------------------- Over one Over five One year year through years through Over MARCH 31, 1996 or less five years ten years ten years Total ------------- ------------- ------------- ------------- ------------- Available-for-sale, amortized cost $ 11,901 $ 70,152 $ 2,870 $ 76 $ 84,999 Available-for-sale, estimated fair value $ 11,672 $ 68,427 $ 2,829 $ 76 $ 83,004
Proceeds from the sale of an investment security during the first quarter of 1996 were $8.5 million. A gross gain of $14 thousand was realized on the sale. There were no sales of investment securities during the same period in 1995. 5 Part I. Item 1 (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3-LOANS Loans by category are summarized below:
March 31, December 31, (DOLLARS IN THOUSANDS) 1996 Percent 1995 Percent - -------------------------------------------------------------------------------------------------------------- Commercial $ 151,217 47.78% $ 147,230 46.47% Real estate, construction 4,091 1.29% 4,416 1.39% Real estate, mortgage 104,708 33.08% 107,662 33.98% Consumer 56,491 17.85% 57,533 18.16% - -------------------------------------------------------------------------------------------------------------- Gross loans 316,507 100.00% 316,841 100.00% ----------- ----------- ----------- ----------- Deferred fee income (502) (531) Allowance for possible loan losses (6,151) (5,734) - ------------------------------------------------------------------ ----------- Loans, net $ 309,854 $ 310,576 - ------------------------------------------------------------------ ----------- - ------------------------------------------------------------------ -----------
No industry constitutes a concentration in the Company's loan portfolio. The following table summarizes the balances and changes in the allowance for possible loan losses:
March 31, December 31, (DOLLARS IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- Average Balance of gross outstanding $ 312,304 $ 261,631 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Gross balance at end of period $ 316,507 $ 316,841 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Allowance at beginning of period $ 5,734 $ 5,318 Charge-offs: Commercial 7 834 Real estate 7 1,227 Consumer 33 587 - -------------------------------------------------------------------------------- Total charge-offs 47 2,648 Recoveries Commercial 156 587 Real estate 2 129 Consumer 26 192 - -------------------------------------------------------------------------------- Total recoveries 184 908 Net (recoveries)/charge-offs (137) 1,740 Provision charge to expense 280 1,539 Allowance on purchased loans - 617 - -------------------------------------------------------------------------------- Allowance at end of period $ 6,151 $ 5,734 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
6 Part I. Item 1 (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3-LOANS (CONTINUED)
March 31, December 31, 1996 1995 - -------------------------------------------------------------------------------- Ratio of allowance for loan losses to loans outstanding at end of period 1.94% 1.81% Ratio of allowance for loan losses to nonaccrual loans at end of period 364.61% 414.01% Ratio of annualized net charge-offs to average loans -0.18% 0.67%
Loans on nonaccrual status were approximately $1.7 million and $2.7 million, respectively at March 31, 1996 and 1995. Interest income that would have been collected on these loans had they performed in accordance with their original terms was approximately $62 thousand and $180 thousand, for the quarters ended March 31, 1996 and 1995, respectively. NOTE 4-COMMITMENTS AND CONTINGENCIES In the normal course of business, there are various outstanding commitments to extend credit which are not reflected in the accompanying consolidated financial statements. The Company does not anticipate losses as a result of these transactions. However, the commitments are a component of the estimate of the allowance for possible loan losses. Commercial and standby letters of credit totaled approximately $5.2 million and $4.3 million at March 31, 1996, and December 31, 1995, respectively. In addition, the Company had unfunded loan commitments of $85.8 million and $85.0 million at March 31, 1996, and December 31, 1995, respectively. The Company uses the same credit policies in making commitments and conditional obligations as it does in extending loan facilities to customers. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The Company has entered into two interest rate swap agreements to reduce the impact of changes in interest rates on its floating-rate loan portfolio. At March 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 income on loans. Net interest expense of $146 thousand and $264 thousand related to the swap agreements is included in interest income for the quarters ended March 31, 1996 and 1995, respectively. The Company is required to pledge collateral on the swaps. U.S. Agency notes having a fair value of approximately $5.6 million were pledged as collateral for the agreements as of March 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. 7 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion presents information about the results of operations, financial condition, liquidity and capital resources of SC Bancorp and its subsidiary, Southern California Bank (together, the "Company"). This information should be read in conjunction with the audited 1995 consolidated financial statements of the Company and the notes thereto, and the accompanying quarterly unaudited consolidated financial statements and notes thereto. During the first quarter of 1996, the Company completed the previously-announced sale of two branches of Southern California Bank and the consolidation of a third branch. In subsequent periods, the Company expects to fully realize the reductions in ongoing operating expenses associated with these actions. RESULTS OF OPERATIONS The Company reported net income of $763 thousand for the first quarter of 1996 compared to net income of $345 thousand for the first quarter of 1995. Net income for the first quarter of 1995 includes a $408 thousand nonrecurring adjustment to interest expense related to the Company's deferred compensation plan, which was offset by a $407 thousand benefit payment received on corporate-owned life insurance. The following table summarizes key performance indicators pertaining to the Company's operating results:
Three months ended March 31, - ------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1996 1995 - ------------------------------------------------------------------------------- Return on average assets (1) 0.66% 0.32% Return on average shareholders' equity (1) 6.99% 3.28% Net income $ 763 $ 345 Earnings per share $ 0.10 $ 0.05 Total average assets $456,149 $425,689 - -------------------------------------------------------------------------------
