-----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, VQUqIasRPcc7fNSmZqRHHPbpZ57gC2s0N/KsspVw6MGHdx6U76Jjsvte07f4GHnJ oJKh8bJzd2zRjO/tXWE1Vg== 0000912057-97-016250.txt : 19970512 0000912057-97-016250.hdr.sgml : 19970512 ACCESSION NUMBER: 0000912057-97-016250 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970509 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10699 FILM NUMBER: 97598543 BUSINESS ADDRESS: STREET 1: 3800 EAST LAPALMA AVENUE CITY: ANAHEIM STATE: CA ZIP: 92807 BUSINESS PHONE: 7142383110 MAIL ADDRESS: STREET 1: 3800 EAST LAPALM AVENUE CITY: ANAHEIM STATE: CA ZIP: 92807 10-K/A 1 FORM 10K/A SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K/A ANNUAL REPORT PURSUANT to SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996. Commission File Number 0-11046 SC BANCORP (Exact name of registrant as specified in its charter) California 95-3585586 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3800 E. La Palma Ave., Anaheim, California 92807-1798 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (714) 238-3110 Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, no par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES. [ X ] NO. [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. There were 7,488,615 shares of common stock for the registrant issued and outstanding as of March 14, 1997. The aggregate market value of the voting stock, based on the $10.75 closing price of the Company's common stock on the American Stock Exchange on March 14, 1997 as reported on Bloomberg, held by nonaffiliates of the registrant was approximately $73,926,793. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- The registrant's annual report to shareholders relating to the fiscal year ended December 31, 1996 is incorporated by reference into Part II. Item 7. of this form 10-K. The registrant's definitive proxy statement for the 1997 annual meeting of shareholders, which will be filed within 120 days after the fiscal year ended December 31, 1996, is incorporated by reference into Part III of this Form 10-K. SC BANCORP FORM 10-K INDEX PAGES PART I ITEM 1. Business 1 ITEM 2. Properties 25 ITEM 3. Legal Proceedings 26 ITEM 4. Submission of Matters to a Vote of Shareholders 26 PART II ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters 26 ITEM 6. Selected Financial Data 27 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 28 ITEM 8. Financial Statements and Supplementary Data 28 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28 PART III ITEM 10. Directors and Executive Officers of the Registrant 28 ITEM 11. Executive Compensation 28 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 28 ITEM 13. Certain Relationships and Related Transactions 28 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28 PART I. ITEM 1. BUSINESS Cautionary Statement Regarding Forward-Looking Statements Certain statements contained under "Business," such as statements concerning the potential for future losses relating to nonaccrual and delinquent loans and the adequacy of the allowance for loan losses, are forward looking statements (as such term is defined in the Securities Exchange Act of 1934, as amended). Because such forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward- looking statements. SC Bancorp is a bank holding company incorporated in California on February 9, 1981, and registered under the Bank Holding Company Act of 1956, as amended ("BHCA"). SC Bancorp conducts operations through its sole, wholly-owned, subsidiary, Southern California Bank, a California state-chartered commercial bank. The Company's executive offices are located at 3800 East La Palma Avenue, Anaheim, California 92807-1798. References herein to the "Company" are to SC Bancorp and Southern California Bank on a consolidated basis. References to "SC Bancorp" are to SC Bancorp on an unconsolidated basis; and references to the "Bank" are to Southern California Bank. SOUTHERN CALIFORNIA BANK Southern California Bank was formed in 1981 through the merger of the Bank of Downey and the National Bank of Whittier, both founded in 1964. The Bank provides general commercial banking services to individuals and to small- to medium-sized businesses in its local service areas through its branch network, which as of December 31, 1996, consisted of 14 branches, 3 of which include corporate banking centers. The Bank concentrates on marketing to and serving the needs of individuals and businesses in southeastern Los Angeles County, and in Orange and San Diego counties. The Bank's primary credit focus is to serve professionals and middle-market companies, including manufacturers and service providers with sales of up to $50 million. Current commercial lending activities consist primarily of medium-term commercial real estate loans secured by commercial properties, working capital loans, and accounts receivable financing. The Bank is also active in loan participation purchases and sales. Its primary focus in this area is to manage potential credit risk by borrower, industry and concentration. The Bank's consumer products are tailored to serve the financing needs of its retail customers and the executives and employees of its business clients. Consumer loans consist primarily of home equity lines of credit, personal lines of credit to high net worth individuals and vehicle loans. The Bank accepts deposits mostly from small to medium-sized businesses and their employees, high net worth individuals, and other consumers. The Bank's deposit accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent permitted by law. The Company became a member of the Federal Reserve System on July 1, 1996. The Company's primary regulator is now the Federal Reserve Board. The Company completed the sale of its Signal Hill and City of Industry branches to other financial institutions and the consolidation of its Yorba Linda branch into its Tustin/La Palma office during the first quarter of 1996. The agreements to sell these branches were signed in the fourth quarter of 1995. As part of the Company's strategic focus on growth, it acquired certain assets and assumed certain liabilities of Independence One Bank of California, F.S.B. ("IOBC"), during the second quarter of 1995. As part of the IOBC transaction, the Company acquired a full-service branch in southern Orange County and opened a full-service branch in northern San Diego County to support the expansion of its market area. During the third quarter of 1995, management implemented a restructuring plan (the "1995 Restructuring") to improve the efficiency and financial performance of the Bank. The Bank recorded approximately $1.7 million of losses and other charges in conjunction with the 1995 Restructuring. During the second and fourth quarters of 1993, the Company acquired certain cash assets and deposits of American Commerce National Bank from the FDIC and a branch centrally located in Downey, California from Community Bank. In conjunction with these acquisitions, management initiated a consolidation of the branch network. In the third quarter of 1993, the Company recorded nonrecurring expenses of approximately $944,000 for severance expenses, lease terminations and write-offs of other assets as part of a restructuring plan (the "1993 Restructuring"). 1 Part 1. Item 1. (continued) COMPETITION The banking and financial services business in California generally, and in the Bank's market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. The Bank competes for loans, deposits and customers for financial services with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the Bank. In order to compete with the other financial services providers, the Bank principally relies upon local promotional activities, personal relationships established by officers, directors and employees with its customers, and specialized services tailored to meet its customers' needs. In those instances where the Bank is unable to accommodate a customer's needs, the Bank may arrange for those services to be provided by its correspondents. The Bank has 14 offices located in Los Angeles, Orange and San Diego counties. EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by the Bank on its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its customers and securities held in the Bank's portfolio comprises the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the control of the Company. Accordingly, the earnings and growth of the SC Bancorp and the Bank are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment. The commercial banking business is not only affected by general economic conditions, but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. Management of the Company cannot accurately predict the nature and impact of any future changes in monetary policies. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial services providers are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies. Management of the Company cannot predict the likelihood of any major legislative changes and the impact such changes might have on SC Bancorp and the Bank. See "-Supervision and Regulation." SUPERVISION AND REGULATION Bank holding companies and banks are extensively regulated under both federal and state law. Set forth below is a summary description of certain laws which relate to the regulation of SC Bancorp and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. SC BANCORP SC Bancorp, as a registered bank holding company, is subject to regulation under the BHCA. SC Bancorp is required to file with the Federal Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may conduct examinations of SC Bancorp and its subsidiaries. The Federal Reserve Board may require that SC Bancorp terminate an activity or terminate control of or liquidate or divest certain of its subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve 2 Part 1. Item 1. (continued) Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, SC Bancorp must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities. Under the BHCA and regulations adopted by the Federal Reserve Board, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Further, SC Bancorp is required by the Federal Reserve Board to maintain certain levels of capital. See "-Capital Standards." SC Bancorp is required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of SC Bancorp and another bank holding company. SC Bancorp is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, SC Bancorp, subject to the prior approval of the Federal Reserve Board, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making any such determination, the Federal Reserve Board is required to consider whether the performance of such activities by SC Bancorp or an affiliate can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between activities commenced DE NOVO and activities commenced by acquisition, in whole or in part, of a going concern. In 1996, the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "Budget Act") eliminated the requirement that bank holding companies seek Federal Reserve Board approval before engaging DE NOVO in permissible nonbanking activities listed in Regulation Y, which governs bank holding companies, if the holding company and its lead depository institution are well-managed and well-capitalized and certain other criteria specified in the statute are met. For purposes of determining the capital levels at which a bank holding company shall be considered "well-capitalized" under this section of the Budget Act and Regulation Y, the Federal Reserve Board adopted as an interim rule, risk-based capital ratios (on a consolidated basis) that are, with the exception of the leverage ratio (which is lower), the same as the levels set for determining that a state member bank is well capitalized under the provisions established under the prompt corrective action provisions of federal law. See "-Prompt Corrective Action and Other Enforcement Mechanisms." Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. SC Bancorp is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, SC Bancorp and its subsidiaries are subject to examination by, and may be required to file reports with, the California State Banking Department. Finally, SC Bancorp is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, including but not limited to, filing annual, quarterly and other current reports with the Securities and Exchange Commission. THE BANK The Bank, as a California state chartered bank and member of the Federal Reserve System, is subject to primary supervision, periodic examination and regulation by the California Superintendent of Banks (the "Superintendent") and the Federal Reserve 3 Part 1. Item 1. (continued) Board. If, as a result of an examination of a bank, the Federal Reserve Board should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the bank's operations are unsatisfactory or that the bank or its management is violating or has violated any law or regulation, various remedies are available to the Federal Reserve Board. Such remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors and ultimately to terminate a bank's deposit insurance, which for a California state-chartered bank would result in a revocation of the bank's charter. The Superintendent has many of the same remedial powers. The deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank pays a semiannual statutory assessment. See:-Premiums for Deposit Insurance. Because the Bank's deposits are insured by the FDIC, the Bank is also subject to certain FDIC rules and regulations. Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices and capital requirements. Further, the Bank is required to maintain certain levels of capital. See "-Capital Standards." RESTRICTIONS ON TRANSFERS OF FUNDS TO THE COMPANY BY THE BANK SC Bancorp is a legal entity separate and distinct from the Bank. There are statutory and regulatory limitations on the amount of dividends which may be paid to SC Bancorp by the Bank. California law restricts the amount available for cash dividends by state chartered banks to the lesser of retained earnings or the bank's net income for its last three fiscal years (less any distributions made to shareholders by the Bank or by any majority- owned subsidiary of the Bank during such period). Notwithstanding this restriction, a bank may, with the prior approval of the Superintendent, make a distribution to its shareholders in an amount not exceeding the greatest of the retained earnings of the bank, net income for such bank's last fiscal year or the net income of the bank for its current year. As a Federal Reserve Board member bank, there are separate limitations imposed under applicable Federal Reserve Board regulations with respect to the Bank's ability to pay dividends to SC Bancorp. In particular, the prior approval of the Federal Reserve Board is required if the total of all dividends declared by a Federal Reserve Board member bank in any calendar year exceeds the bank's net income (as defined) for that year combined with its retained net income (as defined) for the preceding two years, less any transfer to surplus or to a fund for the retirement of preferred stock. Such authority may be delegated to the local Federal Reserve Bank under certain circumstances. The Federal Reserve Board and the Superintendent also have authority to prohibit the Bank from engaging in activities that, in the Federal Reserve Board's or the Superintendent's opinion, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the financial condition of the Bank in question and other factors, that the Federal Reserve Board or the Superintendent could assert that the payment of dividends or other payments might, under some circumstances, be considered such an unsafe or unsound practice. Further, the Federal Reserve Board has established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or SC Bancorp may pay. See "-Prompt Corrective Regulatory Action and Other Enforcement Mechanisms and Capital Standards" for a discussion of these additional restrictions on capital distributions. At present, substantially all of SC Bancorp's revenues, including funds available for the payment of dividends and other operating expenses, is, and will continue to be, primarily dividends paid by the Bank. At December 31, 1996, the Bank had $13.1 million in retained earnings available for the payment of cash dividends. The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of SC Bancorp or other affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of SC Bancorp or other affiliates. Such restrictions prevent SC Bancorp and such other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in SC Bancorp, or to or in any other affiliate is 4 Part 1. Item 1. (continued) limited to an amount not to exceed 10% of the value of the Bank's capital stock and surplus (as defined by federal regulations) and any such secured loans and investments are limited to an amount not to exceed in the aggregate, 20% of the value of the Bank's capital stock and surplus (as defined by federal regulations). California law also imposes certain restrictions with respect to transactions involving SC Bancorp and other controlling persons of the Bank. Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law. See "-Prompt Corrective Regulatory Action and Other Enforcement Mechanisms." CAPITAL STANDARDS The Federal Reserve Board has adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as commercial loans. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets. The regulators measure risk-adjusted assets, which includes off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of, among other things: (i) common stockholders' equity capital (includes common stock and related surplus, and undivided profits); (ii) noncumulative perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies), including any related surplus; and (iii) minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital consists of: (i) a limited amount of the allowance for possible loan and lease losses; (ii) cumulative perpetual preferred stock; (iii) perpetual preferred stock (and any related surplus); and (iv) term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements in Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. In June 1996, the federal banking agencies adopted a joint agency policy statement to provide guidance on managing interest rate risk. These agencies indicated that the adequacy and effectiveness of a bank's interest rate risk management process and the level of its interest rate exposures are critical factors in the agencies' evaluation of the bank's capital adequacy. A bank with material weaknesses in its risk management process or high levels of exposure relative to its capital will be directed by the agencies to take corrective action. Such actions will include recommendations or directions to raise additional capital, strengthen management expertise, improve management information and measurement systems, reduce levels of exposure, or some combination thereof depending upon the individual institution's circumstances. This policy statement augments the August 1995 regulations adopted by the federal banking agencies which addressed risk-based capital standards for interest rate risk. In December 1993, the federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses ("ALLL") which, among other things, establishes certain benchmark ratios of loan loss reserves to classified assets. The benchmark set forth by such policy statement is the sum of (a) assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of assets classified substandard; and (d) estimated credit losses on other assets over the upcoming 12 months. This amount is neither a "floor" nor a "safe harbor" level for an institution's ALLL. Federally supervised banks and savings associations are currently required to report deferred tax assets in accordance with SFAS No. 109. The federal banking agencies issued final rules, which became effective April 1, 1995, governing banks and bank holding companies, which limit the amount of deferred tax assets that are allowable in computing an institution's regulatory capital. 5 Part 1. Item 1. (continued) Deferred tax assets that can be realized for taxes paid in prior carryback years and from future reversals of existing taxable temporary differences are generally not limited. Deferred tax assets that can only be realized through future taxable earnings are limited for regulatory capital purposes to the lesser of (i) the amount that can be realized within one year of the quarter-end report date, based on projected taxable income for that year or (ii) 10% of Tier 1 Capital. The amount of any deferred tax in excess of this limit would be excluded from Tier 1 Capital, total assets and regulatory capital calculations. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends. The following table presents the amounts of regulatory capital and the capital ratios for the Bank, compared to its minimum regulatory capital requirements as of December 31, 1996: December 31, 1996 ---------------- Actual Minimum Capital Amount Ratio Requirement ------ ----- ----------- (In thousands) Leverage ratio $44,970 9.51% 4.0% Tier 1 risk-based ratio $44,970 10.68% 4.0% Total risk-based ratio $49,917 11.86% 8.0% PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. In accordance with federal law, each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An insured depository institution will be classified in the following categories based, in part, on the capital measures indicated below:
"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED" ------------------ ------------------------ Total risk-based capital of 10%; Total risk-based capital of 8%; Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and Leverage ratio of 5%. Leverage ratio of 4%. "UNDERCAPITALIZED" "SIGNIFICANTLY UNDERCAPITALIZED" ------------------ -------------------------------- Total risk-based capital less than 8%; Total risk-based capital less than 6%; Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or Leverage ratio less than 4%. Leverage ratio less than 3%. "CRITICALLY UNDERCAPITALIZED" ----------------------------- Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency, subject to asset growth restrictions and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any 6 Part 1. Item 1. (continued) undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate federal banking agency 45 days after receiving notice, or is deemed to have notice, that the institution is undercapitalized. The appropriate federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan: (i) specifies: (a) the steps the institution will take to become adequately capitalized; (b) the levels of capital to be attained during each year in which the plan will be in effect; (c) how the institution will comply with the restrictions or requirements then in effect under Section 38 of the Federal Deposit Insurance Act; and (d) the types and levels of activities in which the institution will engage; (ii) is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital; and (iii) would not appreciably increase the risk (including credit risk, interest-rate risk, and other types of risk) to which the institution is exposed. In addition, each company controlling an undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been adequately capitalized on average during each of four consecutive calendar quarters and must otherwise provide appropriate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institution's total assets at the time the institution became undercapitalized or (b) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate federal banking agency may impose any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions if it determines that such action will further the purpose of the prompt corrective action provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors or senior executive officers; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by the holding companies of such institutions; (ix) required divestiture of subsidiaries by the institution; or (x) other restrictions or sanctions as determined by the appropriate federal banking agency. Although the appropriate federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to: (i) force a sale of shares or obligations of the bank, or require the bank to be acquired by or combine with another institution; (ii) impose restrictions on affiliate transactions and (iii) impose restrictions on rates paid on deposits, unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, except under limited circumstances, the appropriate federal banking agency, not later than 90 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. See "-Potential Enforcement Actions." SAFETY AND SOUNDNESS STANDARDS Effective July 1995, the federal banking agencies adopted final guidelines establishing standards for safety and soundness, as required by the Federal Deposit Insurance Corporation Improvement Act. These standards are designed to identify potential safety-and-soundness concerns and ensure that action is taken to address those concerns before they pose a risk to the deposit insurance funds. The standards relate to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and benefits. If a federal banking agency determines 7 Part 1. Item 1. (continued) that an institution fails to meet any of these standards, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. In the event the institution fails to submit an acceptable plan within the time allowed by the agency or fails in any material respect to implement an accepted plan, the agency must, by order, require the institution to correct the deficiency. Effective October 1, 1996, the federal banking agencies promulgated safety and soundness regulations and accompanying interagency compliance guidelines on asset quality and earnings standards. These new guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. The institution should: (i) conduct periodic asset quality reviews to identify problem assets; (ii) estimate the inherent losses in those assets and establish reserves that are sufficient to absorb estimated losses; (iii) compare problem asset totals to capital; (iv) take appropriate corrective action to resolve problem assets; (v) consider the size and potential risks of material asset concentrations; and (vi) provide periodic asset reports with adequate information for management and the board of directors to assess the level of asset risk. These new guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. PREMIUMS FOR DEPOSIT INSURANCE The FDIC has adopted final regulations implementing a risk-based premium system required by federal law. On November 14, 1995, the FDIC issued regulations that establish a new assessment rate schedule ranging from $0.0 per $100 of deposits to $0.27 per $100 of deposits applicable to members of the Bank Insurance Fund ("BIF"). To determine the risk-based assessment for each institution, the FDIC will categorize an institution as well capitalized, adequately capitalized or undercapitalized based on its capital ratios using the same standards used by the FDIC for its prompt corrective action regulations. A well-capitalized institution is generally one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio and a 5% Tier 1 leverage capital ratio. An adequately capitalized institution will generally have at least an 8% total risk-based capital ratio, a 4% Tier 1 risk-based capital ratio and a 4% Tier 1 leverage capital ratio. An undercapitalized institution will generally be one that does not meet either of the above definitions. The FDIC will also assign each institution to one of three subgroups based upon reviews by the institution's primary federal or state regulator, statistical analyses of financial statements and other information relevant to evaluating the risk posed by the institution. The three supervisory categories are: financially sound with only a few minor weaknesses (Group A), demonstrates weaknesses that could result in significant deterioration (Group B) and poses a substantial probability of loss (Group C). The BIF assessment rates are set forth below for institutions based on their risk- based assessment categorization. Assessment Rates Effective January 1, 1996* Group A Group B Group C ------- ------- ------- Well Capitalized 0 3 17 Adequately Capitalized 3 10 24 Undercapitalized 10 24 27 *Assessment figures are expressed in terms of cents per $100 of deposits. On September 30, 1996, Congress passed the Budget Act which capitalized the Savings Association Insurance Fund ("SAIF") through a special assessment on SAIF-insured deposits and required banks to share in part of the interest payments on the Financing Corporation ("FICO") bonds which were issued to help fund the federal government costs associated with the savings and loan crisis of the late 1980's. The special thrift SAIF assessment was set at $0.657 per $100 insured by the thrift funds as of March 31, 1995. Effective January 1, 1997, for the FICO payments, SAIF-insured deposits will be assessed at the rate of $0.0648 per $100 of domestic deposits, and BIF-insured deposits will be assessed at the rate of $0.013 per $100 of domestic deposits. Full pro rata sharing of the FICO interest payments takes effect on January 1, 2000. The federal banking regulators are also authorized to prohibit depository institutions and their holding companies from facilitating or encouraging the shifting of deposits from SAIF to BIF for the purpose of evading thrift assessment rates. The Budget Act also prohibits the FDIC from setting premiums under the risk-based schedule above the amount needed to meet the designated reserve ratio (currently 1.25%). 8 Part 1. Item 1. (continued) INTERSTATE BANKING AND BRANCHING On September 29, 1994, the President signed into law the Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"). Under the Interstate Act, beginning one year after the date of enactment, a bank holding company that is adequately capitalized and managed may obtain approval under the BHCA to acquire an existing bank located in another state without regard to state law. A bank holding company is not permitted to make such an acquisition if, upon consummation, it would control (a) more than 10% of the total amount of deposits of insured depository institutions in the United States or (b) 30% or more of the deposits in the state in which the bank is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks or bank holding companies. An out-of-state bank holding company may not acquire a state bank in existence for less than a minimum length of time that may be prescribed by state law except that a state may not impose more than a five year existence requirement. The Interstate Act also permits, beginning June 1, 1997, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state may permit such combinations earlier than June 1, 1997, and may adopt legislation to prohibit interstate mergers after that date in that state or in other states by that state's banks. The same concentration limits discussed in the preceding paragraph apply. The Interstate Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirements and conditions as for a merger transaction. The Interstate Act is likely to increase competition in the Company's market areas especially from larger financial institutions and their holding companies. It is difficult to assess the impact such likely increased competition will have on the Company's operations. Under the Interstate Act, the extent of a commercial bank's ability to branch into a new state will depend on the law of the state. In October 1995, California adopted an early "opt in" statute under the Interstate Act that permits out-of-state banks to acquire California banks that satisfy a five-year minimum age requirement (subject to exceptions for supervisory transactions) by means of merger or purchases of assets, although entry through acquisition of individual branches of California institutions and de novo branching into California are not permitted. The Interstate Act and the California branching statute will likely increase competition from out-of-state banks in the markets in which the Company operates, although it is difficult to assess the impact that such increased competition may have on the Company's operations. COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. In May 1995, the federal banking agencies issued final regulations which change the manner in which they measure a bank's compliance with its CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending service and investment performance, rather than the extent to which the institution conducts needs assessments, documents community outreach, activities or complies with other procedural requirements. In March 1994, the federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment and evidence of disparate impact. In connection with its assessment of CRA performance, the Federal Reserve Board assigns a rating of "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance." Based on an examination conducted during the third quarter of 1996, the Bank was rated satisfactory. 9 Part 1. Item 1. (continued) POTENTIAL ENFORCEMENT ACTIONS Commercial banking organizations, such as the Bank, and their institution- affiliated parties, which include SC Bancorp, may be subject to potential enforcement actions by the Federal Reserve Board, the FDIC and the Superintendent for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease- and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of the Bank), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution affiliated parties and the imposition of restrictions and sanctions under the prompt corrective action provisions of the FDIC Improvement Act. Additionally, a holding company's inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against the holding company. Neither SC Bancorp nor the Bank currently are subject to any such enforcement actions. ACCOUNTING CHANGES In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. This statement also requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair value at the date of the transfer. Furthermore, this statement requires that debtors reclassify financial assets pledged as collateral, and that secured parties recognize those assets and their obligation to return them in certain circumstances in which the secured party has taken control of those assets. In addition, the statement requires that a liability be derecognized if and only if either (a) the debtor pays the creditor and is relieved of its obligation for the liability or (b) the debtor is legally released from being the primary obligor under the liability either judicially or by the creditor. Accordingly, a liability is not considered extinguished by an in-substance defeasance. SFAS 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and is to be applied prospectively. Management does not believe that the application of this statement will have a material impact on the Company's financial statements. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based Compensation." This statement establishes a fair value based method of accounting for stock-based compensation plans and encourages, but does not require, companies to adopt that method of accounting for all of their employee stock compensation plans. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The statement does require that Companies electing not to adopt the fair value accounting method disclose the pro forma effect on net income and earnings per share if the fair value method had been applied. These pro forma disclosures are contained in NOTE 10-SHAREHOLDERS' EQUITY of the Company's consolidated financial statements, which are located in Part 11. Item 8. of this form 10-K. The accounting and disclosure requirements of this Statement are effective for the Bank's fiscal year ending December 31, 1996. In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing Rights." SFAS 122 amendes certain provisions of SFAS No. 65 "Accounting for Certain Mortgage Banking Activities" to require that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. A mortgage banking enterprise that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair value, if it is practicable to estimate those fair values. If it is not practicable to estimate those fair values, the entire cost of the acquisition should be allocated to the mortgage loans only. SFAS 122 is effective for the fiscal year covered by this annual report. Adoption of this pronouncement did not have a material impact on the Company's financial statements. 10 Part 1. Item 1. (continued) In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. An impairment loss shall be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. After an impairment is recognized, the reduced carrying amount of the asset shall be accounted for as its new cost. SFAS No. 121 is effective for the fiscal year covered by this annual report. Adoption of this statement did not have a material impact on the Company's financial statements. In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 prescribes the recognition criterion for loan impairment and the measurement methods for certain impaired loans and loans whose terms are modified in troubled debt restructurings. SFAS No. 114 states that a loan is impaired when it is probable that a creditor will be unable to collect all principal and interest amounts due according to the contracted terms of the loan agreement. A creditor is required to measure impairment by discounting expected future cash flows at the loan's effective interest rate, or by reference to an observable market price, or by determining that foreclosure is probable. SFAS No. 114 also clarifies the existing accounting for in- substance foreclosures by stating that a collateral-dependent real estate loan would be reported as real estate owned only if the lender had taken possession of collateral. SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing methods for recognizing interest income on an impaired loan. To accomplish that, it eliminated the provisions in SFAS No. 114 that described how a creditor should report income on an impaired loan. SFAS No. 118 did not change the provisions in SFAS No. 114 that require a creditor to measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to require information about the recorded investments in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. The Company adopted SFAS No. 114 and No. 118 for the year ended December 31, 1995. Adoption of this statement has not had a material impact on the Company's financial statements. RESULTS OF OPERATIONS The following table summarizes key performance indicators pertaining to the Company's operating results. Certain figures for 1995 have been adjusted for the 1995 Restructuring as indicated. Average balances are computed using daily balances. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" from the Company's 1996 annual report to shareholders incorporated by reference into Part II. Item 7. of this Form 10-K for additional discussion of the Company's operating results. (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Return on average assets 0.96% 0.19% 0.67% as adjusted for restructuring items (1) - 0.41% - Return on average shareholders' equity 9.40% 2.14% 6.59% as adjusted for restructuring items (1) - 4.62% - Average shareholders' equity to average total assets 10.23% 8.87% 10.15% Net income $ 4,455 $ 869 $ 2,705 Earnings per share $ 0.60 $ 0.12 $ 0.49 Total average assets $ 463,084 $ 457,196 $ 404,504 - -------------------------------------------------------------------------------- (1) 1995 net income was adjusted to exclude 1995 Restructuring charges of $1,006 thousand after tax. NET INTEREST INCOME Net interest income is the difference between interest earned on assets and interest paid on liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. The following table sets forth a comparison of net 11 Part I. Item 1 (continued) interest income and net interest margin for the years indicated. (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------- Increase/ Increase/ 1996 (decrease) 1995 (decrease) 1994 - -------------------------------------------------------------------------------- Interest income $ 34,967 4.70% $ 33,396 26.40% $ 26,420 Interest expense 11,727 (2.40%) 12,015 91.35% 6,279 - -------------------------------------------------------------------------------- Net interest income $ 23,240 8.69% $ 21,381 6.16% $ 20,141 - -------------------------------------------------------------------------------- Net interest margin 5.58% 5.30% 5.75% - -------------------------------------------------------------------------------- Interest income and expense are affected by changes in the volume and mix of average interest-earning assets and interest-bearing deposits and other liabilities, as well as fluctuations in interest rates. The following tables set forth certain information concerning average interest-earning assets and average interest-bearing liabilities and the yields and rates thereon. The tables also set forth a summary of the changes in interest income and interest expense resulting from changes in average interest rates (rate) and changes in average asset and liability balances (volume) for the years indicated. The changes in interest income and interest expense attributable to the rate/volume variance are allocated to the rate and volume variances based upon the absolute value of each of those variances as a percentage of the sum of the absolute values of the individual rate and volume variances. Average balances are average daily balances. Nonaccrual loans are included in total average loans outstanding.
