-----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, QDVD059nepQna2Xlty4q2jwjCksfJFMojfXh0RP3AHxHq16BRjjFv6niYIQONdGB XKF85dVa2PhffsLuYco5lg== 0000912057-96-017222.txt : 19960813 0000912057-96-017222.hdr.sgml : 19960813 ACCESSION NUMBER: 0000912057-96-017222 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960812 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: 96609035 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 FORM 10-Q 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 June 30, 1996 Commission File Number 0-11046 SC BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 95-3585586 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3800 E. LA PALMA AVE., ANAHEIM, CALIFORNIA 92807-1798 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (714) 238-3110 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES. [ X ] NO. [ ] There were 7,476,405 shares of common stock for the registrant issued and outstanding as of August 1, 1996. Part I-Financial Information Item 1. Financial Statements SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK Consolidated Balance Sheets (Dollars in thousands)
June 30, December 31, 1996 1995 (Unaudited) (Audited) - ------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 28,931 $ 29,088 Federal funds sold 9,584 - - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents 38,515 29,088 - ------------------------------------------------------------------------------------------------------ Securities available-for-sale, at fair value (Notes 1 and 2) 79,861 94,030 Loans (Notes 1 and 3) 322,953 316,841 Less: Deferred fee income (562) (531) Allowance for possible loan losses (5,327) (5,734) - ------------------------------------------------------------------------------------------------------ Loans, net 317,064 310,576 - ------------------------------------------------------------------------------------------------------ Premises and equipment, net 8,496 9,734 Other real estate owned, net 1,849 2,073 Accrued interest receivable 4,010 4,297 Other assets 12,038 11,885 - ------------------------------------------------------------------------------------------------------ TOTAL ASSETS $461,833 $461,683 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ LIABILITIES Deposits: Interest-bearing $280,226 $276,433 Noninterest-bearing 121,377 130,378 - ------------------------------------------------------------------------------------------------------ Total deposits 401,603 406,811 - ------------------------------------------------------------------------------------------------------ Borrowed funds and other interest-bearing liabilities 10,782 6,407 Accrued interest payable and other liabilities 3,027 2,953 - ------------------------------------------------------------------------------------------------------ Total liabilities 415,412 416,171 - ------------------------------------------------------------------------------------------------------ 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; 7,476,405 and 7,471,505 shares issued and outstanding at June 30, 1996 and December 31, 1995, respectively. 37,681 37,658 Retained earnings 10,283 8,600 Unrealized loss on available-for-sale securities, net of taxes (Note 1) (1,543) (746) - ------------------------------------------------------------------------------------------------------ Total shareholders' equity 46,421 45,512 - ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES and SHAREHOLDERS' EQUITY $461,833 $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 Six Months Ended June 30, June 30, - ------------------------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- INTEREST INCOME Interest and fees on loans $ 7,390 $ 6,613 $14,768 $11,700 Interest on investment securities 1,061 1,689 2,204 3,442 Interest on Federal funds sold 91 242 172 640 - ------------------------------------------------------------------------------------------------------------------- Total interest income 8,542 8,544 17,144 15,782 - ------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits: Interest-bearing demand 571 340 966 632 Savings 233 293 481 604 Time certificates of deposit 1,897 2,274 3,914 3,995 - ------------------------------------------------------------------------------------------------------------------- Total interest on deposits 2,701 2,907 5,361 5,231 - ------------------------------------------------------------------------------------------------------------------- Other interest expense 183 169 489 803 - ------------------------------------------------------------------------------------------------------------------- Total interest expense 2,884 3,076 5,850 6,034 - ------------------------------------------------------------------------------------------------------------------- Net interest income 5,658 5,468 11,294 9,748 (Recovery of) provision for possible loan losses (Note 3) (750) 200 (470) 324 - ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 6,408 5,268 11,764 9,424 - ------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Service charges on deposit accounts 377 410 764 843 Other fees and charges 655 659 1,265 1,289 Merchant bankcard income 126 123 243 237 Net gain on sales of investment securities - - 14 - Net loss on sales of fixed assets (23) - (24) - Life insurance income 26 - 53 407 Other income 85 145 218 197 - ------------------------------------------------------------------------------------------------------------------- Total noninterest income 1,246 1,337 2,533 2,973 - ------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Salaries and employee benefits 2,559 2,568 5,178 5,042 Net occupancy, furniture and equipment 1,078 1,200 2,188 2,342 Legal 488 289 640 356 Other real estate owned 426 231 482 245 Professional fees 192 174 361 247 Postage and delivery 155 148 315 283 Miscellaneous 133 89 242 211 Goodwill amortization 121 101 235 154 Merchant bankcard expense 106 113 203 222 Professional and community 99 41 149 155 Telecommunications 85 119 197 218 Stationery and supplies 84 89 163 160 Data processing 78 59 147 115 Other operating expense 469 776 897 1,509 - ------------------------------------------------------------------------------------------------------------------- Total noninterest expense 6,073 5,997 11,397 11,259 - ------------------------------------------------------------------------------------------------------------------- Income before provision for income taxes 1,581 608 2,900 1,138 Provision for income taxes 661 178 1,217 363 - ------------------------------------------------------------------------------------------------------------------- NET INCOME $ 920 $ 430 $ 1,683 $ 775 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 7,475 7,469 7,474 7,469 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Earnings per share $ 0.12 $ 0.06 $ 0.23 $ 0.10 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2 Part I. Item 1. (continued) SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK Consolidated Statements of Cash Flows (Dollars in thousands)
Six months ended June 30, (Unaudited) - --------------------------------------------------------------------------------------------------------- 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,683 $ 775 Adjustments to reconcile net income to net cash provided by operating activities: (Recovery of) provision for possible loan losses (470) 324 Provision for loss on other real estate owned 369 128 Loss (gain) on sale of other real estate owned 16 (46) Gain on sale of available-for-sale investment securities (14) - Net amortization of premiums on investment securities 467 827 Net amortization of deferred fees and unearned income on loans 31 (53) Depreciation and amortization 951 1,104 Loss on sale of fixed assets 24 - Net decrease (increase) in accrued interest receivable and other assets 697 (501) Net increase (decrease) in accrued interest payable and other liabilities 1,323 (979) - --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 5,077 1,579 - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of available-for-sale investment securities 8,549 - Proceeds from maturities of available-for-sale investment securities 4,005 5,000 Proceeds from maturities of held-to-maturity investment securities - 3,197 Purchase of investment securities (202) - Purchase of IOBC loans - (71,576) Net increase in loans (6,749) (8,138) Proceeds from sale of fixed assets and other assets 197 - Purchase of fixed assets (138) (940) Proceeds from sale of other real estate owned 567 1,333 - --------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 6,229 (71,124) - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 23 - Purchase of IOBC interest-bearing deposits - 14,965 Purchase of IOBC noninterest-bearing deposits - 19,762 Increase in interest-bearing deposits 3,662 55,771 Decrease in noninterest-bearing deposits (8,871) (3,399) Increase (decrease) in other borrowings 3,307 (7,789) - --------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (1,879) 79,310 - --------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 9,427 9,765 Cash and cash equivalents, beginning of period 29,088 31,118 - --------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 38,515 $ 40,883 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS Unrealized loss on investment securities, available-for-sale, net of tax $ 797 $ 2,517 Transfers of loans to other real estate owned 699 979 Assumptions of senior liens on other real estate owned 28 - Asset sales offset to restructuring reserve 91 - Close out of capital lease accounts 118 - - ---------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 Part I. Item 1. (continued) SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK Notes to Consolidated Financial Statements (Unaudited, except for information as of and for the year ended December 31, 1995) NOTE 1-SIGNIFICANT ACCOUNTING POLICIES SC Bancorp, a California bank holding company (the "Company"), and its subsidiary, Southern California Bank, a California state-chartered bank (the "Bank"), operates 14 branches in Southern California. The Company's primary source of revenue is providing loans to customers who are predominantly small and mid-sized businesses. The accounting and reporting policies of the Company conform to generally accepted accounting principles and general practices within the banking industry. See the notes to SC Bancorp's consolidated financial statements contained in the Company's annual report on Form 10-K. The interim period financial statements are unaudited. It is the opinion of Company management that all adjustments consisting of normal, recurring accruals necessary for a fair presentation of the results of operations have been reflected therein. Results for the period ending June 30, 1996 are not necessarily indicative of results that may be expected for any other interim periods or for the year as a whole. SECURITIES: At June 30, 1996, the Company's available-for-sale portfolio had a net unrealized loss of $2.6 million. The tax-effected reduction to shareholders' equity at June 30, 1996, was $1.5 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 June 30, 1996 was $5.9 million. The Company's allowance for possible loan losses at June 30, 1996 includes $1.3 million related to impaired loans. STOCK-BASED COMPENSATION The Company maintains a stock option plan for the benefit of its executives. In 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation," which encourages companies to account for stock-based compensation awards at their fair values at the date the awards are granted. This statement does not require the application of the fair value method and allows the continuance of the current accounting method, which requires accounting for stock-based compensation awards at their intrinsic values, if any, as of the grant date. The accounting and disclosure requirements of this statement are effective for financial statements at various dates beginning after December 15, 1995. The Company has elected not to adopt the fair value provisions of this statement. 4 Part I. Item 1. (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2-INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities as of June 30, 1996 and December 31, 1995 are as follows:
(DOLLARS IN THOUSANDS) June 30,1996 - ----------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ---------- --------- AVAILABLE-FOR-SALE U.S. Treasury securities and obligations of U.S. government agencies $ 33,221 $ - $ (582) $ 32,639 Mortgage-backed securities 47,870 - (2,054) 45,816 FHLB Stock 1,406 - - 1,406 - ----------------------------------------------------------------------------------------------------- Total $ 82,497 $ - $ (2,636) $ 79,861 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) December 31,1995 - ----------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- AVAILABLE-FOR-SALE: U.S. Treasury securities and obligations of US government agencies $ 42,036 $ - $ (363) $ 41,673 Mortgage-backed securities 52,062 - (910) 51,152 FHLB Stock 1,205 - - 1,205 - ----------------------------------------------------------------------------------------------------- Total $ 95,303 $ - $(1,273) $ 94,030 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
Investment securities with a carrying value of $21.1 million and $18.6 million were pledged to secure public deposits and as collateral for other borrowings at June 30, 1996 and December 31, 1995, respectively. The amortized cost and estimated fair value of debt securities at June 30, 1996 by contractual maturities are shown in the following table. Expected maturities will differ from contractual maturities, particularly with respect to mortgage- backed securities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(DOLLARS IN THOUSANDS) Maturing in - ------------------------------------------------------------------------------------------------------------------------ Over one Over five One year year through years through Over June 30, 1996 or less five years ten years ten years Total --------- ------------ ------------- --------- -------- Available-for-sale, amortized cost $ 5,046 $ 68,883 $ 8,491 $ 77 $ 82,497 Available-for-sale, estimated fair value $ 5,017 $ 66,684 $ 8,083 $ 77 $ 79,861
Proceeds from sales of investment securities during the first quarter of 1996 were $8.5 million. A gross gain of $14 thousand was realized on the sale. There were no sales of investment securities during the second quarter of 1996. 5 Part I. Item 1. (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3-LOANS Loans by category are summarized below:
June 30, December 31, (DOLLARS IN THOUSANDS) 1996 Percent 1995 Percent - ---------------------------------------------------------------------------------------------------- Commercial $149,740 46.37% $147,230 46.47% Real estate, construction 6,232 1.93% 4,416 1.39% Real estate, mortgage 106,189 32.88% 107,662 33.98% Consumer 60,792 18.82% 57,533 18.16% - ---------------------------------------------------------------------------------------------------- Gross loans 322,953 100.00% 316,841 100.00% ------- ------- ------- ------- Deferred fee income (562) (531) Allowance for possible loan losses (5,327) (5,734) - ------------------------------------------------------- -------- Loans, net $317,064 $310,576 - ------------------------------------------------------- -------- - ------------------------------------------------------- --------
No industry constitutes a concentration in the Company's loan portfolio. In April 1995, the Company purchased approximately $72 million of floating rate commercial, real estate and consumer loans from Independence One Bank of California, FSB ("IOBC"). The following table summarizes the balances and changes in the allowance for possible loan losses for the periods indicated:
June 30, December 31, June 30, December 31, (DOLLARS IN THOUSANDS) 1996 1995 1995 1994 - ----------------------------------------------- ------------------------- -------------------------- Average balance of gross loans outstanding $ 315,024 $ 261,631 $ 237,295 $ 203,760 - ----------------------------------------------- ------------------------- -------------------------- - ----------------------------------------------- ------------------------- -------------------------- Gross loan balance at end of period $ 322,953 $ 316,841 $ 286,569 $ 207,688 - ----------------------------------------------- ------------------------- -------------------------- - ----------------------------------------------- ------------------------- -------------------------- Allowance at beginning of period $ 5,734 $ 5,318 $ 5,318 $ 10,800 Charge-offs: Commercial 79 834 602 2,004 Real estate 138 1,227 326 3,453 Consumer 122 587 264 362 - ----------------------------------------------- ------------------------- -------------------------- Total charge-offs 339 2,648 1,192 5,819 Recoveries: Commercial 362 587 309 915 Real estate 5 129 62 214 Consumer 35 192 146 58 - ----------------------------------------------- ------------------------- -------------------------- Total recoveries 402 908 517 1,187 Net (recoveries) charge-offs (63) 1,740 675 4,632 Provision (recovery) charged (credited) to expense (470) 1,539 324 (850) Allowance on purchased loans - 617 617 0 - ----------------------------------------------- ------------------------- -------------------------- Allowance at end of period $ 5,327 $ 5,734 $ 5,584 $ 5,318 - ----------------------------------------------- ------------------------- -------------------------- - ----------------------------------------------- ------------------------- --------------------------