(1) Annualized 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 provides information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. The table also provides summary of the changes in interest income and interest expense resulting from changes in average interest rates (rate) and changes in average balances (volume) for the three months ending March 31, 1996 and 1995. Average balances are average daily balances. Nonaccrual loans are included in total average loans outstanding. 8 Part I. Item 2 (continued)
- ----------------------------------------------------------------------------------------------------------------------------------- Three months ended - ----------------------------------------------------------------------------------------------------------------------------------- 1996 and 1995 March 31, 1996 March 31, 1995 Increase (decrease) -------------------------------------------------------------- Average Yield/ Average Yield/ due to change in Net (Dollars in thousands) Balance Interest Rate(1) Balance Interest Rate(1) Rate Volume Change - ----------------------------------------------------------------------------------------------------------------------------------- Assets Interest-earning assets: Loans, net of deferred fees (2) $ 312,304 $ 7,378 9.50% $ 209,887 $5,807 9.83% $(184) $2,475 $2,291 Investment securities 89,475 1,144 5.14% 136,103 1,753 5.22% (27) (582) (609) Federal funds sold and other 5,979 80 5.40% 27,404 397 5.88% (31) (286) (317) - ----------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets/ interest income 407,758 8,602 8.48% 373,394 7,237 7.86% (242) 1,607 1,365 - ----------------------------------------------------------------------------------------------------------------------------------- Noninterest earning assets 48,391 52,295 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 456,149 $ 425,689 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Deposits $ 276,129 $ 2,660 3.87% $ 256,407 $2,322 3.67% $ (19) $ (319) $ (338) Other interest-bearing liabilities/interest expense 18,274 306 6.74% 12,722 635 20.24% 453 (124) 329 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities/interest expense 294,403 2,966 4.05% 269,129 2,957 4.46% 434 (443) (9) - ----------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing liabilities 117,862 114,273 Shareholders' equity 43,884 42,287 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 456,149 $ 425,689 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income/net interest margin $ 5,636 5.56% $4,280 4.65% $ 192 $1,164 $1,356 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
(1) Annualized. (2) Includes loans on nonaccrual status of approximately $1.7 million and $2.7 million at March 31, 1996 and 1995, respectively. The amounts of interest income foregone on loans that were on nonaccrual status was approximately $62 thousand and $180 thousand for the quarters ended March 31, 1996 and 1995, respectively. Interest income on loans includes amortization of net loan fees of approximately $29 thousand and $39 thousand for the same period. Additionally, net interest expenses relating to the interest rate swap agreements of $146 thousand and $264 thousand are included in interest income for the quarters ended march 31, 1996 and 1995, respectively. The Company's net interest income was $5.6 million for the three months ended March 31, 1996, compared to $4.3 million for the three months ended March 31, 1995. The net interest margin increased to 5.56% for the first quarter of 1996, compared to 4.65% for the prior year. The increase in the net interest margin is attibutable in part to a change in the earning asset mix that includes a higher proportion of loans to investment securities, and to a decrease in funding costs. Average loans increased to 77% of total average earning assets from 56% of average earning assets a year ago. The increase was largely due to the $72 million of loans acquired from Independence One Bank of California, FSB ("IOBC") on April 30, 1995. The decrease in investment securities reflects the sale of $27 million of investment securities during the third quarter of 1995, and the sale of a $8.5 million U.S. Agency security during the first quarter of 1996. The decrease in funding costs compared to the prior year is due to the fact that higher rate certificates of deposit raised prior to the IOBC transaction have largely been replaced with lower cost deposits. Interest expense for the first quarter of 1995 also included a $408 thousand nonrecurring adjustment on the Company's deferred compensation plans. The average yield on earning assets increased by 62 basis points despite an approximately 50 basis point decrease in the average prime rate for the first quarter of 1996 compared to the first quarter of 1995. The Company's funding costs decreased 41 basis points from the prior year due to the reasons discussed above. PROVISION FOR POSSIBLE LOAN LOSSES The Company recorded a $280 thousand provision for possible loan losses for the first quarter of 1996. Gross loan charge-offs for the quarter were $47 thousand, and recoveries were $184 thousand. The allowance for possible loan losses increased to $6.2 million at March 31, 1996 from $5.7 million at December 31, 1995. Nonaccrual loans increased to $1.7 million at March 31, 1996 from $1.4 million at December 31, 1995. The ratio of the allowance for possible loan losses to total loans increased to 1.94% at March 31, 1996 from 1.81% at December 31, 1995. Refer to NOTE 3-LOANS of the Company's consolidated financial statements which are included in Part I, Item I, of this Form 10-Q. The Company recorded a $124 thousand provision for possible loan losses for the first quarter of 1995. Gross loan charge-offs were $507 thousand, and gross recoveries were $392 thousand for the quarter. 9 Part I. Item 2 (continued) NONINTEREST INCOME The following table sets forth the major components of noninterest income for the periods indicated:
Three Months Ended (DOLLARS IN THOUSANDS) March 31, - ------------------------------------------------------------------------------- 1996 1995 ---- ---- Service charges on deposit accounts $ 386 $ 433 Other fees and charges 610 630 Merchant bankcard income 117 114 Net gain on sales of investment securities 14 - Net loss on sales of fixed assets (1) - Life insurance income 27 407 Other income 134 52 - ------------------------------------------------------------------------------- Total noninterest income $ 1,287 $ 1,636 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Noninterest income was $1.3 million and $1.6 million for the three months ended March 31, 1996 and 1995, respectively. The decrease in noninterest income from the prior year is largely due to the $407 thousand life insurance benefit payment received in the first quarter of 1995. The reduction in service charge income from the first quarter of 1995 is primarily due to competitive pricing on commercial accounts. The decrease in other fees and charges is primarily due to lower NSF fee income. Other income for the first quarter of 1996 includes $51 thousand for the reversal of unused reserves relating to the third-quarter 1995 restructuring ("1995 Restructuring"). A reserve for the estimated costs of the 1995 Restructuring had been established in the third quarter of 1995. 10 Part I Item 2 (continued) NONINTEREST EXPENSE The following table provides detail of the Company's noninterest expense by category for the periods indicated:
Three Months Ended (DOLLARS IN THOUSANDS) March 31, - ------------------------------------------------------------------------------- 1996 1995 ---- ---- Salaries and employee benefits $ 2,649 $ 2,474 Occupancy, furniture and equipment 1,110 1,143 Professional fees 321 182 Postage and delivery 161 135 Goodwill amortization 114 53 Telecommunications 112 99 Insurance and assessment 101 313 Merchant bankcard 97 109 Office supplies 80 71 Data processing expense 70 56 Other real estate owned 62 43 Computer software 61 89 Other operating expense 386 495 - ------------------------------------------------------------------------------- Total noninterest expense $ 5,324 $ 5,262 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Annualized noninterest expense as a % of average earning assets 5.25% 5.72%
Noninterest expense for the first quarter of 1996 increased slightly over the first quarter of 1995. Noninterest expense for the current year includes the expenses associated with the two corporate banking offices and two branches added following the IOBC transaction during the second quarter of 1995. The addition of the new locations has primarily impacted salaries and occupancy expenses. The Company had 217 and 224 full-time equivalent staff at March 31, 1996 and 1995, respectively. The mix of staff has changed somewhat due to the consolidation of certain operating functions in conjunction with the 1995 Restructuring, and to the addition of staff in the corporate lending area as a result of the IOBC acquisition. The increase in professional fees over the prior year reflects the outsourcing of the Company's internal audit function as part of the 1995 Restructuring, and fees associated with evaluating potential acquisition opportunities. Goodwill amortization increased over the prior year due to the IOBC transaction. The decrease in insurance expense is primarily due to the reduction in FDIC deposit insurance premiums. The Company has improved its operating efficiencies on a larger earning asset base. Annualized noninterest expense as a percentage of average earning assets has decreased to 5.25% from 5.72% a year ago. FINANCIAL CONDITION Total assets at March 31, 1996, were $457.2 million, a decrease of 0.97% from $461.7 million at year-end 1995. Total deposits at March 31, 1996, were $398.6 million, a decrease of 2.0% from $406.8 million at year-end 1995. Gross loan balances at March 31, 1996 are slightly below year end. The decrease in deposits is largely due to the sale of two branches, with deposits totaling approximately $7.5 million, during the first quarter of 1996. The following table provides a summary comparison of assets and liabilities in the Company's consolidated balance sheets and the percentage distribution of these items for the dates indicated: 11 Part I. Item 2 (continued)
- ----------------------------------------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, AMOUNT PERCENT (DOLLARS IN THOUSANDS) 1996 1995 CHANGE CHANGE - ----------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 38,828 $ 29,088 $ 9,740 33.48% Investment securities 83,004 94,030 (11,026) -11.73% Loans, net 309,854 310,576 (722) -0.23% Premises and equipment, net 8,941 9,734 (793) -8.15% Other real estate owned, net 2,053 2,073 (20) -0.97% Accrued interest receivable 2,808 4,297 (1,489) -34.66% Other assets 11,695 11,885 (190) -1.60% - ----------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 457,183 $ 461,683 $ (4,500) 0.97% - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing deposits $ 116,456 $ 130,378 $ (13,922) -10.68% Interest-bearing demand & savings deposits 137,221 130,301 6,920 5.31% Time certificates of deposit 144,882 146,132 (1,250) -0.86% - ----------------------------------------------------------------------------------------------------------------- Total deposits 398,559 406,811 (8,252) -2.03% - ----------------------------------------------------------------------------------------------------------------- Borrowed funds and other interst-bearing liabilities 9,553 6,407 3,146 49.11% Accrued interest payable and other liabilities 3,212 2,953 259 8.78% Total shareholders' equity 45,859 45,512 347 0.76% - ----------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 457,183 $ 461,683 $ (4,500) -0.97% - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
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 $1.0 million were maintained in the form of deposits with the Federal Reserve Bank at March 31, 1996. Cash and cash equivalents increased $9.7 million to $38.8 million at March 31, 1996 from $29.1 million at December 31, 1995. The increase is due to a $10.5 million investment in overnight Federal funds sold. There were no Federal funds sold at December 31, 1995. INVESTMENT SECURITIES The Company's securities portfolio includes U.S. Treasury securities and U.S. government agency securities, most of which are mortgage-backed securities. The Company reclassified it entire held-to-maturity portfolio to the available-for-sale category in December, 1995 under the special one-time exemption authorized by the Financial Accounting Standards Board. The following table sets forth the maturity distribution of the Company's investment securities at their estimated fair values at March 31, 1996: 12 Part I. Item 2 (continued)
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 $ 5,030 $ -- $ -- $ 76 $ 5,106 U.S. government agency securities -- 27,663 1,390 -- 29,053 Mortgage-backed securities 6,642 40,764 1,439 -- 48,845 - ------------------------------------------------------------------------------------------------------------------- Total $ 11,672 $ 68,427 $ 2,829 $ 76 $ 83,004 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