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- Average Income/ Yield/ Average Income/ Yield/ balance Expense Rate balance Expense Rate - -------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans, net of deferred fees (1) $ 321,843 $ 30,145 9.37% $ 261,631 $ 25,961 9.92% Investment securities 83,607 4,256 5.09% 122,498 6,298 5.14% Federal funds sold and other 10,670 566 5.30% 19,463 1,137 5.84% - -------------------------------------------------------------------------------------------------------------------------- Total interest earning assets/interest income 416,121 34,967 8.40% 403,593 33,396 8.27% - -------------------------------------------------------------------------------------------------------------------------- Other assets 15,106 15,291 - -------------------------------------------------------------------------------------------------------------------------- Noninterest earning assets 46,963 53,604 - -------------------------------------------------------------------------------------------------------------------------- Total assets $ 463,084 $ 457,196 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 282,952 $ 11,090 3.92% $ 282,574 $ 10,998 3.89% Other interest-bearing liabilities 9,756 637 6.53% 8,059 1,017 12.62% - -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities/interest expense 292,708 11,727 4.01% 290,633 12,015 4.13% - -------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing liabilities 122,998 125,988 Shareholders' equity 47,379 40,575 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities and equity $ 463,084 $ 457,196 - -------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME/NET INTEREST MARGIN $ 23,240 5.58% $ 21,381 5.30% - -------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------- 1994 - -------------------------------------------------------------------------------------------- Average Income/ Yield/ balance Expense Rate - -------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans, net of deferred fees (1) $ 203,507 $ 18,970 9.32% Investment securities 139,991 7,167 5.12% Federal funds sold and other 6,480 283 4.37% - -------------------------------------------------------------------------------------------- Total interest earning assets/interest income 349,978 26,420 7.55% - -------------------------------------------------------------------------------------------- Other assets 18,858 - -------------------------------------------------------------------------------------------- Noninterest earning assets 54,526 - -------------------------------------------------------------------------------------------- Total assets $ 404,504 - -------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 237,105 $ 5,956 2.51% Other interest-bearing liabilities 5,689 323 5.68% - -------------------------------------------------------------------------------------------- Total interest-bearing liabilities/interest expense 242,794 6,279 2.59% - -------------------------------------------------------------------------------------------- Noninterest-bearing liabilities 120,666 Shareholders' equity 41,043 - -------------------------------------------------------------------------------------------- Total liabilities and equity $ 404,504 - -------------------------------------------------------------------------------------------- NET INTEREST INCOME/NET INTEREST MARGIN $ 20,141 5.75% - --------------------------------------------------------------------------------------------
(1) Includes loans on nonaccrual status of approximately $2.8 million, $1.4 million and $1.6 million at December 31, 1996, 1995 and 1994, respectively. Interest income foregone on loans that were on nonaccrual status was $253,000, $207,000 and $93,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Interest income on loans includes amortization of net loan fees of approximately $1.0 million, $790,000 and $628,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Additionally, net interest (expense) income of ($563,000), ($929,000) and $141,000 relating to the interest rate swap agreements was included in interest income from loans for the years ended December 31, 1996, 1995 and 1994, respectively. 12 Part 1. Item 1. (continued)
1996 and 1995 1995 and 1994 Increase (decrease) Increase (decrease) due to change in Net due to change in Net (DOLLARS IN THOUSANDS) Rate Volume Change Rate Volume Change - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans, net of deferred fees (1) $ (1,521) $ 5,705 $ 4,184 $ 1,288 $ 5,703 $ 6,991 Investment securities (62) (1,980) (2,042) 30 (899) (869) Federal funds sold and other (97) (474) (571) 123 731 854 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets/interest income (1,680) 3,251 1,571 1,441 5,535 6,976 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits 77 15 92 3,738 1,304 5,042 Other interest-bearing liabilities (562) 183 (380) 517 177 694 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities/interest expense (485) 197 (288) 4,255 1,481 5,736 - ----------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME/NET INTEREST MARGIN $ (1,195) $ 3,054 1,859 $ (2,814) $ 4,054 1,240 - -----------------------------------------------------------------------------------------------------------------------------------
Net interest income increased $1.9 million to $23.2 million for the year ended December 31,1996, from $21.4 million for the year ended December 31, 1995. The increase for 1996 is primarily due to higher average loan balances, which increased by $60.2 million over 1995. The average balance of Fed funds sold decreased by $8.8 million and the average balance of investment securities decreased by $38.9 million compared to 1995. Proceeds from the sale and maturity of available-for-sale securities totaling $17.2 million during 1996 were used to fund loan growth. In addition, the Company sold approximately $27 million of available-for-sale securities during the third quarter of 1995 to fund loan growth. The average yield on total earning assets for 1996 increased by 13 basis points to 8.40% from 8.27% for 1995; however, the average yield on loans, including the effect of the interest rate swaps, decreased by 55 basis points to 9.37% from 9.92% for 1995. The decrease can be attributed to the decrease in the prime rate and other market rates, and to competitive pricing pressures on commercial and consumer loan products. The national prime rate remained at 8.25% through the end of the year following a decrease from 8.50% on January 31, 1996. The average prime rate for 1995 was 8.80%. Net interest income increased to $21.4 million for the year ended December 31, 1995, from $20.1 million for the year ended December 31, 1994. Average loan balances for 1995 increased by $58.1 million over the prior year largely due to the purchase of loans from IOBC and the purchase of approximately $20.0 million of SBA loans. The average yield on total earning assets for 1995 increased by 72 basis points to 8.27% from 7.55% for 1994. The average yield on loans, including the effect of the interest rate swaps, increased to 9.92% for 1995 from 9.32% for 1994. The increase in the average national prime rate to 8.80% for 1995 from 7.15% for 1994 contributed to the increase in loan yields. The Company's net interest margin increased to 5.58% for the year ended December 31, 1996 from 5.30% for the year ended December 31, 1995. The increase in the net interest margin for 1996 can be attributed to the increase in loans as a percentage of total earning assets and to a reduction in the Company's cost of funds. The Company's overall cost of funds for 1996 decreased by approximately 12 basis points from 1995 primarily due to the managed reduction in higher-rate certificate of deposit ("TCD") balances raised prior to the IOBC transaction. The average rate paid on TCD accounts decreased to 5.36% for 1996 from 5.77% for 1995. The reduction in the average rate paid on TCD accounts was partially offset by an increase of approximately 53 basis points in the average rate paid on other interest-bearing transaction and savings accounts. The increase in the rate paid on these accounts can be attributed to increased competition for deposits in the Company's market area. Other interest expense in 1995 included a $408,000 nonrecurring adjustment recorded on the Company's deferred compensation plans. The Company's net interest margin for the year ended December 31, 1995 decreased to 5.30% from 5.75% for the year ended December 31, 1994. The increase in the average yield on loans for 1995 (discussed above) was offset by higher funding costs related to the deposit promotion program that raised funds for the IOBC transaction. The average balance of TCDs increased to $145.6 million for 1995 from $79.7 million for 1994. The average rate paid on TCDs increased to 5.77% for 1995 from 3.80% for 1994. Other interest expense for 1995 included the previously-mentioned adjustment relating to the Company's deferred compensation plans. PROVISION FOR POSSIBLE LOAN LOSSES The Company recorded a $470,000 recovery of the provision for possible loan losses, a $1.5 million provision and a $850,000 13 Part I. Item 1 (continued) recovery of the provision for the years ended December 31, 1996, 1995 and 1994, respectively. The reduction in the loan loss provision for 1996 is based on management's assessment of the adequacy of the allowance for possible loan losses. This assessment includes consideration of factors specific to individual loans as well as economic conditions and historical loss experience. Net loan charge-offs for 1996 were 0.10% of total loans compared to 0.67% of total loans for 1995 and 2.28% of total loans for 1994. The $1.5 million provision recorded in 1995 included $900,000 booked in the third quarter. The Company performed an extensive review of its loan portfolio with regard to collateral adequacy during the third quarter. The provision for the quarter included $600,000 relating to two commercial real estate loans. The reduction to the provision recorded in 1994 was based on management's determination that an excess existed in the allowance for possible loan losses following the upgrade of several classified loans and a significant decrease in net loan charge-offs from 1993 levels. The allowance for possible loan losses was 1.42%, 1.81% and 2.56% of gross loans outstanding at December 31, 1996, 1995 and 1994, respectively. Additional information is provided in NOTE 4-LOANS of the Company's consolidated financial statements, which are included in Part II. Item 8. of this Form 10-K. NONINTEREST INCOME The following table sets forth the major components of noninterest income, net of restructuring activity, for the years indicated:
DOLLARS IN THOUSANDS YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------- 1995 1996 1995 Restructure 1995 Net 1994 - ------------------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $ 1,406 $ 1,727 $ - $ 1,727 $ 1,754 Other fees and charges 2,769 2,542 - 2,542 2,637 Merchant bankcard income 523 518 - 518 1,249 Net gain (loss) on sales of investment securities 14 (620) (620) - 17 Net gains on sales of loans - 145 - 145 215 Net gain (loss) on sales of fixed assets (28) (87) (109) 22 409 Life insurance income 124 510 - 510 58 Other income 358 278 - 278 344 - ------------------------------------------------------------------------------------------------------------------------------- Total noninterest income $ 5,166 $ 5,013 $ (729) $ 5,742 $ 6,683 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
Noninterest income decreased to $5.2 million for 1996, from $5.7 million, net of restructuring activity, for 1995, and $6.7 million for 1994. A decrease in service charge income in 1996 from the prior year was largely offset by increases in other deposit-related fees. The sale of two branches and the consolidation of a third branch in early 1996 contributed to the slight decline in total deposit income. Noninterest income for 1995 included a $407,000 benefit payment on a corporate-owned life insurance policy. The 1995 Restructuring loss of $729,000 included the previously-discussed $620,000 loss on the sale of investment securities, and a $109,000 loss on the sale of fixed assets from the two branches sold. Merchant bankcard income decreased to $518,000 for 1995 from $1.2 million in 1994. The Company's largest merchant customer left during the third quarter of 1994. The reduction in merchant bankcard activity led to a corresponding decrease in merchant bankcard expense. Noninterest income in 1994 also included gains on sales of loans and sale of the Company's headquarters facility of approximately $215,000 and $414,000, respectively. 14 Part 1. Item 1 (continued) NONINTEREST EXPENSE The following table provides a breakdown of the Company's noninterest expense by category, net of restructuring charges, for the years indicated:
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------- 1996 1995 Restructure 1995, Net 1994 ----------- ----------- ----------- ----------- ---------- Salaries and employee benefits $ 10,147 $ 10,405 $ 179 $ 10,226 $ 9,518 Net occupancy, furniture and equipment 4,056 5,127 256 4,871 4,678 Professional and legal fees 1,676 1,288 86 1,202 1,476 Other real estate owned 439 219 - 219 1,832 Postage and delivery 624 586 - 586 543 Goodwill amortization 505 821 427 394 211 Advertising and promotions 472 530 - 530 426 Merchant bankcard 424 475 - 475 1,013 Telecommunications 351 481 - 481 352 Software 340 395 395 214 Office supplies 305 391 - 391 402 Data processing 291 253 - 253 235 FDIC assessment and other insurance 273 857 - 857 1,442 Other operating expense 1,325 1,465 - 1,465 1,493 - --------------------------------------------------------------------------------------------------------------- Total noninterest expense $ 21,228 $ 23,293 $ 948 $ 22,343 $ 23,835 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Noninterest expense as a % of average total assets 4.58% 4.89% 5.89%
The Company reported noninterest expense of $21.2 million, $22.3 million, net of restructuring charges, and $23.8 million for the years ended December 31, 1996, 1995 and 1994, respectively. Salaries and benefits expense for 1996 decreased by approximately $258,000 from 1995. Total full-time equivalent staff ("FTE"), a staff count that includes a fractional equivalent for part-time staff, decreased to 211 at December 31, 1996 from 226 at December 31, 1995. The reduction in FTE is due to the 1995 Restructuring and selected additional staff reductions. Occupancy expense for 1996 decreased by $815,000 from the prior year, net of restructuring charges, following the 1995 Restructuring. FDIC insurance expense decreased to $53,000 in 1996 from $498,000 in 1995 and $1.0 million in 1994 due to reductions in the FDIC assessment rate. The decreases in 1996 noninterest expense from 1995 were partially offset by a $388,000 increase in professional and legal fees. The increase in professional fees includes approximately $105,000 associated with outsourcing the Company's internal audit function. The $948,000 of restructuring charges reflected in noninterest expense for 1995 included: (1) staff reductions resulting from the sale of two branches and the consolidation of a third branch - $179,000; (2) closure of an administrative facility and write off of lease obligations on branch sales - $256,000; (3) accruals for legal and professional fees relating to the branch sale transactions - $86,000; and (4) write-off of $427,000 of goodwill associated with one of the branches sold. It was originally anticipated that 20 positions would be eliminated in conjunction with the 1995 Restructuring. Eight of the staff displaced were placed in other positions with the Company. The amount of termination benefits charged against the $179,000 reserve established when the restructuring program was announced totaled $147,000. The remaining reserve of $32,000 was reversed. Noninterest expense for 1995, net of restructuring charges, decreased to $22.3 million from $23.8 million for 1994. An increase in salary and benefits expense due to the addition of staff to service the loans and deposits purchased from IOBC, was offset by decreases in OREO, merchant bankcard (refer to the discussion of merchant bankcard income above) and FDIC insurance expense. FTE increased to 226 at December 31, 1995 from 222 at December 31, 1994. The Company has improved its operating efficiencies and achieved lower noninterest expense, as adjusted for the expenses and losses of the restructuring plan and the branch consolidation, on a larger average earning assets base. Noninterest expense as a percentage of average total assets decreased to 4.58% for 1996 from 4.89% for 1995 and 5.89% for 1994. 15 Part I. Item 1. (continued) The following table sets forth the components of the Company's OREO expense for the years indicated: (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------- 1996 1995 1994 --------- --------- --------- OREO income $ (104) $ (95) $ - OREO holding expenses 200 316 655 writedowns and provisions for losses 428 128 1,182 net (gains) from sales (85) (130) (5) - -------------------------------------------------------------------------- OREO expense, net $ 439 $ 219 $ 1,832 - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- OREO expense increased to $439,000 for 1996 from $219,000 for 1995. The increase was due to additional valuation reserves taken on one OREO property that was sold during the fourth quarter of 1996. Five OREO properties were sold during the year, resulting in a net gain of $85,000. Two properties remained in OREO at December 31, 1996. OREO expense decreased to $219,000 for 1995 from $1.8 million for 1994. Most of the decrease is due to lower charges for writedowns of OREO properties. FINANCIAL CONDITION CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand, deposits at correspondent banks and overnight investment of excess cash balances as Federal funds sold. The Company maintains balances at correspondent banks adequate to cover daily inclearings and other charges. In accordance with Federal regulations, reserve balances of $1.5 million were maintained in the form of deposits with the Federal Reserve Bank at December 31,1996. INVESTMENT SECURITIES The Company's securities portfolio includes U.S. Treasury securities and U.S. federal agency securities, most of which are mortgage-backed securities. As a member of the Federal Reserve Bank and the Federal Home Loan Bank, the Company is required to hold stock in those institutions. The decrease in the balance of investment securities due to sales and maturities is discussed in "NET INTEREST INCOME" above. The Company currently classifies its entire securities portfolio as available- for-sale in order to maintain flexibility in managing the portfolio and in responding to changing business and market conditions. While the Company currently has no plans to liquidate securities in the portfolio, it has sold securities in previous years. The likelihood that securities would be sold in the future and the potential for losses to be realized remains uncertain. In the event that securities held as available-for-sale were sold at a loss, any loss would be reflected in the results of operations on an after-tax basis. However, there would be no expected impact on the Company's financial condition, given that the securities are carried at their estimated fair value, net of any unrealized loss. The unrealized loss on securities held as available-for-sale increased to $1.5 million at December 31, 1996 from $1.3 million at year-end 1995. The unrealized loss on mortgage-backed securities increased from $910,000 to $1.2 million over the same period, despite a reduction in the amortized cost of this portfolio from $52.1 million to $43.1 million, reflecting the general increase in relevant market interest rates, which had a modest negative impact on the market value of these securities. Additional information is provided in NOTE 1-SIGNIFICANT ACCOUNTING POLICIES and NOTE 3-INVESTMENT SECURITIES of the Company's consolidated financial statements which are located in Part II. Item 8. of this Form 10-K. 16 Part I. Item 1. (continued) The following table sets forth the maturity distribution of the Company's investment securities at December 31, 1996:
Maturing in - ----------------------------------------------------------------------------------------------------- Over one Over five One year year through years through Over (DOLLARS IN THOUSANDS) or less five years ten years ten years Total - ----------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 5,002 $ - $ - $ 79 $ 5,081 U.S. Agency securities 14,832 12,768 - - 27,600 Mortgage-backed securities 8,253 33,599 - - 41,852 - ----------------------------------------------------------------------------------------------------- Total $ 28,087 $ 46,367 $ - $ 79 $ 74,533 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
LOANS The Company provides a full range of credit products designed to meet the credit needs of borrowers in its market area. The Company engages in medium-term commercial real estate loans secured by commercial properties, commercial loans, term financing, SBA loans, loan participations, and consumer loans principally in the form of home equity lines of credit, vehicle loans, and personal lines of credit to high net worth individuals. The Company also offers construction loan products principally for entry level housing and owner-user commercial industrial properties. The following table sets forth the amount of loans by type for the years indicated:
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, 1996 % 1995 % 1994 % 1993 % 1992 % - ----------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Commercial $ 160,633 46.17% $ 147,230 46.47% $ 79,369 38.22% $ 73,220 34.47% $ 88,761 34.37% Real estate, construction 8,544 2.46% 4,416 1.39% 30 0.01% 1,991 0.94% 8,935 3.46% Real estate, mortgage 105,123 30.22% 107,662 33.98% 83,712 40.31% 99,190 46.70% 117,280 45.41% Consumer 73,564 21.15% 57,533 18.16% 44,577 21.46% 38,006 17.89% 43,271 16.76% - ----------------------------------------------------------------------------------------------------------------------------------- Gross loans 347,864 100.00% 316,841 100.00% 207,688 100.00% 212,407 100.00% 258,247 100.00% ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Deferred fee income (689) (531) (298) (274) (625) Allowance for possible loan losses (4,947) (5,734) (5,318) (10,800) (6,859) - -------------------------------------- --------- --------- --------- --------- Loans, net $ 342,228 $ 310,576 $ 202,072 $ 201,333 $ 250,763 - -------------------------------------- --------- --------- --------- --------- - -------------------------------------- --------- --------- --------- ---------
No industry constitutes a concentration in the Bank's loan portfolio. COMMERCIAL LOANS. The balance of commercial loans increased to $160.6 million, or 46.17%, of total loans at December 31, 1996 from $147.2 million, or 46.47%, of total loans at December 31, 1995. Growth in unsecured and asset-based commercial loan balances totaling $23.2 million for the year was partially offset by a $8.6 million decrease in commercial real estate loans. Most of the Company's commercial borrowers are small- to medium-sized businesses and professionals. Most of the commercial loans are short term, are reviewed or renewed annually and bear a floating rate of interest. Approximately 60% of the commercial loan portfolio is secured. Collateral for these loans consists of accounts receivable, inventories, equipment and other business assets, including real estate. At December 31, 1996, $40.6 million, or 11.67%, of total loans were secured by accounts receivable as compared to $29.5 million, or 9.31%, of loans at December 31, 1995. Commercial loans secured by real estate comprise $14.4 million, or 4.15%, of total loans at December 31, 1996, compared to $20.5 million, or 6.48%, of loans at December 31, 1995. In 1994, the Company began participating in government-insured lending programs, including SBA loans. At December 31, 1996, the Company had $20.2 million of SBA loans outstanding. Commercial loans increased to $147.2 million, or 46.47% , of loans at December 31, 1995 from $79.4 million, or 38.22%, of loans at December 31, 1994. The $67.8 million increase in loans includes the purchase of $37.4 million of commercial loans from IOBC in the second quarter of 1995, and $29.2 million of loan purchases, principally SBA loans, during the fourth quarter of 1995. REAL ESTATE, CONSTRUCTION LOANS. Real estate construction loans comprise $8.5 million, or 2.46%, of outstanding loans at December 31, 1996. The increase from $4.4 million, or 1.39%, of total loans at December 31, 1995 is the result of the Company's modest expansion of its construction loan activity. Construction loans were $30,000, or 0.01%, of loans at December 31, 1994. The Company's construction loan products are primarily targeted to developers of quality entry-level housing projects and to existing borrowers who are owner/users of commercial industrial property. 17 Part I. Item 1 (continued) REAL ESTATE, MORTGAGE LOANS. Real estate mortgage loans comprise $105.1 million, or 30.22%, of the total loan portfolio at December 31,1996, down slightly from $107.7 million, or 33.98%, of total loans outstanding at year end 1995. Real estate mortgage loans were $83.7 million, or 40.31%, of total loans at December 31, 1994. The increase in mortage loan balances for 1995 was primarily due to the purchase of $16.8 million of real estate loans from IOBC. Commercial real estate loans comprise the majority of the Company's mortgage loan portfolio. New real estate loans are generally made only to existing borrowers who are owner/users or to new borrowers who provide a major new banking relationship and demonstrate adequate cash flows. All new real estate borrowers must provide financial reporting that meets FDICIA standards and the loans must meet the Company's underwriting standards. The majority of the Company's real estate loans are secured by first trust deeds; and approximately 50% are to owner/users. CONSUMER LOANS. Consumer loans increased to $73.6 million, or 21.15%, of the loan portfolio at December 31, 1996 from $57.5 million, or 18.16%, of total loans at December 31, 1995. Consumer loans were $44.6 million, or 21.46%, of total loans at December 31, 1994. The increase of $16.1 million from 1995 occurred primarily in unsecured lines of credit to high net worth borrowers. The Company added this loan product in mid-1995 following the purchase of loans from IOBC. At December 31, 1996, the consumer loan portfolio included $27.9 million of home equity loans and home equity lines representing 8.01% of total loans; auto and RV loans totaling $20.0 million, or 5.74%, of total loans; and lines of credit totaling $18.8 million, or 5.41%, of total loans. The levels of consumer loans at period ends may fluctuate and may not necessarily be representative of average levels experienced during the respective periods due to the timing of advances and payments made on such loans by borrowers. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following table sets forth the maturity distribution of the Company's loan portfolio (excluding consumer and nonaccrual loans) at December 31, 1996 based on remaining scheduled principal repayments: Maturing in --------------------------------------------------------------------------- Over one One year year through Over or less five years five years Total --------------------------------------------------------------------------- (GROSS LOANS, IN THOUSANDS) Commercial $ 83,589 $ 53,652 $ 21,993 $ 159,234 Real estate, construction 3,791 1,277 3,476 8,544 Real estate, mortgage 18,996 62,208 22,471 103,676 -------------------------------------------------------------------------- Total $ 106,376 $ 117,138 $ 47,940 $ 271,454 -------------------------------------------------------------------------- -------------------------------------------------------------------------- The following table sets forth information on sensitivity to changes in interest rates for the Company's loan portfolio (excluding consumer and nonaccrual loans) at December 31, 1996: Repricing in --------------------------------------------------------------------------- Over one One year year through Over or less five years five years Total --------------------------------------------------------------------------- (GROSS LOANS, IN THOUSANDS) Fixed interest rates $ 15,639 $ 46,839 $ 17,158 $ 79,636 Variable interest rates 191,818 - - 191,818 -------------------------------------------------------------------------- Total $ 207,457 $ 46,839 $ 17,158 $ 271,454 -------------------------------------------------------------------------- -------------------------------------------------------------------------- The amounts reported in the categories in the tables do not reflect loan prepayments or other factors which may cause the loans to react in different degrees and at different times to changes in market interest rates. ASSET QUALITY NONACCRUAL, PAST DUE AND MODIFIED LOANS The Company recognizes income principally on the accrual basis of accounting. In determining income from loans, the Company 18 Part I. Item 1 (continued) generally adheres to a policy of not accruing interest on loans on which a default of principal or interest has existed for a period of 90 days or more. The Company's policy is to assign nonaccrual status to a loan if either (i) principal or interest payments are past due in excess of 90 days, unless the loan is both well secured and in the process of collection; or (ii) the full collection of interest or principal becomes uncertain, regardless of the length of past due status. When a loan reaches nonaccrual status, any interest accrued on such a loan is reversed and charged against current income. Nonaccrual loans increased to $2.8 million, or 0.82%, of total loans at December 31, 1996 from $1.4 million, or 0.44%, of total loans at December 31, 1995. The increase in nonaccrual loans in 1996 is primarily due to one real estate loan. Nonaccrual loans were $1.6 million, or 0.78%, of total loans at December 31, 1994. Interest income that would have been collected on nonaccrual loans had they performed in accordance with their original terms, was approximately $253,000, $207,000, $93,000, $550,000 and $371,000 for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The following table provides the balance of the Company's nonaccrual loans as of the dates indicated. The Company had one loan of $193,000 that was past due over 90 days and still accruing interest at December 31, 1996. The principal and interest on the loan are guaranteed by the Small Business Administration. The Company anticipates full payment of the amounts due. The Company had no loans past due 90 days or more that were still accruing interest at December 31, 1995, 1994, 1993 and 1992.
- ------------------------------------------------------------------------------------------------- December 31, 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Nonaccrual loans (1) $ 2,846 $ 1,385 $ 1,612 $ 7,081 $ 7,426 Nonaccrual loans as a percentage of total gross loans 0.82% 0.44% 0.78% 3.33% 2.88% - -------------------------------------------------------------------------------------------------
(1) Includes loans with modified terms of $5.5 million, $125,000, $100,000 and $1.4 million for the years ended December 31, 1996, 1995, 1994 and 1993, respectively. Nonaccrual loans by category are summarized below:
- ---------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Commercial $ 1,316 $ 620 $ 283 $ 1,269 $ 4,000 Real estate, construction - - - - 231 Real estate, mortgage 1,447 615 930 5,789 2,956 Consumer 84 150 399 23 239 - ---------------------------------------------------------------------------------------------------------------- Total nonaccrual loans $ 2,846 $ 1,385 $ 1,612 $ 7,081 $ 7,426 - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- Delinquent loans (past due 30 to 89 days) by category are summarized below: - ---------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Commercial $ 1,273 $ 548 $ 998 $ 696 $ 4,160 Real estate, construction - - - - - Real estate, mortgage 414 503 2,089 1,239 9,638 Consumer 1,125 411 416 436 520 - ---------------------------------------------------------------------------------------------------------------- Total delinquent loans $ 2,813 $ 1,462 $ 3,503 $ 2,371 $ 14,318 - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- Percentage of total gross loans: Nonaccrual loans 0.82% 0.44% 0.78% 3.33% 2.88% Nonaccrual and delinquent loans 1.63% 0.90% 2.46% 4.45% 8.42%
19 Part I. Item 1 (continued) The increase in delinquent commercial loans to $1.3 million at December 31, 1996 from $548,000 at year-end 1995 is due to a limited number of purchased SBA loans. The principal and interest on SBA loans is fully guaranteed. Management does not expect to incur a loss on these loans. The increase in delinquent consumer loans to $1.1 million at December 31, 1996 from $411,000 at December 31, 1995 is primarily due to purchased real estate loans secured by second trust deeds. These loans are government insured and are serviced by a third party. The reported delinquencies can largely be attributed to the delay between the receipt of payment by the servicer and the remittance of the payment to the Company. Management does not expect to incur a loss of principal or interest on these loans. The level of delinquent loans may fluctuate and may not necessarily be representative of levels experienced during the respective periods due to the variability of the timing of payments made on such loans by borrowers. Management cannot predict the extent to which the changes in the current economic environment may impact the Company's loan portfolio. Furthermore, the Company's primary regulators review the loan portfolio as an integral component of their regular examinations of the Company, and their assessment of specific credits may affect the level of the Company's problem assets. Accordingly, there can be no assurance that other loans will not become nonaccrual, potential problem credits or delinquent loans in the future. ALLOWANCE FOR POSSIBLE LOAN LOSSES A certain degree of risk is inherent in the extension of credit. Management has adopted a policy to maintain the allowance for possible loan and lease losses at a level considered by management to be adequate to absorb estimated known and inherent risks in the existing portfolio. Management performs a comprehensive analysis of the loan portfolio and its current allowance for loan losses on a regular basis to determine that loans are currently protected according to financial and collateral standards deemed acceptable. The allowance for possible loan losses represents management's recognition of the assumed risks of extending credit and the quality of the loan portfolio. The allowance is management's estimate, which is inherently uncertain and depends on the outcome of future events. A sudden and sustained increase in interest rates could have an adverse impact of borrowers' ability to repay. The evaluation of the quality of the loan portfolio considers the borrower's management, financial condition, cash flow and repayment program, as well as the existence of collateral and guarantees. External business and economic factors beyond the borrower's control, combined with the Company's previous loan loss experience, are considered in management's evaluation of the allowance for possible loan losses. In addition, the bank regulatory authorities, as an integral part of their examination process, periodically review the Company's allowance for possible loan losses and may recommend additions to the allowance based on their assessment of information available to them at the time of their examination. When it is determined that additions are required, additions to the allowance are made through charges to operations and are reflected in the statements of operations as a provision for loan losses. Loans which are deemed to be uncollectible are charged to the allowance. Subsequent recoveries, if any, are credited back to the allowance. Reference may be made to NOTE 4-LOANS of the Company's consolidated financial statements, which are located in Part II. Item 8. of this Form 10-K, for additional detail concerning activity in the allowance for possible loan losses, including loan charge-offs and recoveries. 20 Part I. Item 1. (continued) The following table provides a summary of net charge-offs for the years indicated:
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Average balance of gross loans outstanding $ 321,843 $ 261,631 $ 203,507 $ 235,414 $ 282,991 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Gross loan balance at December 31, $ 347,864 $ 316,841 $ 207,688 $ 207,688 $ 212,407 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Allowance at January 1, $ 5,734 $ 5,318 $ 10,800 $ 6,859 $ 4,575 Charge-offs: Commercial 422 834 2,004 3,704 2,560 Real estate 279 1,227 3,453 4,488 4,146 Consumer 168 587 362 381 462 - ---------------------------------------------------------------------------------------------------------------------------------- Total charge-offs 869 2,648 5,819 8,573 7,168 Recoveries: Commercial 477 587 915 607 195 Real estate 21 129 215 4 - Consumer 54 192 57 153 185 - ---------------------------------------------------------------------------------------------------------------------------------- Total recoveries 552 908 1,187 764 380 Net charge-offs 317 1,740 4,632 7,809 6,788 (Recovery) provision (credited) charged to expense (470) 1,539 (850) 11,750 9,072 Allowance on purchased loans - 617 - - - - ---------------------------------------------------------------------------------------------------------------------------------- Allowance at December 31, $ 4,947 $ 5,734 $ 5,318 $ 10,800 $ 6,859 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------------------------------------------------------------- Ratio of allowance for loan losses to loans outstanding at December 31, 1.42% 1.81% 2.56% 5.20% 3.23% Ratio of allowance for loan losses to nonaccrual loans at December 31, 173.84% 414.01% 329.88% 152.53% 92.36% Ratio of net charge-offs to average loans 0.10% 0.67% 2.28% 3.32% 2.40%
Net loan charge-offs were $317,000, or 0.10%, of average outstanding loans for 1996 a decrease from $1.7 million, or 0.67%, of average loans for 1995, and $4.6 million, or 2.28%, of average loans for 1994. Net charge-offs for 1994 include $2.8 million related to nonaccrual loans that were sold during the third quarter of that year. Net charge-offs were $7.8 million and $6.8 million for 1993 and 1992, respectively. The higher level of net charge-offs recorded by the Company in 1992, 1993 and 1994 reflect the economic downturn and declining real estate values experienced in the Company's market area during the early 1990s. The decrease in net charge-offs in 1995 and 1996 is reflective of the continued improvement in the quality of the Company's loan portfolio and of the general economic recovery in Southern California. The following table sets forth the allocation of the allowance for possible loan losses by category as of the dates indicated:
- ---------------------------------------------------------------------------------------------------------------------------------- Percent of loans Percent of loans Percent of loans in each category in each category in each category December 31, 1996 to total loans 1995 to total loans 1994 to total loans - ---------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Commercial $ 1,280 46.17% $ 1,821 46.47% $ 1,406 38.22% Real estate, construction 77 2.46% 43 1.39% 10 0.01% Real estate, mortgage 2,483 30.22% 2,172 33.98% 2,366 40.31% Consumer 465 21.15% 660 18.16% 592 21.46% Unallocated 643 - 1,038 - 944 - - ---------------------------------------------------------------------------------------------------------------------------------- Total allowance for loan losses $ 4,947 100.00% $ 5,734 100.00% $ 5,318 100.00% - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
21 Part I. Item 1 (continued)
- ---------------------------------------------------------------------------------------------------- Percent of loans Percent of loans in each category in each category December 31, 1993 to total loans 1992 to total loans - ---------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Commercial $ 2,563 34.47% $ 2,972 34.37% Real estate, construction 139 0.94% 249 3.46% Real estate, mortgage 4,415 46.70% 3,070 45.41% Consumer 381 17.89% 568 16.76% Unallocated 3,302 - - - - ---------------------------------------------------------------------------------------------------- Total allowance for loan losses $ 10,800 100% $ 6,859 100% - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
Management establishes specific reserves where necessary, according to the criteria for loans deemed to be impaired under the guidance of SFAS No. 114 and No. 118. Loans are evaluated for impairment on an individual basis with the exception of consumer loans, which are evaluated collectively. Specific reserves related to impaired loans are included in the allowance for loan losses shown above. The remainder of the allowance is general in nature and is available for the loan portfolio in its entirety. Further discussion of the Company's policies relating to impaired loans is proivded in NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of the Company's consolidated financial statements, which are located in Part II. Item 8. of this Form 10-K. OTHER REAL ESTATE OWNED OREO primarily includes properties acquired through foreclosure or through full or partial satisfaction of loans. The difference between the fair value of the real estate collateral, less the estimated costs of disposal, and the loan balance at the time of transfer to OREO is reflected in the allowance for possible loan losses as a charge-off. Any subsequent declines in the fair value of the OREO property after the date of transfer are recorded through a provision for writedowns on OREO. Routine holding costs, net of any income and net gains and losses on disposal, are reported as noninterest expense. Activity in OREO for the years indicated is as follows:
1996 1995 1994 - ------------------------------------------------------------------------------------- (Dollars in thousands) Balance, January 1 $ 2,073 $ 5,837 $ 6,133 Additions 699 1,923 3,585 Sales (4,215) (5,689) (2,699) Valuation and other adjustments 1,979 2 (1,182) - ------------------------------------------------------------------------------------- Balance, December 31 $ 536 $ 2,073 $ 5,837 - ------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------
The OREO portfolio at December 31, 1996 consisted of 2 properties totaling $536,000. The Bank is actively marketing these properties. DEPOSITS The following table sets forth the distribution of average deposit balances and the average rates paid thereon for the years indicated:
For the years ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Average Average % Average Average % Average Average % balance Rate of total balance Rate of total balance Rate of total - ---------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Demand deposits(1) $119,570 29.70% $123,815 30.47% $118,044 33.24% NOW/MMDA 95,098 2.58% 23.63% 81,815 1.77% 20.13% 78,860 1.73% 22.20% Savings 44,273 2.11% 11.00% 55,204 2.08% 13.58% 78,558 1.99% 22.12% TCDs 143,582 5.36% 35.67% 145,555 5.77% 35.82% 79,687 3.80% 22.44% - ---------------------------------------------------------------------------------------------------------------------------------- Total average deposits $402,522 100.00% $406,389 100.00% $355,149 100.00% - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
(1) The Company purchased approximately $19.8 million of noninterest bearing demand deposits from IOBC in the second quarter of 1995. Following the purchase, IOBC demand deposits decreased $7.4 million, primarily due to a reduction in balances maintained by a large commercial customer. Most of the IOBC customer base has been retained. Demand deposits, net of the effects of the IOBC purchase, have remained flat since 1994. 22 Part I. Item 1. (continued) Average demand deposits decreased to $119.6 million, or 29.70%, of total deposits for 1996 from $123.8 million, or 30.47%, of total deposits for 1995. Factors contributing to the decrease in demand balances for 1996 include the reduction of three branches from the prior year, and to growth in a cash management product offered to commercial customers that provides for the overnight investment of funds. Average demand deposits were $118.0 million, or 33.24%, of total deposits for 1994. Average NOW/MMDA accounts increased to $95.1 million, or 23.63%, of total deposits for 1996 from $81.8 million, or 20.13%, of total deposits for 1995. The increase can be attributed to targeted product promotions. Average NOW/MMDA accounts for 1994 were $78.9 million, or 22.20%, of total deposits. The Company acquired $12.2 million of NOW/MMDA accounts from IOBC on April 30, 1995. Average TCD balances were $143.6 million, or 35.67%, of total deposits for 1996 and $145.6million, or 35.82% , of total deposits for 1995. Average TCD balances were $79.7, or 22.44%, of total deposit for 1994. The increase in TCD balances for 1995 can be attributed to a promotional TCD program that was run during the first quarter of 1995 to obtain funding for the IOBC transaction. The program proved to be highly successful, procuring in excess of $70 million in 7 to 12 month TCDs. The Company retained 65%-75% of these balances as they matured at average rates significantly lower than the rates offered through the initial promotional program. The following table sets forth the maturities of the Company's time certificates of deposit outstanding at the dates indicated:
December 31, 1996 Maturing in - ---------------------------------------------------------------------------------------------------------------------------------- Over three Over six Three months months through months through Over or less six months twelve months twelve months Total - ---------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Under $100,000 $ 31,750 $ 20,563 $ 19,700 $ 9,565 $ 81,577 $100,000 and over 41,016 9,170 11,097 2,373 63,656 - ---------------------------------------------------------------------------------------------------------------------------------- Total time certificates of deposit $ 72,766 $ 29,733 $ 30,797 $ 11,938 $ 145,233 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
OTHER BORROWED FUNDS Other borrowed funds consist of overnight Federal funds purchased, Treasury tax and loan notes ("TT&L"), obligations under securities repurchase agreements, the principal portions of capitalized lease obligations, obligations to senior lienholders for certain OREO properties, and deferred compensation liabilities. The balance of other borrowed funds was $8.1 million, $6.4 million and $13.8 million at December 31, 1996, 1995 and 1994, respectively. Additional discussion of the Company's borrowing arrangements is located in "Management's Discussion and Analysis of Financial Condition and Results of Operations" from the Company's annual report to shareholders incorporated by reference into Part II. Item 7. of this Form 10-K, and in NOTE 8-BORROWED FUNDS AND OTHER INTEREST-BEARING LIABILITIES of the Company's consolidated financial statements located in Part II. Item 8. of this Form 10-K. ASSET/LIABILITY MANAGEMENT The objective of asset/liability management is to manage and control the Company's exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. The Company seeks to achieve this objective by matching its interest rate-sensitive assets and liabilities, and maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment. Generally, if rate-sensitive assets exceed rate sensitive liabilities, the net interest income will be positively impacted during a rising rate environment and negatively impacted during a declining rate environment. When rate-sensitive liabilities exceed rate-sensitive assets, the net interest income will generally be positively impacted during a declining rate environment and negatively impacted during a rising rate environment. However, because interest rates for different asset and liability products offered by depository institutions respond differently to changes in the interest rate environment, the gap between rate-sensitive assets and rate- sensitive liabilities can only be used as a general indicator of interest rate sensitivity. 23 Part I. Item 1. (continued) The following gap repricing table sets forth information concerning the Company's rate-sensitive assets and rate-sensitive liabilities, including the off-balance sheet amounts for interest rate swaps, as of December 31, 1996. Such assets and liabilities are classified by the earlier of maturity or repricing date in accordance with their contractual terms. Certain shortcomings are inherent in the method of analysis presented in the following gap table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees and at different times to changes in market interest rates. Also, loan prepayments and changes in the mix or level of deposits could cause the interest sensitivities to vary from those which appear in the table.