6 Part I. Item 1. (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3-LOANS (CONTINUED)
June 30, December 31, June 30, December 31, (DOLLARS IN THOUSANDS) 1996 1995 1995 1994 - ------------------------------------------------------------------------------------------------------ Ratio of allowance for loan losses to loans outstanding at end of period 1.65% 1.81% 1.95% 2.56% Ratio of allowance for loan losses to nonaccrual loans at end of period 778.80% 414.01% 279.20% 329.90% Ratio of annualized net charge-offs to average loans -0.04% 0.67% 0.28% 2.27%
Loans on nonaccrual status were $684 thousand and $2.0 million, respectively at June 30, 1996 and 1995. Interest income that would have been collected on these loans had they performed in accordance with their original terms was approximately $96 thousand and $125 thousand, for the six months ended June 30, 1996 and 1995, respectively. NOTE 4-COMMITMENTS AND CONTINGENCIES In the normal course of business, there are various outstanding commitments to extend credit which are not reflected in the accompanying consolidated financial statements. The Company does not anticipate losses as a result of these transactions. However, the commitments are a component of the estimate of the allowance for possible loan losses. Commercial and standby letters of credit totaled approximately $5.1 million and $4.3 million at June 30, 1996, and December 31, 1995, respectively. In addition, the Company had unfunded loan commitments of $92.9 million and $85.0 million at June 30, 1996 and December 31, 1995, respectively. The Company uses the same credit policies in making commitments and conditional obligations as it does in extending loan facilities to customers. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The Company has entered into two interest rate swap agreements to reduce the impact of changes in interest rates on its floating-rate loan portfolio. At June 30, 1996, the Company had outstanding one interest rate swap agreement with a commercial bank having a total notional principal amount of $50 million (Swap #1), and one interest rate swap agreement with a securities broker having a notional principal amount of $25 million (Swap #2). The agreements were intended to reduce the Company's exposure to declines in prime lending rates by artificially converting $75 million of the Company's prime-based loans to fixed rates for the duration of the agreements. Swap #1 was entered into in September 1993. The terms of the first agreement require the Company to pay interest quarterly based on three-month LIBOR and to receive interest semi-annually at a fixed rate of 4.865%. The agreement matures in September 1998. Swap #2 was entered into in January 1994. The terms of the second agreement require the Company to pay interest quarterly based on three-month LIBOR in arrears, and to receive interest semi-annually at a fixed rate of 5.04% through the January 1997 maturity date. The Company accrues monthly interest income and expense on the swaps, the net of which is included in income on loans. Net interest expense of $271 thousand and $524 thousand related to the swap agreements is included in interest income for the six months ended June 30, 1996 and 1995, respectively. The Company is required to pledge collateral on the swaps. U.S. Agency notes having a fair value of approximately $5.3 million were pledged as collateral for the agreements as of June 30, 1996. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company does not anticipate nonperformance by the counterparties. 7 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion presents information about the results of operations, financial condition, liquidity and capital resources of SC Bancorp and its subsidiary, Southern California Bank (together, the "Company"). This information should be read in conjunction with the audited 1995 consolidated financial statements of the Company and the notes thereto, and the accompanying quarterly unaudited consolidated financial statements and notes thereto. RESULTS OF OPERATIONS The Company reported net income of $920 thousand for the second quarter of 1996 compared to net income of $430 thousand for the second quarter of 1995. Net income for the second quarter of 1996 reflects the cost savings associated with the sale of two branches and the consolidation of a third branch earlier in the year. Net income for the first six months of 1996 was $1.7 million compared to $775 thousand for the same period in 1995. Year-to-date net income for the current year includes a full six months of operating expenses for the private and corporate banking business acquired from Independence One Bank of California, FSB ("IOBC") on April 30, 1995. Year-to-date net income for 1995 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 Six months ended June 30, June 30, - ----------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------- Return on average assets (1) 0.82% 0.37% 0.75% 0.35% Return on average shareholders' equity (1) 8.08% 3.92% 7.40% 3.62% Net income $ 920 $ 430 $ 1,683 $ 775 Earnings per share $ 0.12 $ 0.06 $ 0.23 $ 0.10 Total average assets $452,972 $466,762 $454,303 $446,330
- ------------------------- (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 tables provides information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon for the periods indicated. They also provide a summary of the changes in interest income and interest expense resulting from changes in average interest rates (rate) and changes in average balances (volume). Average balances are average daily balances. Nonaccrual loans are included in total average loans outstanding. 8 Part I. Item 2. (continued)
- ------------------------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED - ----------------------------------------------------------------------------------------------------- June 30, 1996 June 30, 1995 1996 and 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) $316,710 $ 7,390 9.38% $264,074 $ 6,613 10.07% $ (476) $ 1,252 $ 777 Investment securities 83,943 1,061 5.08% 130,797 1,689 5.19% (35) (593) (628) Federal funds sold and other 6,909 91 5.33% 15,982 242 6.08% (27) (123) (150) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest earning assets/interest income 407,562 8,542 8.43% 410,853 8,544 8.36% 69 (71) (2) - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest earning assets 45,410 55,909 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $452,972 $466,762 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $277,297 $ 2,701 3.92% $284,883 $ 2,907 4.10% $ (128) $ (78) $ (206) Other interest-bearing liabilities 11,352 183 6.48% 9,689 169 7.02% (14) 27 14 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities/interest expense 288,649 2,884 4.02% 294,572 3,076 4.20% (131) (61) (192) - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing liabilities 118,527 128,126 Shareholders' equity 45,796 44,064 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $452,972 $466,762 - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME/NET INTEREST MARGIN $ 5,658 5.52% $ 5,468 5.28% $ 457 $ (267) $ 190 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Annualized. The Company's net interest income was $5.7 million for the three months ended June 30, 1996, compared to $5.5 million for the three months ended June 30, 1995. The net interest margin increased to 5.52% for the second quarter of 1996, compared to 5.28% for the prior year.