LOANS The Company provides a full range of credit products designed to meet the credit needs of borrowers in its service area. The Company engages in medium-term commercial real estate loans secured by commercial properties, commercial loans, term financing, SBA loans, and consumer loans principally in the form of home equity lines of credit, vehicle loans, and loans to high net worth individuals. Additionally, the Company offers construction loan products principally for entry level housing and owner-user commercial industrial properties. Refer to NOTE 3-LOANS of the Company's consolidated financial statements which are included in Part 1, Item 1, of this Form 10-Q for a comparison of loans by category at March 31, 1996 and December 31, 1995. COMMERCIAL LOANS. Commercial loans totaled $151.2 million or 47.8% of total loans and $147.2 million or 46.5% of total loans at March 31, 1996, and December 31, 1995, respectively. Commercial loans at March 31, 1996 and December 31, 1995 include the loans purchased from IOBC and approximately $20 million of SBA loans purchased during the fourth quarter of 1995. Most of the Bank's commercial borrowers and customers are small to medium size businesses and professionals. Most of the commercial loans are short term, are reviewed and renewed annually, and bear a floating rate of interest. Approximately 67% 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 March 31, 1996, $36.8 million or 11.6% of total loans were secured by accounts receivable as compared to $29.5 million or 9.3% of loans at December 31, 1995. Commercial loans secured by real estate were $17.8 million or 5.6% at March 31, 1996, compared to $18.9 million or 6.0% of loans at December 31, 1995. In 1995, the Company began participating in government-insured lending programs, including SBA loans. At March 31, 1996, the Company had $20.8 million of SBA loans. REAL ESTATE CONSTRUCTION LOANS. Real estate construction loans comprise $4.1 million or 1.3% of outstanding loans at March 31, 1996. Construction loans were $4.4 million, or 1.4%, of total loans at December 31, 1995. REAL ESTATE MORTGAGE LOANS. Real estate mortgage loans comprise $104.7 million or 33.1% of the total loan portfolio at March 31, 1996, compared to $107.7 million or 34.0% of the total loans outstanding at year end 1995. Approximately $16.8 million of real estate loans were purchased from IOBC. Company management continues to monitor the concentration of real estate loans in the loan portfolio. New real estate loans are made only to existing borrowers who are owner/users or to new borrowers who provide a new major banking relationship, and demonstrate adequate cash flows. All new real estate borrowers must provide financial reporting that meets FDICIA standards, and the loans must have conservative loan to value ratios. Approximately 80% of the Bank's real estate loans are secured by first trust deeds; and approximately 50% are to owner/users. CONSUMER LOANS. Approximately $56.5 million, or 17.9%, of the loan portfolio is consumer loans at March 31, 1996. The consumer loan portfolio includes $29.8 million, or 9.4% of total loans, of home equity loans and home equity lines of credit. Vehicle loans comprise approximately $18.3 million, or 5.8%, of total loans at March 31, 1996. The levels of consumer loans at period ends may fluctuate and may not necessarily be representative of average levels experienced during the respective periods due to the timing of advances and payments made on such loans by borrowers. 13 Part I. Item 2 (continued) MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES. The following table sets forth the maturity distribution of the Company's loan portfolio (excluding consumer and nonaccrual loans) at March 31, 1996 based on remaining scheduled principal repayments:
Maturing in - ------------------------------------------------------------------------------------------------------------------ Over one One year year through Over (DOLLARS IN THOUSANDS) or less five years five years Total - ------------------------------------------------------------------------------------------------------------------ Commercial $ 77,584 $ 46,475 $ 25,978 $ 150,037 Real estate, construction 3,468 623 -- 4,091 Real estate, mortgage 27,184 57,147 19,986 104,317 - ------------------------------------------------------------------------------------------------------------------ Total $ 108,236 $ 104,245 $ 45,964 $ 258,445 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
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 March 31, 1996:
Repricing in - ------------------------------------------------------------------------------------------------------------------ Over one One year year through Over (DOLLARS IN THOUSANDS) or less five years five years Total - ------------------------------------------------------------------------------------------------------------------ Fixed interest rates $ 23,420 $ 33,957 $ 13,281 $ 70,658 Variable interest rates 187,787 -- -- 187,787 - ------------------------------------------------------------------------------------------------------------------ Total $ 211,207 $ 33,957 $ 13,281 $ 258,445 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
The amounts reported in the categories in the tables do not reflect loan prepayments or other factors which may cause the loans to react in different degrees and at different times to changes in market interest rates. ASSET QUALITY Nonaccrual, Past Due and Modified Loans The Company recognizes income principally on the accrual basis of accounting. In determining income from loans, the Company generally adheres to a policy of not accruing interest on loans on which a default of principal or interest has existed for a period of 90 days or more. The Company's policy is to assign nonaccrual status to a loan if either (i) principal or interest payments are past due in excess of 90 days, unless the loan is both well secured and in the process of collection; or (ii) the full collection of interest or principal becomes uncertain, regardless of the length of past due status. When a loan reaches "nonaccrual" status, any interest accrued on such a loan is reversed and charged against current income. Nonaccrual loans by category are summarized below:
March 31, December 31, (DOLLARS IN THOUSANDS) 1996 1995 - --------------------------------------------------------------------------------- Commercial $ 621 $ 620 Real estate, construction -- -- Real estate, mortgage 950 615 Consumer 116 150 - --------------------------------------------------------------------------------- Total nonaccrual loans $ 1,687 $ 1,385 - --------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------