Three months One year Three months through through Over or less twelve months five years five years Total - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) INTEREST-EARNING ASSETS Federal funds sold $ 3,800 $ - $ - $ - $ 3,800 Investment securities - 19,834 48,608 8,148 76,590 Loans (1) 230,190 23,160 64,327 27,341 345,018 Interest rate swaps 25,000 50,000 75,000 - ------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 258,990 $ 42,994 $ 162,935 $ 35,489 $ 500,408 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest-bearing demand and savings deposits $ - $ 25,954 $ 100,933 $ 17,303 $ 144,190 Time certificates of deposit 72,837 60,475 11,921 - 145,233 Other borrowings and interest- bearing liabilities 6,940 1,156 - 8,096 Interest rate swaps 75,000 75,000 - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 154,777 $ 87,585 $ 112,854 $ 17,303 $ 372,519 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap $ 104,213 $ (44,591) $ 50,081 $ 18,186 Cumulative interest rate sensitivity gap 104,213 59,622 109,703 127,889 Cumulative interest rate sensitivity gap as a percentage of total interest- earning assets 20.83% 11.91% 21.92% 25.56%
- ----------------------------------- (1) Loans exclude nonaccrual loans of $2,846. At December 31,1996, the Company's rate-sensitive balance sheet was shown to be in a positive gap position on a cumulative basis for all time periods reported. The cumulative gap between assets and liabilities that reprice within 12 months was $59.6 million, or 11.91%, of rate-sensitive assets. The cumulative positive gap for all time periods is $127.9 million, or 25.56%, of rate-sensitve assets. The table above implies that the Company is moderately asset-sensitive and that its earnings would increase if interest rates rise. Repricing of the Company's interest-bearing demand and savings deposits generally lags repricing on the Company's variable rate loan portfolio. These core deposits tend to be fairly stable over time and exhibit a low sensitivity to changes in interest rates. In preparing the gap table, management distributes core deposit balances across the maturity ranges in accordance with regulatory guidelines in order to incorporate these characteristics of its core deposits. In addition to utilizing the repricing gap table above in managing its interest rate risk, the company performs a quarterly income simulation analysis. This simulation analysis provides a dynamic evaluation of the Company's balance sheet and income statement under varying yield curve scenarios, providing an estimate of both the dollar amount and percentage change in net interest income under various changes in interest rates. Based on the income simulation analysis conducted as of December 31, 1996, the Company remains moderately asset- sensitive. Thus, a rising rate environment would tend to lead to an increase in net interest income, while a falling rate environment would tend to lead to a decrease in net interest income. In order to stabilize the Company's net interest income with respect to changing rates, the Company entered into a $50 million 5-year interest rate swap agreement in September 1993 ("Swap #1") and a $25 million 3-year interest rate swap agreement in January 24 Part I. Item 1 (continued) 1994 ("Swap #2"). The terms of these swap agreements require the Company to pay a floating rate of interest tied to three-month LIBOR, and to receive fixed rates of interest of 4.87% and 5.04% for Swap #1 and Swap #2, respectively. The Company's combined break-even point on both swap agreements is approximately 4.92%. Since the fourth quarter of 1994, the three-month LIBOR has exceeded the Company's break-even point, so that interest expense on the swap agreements has exceeded interest income. Net interest income (expense)on the swaps for the years ended December 31, 1996, 1995 and 1994 was ($563,000),($929,000) and $141,000. EMPLOYEES The Company had 211 full-time equivalent employees at December 31, 1996. Full- time equivalent employees include full-time employees plus part-time employees expressed as a fractional equivalent of full-time employees based on the number of hours worked. For example, a part-time employee who works 20 hours a week would equal 0.5 full-time equivalent staff. Management believes that its relations with its employees are satisfactory. ITEM 2 PROPERTIES The Company owns the following properties: The Bellflower branch office, located at 17046 Bellflower Boulevard, Bellflower, California. This 2,924 square foot facility houses the Bank's Bellflower branch. The Brea branch office, located at 275 West Central Avenue, Brea, California. This 5,300 square foot facility houses the Bank's Brea branch. The Downey Main branch office, located at 10990 Downey Avenue, Downey, California. This 8,795 square foot facility houses the Bank's Downey branch and its Los Angeles County Corporate Banking Center. The Orange branch office, located at 303 West Katella Avenue, Orange, California. This 20,966 square foot facility houses the Bank's Orange branch. The Santa Fe Springs branch office, located at 13372 East Telegraph Road, Santa Fe Springs, California. This 7,300 square foot facility houses the Bank's Santa Fe Springs branch. The Uptown Whittier branch office, located at 12802 East Hadley Street, Whittier, California. This 5,460 square foot facility houses the Bank's Uptown Whittier branch. The Whittier branch office, located at 13525 West Whittier Boulevard, Whittier, California. This 9,000 square foot facility houses the Bank's Whittier branch. The Company leases the following properties: The Company leases 44,259 square feet for its operations center offices, located at 16420 Valley View Avenue, La Mirada, California. The Company leases 10,463 square feet for its executive offices, located at 3800 East La Palma Avenue, Anaheim, California. This location also houses the Bank's Tustin/La Palma branch. The Company leases 441 square feet for its Anaheim Pavilions Supermarket branch office, located at 8010 Santa Ana Canyon Road, Anaheim Hills, California. The Company leases 4,000 square feet for its Catalina branch office, located at 303 Crescent Avenue, Avalon, California, on Santa Catalina Island. The Company leases 6,980 square feet for its Huntington Beach branch office, located at 9042 Garfield Avenue, Huntington Beach, California. 25 Part I. Item 2 (continued) The Company leases 411 square feet for its La Habra branch office, located at the Vons Supermarket, 2101 West Imperial Highway, La Habra, California. The Company leases 9,495 square feet for its Laguna Hills branch office, located at 24061 Calle de la Plata, Laguna Hills, California. This location also houses its Orange County Corporate Banking Center. The Company leases 3,471 square feet for its La Jolla branch office, located at 4180 La Jolla Village Drive, Suite 125, La Jolla, California. The Company leases 2,100 square feet for its San Diego Corporate Banking Center, located at 4180 La Jolla Village Drive, Suite 430, La Jolla, California. ITEM 3. LEGAL PROCEEDINGS The Company is a party to routine litigation involving various aspects of its business. As of the date of this Form 10-K, it is management's opinion after consulting with legal counsel that none of the pending litigation will have a material adverse impact on the consolidated financial condition or operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to shareholders during the fourth quarter of 1996. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is listed on the American Stock Exchange ("AMEX") under the symbol, "SCK". The following table sets forth the high and low closing sale prices on a per share basis for the Common Stock as reported by the AMEX for the periods indicated: The Company had approximately 531 shareholders of record of its common stock as of March 14, 1997.
(SHARE PRICES IN DOLLARS) High Low - ------------------------------------------------------------------------------------- 1995 First quarter $ 5 1/4 $ 4 5/16 Second quarter 5 1/4 4 5/8 Third quarter 6 5/8 4 3/4 Fourth quarter 6 1/8 5 7/16 1996 First quarter 6 3/4 6 1/16 Second quarter 7 1/8 6 3/8 Third quarter 7 6 3/16 Fourth quarter 9 7/8 7 1997 First quarter (through March 14, 1997) 11 3/4 9 3/8
On March 14, 1997 the last reported sales price per share for the Company's stock was $10.75. 26 ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------- As of or for the year ended December 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Interest income $ 34,967 $ 33,396 $ 26,420 $ 29,732 $ 35,915 Interest expense 11,727 12,015 6,279 9,619 13,665 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income 23,240 21,381 20,141 20,113 22,250 Provision for loan losses (470) 1,539 (850) 11,750 9,072 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 23,710 19,842 20,991 8,363 13,178 - ---------------------------------------------------------------------------------------------------------------------------------- Net gains (losses) on sales of securities 14 (620) 17 7,074 2,395 Noninterest income 5,152 5,633 6,666 6,869 5,728 Noninterest expense 21,228 23,293 23,835 26,024 23,835 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 7,648 1,562 3,839 (3,718) (2,534) Provision for income taxes (benefits) 3,193 693 1,134 (1,026) (1,131) - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of a change in accounting principle 4,455 869 2,705 (2,692) (1,403) - ---------------------------------------------------------------------------------------------------------------------------------- Cumulative effect of change in accounting principle - - - (41) 0 - ---------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 4,455 $ 869 $ 2,705 $ (2,733) $ (1,403) - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE AND STOCK DATA: Net income (loss) $ 0.60 $ 0.12 $ 0.49 $ (0.79) $ (0.40) Cash dividends declared $ - $ - $ - $ - $ - Book value (1) $ 6.67 $ 6.09 $ 5.60 $ 8.21 $ 8.99 Weighted average shares outstanding (2) 7,476,464 7,468,760 5,507,000 3,468,505 3,468,505 BALANCE SHEET DATA (YEAR END BALANCES): Investment securities $ 76,590 $ 94,030 $ 131,881 $ 149,543 $ 164,546 Loans, net 342,228 310,576 202,072 201,333 250,763 Total assets 476,013 461,779 398,555 407,889 464,229 Total deposits 415,326 406,811 339,939 368,388 402,892 Shareholders' equity 49,919 45,512 41,844 28,462 31,195 ASSET QUALITY: Nonaccrual loans $ 2,846 $ 1,385 $ 1,612 $ 7,081 $ 7,426 OREO 536 2,073 5,837 6,133 6,318 ASSET QUALITY RATIOS: Net charge-offs to average gross loans 0.10% 0.67% 2.28% 3.32% 2.40% Nonaccrual loans to year-end gross loans 0.82% 0.44% 0.78% 3.33% 2.88% Nonperforming assets to year-end assets (3) 0.71% 0.75% 1.87% 3.24% 2.96% Allowance for possible loan losses to year-end gross loans 1.42% 1.81% 2.56% 5.08% 2.66% Allowance for possible loan losses to nonaccrual loans 173.84% 414.01% 329.88% 152.53% 92.36% SELECTED PERFORMANCE RATIOS: Return on average assets 0.96% 0.19% 0.67% (0.59%) (0.30%) Return on average shareholders' equity 9.40% 2.14% 6.59% (8.90%) (4.42%) Average shareholders' equity to average assets 10.23% 8.87% 10.15% 6.61% 6.73% Dividend payout ratio 0.00% 0.00% 0.00% 0.00% 0.00% Noninterest expense to average assets 4.58% 5.09% 5.90% 5.61% 5.03% Net interest margin (4) 5.58% 5.30% 5.75% 4.82% 5.27% COMPANY CAPITAL RATIOS: Leverage 9.97% 9.08% 10.74% 6.09% 6.30% Tier 1 risk-based capital 11.20% 10.75% 15.72% 8.89% 9.10% Total capital 12.37% 12.01% 16.98% 10.18% 10.60% BANK CAPITAL RATIOS: Leverage 9.51% 8.59% 8.86% 6.09% 6.30% Tier 1 risk-based capital 10.68% 10.14% 12.96% 8.89% 9.10% Total capital 11.86% 11.39% 14.22% 10.18% 10.60%
- ----------------------------------- (1) Book value per share data is based on the number of shares outstanding at year end. (2) Excludes the effect of stock options as common stock equivalents as such effect was antidilutive for the years presented. (3) Includes nonaccrual loans and other real estate acquired by the Bank through foreclosure. (4) Computed on a tax-equivalent basis for 1992. The Company had no investments in tax-exempt municipal securities for 1996, 1995, 1994 and 1993. 27 Part II. (continued) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Incorporated by reference to pages 7-11 of the Company's 1996 annual report to shareholders which pages are filed as Exhibit 13.1 to this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this Item 8 are listed in Item 14(a) and are submitted at the end of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors and executive officers is incorporated by reference from the sections entitled "Nominees for Election as Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's definitive Proxy Statement which will be filed within 120 days after the Company's fiscal year ended December 31, 1996 (the "1997 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION Information concerning management remuneration and transactions is incorporated by reference from the sections entitled "Executive Compensation", "Information About the Board of Directors and Committees of the Board", and "Compensation Committee Interlocks and Insider Participation" of the 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the section entitled "Certain Relationships and Related Transactions" of the 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Information concerning certain relationships and related party transactions is incorporated by reference from the section entitled "Certain Relationships and Related Transactions" of the 1997 Proxy Statement. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) The following consolidated financial statements of the Company and subsidiary are filed as part of this Annual Report. Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Operations for the years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995, and 1994 28 Part IV. Item 14. (continued) Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994 Notes to Consolidated Financial Statements SC Bancorp (parent only) financial statements - Note 13 (a)(2) All other financial statement schedules are omitted because they are not applicable, not material or because the information is included in the consolidated financial statements or notes thereto. (a)(3) Exhibits 3(i).1 SC Bancorp Articles of Incorporation (f) 3(i).2 Certificate of Amendment to SC Bancorp Articles of Incorporation dated May 9, 1995(g) 3(ii).1 Amended and Restated Bylaws of SC Bancorp 4.1 Specimen Common Stock Certificate(a) 4.2 SC Bancorp 1989 Stock Option Plan(d) 4.3.1 Amended and restated Southern California Bank Employee Retirement Plan(c) 4.3.2 First amendment to the amended and restated Southern California Bank Employee Retirement Plan(g) 4.3.3 Second amendment to the amended and restated Southern California Bank Employee Retirement Plan(g) 4.3.4 Third amendment to the amended and restated Southern California Bank Employee Retirement Plan(g) 4.3.5 Fourth amendment to the amended and restated Southern California Bank Employee Retirement Plan(g) 4.4 SC Bancorp Executive Deferral Plan (IV)(d) 4.5 Southern California Bank Executive Incentive Compensation Plans for 1994(a) 4.6 Southern California Bank Executive Incentive Compensation Plans for 1995(g) 4.7 Southern California Bank Executive Incentive Compensation Plans for 1996 10.1 Sublease between SC Bancorp and Denny's, dated December 24, 1992, for office space in La Mirada, California(b) 10.2 Lease between Southern California Bank and Robert Stein, dated September 1, 1981, amended June 19, 1990, for office space in Avalon, California(c) 10.3 Assignment of lease between Southern California Bank and Garfield Bank, dated December 27, 1985, amended January 1, 1987, for office space in Huntington Beach, California(a) 10.4 Lease between Southern California Bank and Tustin-La Palma Business Center, dated July 8, 1993 for office space in Anaheim, California(a) 10.5 License Agreement between Southern California Bank and The Vons Companies, Inc., dated December 18, 1992 for supermarket space in Anaheim Hills, California(a) 10.6 First amendment to license agreement between Southern California Bank and The Vons Companies, Inc., dated December 18, 1992 for supermarket space in Anaheim Hills, California(h) 10.7 Consent to assignment of sublease and sublease between Southern California Bank, Bank of America, NTSA, and The Taj dated May 12, 1995 for office space in Laguna Hills, California(g) 10.8 Sublease between Southern California Bank and Citicorp Savings, dated November 30, 1995 for office space in La Jolla, California(g) 10.9 Lease between Southern California Bank and Regents Park Financial Centre, Ltd., dated October 25, 1995 for office space in La Jolla, California(g) 10.10 Forward lease between Southern California Bank and Regents Park Financial Centre, Ltd., dated October 25, 1995 for office space in La Jolla, California(g) 10.11 License Agreement between Southern California Bank and The Vons Companies, Inc., dated February 22, 1996 for supermarket space in La Habra, California(h) 10.12 Employment Agreement between SC Bancorp and Southern California Bank and Larry D. Hartwig, dated January 1, 1997 10.13 Employment Agreement between SC Bancorp and Southern California Bank and David A. McCoy, dated February 25, 1992 10.14 Amended and Restated Employment Security Agreement between SC Bancorp and Southern California Bank and David A. McCoy, dated January 1, 1997 10.15 Amended and Restated Employment Security Agreement between SC Bancorp and Southern California Bank and Bruce W. Roat, dated January 1, 1997 29 Part IV. Item 14 (continued) 10.16 Amended and Restated Employment Security Agreement between SC Bancorp and Southern California Bank and Ann E. McPartlin, dated January 1, 1997 10.17 Amended and Restated Employment Security Agreement between SC Bancorp and Southern California Bank and M. V. Cummings, dated January 1, 1997 10.18 Form of Indemnification Agreement entered into with each Executive Officer and Director of SC Bancorp(a) 10.19 Form of Indemnification Agreement entered into with each Executive Officer and Director of Southern California Bank(a) 13.1 Pages 7-11 of the Company's 1996 annual report to shareholders 21.0 Subsidiaries of the Registrant(e) 23.1 Consent of the Company's independent auditor (Deloitte & Touche, LLP) to the incorporation by reference in the Registration Statement of SC Bancorp on Form S-8 (No. 33-38666) of their report dated January 24, 1997 appearing in the Annual Report on Form 10-K of SC Bancorp for the year ended December 31, 1996. 27.1 Financial Data Schedule (b) The Company filed the following reports on Form 8-K during the fourth quarter of 1996: None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (a) This exhibit is contained in SC Bancorp's Registration Statement on Form S-2, filed with the Commission on March 9, 1994, (Commission File No. 33-76274), and incorporated herein by reference. (b) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1992, filed with the Commission on March 30, 1993, (Commission File No. 0-11046) and incorporated herein by reference. (c) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1991, filed with the Commission on March 30, 1992, (Commission File No. 0-11046) and incorporated herein by reference. (d) This exhibit is contained in SC Bancorp's Proxy Statement, filed with the Commission on on March 23, 1990, (Commission File No. 0-11046) and incorporated herein by reference. (e) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1994, filed with the Commission on March 30, 1995, (Commission File No. 0-11046) and incorporated herein by reference. (f) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10- Q for the period ended March 31, 1995, filed with the Commission on May 15, 1995, (Commission File No. 0-11046) and incorporated herein by reference. (g) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1995, filed with the Commission on March 29, 1996, (Commission File No. 0-11046) and incorporated herein by reference. (h) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10- Q for the period ended September 30, 1996, filed with the Commission on November 14, 1996, (Commission File No. 0-11046) and incorporated herein by reference. 30 INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of SC Bancorp and its subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of SC Bancorp and its subsidiary at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Los Angeles, California January 24, 1997 Deloitte & Touche, LLP 31 CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS)
1996 1995 - --------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (Note 2) $ 29,968 $ 29,088 Federal funds sold 3,800 - - --------------------------------------------------------------------------------------------------------- Cash and cash equivalents 33,768 29,088 - --------------------------------------------------------------------------------------------------------- Securities available-for-sale, at fair value (Note 3) 74,533 92,825 Investment in Federal Home Loan Bank stock, at cost 1,450 1,205 Investment in Federal Reserve Bank stock, at cost 607 - Loans (Notes 4 and 16) 347,864 316,841 Less: Deferred fee income (689) (531) Allowance for possible loan losses (4,947) (5,734) - --------------------------------------------------------------------------------------------------------- Loans, net 342,228 310,576 - --------------------------------------------------------------------------------------------------------- Premises and equipment, net (Note 5) 7,740 9,734 Other real estate owned, net (Note 6) 536 2,073 Accrued interest receivable 3,931 4,297 Other assets 11,220 11,981 - --------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 476,013 $ 461,779 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- LIABILITIES Deposits: (Note 7) Interest-bearing $ 289,423 $ 276,433 Noninterest-bearing 125,903 130,378 - --------------------------------------------------------------------------------------------------------- Total deposits 415,326 406,811 - --------------------------------------------------------------------------------------------------------- Borrowed funds and other interest-bearing liabilities (Note 8) 8,096 6,407 Accrued interest payable and other liabilities 2,672 3,049 - --------------------------------------------------------------------------------------------------------- Total Liabilities 426,094 416,267 - --------------------------------------------------------------------------------------------------------- Commitments and contingencies (Note 11) - - SHAREHOLDERS' EQUITY (NOTES 10 AND 15) Preferred stock, no par or stated value: 10,000,000 shares authorized; no shares issued or outstanding - - Common stock, no par or stated value: 20,000,000 shares authorized; 7,486,375 shares issued and outstanding at December 31, 1996, and 7,471,505 shares issued and outstanding at December 31, 1995 37,738 37,658 Retained earnings 13,055 8,600 Unrealized loss on available-for-sale securities, net of taxes (874) (746) - --------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 49,919 45,512 - --------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 476,013 $ 461,779 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 32 CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Interest and fees on loans $ 30,145 $ 25,960 $ 18,971 Interest on investment securities 4,256 6,299 7,166 Interest on Federal funds sold 566 1,137 283 - ------------------------------------------------------------------------------------------------------------------------ Total interest income 34,967 33,396 26,420 - ------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest on deposits: Interest-bearing demand 2,457 1,451 1,363 Savings 932 1,150 1,564 Time certificates of deposit 7,701 8,397 3,029 - ------------------------------------------------------------------------------------------------------------------------ Total interest on deposits 11,090 10,998 5,956 - ------------------------------------------------------------------------------------------------------------------------ Other interest expense 637 1,017 323 - ------------------------------------------------------------------------------------------------------------------------ Total interest expense 11,727 12,015 6,279 - ------------------------------------------------------------------------------------------------------------------------ Net interest income 23,240 21,381 20,141 (Recovery of) provision for possible loan losses (Note 4) (470) 1,539 (850) - ------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for possible loan losses 23,710 19,842 20,991 - ------------------------------------------------------------------------------------------------------------------------ Noninterest income: Service charges on deposit accounts 1,406 1,727 1,754 Other fees and charges 2,769 2,542 2,637 Merchant bankcard income 523 518 1,249 Net gain (loss) on sales of available-for-sale investment securities 14 (620) 17 Other (loss) gain on sale of assets, net (28) 58 624 Other income 482 788 402 - ------------------------------------------------------------------------------------------------------------------------ Total noninterest income 5,166 5,013 6,683 - ------------------------------------------------------------------------------------------------------------------------ Noninterest expense: Salaries and employee benefits 10,147 10,405 9,518 Net occupancy, furniture and equipment 4,056 5,127 4,678 Professional and legal fees 1,676 1,288 1,476 Other real estate owned 439 219 1,832 Postage and delivery 624 586 543 Goodwill amortization 505 821 211 Advertising and promotion 472 530 426 Merchant bankcard 424 475 1,013 Telecommunications 351 481 352 Software 340 395 214 Office supplies 305 391 402 Data processing 291 253 235 FDIC assessment and other insurance 273 857 1,442 Other operating expense 1,325 1,465 1,493 - ------------------------------------------------------------------------------------------------------------------------ Total noninterest expense 21,228 23,293 23,835 - ------------------------------------------------------------------------------------------------------------------------ Income before provision for income taxes 7,648 1,562 3,839 Provision for income taxes 3,193 693 1,134 - ------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 4,455 $ 869 $ 2,705 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Weighted average number of shares outstanding 7,476 7,469 5,507 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Earnings per share $ 0.60 $ 0.12 $ 0.49 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 33 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS AND SHARES OUTSTANDING IN THOUSANDS)
UNREALIZED (LOSS)/ GAIN ON AVAILABLE-FOR- COMMON STOCK RETAINED SALE SECURITIES, SHARES AMOUNT EARNINGS NET OF TAX TOTAL - ----------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1994 3,469 $ 23,436 $ 5,026 $ - $ 28,462 Common stock issued 4,000 14,207 14,207 Unrealized loss on available-for-sale securities (3,530) (3,530) Net income 2,705 2,705 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 7,469 37,643 7,731 (3,530) 41,844 Common stock issued 3 15 15 Unrealized gain on available-for-sale securities 2,784 2,784 Net income 869 869 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 7,472 37,658 8,600 (746) 45,512 Common stock issued 14 80 80 Unrealized loss on available-for-sale securities (128) (128) Net income 4,455 4,455 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 7,486 $ 37,738 $ 13,055 $ (874) $ 49,919 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,455 $ 869 $ 2,705 Adjustments to reconcile net income to net cash provided by operating activities: (Recovery of) provision for possible loan losses (470) 1,539 (850) Provision for loss on other real estate owned 428 128 1,182 Gain on sale of other real estate owned (85) (130) (5) (Gain) loss on sale of available-for-sale investment securities (14) 620 (17) Net amortization of premiums on investment securities 907 2,165 1,695 Gain on sale of loans - (145) (215) Net amortization of deferred fees and unearned income on loans 158 29 24 Depreciation and amortization 2,311 2,876 2,106 Loss (gain) on sale of fixed assets and other assets 28 (1) (409) Provision (benefit) for deferred income taxes 1,371 (541) 1,492 Increase in accrued interest receivable and other assets (659) (404) (16) (Decrease) increase in accrued interest payable and other liabilities (417) (198) 645 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,013 6,807 8,337 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of available-for-sale investment securities 8,549 26,860 5,245 Proceeds from maturities of available-for-sale investment securities 8,632 6,000 10,295 Proceeds from maturities of held-to-maturity investment securities - 7,530 - Purchase of investment securities available-for-sale, FHLB and FRB stock (856) (1,206) (4,946) Proceeds from sale of loans - 2,084 - Purchase of IOBC loans - (71,576) - Purchase of other loans (5,185) (26,432) - Loans funded, net of payments received (26,854) (15,823) (3,283) Proceeds from sale of premises and equipment and other assets 199 1 932 Purchase of premises and equipment (245) (1,535) (2,576) Proceeds from sale of other real estate owned 1,791 5,689 2,704 - ----------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (13,969) (68,408) 8,371 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Rights Offering - - 14,207 Proceeds from exercise of stock options 80 15 - Purchase of IOBC interest-bearing deposits - 14,965 - Purchase of IOBC noninterest-bearing deposits - 19,762 - Increase (decrease) in interest-bearing deposits 12,990 68,998 (15,105) Decrease in noninterest-bearing deposits (4,475) (36,853) (13,344) Increase (decrease) in other borrowings 2,041 (7,316) 5,088 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 10,636 59,571 (9,154) - ----------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 4,680 (2,030) 7,554 Cash and cash equivalents, beginning of period 29,088 31,118 23,564 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 33,768 $ 29,088 $ 31,118 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Unrealized loss (gain) on investment securities available-for-sale, net of tax $ 128 $ (2,784) $ 3,530 Transfer of loans to other real estate owned 699 1,821 3,585 Assumption of senior liens on other real estate owned - 102 - Transfer of held-to-maturity securities to available-for-sale - 51,991 - Close out of capital lease accounts 118 - - Asset sales offset to restructuring reserve 88 - - - -----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SC Bancorp, a bank holding company (the "Company"), and its subsidiary, Southern California Bank, a California state-chartered bank (the "Bank"), operate 14 branches in Southern California. The Company's primary source of revenue is providing loans to customers, who are predominantly small and mid-sized businesses. The accounting and reporting policies of the Company conform to generally accepted accounting principles and general practices within the banking industry. The following are descriptions of the more significant of these policies: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS: The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: For cash flow reporting purposes, cash, amounts due from banks, and short-term investments with maturities of less than three months are considered cash and cash equivalents. SECURITIES: The Company's securities portfolio includes U.S. Treasury and U.S. federal agency securities, most of which are mortgage-backed securities. The Company has classified its investment securities as available-for-sale; the Company has no trading account assets. Securities are classified as available-for-sale when the Company intends to hold the securities for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity demands, regulatory capital considerations, and other similar factors. Securities classified as available-for-sale are reported at their fair values. Unrealized holding gains and losses on securities available-for-sale are reported, net of tax, as a separate component of shareholders' equity. Realized gains and losses from the sales of available-for-sale securities are reported separately in the consolidated statements of operations using the specific identification method. In January 1995, the FDIC issued a final rule excluding unrealized holding gains and losses on available-for-sale debt securities from the calculation of Tier 1 capital. At December 31, 1996 and 1995, the Company's available-for-sale portfolio had a net unrealized loss of $1.5 million and $1.3 million, respectively. The tax-effected reduction to shareholders' equity at December 31, 1996 and 1995 was $874,000 and $746,000, respectively. Securities are classified as held-to-maturity when the Company has both the intent and ability to hold the securities to maturity on a long-term basis. Securities held-to-maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated lives of the securities. In December 1995, the Company reclassified its entire held-to-maturity investment portfolio to the available-for-sale category under a special one-time exemption authorized by the Financial Accounting Standards Board ("FASB") that allowed companies to reclassify their investment securities portfolio categories. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, held-to-maturity investment securities were transferred to available-for-sale at their fair market values. The net result of the transfer was an aggregate unrealized net loss of $910,000 at December 31, 1995. STOCK OF FEDERAL HOME LOAN BANK OF SAN FRANCISCO: As a member of the Federal Home Loan Bank of San Francisco ("FHLB"), the Bank is required to own common stock in the FHLB 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) based upon a percentage of one of the following balances: residential mortgage loans, total assets, or the outstanding balance of FHLB advances, whichever is greater. STOCK OF FEDERAL RESERVE BANK OF SAN FRANCISCO: As a member of the Federal Reserve System, the Bank is required to own common stock in the Federal Reserve Bank of San Francisco ("FRB") based upon a percentage of capital and surplus at the time of initial membership. LOANS-ALLOWANCE FOR POSSIBLE LOAN LOSSES AND INCOME RECOGNITION: A certain degree of risk is inherent in the extension of credit. Credit losses arise primarily from the loan portfolio, but may also be derived from other credit-related sources, including commitments to extend credit, guarantees, and standby letters of credit. Actual credit losses and other charges, net of recoveries, are deducted from the allowance for possible loan losses. Other charges to the allowance primarily include amounts related to loan foreclosures at the time of transfer to other real estate owned. A provision for possible loan losses, which is a charge against earnings, is added to the allowance based on management's assessment of certain factors including, but not necessarily limited to, estimated losses from loans and other credit arrangements; general economic conditions; deterioration in pledged collateral; historical loss experience; and trends in portfolio volume, maturity, composition, delinquencies, and nonaccruals. The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures-An Amendment of FASB Statement No. 114," effective January 1, 1995. Statement No. 114 prescribes that a loan is impaired when it is probable that the creditor will be unable to collect all contractual principal and interest payments under the terms of the loan agreement. Loans are evaluated for impairment on an individual basis with the exception of consumer loans, which are aggregated and evaluated collectively. This statement generally requires impaired loans to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as an expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company has determined that the combined effect of adoption of SFAS No. 114 and No. 118 was immaterial to the consolidated financial statements due to the Company's pre-existing methodology for calculating its allowance for possible loan losses, which was based on the value of the underlying collateral of "impaired" loans, as defined by SFAS No. 114. All loans on nonaccrual are considered to be impaired; however, not all impaired loans are on nonaccrual status. Impaired loans on accrual status must meet the following criteria: all payments must be current and the loan underwriting must support the debt service requirements. Factors that contribute to a performing loan being classified as impaired include: a below market interest rate, delinquent taxes and debts to other lenders that cannot be serviced out of existing cash flow. Nonaccrual loans are those which are past due 90 days as to either principal or interest, or earlier when payment in full of principal or interest is not expected. When a loan is placed on nonaccrual status, interest accrued but not received is reversed against interest income. Thereafter, interest income is no longer recognized and the full amount of all payments received, whether principal or interest, are applied to the principal balance of the loan. A nonaccrual loan may be restored to an accrual status when principal and interest payments are current, and full payment of principal and interest is expected. Loans are generally carried at the principal amount outstanding, net of unearned discounts and deferred fees. Purchased loans are generally carried at the principal amount outstanding, net of any unearned discounts or premiums. Interest on loans, other than installment loans, is calculated using the simple interest method. Interest income on discounted loans is generally recognized over the estimated lives of the loans based on methods that approximate the interest method. Net deferred loan origination fees are amortized to interest income over the contractual lives of the related loans using the interest method. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less accumulated depreciation and amortization computed on a straight-line basis over the 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) estimated useful lives of the assets or the lease terms. Sublease rental income is reported in noninterest expense. Net gains and losses on disposal or retirement of premises and equipment are reported in net gains and losses on sales of assets. OTHER REAL ESTATE OWNED: Other real estate owned ("OREO") is recorded at the lower of cost or fair value less estimated costs of disposal at the time of foreclosure. Initial losses on properties acquired through foreclosure are treated as credit losses at the time of transfer to OREO. Routine holding costs, net of any income and net gains and losses on disposal, are reported in the consolidated statements of operations as noninterest expense. Allowances for OREO losses are recorded for any subsequent declines in fair values. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS: Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired. The Company amortizes goodwill over its estimated useful life, not to exceed 15 years. Core deposit intangibles are amortized using the straight-line method based on the estimated runoff of the related deposits. Other identifiable intangible assets are amortized using the interest method or on a straight-line basis over their estimated periods of benefit. Goodwill and identifiable intangible assets are reported as part of other assets. INCOME TAXES: The Company files a consolidated Federal income tax return and a combined California state franchise tax return. Deferred income taxes, which are reported with other assets, result from the recognition of income and expense items in different periods for tax and financial reporting purposes. SFAS No. 109, "Accounting for Income Taxes," requires an asset and liability approach for determining the amount of income taxes for financial reporting. A current or deferred tax liability or asset is measured based on the amount of taxes calculated at the current effective tax rates or refundable currently or in future years. If it is more likely than not that any portion of a deferred tax asset will not be realized, the statement requires a valuation allowance to be recorded. EARNINGS PER SHARE: The computation of earnings per share is based on the weighted average number of shares and common stock equivalents outstanding during the year. The weighted average number of shares used for calculating earnings per share was 7,476,000, 7,469,000 and 5,507,000 for 1996, 1995 and 1994, respectively. IMPAIRMENT OF LONG-LIVED ASSETS: On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, or disposed of, be reviewed for impairment based on the fair value of the assets. Furthermore, this statement requires that certain long-lived assets and identifiable intangibles to be disposed of, be reported at the lower of carrying amount or fair value less estimated disposal costs. The Company has determined that the impact of this Statement on its operations and financial position is not material for the year ended December 31, 1996. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION: The Company maintains a stock option plan for the benefit of its executives. In 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation," which encourages, but does not require companies to record compensation expense for stock-based employee compensation at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The pro forma effects on net income if the Company had adopted the fair value accounting provisions of SFAS No. 123 are disclosed in Note 10. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES: In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities, and is applied prospectively to financial statements for fiscal years beginning after December 31, 1996. In 1996, the FASB also issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125," which defers for one year the effective date of certain provisions within SFAS No. 125. The Company does not believe that the impact on its operations and financial position will be material upon adoption of SFAS 125 or SFAS No. 127. INTEREST RATE SWAP AGREEMENTS: The Company has entered into two interest rate swap agreements in the management of its interest rate exposure. Revenue or expense associated with these agreements, which are intended to convert the interest-rate characteristics of interest-bearing assets, are accounted for on a settlement accounting basis and are recognized as an adjustment to interest income, based on the interest rates currently in effect for such contracts. RECLASSIFICATIONS: Certain reclassifications have been made to prior year amounts to conform to the current year presentation. NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS Withdrawal and usage restrictions exist on a portion of the funds of the Company, the majority of which arise from the requirements of the Federal Reserve Board to maintain a certain average balance. Such restricted funds amounted to approximately $1.4 million and $3.0 million at December 31, 1996 and 1995, respectively. These funds are included in Cash and Due from Banks in the accompanying consolidated balance sheets. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 3 - INVESTMENT SECURITIES The amortized cost and estimated fair values of investment securities as of December 31, 1996 and 1995 are as follows:
(DOLLARS IN THOUSANDS) DECEMBER 31, 1996 - ----------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------- ---------- ---------- --------- AVAILABLE-FOR-SALE: U.S. Treasury securities and obligations of U.S. government agencies $ 32,967 $ - $ (285) $ 32,682 Mortgage-backed securities 43,060 - (1,209) 41,851 --------- ---------- ---------- --------- Total $ 76,027 $ - $ (1,494) $ 74,533 --------- ---------- ---------- --------- --------- ---------- ---------- --------- (DOLLARS IN THOUSANDS) DECEMBER 31, 1995 - ----------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------- ---------- ---------- --------- AVAILABLE-FOR-SALE: U.S. Treasury securities and obligations of U.S. government agencies $ 42,036 $ - $ (363) $ 41,673 Mortgage-backed securities 52,062 - (910) 51,152 --------- ---------- ---------- --------- Total $ 94,098 $ - $ (1,273) $ 92,825 --------- ---------- ---------- --------- --------- ---------- ---------- ---------
Investment securities with a carrying value of $15.5 million and $18.6 million were pledged to secure public deposits and as collateral for other borrowings at December 31, 1996 and 1995, respectively. The amortized cost and estimated fair value of debt securities at December 31, 1996 by contractual maturities are shown in the following table. Expected maturities will differ from contractual maturities, particularly with respect to mortgage-backed securities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Maturing in - ----------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Over one Over five One year year through years through Over DECEMBER 31, 1996 or less five years ten years ten years Total ---------- ------------ ---------- --------- -------- Available-for-sale, amortized cost $ 28,141 $ 47,807 $ - $ 79 $ 76,027 Available-for-sale, estimated fair value $ 28,087 $ 46,367 $ - $ 79 $ 74,533
Proceeds from sales of investments in securities during 1996, 1995 and 1994 were $8.5 million, $26.9 million and $5.2 million, respectively. Gross gains of $14,000 and $17,000 were realized on those sales in 1996 and 1994, respectively. Gross losses of $620,000 were realized on the sales in 1995. No gross gains were realized from sales in 1995, and no gross losses were realized from sales in 1996 and 1994. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 4 - LOANS Loans outstanding at December 31, 1996 and 1995, are summarized as follows:
- --------------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 % 1995 % - --------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Commercial $ 160,633 46.17% $ 147,230 46.47% Real estate, construction 8,544 2.46% 4,416 1.39% Real estate, mortgage 105,123 30.22% 107,662 33.98% Consumer 73,564 21.15% 57,533 18.16% - --------------------------------------------------------------------------------------------------------- Gross loans 347,864 100.00% 316,841 100.00% ------- ------- ------- ------- Deferred fee income (689) (531) Allowance for possible loan losses (4,947) (5,734) - ------------------------------------------------------------ ----------- Loans, net $ 342,228 $ 310,576 - ------------------------------------------------------------ ----------- - ------------------------------------------------------------ -----------
No industry constitutes a concentration in the Bank's loan portfolio. The Bank commonly accepts real estate as abundance of collateral in extending credits for commercial purposes. Real estate mortgage loans generally comprise medium-term loans secured by first or second deeds of trust on real estate located in the State of California. Real estate values in California have generally stabilized in the Bank's market area. Management believes that the level of the allowance for possible loan losses as of December 31, 1996, is adequate to absorb losses inherent in the loan portfolio. The changes in the allowance for possible loan losses are as follows:
(DOLLARS IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Average balance of gross loans outstanding $ 321,843 $ 261,631 $ 203,507 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Gross loan balance at December 31, $ 347,864 $ 316,841 $ 207,688 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Allowance at January 1, $ 5,734 $ 5,318 $ 10,800 Charge-offs: Commercial 422 834 2,004 Real estate 279 1,227 3,453 Consumer 168 587 362 - -------------------------------------------------------------------------------------------------------------- Total charge-offs 869 2,648 5,819 Recoveries: Commercial 477 587 915 Real estate 21 129 215 Consumer 54 192 57 - -------------------------------------------------------------------------------------------------------------- Total recoveries 552 908 1,187 Net charge-offs 317 1,740 4,632 (Recovery) provision (credited) charged to expense (470) 1,539 (850) Allowance on purchased loans - 617 - - -------------------------------------------------------------------------------------------------------------- Allowance at December 31, $ 4,947 $ 5,734 $ 5,318 - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 4 - LOANS (CONTINUED) 1996 1995 1994 -------------------------------- Ratio of allowance for loan losses to loans outstanding at December 31, 1.42% 1.81% 2.56% Ratio of allowance for loan losses to nonaccrual loans at December 31, 173.84% 414.01% 329.88% Ratio of net charge-offs to average loans 0.10% 0.67% 2.28% At December 31, 1996 and 1995, the Bank had classified $7.1 million and $1.5 million, respectively, of its loans as impaired with specific reserves of $1.6 million and $143,000, respectively, as determined in accordance with SFAS No. 114, as amended by SFAS No. 118. The average recorded investment in impaired loans during the years ended December 31, 1996 and 1995, was approximately $5.3 million and $3.2 million, respectively. Interest income recognized on impaired loans during 1996 and 1995 was $359,000 and $260,000, of which $342,000 and $260,000, respectively, was collected in cash. NOTE 5 - PREMISES AND EQUIPMENT The following schedule sets forth the cost and accumulated depreciation and amortization of premises and equipment at December 31, 1996 and 1995: (DOLLARS IN THOUSANDS) December 31, ------------------------------------------------------------------ 1996 1995 ------------------------------------------------------------------ Land $ 2,122 $ 2,122 Buildings and improvements: Owned 5,092 3,688 Capital leases - 401 Furniture, fixtures, and equipment 7,132 11,810 Leasehold improvements 3,146 5,598 ------------------------------------------------------------------ Total 17,492 23,619 Less: accumulated depreciation and amortization (9,752) (13,885) ------------------------------------------------------------------ Premises and equipment, net $ 7,740 $ 9,734 ------------------------------------------------------------------ ------------------------------------------------------------------ Depreciation expense was approximately $1.8 million, $2.1 million, and $1.9 million for the years ended December 31, 1996, 1995 and 1994. The Bank's former head office facility was sold in 1994, which resulted in a gain of $414,000. NOTE 6 - OTHER REAL ESTATE OWNED The components of other real estate owned (OREO) at December 31, 1996 and 1995 are as follows: (DOLLARS IN THOUSANDS) December 31, -------------------------------------------------------------------------- 1996 1995 -------------------------------------------------------------------------- Other real estate owned - foreclosure $ 625 $ 4,243 Less: allowance for losses and selling expenses (89) (2,170) -------------------------------------------------------------------------- Other real estate owned - net $ 536 $ 2,073 -------------------------------------------------------------------------- -------------------------------------------------------------------------- 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 6 - OTHER REAL ESTATE OWNED (CONTINUED) The changes in the allowance for OREO losses and selling expenses for the years ended December 31, 1996 and 1995 were as follows: (DOLLARS IN THOUSANDS) December 31, ------------------------------------------------------------------ 1996 1995 ------------------------------------------------------------------ Balance, January 1 $ 2,170 $ 2,761 Provisions charged to expense 428 128 Sales (2,509) (719) ------------------------------------------------------------------ Balance, December 31 $ 89 $ 2,170 ------------------------------------------------------------------ ------------------------------------------------------------------ NOTE 7 - DEPOSITS Time certificates of deposit in denominations of $100,000 or more totaled $64.0 million and $46.4 million as of December 31, 1996 and 1995, respectively. Interest paid on deposit accounts totaled $11.2 million, $10.7 million, and $6.2 million in 1996, 1995 and 1994, respectively. NOTE 8 - BORROWED FUNDS AND OTHER INTEREST-BEARING LIABILITIES Borrowed funds and other interest-bearing liabilities at December 31, 1996 and 1995 were as follows: (DOLLARS IN THOUSANDS) December 31, -------------------------------------------------------------- 1996 1995 -------------------------------------------------------------- Federal funds purchased $ 1,852 $ - Treasury, tax and loan (TT&L) 5,088 4,883 Deferred compensation 1,156 1,165 Capital lease obligations - 257 Other - 102 -------------------------------------------------------------- $ 8,096 $ 6,407 -------------------------------------------------------------- -------------------------------------------------------------- TT&L balances fluctuate based on the amounts deposited by customers and the amounts called for payment by the Federal Reserve Bank. The Bank's limit on its TT&L at the Federal Reserve Bank is $6.0 million. Any amounts in excess of this limit will generally be automatically withdrawn by the Federal Reserve Bank the following day. Interest paid on borrowed funds and other interest-bearing liabilities totaled $623,000, $548,000 and $294,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 9 - INCOME TAXES The provision for income taxes consists of the following: (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------- 1996 1995 1994 - --------------------------------------------------------------------- Current: Federal $ 1,564 $ 1,045 $ (360) State 258 189 2 - --------------------------------------------------------------------- Total current 1,822 1,234 (358) - --------------------------------------------------------------------- Deferred: Federal 758 (320) 1,811 State 613 (221) (319) - --------------------------------------------------------------------- Total deferred 1,371 (541) 1,492 - --------------------------------------------------------------------- Total provision $ 3,193 $ 693 $ 1,134 - --------------------------------------------------------------------- - --------------------------------------------------------------------- The federal income tax provision for the years ended December 31, 1996, 1995 and 1994 differs from the statutory corporate rate of 35% as follows:
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 Amount % Amount % Amount % - ----------------------------------------------------------------------------------------------------------------------------- Rate reconciliation Tax benefit at statutory rate $ 2,676 35.00% $ 547 35.00% $ 1,305 35.00% Tax-exempt municipal interest (7) -0.09% (7) -0.48% (8) -0.21% State franchise tax, net of federal benefit 575 7.51% 125 7.98% (211) -5.66% Officer life insurance (40) -0.53% (167) -10.71% (11) -0.29% Goodwill 40 0.52% 196 12.53% 54 1.45% Other (51) -0.66% (1) 0.02% 5 0.13% - ----------------------------------------------------------------------------------------------------------------------------- $ 3,193 41.75% $ 693 44.34% $ 1,134 30.42% - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
Federal income and California state franchise taxes paid totaled $3.4 million, $865,000 and $152,000 in 1996, 1995 and 1994, respectively. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. The components of the Company's net deferred tax asset are as follows: 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 9 - INCOME TAXES (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, - ------------------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------- Deferred Tax Assets Bad debt reserve $ - $ 1,347 Deferred compensation 953 955 Effect of state taxes on federal liability 85 - Unrealized loss on securities 619 528 Depreciation 514 582 Other 562 709 - ------------------------------------------------------------------------------- Gross deferred tax asset 2,733 4,121 - ------------------------------------------------------------------------------- Deferred Tax Liabilities Bad debt reserve (137) - Deductible prepaid expense (301) (301) Effect of state taxes on federal liability - (209) Other (84) (121) - ------------------------------------------------------------------------------- Gross deferred tax liability (522) (631) - ------------------------------------------------------------------------------- Total deferred tax asset $ 2,211 $ 3,490 Valuation allowance - - - ------------------------------------------------------------------------------- Net deferred tax asset $ 2,211 $ 3,490 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No valuation allowance was required under SFAS No. 109 for federal or state purposes as of December 31, 1996 or 1995, because management expects deferred tax assets to be fully realized as an offset against future taxable income exclusive of reversing temporary differences and carryforwards, reversing temporary differences (which create net future tax liabilities), or through loss carrybacks. NOTE 10 - SHAREHOLDERS' EQUITY COMMON STOCK During the second quarter of 1994, the Company successfully completed a rights offering which resulted in the issuance of an additional 4.0 million shares of common stock at $4.00 per share. Net proceeds of $14.2 million were realized on this offering after issuance costs of approximately $1.8 million. On January 23, 1997, the Company declared a $0.05 per share cash dividend to be paid to shareholders of record at the close of business on February 6, 1997. The dividend will be paid on February 20, 1997. STOCK OPTIONS The Company's stock option plan (the "Plan") provides for the granting of options to directors and full-time salaried officers and management level employees to purchase shares of the Company's common stock at option prices per share at a price equal to the fair market value of the common stock on the date that each option is granted. Options granted pursuant to the Plan are intended to qualify as Incentive Stock Options within the meaning of Section 422A of the Internal Revenue Code of 1986, or Non-Qualified Stock Options ("NQSO") as determined upon the grant of each option. The options outstanding at December 31, 1996 are all NQSOs. Options granted under the Plan have a maximum life of ten years. The options become exercisable in installments of 20% beginning on the date of grant and 20% upon each anniversary date of the original grant. The total shares available under the Company's stock option plan are 650,000. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED) The following table summarizes the activity relating to the Company's stock options for the years indicated.
- --------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- No. of Weighted-Avg. No. of Weighted-Avg. No. of Weighted-Avg. Shares Exercise Price Shares Exercise Price Shares Exercise Price ------- --------------- ------- --------------- ------- --------------- Balance, January 1 472,100 $ 6.81 379,650 $ 6.54 235,250 $ 7.59 Options granted 138,250 6.93 174,750 5.00 152,200 4.99 Options exercised (14,870) 5.40 (3,000) 4.88 - - Options expired (36,540) 6.15 (79,300) 6.46 (7,800) 8.20 - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31 558,940 $ 6.23 472,100 $ 6.81 379,650 $ 6.54 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Weighted-average grant date fair value of options granted during the year $ 4.37 $ 3.12 $ 3.18
The fair market value of options granted during 1996 and 1995 was estimated using the Black-Scholes option-pricing model. The following assumptions were incorporated into the valuation calculation: an option contract life of 10 years, a stock price volatility of 39.71% based on daily market prices for the preceding five year period, the stock pays no dividends and a risk-free interest rate equivalent to the 10-year Treasury rate on the date of each grant. The weighted-average risk-free rate for options granted during 1996 is 6.87%. The table below provides the range of exercise prices, weighted-average exercise prices and weighted-average remaining contractual lives for options outstanding at December 31, 1996.
Options Outstanding Options Exercisable --------------------------------------------------------- ----------------------------------- Number Weighted-Avg. Number Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price ------------------------------------------------------------------------------------------------------------------- $4.50 to $5.19 259,350 8.1 years $ 5.03 125,060 $ 5.02 $6.00 to $7.63 274,340 7.6 years 6.91 150,592 6.89 $10.10 to $11.87 25,250 3.3 years 11.30 25,250 11.30 ------------------------------------------------------------------------------------------------------------------- $4.50 to $11.87 558,940 7.6 years $ 6.23 300,902 $ 6.48 ------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock option and purchase plans. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, the Company's net income and earnings per share for the years ended 1996 and 1995 would have been reduced to the pro forma amounts indicated below: 1996 1995 Net Income to Common Shareholders -------------------------- As reported $ 4,455 $ 869 Pro forma $ 4,400 $ 834 Net Income per common and common share equivalent As reported $ 0.60 $ 0.12 Pro forma $ 0.59 $ 0.11 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 11 - COMMITMENTS AND CONTINGENCIES CREDIT EXTENSION: In the normal course of business, there are various outstanding commitments to extend credit which are not reflected in the accompanying consolidated financial statements. The Company does not anticipate losses as a result of these transactions. However, the commitments are a component of the estimate of the allowance for possible loan losses. Commercial and standby letters of credit totaled approximately $4.1 million and $4.3 million at December 31, 1996 and 1995, respectively. In addition, the Company had unfunded loan commitments of $110.5 million and $85.0 million at December 31, 1996 and 1995, respectively. All of the commitments outstanding at December 31, 1996 represent unfunded loans which bear a floating interest rate. The Company uses the same credit policies in making commitments and conditional obligations as it does in extending loan facilities to customers. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. INTEREST RATE SWAPS: The Company has entered into two interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate loan portfolio and does not use them for trading purposes. At December 31, 1996, the Company had outstanding one interest rate swap agreement with a commercial bank having a total notional principal amount of $50 million (Swap #1), and one interest rate swap agreement with a broker dealer having a notional principal amount of $25 million (Swap #2). The agreements were intended to reduce the Company's exposure to declines in prime lending rates by artificially converting $75 million of the Company's prime-based loans to fixed rates for the duration of the agreements. Swap #1 was entered into in September 1993. The terms of the first agreement require the Company to pay interest quarterly based on three-month LIBOR and to receive interest semi-annually at a fixed rate of 4.865%. The agreement matures in September 1998. Swap #2 was entered into in January 1994. The terms of the second agreement require the Company to pay interest quarterly based on three-month LIBOR in arrears, and to receive interest semi-annually at a fixed rate of 5.04% through the January 1997 maturity date. The Company accrues monthly interest income and expense on the swaps, the net of which is included in interest income on loans. For the years ended December 31, 1996, 1995, and 1994, net interest income or (expense) of ($563,000), ($929,000), and $141,000 from the swap agreements is included in interest income on loans in the consolidated statements of operations. The Company is required to pledge collateral on the transactions. U.S. Agency notes having a fair value of approximately $5.2 million were pledged as collateral for the agreements as of December 31, 1996. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company does not anticipate nonperformance by the counterparties. The following table summarizes the characteristics of the swap agreements as of December 31, 1996:
Notional Interest Rate Interest Rate Unrealized Estimated Maturity (DOLLARS IN THOUSANDS) Amount Paid Received Loss Fair Value Date - --------------------------------------------------------------------------------------------------------------------------- Swap #1 $50,000 3-mo LIBOR 4.865% $ 899 $ (899) September 14, 1998 Swap #2 $25,000 3-mo LIBOR 5.04% $ 1 $ (1) January 7, 1997 (in arrears)
LEASE COMMITMENTS: The Company leases parcels of land and buildings under operating leases, which require the Company to pay all normal property taxes, insurance, and maintenance. The Company had no capital leases at December 31, 1996. At December 31, 1995, the Company had one building lease with an amortized cost of $123,000 recorded as a capital lease and included in premises and equipment in the accompanying consolidated balance sheets. The capital lease was terminated during the first quarter of 1996. The costs associated with terminating the lease are included in the accompanying consolidated statement of operations for 1995. Net rent expense for the years ended 1996, 1995 and 1994 was approximately $800,000, $1.2 million and $900,000, respectively. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Future minimum payments required under noncancellable leases with initial or remaining terms of one year or more are as follows as of December 31, 1996: (DOLLARS IN THOUSANDS) ----------------------------------------------------------------- Operating YEARS ENDING DECEMBER 31, Leases ----------------------------------------------------------------- 1997 $ 783 1998 792 1999 933 2000 938 2001 951 Thereafter 6,161 ----------------------------------------------------------------- Total minimum payments $ 10,558 ----------------------------------------------------------------- ----------------------------------------------------------------- The payments shown above for operating leases take into consideration only one lease option that the Company intends to exercise. The Company has options to extend several of its other operating leases. However, because it is uncertain whether or not these other options will be exercised, payments for those option periods have been excluded. BORROWING ARRANGEMENTS: In the event that the Company experiences a temporary liquidity shortage, it has available other sources of liquidity, including reverse repurchase arrangements to borrow cash for short to intermediate periods of time using the Company's available-for-sale investment securities as collateral, Federal funds lines of credit that allow the Company to temporarily borrow an aggregate of up to $30.0 million from three commercial banks, and short-term borrowing lines of credit at the Federal Reserve Bank and Federal Home Loan Bank. Federal funds arrangements with correspondent banks are subject to the terms of the individual arrangements and may be terminated at the discretion of the correspondent bank. LITIGATION: The Company is a party to routine litigation involving various aspects of its business. In the opinion of management, none of the pending litigation at December 31, 1996 would have a material adverse impact on the consolidated financial condition or operations of the Company. NOTE 12 - EMPLOYEE BENEFIT PLANS The Company has a 401(k) plan that covers substantially all full-time employees. It permits voluntary contributions by employees, a portion of which is matched by the Company. The plan may acquire Company shares on the open market as part of the Company's matching contribution. The Company's expenses relating to its contributions to the 401(k) plan were $129,000, $139,000, and $108,000 in 1996, 1995 and 1994, respectively. The Company has established deferred compensation plans which permit certain directors and management employees to defer portions of their compensation and earn interest at a predetermined amount above a specified interest rate index on the deferred amounts. Interest expense incurred on deferred balances was approximately $177,000, $648,000 and $174,000 in 1996, 1995 and 1994, respectively. The deferred compensation liability at December 31, 1996 and 1995 was approximately $2.1 million, of which $1.2 million represented principal and was classified with other interest-bearing liabilities in the accompanying consolidated balance sheets. Approximately $948,000 and $946,000 represented accrued interest payable at December 31, 1996 and 1995, respectively, and was classified as accrued interest payable on other liabilities in the accompanying consolidated balance sheets. In conjunction with the plans, the Company has purchased life insurance policies on the participants with the Company as beneficiary. The cash surrender values of the life insurance policies were included in other assets in the accompanying consolidated balance sheets totaling approximately $3.5 million and $3.0 million at December 31, 1996 and 1995, respectively. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 13-PARENT COMPANY ONLY INFORMATION
BALANCE SHEETS DECEMBER 31, - -------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------------------------- ASSETS Cash $ 2,041 $ 2,305 Other assets 296 95 Investment in Southern California Bank 47,721 43,113 - -------------------------------------------------------------------------------------------------- Total Assets $ 50,058 $ 45,513 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities $ 139 $ 1 Shareholders' Equity: Common stock 37,738 37,658 Retained earnings 13,055 8,600 Unrealized loss on available-for-sale securities, net of tax (874) (746) - -------------------------------------------------------------------------------------------------- Total Shareholders' Equity 49,919 45,512 - -------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 50,058 $ 45,513 - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- INCOME Interest income $ 63 $ 108 $ 93 Dividend income from subsidiary - - 163 - ---------------------------------------------------------------------------------------------------------------------- Total income 63 108 256 - ---------------------------------------------------------------------------------------------------------------------- EXPENSE Management fees 90 66 24 Other professional fees 328 281 26 Other expenses 129 - 91 - ---------------------------------------------------------------------------------------------------------------------- Total expense 547 347 141 - ---------------------------------------------------------------------------------------------------------------------- (Loss) income before income taxes and equity in undistributed earnings of subsidiary (484) (239) 115 (Benefit) provision for income taxes (201) (99) - Equity in undistributed earnings of subsidiary 4,738 1,009 2,590 - ---------------------------------------------------------------------------------------------------------------------- NET INCOME $ 4,455 $ 869 $ 2,705 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 13-PARENT COMPANY ONLY INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net income $ 4,455 $ 869 $ 2,705 Adjustments to reconcile net income to net cash used in operating activities: (Increase) decrease in other assets (199) 43 (43) Undistributed earnings of subsidiary (4,738) (1,009) (2,753) Increase (decrease) in other liabilities 138 (94) - - ------------------------------------------------------------------------------------------------- Net cash used in operating activities (344) (191) (91) - ------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Dividends received from subsidiary - - 163 Additional investment in subsidiary - (5,000) (6,810) - ------------------------------------------------------------------------------------------------- Net cash used in investing activities - (5,000) (6,647) - ------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Proceeds from issuance of common stock 80 15 14,207 - ------------------------------------------------------------------------------------------------- Net cash provided by financing activities 80 15 14,207 - ------------------------------------------------------------------------------------------------- Net (decrease) increase in cash (264) (5,176) 7,469 Cash, January 1 2,305 7,481 12 - ------------------------------------------------------------------------------------------------- Cash, December 31 $ 2,041 $ 2,305 $ 7,481 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
NOTE 14 - CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 Quarter Ended - ----------------------------------------------------------------------------------------------------------- 31-Dec 30-Sep 30-Jun 31-Mar - ----------------------------------------------------------------------------------------------------------- Interest income $ 8,983 $ 8,840 $ 8,542 $ 8,602 Interest expense 2,905 2,972 2,884 2,966 - ---------------------------------------------------------------------------------------------------------- Net interest income 6,078 5,868 5,658 5,636 - ---------------------------------------------------------------------------------------------------------- (Recovery of) provision for possible loan losses - - (750) 280 Net gains on sales of securities - - - 14 Noninterest income 1,310 1,323 1,246 1,273 Noninterest expense 4,783 5,048 6,073 5,324 - ----------------------------------------------------------------------------------------------------------- Income before income taxes 2,605 2,143 1,581 1,319 - ----------------------------------------------------------------------------------------------------------- Provision for income taxes 1,083 893 661 556 - ----------------------------------------------------------------------------------------------------------- Net income $ 1,522 $ 1,250 $ 920 $ 763 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Net income per share $ 0.20 $ 0.17 $ 0.12 $ 0.10 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Stock Data Common stock price range: (1) High 9 7/8 7 7 1/8 6 3/4 Low 7 6 3/16 6 3/8 6 1/16
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 14 - CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 Quarter Ended - ----------------------------------------------------------------------------------------------------------------------- 31-Dec 30-Sep 30-Jun 31-Mar - ----------------------------------------------------------------------------------------------------------------------- Interest income $ 8,819 $ 8,796 $ 8,544 $ 7,237 Interest expense 2,875 3,107 3,076 2,957 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 5,944 5,689 5,468 4,280 - ----------------------------------------------------------------------------------------------------------------------- Provision for possible loan losses 314 900 200 124 Net losses on sales of securities - (620) - - Noninterest income 1,281 1,379 1,337 1,636 Noninterest expense 5,202 6,833 5,997 5,262 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 1,709 (1,285) 608 530 - ----------------------------------------------------------------------------------------------------------------------- Provision for income taxes (benefits) 707 (377) 178 185 - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 1,002 $ (908) $ 430 $ 345 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) per share $ 0.13 $ (0.12) $ 0.06 $ 0.05 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Stock Data Common stock price range: (1) High 6 1/8 6 5/8 5 1/4 5 1/4 Low 5 7/16 4 3/4 4 5/8 4 5/16
(1) The common stock is listed on the American Stock Exchange ("AMEX") under the symbol, "SCK". The preceding table sets forth the high and low closing prices on a per share basis for the common stock as reported by the AMEX for the periods indicated. NOTE 15 - REGULATORY MATTERS The Company became a member of the Federal Reserve System effective July 1, 1996. The Company's primary regulator is now the Federal Reserve Board. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1995, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. As of December 31, 1996, the Bank continued to meet the requirements to be categorized as well-capitalized, maintaining total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 15-REGULATORY MATTERS (CONTINUED)
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions DOLLARS IN THOUSANDS Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------- As of December 31, 1996: Total Capital (1) $ 49,917 11.86% $ 33,676 8.00% $ 42,095 10.00% Tier 1 Capital (1) $ 44,970 10.68% $ 16,838 4.00% $ 25,257 6.00% Leverage Capital (2) $ 44,970 9.51% $ 18,908 4.00% $ 23,635 5.00% As of December 31, 1995: Total Capital (1) $ 44,634 11.39% $ 31,342 8.00% $ 39,170 10.00% Tier 1 Capital (1) $ 39,727 10.14% $ 15,671 4.00% $ 23,502 6.00% Leverage Capital (2) $ 39,727 8.59% $ 18,493 4.00% $ 23,115 5.00%
(1) Ratio of Total and Tier 1 capital to risk-weighted assets. (2) Ratio of Tier 1 capital to average assets. NOTE 16 - TRANSACTIONS WITH DIRECTORS & OFFICERS The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its directors, principal officers, their immediate families, and affiliated companies in which they are principal shareholders. Any such transactions are on the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with others. These related parties were indebted to the Company for loans totaling approximately $2.0 million, $2.0 million, and $2.5 million as of December 31, 1996, 1995, and 1994, respectively. New loans granted in 1996 and 1995 were $490,000 and $714,000, respectively; repayments were $581,000, $1.1 million, respectively. NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS Management uses its best judgment in estimating the fair value of the Company's financial instruments. However, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments except marketable securities with quoted market prices, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in sales transactions at either December 31, 1996 or 1995. The estimated fair value amounts for 1996 and 1995 have been measured as of their respective year ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following information should not be interpreted as an estimate of the fair value of the entire company since a fair value calculation is only required for a limited portion of the Company's assets.