- ------------------------------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED --------------------------------------------------------------- 1996 and 1995 June 30, 1996 June 30, 1995 Increase (decrease) Average Yield/ Average Yield/ due to change in Net (DOLLARS IN THOUSANDS) Balance Interest Rate(1) Balance Interest Rate(1) Rate Volume Change - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Interest-earning assets: Loans, net of deferred fees (2) $314,508 $ 14,768 9.44% $237,019 $ 11,700 9.93% $ (601) $ 3,669 $3,068 Investment securities 86,708 2,204 5.11% 129,912 3,442 5.33% (137) (1,101) (1,238) Federal funds sold and other 6,444 172 5.37% 21,662 640 5.94% (56) (412) (468) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest earning assets/interest income 407,660 17,144 8.46% 388,593 15,782 8.17% 572 790 1,362 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest earning assets 46,643 57,737 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $454,303 $446,330 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $275,578 $ 5,361 3.91% $270,589 $ 5,231 3.89% $ 28 $ 101 $ 130 Other interest-bearing liabilities 15,282 489 6.44% 11,486 803 14.06% (525) 211 (314) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities/interest expense 290,860 5,850 4.04% 282,075 6,034 4.30% (369) 185 (184) - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing liabilities 117,671 121,080 Shareholders' equity 45,772 43,175 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $454,303 $446,330 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME/NET INTEREST MARGIN $ 11,294 5.57% $ 9,748 5.06% $1,040 $506 $1,546 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Annualized. (2) Includes loans on nonaccrual status of approximately $684 thousand and $2.0 million at June 30, 1996 and 1995, respectively. The amount of interest income foregone on loans that were on nonaccrual status was approximately $96 thousand and $125 thousand for the six months ended June 30, 1996 and 1995, respectively. Interest income on loans includes amortization of net loan fees of approximately $445 thousand and $336 thousand for the quarters ended June 30, 1996 and 1995, respectively. Additionally, net interest expense of $271 thousand and $524 thousand relating to the interest rate swap agreements was included in interest income from loans for the six months ended June 30, 1996 and 1995, respectively. Net interest income was $11.3 million for the six months ended June 30, 1996, compared to $9.7 million for the comparable period for the prior year. The net interest margin increased to 5.57% for the first six months of 1996 from 5.06% for the comparable period of the prior year. The increase in the net interest margin is attibutable in part to a change in the earning asset mix that includes a 9 Part I. Item 2. (continued) higher proportion of loans to investment securities, and to a decrease in funding costs. On a year-to-date basis, average loans increased to 77% of total average earning assets for the current year from 61% of average earning assets a year ago. The increase was largely due to the $72 million of loans acquired from IOBC on April 30, 1995. The decrease in investment securities reflects the sale of $27 million of investment securities during the third quarter of 1995, and the sale of $8.5 million of U.S. agency securities during the first quarter of 1996. The decrease in funding costs compared to the prior year is due to the fact that higher rate certificates of deposit raised prior to the IOBC transaction have largely been replaced with lower cost deposits. Interest expense for 1995 also included a $408 thousand nonrecurring adjustment on the Company's deferred compensation plans. The average yield on earning assets for the six months ended June 30, 1996 increased to 8.46% from 8.17% for the comparable period of the prior year. This increase occurred despite an approximately 63 basis point decrease in the average prime rate for the first half of 1996 compared to the same period in 1995. The Company's funding costs decreased 26 basis points from the prior year due to the reasons discussed above. PROVISION FOR POSSIBLE LOAN LOSSES The Company recorded a $750 thousand reduction to the provision for possible loan losses for the second quarter of 1996. This reduction is based on a re- evaluation of the Company's allocation of loan loss reserves based on historical results and loan loss migration analysis. Loan charge-offs and recoveries for the quarter were $292 thousand and $218 thousand, respectively. Nonaccrual loans decreased to $684 thousand at June 30, 1996 from $1.4 million at December 31, 1995. The ratio of the allowance for possible loan losses to total loans decreased to 1.65% at June 30, 1996 from 1.81% at December 31, 1995. Refer to NOTE 3-LOANS of the Company's consolidated financial statements which are included in Part I, Item 1, of this Form 10-Q. The Company recorded a $470 thousand reduction to the provision for possible loan losses for the first six months of 1996 compared to a $324 thousand provision for the comparable period of 1995. Year-to-date loan charge-offs and recoveries for the current year were $339 thousand and $402 thousand, respectively, representing a year-to-date net recovery of $63 thousand. Year to date charge-offs and recoveries for the same period of the prior year were $1.2 million and $517 thousand, respectively, representing a year-to-date net charge- off of $675 thousand. NONINTEREST INCOME The following table sets forth the major components of noninterest income for the periods indicated:
Three Months Ended Six Months Ended (DOLLARS IN THOUSANDS) June 30, June 30, - ---------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 Service charges on deposit accounts $ 377 $ 410 $ 764 $ 843 Other fees and charges 655 659 1,265 1,289 Merchant bankcard income 126 123 243 237 Net gain on sales of investment securities - - 14 - Net loss on sales of fixed assets (23) - (24) - Life insurance income 26 - 53 407 Other income 85 145 218 197 - ---------------------------------------------------------------------------------------------------- Total noninterest income $ 1,246 $ 1,337 $ 2,533 $ 2,973 - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
Noninterest income was $1.2 million and $1.3 million for the three months ended June 30, 1996 and 1995, respectively. Year-to-date noninterest income was $2.5 million in 1996 compared to $3.0 million for the same period in 1995. The decrease in noninterest income for the first six months of 1996 from the first six months of the prior year is largely due to the $407 thousand life insurance benefit payment received in the first quarter of 1995. Service charge income decreased in the first six months of 1996 from the comparable period of the prior year due to competitive pricing on commercial accounts. Other income also includes check printing upcharge income, sundry operating recoveries and miscellaneous income. Year-to-date income in these categories was comparable for 1996 and 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 Six Months Ended (DOLLARS IN THOUSANDS) June 30, June 30, - ---------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 Salaries and employee benefits $ 2,559 $ 2,568 $ 5,178 $ 5,042 Net occupancy, furniture and equipment 1,078 1,200 2,188 2,342 Legal 488 289 640 356 Other real estate owned 426 231 482 245 Professional fees 192 174 361 247 Postage and delivery 155 148 315 283 Miscellaneous 133 89 242 211 Goodwill amortization 121 101 235 154 Merchant bankcard expense 106 113 203 222 Professional and community 99 41 149 155 Telecommunications 85 119 197 218 Stationery and supplies 84 89 163 160 Data processing 78 59 147 115 Other operating expense 469 776 897 1,509 - ---------------------------------------------------------------------------------------------------- Total noninterest expense $ 6,073 $ 5,997 $11,397 $11,259 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Annualized noninterest expense as a % of average earning assets 5.91% 5.85% 5.62% 5.84%