14 Part I. Item 2 (continued) Delinquent loans (past due 30 to 89 days and still accruing) by category are summarized below:
March 31, December 31, (DOLLARS IN THOUSANDS) 1996 1995 - --------------------------------------------------------------------------------- Commercial $ 256 $ 548 Real estate, construction -- -- Real estate, mortgage 383 503 Consumer 835 411 - --------------------------------------------------------------------------------- Total delinquent loans $ 1,474 $ 1,462 - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Percentage of total gross loans: Nonaccrual loans 0.53% 0.44% Delinquent loans, still accruing interest 0.47% 0.46% Nonaccrual and delinquent loans 1.00% 0.90%
ALLOWANCE FOR POSSIBLE LOAN LOSSES A certain degree of risk is inherent in the extension of credit. Management has adopted a policy to maintain the allowance for possible loan and lease losses at a level considered by management to be adequate to absorb estimated known and inherent risks in the existing portfolio. Management performs a comprehensive analysis of the loan portfolio on a regular basis and its current allowance for loan losses to determine that loans are currently protected according to financial and collateral standards deemed acceptable. The allowance for possible loan losses represents management's recognition of the assumed risks of extending credit and the quality of the loan portfolio. The allowance is management's estimate, which is inherently uncertain and depends on the outcome of future events. The evaluation of the quality of the loan portfolio considers the borrower's management, financial condition, cash flow and repayment program, as well as the existence of collateral and guarantees. External business and economic factors beyond the borrower's control, combined with the Company's previous loan loss experience, are considered in management's evaluation of the allowance for possible loan losses. In addition, the bank regulatory authorities, as an integral part of their examination process, periodically review the Company's allowance for possible loan losses and may recommend additions to the allowance based on their assessment of information available to them at the time of their examination. When it is determined that additions are required, additions to the allowance are made through charges to operations and are reflected in the statements of operations as a provision for loan losses. Loans which are deemed to be uncollectible are charged to the allowance. Subsequent recoveries, if any, are credited back to the allowance. Refer to NOTE 3-LOANS of the Company's consolidated financial statements which are included in Part I, Item I, of this Form 10-Q for additional information concerning activity in the allowance for possible loan losses, including charge-offs and recoveries. OTHER REAL ESTATE OWNED OREO primarily includes properties acquired through foreclosure or through full or partial satisfaction of loans. The difference between the fair value of the real estate collateral and the loan balance at the time of transfer to OREO is reflected in the allowance for possible loan losses as a charge-off. Any subsequent declines in the fair value of the OREO property after the date of transfer are recorded through a provision for writedowns on OREO. Routine holding costs, net of any income and net gains and losses on disposal, are reported as noninterest expense. Activity in OREO for the periods indicated is as follows: 15 Part I. Item 2 (continued)
Three Months Year Ended Ended December 31, (DOLLARS IN THOUSANDS) March 31, 1996 1995 - -------------------------------------------------------------------------------------- Balance, beginning of period $ 2,073 $ 5,837 Additions -- 1,923 Sales -- (5,689) Valuation and other adjustments (20) 2 - -------------------------------------------------------------------------------------- Balance, end of period $ 2,053 $ 2,073 - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
At March 31, 1996, OREO portfolio consisted of four properties. The Company is actively marketing these properties. DEPOSITS Total deposits at March 31, 1996 were $398.6 million, a $8.2 million decrease from $406.8 million at year end 1995. As discussed in the overview section above, the decrease in deposit balances is primarily attributable to the sale of two branches during the first quarter of 1996. The following table sets forth the distribution of average deposits and the rates paid thereon for the periods indicated:
THREE MONTHS ENDED FISCAL YEAR ENDED MARCH 31, 1996 DECEMBER 31, 1995 - ------------------------------------------------------------------------------------------------------------------------ AVERAGE AVERAGE (DOLLARS IN THOUSANDS) BALANCE RATE (1) % OF TOTAL BALANCE RATE (1) % OF TOTAL - ------------------------------------------------------------------------------------------------------------------------ Demand deposits $ 114,585 29.33% $ 123,815 30.47% NOW/MMDA 80,596 1.97% 20.63% 81,815 1.77% 20.13% Savings 47,804 2.09% 12.24% 55,204 2.08% 13.58% TCDs 147,728 5.49% 37.80% 145,555 5.77% 35.82% - ------------------------------------------------------------------------------------------------------------------------ Deposits $ 390,713 100.00% $ 406,389 100.00% - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
The decrease in average demand deposit balances to $114.6 million at March 31, 1996 from $123.8 million at December 31, 1995 can be attributed to the use of investment sweep accounts by selected business customers, and to the sale of two branches during the first quarter of 1996. The reduction in the average rate paid on time certificates of deposit to 5.49% at March 31, 1996 from 5.77% at December 31, 1995 is due in part to the maturity of the higher rate accounts raised prior to the IOBC transaction. These accounts have largely been replaced with lower cost deposits. The following table sets forth the maturities of the Company's time certificate of deposit accounts at the dates indicated: 16 Part I. Item 2 (continued)