DECEMBER 31, 1996 DECEMBER 31, 1995 - --------------------------------------------------------------------------------------------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair (DOLLARS IN THOUSANDS) Amount Value Amount Value - --------------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and cash equivalents $ 33,768 $ 33,768 $ 29,088 $ 29,088 Investments: Securities available-for-sale 74,533 74,533 92,825 92,825 Investment in Federal Home Loan Bank stock, at cost 1,450 1,450 1,205 1,205 Investment in Federal Reserve Bank stock, at cost 607 607 - - Loans, net (excludes nonaccrual loans): Commercial 159,118 160,112 146,609 147,595 Real estate, construction 8,429 8,469 4,416 4,451 Real estate, mortgage 103,289 104,565 107,048 109,379 Consumer 73,493 73,995 57,383 58,427 Less: Allowance for possible loan losses 4,947 4,947 5,734 5,734 Accrued interest receivable 3,931 3,931 4,297 4,297 - --------------------------------------------------------------------------------------------------------------------------------- Total financial assets $ 453,671 $ 456,483 $ 437,137 $ 441,533 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES: Deposits: Deposits payable on demand $ 270,093 $ 270,093 $ 260,679 $ 260,679 Deposits with fixed maturities 145,233 145,347 146,132 146,663 Short-term borrowings 6,940 6,940 4,883 4,883 - --------------------------------------------------------------------------------------------------------------------------------- Total financial liabilities $ 422,266 $ 422,380 $ 411,694 $ 412,225 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Interest rate swap agreements in a net payable position $ - $ (900) $ - $ (1,070)
This disclosure of fair value amounts does not include the fair values of any intangible assets, such as core deposit intangibles, or loan servicing rights. The carrying values of certain financial instruments approximated their fair values. These financial instruments include cash and due from banks, interest-bearing deposits in banks, Federal funds sold and purchased, customers' acceptance liability, accrued interest receivable, demand deposits, other short-term borrowings, acceptances outstanding, and other liabilities that are considered financial instruments. Carrying values were assumed to approximate fair values for these financial instruments because they are short term in nature and their recorded amounts approximate fair values or are receivable or payable on demand. Fair value amounts of investment securities were based on quoted market prices. For purposes of these fair value calculations, the aggregate fair value of the loan portfolio, excluding nonaccrual loans, was adjusted by a related portion of the allowance for possible loan losses. That portion of the allowance for possible loan losses primarily represents the credit risk associated with loans that reprice within relatively short time frames. The fair values of loans that do not 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) reprice within relatively short time frames were calculated using discounted cash flow models based on the maturities of the loans. The discount rates, which were based on market interest rates for similar types of loans, incorporated adjustments for credit risk. The fair values of nonaccrual loans with recorded book values of $2.8 million and $1.4 million at December 31, 1996 and 1995, respectively, were not estimated because it was not practical to reasonably estimate the amount or timing of future cash flows for such loans. The fair market values of the interest rate swap agreements are based on quoted market prices. For deposits with defined maturities, the fair values were calculated using discounted cash flow models based on market interest rates for different product types and maturity dates for which the deposits were held. The fair value of loan commitments is not material to the financial statements taken as a whole. 55 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SC BANCORP By: /s/ Larry D. Hartwig ---------------------------------------- Larry D. Hartwig Chief Executive Officer and President Date: May 9, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: SIGNATURE TITLE DATE - --------- ----- ---- /s/ Larry D. Hartwig - ------------------------------ Chief Executive Officer, May 9, 1997 Larry D. Hartwig President and Director (Principal Executive Officer) /s/ Bruce Roat - ------------------------------ Executive Vice President, May 9, 1997 Bruce Roat Chief Financial Officer (Principal Financial and Accounting Officer) /s/ H. A. Beisswenger - ------------------------------ Chairman of the Board May 9, 1997 H. A. Beisswenger /s/ N. Keith Abbott - ------------------------------ Director May 9, 1997 N. Keith Abbott /s/ Robert C. Ball - ------------------------------ Director May 9, 1997 Robert C. Ball 56 /s/ James E. Cunningham - ------------------------------ Director May 9, 1997 James E. Cunningham /s/ William C. Greenbeck - ------------------------------ Director May 9, 1997 William C. Greenbeck /s/ Irving J. Pinsky - ------------------------------ Director May 9, 1997 Irving J. Pinsky /s/ Peer A. Swan - ------------------------------ Director May 9, 1997 Peer A. Swan /s/ Donald E. Wood - ------------------------------ Director May 9, 1997 Donald E. Wood 57 Exhibit Index - -------------------------------------------------------------------------------- Exhibit Description Page No. No. - -------------------------------------------------------------------------------- 3(i).1 SC Bancorp Articles of Incorporation (f) 3(i).2 Certificate of Amendment to SC Bancorp Articles of Incorporation dated May 9, 1995(g) 3(ii).1 Amended and Restated Bylaws of SC Bancorp 4.1 Specimen Common Stock Certificate(a) 4.2SC Bancorp 1989 Stock Option Plan(d) 4.3.1 Amended and restated Southern California Bank Employee Retirement Plan(c) 4.3.2 First amendment to the amended and restated Southern California Bank Employee Retirement Plan(g) 4.3.3 Second amendment to the amended and restated Southern California Bank Employee Retirement Plan(g) 4.3.4 Third amendment to the amended and restated Southern California Bank Employee Retirement Plan(g) 4.3.5 Fourth amendment to the amended and restated Southern California Bank Employee Retirement Plan(g) 4.4 SC Bancorp Executive Deferral Plan (IV)(d) 4.5 Southern California Bank Executive Incentive Compensation Plans for 1994(a) 4.6 Southern California Bank Executive Incentive Compensation Plans for 1995(g) 4.7 Southern California Bank Executive Incentive Compensation Plans for 1996 10.1 Sublease between SC Bancorp and Denny's, dated December 24, 1992, for office space in La Mirada, California(b) 10.2 Lease between Southern California Bank and Robert Stein, dated September 1, 1981, amended June 19, 1990, for office space in Avalon, California(c) 10.3 Assignment of lease between Southern California Bank and Garfield Bank, dated December 27, 1985, amended January 1, 1987, for office space in Huntington Beach, California(a) 10.4 Lease between Southern California Bank and Tustin-La Palma Business Center, dated July 8, 1993 for office space in Anaheim, California(a) 10.5 License Agreement between Southern California Bank and The Vons Companies, Inc., dated December 18, 1992 for supermarket space in Anaheim Hills, California(a) 10.6 First amendment to license agreement between Southern California Bank and The Vons Companies, Inc., dated December 18, 1992 for supermarket space in Anaheim Hills, California(h) 10.7 Consent to assignment of sublease and sublease between Southern California Bank, Bank of America, NTSA, and The Taj dated May 12, 1995 for office space in Laguna Hills, California(g) 10.8 Sublease between Southern California Bank and Citicorp Savings, dated November 30, 1995 for office space in La Jolla, California(g) 10.9 Lease between Southern California Bank and Regents Park Financial Centre, Ltd., dated October 25, 1995 for office space in La Jolla, California(g) 10.10 Forward lease between Southern California Bank and Regents Park Financial Centre, Ltd., dated October 25, 1995 for office space in La Jolla, California(g) 10.11 License Agreement between Southern California Bank and The Vons Companies, Inc., dated February 22, 1996 for supermarket space in La Habra, California(h) 10.12 Employment Agreement between SC Bancorp and Southern California Bank and Larry D. Hartwig, dated January 1, 1997 10.13 Employment Agreement between SC Bancorp and Southern California Bank and David A. McCoy, dated February 25, 1992 10.14 Amended and Restated Employment Security Agreement between SC Bancorp and Southern California Bank and David A. McCoy, dated January 1, 1997 10.15 Amended and Restated Employment Security Agreement between SC Bancorp and Southern California Bank and Bruce W. Roat, dated January 1, 1997 10.16 Amended and Restated Employment Security Agreement between SC Bancorp and Southern California Bank and Ann E. McPartlin, dated January 1, 1997 10.17 Amended and Restated Employment Security Agreement between SC Bancorp and Southern California Bank and M. V. Cummings, dated January 1, 1997 58 Exhibit Index (continued) 10.18 Form of Indemnification Agreement entered into with each Executive Officer and Director of SC Bancorp(a) 10.19 Form of Indemnification Agreement entered into with each Executive Officer and Director of Southern California Bank(a) 13.1 Pages 7-11 of the Company's 1996 annual report to shareholders 21.0 Subsidiaries of the Registrant(e) 23.1 Consent of the Company's independent auditor (Deloitte & Touche, LLP) to the incorporation by reference in the Registration Statement of SC Bancorp on Form S-8 (No. 33-38666) of their report dated January 24, 1997 appearing in the Annual Report on Form 10-K of SC Bancorp for the year ended December 31, 1996. 27.1 Financial Data Schedule - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (a) This exhibit is contained in SC Bancorp's Registration Statement on Form S-2, filed with the Commission on March 9, 1994, (Commission File No. 33-76274), and incorporated herein by reference. (b) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1992, filed with the Commission on March 30, 1993, (Commission File No. 0-11046) and incorporated herein by reference. (c) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1991, filed with the Commission on March 30, 1992, (Commission File No. 0-11046) and incorporated herein by reference. (d) This exhibit is contained in SC Bancorp's Proxy Statement, filed with the Commission on on March 23, 1990, (Commission File No. 0-11046) and incorporated herein by reference. (e) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1994, filed with the Commission on March 30, 1995, (Commission File No. 0-11046) and incorporated herein by reference. (f) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10- Q for the period ended March 31, 1995, filed with the Commission on May 15, 1995, (Commission File No. 0-11046) and incorporated herein by reference. (g) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31,1995, filed with the Commission on March 29, 1996, (Commission File No. 0-11046) and incorporated herein by reference. (h) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10- Q for the period ended September 30, 1996, filed with the Commission on November 14, 1996, (Commission File No. 0-11046) and incorporated herein by reference. 59 EX-3.(II) 2 AMENDED AND RESTATED BY-LAWS OF SC BANCORP AMENDED AND RESTATED BY-LAWS OF SC BANCORP ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside the State of California, and the corporation has one or more business offices in such state, the Board of Directors shall fix and designate a principal business office in the State of California. SECTION 2. OTHER OFFICES. Branch or other subordinate offices may at any time be established by the Board of Directors at such other places as it deems appropriate. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of California designated by the Board of Directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. SECTION 2. ANNUAL MEETING. The annual meeting of shareholders shall be held on the third Tuesday in May of each year at 1:30 p.m., or such other date or such other time as may be fixed by the Board of Directors. SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by the Board of Directors, the Chairman of the Board, the President, or by the holders of shares entitled to cast not less than ten percent (10%) of the votes at such meeting. If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or by registered mail to the Chairman of the Board, the President, any Vice President or the Secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after receipt of the request. If the notice is not given within 20 days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing in this paragraph shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board of Directors may be held. SECTION 4. NOTICE OF MEETINGS. Written notice, in accordance with Section 5 of this Article II, of each annual or special meeting of shareholders shall be given not less than 10 nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date, and hour of the meeting and (a) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (b) in the case of the annual meeting, those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of applicable law, any proper matter may be presented at the meeting for such action. The notice of any meeting at which Directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by the Board of Directors for election. If action is proposed to be taken at any meeting for approval of (a) a contract or transaction in which a Director has a direct or indirect financial interest, pursuant to Section 310 of the California General Corporation Law, (b) an amendment of the Articles of Incorporation, pursuant to Section 902 of that Law, (c) a reorganization of the corporation, pursuant to Section 1201 of that Law, (d) a voluntary dissolution of the corporation, pursuant to Section 1900 of that Law, or (e) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Law, the notice shall also state the general nature of that proposal. SECTION 5. MANNER OF GIVING NOTICE. Notice of a shareholders' meeting may be given either personally or by first-class mail, or by third-class mail if the corporation has outstanding shares held of record by 500 or more persons (determined as provided in Section 605 of the California General Corporation Law) on the record date for the shareholders' meeting, or by telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have 2 been given if sent to that shareholder by mail or telegraphic or other written communication to the corporation's principal office or if published at least once in a newspaper of general circulation in the county in which that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of mailing or other means of giving any notice in accordance with the above provisions, executed by the Secretary, Assistant Secretary or other transfer agent shall be prima facie evidence of the giving of the notice. If any notice addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States postal service marked to indicate that the United States postal service is unable to deliver the notice to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice to all other shareholders. SECTION 6. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. SECTION 7. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum (except as provided in Section 6 of this Article) no other business may be transacted at such meeting. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, when any shareholders' meeting is adjourned for more than 45 days from the date set for the original adjourned meeting, or, if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. At any adjourned meeting the corporation may transact any business which may have been transacted at the original meeting. 3 SECTION 8. VOTING. The shareholders entitled to notice of any meeting or to vote at any such meeting shall be only persons in whose name shares stand on the stock records of the corporation on the record date determined in accordance with Section 9 of this Article. Voting shall in all cases be subject to the provisions of Sections 702 through 704, inclusive, of the California General Corporation Law (relating to voting shares held by a fiduciary, in the name of a corporation, or in joint ownership). The shareholders' vote may be by voice or ballot; provided, however, that any election for Directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than elections of Directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of Directors) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the California General Corporation Law or by the Articles of Incorporation. Pursuant to Section 301.5 of the California General Corporation Law, this corporation shall not have cumulative voting as provided under Section 708 of such Law, provided that this corporation shall then be a listed corporation as defined in Section 301.5 of such Law. In any election of Directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of Directors to be elected, shall be elected. SECTION 9. RECORD DATE. The Board of Directors may fix, in advance, a record date for the determination of the shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect of any other lawful action. The record date so fixed shall be not more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action. When a record date is so fixed, only shareholders of record at the close of business on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise of the rights, as the case may be, notwithstanding any transfer of shares on the books of the corporation after the record date. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any 4 adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting. The Board of Directors shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting. If no record date is fixed by the Board, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. The record date for determining shareholders for any purpose other than set forth in this Section 9 or Section 11 of this Article shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. SECTION 10. CONSENT OF ABSENTEES. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a waiver of notice, or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by Section 4 to be included in the notice but not so included, if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of the proposal. SECTION 11. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Subject to Section 603 of the California General Corporation Law, any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, is signed by the holders of the outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, or their proxies. All such consents shall be filed with the Secretary of the corporation and shall be maintained in the corporate records; provided, however, that 5 (1) unless the consents of all shareholders entitled to vote have been solicited in writing, notice of any shareholder approval without a meeting by less than unanimous written consent shall be given, as provided by Sections 603(b)(1) and (2) of the California General Corporation Law, and (2) in the case of election of Directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of Directors; provided, however, that subject to applicable law, a Director may be elected by the shareholders at any time to fill a vacancy on the Board of Directors that has not been filled by the Directors within five (5) business days of the creation of the vacancy. Any such election by written consent other than to fill a vacancy created by removal requires the consent of the holders of a majority of the outstanding shares entitled to vote for the election of Directors. Any written consent may be revoked by a writing received by the Secretary of the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. Unless a record date for voting purposes be fixed as provided in Section 9 of this Article, in order that the Corporation may determine the shareholders entitled to consent to corporate action in writing without a meeting pursuant to this Section 11, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any shareholder of record seeking to have the shareholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date (unless the record date has previously been fixed by the Board of Directors pursuant to the first sentence of this second paragraph of Section 11). If no record date has been fixed by the Board of Directors pursuant to the first sentence of this second paragraph of Section 11 or otherwise within ten (10) days of the date on which such a request is received, the record date for determining shareholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Secretary in accordance with this Section 11. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining shareholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. 6 In the event of the delivery, in the manner provided by this Section 11, to the corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the corporation shall engage independent inspectors of elections for the purpose of performing promptly a ministerial review of the validity of the consents and revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the independent inspectors certify to the corporation that the consents delivered to the corporation in accordance with this Section 11 represent at least the minimum number of votes that would be necessary to take the corporate action. Nothing contained in this Section 11 shall in any way be construed to suggest or imply that the Board of Directors or any shareholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors, or to take any other action (including, without limitation, the commencement, prosecution, or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). Every written consent shall bear the date of signature of each shareholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated written consent received in accordance with Section 11, a written consent or consents signed by a sufficient number of holders to take such action are delivered to the corporation in the manner prescribed in this Section 11. SECTION 12. PROXIES. Every person entitled to vote shares or execute written consents has the right to do so either in person or by one or more persons authorized by a written proxy executed and dated by such shareholder and filed with the Secretary of the corporation prior to the convening of any meeting of the shareholders at which any such proxy is to be used or prior to the use of such written consent. A validly executed proxy which does not state that it is irrevocable continues in full force and effect unless (1) revoked by the person executing it, before the vote pursuant thereto, by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or by attendance at the meeting and voting in person by, the person executing the proxy; or (2) written notice of the death or incapacity of the maker of the proxy is received by the corporation before the vote pursuant thereto is counted; provided, however, that no proxy shall be valid after the expiration of 11 months from the date of its execution unless otherwise provided in the proxy. SECTION 13. INSPECTORS OF ELECTION. In advance of any meeting of shareholders, the Board of Directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting and any adjournment thereof. If no inspectors of election are so appointed, or if any persons so appointed fail to appear or fail or refuse to act, the Chairman of any such meeting 7 may, and on the request of any shareholder or shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present shall determine whether one (1) or three (3) inspectors are to be appointed. The duties of such inspectors shall be as prescribed by Section 707(b) of the California General Corporation Law and shall include: determining (1) the number of shares outstanding and the voting power of each, (2) the shares represented at the meeting, (3) the existence of a quorum, (4) the authenticity, validity and the effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and doing such acts as may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors of election, the decision, act, or certificate of a majority is effective in all respects as the decision, act or certificate of all. ARTICLE III DIRECTORS SECTION 1. POWERS. Subject to the provisions of the California General Corporation Law and any limitations in the Articles of Incorporation and these By-Laws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board of Directors. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Board of Directors shall have the following powers in addition to the other powers enumerated in these By-Laws: (a) To select and remove all the other officers, agents, and employees of the corporation, prescribe any powers and duties for them that are consistent with law, or with the Articles or these By-Laws, fix their compensation, and require from them security for faithful service. 8 (b) To conduct, manage, and control the affairs and business of the corporation and to make such rules and regulations therefor not inconsistent with law, or with the Articles or these By-Laws, as they may deem best. (c) To adopt, make, and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time as in their judgment they may deem best. (d) To authorize the issuance of shares of stock of the corporation from time to time, upon such terms and for such consideration as may be lawful. (e) To borrow money and incur indebtedness for the purposes of the corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory and capital notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities therefor and any agreements pertaining thereto. (f) To prescribe the manner in which and the person or persons by whom any or all of the checks, drafts, notes, contracts and other corporate instruments shall be executed. (g) To appoint and designate, by resolution adopted by a majority of the authorized number of Directors, one or more committees, each consisting of two or more Directors, including the appointment of alternate members of any committee who may replace any absent member at any meeting of the committee; and (h) Generally, to do and perform every act or thing whatever that may pertain to or be authorized by the Board of Directors of a commercial bank under the laws of this state. SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS. (a) The number of Directors shall be nine (9). Commencing with the 1993 annual meeting of shareholders, the Board of Directors shall be divided into three classes, Class I, Class II and Class III, each having three Directors. At the 1993 annual meeting of shareholders, Directors of the first class (Class I) shall be elected to hold office for a term expiring at the 1994 annual meeting of shareholders; Directors of the second class (Class II) shall be elected to hold office for a term expiring at the 1995 annual meeting of shareholders; and Directors of the third class (Class III) shall be elected to hold office for a term expiring at the 1996 annual meeting of shareholders. At each annual meeting of shareholders after 1993, the successors to the class of Directors whose terms then shall expire shall be identified as being of the same class as the Directors they succeed and 9 elected to hold office for a term expiring at the third succeeding annual meeting of shareholders. Notwithstanding the foregoing, whenever the holders of the preferred stock or preference stock issued by the corporation shall have the right, voting separately by class, to elect Directors at an annual or special meeting of shareholders, the election, term of office and filling of vacancies of such Directors shall be governed by the terms of the Articles of Incorporation applicable thereto, and such Directors so elected shall not be divided into classes pursuant to this paragraph. Directors elected by a vote of the holders of preferred stock or preference stock as provided in the Articles of Incorporation shall hold office only so long as is required by the Articles of Incorporation. If at any meeting for the election of Directors, more than one class of stock, voting separately as classes, shall be entitled to elect one or more Directors and there shall be a quorum of only one such class of stock, that class of stock shall be entitled to elect its quota of Directors notwithstanding the absence of a quorum of the other class or classes of stock. (b) No person shall be eligible for or shall be elected to the Board of Directors of the corporation unless he or she (1) shall be a citizen of the United States of America, (2) has resided within 150 miles of the principal executive offices of the Company or any branch office of its principal subsidiary existing at the time of such election for at least 1 year immediately preceding such election, (3) owns in his or her own right at least 1,000 shares of the common stock of the corporation, and (4) has never been convicted of a felony crime in any jurisdiction within the United States, or of any crime punishable by more than 6 months imprisonment in any jurisdiction. (c) Nominations for election of members of the Board of Directors may be made by the Board of Directors, by a nominating committee or person appointed by the Board of Directors or by any holder of any outstanding class of capital stock of the corporation entitled to vote for the election of Directors. Notice of intention to make any nominations (other than those made by or at the direction of the Board of Directors) shall be made pursuant to a timely notice in writing to the Secretary of the corporation, with a copy thereof to the Chairman of the Board. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation by the latter of: (i) the close of business 21 days prior to the meeting of shareholders called for the election of Directors or (ii) 10 days after the date of mailing of notice of the meeting to shareholders. Such shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a Director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the corporation which are beneficially owned by the person, (iv) the number of shares of any bank, 10 bank holding company, savings and loan association or other depositary institution owned beneficially by the person and the identities and locations of any such institutions, (v) whether the person has ever been convicted of or pleaded nolo contendere to any criminal offense involving dishonesty or breach of trust, filed a petition in bankruptcy or been adjudged bankrupt, and (vi) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of Directors pursuant to Schedule 14A under the Securities Exchange Act of 1934, as amended; and (b) as to the shareholder giving the notice (i) the name and record address of the shareholder, (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the shareholder, and (iii) the number of shares of capital stock of any bank, bank holding company, savings and loan association or other depositary institution owned beneficially by the shareholder and the identities and locations of any such institutions. The notice shall be signed by the nominating shareholder and by each nominee, and shall be accompanied by a written consent to be named as a nominee for election as a Director from each proposed nominee. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of any such proposed nominee to serve as a Director of the corporation. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth herein. Nominations not made in accordance with these procedures shall be disregarded by the chairman of the meeting, and upon his instructions, the inspectors of elections shall disregard all votes cast for each such nominee. The foregoing requirements do not apply to the nomination of a person to replace a proposed nominee who has become unable to serve as a Director between the last day for giving notice in accordance with this paragraph and the date of election of Directors if the procedure called for in this paragraph was followed with respect to the nomination of the proposed nominee. SECTION 3. ELECTION AND TERM OF OFFICE. If any annual meeting is not held or the Directors to then be elected are not elected thereat, the Directors to then be elected may be elected at any special meeting of shareholders held for that purpose. Each Director shall hold office until expiration of the term for which such Director was elected and until a successor has been elected and qualified pursuant to Section 2(a) of this Article III. SECTION 4. VACANCIES. Any Director may resign effective upon giving written notice to the Chairman of the Board, the President, Secretary, or the Board of Directors, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Except for a vacancy created by the removal of a Director, vacancies on the Board of Directors may be filled by approval of a majority of the remaining 11 Directors, or, if the number of Directors then in office is less than a quorum, by (1) the unanimous written consent of the Directors then in office, (2) the affirmative vote of a majority of the Directors then in office at a meeting held pursuant to notice or waivers of notice complying with Section 307 of the California General Corporation Law or (3) a sole remaining Director, and each Director so elected shall hold office until such expiration of the term for which such Director was elected and until such Director's successor has been elected and qualified pursuant to Section 2(a) of this Article III. A vacancy on the Board of Directors existing as the result of a removal of a Director may be filled only by approval of the shareholders, unless the Articles of Incorporation or a by-law adopted by the shareholders so provides. A vacancy or vacancies in the Board of Directors shall be deemed to exist in case of death, resignation, or removal of any Director, or if the authorized number of Directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any Director or Directors are elected, to elect the full authorized number of Directors to be voted for at that meeting. The Board of Directors may declare vacant the office of a Director who has been declared of unsound mind by an order of court or convicted of a felony. The shareholders may elect a Director or Directors at any time to fill any vacancy or vacancies not filled by the Directors within five (5) business days of the creation of the vacancy. Any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote. Any such election by written consent to fill a vacancy created by removal requires the unanimous consent of the outstanding shares entitled to vote. If the Board of Directors accepts the resignation of a Director tendered to take effect at a future time, the Board of Directors or the shareholders shall have power to elect a successor to take office when the resignation is to become effective. No reduction of the authorized number of Directors or amendment reducing the number of classes of Directors shall have the effect of removing any Director prior to the expiration of the Director's term of office. SECTION 5. PLACE OF MEETING. Regular meetings of the Board of Directors shall be held at any place within or without the State of California which has been designated in the notice of meeting or if there is no notice, at the principal office of the corporation, or at a place designated by resolution of the Board of Directors or by the written consent of the Board of Directors. Any regular or special meeting is valid wherever held if held upon written consent of all 12 members of the Board of Directors given either before or after the meeting and filed with the Secretary of the corporation. SECTION 6. REGULAR MEETINGS. Immediately following each annual meeting of shareholders and at the same place, the Board of Directors shall hold a regular meeting for the purpose of organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required. Other regular meetings of the Board of Directors shall be held without notice either on the third Tuesday of each month at the hour of 4:00 p.m. or at such different date and time as the Board of Directors may from time to time fix by resolution; provided, however, should said day fall upon a legal holiday observed by the corporation at its principal office, then said meeting shall be held at the same time and place on the next succeeding full business day. Call and notice of all regular meetings of the Board of Directors are hereby dispensed with. SECTION 7. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board, the President, or the Secretary or by any two Directors. Special meetings of the Board of Directors shall be held upon no less than four days' written notice by mail or 48 hours' notice delivered personally or by telephone or telegraph. Any such written or telegraphic notice shall be addressed or delivered to each Director at such Director's address as it is shown upon the records of the corporation or as may have been given to the corporation by the Director for purposes of notice or, if such address is not shown on such records or is not readily ascertainable, at the place in which the meetings of the Directors are regularly held. Such notice may, but need not, specify the purpose of the meeting, nor the place if the meeting is to be held at the principal office of the corporation. Notice of any meeting of the Board of Directors need not be given to any Director who signs a waiver of notice or a consent to holding the meeting, or who attends the meeting without protesting, either prior thereto or at its commencement, the lack of notice to such Director. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. 13 SECTION 8. QUORUM. A majority of the authorized number of Directors constitutes a quorum of the Board of Directors for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the Directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, unless a greater number be required by the Articles and subject to the provisions of Section 310 of the California General Corporation Law (as to approval of contracts or transactions in which a Director has a direct or indirect material financial interest), Section 311 (as to appointment of committees), and Section 317 (e) (as to indemnification of Directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of Directors, if any action taken is approved by at least a majority of the required quorum for such meeting. SECTION 9. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the Board of Directors may participate in a meeting through use of a conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting pursuant to this Section 9 constitutes "presence" in person at such meeting. SECTION 10. WAIVER OF NOTICE. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the Directors not present signs a written waiver of notice, a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 11. ADJOURNMENT. A majority of the Directors present, whether or not a quorum is present, may adjourn any Directors' meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty- four hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 7 of this Article III, to the Directors who were not present at the time of the adjournment. SECTION 12. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board of Directors shall individually or collectively consent in writing to such action. Such action by written consent shall have the same effect as a unanimous vote of the Board of Directors. Such consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. SECTION 13. FEES AND COMPENSATION. Directors and members of committees may receive such compensation, if any, for their services, and such 14 reimbursement for expenses, as may be fixed or determined by resolution of the Board of Directors. This Section shall not be construed to preclude any Director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services. SECTION 14. RIGHTS OF INSPECTION. Every Director of the corporation shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a Director may be made in person or by agent or attorney and includes the right to copy and obtain extracts. SECTION 15. COMMITTEES OF THE BOARD. The Board of Directors may designate, by resolution adopted by a majority of the authorized number of Directors, one or more committees, consisting of two or more Directors, to serve at the pleasure of the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of any committee, and such alternate members may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of Directors. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have all the authority of the Board except as otherwise provided by law. ARTICLE IV OFFICERS SECTION 1. OFFICERS. The officers of the corporation shall be a President, one or more Vice Presidents, a Secretary, and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, a Vice Chairman of the Board, one or more Assistant Vice Presidents, one or more Assistant Financial Officers, one or more Assistant Secretaries and such other officers as may be elected or appointed in accordance with provisions of Section 3 of this Article. One person may hold two or more offices, except those of President and Chief Financial Officer. SECTION 2. ELECTION. The officers of the corporation, except such officers as may be elected or appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by, and shall serve at the pleasure of, the Board of Directors, and shall hold their respective offices until their resignation, removal, or other disqualification from service, or until their respective successors shall be elected, subject to the rights, if any, of an officer under any contract of employment. 15 SECTION 3. SUBORDINATE OFFICERS. The Board of Directors may elect, and may empower the President to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these By-Laws or as the Board of Directors may from time to time determine. SECTION 4. REMOVAL AND RESIGNATION. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors at any time, or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the corporation, but without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these By-Laws for regular election or appointment to such office. SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors and of the shareholders, and exercise and perform such other powers and duties as may be from time to time assigned by the Board of Directors. SECTION 7. VICE CHAIRMAN. The Vice Chairman of the Board, if there shall be such an officer, shall in the absence of the Chairman of the Board, preside at all meetings of the Board of Directors and of the shareholders, and exercise and perform such other powers and duties as may be from time to time assigned by the Board of Directors. SECTION 8. PRESIDENT. Subject to such powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President is the General Manager and Chief Executive Officer of the corporation and has, subject to the control of the Board of Directors, general supervision, direction, and control of the business and officers of the corporation. In the absence of both the Chairman of the Board and the Vice Chairman, or if there be none, the President shall preside at all meetings of the shareholders and at all meetings of the Board of Directors. The President has the general powers and duties of management usually vested in the office of President and General 16 Manager of a corporation and such other powers and duties as may be prescribed by the Board of Directors. SECTION 9. VICE PRESIDENTS. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the By-Laws, and the President, or the Chairman of the Board. SECTION 10. SECRETARY. The Secretary shall keep or cause to be kept, at the principal office and such other place as the Board of Directors may order, a book of minutes of all meetings of shareholders, the Board of Directors, and its committees, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present or represented at shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, a copy of the By-Laws of the corporation at the principal office or business office in accordance with Section 213 of the California General Corporation Law. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation's transfer agent or registrar, if one be appointed, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders, of the Board of Directors and of any committees thereof required by these By-Laws or by law to be given, shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors. SECTION 11. ASSISTANT SECRETARY. The Assistant Secretary or the Assistant Secretaries, in the order of their seniority, shall, in the absence or disability of the Secretary, or in the event of such officer's refusal to act, perform the duties and exercise the powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. SECTION 12. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of the properties and business transactions of the corporation, 17 including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares, and shall send or cause to be sent to the shareholders of the corporation such financial statements and reports as are by law or these By-Laws required to be sent to them. The books of account shall at all times be open to inspection by any Director of the corporation. The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and Directors, whenever they request it, an account of all transactions as Treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors. SECTION 13. ASSISTANT FINANCIAL OFFICER. The Assistant Financial Officer or the Assistant Financial Officers, in the order of their seniority, shall, in the absence or disability of the Chief Financial Officer, or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such additional powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. SECTION 14. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that such officer is also a Director of the corporation. SECTION 15. OFFICERS HOLDING MORE THAN ONE OFFICE. Any two or more offices, except those of President and Chief Financial Officer, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. SECTION 16. INABILITY TO ACT. In the case of absence or inability to act of any officer of the corporation and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer, or any Director or other person whom it may select. 18 ARTICLE V OTHER PROVISIONS SECTION 1. INSPECTION OF CORPORATE RECORDS. The corporation shall keep at its principal executive office a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may: (a) Inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five business days' prior written demand upon the corporation; or (b) Obtain from the transfer agent, if any, for the corporation, upon written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of Directors and their shareholdings, as of the most recent record date for which it has been compiled, or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of five business days after the demand is received or the date specified therein as the date as of which the list is to be compiled. SECTION 2. INSPECTION OF BY-LAWS. The corporation shall keep in its principal executive office the original or a copy of these By-Laws as amended to date, which shall be open to inspection by shareholders at all reasonable times during office hours. SECTION 3. ENDORSEMENT OF DOCUMENTS; CONTRACTS. Subject to the provisions of applicable law, any note, mortgage, evidence of indebtedness, contract, share certificate, initial transaction statement or written statement, conveyance, or other instrument in writing, and any assignment or endorsement thereof executed or entered into between this corporation and any other person, when signed by (i) the Chairman of the Board, the President or any Vice President and (ii) the Secretary, any Assistant Secretary, the Chief Financial Officer or any Assistant Treasurer of this corporation shall be valid and binding upon this corporation in the absence of actual knowledge on the part of the other person that the signing officers had not the authority to execute the same. Any such instruments may be signed by any other persons or persons and in such manner as from time to time shall be determined by the Board of Directors, and unless so authorized by the Board of Directors, no officer, agent, or employee shall have any 19 power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or amount. SECTION 4. CERTIFICATES OF STOCK. Every holder of shares of the corporation shall be entitled to have a certificate signed in the name of the corporation by the President or a Vice President and by the Chief Financial Officer or Assistant Financial Officer or by the Secretary or Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Signatures on the certificates may be facsimile. If any officer, transfer agent or registrar who has signed a certificate or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. The Board of Directors may, in case any certificate for shares is alleged to have been lost, stolen, or destroyed, authorize the issuance of a new certificate in lieu thereof, and the corporation may require that the corporation be given a bond or other adequate security sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft, or destruction of any such certificate or the issuance of such new certificate. Prior to the due presentment for registration of transfer in the stock transfer book of the corporation, the registered owner shall be treated as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, except as expressly provided otherwise by the laws of the State of California. SECTION 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The President or any other officer or officers authorized by the Board of Directors or the President are each authorized to vote, represent, and exercise on behalf of the corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the corporation. The authority herein granted may be exercised by any such officer in person or by any other person authorized to do so by proxy or power of attorney duly executed by said officer. SECTION 6. ANNUAL REPORT TO SHAREHOLDERS. Not later than 120 days after the close of the fiscal year, the Board of Directors shall cause an annual report to be sent to shareholders of the corporation, complying with Section 1501 of the California General Corporation Law. SECTION 7. SEAL. The corporate seal of the corporation shall consist of two concentric circles, between which shall be the name of the corporation, and in 20 the center shall be inscribed the word "Incorporated" and the date of its incorporation. SECTION 8. FISCAL YEAR. The fiscal year of this corporation shall begin on the first day of January and end on the 31st day of December of each year. SECTION 9. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise requires, the general provisions, rules of construction, and definitions contained in the California General Corporation Law shall govern the construction of these By-Laws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. SECTION 10. BY-LAW PROVISIONS CONTRARY TO OR INCONSISTENT WITH PROVISIONS OF LAW. Any article, section, subsection, subdivision, sentence, clause or phrase of these By-Laws which, upon being construed in the manner provided in Section 9 of this Article, shall be contrary to or inconsistent with any applicable provision of the Accountancy Corporation Board of the State of California or other applicable law of the State of California or of the United States shall not apply so long as said provisions of law shall remain in effect, but such result shall not affect the validity or applicability of any other portions of these By-Laws, it being hereby declared that these By-Laws would have been adopted and each article, section, subsection, subdivision, sentence, clause or phrase thereof, irrespective of the fact that any one or more articles, sections, subsections, subdivisions, sentences, clauses or phrases is or are illegal. ARTICLE VI INDEMNIFICATION SECTION 1. DEFINITIONS. For the purposes of this Article, "agent", includes any person who is or was a Director, officer, employee, or other agent of the corporation, or is or was serving at the request of the corporation as a Director, officer, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, or was a Director, officer, employee, or agent of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation; "proceeding" includes any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes, without limitation, attorneys' fees and expenses of establishing a right to indemnification pursuant to law. SECTION 2. EXTENT OF INDEMNIFICATION. 21 (a) The corporation shall, to the maximum extent permitted by the California General Corporation Law, indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that the person is or was an agent of the corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the proceeding. (b) The corporation shall, to the maximum extent permitted by the California General Corporation Law, indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was an agent of the corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action. (c) The corporation shall, to the maximum extent permitted by the California General Corporation Law, advance the expenses incurred by any agent of the corporation in defending any proceeding prior to the final disposition of the proceeding. SECTION 3. INSURANCE. The corporation shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in that capacity or arising out of the agent's status as such whether or not the corporation would have the power to indemnify the agent against that liability under the provisions of this Article. ARTICLE VII AMENDMENTS New By-Laws may be adopted or these By-Laws may be amended or repealed by the approval of the outstanding shares or by the approval of the Board of Directors; provided, however, that a by-law specifying or changing a fixed number of Directors or the maximum or minimum number or changing from a fixed to a variable Board of Directors or vice versa may only be adopted by approval of the outstanding shares, complying, if applicable, with Section 212 of the California General Corporation Law. If the Articles of Incorporation of the corporation set forth the authorized number of Directors of the corporation, the authorized number of Directors may be changed only by an amendment of the Articles of Incorporation. 22 (as amended through January 30, 1997) 23 EX-4.7 3 EXECUTIVE INCENTIVE COMPENSATION PLAN EXHIBIT 4.7 SOUTHERN CALIFORNIA BANK - -------------------------------------------------------------------------------- EXECUTIVE INCENTIVE COMPENSATION PLAN FOR 1996 - -------------------------------------------------------------------------------- CONFIDENTIAL ------------ December 19, 1995 BUSINESS STRATEGY Southern California Bank believes our key responsibility is to provide high quality, relationship-based financial services to businesses and consumers within our market area. We work constantly to satisfy our customer needs and to provide services that are convenient, reliable and fairly priced. TOTAL COMPENSATION PHILOSOPHY The cornerstone of any effective compensation program is the philosophy on which it is based. Southern California Bank's compensation philosophy is to provide its executives with a TOTAL COMPENSATION PROGRAM, including base salaries, incentives, stock options and benefits that is: - - Based on achievement of key results and performance. - - True to our organization values and culture. - - Highly competitive within the external marketplace. To accomplish this, we have established base salary levels fully competitive with market rates. Incentives enable you to increase your compensation significantly based on the Bank's annual performance results. Stock options provide the necessary link to increased shareholder value. Benefits consider your needs as well as program costs and tax efficiency. GOALS OF THE PROGRAM The goals of our total compensation program are to: - - Attract, motivate and retain high-caliber executives. - - Make sure we are all working towards those objectives critical to our growth and profitability. - - Recognize and reward your contribution to that success. - - Inspire teamwork. - - Pay above competitive market levels in total compensation based on results. TOTAL COMPENSATION PROGRAM Four major elements make up our total compensation program: - - Base salary - - Incentive compensation - - Executive benefits, including deferred compensation - - Stock options. 1. BASE SALARY In pricing our services/products, we consider market conditions and what our competitors charge for similar services/products. Likewise, to determine competitive compensation levels, we look outside to see what other banks pay for similar jobs. Competitive compensation levels were obtained through participation in industry surveys and a proxy review of banking institutions in Northern and Southern California with assets primarily between $400 million and $1 billion. Based on that data, we have developed base salaries for each executive position and ensured that these salaries reflect competitive compensation levels within our industry peer group. Your base salary is intended to reflect a compensation level for your individual skills, experience and performance, as well as the competitive level paid for your position within our industry peer group. For 1996, participants in the Executive Incentive Compensation Plan, and other formal incentive plans, will not be eligible for merit increases as the Bank is looking to stabilize base salaries. Opportunity for additional compensation will be dependent upon meeting or exceeding the goals in the Executive Incentive Compensation Plan and on the Executives' attainment of individual performance objectives. 2 2. INCENTIVE COMPENSATION The 1996 Executive Incentive Compensation Plan is based on how well the Bank performs and how well you, individually, perform. - - Bank and individual performance are viewed as independent components of the incentive award, with Bank performance weighted 75% and individual, 25%. - - Bank performance will be measured by 1996 bank average return on equity (ROE), and capital, asset quality, and liquidity requirements. - - Individual performance is measured on achievement of specific functional area objectives and management performance. - - Target for average ROE for the Bank has been established for the incentive period, January 1, 1996 to December 31, 1996. INCENTIVE AWARD OPPORTUNITY - - Target awards, defined as a percentage of base salary, are established for each executive. This is the amount you will receive if the Bank achieves target goals and objectives, and your performance is rated at a level of "Achieves Expectations" or greater. - - These target awards increase when results exceed the goal and decrease when results are less than the goal. 3 2. INCENTIVE COMPENSATION (CONTINUED) INCENTIVE AWARD OPPORTUNITY (Continued): - - Specifically, the elements to be evaluated in calculating executive incentive awards are as follows: - -------------------------------------------------------------------------------- BANK PERFORMANCE (75%) - -------------------------------------------------------------------------------- THRESHOLD: - Minimum Level Average ROE of 8.54% for the Bank for 1996. - Capital: Tier 1 Leverage Ratio not to fall below 7.0% based on an average of four quarterly calculations for 1996. - Asset Quality: Net Loan Losses, as a percentage of average loans outstanding, for the calendar year ending December 31, 1996, not to exceed 1.2%. - Liquidity Ratio within policy guidelines of 20 to 40% as measured at the end of each quarter in 1996. - -------------------------------------------------------------------------------- TARGET: - Average Bank ROE of 10.05% for 1996. - -------------------------------------------------------------------------------- INDIVIDUAL PERFORMANCE (25%) - -------------------------------------------------------------------------------- THRESHOLD: - "Achieves Expectations" - -------------------------------------------------------------------------------- TARGET: - Goal attainment - Managerial/Team Performance - -------------------------------------------------------------------------------- - - The following pages present the incentive earnings schedule and examples of award calculations. - - Incentive awards will be paid in cash within 30 days after annual performance figures have been verified by the Bank's external auditors and the CEO and Board of Directors. 4 1996 INCENTIVE SCHEDULE
- ---------------------------------------------------------------------------------------------------- AVERAGE ROE (75%) INDIVIDUAL PERFORMANCE* (25%) - ---------------------------------------------------------------------------------------------------- 1996 PERCENTAGE PERCENTAGE GOAL ACHIEVEMENT ATTAINED ATTAINED INCENTIVE MANAGERIAL ROE EARNED - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- 8.53 LESS THAN 85% 0% - ---------------------------------------------------------------------------------------------------- THRESHOLD 8.54 85% 50% "ACHIEVES EXPECTATIONS" - ---------------------------------------------------------------------------------------------------- 8.84 87% 60% 9.14 90% 70% 9.44 94% 80% 9.74 97% 90% - ---------------------------------------------------------------------------------------------------- TARGET 10.05 100% 100% 100% OF TARGET AWARD - ---------------------------------------------------------------------------------------------------- 10.51 104% 105% 10.97 108% 110% 11.43 112% 115% 11.89 116% 120% 12.35 119% 125% 12.81 123% 130% 13.27 127% 135% 13.73 131% 140% 14.19 135% 145% 14.65 139% 150% 15.11 143% 160% 15.58 149% 170% 16.05 156% 180% 16.52 162% 190% - ---------------------------------------------------------------------------------------------------- MAXIMUM 16.99 169% 200% "EXCEEDS EXPECTATIONS" 150% OF TARGET AWARD - ----------------------------------------------------------------------------------------------------
* Individual performance for EVPs will be determined via assessment of performance as done by the CEO and reviewed by the Board Compensation and Benefits Committee; the rating for individual performance of the CEO will be determined by the Chairmen of the various Board Committees. Percentage of incentive earned for individual performance component does not accelerate beyond average ROE% attained until Bank achieves target level (100%) of average ROE performance. 5 EXAMPLE OF CALCULATION - -------------------------------------------------------------------------------- (SCENARIO I - BANK EXCEEDS AVERAGE ROE TARGET) - -------------------------------------------------------------------------------- ASSUMPTIONS PERFORMANCE RESULTS - -------------------------------------------------------------------------------- - - Base Salary: $130,000 - Bank meets all threshold goals - - Target Incentive (25%): $32,500 - ROE is 108% of goal - - Target Annual Total Cash: $162,500 - Individual performance "Achieves Expectations" - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------- TARGET INCENTIVE AWARD INCENTIVE AWARD CALCULATIONS - ---------------------------------------------------------------------------------------------------- BANK ELEMENT AVERAGE ROE (75% WEIGHTING) - - Target ROE: $24,375 108% of Goal 110% X $24,375 = $26,813 INDIVIDUAL ELEMENT (25% WEIGHTING) - - Target: $8,125 100% 100% X $8,125 = $8,125 ------ (ACHIEVES ------ Total Target Incentive: $32,500 EXPECTATIONS) TOTAL EARNED INCENTIVE $34,938 - ----------------------------------------------------------------------------------------------------
6 EXAMPLE OF CALCULATION - -------------------------------------------------------------------------------- (SCENARIO II - BANK FAILS TO ATTAIN AVERAGE ROE TARGET) - -------------------------------------------------------------------------------- ASSUMPTIONS PERFORMANCE RESULTS - -------------------------------------------------------------------------------- - - Base Salary: $130,000 - Bank meets all threshold goals - - Target Incentive (25%): $32,500 - ROE is 85% of goal - - Target Annual Total Cash: $162,500 - Individual performance "Exceeds Expectations" - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------- TARGET INCENTIVE INCENTIVE AWARD CALCULATIONS AWARD - ---------------------------------------------------------------------------------------------------- BANK ELEMENT AVERAGE ROE (75% WEIGHTING) - - Target ROE: $24,375 85% of Goal 50% X $24,375 = $12,187 INDIVIDUAL ELEMENT (25% WEIGHTING) - - Target: $8,125 50% * 50% X $8,125 = $4,063 ------ (EXCEEDS ------ EXPECTATIONS) TOTAL EARNED INCENTIVE $16,250 - ----------------------------------------------------------------------------------------------------
* Percentage incentive earned for individual performance component does not accelerate beyond average ROE% attained until Bank achieves target ROE performance. 7 3. EXECUTIVE BENEFIT PROGRAMS The Bank recognizes that the well being of our executives and their families is an important factor in your individual performance and, therefore, to our overall success. Our benefits and perquisites are designed to provide protection, savings, security, and rest and relaxation. They are also designed to be flexible and tax efficient. These plans are so much a part of our lives that we often take them for granted and forget how valuable they are. Our programs are highly competitive and comprehensive, adding approximately 40% to your annual pay, including: - - Deferred Compensation - - Medical, dental and vision insurance - - 401(k) savings plan - - Long-term disability insurance - - Life insurance - - Leased automobile - - Vacations and holidays. 4. STOCK OPTIONS Our executive stock option program is intended to reward your continued tenure with Southern California Bank and to reward your contributions over time. Holding options provides you with an excellent opportunity to achieve considerable capital accumulation longer term, and to participate in the Bank's success and growth along with our external shareholders. Options are most frequently used at the executive level and optionee holdings are reviewed on an annual basis. 8 SOUTHERN CALIFORNIA BANK 1996 EXECUTIVE INCENTIVE COMPENSATION PLAN TERMS AND CONDITIONS - -------------------------------------------------------------------------------- 1. PARTICIPATION Executive positions that are eligible to participate for Plan Year 1996, their targeted incentive award levels and the weighting between Bank and individual performance are listed in EXHIBIT I. Executives must have been employed for at least one full calendar quarter, in an eligible position, to be eligible for an award under the plan. 2. EFFECTIVE DATE This program supersedes all previous incentive compensation or bonus plans. It became effective January 1, 1996 and, subject to Southern California Bank's rights as described below to amend, modify or discontinue the program at any time during the specified period, the program will remain in effect until December 31, 1996. 3. PROGRAM ADMINISTRATION This program is authorized and administered annually by the Compensation and Benefits Committee of the Board of Directors through the Chief Executive Officer (CEO), with process and procedural assistance from the Executive Vice President, Human Resources. The Board Compensation and Benefits Committee has final authority to interpret the program and to make or nullify any rules and procedures as necessary for proper program administration. Any determination of the Committee about the program will be final and binding on all participants. 4. PROGRAM CHANGES OR DISCONTINUANCE Southern California Bank has developed this program based on existing business, market and economic conditions; current services; and personnel assignments. If substantial changes occur at the Bank which affect these conditions, services, assignments, or forecasts, the Compensation and Benefits Committee may add to, amend, modify or discontinue any of the terms or conditions of the program at any time during the program's specified period, provided that this action does not reduce the amount of awards earned before the date of the action. Any modifications to the Plan must be in writing; the Plan cannot be modified orally. 9 5. INCENTIVE COMPENSATION CALCULATION AND PAYMENT All incentive awards will be based on a combination of Bank performance and individual performance and the percentages of earned incentive will be calculated using the Incentive Schedule chart for respective participants. Incentive amounts will be calculated on the actual base salary of the executive as of December 31, 1996, less any bonuses or incentives, car allowances, housing allowances, relocation payments or other non-base compensation elements. Incentive awards will be paid in cash after the end of the fiscal year and within 30 days after annual performance figures have been verified by the Bank's external auditors and the CEO and Board of Directors. Any rights accruing to a participant or his/her beneficiary under the program shall be solely those of an unsecured general creditor of Southern California Bank. Nothing contained in the program and no action taken pursuant to the provisions hereof will create or be construed to create a trust of any kind, or a pledge, or a fiduciary relationship between Southern California Bank or the CEO and the participant or any other person. Nothing herein will be construed to require Southern California Bank or its CEO or Board of Directors to maintain any fund or to segregate any amount for a participant's benefit. Incentive payments will be included as compensation in the year paid for determining compensation under benefit programs. Incentive compensation will be considered taxable income to participants in the year paid and will be subject to all legally required withholdings. Actual tax liability is the participant's responsibility. - -------------------------------------------------------------------------------- Participants must have attained an overall individual performance rating of "Achieves Expectations" for their performance for the Plan Year period to be eligible to receive an incentive award. In all cases, the Bank's performance will serve as the threshold for any payments made under this Executive Incentive Plan. If the Bank fails to attain its capital, credit quality or liquidity thresholds, or if it fails to attain the specified minimum profitability level, no payments will be made to participants even if individual and functional area performance goals have been met and/or exceeded. - -------------------------------------------------------------------------------- 10 6. TERMINATION OF EMPLOYMENT A participant, to receive his or her award, must be an active full-time employee of Southern California Bank on the last day of the incentive period for which an award is earned (i.e., December 31, 1996). Voluntary resignation, prior to the end of the incentive period, will serve as a forfeiture of any award. A person being terminated involuntarily will not be eligible for any awards under this plan. 7. NEW HIRES, PROMOTIONS, TRANSFERS, APPROVED LEAVES OF ABSENCE Participants who are not employed by Southern California Bank at the beginning of the Plan Year may receive a proration of their earned award based on their length of employment, except that an executive hired, transferred or promoted into an eligible position on or after October 1, 1996 will not be eligible for any incentive award under this Plan. Participants who are on an approved Leave of Absence may be eligible for a pro- rated payment of earned incentive awards provided that the leave does not exceed 90 days in length. 8. DISABILITY, DEATH, OR RETIREMENT If a participant is disabled by an accident or illness, and is disabled long enough to be placed on long-term disability, his or her incentive award for the incentive period shall be prorated so that no award shall be earned during the period of long-term disability. In the event of death, Southern California Bank will pay to the estate or the beneficiary of the participant the pro rata portion of the earned award that the participant would have received if he/she had lived to the end of the Plan Year. Incentive award payments will be prorated in the event that a participant retires before the end of the Plan Year. 9. MISCELLANEOUS The Plan will not be deemed to give any participant the right to be retained in the employ of Southern California Bank, which is an "at-will" employer, nor will the Plan interfere with the right of the Bank to discharge any participant for any reason, with or without cause or notice, at any time. 11 The Plan will not be deemed to constitute a contract of employment with any participant or to be a consideration for the employment of any participant; rather, I understand that Southern California Bank and I have the right to terminate my employment for any reason at any time, and that this policy may be modified only in a written document signed by Southern California Bank's President and CEO. Participation in the 1996 Executive Compensation Plan does not guarantee participation in future incentive plans or other bonus or profit sharing programs. Plan structures and participation will be determined on a year-to- year basis. 12 EXHIBIT I --------- SOUTHERN CALIFORNIA BANK 1996 EXECUTIVE INCENTIVE COMPENSATION PLAN TERMS AND CONDITIONS - -------------------------------------------------------------------------------- ELIGIBLE POSITIONS ------------------ - - President and Chief Executive Officer - - EVP/Chief Operating Officer - - EVP/Chief Credit Officer & Chief Administrative Officer - - EVP/Corporate Banking - - EVP/Chief Financial Officer - - EVP/Human Resources TARGET AWARD STRUCTURE
- ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Position Target Incentive Calculation Incentive Opportunity Award Weighting (% of Base Salary) --------------------- -------------------------------------- Bank Individual Minimum* Target ** Max*** - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- PRES/CEO 40% 75% 25% 20% 40% 75% EVP/COO 30% 75% 25% 15% 30% 56% EVP/CCO 25% 75% 25% 12.5% 25% 47% EVP/CB 25% 75% 25% 12.5% 25% 47% EVP/CFO 25% 75% 25% 12.5% 25% 47% EVP/HR 20% 75% 25% 10% 20% 37.5% - ----------------------------------------------------------------------------------------------------
* MINIMUM = MINIMUM THRESHOLDS AND PERFORMANCE RATING OF "ACHIEVES EXPECTATIONS" ** TARGET = 100% AVERAGE ROE AND PERFORMANCE RATING OF "ACHIEVES EXPECTATIONS" *** MAXIMUM = 200% OF BANK AVERAGE ROE AND PERFORMANCE RATING OF "EXCEEDS EXPECTATIONS" 13 SOUTHERN CALIFORNIA BANK 1996 EXECUTIVE INCENTIVE COMPENSATION PLAN EFFECTIVE JANUARY 1, 1996 THROUGH DECEMBER 31, 1996 PARTICIPATION AGREEMENT ----------------------- I have read and reviewed the 1996 Executive Incentive Compen-sation Plan, including the Terms and Conditions, and understand their applicability. I understand the Plan will not be deemed to constitute a contract of employment or to be a consideration for my employment; rather, I understand that Southern California Bank is an "at-will" employer and that the Bank and I have the right to terminate my employment for any reason, at any time, and that this policy may be modified only in a written document signed by Southern California Bank's President and CEO or Chairman. - ----------------------------------- -------------------- Participant's Signature Date In the event of my death, any awards payable under this plan shall be payable to the following beneficiary. - ----------------------------------- -------------------- Beneficiary Name Social Security # If you are married and the beneficiary you have named is someone other than your spouse, your spouse must sign below to indicate consent to the designated beneficiary. - ----------------------------------- -------------------- Signature of Spouse Date 14 EX-10.12 4 EMPLOYMENT AGRMT BETW. SC AND L HARTWIG EXHIBIT 10.12 EMPLOYMENT AGREEMENT This Employment Agreement (sometimes referred to as the "Agreement") is effective January 1, 1997, between SC Bancorp ("Bancorp") and Southern California Bank ("Bank") (collectively referred to as "Employers"), and Larry D. Hartwig ("Employee"). RECITALS A. Employee entered into an Employment Agreement with Employers effective as of January 1, 1995 (the "Prior Agreement"). B. Employers desire to continue to employ Employee in the full-time employ of Employers as the President and Chief Executive Officer of the Employers and to provide hereby the terms of that employment. C. Employee has advised Employers' Boards of Directors of his willingness to continue to act in a full-time capacity as the President and Chief Executive Officer of Employers on the terms provided herein. D. Employee and Employers wish to terminate the Prior Agreement in its entirety and enter into a new agreement encompassing the terms of Employee's employment with Employers as contained herein. NOW, THEREFORE, in consideration of the foregoing Recitals, and the terms, conditions and covenants contained herein, it is agreed as follows: 1. EMPLOYMENT. Employers hereby employ Employee and Employee hereby accepts this employment and agrees to exercise and perform faithfully, exclusively, and to the best of his ability on behalf of each of the Employers the powers and duties customarily exercised and performed by its President and Chief Executive Officer on the terms and conditions set forth herein and as determined from time to time by the Employers' Boards of Directors. Employee acknowledges and agrees that he is hereby also making a moral commitment to honor this Agreement and to further the Employers' best interests during the full term of this Agreement. Employers acknowledge and agree that they are hereby making a moral commitment to honor this Agreement, to provide Employee with the authority necessary to fulfill his responsibilities and to direct the affairs of Employers in a manner which is consistent with safe and sound banking practices and in compliance with all applicable laws and regulations. 1 2. EMPLOYEE'S SERVICES AND DUTIES. 2.1 During the term hereof, Employee shall: a. Observe and conform to the policies and directions promulgated by Employers' Boards of Directors; b. Assume and perform those duties customarily performed by the Chief Executive Officer and President of a bank as determined from time to time by the Employers' Boards of Directors, including general executive duties and other powers and duties pertaining by law, regulations, or practice to the office of Chief Executive Officer and President, or otherwise imposed by the Bylaws of Employers; c. Serve as full-time employee, and devote his ability and attention to the business of Employers during the term of this Agreement, and neither directly nor indirectly render any services of a business, commercial, or professional nature, whether as employee, partner, officer, director or shareholder, to any other person, firm, corporation or organization which in any manner competes with Employers, whether for compensation or otherwise, nor engage in any activity which is adverse to the Employers' business or welfare, without the prior written consent of Employers' Boards of Directors; and d. Act as a member of the Boards of Directors of Employers if so elected by the shareholders of the Employers, and if appointed or elected as a member of any committees established by the Employers' Boards of Directors, to perform all of the duties and functions incident thereto. The precise services to be performed by Employee may be extended or curtailed, from time to time, at the discretion of the Employers' Boards of Directors, provided such services shall at all times be of the nature customarily performed by the Chief Executive Officer and President of a bank and bank holding company, as the case may be. 2.2 Nothing contained herein shall be construed to prevent Employee from investing his assets in any form or manner, or supervising these investments, provided that such investment-related activities do not, in any manner nor for any significant amount of time, interfere with his performance of services on behalf of Employers, and provided further Employee shall not acquire any direct or indirect ownership interest in any bank or financial institution, other than Employers, where such ownership interest exceeds one tenth of one percent of the total ownership interest in any bank or financial institution other than Employers. This restriction shall only apply to banks or financial institutions that are located within the service 2 areas of any of Employers' offices and are in direct competition with Employers. 2.3 During the term hereof Employee shall not have a margin account with any entity without the prior written consent of the Employers' Boards of Directors. 2.4 Employee is a director of Bancorp and Bank and Employee and Employers desire that Employee continue to serve as a director. Bancorp and Bank shall use their reasonable best efforts to cause Employee to be elected a director of both Boards of Directors at any meeting of the Boards or of the shareholders held for the purpose of electing directors during the term of this Agreement. 3. TERM. Unless terminated by other provisions contained herein, the term of Employee's employment by Employers pursuant to this Agreement shall be for a period of one and one half (1-1/2) consecutive calendar years, commencing as of January 1, 1997 and terminating on June 30, 1998; PROVIDED, HOWEVER, that Employers agree that on or before December 31, 1997, and on each December 31 thereafter so long as this Agreement shall remain in force and not terminate (each a "Consideration Date"), Employers' Boards of Directors will consider an extension of this Agreement for an additional one year term commencing on July 1, immediately following such Consideration Date and terminating one year thereafter. If on, or within the twelve (12) month period preceding, any Consideration Date the Employers' Boards of Directors do not by written notice to Employee affirmatively extend the term of this Agreement for one year, this Agreement shall terminate on June 30, immediately following such Consideration Date, unless terminated earlier by the operation of other provisions contained herein. 4. COMPENSATION AND OTHER BENEFITS. As compensation for the services to be rendered by Employee hereunder, Employers shall pay and the Employee shall accept the following compensation: a. Employers shall pay to Employee a minimum base salary of $210,000 per year, payable in equal semi-monthly installments, less usual withholding deductions. The Employers' Boards of Directors will consider on an annual basis on or before the end of the calendar year whether it is appropriate or desirable to increase the amount of the base salary as of January 1 of the next calendar year. Notwithstanding that the INITIAL TERM of this Agreement commences as of January 1, 1995, the first consideration of an increase in base salary shall occur before the end of calendar year 1994 for possible implementation in calendar year 1995. Nothing herein shall be construed to impose upon the Employers any obligation to increase the Employee's base salary, but rather the Employers' Boards of Directors may 3 increase Employee's base salary at any time in their absolute discretion. b. Employers shall provide Employee during the term of this Agreement with an automobile, purchased or leased new, comparable to a domestic luxury sedan. Employers shall pay all reasonable operating expenses with regard to such automobile and shall procure and maintain in force at Employers' expense an insurance policy on such automobile which shall include collision, comprehensive, medical payments and liability coverage with the limits mutually agreed to by Employers and Employee. c. As additional compensation, Employee shall, in the absolute discretion of Employers' Boards of Directors, be entitled to participate in the Employees' Senior Management Incentive Compensation Program or any other similar program from time to time in effect. d. During the term of Employee's employment under this Agreement, Employee shall be entitled to receive other benefits of employment made available to other employees of Employers, such as life, health and accident insurance on Employee in the form, kind and amount made available under group insurance coverage to employees of Employers plus directors and executive officers (D&O) insurance coverage. Employee shall also be entitled to participate in all of Employers' ERISA type plans in existence during the term of this Agreement. Employee shall not be entitled to participate in any profit sharing plans, incentive compensation programs or other benefit plans made available to employees of Employers except as described in paragraph 4(c) or other paragraphs of this Agreement. e. In addition to any benefits payable to the Employee in accordance with the provisions of any plan, agreement or arrangement described above, Employers will purchase a term life insurance policy in the amount of $400,000 on the life of the Employee, over and above the standard group insurance benefits provided by the Employers, with the proceeds thereof to be paid to the Employee's beneficiary or beneficiaries or to his estate, PROVIDED, HOWEVER, that Employers' obligation to purchase such term life insurance policy shall cease if it is reasonably determined by the Employers' Boards of Directors that such purchase would in any way violate any applicable banking laws or regulations. Such term life insurance policy shall remain in effect during the term of this Agreement and shall be subject to Employee's passing any required physical examination for such insurance coverage. In addition, the obligations of Employers to purchase a term life insurance policy are subject to Employee being insurable and the premiums for such policy being reasonable and in conformity with those paid on an average person of Employee's age. Such term life insurance policy shall be transferred to Employee at no cost to Employee upon Employee's 4 cessation of employment for any reason; PROVIDED that (i) the terms of such term life insurance policy permit such transfer; (ii) that such transfer is in compliance with all applicable banking laws and regulations as reasonably determined by the Employers' Boards of Directors; (iii) that the Employers incur no additional costs as a result of such transfer, other than payment of a reasonable transfer fee; and (iv) that premiums relating to such term life insurance policy shall thereafter be the responsibility of Employee. f. Employee shall not be entitled to fees for service as a director of Employers, including committee fees or any other fees or compensation available to outside directors. 5. EXPENSES. Employee is authorized to incur reasonable expenses for promoting the business of Employers, including expenses for entertainment, travel, service club memberships and similar items. Any reasonable business related costs incurred by Employee for conventions, meetings, and seminars will be reimbursed by Employers as will all such reasonable expenses incurred by Employee on behalf of Employers upon presentation by Employee, from time to time, of an itemized account of his business related expenditures. 6. VACATIONS. Employee shall be entitled to an annual vacation according to the Employers' personnel policy of not less than four (4) weeks without reduction in salary. In the event that Employee has not utilized all vacation days during a year, Employee shall be entitled to utilize such vacation days during the first quarter of the next calendar year. Except as specified in the preceding sentence, vacation days shall be non-cumulative. Employee shall also be entitled to all paid holidays provided to Employers' senior officers. Employee agrees to utilize his vacation in a manner which complies with all applicable banking laws and regulations. 7. STOCK OPTIONS. Employers' Boards of Directors shall annually consider the grant to Employee of stock options in such amounts which, when aggregated with stock options already held by Employee, are commensurate with amounts customarily awarded to executives with comparable responsibilities, PROVIDED, HOWEVER, that the grant of such stock options shall be solely in the discretion of the Employers' Boards of Directors and PROVIDED, FURTHER, that Employers' Boards of Directors shall be under no obligation to grant stock options to Employee at any time. In an event constituting a Change in Control (as hereinafter defined) shall be expected to occur, all previously granted stock options then outstanding and not then otherwise fully exercisable shall, during the five business day period immediately prior to the effective date of such Change of 5 Control, be fully exercisable. If the anticipated Change in Control does not occur for any reason, such options shall be reinstated on their previous terms (and any exercise of options which would not otherwise have been exercisable shall be unwound). This paragraph supersedes the terms of any option agreement now or hereafter outstanding. 8. CLUB MEMBERSHIPS. Employers shall provide the use of a country club membership to Employee for the promotion of Employers' business. Employers shall be responsible for all costs related to such membership to the extent such costs are business related (without regard, however, to whether such costs are deductible for income tax purposes). If Employers are incapable of holding such membership in corporate name, Employers shall provide to Employee funds necessary to acquire such membership. Employee shall be entitled to use of such membership during the term of this Agreement. During the term of this Agreement, Employee shall be entitled to purchase such membership interest from Employers at a purchase price equal to the then fair market value of such membership. Upon Employee ceasing employment with Employers, Employee shall transfer any and all ownership of such membership to Employers or a designee of Employers unless Employee has purchased such memberships as provided above. 9. TERMINATION PRIOR TO EXPIRATION OF TERM. 9.1 TERMINATION BY EMPLOYERS FOR CAUSE. Employers, by vote or written approval of the Boards of Directors duly taken in accordance with the law and the Employers' Bylaws, may terminate this Agreement immediately, at which time all obligations and liability of Employers under this Agreement shall cease (except as to benefits then accrued), upon determination in good faith that Employee (i) has been adjudged guilty of a felony or a misdemeanor involving moral turpitude by a court of competent jurisdiction; (ii) has committed any act which would cause termination of coverage under the Employers' Bankers' Blanket Bond as to Employee (as distinguished from termination of coverage as to the Employers as a whole); or (iii) has been grossly negligent or has engaged in criminal misfeasance or willful misconduct in the performance of his duties. For purposes of this section, an act, or failure to act, on the Employee's part shall be considered "willful" only if done, or omitted to be done, by him in bad faith and without reasonable belief that such act, or failure to act, is in the best interest of the Employers. 9.2 TERMINATION BY EMPLOYERS WITHOUT CAUSE. Employers, by vote or written approval of the Boards of Directors duly taken in accordance with the law and Employers' Bylaws, may terminate this Agreement and rights hereunder, without cause or any reason whatsoever, upon payment to Employee of the sum of 6 eighteen (18) months base salary as in effect on the date of termination. Any pay in lieu of vacation accrued to Employee, but not taken as of the date of termination, will be deemed included in the termination pay. In the event of termination under this Section 9.2 all stock options granted pursuant to Section 7 hereunder shall become fully vested and immediately exercisable for a period of not less than ninety (90) days following termination. In the event of termination under this paragraph 9.2, insurance benefits provided to Employee by Employers shall be extended at Employers' sole cost for twelve (12) months following the date of termination. All remaining obligations and liability of Employers under this Agreement shall cease at the date of termination, except as to benefits then accrued. 9.3 ACQUISITION OR DISSOLUTION OF EMPLOYERS. This Agreement shall not be terminated by the voluntary or involuntary dissolution of Employers or by any merger or consolidation where Employers or either of them are not the surviving or resulting corporation, or upon any transfer of all or substantially all of the assets of Employers or either of them. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon and inure to the benefit of the surviving or resulting corporation or the corporation to which such assets shall be transferred. Notwithstanding the foregoing, in the event proceedings for liquidation of Employers are commenced by regulatory authorities, this Agreement and all rights and benefits hereunder shall terminate; PROVIDED, HOWEVER, Employee will have the sole option to demand and receive the lesser of (i) one year base salary based upon the salary being paid to Employee at the time of such termination, or (ii) the balance payable under this Agreement. 9.4 DEATH OF EMPLOYEE. If Employee dies during the term of this employment, Employers shall pay to the estate of Employee the compensation and other rights hereunder which would otherwise be payable to Employee up to the end of the month following the month in which his death occurs, and Employers shall have no further obligations or liability under this Agreement (except as to benefits then accrued). In the event of Employee's death, all stock options granted pursuant to Section 7 hereunder shall become fully vested and immediately exercisable by the estate of Employee for a period of not less than ninety (90) days following Employee's death. 9.5 DISABILITY OF EMPLOYEE. If Employee becomes disabled during the term of this Agreement and such disability continues for a period of one hundred eighty (180) days, Employers, by vote or written approval of the Boards of Directors 7 duly taken in accordance with the law and Employers' Bylaws, may, at their option, after the expiration of such period, terminate this Agreement by giving written notice to Employee, at which time all obligations and liability of Employers under this Agreement shall cease (except as to benefits then accrued). While Employee is disabled, Employers shall pay to Employee one-hundred percent (100%) of the monthly salary installments as provided in paragraph 3, but such installments shall be reduced by all amounts paid to Employee on account of disability insurance, worker's compensation or social security payments made to Employee arising out of his disability other than medical, hospital or similar health insurance; provided, however, that such payments by Employers shall cease upon the earlier of (a) the expiration of the term of this Agreement, (b) the earlier termination of this Agreement pursuant to its provisions, or (c) the continuation of Employee's disability for a period of one hundred eighty (180) days. For the purpose of this Agreement, the term "disabled" shall be defined as Employee's inability, through physical or mental illness or other cause, to perform normal and customary duties which he is required to perform under this Agreement. In determining whether Employee is disabled, Employers' Boards of Directors may rely upon the written statement provided by a licensed physician acceptable to Employers' Boards of Directors. Employee shall allow himself to be examined from time to time by any licensed physician selected by Employers' Boards of Directors and agreed to by Employee. All such examinations will be conducted within a reasonable time period. 9.6 TERMINATION BY EMPLOYEE. Employee shall give a minimum of ninety (90) days prior notice, in writing, to Employers' Boards of Directors in the event Employee resigns or voluntarily terminates employment. The Employers' Boards of Directors, at their absolute discretion, may reduce the number of days of prior notice required or may waive the provision in its entirety. 9.7 MISCELLANEOUS PROVISIONS REGARDING TERMINATION. a. The paragraph in this Agreement providing for Employers' right to terminate this Agreement shall be interpreted wholly independent from and without reference to one another and shall not be construed to impair or in any manner limit Employers' right to otherwise terminate this Agreement pursuant to the laws of the State of California. b. Subject to Section 7 hereof, Employee may exercise Employee's rights to exercise any stock options vested prior to termination or resignation, if any, and as provided in a Stock Option Plan and Stock Option Agreement to which Employee is a party. 8 10. NOTICE. Any written notice to be given to Employee by Employers or their Boards of Directors may be given either by personal delivery to Employee, or by mail, registered and certified, postage prepaid with return receipt requested, addressed to Employee at his then current residence. Any written notice to be given to Employers or their Boards of Directors by Employee shall be given either by personal delivery to the Chairman of the Board of Directors of Bancorp, or by Mail, registered or certified, postage prepaid with return receipt requested, addressed to the Chairman of the Board of Directors of Bancorp at the administrative office of Bancorp. 11. PAYMENTS RESULTING FROM "CHANGE IN CONTROL". 11.1 DEFINITION OF "CHANGE IN CONTROL". For purposes of the Agreement, a "Change in Control" shall be deemed to have occurred if and when: (a) the Bancorp shall consummate a merger or consolidation (a "Transaction") with another corporation, association or similar entity; PROVIDED, HOWEVER, that a Change of Control shall not be deemed to have occurred with respect to a Transaction if the beneficial owners of the outstanding shares entitled to vote in the election of directors of Bancorp immediately prior to such Transaction will beneficially own more than sixty percent (60%) of the outstanding shares entitled to vote in the election of directors of the corporation resulting from the consummation of the Transaction; or (b) twenty-five percent (25%) of the Bancorp's securities then entitled to vote in the election of directors shall be acquired by any "person" (as such term is used in Sections 13(d) of the Securities Exchange Act of 1934, as amended); or (c) during any period of twenty-four (24) consecutive months, individuals who at the beginning of such period were members of the Board of Directors of the Bancorp (the "Incumbent Board") shall cease to constitute a majority of the Board of Directors of the Bancorp or any successor to the Bancorp, provided that any person becoming a director subsequent to the beginning of such period whose election or nomination for election was approved by a vote of at least eighty-five percent (85%) of the directors comprising the Incumbent Board shall be, for purposes hereof, considered as though such person were a member of the Incumbent Board; or (d) the Bancorp or the Bank shall sell all, or substantially all, of its assets to another corporation. 