Noninterest expense for the second quarter and year-to-date 1996 increased slightly over the corresponding periods of 1995. The anticipated reduction in ongoing operating expenses associated with the 1995 Restructuring were achieved during the second quarter of 1996. Noninterest expense for the current year includes a full six months of expenses associated with the two corporate banking offices and two branches added following the IOBC transaction during the second quarter of 1995. The addition of the new locations primarily resulted in higher salaries and occupancy expenses. The Company had 208 and 242 full-time equivalent staff at June 30, 1996 and 1995, respectively. The reduction in staff is due to the branch sales and consolidations during the first quarter of 1996 and to the consolidation of certain functions in conjunction with the 1995 Restructuring. The increase in OREO expense for the first six months of 1996 over the corresponding period of the prior year is largely due to the valuation reserves taken to facilitate the disposition of one property. The increase in legal fees is primarily due to two matters pending resolution. The increase in professional fees can be attributed to the outsourcing of the Company's internal audit function as part of the 1995 Restructuring and to fees associated with evaluating potential acquisition opportunities. Goodwill amortization for the first six months of 1996 increased over the same period of the prior year due to the IOBC transaction. The decrease in other operating expense over the prior year includes a $400 thousand reduction in insurance expense due to the reduction in FDIC deposit insurance premiums. The Company has improved its ongoing operating efficiencies on a larger earning asset base. Year-to-date noninterest expense for the first six months of 1996 as a percentage of average earning assets has decreased to 5.62% from 5.84% for a year ago. FINANCIAL CONDITION Total assets at June 30, 1996 were $461.8 million, up slighty from $461.7 million at December 31, 1995. Total deposits at June 30, 1996 were $401.6 million, a decrease of 1.3% from $406.8 million at December 31, 1995. Gross loan balances at June 30, 1996 of $323 million increased $6.1 million from December 31, 1995. 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. 11 Part I. Item 2. (continued) The following table provides a summary comparison of assets and liabilities in the Company's consolidated balance sheets and the percentage change in these balances for the dates indicated:
June 30, December 31, Amount Percent (DOLLARS IN THOUSANDS) 1996 1995 Change Change - ----------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 38,515 $ 29,088 $ 9,427 32.41% Securities available-for-sale, at fair value 79,861 94,030 (14,169) (15.07%) Loans, net 317,064 310,576 6,488 2.09% Premises and equipment, net 8,496 9,734 (1,238) (12.72%) Other real estate owned, net 1,849 2,073 (224) (10.81%) Accrued interest receivable 4,010 4,297 (287) (6.68%) Other assets 12,038 11,885 153 1.29% - ----------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 461,833 $ 461,683 $ 150 0.03% - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing deposits $ 121,377 $ 130,378 $ (9,001) (6.90%) Interest-bearing demand & savings deposits 138,761 130,301 8,460 6.49% Time certificates of deposit 141,465 146,132 (4,667) (3.19%) - ----------------------------------------------------------------------------------------------------------- Total deposits 401,603 406,811 (5,208) (1.28%) - ----------------------------------------------------------------------------------------------------------- Borrowed funds and other interest-bearing liabilities 10,782 6,407 4,375 68.28% Accrued interest payable and other liabilities 3,027 2,953 74 2.51% Total shareholders' equity 46,421 45,512 909 2.00% - ----------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 461,833 $ 461,683 $ 150 0.03% - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand, deposits at correspondent banks and overnight investment of excess cash balances as Federal funds sold. The Company maintains balances at correspondent banks adequate to cover daily inclearings and other charges. The Company's reserve requirement with the Federal Reserve Bank was $9.4 million at June 30, 1996. Cash and cash equivalents increased $9.4 million to $38.5 million at June 30, 1996 from $29.1 million at December 31, 1995. The increase is due to a $9.6 million investment in overnight Federal funds sold. There were no Federal funds sold at December 31, 1995. INVESTMENT SECURITIES The Company's securities portfolio includes U.S. Treasury securities and U.S. government agency securities, most of which are mortgage-backed securities. The Company reclassified it entire held-to-maturity portfolio to the available-for- sale category in December, 1995 under the special one-time exemption authorized by the Financial Accounting Standards Board. 12 Part I. Item 2. (continued) The following table sets forth the maturity distribution of the Company's investment securities at their estimated fair values at June 30, 1996:
Maturing in - -------------------------------------------------------------------------------------------------------- Over one Over five One year year through years through Over (DOLLARS IN THOUSANDS) or less five years ten years ten years Total - -------------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 5,017 $ - $ - $ 77 $ 5,094 U.S. government agency securities - 27,546 1,406 - 28,952 Mortgage-backed securities - 39,138 6,677 - 45,815 - -------------------------------------------------------------------------------------------------------- Total $ 5,017 $ 66,684 $ 8,083 $ 77 $ 79,861 - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
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 June 30, 1996 and December 31, 1995. COMMERCIAL LOANS. Commercial loans totaled $149.7 million, or 46.4%, of total loans and $147.2 million, or 46.5%, of total loans at June 30, 1996 and December 31, 1995, respectively. Commercial loans at June 30, 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 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 65% 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 June 30, 1996, $34.6 million, or 10.7%, of total loans were secured by accounts receivable as compared to $29.5 million, or 9.3%, of loans at December 31, 1995. Commercial loans secured by real estate comprised $15.7 million, or 4.9%, of total loans at June 30, 1996, compared to $18.9 million, or 6.0%, of loans at December 31, 1995. In 1995, the Company began participating in government-insured lending programs, including SBA loans. At June 30, 1996, the Company had $20.9 million of SBA loans. REAL ESTATE CONSTRUCTION LOANS. Real estate construction loans increased to $6.2 million, or 1.9%, of total loans at June 30, 1996 compared to $4.4 million, or 1.4%, of total loans at December 31, 1995. REAL ESTATE MORTGAGE LOANS. Real estate mortgage loans comprise $106.2 million, or 32.9%, of the total loan portfolio at June 30, 1996 compared to $107.7 million, or 34.0%, of the total loans outstanding at December 31, 1995. Approximately $16.8 million of such real estate loans were purchased from IOBC. Company management continues to monitor the concentration of real estate loans in the loan portfolio. New real estate loans are made only to existing borrowers who are owner/users or to new borrowers who provide a new major banking relationship and demonstrate adequate cash flows. All new real estate borrowers must provide financial reporting that meets FDICIA standards and the loans must have conservative loan to value ratios. Approximately 80% of the Bank's real estate loans are secured by first trust deeds, and approximately 50% are to owner/users. CONSUMER LOANS. Approximately $61 million, or 18.8%, of the loan portfolio is consumer loans at June 30, 1996. This represents an increase from the $58 million, or 18.2%, of the loan portfolio it comprised at December 31, 1995. The consumer loan portfolio includes $29.0 million of home equity loans and home equity lines of credit representing 9% of total loans. Vehicle loans comprise approximately $16.5 million, or 5.1%, of total loans at June 30, 1996. The levels of consumer loans at period ends may fluctuate and may not necessarily be representative of average levels experienced during the respective periods due to the timing of advances 13 Part I. Item 2. (continued) 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 June 30, 1996 based on remaining scheduled principal repayments:
Maturing in - ------------------------------------------------------------------------------------- Over one One year year through Over (DOLLARS IN THOUSANDS) or less five years five years Total - ------------------------------------------------------------------------------------- Commercial $ 76,770 $ 44,062 $ 28,473 $ 149,305 Real estate, construction 5,011 - 1,220 6,231 Real estate, mortgage 26,192 57,578 22,242 106,012 - ------------------------------------------------------------------------------------- Total $ 107,973 $ 101,640 $ 51,935 $ 261,548 - ------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------
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 June 30, 1996:
Maturity or Repricing in - ------------------------------------------------------------------------------------- Over one One year year through Over (DOLLARS IN THOUSANDS) or less five years five years Total - ------------------------------------------------------------------------------------- Fixed interest rates $ 22,826 $ 34,858 $ 15,753 $ 73,437 Variable interest rates 184,953 27 3,131 188,111 - ------------------------------------------------------------------------------------- Total $ 207,779 $ 34,885 $ 18,884 $ 261,548 - ------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------
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. 14 Part I. Item 2. (continued) Nonaccrual loans by category are summarized below: June 30, December 31, (DOLLARS IN THOUSANDS) 1996 1995 - --------------------------------------------------------------- Commercial $ 446 $ 620 Real estate, construction - - Real estate, mortgage 167 615 Consumer 71 150 - --------------------------------------------------------------- Total nonaccrual loans $ 684 $ 1,385 - --------------------------------------------------------------- - --------------------------------------------------------------- Delinquent loans (past due 30 to 89 days and still accruing interest) by category are summarized below: June 30, December 31, (DOLLARS IN THOUSANDS) 1996 1995 - --------------------------------------------------------------- Commercial $ 538 $ 548 Real estate, construction - - Real estate, mortgage - 503 Consumer 505 411 - --------------------------------------------------------------- Total delinquent loans $ 1,043 $ 1,462 - --------------------------------------------------------------- - --------------------------------------------------------------- Percentage of total gross loans: Nonaccrual loans 0.21% 0.44% Delinquent loans, still accruing interest 0.32% 0.46% Nonaccrual and delinquent loans 0.53% 0.90% ALLOWANCE FOR POSSIBLE LOAN LOSSES A certain degree of risk is inherent in the extension of credit. Management has adopted a policy to maintain the allowance for possible loan and lease losses at a level considered by management to be adequate to absorb estimated known and inherent risks in the existing portfolio. Management performs a comprehensive analysis of the loan portfolio on a regular basis and its current allowance for loan losses to determine if loans are currently protected according to financial and collateral standards deemed acceptable. The allowance for possible loan losses represents management's recognition of the assumed risks of extending credit and the quality of the loan portfolio. The allowance is management's estimate, which is inherently uncertain and depends on the outcome of future events. The evaluation of the quality of the loan portfolio considers the borrower's management, financial condition, cash flow and repayment program, as well as the existence of collateral and guarantees. External business and economic factors beyond the borrower's control, combined with the Company's previous loan loss experience, are considered in management's evaluation of the allowance for possible loan losses. In addition, bank regulatory authorities, as an integral part of their examination process, periodically review the Company's allowance for possible loan losses and may recommend additions to the allowance based on their assessment of information available to them at the time of their examination. When it is determined that additions are required, additions to the allowance are made through charges to operations and are reflected in the statements of operations as a provision for loan losses. Loans which are deemed to be uncollectible are charged to the allowance. Subsequent recoveries, if any, are credited back to the allowance. Refer to NOTE 3-LOANS of the Company's consolidated financial statements which are included in Part I, Item 1, of this Form 10-Q for additional information concerning activity in the allowance for possible loan losses, including charge-offs and recoveries. The provision for possible loan losses is discussed above in Item 2. 15 Part I. Item 2. (continued) OTHER REAL ESTATE OWNED OREO primarily includes properties acquired through foreclosure or through full or partial satisfaction of loans. The difference between the fair value of the real estate collateral and the loan balance at the time of transfer to OREO is reflected in the allowance for possible loan losses as a charge-off. Any subsequent declines in the fair value of the OREO property after the date of transfer are recorded through a provision for writedowns on OREO. Routine holding costs, net of any income and net gains or losses on disposal, are reported in noninterest expense. Activity in OREO for the periods indicated is as follows: Six months Ended Year Ended June 30, December 31, (DOLLARS IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- Balance, beginning of period $ 2,073 $ 5,837 Additions 699 1,923 Sales (583) (5,689) Valuation and senior liens (340) 2 - -------------------------------------------------------------------------------- Balance, end of period $ 1,849 $ 2,073 - -------------------------------------------------------------------------------- At June 30, 1996, the OREO portfolio consisted of four properties. The Company is actively marketing these properties. DEPOSITS Total deposits at June 30, 1996 were $401.6 million, a $5.2 million decrease from $406.8 million at December 31, 1995. As discussed 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:
Six Months Ended Year Ended June 30, 1996 December 31, 1995 Average Average (DOLLARS IN THOUSANDS) Balance Rate (1) % of total Balance Rate % of total - ------------------------------------------------------------------------------------------------------------------------ Demand deposits $ 115,365 29.51% $ 123,815 30.47% NOW/MMDA 84,027 2.31% 21.49% 81,815 1.77% 20.13% Savings 46,184 2.09% 11.81% 55,204 2.08% 13.58% TCDs 145,367 5.41% 37.19% 145,555 5.77% 35.82% - ------------------------------------------------------------------------------------------------------------------------ Deposits $ 390,943 100.00% $ 406,389 100.00% - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------- (1) Annualized.