MARCH 31, 1996, MATURING IN - ----------------------------------------------------------------------------------------------------------------- OVER THREE OVER SIX MONTHS THREE MONTHS MONTHS THROUGH THROUGH TWELVE OVER TWELVE (DOLLARS IN THOUSANDS) OR LESS SIX MONTHS MONTHS MONTHS TOTAL - ----------------------------------------------------------------------------------------------------------------- Under $100,000 $ 35,006 $ 28,787 $ 23,862 $ 9,081 $ 96,736 $100,000 and over 24,067 12,484 7,578 4,017 48,146 - ----------------------------------------------------------------------------------------------------------------- Total $ 59,073 $ 41,271 $ 31,440 $ 13,098 $ 144,882 - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995, MATURING IN - ----------------------------------------------------------------------------------------------------------------- OVER THREE OVER SIX MONTHS THREE MONTHS MONTHS THROUGH THROUGH TWELVE OVER TWELVE (DOLLARS IN THOUSANDS) OR LESS SIX MONTHS MONTHS MONTHS TOTAL - ----------------------------------------------------------------------------------------------------------------- Under $100,000 $ 32,926 $ 28,532 $ 31,492 $ 7,034 $ 99,984 $100,000 and over 20,183 13,587 9,260 3,118 46,148 - ----------------------------------------------------------------------------------------------------------------- Total $ 53,109 $ 42,119 $ 40,752 $ 10,152 $ 146,132 - -----------------------------------------------------------------------------------------------------------------
BORROWED FUNDS AND OTHER INTEREST-BEARING LIABILITIES Borrowed funds and other interest-bearing liabilities consist of overnight Federal funds purchased, Treasury, tax and loan notes ("TT&L"), obligations under securities repurchase agreements, the principal portions of capitalized lease obligations, obligations to senior lienholders for certain OREO properties, and deferred compensation liabilities. The balance of borrowed funds and other interest-bearing liabilities increased to $9.6 million at March 31, 1996 from $6.4 million at December 31, 1995. The $3.2 million net increase comprises a $5 million increase in Federal funds purchased, partially offset by a $1.6 million decrease in TT&L and a $257 thousand decrease in capital lease obligations. ASSET/LIABILITY MANAGEMENT The objective of asset/liability management is to manage and control the Company's exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. The Company seeks to achieve this objective by matching its interest sensitive assets and liabilities, and maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment. Generally, if rate sensitive assets exceed rate sensitive liabilities, the net interest income will be positively impacted during a rising rate environment and negatively impacted during a declining rate environment. When rate sensitive liabilities exceed rate sensitive assets, the net interest income will generally be positively impacted during a declining rate environment and negatively impacted during a rising rate environment. However, because interest rates for different asset and liability products offered by depository institutions respond differently to changes in the interest rate environment, the gap between rate sensitive assets and rate sensitive liabilities can only be used as a general indicator of interest rate sensitivity. The following gap repricing table sets forth information concerning the Company's rate sensitive assets and rate sensitive liabilities, including the off-balance sheet amounts for interest rate swaps, as of March 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. 17 Part I. Item 2 (continued)
Over Over Three months One year Three months through through Over (DOLLARS IN THOUSANDS) or less twelve months five years five years Total - ------------------------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS Federal funds sold $ 10,483 $ -- $ -- $ -- $ 10,483 Investment securities 1,660 10,012 68,427 2,905 83,004 Loans(1) 205,780 39,162 49,130 20,748 314,820 Interest rate swap -- 25,000 50,000 -- 75,000 - ------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets $ 217,923 $ 74,174 $ 167,557 $ 23,653 $ 483,307 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ INTEREST-BEARING LIABILITIES Interest-bearing demand and savings deposits $ -- $ 24,862 $ 95,320 $ 17,039 $ 137,221 Time certificates of deposit 59,074 72,710 13,086 12 144,882 Other borrowing and interest- bearing liabilities 8,407 1,146 -- -- 9,553 Interest rate swap 75,000 -- -- -- 75,000 - ------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 142,481 $ 98,718 $ 108,406 $ 17,051 $ 366,656 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Interest rate sensitivity gap $ 75,442 $ (24,544) $ 59,151 $ 6,602 Cumulative interest rate sensitivity gap 75,442 50,898 110,049 116,651 Cumulative interest rate sensitivity gap as a as a percentage of total interest-earning assets 15.61% 10.53% 22.77% 24.14%
- ------------------------------------------------------- (1) Loans exclude nonaccrual loans of $1,687. At March 31, 1996, the Company's rate sensitive balance sheet was shown to be in a positive gap position over a one-year horizon. The gap between assets and liabilities that reprice within 12 months was $50.9 million or 10.53% of assets. The table above implies that the Company is moderately asset-sensitive and that its earnings would increase in the short-term if interest rates rise. Repricing of the Company's interest-bearing demand and savings deposits generally lags repricing on the Company's variable rate loan portfolio. These core deposits tend to be fairly stable over time and exhibit a low sensitivity to changes in interest rates. In preparing the gap table, management distributes core deposit balances across the maturity ranges in accordance with regulatory guidelines in order to incorporate these characteristics of its core deposits. In addition to utilizing the repricing gap table above in managing its interest rate risk, the Company performs a quarterly income simulation analysis. This simulation analysis provides a dynamic evaluation of the Company's balance sheet and income statement under varying scenarios, providing an estimate of both the dollar amount and percentage change in net interest income under various changes in interest rates. Based on this income simulation analysis, the Company has tended to be moderately asset-sensitive. Thus, a rising rate environment would tend to lead to an increase in net interest income. LIQUIDITY Liquidity management involves the Company's ability to meet the cash flow requirements of its customers who may be depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Company's liquid assets consist of cash and cash equivalents, and investment securities, excluding those pledged as collateral. It is the Company's policy to maintain a liquidity ratio (liquid assets to liabilities) of between 20% and 40%, and to limit loans to no more than 85% of deposits. At March 31, 1996, the Company's ratios were within these guidelines: the liquidity ratio was 25.3% and the loan to deposit ratio was 79.4%. The Company maintains short-term sources of funds to meet periodic planned and unplanned increases in loan demand and deposit withdrawals and maturities. The initial source of liquidity is the excess funds sold daily to other banks in the form of Federal funds. Besides cash and cash equivalents, the Company maintains a portion of its investment securities portfolio as available-for-sale. Available-for-sale securities can be sold in response to liquidity needs or used as collateral under reverse repurchase agreements. 