9 11.2 COVERED TERMINATION. (a) The benefits described in Section 11.4 hereof shall be provided to the Employee in the event that his employment with the Employers is terminated following, or in contemplation of, a Change of Control on account of a "Covered Termination." (b) "Covered Termination" shall mean (i) termination of employment by the Employers other than for "Cause," as described in Section 9.1 hereof or the disability of Employee as described in Section 9.5 hereof or (ii) termination of Employee's employment by the Employee for "Good Reason" as described in Section 11.3 hereof. 11.3 TERMINATION BY EMPLOYEE FOR GOOD REASON. (a) For purposes hereof, following a Change in Control the Employee may terminate his employment for Good Reason if: (i) the Employee's then-current level of annual base salary (whether payable by the either of the Employers) is reduced; or (ii) there is any reduction in the employee benefit coverage provided to the Employee (including pension, profit sharing and welfare benefits and perquisites, but not including incentive bonuses) from the coverage levels in effect immediately prior to the Change in Control, unless, however, the Employers provide substantially equivalent employee benefits to the Employee; or (iii) the Employee suffers a material diminution in his title, position, reporting relationship, responsibilities, authority or offices; or (iv) there is a relocation of the Employee's principal business office by more than ten (10) miles, and (a) the Employee's new commute is more than fifty (50) miles from the Employee's current primary residence or (b) the Employee's new commute is more than the Employee's current commute which is at least fifty (50) miles; or (v) the Employers fail to obtain assumption of this agreement by any successor or assign; 10 PROVIDED, HOWEVER, that any termination by the Employee for Good Reason must be made in good faith. (b) Notwithstanding the provisions of Section 11.3(a), no such termination of the Employee's employment for Good Reason shall be treated as a Covered Termination unless (i) the Employee shall give written notice to the Employers' Boards of Directors, not later than thirty (30) days prior to the effective date of any such termination for Good Reason and within six (6) months after the date the Employee first becomes entitled to terminate for Good Reason on account of the event(s) forming the basis for such termination, setting forth in specific detail the basis for such termination for Good Reason, and (ii) the Employers' Boards of Directors shall not, within thirty (30) days after receipt of such notice, take actions reasonably acceptable to the Employee to remedy the circumstances leading to the termination for Good Reason. 11.4 BENEFITS RESULTING FROM A COVERED TERMINATION. In the event that the employment of the Employee shall have been terminated after, or in contemplation of, a Change in Control in a manner that shall constitute a Covered Termination, the Employers shall make payments to, and provide benefit coverage for, the Employee as described below in Section 11.4, PROVIDED, HOWEVER, that any such benefits resulting from a "Covered Termination" shall be in lieu of any termination benefits to which Employee might otherwise be entitled pursuant to Section 9.2 hereof. (a) BASE SALARY. The Employee shall receive a payment equal to two and one half (2 1/2) times the highest annual base salary amount paid to the Employee within the three years preceding the Covered Termination. Such payment shall be made to the Employee within fifteen (15) business days following the Covered Termination. The highest annual base salary amount shall not include any bonuses awarded to the Employee. (b) TARGET BONUS. The Employee shall also receive a payment equal to the amount of the Employee's target bonus in the year that the Covered Termination occurs under any Employers' incentive compensation plan in which the Employee then participates ; PROVIDED HOWEVER, that if a Covered Termination shall take place between January 1 and June 30, such payment to the Employee shall be prorated and reduced to an amount equal to the product of (i) the Employee's target bonus in the year that the Covered Termination occurs, and (ii) a quotient of which the numerator will be the number of months that have elapsed between January 1 immediately preceding the Covered Termination and the date of the Covered Termination, rounded up to the next whole number, and the denominator shall be twelve (12). Such payment 11 shall be made to the Employee within fifteen (15) business days following the Covered Termination. (c) WELFARE BENEFITS. The Employers shall continue to maintain, in full force and effect, any "Welfare Benefits," such as life insurance coverage and health and disability benefits, which were being provided to the Employee at the time of the Covered Termination during the "Continuation Period." The Continuation Period shall mean the thirty (30) month period following the date of a Covered Termination. Notwithstanding the above, the Employers may provide coverage and benefits under separate insured arrangements that provide benefits substantially identical to those being provided to the Employee at the time of the Covered Termination. In addition, the Employee's right to any particular type of Welfare Benefit shall be subject to cancellation by the Employers if the Employee obtains alternative coverage of a similar type during the Continuation Period that is at least as favorable to the Employee as the corresponding Welfare Benefit. The Employee shall be obligated to notify the Employers' Boards of Directors of any such alternative coverage within thirty (30) days of it first becoming applicable to him. (c) WITHHOLDING FOR TAXES. All payments required to be made by the Employers to the Employee under this Agreement shall be subject to the withholding of such amounts, if any, relating to tax, excise tax and other payroll deductions as the Employers may reasonably determine it should withhold pursuant to any applicable law or regulation. (d) MITIGATION. The Employee shall not be obligated to seek other employment in mitigation of the amounts payable and benefits to be provided under this Agreement. 12. EXCISE TAX LIMIT. Notwithstanding anything elsewhere in this Agreement to the contrary, if any of the payments provided for in this Agreement, together with any other payments or benefits which the Employee has the right to receive from the Employers (or its affiliated companies), would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), the payments pursuant to this Agreement shall be reduced so that the present value of the total amount received by the Employee that would constitute a "parachute payment" will be one dollar ($1.00) less than three (3) times the Employee's base amount (as defined in Section 280G of the Code) and so that no portion of the payments or benefits received by the Employee shall be subject to the excise tax imposed by Section 4999 of the Code. If through error or otherwise the Employee should receive 12 payments under this Agreement or otherwise in excess of one dollar ($1.00) less than three (3) times his base amount, the Employee shall immediately repay such excess to the Employers upon notification that an overpayment has been made. 13. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of Employers, their successors and assigns. Employee may not assign all or any part of his interest under this Agreement without the prior written consent of Employers' Boards of Directors. 14. RECEIPT OF AGREEMENT. Each of the parties hereto acknowledges that he or it has Agreement in its entirety and does hereby acknowledge receipt of a fully executed copy thereof. A fully executed copy shall be an original for all purposes, and is a duplicate original. 15. ARBITRATION AND ATTORNEYS' FEES. Any controversy between the Employers and Employee involving the construction or application of any of the terms, provisions or conditions of this Agreement shall, on the written request of either party served on the other, be submitted to arbitration, and such arbitration shall comply with and be governed by the provisions of the California Arbitration Act, Sections 1280 through 1294.2 of the California Code of Civil Procedure. Both parties shall agree upon an arbitrator from the Los Angeles County Superior Court panel and, if they are unable to agree on an arbitrator, then each will choose an arbitrator, who together will select a third impartial arbitrator whose decision shall be final and conclusive upon all parties. The cost of arbitration shall be borne by the losing party or in such proportion as the arbitrator shall decide. In any arbitration proceeding and in action at law or in equity to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs and necessary disbursements in addition to any other relief to which he may be entitled, except to the extent arbitrator(s) may otherwise be permitted to apportion costs and disbursements. 16. CALIFORNIA LAW. This Agreement is to be governed by and construed under the laws of the State of California except to the extent that any federal law regulating banks may apply. 17. CAPTIONS AND SECTION HEADINGS. Captions and paragraph headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. 18. INVALID PROVISIONS. Should any part of this Agreement for any reason be declared invalid, the validity and binding effect of any remaining portion shall not be affected, 13 and the remaining portions of this Agreement shall remain in force and effect as if this Agreement had been executed with the invalid provisions eliminated. 19. ENTIRE AGREEMENT. This Agreement contains the entire Agreement between the Parties with respect to the employment of Employee by Employers, and supersedes all prior and contemporaneous agreements, representations and understandings of the parties. No modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing specifically referring hereto and signed by both parties. 20. WAIVER OF BREACH. The failure to enforce at any time any of the provisions of this Agreement, or to require at any time performance by the other party of any of the provisions hereof, shall in no way be construed to be a waiver of such provisions or to effect either the validity of this Agreement or any part hereof or the right of either party thereafter to enforce each and every provision in accordance with the terms of this Agreement. 21. INDEMNIFICATION. To the fullest extent permitted by law, Employers shall pay as and when incurred all expenses, including legal and attorney costs, incurred by, or shall satisfy as and when entered or levied a judgment or fine rendered or levied against, Employee in an action brought by a third party against Employee (whether or not Employers are joined as party defendants) to impose a liability or penalty on Employee for an act alleged to have been committed by Employee while an officer of Employers or each of them; provided, that Employee was acting in good faith, within what Employee reasonably believed to be the scope of Employee's employment or authority and for a purpose which Employee reasonably believed to be in the best interests of Employers or Employers' shareholders, and in the case of a criminal proceeding, that Employee had no reasonable cause to believe that Employee's conduct was unlawful. Payments authorized hereunder include amounts paid and expenses incurred in settling any such action or threatened action. All rights hereunder are limited by any applicable state or Federal laws. 22. EXPENSES. Employers shall pay or reimburse Employee for legal fees and expenses incurred by him in the review and negotiation of this Agreement. 23. JOINT AND SEVERAL OBLIGATIONS. The obligations of the Bancorp and the Bank hereunder are joint and several; provided, however, that if, based upon the written advice of the Bank's regulatory legal counsel, the Board of Directors of the Bank determines in its sole discretion that the portion of the compensation and other benefits actually paid by the Bank (as opposed to Bancorp) under Section 4 hereunder would otherwise violate any regulatory order, regulation or statute, including 14 Sections 23A or 23B of the Federal Reserve Act, such obligations of the Bank shall be limited to the extent necessary to comply with such provisions. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective on the day and year herein before set forth. SC BANCORP By - ------------------------------ ------------------------------------- Larry D. Hartwig SOUTHERN CALIFORNIA BANK By ------------------------------------- 15 EX-10.13 5 EMPLOYMENT AGRMT BETW. SC AND D MCCOY EXHIBIT 10.13 EMPLOYMENT AGREEMENT This Employment Agreement (sometimes referred to as this "Agreement") is effective February 25, 1992, between SC Bancorp ("Bancorp") and Southern California Bank ("Bank") (collectively refereed to as "Employers"), and David A. McCoy ("Employee"). RECITALS A. Employers desire to employ Employee in the full-time position of Executive Vice President and Chief Operating Officer and the Employee has advised Employers of his willingness to accept such employment by Employers. B. Employers and Employee hereby enter into this Agreement setting forth each and all of the terms and conditions of the employment. NOW, THEREFORE, in consideration of the foregoing Recitals, and the terms, conditions and covenants contained herein, it is agreed as follows: 1. EMPLOYMENT. Employers hereby employ Employee and Employee hereby accepts this employment and agrees to exercise and perform faithfully, exclusively, and to the best of his ability on behalf of each of the Employers the powers and duties customarily exercised and performed by its Chief Operating Officer for a period of three years from March 23, 1992, ("Employment Date") until March 24, 1995, on the terms and conditions set forth herein. Employee acknowledges and agrees that he is hereby also making a moral commitment to honor this Agreement and to further the Employers' best interest during the full term of this Agreement. Employers acknowledge and agree that they are hereby making a moral commitment to honor this Agreement, to provide Employee with the authority necessary to fulfill his responsibilities and to carry out the affairs of Employers in a manner which is consistent with safe and sound banking practices and in compliance with all applicable laws and regulations. 2. EMPLOYEE'S SERVICES AND DUTIES. 2.1 During the term hereof, Employee shall: (a) Observe and conform to the policies, and directions, promulgated by Employers' Board of Directors and/or President; (b) Assume and perform those duties customarily performed by the Chief Operating Officer of a bank, including general duties and other powers and duties pertaining by law, 1 regulations, or practice to the office of Director of Branch Banking or as assigned or delegated to Employee by the President or as otherwise imposed by the Bylaws of Employers; and (c) Shall report directly to the President who shall set performance goals in consultation with employee and shall review his performance on an annual basis and (d) Serve as a full-time employee, and devote his ability and attention to the business of Employers during the term of this Agreement, and neither directly nor indirectly render any services of a business, commercial, or professional nature, whether as employee, partner, officer, director or shareholder, to any other person, firm, corporation or organization which in any manner competes with Employer, whether for compensation or otherwise, nor engage in any activity which is adverse to the Employers' business or welfare, without the prior written consent of Employers. The precise services to be performed by Employee may be extended or curtailed, from time to time, at the discretion of Employers' Board of Directors and/or President provided such services shall at all times be of the nature customarily performed by the Chief Operating Officer of a bank and bank holding company, as the case may be. 2.2 Nothing contained herein shall be construed to prevent Employee from investing his assets in any form or manner, or supervising these investments, provided that such investment-related activities do not, in any manner nor for any significant amount of time, interfere with his performance of services on behalf of Employers, and provided further Employee shall not acquire any direct or indirect ownership interest in any bank or financial institution, other than Employers, where such ownership interest exceeds one tenth of one percent of the total ownership interest in any bank or financial institution other than Employers. This restriction shall only apply to banks or financial institutions that are located within the service areas of any Employers' offices and are in direct competition with Employers. 2.3 During the term hereof Employee shall not have a margin account with any entity without the prior written consent of Employers' Board of Directors or President. 3. TERM. The term of Employee's employment by Employers pursuant to this Agreement shall be for a period of three consecutive years, commencing on the Employment Date of March 23, 1992, and terminating on March 24, 1995, subject to earlier termination as hereinafter provided. Provided further that, notwithstanding the foregoing, two years after the employment date the term of this Agreement shall be automatically renewed 2 for an additional two year term so that the agreement shall be for a three year term unless either party provides thirty days written notice of this party's intent not to renew. In the event this agreement is not renewed it shall remain in effect for a one year period. 4. COMPENSATION AND OTHER BENEFITS. As compensation in full for the services to be rendered by Employee hereunder, Employers shall pay and the Employee shall accept the following compensation: (a) Employers shall pay to Employee a base salary of $130,000 per year, commencing with the Employment Date, payable in equal semi-monthly installments, less usual withholding deductions. Such base salary shall be a minimum salary. As of January 1, 1993 and each January 1 thereafter during the term of this Agreement, Employee's minimum base salary will be reviewed by the Board of Directors on the basis of his performance to such date and the progress of Employers and shall be increased as of such dates if so determined by the Board of Directors in its absolute discretion. The Board of Directors may also increase Employee's base salary at any other time in its absolute discretion. (b) Employers shall provide Employee with a leased automobile of the kind provided to other Employees with similar duties, responsibilities and title. Employers shall pay for all maintenance and insurance on such automobile. (c) As additional compensation, Employee shall be entitled to participate in the Senior Management Incentive Compensation Program. (d) During the term of Employee's employment under this Agreement, Employee shall be entitled to receive other benefits of employment, such as life, health and accident insurance on Employee in the form, kind and amount made available under group insurance coverage to other employees of Employers with responsibilities and duties similar to those of Employee. Employee shall also be entitled to participate in all of Employers' ERISA type plans in existence during the term of this Agreement. Employee shall not be entitled to participate in any profit sharing plans, incentive compensation programs or other benefit plans made available to employees of Employers except as described in paragraph 4(c) or other paragraphs of this Agreement. (e) Employers shall provide the use of a country club membership to Employee for the promotion of Employers' business. Employers shall be responsible for all costs related to such membership. If Employers are incapable of holding such membership in corporate name, Employers shall provide to Employee 3 funds necessary to acquire such membership. Employee shall be entitled to use of such membership during the terms of this Agreement. Upon Employee ceasing employment with Employers, Employee shall transfer any and all ownership of such membership to Employers or a designee of Employers. 5. EXPENSES. Employee is authorized to incur reasonable expenses for promoting the business of Employers and other customary, ordinary and business activities. Such expenses will be reimbursed only upon presentation by Employee with an itemized account of his expenditures with appropriate documentation to substantiate such expenses on behalf of Employers. 6. VACATIONS AND HOLIDAYS. Employee shall be entitled to an annual vacation according to Employers' personnel policy of four weeks without reduction in salary. In the event that Employee has not utilized all his vacation days during a year, his unused vacation may carry over to the next calendar year up to a cap of two weeks. Once Employee reaches his vacation cap, he ceases earning vacation until the unused vacation is reduced. Employee shall also be entitled to all paid holidays provided to Employers' employees with similar responsibilities and duties. 7. STOCK OPTIONS. Employee shall be entitled to participate in the Employer's Stock Option Plan pursuant to the terms of said plan. Within 21 days of employment, Employer shall grant to Employee stock options to acquire 7500 shares of common Stock at such terms as determined by the Board of Directors. 8. TERMINATION PRIOR TO EXPIRATION OF TERM. 8.1 TERMINATION BY EMPLOYERS FOR CAUSE. Employers have the unrestricted right to terminate this Agreement at any time for cause, at which time all obligations and liability of Employees under this Agreement shall cease (except as to benefits then accrued), upon determination in good faith that Employee (i) has been adjudged guilty of a felony or a misdemeanor involving moral turpitude by a court of competent jurisdiction; (ii) has committed any act which would cause termination of coverage under the Employers' Bankers' Blanket Bond as to Employee (as distinguished from termination of coverage as to the Employers as a whole); (iii) was involved in a criminal misfeasance or willful misconduct in the performance of his duties; (iv) refused or failed to perform his duties as provided in this Agreement; (v) refused or failed to follow the rules and policies established by the Employers' Board of Directors or President; (vi) was dishonest with respect to his relationship with Employers; (vii) committed act(s) of gross negligence or reckless behavior which resulted in harm to Employers; (viii) breached any of the covenants set forth in this Agreement resulting in, or which reasonably may be expected to have, an adverse effect upon 4 Employers; or (ix) became disabled as discussed in Paragraph 8.4 of this Agreement. 8.2 TERMINATION BY EMPLOYERS WITHOUT CAUSE. Either Employers' Board of Directors and or President may terminate this Agreement and rights hereunder, without cause or any reason whatsoever, upon payment to Employee of the sum of twelve (12) months pay if terminated during the first year of this Agreement and Six (6) months pay during any year thereafter at Employee's base salary in effect on the date of termination. Any pay in lieu of vacation accrued to Employee, but not taken as of the date of termination, will be deemed included in the termination pay. All remaining obligations and liability of Employers under this Agreement shall cease at the date of termination, (except as to benefits then accrued). Upon any termination of this Agreement without cause, payment to Employee by Employers as provided in the preceding paragraph of this Section 8.2 shall constitute full and complete satisfaction of each and every obligation of the Employers to the Employee. 8.3 DEATH OF EMPLOYEE. If Employee dies during the term of this Agreement, Employers shall pay to the estate of Employee the compensation and other rights hereunder which would otherwise be payable to Employee up to the end of the following month in which his death occurs, and Employers shall have no further obligations or liability under this Agreement (except as to benefits then accrued). 8.4 DISABILITY OF EMPLOYEE. If Employee becomes disabled during the term of this Agreement and such disability continues for a period of ninety (90) days in any twelve month period, Employers may, at their option, after the expiration of such period, terminate this Agreement by giving written notice to Employee, at which time all obligations and liability of Employers under this Agreement shall cease (except as to benefits then accrued). For the purposes of this Agreement, the term "disabled" shall be defined as Employee's inability, through physical or mental illness or other cause, to perform normal and customary duties which he is required to perform under this Agreement. In determining whether Employee is disabled, Employers may rely upon the written statement provided by a licensed physician acceptable to Employers. Employee shall allow himself to be examined from time to time by any licensed physician selected by Employers. All such examinations will be conducted within a reasonable time period. 8.5 TERMINATION BY EMPLOYEE. Employee shall have the right to terminate this Agreement with or without cause or with or without notice. However, Employers request that Employee give a minimum of ninety (90) days prior notice, in writing, to 5 Employers in the event Employee resigns or voluntarily terminates employment during the term of this Agreement. The Employers' Board of Directors or President, at their sole discretion, may reduce the number of days of prior notice required or may waive the provision in its entirety. 8.6 MISCELLANEOUS PROVISION REGARDING TERMINATION. The paragraphs in this Agreement providing for Employers' right to terminate this Agreement shall be interpreted wholly independent from and without reference to one another and shall not be construed to impair or in any manner limit Employers' right to otherwise terminate this Agreement pursuant to the laws of the State of California. 8.7 CHANGE OF CONTROL. In the event of a change of control during the term of this Agreement or any renewal thereof, Employee shall receive twelve (12) months severance pay if he is not retained in the same or similar position for a period of one year after the change of control. Change of control shall mean the purchase of a majority of the outstanding shares of common stock of the Employers other than by an affiliate of the Employers or any purchase or sale of substantially all of the property and assets of the Employers to a person or entity other than an affiliate of the Employers or the merger or consolidation of the Employer with or into another Corporation unless the Employer is to be the surviving Corporation. 9. NOTICE. Any written notice to be given to Employee by Employers may be given either by personal delivery to Employee, or by mail, registered or certified, postage prepaid with return receipt requested, addressed to Employee at his then current residence. Any written notice to be given to Employers by Employee shall be given either by personal delivery to Employers' President, or by mail, registered or certified, postage prepaid with return receipt requested, addressed to Employers' President, at the administrative office of the Employers. 10. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of Employers, their successors and assigns. Employee may not assign all or any part of his interest under this Agreement without the prior written consent of Employers. 11. RECEIPT OF AGREEMENT. Each of the parties hereto acknowledges that he or they have read this Agreement in its entirety and does hereby acknowledge receipt of a fully executed copy thereof. A fully executed copy shall be an original for all purposes, and is a duplicate original. 12. ARBITRATION AND ATTORNEY'S FEES. Any controversy between Employers and Employee involving the construction or application of any of the terms, provisions or conditions of this Agreement shall, on the written request of either party served on 6 the other, be submitted to arbitration, and such arbitration shall comply with and be governed by the provisions of the California Arbitration Act, Sections 1280 through 1294.2 of the California Code of Civil Procedure. Both parties shall agree upon an arbitrator from the Los Angeles County Superior Court panel and, if they are unable to agree on an arbitrator, then each will choose an arbitrator, who together will select a third impartial arbitrator whose decision shall be final and conclusive upon all parties. Employers and Employee shall each pay the fees and/or expenses of their or his attorneys, witnesses and all other expenses connected with presenting their or his case in arbitration. All other costs of arbitration, including without limitation, the costs of any record or transcript of the arbitration proceedings, administrative fees, the fee and expenses of the arbitration(s) and all other fees and costs shall be borne equally by Employers and Employee. The arbitrator(s) who hears and decides any controversy, dispute and/or claim between Employers and Employee shall, in determining a remedy, have jurisdiction and authority only to award compensatory damages to make whole a party suffering foreseeable economic damages, and, the arbitrator(s) shall not have any authority or jurisdiction to make any award of any kind or nature whatsoever or compensation for any damages including, without limitation, any award for punitive damages and/or any award of damages for pain and suffering, emotional distress or any other kind of form of non-economic damages and/or non- foreseeable economic damages. 13. CALIFORNIA LAW. This Agreement is to be governed by and construed under the laws of the State of California except to the extent that any federal law regulating banks may apply. 14. CAPTIONS AND PARAGRAPH HEADINGS. Captions and paragraph headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. 15. INVALID PROVISIONS. Should any part of this Agreement for any reason be declared invalid, the validity and binding effect of any remaining portion shall not be affected, and the remaining portions of this Agreement shall remain in force and effect as if this Agreement had been executed with the invalid provisions eliminated. 16. ENTIRE AGREEMENT. This Agreement contains the entire Agreement between the parties with respect to the employment of Employee by Employers, and supersedes all prior and contemporaneous agreements, representations and understandings of the parties. No modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing specifically referring hereto and signed by both parties. 7 17. WAIVER OF BREACH. The failure to enforce at any time any of the provisions of this Agreement, or to require at any time performance by the other party of any of the provisions hereof, shall in no way be construed to be a waiver of such provisions or to effect either the validity of this Agreement or any part hereof or the right of either party thereafter to enforce each and every provision in accordance with the terms of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective on the day and year herein before set forth. By ----------------------------------- David A. McCoy SOUTHERN CALIFORNIA BANK By ----------------------------------- Its: ----------------------------------- SC BANCORP By ----------------------------------- Its: ----------------------------------- 8 EX-10.14 6 AMENDED & RESTATED EMPLMT AGRMNT EXHIBIT 10.14 AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT This AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT (the "Agreement") by and among SC BANCORP, a California corporation (the "Company"), SOUTHERN CALIFORNIA BANK, a California corporation and a wholly owned subsidiary of the Company (the "Bank"), and David McCoy (the "Executive"), is entered into as of January 1, 1997 (the "Agreement Date"). W I T N E S S E T H WHEREAS the Company, the Bank and the Executive are parties to that certain Employment Security Agreement dated as of September 15, 1994, as amended (the "Initial Agreement"); and WHEREAS, the Company and the Bank wish to continue to assure themselves and the Executive of continuity of senior management during the term of this Agreement and to provide the Executive with certain termination benefits in the event the Executive's employment is terminated under certain circumstances; and WHEREAS, should the possibility of a change in control of the Company arise, the Board of Directors believes it imperative that the Company, the Bank and the Board be able to rely upon the Executive to continue in his position, and that the Company and the Bank be able to receive and rely upon the Executive's advice, if it requests such advice, as to the best interests of the Company, without concern that he might be distracted by the 1 personal uncertainties and risks created by the possibility of a change in control; and WHEREAS, should the possibility of a change in control arise, in addition to the Executive's regular duties, the Executive may be called upon to assist in the assessment of such possible change in control, to advise management and the Board as to whether such change in control would be in the best interests of the Company and to take such other actions as the Board might determine to be appropriate; and WHEREAS, the Company, the Bank and the Executive agree that the terms and conditions of the Agreement shall supersede and render ineffective Section 8.7 of that certain Employment Agreement dated February 25, 1992 between the Company, the Bank and the Executive (the "Employment Agreement"), as well as any other provisions of the Employment Agreement which are inconsistent with the terms and conditions of the Agreement; and WHEREAS, the Company, the Bank and the Executive wish to amend and restate the Initial Agreement in its entirety as hereinafter provided; NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties do hereby agree as follows: 2 SECTION 1. TERM OF AGREEMENT This Agreement shall be effective as of the Agreement Date and shall continue in effect until the Expiration Date (as defined below). The "Expiration Date" shall initially be July 31, 1998, but commencing on August 1, 1997 and each August 1 thereafter, the Expiration Date shall automatically be extended by one additional year unless, not later than April 30 of such year, the Company shall have given notice to the Executive that it does not wish to extend the Expiration Date; PROVIDED, HOWEVER, that if a Change in Control (as defined in Section 2, below) shall have occurred prior to the original or extended Expiration Date, the Expiration Date shall automatically become the second anniversary of the last day of the month in which the Change in Control occurred. Notwithstanding the foregoing, the Expiration Date shall be any earlier date on which the Executive's employment with the Company or the Bank terminates, in the event such termination occurs prior to a Change in Control. SECTION 2. DEFINITION OF "CHANGE IN CONTROL" For purposes of the Agreement, a "Change in Control" shall be deemed to have occurred if and when: (a) the Company shall consummate a merger or consolidation (a "Transaction") with another corporation; PROVIDED, HOWEVER, that a Change of Control shall not be deemed to have occurred with respect to a Transaction if the beneficial owners of the outstanding shares entitled to vote in the election of directors immediately prior to such Transaction will beneficially own more than sixty 3 percent (60%) of the outstanding shares entitled to vote in the election of directors of the corporation resulting from the consummation of the Transaction; or (b) twenty-five percent (25%) of the Company's securities then entitled to vote in the election of directors shall be acquired by any "person" (as such term is used in Sections 13(d) of the Securities Exchange Act of 1934, as amended); or (c) during any period of twenty-four (24) consecutive months, individuals who at the beginning of such period were members of the Board of Directors of the Company (the "Incumbent Board") shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company, provided that any person becoming a director subsequent to the beginning of such period whose election or nomination for election was approved by a vote of at least eighty-five percent (85%) of the directors comprising the Incumbent Board shall be, for purposes hereof, considered as though such person were a member of the Incumbent Board; or (d) the Company or the Bank shall sell all, or substantially all, of its assets to another corporation. SECTION 3. COVERED TERMINATION The termination benefits described in Section 4 hereof shall be provided to the Executive in the event that his employment with the Company or the Bank is terminated following, or in contemplation of, a Change of Control on account of a "Covered Termination". "Covered Termination" shall mean (i) termination of employment by the Company or the Bank other than for "Cause" as described below or (ii) termination of employment by the Executive for "Good Reason" as described below. 4 A. TERMINATION BY COMPANY OR BANK FOR CAUSE. For purposes hereof, the Company and the Bank shall have "Cause" to terminate the Executive's employment if: (i) the Executive is grossly negligent or engages in willful misconduct in the performance of his material duties; or (ii) the Executive commits an act or acts of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company or the Bank; or (iii) the Executive discloses to a third party information that is of a confidential or proprietary nature to the Company or the Bank, other than as appropriate in the normal course of the performance of his duties; or (iv) the Executive suffers from an illness, injury or other incapacity that prevents him from performing his material duties for a total of six (6) months, whether or not consecutive, within a twelve (12) month period; or (v) the Executive's death occurs. B. TERMINATION BY EXECUTIVE FOR GOOD REASON. For purposes hereof, following a Change in Control the Executive may terminate his employment for Good Reason if: (i) the Executive's then-current level of annual base salary (whether payable by the Company or the Bank) is reduced; or (ii) there is any reduction in the employee benefit coverage provided to the Executive (including pension, profit sharing and welfare benefits and perquisites, but not including incentive bonuses) from the coverage levels in effect immediately prior to the Change in Control, unless, however, the Company or the Bank provides substantially equivalent employee benefits to the Executive; or (iii) the Executive suffers a material diminution in his title, position, reporting relationship, responsibilities, authority or offices; or 5 (iv) there is a relocation of the Executive's principal business office by more than ten (10) miles, and (a) the Executive's new commute is more than fifty (50) miles from the Executive's current primary residence or (b) the Executive's new commute is more than the Executive's current commute which is at least fifty (50) miles; or (v) the Company fails to obtain assumption of this agreement by any successor or assign of the Company; PROVIDED, HOWEVER, that any termination by the Executive for Good Reason must be made in good faith. C. NOTICE. Notwithstanding the foregoing provisions of this Section 3, no such termination of the Executive's employment for Good Reason under paragraph B above shall be treated as a Covered Termination unless (i) the Executive shall give written notice to the Company, not later than thirty (30) days prior to the effective date of any such termination for Good Reason and within six (6) months after the date the Executive first becomes entitled to terminate for Good Reason on account of the event(s) forming the basis for such termination, setting forth in specific detail the basis for such termination for Good Reason, and (ii) the Company or the Bank shall not, within thirty (30) days after receipt of such notice, take actions reasonably acceptable to the Executive to remedy the circumstances leading to the termination for Good Reason. 6 SECTION 4. CONSEQUENCES OF COVERED TERMINATION In the event that the employment of the Executive shall have been terminated after, or in contemplation of, a Change in Control in a manner that shall constitute a Covered Termination under Section 3 above, the Company shall make payments to, and provide benefit coverage for, the Executive as described below in this Section 4. A. BASE SALARY. The Executive shall receive a payment equal to one and one-half (1 1/2) times the highest annual base salary amount paid (by either the Company or the Bank) to the Executive within the three years preceding the Covered Termination. Such payment shall be paid to the Executive within fifteen (15) business days following the Covered Termination. The highest annual base salary amount shall not include any bonuses awarded to the Executive. B. TARGET BONUS. The Executive shall also receive a payment equal to the amount of the Executive's target bonus in the year that the Covered Termination occurs under any of the Company's or the Bank's incentive compensation plans in which the Executive then participates; PROVIDED HOWEVER, that if a Covered Termination shall take place between January 1 and June 30, such payment to the Executive shall be prorated and reduced to an amount equal to the product of (i) the amount of the Executive's target bonus in the year that the Covered Termination occurs, and (ii) a quotient of which the numerator will be the number of 7 months that have elapsed between January 1 immediately preceding the Covered Termination and the date of the Covered Termination, rounded up to the next whole number, and the denominator shall be twelve (12). Such payment shall be made to the Executive within fifteen (15) business days following the Covered Termination. C. STOCK OPTIONS. Immediately upon a Covered Termination, any stock options granted to the Executive under any Company incentive plan that were not fully vested and exercisable shall become fully vested and immediately exercisable. Such options will be exercisable for a period of 90 days from the date of the Covered Termination (or such greater period as may be provided in the related plan). Any restrictions on payment or transfer of previously granted incentive awards shall immediately lapse. D. WELFARE BENEFITS. The Company and the Bank shall continue to maintain, in full force and effect, any "Welfare Benefits," such as life insurance coverage and health and disability benefits, which were being provided to the Executive at the time of the Covered Termination during the "Continuation Period." The Continuation Period shall mean the eighteen (18) month period following the date of a Covered Termination. Notwithstanding the above, the Company or the Bank may provide coverage and benefits under separate insured arrangements that provide benefits substantially identical to those being provided to the Executive at the time of the Covered Termination. 8 In addition, the Executive's right to any particular type of Welfare Benefit shall be subject to cancellation by the Company or the Bank if the Executive obtains alternative coverage of a similar type during the Continuation Period that is at least as favorable to the Executive as the corresponding Welfare Benefit. The Executive shall be obligated to notify the Company of any such alternative coverage within thirty (30) days of it first becoming applicable to him. E. WITHHOLDING FOR TAXES. All payments required to be made by the Company to the Executive under this Agreement shall be subject to the withholding of such amounts, if any, relating to tax, excise tax and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. SECTION 5. EXCISE TAX LIMIT Notwithstanding anything elsewhere in this Agreement to the contrary, if any of the payments provided for in this Agreement, together with any other payments or benefits which the Executive has the right to receive from the Company or the Bank (or its affiliated companies), would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), the payments pursuant to this Agreement shall be reduced so that the present value of the total amount received by the Executive that would constitute a 9 "parachute payment" will be one dollar ($1.00) less than three (3) times the Executive's base amount (as defined in Section 280G of the Code) and so that no portion of the payments or benefits received by the Executive shall be subject to the excise tax imposed by Section 4999 of the Code. If through error or otherwise the Executive should receive payments under this Agreement or otherwise in excess of one dollar ($1.00) less than three (3) times his base amount, the Executive shall immediately repay such excess to the Company or the Bank upon notification that an overpayment has been made. SECTION 6. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the State of California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If the Company or the Bank is found to have breached this Agreement, the Company shall bear the expense of the arbitration proceeding and shall reimburse the Executive for all of his reasonable costs and expenses relating to such arbitration proceeding, including, without limitation, reasonable attorneys' fees and expenses. In no event shall the Executive be required to reimburse the Company or the Bank for any of the costs or expenses relating to such arbitration proceeding. 10 SECTION 7. NOTICES All notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be sufficiently given if and when mailed in the continental United States by registered or certified mail or personally delivered to the party entitled thereto at the address stated below or to such changed address as the addressee may have given by a similar notice: TO THE COMPANY: SC Bancorp 9040 East Telegraph Road P.O. Box 869 Downey, California 90241-0869 TO THE EXECUTIVE: David McCoy 25571 Harrington Court Laguna Hills, California 92653 SECTION 8. GENERAL PROVISIONS A. ENTIRETY OF AGREEMENT. This Agreement constitutes the entire agreement between the Company, the Bank and the Executive relating to the subject matter hereof and shall supersede any right under any other agreement relating to the subject matter hereof between the Company or the Bank and the Executive existing as of the Agreement Date. Any compensation or benefits to which the Executive is entitled under this Agreement shall be provided based solely upon its terms, without regard to any materials used in the preparation or consideration of this Agreement, including 11 any summary of terms or estimate of amounts relating to this Agreement. B. ENFORCEABILITY. If any provision of this Agreement shall be determined by a court of competent jurisdiction to be, in whole or in part, unenforceable or contrary to any statute, law, order, rule, regulation, directive or other action of any federal or state regulatory agency having jurisdiction over the Company or its subsidiary, then the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. The validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California, without giving effect to the principles of conflict of laws thereof. C. MITIGATION. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable and benefits to be provided under this Agreement. D. ASSIGNMENT OF INTEREST. No right to or interest in any payments shall be assignable by the Executive; PROVIDED, HOWEVER, that this Agreement shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees after the Executive's death to the extent of any payments due in respect of the Executive hereunder. 