The decrease in average demand deposit balances to $115.4 million at June 30, 1996 from $123.8 million at December 31, 1995 can be attributed to the use of investment sweep accounts by selected business customers and to the sale of two branches during the first quarter of 1996. The reduction in the average rate paid on time certificates of deposit to 5.41% at June 30, 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. 16 Part I. Item 2. (continued) The following table sets forth the maturities of the Company's time certificate of deposit accounts at the dates indicated:
June 30, 1996 Maturing in - ------------------------------------------------------------------------------------------------------------------------ Over three Over six Three months months through months through Over (DOLLARS IN THOUSANDS) or less six months twelve months twelve months Total - ------------------------------------------------------------------------------------------------------------------------ Under $100,000 $ 35,368 $ 21,817 $ 24,619 $ 7,919 $ 89,723 $100,000 and over 31,194 7,470 9,071 4,007 51,742 - ------------------------------------------------------------------------------------------------------------------------ Total $ 66,562 $ 29,287 $ 33,690 $ 11,926 $ 141,465 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ December 31, 1995 Maturing in - ------------------------------------------------------------------------------------------------------------------------ Over three Over six Three months months through months through Over (DOLLARS IN THOUSANDS) or less six months twelve months twelve 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 $10.8 million at June 30, 1996 from $6.4 million at December 31, 1995. The $4.4 million net increase reflects a $5 million increase in reverse repurchase agreements, partially offset by a $431 thousand 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 rate- sensitive assets and liabilities, and maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment. Generally, if rate-sensitive assets exceed rate-sensitive liabilities, the net interest income will be positively impacted during a rising rate environment and negatively impacted during a declining rate environment. When rate-sensitive liabilities exceed rate-sensitive assets, the net interest income will generally be positively impacted during a declining rate environment and negatively impacted during a rising rate environment. However, because interest rates for different asset and liability products offered by depository institutions respond differently to changes in the interest rate environment, the gap between rate-sensitive assets and rate- sensitive liabilities can only be used as a general indicator of interest rate sensitivity. The following gap repricing table sets forth information concerning the Company's rate-sensitive assets and rate-sensitive liabilities, including the off-balance sheet amounts for interest rate swaps, as of June 30, 1996. Such assets and liabilities are classified by the earlier of maturity or repricing date in accordance with their contractual terms. Certain shortcomings are inherent in the method of analysis presented in the following gap table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees and at different times to changes in market interest rates. Also, loan prepayments and changes in the mix or level of deposits could cause the interest sensitivities to vary from those which appear in the table. 17 Part I. Item 2. (continued)
Over three Over one Three months months through year through Over (DOLLARS IN THOUSANDS) or less twelve months five years five years Total - ------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS Federal funds sold $ 9,584 $ - $ - $ - $ 9,584 Investment securities - 5,017 66,684 8,160 79,861 Gross Loans (1) 220,116 23,351 49,951 28,851 322,269 Interest rate swap - 25,000 50,000 - 75,000 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 229,700 $ 53,368 $ 166,635 $ 37,011 $ 486,714 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest-bearing demand and savings deposits $ - $ 24,977 $ 97,133 $ 16,651 $ 138,761 Time certificates of deposit 66,562 62,977 11,926 - 141,465 Other borrowings and interest- bearing liabilities 9,625 1,157 - - 10,782 Interest rate swap 75,000 - - - 75,000 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 151,187 $ 89,111 $ 109,059 $ 16,651 $ 366,008 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap $ 78,513 $ (35,743) $ 57,576 $ 20,360 Cumulative interest rate sensitivity gap 78,513 42,770 100,346 120,706 Cumulative interest rate sensitivity gap as a percentage of total interest-earning assets 16.13% 8.79% 20.62% 24.80% - ---------------------------------------------- (1) Excludes nonaccrual loans of $684,000.
At June 30, 1996, the Company's rate-sensitive balance sheet was shown to be in a positive gap position over a one-year horizon. The gap between assets and liabilities that reprice within 12 months was $42.8 million or 8.79% of assets. The table above implies that the Company is moderately asset-sensitive and that its earnings would increase in the short-term if interest rates rise. Repricing of the Company's interest-bearing demand and savings deposits generally lags repricing on the Company's variable rate loan portfolio. These core deposits tend to be fairly stable over time and exhibit a low sensitivity to changes in interest rates. In preparing the gap table, management distributes core deposit balances across the maturity ranges in accordance with regulatory guidelines in order to incorporate these characteristics of its core deposits. In addition to utilizing the repricing gap table above in managing its interest rate risk, the Company performs a quarterly income simulation analysis. This simulation analysis provides a dynamic evaluation of the Company's balance sheet and income statement under varying scenarios, providing an estimate of both the dollar amount and percentage change in net interest income under various changes in interest rates. Based on this income simulation analysis, the Company has tended to be moderately asset-sensitive. Thus, a rising rate environment would tend to lead to a moderate increase in net interest income. LIQUIDITY Liquidity management involves the Company's ability to meet the cash flow requirements of its customers who may be depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Company's liquid assets consist of cash and cash equivalents and investment securities, excluding those pledged as collateral. It is the Company's policy to maintain a liquidity ratio (liquid assets to liabilities) of between 20% and 40%, and to limit loans to no more than 85% of deposits. At June 30, 1996, the Company's ratios were within these guidelines: the liquidity ratio was 23.2% and the loan to deposit ratio was 80.6%. 