18 Part I. Item 2 (continued) The Company's liquid assets were $100.2 million at March 31, 1996, up from $101.3 million at December 31, 1995. Secondary sources of liquidity include reverse repurchase arrangements to borrow cash for short to intermediate periods of time using the Company's available-for-sale securities as collateral and Federal funds lines of credit that allow the Company to temporarily borrow an aggregate of up to $25.0 million from three commercial banks. At March 31, 1996, the Company had approximately $64.6 million in unpledged securities that could be used for reverse repurchase agreements. During the three months ended March 31, 1996, the largest amount of funds so borrowed was $20.5 million. Federal funds arrangements with correspondent banks are subject to the terms of the individual arrangements and may be terminated at the discretion of the correspondent bank. Federal funds purchases of up to $10.0 million were borrowed during the quarter ended March 31, 1996. CAPITAL RESOURCES The Company and its bank subsidiary are subject to risk-based capital regulations adopted by the federal banking regulators in January 1990. These guidelines are used to evaluate capital adequacy, and are based on an institution's asset risk profile and off-balance sheet exposures, such as unused loan commitments and standby letters of credit. The regulations require that a portion of total capital be core, or Tier 1, capital consisting of common stockholders' equity and perpetual preferred stock, less goodwill and certain other deductions, with the remaining, or Tier 2, capital consisting of other elements, primarily subordinated debt, mandatory convertible debts, and grandfathered senior debt, plus the allowance for possible loan losses, subject to certain limitations. As of December 1992, the risk-based capital rules were further supplemented by a leverage ratio, defined as Tier 1 capital divided by quarterly average assets after certain adjustments. The minimum leverage ratio is 3 percent for banking organizations that do not anticipate significant growth and have well-diversified risk (including no undue interest rate exposure), excellent asset quality, high liquidity, and good earnings. Other banking organizations not in this category are expected to have ratios of at least 4 to 5 percent, depending on their particular condition and growth plans. Higher capital ratios can be mandated by the regulators if warranted by the particular circumstances or risk profile of a banking organization. In the current regulatory environment, banking companies must stay well capitalized, as defined in the banking regulations, in order to receive favorable regulatory treatment on acquisitions and favorable risk-based deposit insurance assessments. Management seeks to maintain capital ratios in excess of the regulatory minimums. As of March 31, 1996, the capital ratios of the Company and the Bank exceeded the well capitalized thresholds prescribed in the rules. The following table sets forth the Company's and the Bank's leverage and risk-based capital ratios at March 31, 1996: 19 Part I. Item 2 (continued)
March 31, 1996 Company Bank - ------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Amount % Amount % - ------------------------------------------------------------------------------------------ Leverage ratio $43,009 9.44% $41,816 9.17% Regulatory minimum 18,222 4.00% 18,243 4.00% Excess 24,787 5.44% 23,573 5.17% Risk-based ratios Tier 1 capital $43,009(a) 10.92%(b) $41,816(a) 10.66%(b) Tier 1 minimum 15,760 4.00%(c) 15,695 4.00%(c) Excess 27,249 6.92% 26,121 6.66% Total capital $47,949(d) 12.17%(b) 46,791(d) 11.93%(b) Total capital minimum 31,521 8.00% 31,390 8.00% Excess 16,428 4.17% 15,401 3.93% - ------------------------------------------------------------------------------------------
(a) Includes common shareholders' eqity (excluding unrealized losses on available-for-sale securities) less goodwill. The Tier 1 capital ratio is adjusted for the disallowed portion of deferred tax assets, if applicable. (b) Risk-weighted assets of $394.0 million and $392.4 million were used to compute these percentages. (c) Insured institutions, such as the Bank, must maintain a Tier 1 capital ratio of at least 4% or 5%, a Tier 1 capital ratio of at least 4% or 6%, and a Tier 1 capital ratio of at least 8% or 10% in order to be categorized adequately capitalized or well-capitalized, respectively. (d) Tier 1 capital plus the allowance for loan losses, limited to 1.25% of total risk-weighted assets. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings Not Applicable Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Index - -------------------------------------------------------------------------------- Exhibit Description No. - -------------------------------------------------------------------------------- 2.1 Real Estate Purchase Agreement dated February 28, 1994, between Southern California Bank and Downey Community Hospital Foundation (a) 2.2 Asset Purchase and Liability Assumption Agreement between Southern California Bank and Independence One Bank of California, F.S.B., dated January 18, 1995(g) 2.3 Deposit Purchase Agreement between Southern California Bank and Home Bank dated October 10, 1995(j) 2.4 Deposit Purchase Agreement between Southern California Bank and Preferred Bank dated November 14, 1995(j) 3(i).1 SC Bancorp Articles of Incorporation as previously amended(h) 3(i).2 Amendment to SC Bancorp Articles of Incorporation dated May 9, 1995(j) 3(ii).1 Bylaws, as amended through March 25, 1996.