18 Part I. Item 2. (continued) The Company maintains short-term sources of funds to meet periodic planned and unplanned increases in loan demand and deposit withdrawals and maturities. The initial source of liquidity is the excess funds sold daily to other banks in the form of Federal funds. Besides cash and cash equivalents, the Company maintains a portion of its investment securities portfolio as available-for-sale. Available-for-sale securities can be sold in response to liquidity needs or used as collateral under reverse repurchase agreements. The Company's liquid assets were $92.2 million at June 30, 1996, a decrease of $9.1 million from December 31, 1995. The decrease is largely due to the reduction in deposits following the sale of two branches in the first quarter of 1996. Secondary sources of liquidity include reverse repurchase arrangements to borrow cash for short to intermediate periods of time using the Company's available-for-sale securities as collateral and Federal funds lines of credit that allow the Company to temporarily borrow an aggregate of up to $30 million from three commercial banks. At June 30, 1996, the Company had approximately $57.3 million in unpledged securities that could be used to secure borrowings such as reverse repurchase agreements. During the three months ended June 30, 1996, the largest amount of funds so borrowed was $14.5 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 $8.8 million were borrowed during the quarter ended June 30, 1996. CAPITAL RESOURCES The Company and its bank subsidiary are subject to risk-based capital regulations adopted by the federal banking regulators in January 1990. These guidelines are used to evaluate capital adequacy, and are based on an institution's asset risk profile and off-balance sheet exposures, such as unused loan commitments and letters of credit. The regulations require that a portion of total capital be core, or Tier 1, capital consisting of common shareholders' equity and perpetual preferred stock, less goodwill and certain other deductions, with the remaining, or Tier 2, capital consisting of other elements, primarily subordinated debt, mandatory convertible debt, and grandfathered senior debt, plus the allowance for possible loan losses, subject to certain limitations. As of December 1992, the risk-based capital rules were further supplemented by a leverage ratio defined as Tier 1 capital divided by quarterly average assets after certain adjustments. The minimum leverage ratio is 3 percent for banking organizations that do not anticipate significant growth and have well-diversified risk (including no undue interest rate exposure), excellent asset quality, high liquidity and good earnings. Other banking organizations not meeting these standards are expected to have ratios of at least 4 to 5 percent, depending on their particular condition and growth plans. Higher capital ratios can be mandated by the regulators if warranted by the particular circumstances or risk profile of a banking organization. In the current regulatory environment, banking companies must stay well-capitalized, as defined in the banking regulations, in order to receive favorable regulatory treatment on acquisitions and favorable risk-based deposit insurance assessments. Management seeks to maintain capital ratios in excess of the regulatory minimums. As of June 30, 1996, the capital ratios of the Company and the Bank exceeded the well-capitalized thresholds prescribed in the rules. 19 Part I. Item 2. (continued) The following table sets forth the Company's and the Bank's leverage and risk-based capital ratios at June 30, 1996:
Company Bank - ---------------------------------------------------------------------------------------------- (Dollars in thousands) Amount % Amount % - ---------------------------------------------------------------------------------------------- Leverage ratio $ 44,067 9.73% $ 41,793 9.22% Regulatory minimum 18,119 4.00% (c) 18,136 4.00% (c) Excess 25,948 5.73% 23,657 5.22% Risk-based ratios Tier 1 capital $ 44,067 (a) 10.93% (b) $ 41,793 (a) 10.37% (b) Tier 1 minimum 16,121 4.00% (c) 16,121 4.00% (c) Excess 27,946 6.93% 25,672 6.37% Total capital $ 49,109 (d) 12.19% (b) $ 46,884 (d) 11.63% (b) Total capital minimum 32,241 8.00% 32,241 8.00% (c) Excess 16,868 4.19% 14,643 3.63% - -----------------------------------------------------------------------------------------------------
(a) Includes common shareholders' equity (excluding unrealized losses on available-for-sale securities) less goodwill. The Tier 1 capital ratio is adjusted for the disallowed portion of deferred tax assets, if applicable. (b) Risk-weighted assets of $403 million were used to compute these percentages. (c) Insured institutions, such as the Bank, must maintain a leverage capital ratio of at least 4% or 5%, a Tier 1 captial ratio of at least 4% or 6%, and a Total captial 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. - -------------------------------------------------------------------------------- 3(i).1 SC Bancorp Articles of Incorporation as previously amended (a) 3(i).2 Amendment to SC Bancorp Articles of Incorporation dated May 9, 1995 (b) 3(ii).1 Bylaws, as amended through March 25, 1996 (b) 4.1 Specimen Common Stock Certificate (b) 4.2 SC Bancorp 1989 Stock Option Plan (February 1990) (c) 4.3.1 Amended and restated Southern California Bank Employee Retirement Plan dated January 1, 1992(d) 4.3.2 First amendment to the amended and restated Southern California Bank Employee Retirement Plan(b) 4.3.3 Second amendment to the amended and restated Southern California Bank Employee Retirement Plan(b) 4.3.4 Third amendment to the amended and restated Southern California Bank Employee Retirement Plan(b) 4.3.5 Fourth amendment to the amended and restated Southern California Bank Employee Retirement Plan(b) 4.4 SC Bancorp Executive Deferral Plan (IV) (February 1990)(c) 4.5 Southern California Bank Executive Incentive Compensation Plans for 1994 (December 1993)(e) 4.6 Southern California Bank Executive Incentive Compensation Plans for 1995(b) 27.1 Financial Data Schedule - -------------------------------------------------------------------------------- (a) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10- Q for the period ended March 31, 1995, filed with the Commission on May 15, 1995, (Commission File No. 0-11046) and incorporated herein by reference. (b) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31, 1995 filed with the Commission on March 29, 1996, (Commission File No. 0-11046) and incorporated herein by reference. (c) This exhibit is contained in SC Bancorp's Proxy Statement, filed with the Commission on on March 23, 1990, (Commission File No. 0-11046) and incorporated herein by reference. (d) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1991, filed with the Commission on March 30, 1992, (Commission File No. 0-11046) and incorporated herein by reference. (e) This exhibit is contained in SC Bancorp's Registration Statement on Form S-2, filed with the Commission on March 9, 1994, (Commission File No. 33-76274), and incorporated herein by reference. - ----------------- (b) Reports filed on Form 8-K None filed during the second quarter of 1996. 21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: 8 August, 1996 SC BANCORP (Registrant) By: /s/ Bruce Roat ---------------------- Bruce Roat E.V.P./C.F.O. (Principal Financial and Accounting Officer) 22 EX-27 2 EXHIBIT 27
9 1,000 6-MOS DEC-31-1995 JAN-01-1996 JUN-30-1996 28,931 0 9,584 0 79,861 0 0 322,953 5,327 461,833 401,603 10,782 3,027 0 0 0 37,681 8,740 461,833 14,768 2,204 172 17,144 5,361 5,850 11,294 (470) 14 11,397 2,900 2,900 0 0 1,683 .23 .23 5.57 684 0 1,477 0 5,734 339 402 5,327 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----