(j) 4.1 Specimen Common Stock Certificate(j) 4.2 SC Bancorp 1989 Stock Option Plan (February 1990)*(f) 4.3.1 Amended and restated Southern California Bank Employee Retirement Plan dated January 1, 1992*(d) 4.3.2 First amendment to the amended and restated Southern California Bank Employee Retirement Plan*(j) 4.3.3 Second amendment to the amended and restated Southern California Bank Employee Retirement Plan*(j) 4.3.4 Third amendment to the amended and restated Southern California Bank Employee Retirement Plan*(j) 4.3.5 Fourth amendment to the amended and restated Southern California Bank Employee Retirement Plan*(j) 4.4 SC Bancorp Executive Deferral Plan (IV) (February 1990)*(f) 4.5 Southern California Bank Executive Incentive Compensation Plans for 1994 (December 1993)*(b) 4.6 Southern California Bank Executive Incentive Compensation Plans for 1995*(j) 10.1 Sublicense Agreement between Southern California Bank and National Commerce Bank Services, Inc., dated October 22, 1992 for supermarket space in La Habra, California(c) 10.2 Sublease between SC Bancorp and Denny's, dated December 24, 1992 for office space in La Mirada, California(c) 10.3 Lease between Southern California Bank and Robert Stein, dated September 1, 1981, amended June 19, 1990, for office space in Avalon, California(d) 10.4 Lease between Southern California Bank and Commonwealth Equity Trust, dated December 17, 1990 for office space in Signal Hill, California(d) 10.5 Lease between SC Bancorp and Forest Lawn Company and Western Empire Savings and Loan Association, dated August 18, 1983, amended January 3, 1991, for office space in Yorba Linda, California(d) 10.6 Assignment of lease between Southern California Bank and Garfield Bank, dated December 27, 1985, amended January 1, 1987, for office space in Huntington Beach, California(b) 21 Part II. Item 6 (continued) 10.7 Lease between Southern California Bank and Tustin-La Palma Business Center, dated July 8, 1993 for office space in Anaheim, California(b) 10.8 Lease between Southern California Bank and Dicker-Warmington Properties, dated as of January 1, 1990 for office space in City of Industry, California(b) 10.9 License Agreement between Southern California Bank and The Vons Companies, Inc., dated December 18, 1992 for supermarket space in Anaheim Hills, California(b) 10.10 Consent to assignment of sublease and sublease between Southern California Bank, Bank of America, NTSA, and The Taj dated May 12, 1995 for office space in Laguna Hills, California(j) 10.11 Sublease between Southern California Bank and Citicorp Savings, dated November 30, 1995 for office space in La Jolla, California(j) 10.12 Lease between Southern California Bank and Regents Park Financial Centre, Ltd., dated October 25, 1995 for office space in La Jolla, California(j) 10.13 Forward lease between Southern California Bank and Regents Park Financial Centre, Ltd., dated October 25, 1995 for office space in La Jolla, California(j) 10.14 Employment Security Agreement between SC Bancorp and Larry D. Hartwig, dated January 1, 1995*(g) 10.15 Amendment to Employment Security Agreement between SC Bancorp and Larry D. Hartwig, dated July 18, 1995*(i) 10.16 Employment Security Agreement between SC Bancorp and David A. McCoy, dated February 25, 1992*(c) 10.17 Amendment to Employment Security Agreement between SC Bancorp and David A. McCoy dated November 21, 1995*(j) 10.18 Employment Security Agreement between SC Bancorp and Bruce W. Roat, dated March 17, 1995*(g) 10.19 Amendment to Employment Security Agreement between SC Bancorp and Bruce. W. Roat, dated November 21, 1995*(j) 10.20 Employment Security Agreement between SC Bancorp and Mark B. Metzinger, dated May 1, 1995*(j) 10.21 Amendment to Employment Security Agreement between SC Bancorp and Mark B. Metzinger dated November 21, 1995*(j) 10.22 Employment Security Agreement between Southern California Bank and Ann E. McPartlin, dated September 15, 1994*(g) 10.23 Amendment to Employment Security Agreement between SC Bancorp and Ann E. McPartlin, dated November 21, 1995*(j) 10.24 Employment Security Agreement between Southern California Bank and M. V. Cummings, dated September 15, 1994*(g) 10.25 Amendment to Employment Security Agreement between SC Bancorp and M. V. Cummings, dated November 21, 1995*(j) 10.26 Form of Indemnification Agreement entered into with each Executive Officer and Director of SC Bancorp(b) 10.27 Form of Indemnification Agreement entered into with each Executive Officer and Director of Southern California Bank(b) 27.1 Financial Data Schedule - -------------------------------------------------------------------------------- (a) This exhibit is contained in SC Bancorp's Registration Statement on Form S-2, Amendment No. 1, filed with the Commission on April 28, 1994, (Commission File No. 33-76274), and incorporated herein by reference. (b) This exhibit is contained in SC Bancorp's Registration Statement on Form S-2, filed with the Commission on March 9, 1994, (Commission File No. 33-76274), and incorporated herein by reference. (c) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1992, filed with the Commission on March 30, 1993, (Commission File No. 0-11046) and incorporated herein by reference. (d) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1991, filed with the Commission on March 30, 1992, (Commission File No. 0-11046) and incorporated herein by reference. (e) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1990, filed with the Commission on April 1, 1991, (Commission File No. 0-11046) and incorporated herein by reference. (f) This exhibit is contained in SC Bancorp's Proxy Statement, filed with the Commission on on March 23, 1990, (Commission File No. 0-11046) and incorporated herein by reference. (g) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1994, filed with the Commission on March 30, 1995, (Commission File No. 0-11046) and incorporated herein by reference. (h) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10-Q for the period ended March 31, 1995, filed with the Commission on May 15, 1995, (Commission File No. 0-11046) and incorporated herein by reference. (i) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10-Q for the period ended June 30, 1995, filed with the Commission on August 15, 1995, (Commission File No. 0-11046) and incorporated herein by reference. (j) 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. - -------------------------------------------------------------------------------- (b) Reports filed on Form 8-K None filed during the first quarter of 1996. 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: 10 May, 1996 SC BANCORP (Registrant) By: /S/ Bruce Roat ------------------------ Bruce Roat E.V.P./C.F.O. (Principal Financial and Accounting Officer) 23 EX-27 2 FINANCIAL DATA SCHEDULE
9 3-MOS DEC-31-1995 JAN-31-1996 MAR-31-1996 28,345,000 0 10,483,000 0 83,004,000 0 0 316,507,000 6,151,000 457,183,000 398,559,000 8,407,000 4,358,000 0 0 0 37,664,000 8,195,000 457,183,000 7,378,000 1,144,000 80,000 8,602,000 2,660,000 2,966,000 5,636,000 280,000 14,000 5,324,000 1,319,000 1,319,000 0 0 763,000 .10 .10 5.56 1,687,000 0 1,489,000 0 5,734,000 47,000 184,000 6,151,000 0 0 0
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