12 E. COMPANY, BANK AND SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company, the Bank and any successor thereof including, without limitation, any corporation or corporations acquiring directly or indirectly all or substantially all of the assets of the Company, whether by merger, consolidation, sale or otherwise (and such successor shall thereafter be deemed "the Company" for the purposes of this Agreement), but shall not otherwise be assignable by the Company. F. AMENDMENT, MODIFICATION AND WAIVER. No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a written agreement signed by the Executive and by a duly authorized Company officer. G. NO GUARANTEE OF EMPLOYMENT. The parties hereto explicitly acknowledge that notwithstanding any provision to the contrary contained herein, this Agreement shall not, in any way, be interpreted to provide the Executive with any fixed or minimum term of employment with the Company or the Bank. H. AMENDMENT TO EMPLOYMENT AGREEMENT. The Company, the Bank and the Executive explicitly acknowledge that this Agreement shall supersede and render ineffective Section 8.7 of the Employment Agreement, as well as any other provisions of the Employment Agreement which are inconsistent with the terms and conditions of the Agreement. The Company, the 13 Bank and the Executive further acknowledge that the term of the Employment Agreement shall not hereafter be extended (whether by the provisions thereof or otherwise) without the affirmative consent of the Boards of Directors of the Company and the Bank. [signature page follows] 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SC BANCORP BY ---------------------------- SOUTHERN CALIFORNIA BANK BY ---------------------------- ------------------------------ David McCoy 15 EX-10.15 7 AMENDED & RESTATED EMPLMNT SECURITY AGRMNT EXHIBIT 10.15 AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT This AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT (the "Agreement") by and among SC BANCORP, a California corporation (the "Company"), SOUTHERN CALIFORNIA BANK, a California corporation and a wholly owned subsidiary of the Company (the "Bank"), and Bruce W. Roat (the "Executive"), is entered into as of January 1, 1997 (the "Agreement Date"). W I T N E S S E T H WHEREAS, the Company, the Bank and the Executive are parties to that certain Employment Security Agreement dated as of March 17, 1995 (the "Initial Agreement"); and WHEREAS, the Company and the Bank wish to continue to assure themselves and the Executive of continuity of senior management during the term of this Agreement and to provide the Executive with certain termination benefits in the event the Executive's employment is terminated under certain circumstances; and WHEREAS, should the possibility of a change in control of the Company arise, the Board of Directors believes it imperative that the Company, the Bank and the Board be able to rely upon the Executive to continue in his position, and that the Company and the Bank be able to receive and rely upon the Executive's advice, if it requests such advice, as to the best interests of the Company, without concern that he might be distracted by the 1 personal uncertainties and risks created by the possibility of a change in control; and WHEREAS, should the possibility of a change in control arise, in addition to the Executive's regular duties, the Executive may be called upon to assist in the assessment of such possible change in control, to advise management and the Board as to whether such change in control would be in the best interests of the Company and to take such other actions as the Board might determine to be appropriate; and WHEREAS, the Company, the Bank and the Executive wish to amend and restate the Initial Agreement in its entirety as hereinafter provided; NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties do hereby agree as follows: SECTION 1. TERM OF AGREEMENT This Agreement shall be effective as of the Agreement Date and shall continue in effect until the Expiration Date (as defined below). The "Expiration Date" shall initially be July 31, 1998, but commencing on August 1, 1997 and each August 1 thereafter, the Expiration Date shall automatically be extended by one additional year unless, not later than April 30 of such year, the Company shall have given notice to the Executive that it does not wish to extend the Expiration Date; PROVIDED, 2 HOWEVER, that if a Change in Control (as defined in Section 2, below) shall have occurred prior to the original or extended Expiration Date, the Expiration Date shall automatically become the second anniversary of the last day of the month in which the Change in Control occurred. Notwithstanding the foregoing, the Expiration Date shall be any earlier date on which the Executive's employment with the Company or the Bank terminates, in the event such termination occurs prior to, and not in contemplation of, a Change in Control. SECTION 2. DEFINITION OF "CHANGE IN CONTROL" For purposes of the Agreement, a "Change in Control" shall be deemed to have occurred if and when: (a) the Company shall consummate a merger or consolidation (a "Transaction") with another corporation; PROVIDED, HOWEVER, that a Change of Control shall not be deemed to have occurred with respect to a Transaction if the beneficial owners of the outstanding shares entitled to vote in the election of directors immediately prior to such Transaction will beneficially own more than sixty percent (60%) of the outstanding shares entitled to vote in the election of directors of the corporation resulting from the consummation of the Transaction; or (b) twenty-five percent (25%) of the Company's securities then entitled to vote in the election of directors shall be acquired by any "person" (as such term is used in Sections 13(d) of the Securities Exchange Act of 1934, as amended); or (c) during any period of twenty-four (24) consecutive months, individuals who at the beginning of such period were members of the Board of Directors of the Company (the "Incumbent Board") shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company, provided that any person becoming a director 3 subsequent to the beginning of such period whose election or nomination for election was approved by a vote of at least eighty-five percent (85%) of the directors comprising the Incumbent Board shall be, for purposes hereof, considered as though such person were a member of the Incumbent Board; or (d) the Company or the Bank shall sell all, or substantially all, of its assets to another corporation. SECTION 3. COVERED TERMINATION The termination benefits described in Section 4 hereof shall be provided to the Executive in the event that his employment with the Company or the Bank is terminated following, or in contemplation of, a Change of Control on account of a "Covered Termination". "Covered Termination" shall mean (i) termination of employment by the Company or the Bank other than for "Cause" as described below or (ii) termination of employment by the Executive for "Good Reason" as described below. A. TERMINATION BY COMPANY OR BANK FOR CAUSE. For purposes hereof, the Company and the Bank shall have "Cause" to terminate the Executive's employment if: (i) the Executive is grossly negligent or engages in willful misconduct in the performance of his material duties; or (ii) the Executive commits an act or acts of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company or the Bank; or (iii) the Executive discloses to a third party information that is of a confidential or proprietary nature to the Company or the Bank, 4 other than as appropriate in the normal course of the performance of his duties; or (iv) the Executive suffers from an illness, injury or other incapacity that prevents him from performing his material duties for a total of six (6) months, whether or not consecutive, within a twelve (12) month period; or (v) the Executive's death occurs. B. TERMINATION BY EXECUTIVE FOR GOOD REASON. For purposes hereof, following a Change in Control the Executive may terminate his employment for Good Reason if: (i) the Executive's then-current level of annual base salary (whether payable by the Company or the Bank) is reduced; or (ii) there is any reduction in the employee benefit coverage provided to the Executive (including pension, profit sharing and welfare benefits and perquisites, but not including incentive bonuses) from the coverage levels in effect immediately prior to the Change in Control, unless, however, the Company or the Bank provides substantially equivalent employee benefits to the Executive; or (iii) the Executive suffers a material diminution in his title, position, reporting relationship, responsibilities, authority or offices; or (iv) there is a relocation of the Executive's principal business office by more than ten (10) miles, and (a) the Executive's new commute is more than fifty (50) miles from the Executive's current primary residence or (b) the Executive's new commute is more than the Executive's current commute which is at least fifty (50) miles; or (v) the Company fails to obtain assumption of this agreement by any successor or assign of the Company; PROVIDED, HOWEVER, that any termination by the Executive for Good Reason must be made in good faith. 5 C. NOTICE. Notwithstanding the foregoing provisions of this Section 3, no such termination of the Executive's employment for Good Reason under paragraph B above shall be treated as a Covered Termination unless (i) the Executive shall give written notice to the Company, not later than thirty (30) days prior to the effective date of any such termination for Good Reason and within six (6) months after the date the Executive first becomes entitled to terminate for Good Reason on account of the event(s) forming the basis for such termination, setting forth in specific detail the basis for such termination for Good Reason, and (ii) the Company or the Bank shall not, within thirty (30) days after receipt of such notice, take actions reasonably acceptable to the Executive to remedy the circumstances leading to the termination for Good Reason. SECTION 4. CONSEQUENCES OF COVERED TERMINATION In the event that the employment of the Executive shall have been terminated after, or in contemplation of, a Change in Control in a manner that shall constitute a Covered Termination under Section 3 above, the Company shall make payments to, and provide benefit coverage for, the Executive as described below in this Section 4. A. BASE SALARY. The Executive shall receive a payment equal to one and one-half (1 1/2) times the highest annual base salary amount paid 6 (by either the Company or the Bank) to the Executive within the three years preceding the Covered Termination. Such payment shall be paid to the Executive within fifteen (15) business days following the Covered Termination. The highest annual base salary amount shall not include any bonuses awarded to the Executive. B. TARGET BONUS. The Executive shall also receive a payment equal to the amount of the Executive's target bonus in the year that the Covered Termination occurs under any of the Company's or the Bank's incentive compensation plans in which the Executive then participates; PROVIDED HOWEVER, that if a Covered Termination shall take place between January 1 and June 30, such payment to the Executive shall be prorated and reduced to an amount equal to the product of (i) the amount of the Executive's target bonus in the year that the Covered Termination occurs, and (ii) a quotient of which the numerator will be the number of months that have elapsed between January 1 immediately preceding the Covered Termination and the date of the Covered Termination, rounded up to the next whole number, and the denominator shall be twelve (12). Such payment shall be made to the Executive within fifteen (15) business days following the Covered Termination. C. STOCK OPTIONS. Immediately upon a Covered Termination, any stock options granted to the Executive under any Company incentive plan that were not fully vested and exercisable shall become fully vested and immediately exercisable. Such options will be exercisable 7 for a period of 90 days from the date of the Covered Termination (or such greater period as may be provided in the related plan). Any restrictions on payment or transfer of previously granted incentive awards shall immediately lapse. D. WELFARE BENEFITS. The Company and the Bank shall continue to maintain, in full force and effect, any "Welfare Benefits," such as life insurance coverage and health and disability benefits, which were being provided to the Executive at the time of the Covered Termination during the "Continuation Period." The Continuation Period shall mean the eighteen (18) month period following the date of a Covered Termination. Notwithstanding the above, the Company or the Bank may provide coverage and benefits under separate insured arrangements that provide benefits substantially identical to those being provided to the Executive at the time of the Covered Termination. In addition, the Executive's right to any particular type of Welfare Benefit shall be subject to cancellation by the Company or the Bank if the Executive obtains alternative coverage of a similar type during the Continuation Period that is at least as favorable to the Executive as the corresponding Welfare Benefit. The Executive shall be obligated to notify the Company of any such alternative coverage within thirty (30) days of it first becoming applicable to him. 8 E. WITHHOLDING FOR TAXES. All payments required to be made by the Company to the Executive under this Agreement shall be subject to the withholding of such amounts, if any, relating to tax, excise tax and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. SECTION 5. EXCISE TAX LIMIT Notwithstanding anything elsewhere in this Agreement to the contrary, if any of the payments provided for in this Agreement, together with any other payments or benefits which the Executive has the right to receive from the Company or the Bank (or its affiliated companies), would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), the payments pursuant to this Agreement shall be reduced so that the present value of the total amount received by the Executive that would constitute a "parachute payment" will be one dollar ($1.00) less than three (3) times the Executive's base amount (as defined in Section 280G of the Code) and so that no portion of the payments or benefits received by the Executive shall be subject to the excise tax imposed by Section 4999 of the Code. If through error or otherwise the Executive should receive payments under this Agreement or otherwise in excess of one dollar ($1.00) less than three (3) times his base amount, the Executive shall immediately 9 repay such excess to the Company or the Bank upon notification that an overpayment has been made. SECTION 6. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the State of California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If the Company or the Bank is found to have breached this Agreement, the Company shall bear the expense of the arbitration proceeding and shall reimburse the Executive for all of his reasonable costs and expenses relating to such arbitration proceeding, including, without limitation, reasonable attorneys' fees and expenses. In no event shall the Executive be required to reimburse the Company or the Bank for any of the costs or expenses relating to such arbitration proceeding. SECTION 7. NOTICES All notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be sufficiently given if and when mailed in the continental United States by registered or certified mail or personally delivered to the party entitled thereto at the address stated below or to such 10 changed address as the addressee may have given by a similar notice: TO THE COMPANY: SC Bancorp 9040 East Telegraph Road P.O. Box 869 Downey, California 90241-0869 TO THE EXECUTIVE: Bruce W. Roat 1631 Michael Lane Pacific Palisades, California 90272 SECTION 8. GENERAL PROVISIONS A. ENTIRETY OF AGREEMENT. This Agreement constitutes the entire agreement between the Company, the Bank and the Executive relating to the subject matter hereof and shall supersede any right under any other agreement relating to the subject matter hereof between the Company or the Bank and the Executive existing as of the Agreement Date. Any compensation or benefits to which the Executive is entitled under this Agreement shall be provided based solely upon its terms, without regard to any materials used in the preparation or consideration of this Agreement, including any summary of terms or estimate of amounts relating to this Agreement. B. ENFORCEABILITY. If any provision of this Agreement shall be determined by a court of competent jurisdiction to be, in whole or in part, unenforceable or contrary to any statute, law, order, rule, regulation, directive or other action of any federal or state 11 regulatory agency having jurisdiction over the Company or its subsidiary, then the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. The validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California, without giving effect to the principles of conflict of laws thereof. C. MITIGATION. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable and benefits to be provided under this Agreement. D. ASSIGNMENT OF INTEREST. No right to or interest in any payments shall be assignable by the Executive; PROVIDED, HOWEVER, that this Agreement shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees after the Executive's death to the extent of any payments due in respect of the Executive hereunder. E. COMPANY, BANK AND SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company, the Bank and any successor thereof including, without limitation, any corporation or corporations acquiring directly or indirectly all or substantially all of the assets of the Company, whether by merger, consolidation, sale or otherwise (and such successor shall thereafter be deemed "the Company" for 12 the purposes of this Agreement), but shall not otherwise be assignable by the Company. F. AMENDMENT, MODIFICATION AND WAIVER. No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a written agreement signed by the Executive and by a duly authorized Company officer. G. NO GUARANTEE OF EMPLOYMENT. The parties hereto explicitly acknowledge that notwithstanding any provision to the contrary contained herein, this Agreement shall not, in any way, be interpreted to provide the Executive with any fixed or minimum term of employment with the Company or the Bank. [signature page follows] 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SC BANCORP BY ---------------------------- SOUTHERN CALIFORNIA BANK BY ---------------------------- ------------------------------ Bruce W. Roat 14 EX-10.16 8 AMENDED & RESTATED EMPLMNT SECRTY AGRMNT AMONG SC EXHIBIT 10.16 AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT This AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT (the "Agreement") by and among SC BANCORP, a California corporation (the "Company"), SOUTHERN CALIFORNIA BANK, a California corporation and a wholly owned subsidiary of the Company (the "Bank"), and Ann McPartlin (the "Executive"), is entered into as of January 1, 1997 (the "Agreement Date"). W I T N E S S E T H WHEREAS the Company, the Bank and the Executive are parties to that certain Employment Security Agreement dated as of September 15, 1994, as amended (the "Initial Agreement"); and WHEREAS, the Company and the Bank wish to continue to assure themselves and the Executive of continuity of senior management during the term of this Agreement and to provide the Executive with certain termination benefits in the event the Executive's employment is terminated under certain circumstances; and WHEREAS, should the possibility of a change in control of the Company arise, the Board of Directors believes it imperative that the Company, the Bank and the Board be able to rely upon the Executive to continue in her position, and that the Company and the Bank be able to receive and rely upon the Executive's advice, if it requests such advice, as to the best interests of the Company, without concern that she might be distracted by the 1 personal uncertainties and risks created by the possibility of a change in control; and WHEREAS, should the possibility of a change in control arise, in addition to the Executive's regular duties, the Executive may be called upon to assist in the assessment of such possible change in control, to advise management and the Board as to whether such change in control would be in the best interests of the Company and to take such other actions as the Board might determine to be appropriate; and WHEREAS, the Company, the Bank and the Executive wish to amend and restate the Initial Agreement in its entirety as hereinafter provided; NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties do hereby agree as follows: SECTION 1. TERM OF AGREEMENT This Agreement shall be effective as of the Agreement Date and shall continue in effect until the Expiration Date (as defined below). The "Expiration Date" shall initially be July 31, 1998, but commencing on August 1, 1997 and each August 1 thereafter, the Expiration Date shall automatically be extended by one additional year unless, not later than April 30 of such year, the Company shall have given notice to the Executive that it does not wish to extend the Expiration Date; PROVIDED, 2 HOWEVER, that if a Change in Control (as defined in Section 2, below) shall have occurred prior to the original or extended Expiration Date, the Expiration Date shall automatically become the second anniversary of the last day of the month in which the Change in Control occurred. Notwithstanding the foregoing, the Expiration Date shall be any earlier date on which the Executive's employment with the Company or the Bank terminates, in the event such termination occurs prior to, and not in contemplation of, a Change in Control. SECTION 2. DEFINITION OF "CHANGE IN CONTROL" For purposes of the Agreement, a "Change in Control" shall be deemed to have occurred if and when: (a) the Company shall consummate a merger or consolidation (a "Transaction") with another corporation; PROVIDED, HOWEVER, that a Change of Control shall not be deemed to have occurred with respect to a Transaction if the beneficial owners of the outstanding shares entitled to vote in the election of directors immediately prior to such Transaction will beneficially own more than sixty percent (60%) of the outstanding shares entitled to vote in the election of directors of the corporation resulting from the consummation of the Transaction; or (b) twenty-five percent (25%) of the Company's securities then entitled to vote in the election of directors shall be acquired by any "person" (as such term is used in Sections 13(d) of the Securities Exchange Act of 1934, as amended); or (c) during any period of twenty-four (24) consecutive months, individuals who at the beginning of such period were members of the Board of Directors of the Company (the "Incumbent Board") shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company, provided that any person becoming a director subsequent to the beginning of such period whose election or nomination for election was approved 3 by a vote of at least eighty-five percent (85%) of the directors comprising the Incumbent Board shall be, for purposes hereof, considered as though such person were a member of the Incumbent Board; or (d) the Company or the Bank shall sell all, or substantially all, of its assets to another corporation. SECTION 3. COVERED TERMINATION The termination benefits described in Section 4 hereof shall be provided to the Executive in the event that her employment with the Company or the Bank is terminated following, or in contemplation of, a Change of Control on account of a "Covered Termination". "Covered Termination" shall mean (i) termination of employment by the Company or the Bank other than for "Cause" as described below or (ii) termination of employment by the Executive for "Good Reason" as described below. A. TERMINATION BY COMPANY OR BANK FOR CAUSE. For purposes hereof, the Company and the Bank shall have "Cause" to terminate the Executive's employment if: (i) the Executive is grossly negligent or engages in willful misconduct in the performance of her material duties; or (ii) the Executive commits an act or acts of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company or the Bank; or (iii) the Executive discloses to a third party information that is of a confidential or proprietary nature to the Company or the Bank, other than as appropriate in the normal course of the performance of her duties; or 4 (iv) the Executive suffers from an illness, injury or other incapacity that prevents her from performing her material duties for a total of six (6) months, whether or not consecutive, within a twelve (12) month period; or (v) the Executive's death occurs. B. TERMINATION BY EXECUTIVE FOR GOOD REASON. For purposes hereof, following a Change in Control the Executive may terminate her employment for Good Reason if: (i) the Executive's then-current level of annual base salary (whether payable by the Company or the Bank) is reduced; or (ii) there is any reduction in the employee benefit coverage provided to the Executive (including pension, profit sharing and welfare benefits and perquisites, but not including incentive bonuses) from the coverage levels in effect immediately prior to the Change in Control, unless, however, the Company or the Bank provides substantially equivalent employee benefits to the Executive; or (iii) the Executive suffers a material diminution in her title, position, reporting relationship, responsibilities, authority or offices; or (iv) there is a relocation of the Executive's principal business office by more than ten (10) miles, and (a) the Executive's new commute is more than fifty (50) miles from the Executive's current primary residence or (b) the Executive's new commute is more than the Executive's current commute which is at least fifty (50) miles; or (v) the Company fails to obtain assumption of this agreement by any successor or assign of the Company; PROVIDED, HOWEVER, that any termination by the Executive for Good Reason must be made in good faith. 5 C. NOTICE. Notwithstanding the foregoing provisions of this Section 3, no such termination of the Executive's employment for Good Reason under paragraph B above shall be treated as a Covered Termination unless (i) the Executive shall give written notice to the Company, not later than thirty (30) days prior to the effective date of any such termination for Good Reason and within six (6) months after the date the Executive first becomes entitled to terminate for Good Reason on account of the event(s) forming the basis for such termination, setting forth in specific detail the basis for such termination for Good Reason, and (ii) the Company or the Bank shall not, within thirty (30) days after receipt of such notice, take actions reasonably acceptable to the Executive to remedy the circumstances leading to the termination for Good Reason. SECTION 4. CONSEQUENCES OF COVERED TERMINATION In the event that the employment of the Executive shall have been terminated after, or in contemplation of, a Change in Control in a manner that shall constitute a Covered Termination under Section 3 above, the Company shall make payments to, and provide benefit coverage for, the Executive as described below in this Section 4. A. BASE SALARY. The Executive shall receive a payment equal to one and one-half (1 1/2) times the highest annual base salary amount paid 6 (by either the Company or the Bank) to the Executive within the three years preceding the Covered Termination. Such payment shall be paid to the Executive within fifteen (15) business days following the Covered Termination. The highest annual base salary amount shall not include any bonuses awarded to the Executive. B. TARGET BONUS. The Executive shall also receive a payment equal to the amount of the Executive's target bonus in the year that the Covered Termination occurs under any of the Company's or the Bank's incentive compensation plans in which the Executive then participates; PROVIDED HOWEVER, that if a Covered Termination shall take place between January 1 and June 30, such payment to the Executive shall be prorated and reduced to an amount equal to the product of (i) the amount of the Executive's target bonus in the year that the Covered Termination occurs, and (ii) a quotient of which the numerator will be the number of months that have elapsed between January 1 immediately preceding the Covered Termination and the date of the Covered Termination, rounded up to the next whole number, and the denominator shall be twelve (12). Such payment shall be made to the Executive within fifteen (15) business days following the Covered Termination. C. STOCK OPTIONS. Immediately upon a Covered Termination, any stock options granted to the Executive under any Company incentive plan that were not fully vested and exercisable shall become fully vested and immediately exercisable. Such options will be exercisable 7 for a period of 90 days from the date of the Covered Termination (or such greater period as may be provided in the related plan). Any restrictions on payment or transfer of previously granted incentive awards shall immediately lapse. D. WELFARE BENEFITS. The Company and the Bank shall continue to maintain, in full force and effect, any "Welfare Benefits," such as life insurance coverage and health and disability benefits, which were being provided to the Executive at the time of the Covered Termination during the "Continuation Period." The Continuation Period shall mean the eighteen (18) month period following the date of a Covered Termination. Notwithstanding the above, the Company or the Bank may provide coverage and benefits under separate insured arrangements that provide benefits substantially identical to those being provided to the Executive at the time of the Covered Termination. In addition, the Executive's right to any particular type of Welfare Benefit shall be subject to cancellation by the Company or the Bank if the Executive obtains alternative coverage of a similar type during the Continuation Period that is at least as favorable to the Executive as the corresponding Welfare Benefit. The Executive shall be obligated to notify the Company of any such alternative coverage within thirty (30) days of it first becoming applicable to her. 8 E. WITHHOLDING FOR TAXES. All payments required to be made by the Company to the Executive under this Agreement shall be subject to the withholding of such amounts, if any, relating to tax, excise tax and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. SECTION 5. EXCISE TAX LIMIT Notwithstanding anything elsewhere in this Agreement to the contrary, if any of the payments provided for in this Agreement, together with any other payments or benefits which the Executive has the right to receive from the Company or the Bank (or its affiliated companies), would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), the payments pursuant to this Agreement shall be reduced so that the present value of the total amount received by the Executive that would constitute a "parachute payment" will be one dollar ($1.00) less than three (3) times the Executive's base amount (as defined in Section 280G of the Code) and so that no portion of the payments or benefits received by the Executive shall be subject to the excise tax imposed by Section 4999 of the Code. If through error or otherwise the Executive should receive payments under this Agreement or otherwise in excess of one dollar ($1.00) less than three (3) times his base amount, the Executive shall immediately 9 repay such excess to the Company or the Bank upon notification that an overpayment has been made. SECTION 6. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the State of California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If the Company or the Bank is found to have breached this Agreement, the Company shall bear the expense of the arbitration proceeding and shall reimburse the Executive for all of her reasonable costs and expenses relating to such arbitration proceeding, including, without limitation, reasonable attorneys' fees and expenses. In no event shall the Executive be required to reimburse the Company or the Bank for any of the costs or expenses relating to such arbitration proceeding. SECTION 7. NOTICES All notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be sufficiently given if and when mailed in the continental United States by registered or certified mail or personally delivered to the party entitled thereto at the address stated below or to such 10 changed address as the addressee may have given by a similar notice: TO THE COMPANY: SC Bancorp 9040 East Telegraph Road P.O. Box 869 Downey, California 90241-0869 TO THE EXECUTIVE: Ann McPartlin 7917 Nardian Way Los Angeles, California 90045 SECTION 8. GENERAL PROVISIONS A. ENTIRETY OF AGREEMENT. This Agreement constitutes the entire agreement between the Company, the Bank and the Executive relating to the subject matter hereof and shall supersede any right under any other agreement relating to the subject matter hereof between the Company or the Bank and the Executive existing as of the Agreement Date. Any compensation or benefits to which the Executive is entitled under this Agreement shall be provided based solely upon its terms, without regard to any materials used in the preparation or consideration of this Agreement, including any summary of terms or estimate of amounts relating to this Agreement. B. ENFORCEABILITY. If any provision of this Agreement shall be determined by a court of competent jurisdiction to be, in whole or in part, unenforceable or contrary to any statute, law, order, rule, 11 regulation, directive or other action of any federal or state regulatory agency having jurisdiction over the Company or its subsidiary, then the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. The validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California, without giving effect to the principles of conflict of laws thereof. C. MITIGATION. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable and benefits to be provided under this Agreement. D. ASSIGNMENT OF INTEREST. No right to or interest in any payments shall be assignable by the Executive; PROVIDED, HOWEVER, that this Agreement shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees after the Executive's death to the extent of any payments due in respect of the Executive hereunder. E. COMPANY, BANK AND SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company, the Bank and any successor thereof including, without limitation, any corporation or corporations acquiring directly or indirectly all or substantially all of the assets of the Company, whether by merger, consolidation, sale or otherwise 12 (and such successor shall thereafter be deemed "the Company" for the purposes of this Agreement), but shall not otherwise be assignable by the Company. F. AMENDMENT, MODIFICATION AND WAIVER. No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a written agreement signed by the Executive and by a duly authorized Company officer. G. NO GUARANTEE OF EMPLOYMENT. The parties hereto explicitly acknowledge that notwithstanding any provision to the contrary contained herein, this Agreement shall not, in any way, be interpreted to provide the Executive with any fixed or minimum term of employment with the Company or the Bank. [signature page follows] 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SC BANCORP BY ---------------------------- SOUTHERN CALIFORNIA BANK BY ---------------------------- ------------------------------ Ann McPartlin 14 EX-10.17 9 AMENDED & RESTATED EMPLMNT SECRTY AGRMNT AMONG SC EXHIBIT 10.17 AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT This AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT (the "Agreement") by and among SC BANCORP, a California corporation (the "Company"), SOUTHERN CALIFORNIA BANK, a California corporation and a wholly owned subsidiary of the Company (the "Bank"), and Michael V. Cummings (the "Executive"), is entered into as of January 1, 1997 (the "Agreement Date"). W I T N E S S E T H WHEREAS the Company, the Bank and the Executive are parties to that certain Employment Security Agreement dated as of September 15, 1994, as amended (the "Initial Agreement"); and WHEREAS, the Company and the Bank wish to continue to assure themselves and the Executive of continuity of senior management during the term of this Agreement and to provide the Executive with certain termination benefits in the event the Executive's employment is terminated under certain circumstances; and WHEREAS, should the possibility of a change in control of the Company arise, the Board of Directors believes it imperative that the Company, the Bank and the Board be able to rely upon the Executive to continue in his position, and that the Company and the Bank be able to receive and rely upon the Executive's advice, if it requests such advice, as to the best interests of the Company, without concern that he might be distracted by the 1 personal uncertainties and risks created by the possibility of a change in control; and WHEREAS, should the possibility of a change in control arise, in addition to the Executive's regular duties, the Executive may be called upon to assist in the assessment of such possible change in control, to advise management and the Board as to whether such change in control would be in the best interests of the Company and to take such other actions as the Board might determine to be appropriate; and WHEREAS, the Company, the Bank and the Executive wish to amend and restate the Initial Agreement in its entirety as hereinafter provided; NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties do hereby agree as follows: SECTION 1. TERM OF AGREEMENT This Agreement shall be effective as of the Agreement Date and shall continue in effect until the Expiration Date (as defined below). The "Expiration Date" shall initially be July 31, 1998, but commencing on August 1, 1997 and each August 1 thereafter, the Expiration Date shall automatically be extended by one additional year unless, not later than April 30 of such year, the Company shall have given notice to the Executive that it does not wish to extend the Expiration Date; PROVIDED, 2 HOWEVER, that if a Change in Control (as defined in Section 2, below) shall have occurred prior to the original or extended Expiration Date, the Expiration Date shall automatically become the second anniversary of the last day of the month in which the Change in Control occurred. Notwithstanding the foregoing, the Expiration Date shall be any earlier date on which the Executive's employment with the Company or the Bank terminates, in the event such termination occurs prior to, and not in contemplation of, a Change in Control. SECTION 2. DEFINITION OF "CHANGE IN CONTROL" For purposes of the Agreement, a "Change in Control" shall be deemed to have occurred if and when: (a) the Company shall consummate a merger or consolidation (a "Transaction") with another corporation; PROVIDED, HOWEVER, that a Change of Control shall not be deemed to have occurred with respect to a Transaction if the beneficial owners of the outstanding shares entitled to vote in the election of directors immediately prior to such Transaction will beneficially own more than sixty percent (60%) of the outstanding shares entitled to vote in the election of directors of the corporation resulting from the consummation of the Transaction; or (b) twenty-five percent (25%) of the Company's securities then entitled to vote in the election of directors shall be acquired by any "person" (as such term is used in Sections 13(d) of the Securities Exchange Act of 1934, as amended); or (c) during any period of twenty-four (24) consecutive months, individuals who at the beginning of such period were members of the Board of Directors of the Company (the "Incumbent Board") shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company, provided that any person becoming a director subsequent to the beginning of such period whose election or nomination for election was approved 3 by a vote of at least eighty-five percent (85%) of the directors comprising the Incumbent Board shall be, for purposes hereof, considered as though such person were a member of the Incumbent Board; or (d) the Company or the Bank shall sell all, or substantially all, of its assets to another corporation. SECTION 3. COVERED TERMINATION The termination benefits described in Section 4 hereof shall be provided to the Executive in the event that his employment with the Company or the Bank is terminated following, or in contemplation of, a Change of Control on account of a "Covered Termination". "Covered Termination" shall mean (i) termination of employment by the Company or the Bank other than for "Cause" as described below or (ii) termination of employment by the Executive for "Good Reason" as described below. A. TERMINATION BY COMPANY OR BANK FOR CAUSE. For purposes hereof, the Company and the Bank shall have "Cause" to terminate the Executive's employment if: (i) the Executive is grossly negligent or engages in willful misconduct in the performance of his material duties; or (ii) the Executive commits an act or acts of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company or the Bank; or (iii) the Executive discloses to a third party information that is of a confidential or proprietary nature to the Company or the Bank, other than as appropriate in the normal course of the performance of his duties; or 4 (iv) the Executive suffers from an illness, injury or other incapacity that prevents him from performing his material duties for a total of six (6) months, whether or not consecutive, within a twelve (12) month period; or (v) the Executive's death occurs. B. TERMINATION BY EXECUTIVE FOR GOOD REASON. For purposes hereof, following a Change in Control the Executive may terminate his employment for Good Reason if: (i) the Executive's then-current level of annual base salary (whether payable by the Company or the Bank) is reduced; or (ii) there is any reduction in the employee benefit coverage provided to the Executive (including pension, profit sharing and welfare benefits and perquisites, but not including incentive bonuses) from the coverage levels in effect immediately prior to the Change in Control, unless, however, the Company or the Bank provides substantially equivalent employee benefits to the Executive; or (iii) the Executive suffers a material diminution in his title, position, reporting relationship, responsibilities, authority or offices; or (iv) there is a relocation of the Executive's principal business office by more than ten (10) miles, and (a) the Executive's new commute is more than fifty (50) miles from the Executive's current primary residence or (b) the Executive's new commute is more than the Executive's current commute which is at least fifty (50) miles; or (v) the Company fails to obtain assumption of this agreement by any successor or assign of the Company; PROVIDED, HOWEVER, that any termination by the Executive for Good Reason must be made in good faith. C. NOTICE. Notwithstanding the foregoing provisions of this Section 3, no such termination of the Executive's employment for Good Reason 5 under paragraph B above shall be treated as a Covered Termination unless (i) the Executive shall give written notice to the Company, not later than thirty (30) days prior to the effective date of any such termination for Good Reason and within six (6) months after the date the Executive first becomes entitled to terminate for Good Reason on account of the event(s) forming the basis for such termination, setting forth in specific detail the basis for such termination for Good Reason, and (ii) the Company or the Bank shall not, within thirty (30) days after receipt of such notice, take actions reasonably acceptable to the Executive to remedy the circumstances leading to the termination for Good Reason. SECTION 4. CONSEQUENCES OF COVERED TERMINATION In the event that the employment of the Executive shall have been terminated after, or in contemplation of, a Change in Control in a manner that shall constitute a Covered Termination under Section 3 above, the Company shall make payments to, and provide benefit coverage for, the Executive as described below in this Section 4. A. BASE SALARY. The Executive shall receive a payment equal to one and one-half (1 1/2) times the highest annual base salary amount paid (by either the Company or the Bank) to the Executive within the three years preceding the Covered Termination. Such payment shall be paid to the Executive within fifteen (15) business days following 6 the Covered Termination. The highest annual base salary amount shall not include any bonuses awarded to the Executive. B. TARGET BONUS. The Executive shall also receive a payment equal to the amount of the Executive's target bonus in the year that the Covered Termination occurs under any of the Company's or the Bank's incentive compensation plans in which the Executive then participates; PROVIDED HOWEVER, that if a Covered Termination shall take place between January 1 and June 30, such payment to the Executive shall be prorated and reduced to an amount equal to the product of (i) the amount of the Executive's target bonus in the year that the Covered Termination occurs, and (ii) a quotient of which the numerator will be the number of months that have elapsed between January 1 immediately preceding the Covered Termination and the date of the Covered Termination, rounded up to the next whole number, and the denominator shall be twelve (12). Such payment shall be made to the Executive within fifteen (15) business days following the Covered Termination. C. STOCK OPTIONS. Immediately upon a Covered Termination, any stock options granted to the Executive under any Company incentive plan that were not fully vested and exercisable shall become fully vested and immediately exercisable. Such options will be exercisable for a period of 90 days from the date of the Covered Termination (or such greater period as may be provided in the related plan). Any restrictions on payment or transfer of previously granted incentive awards shall immediately lapse. 7 D. WELFARE BENEFITS. The Company and the Bank shall continue to maintain, in full force and effect, any "Welfare Benefits," such as life insurance coverage and health and disability benefits, which were being provided to the Executive at the time of the Covered Termination during the "Continuation Period." The Continuation Period shall mean the eighteen (18) month period following the date of a Covered Termination. Notwithstanding the above, the Company or the Bank may provide coverage and benefits under separate insured arrangements that provide benefits substantially identical to those being provided to the Executive at the time of the Covered Termination. In addition, the Executive's right to any particular type of Welfare Benefit shall be subject to cancellation by the Company or the Bank if the Executive obtains alternative coverage of a similar type during the Continuation Period that is at least as favorable to the Executive as the corresponding Welfare Benefit. The Executive shall be obligated to notify the Company of any such alternative coverage within thirty (30) days of it first becoming applicable to him. E. WITHHOLDING FOR TAXES. All payments required to be made by the Company to the Executive under this Agreement shall be subject to the withholding of such amounts, if any, relating to tax, excise tax and other payroll deductions as the Company may reasonably 8 determine it should withhold pursuant to any applicable law or regulation. SECTION 5. EXCISE TAX LIMIT Notwithstanding anything elsewhere in this Agreement to the contrary, if any of the payments provided for in this Agreement, together with any other payments or benefits which the Executive has the right to receive from the Company or the Bank (or its affiliated companies), would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), the payments pursuant to this Agreement shall be reduced so that the present value of the total amount received by the Executive that would constitute a "parachute payment" will be one dollar ($1.00) less than three (3) times the Executive's base amount (as defined in Section 280G of the Code) and so that no portion of the payments or benefits received by the Executive shall be subject to the excise tax imposed by Section 4999 of the Code. If through error or otherwise the Executive should receive payments under this Agreement or otherwise in excess of one dollar ($1.00) less than three (3) times his base amount, the Executive shall immediately repay such excess to the Company or the Bank upon notification that an overpayment has been made. 9 SECTION 6. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the State of California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If the Company or the Bank is found to have breached this Agreement, the Company shall bear the expense of the arbitration proceeding and shall reimburse the Executive for all of his reasonable costs and expenses relating to such arbitration proceeding, including, without limitation, reasonable attorneys' fees and expenses. In no event shall the Executive be required to reimburse the Company or the Bank for any of the costs or expenses relating to such arbitration proceeding. SECTION 7. NOTICES All notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be sufficiently given if and when mailed in the continental United States by registered or certified mail or personally delivered to the party entitled thereto at the address stated below or to such changed address as the addressee may have given by a similar notice: 10 TO THE COMPANY: SC Bancorp 9040 East Telegraph Road P.O. Box 869 Downey, California 90241-0869 TO THE EXECUTIVE: Michael V. Cummings 2323 Flintridge Drive Glendale, California 91206 SECTION 8. GENERAL PROVISIONS A. ENTIRETY OF AGREEMENT. This Agreement constitutes the entire agreement between the Company, the Bank and the Executive relating to the subject matter hereof and shall supersede any right under any other agreement relating to the subject matter hereof between the Company or the Bank and the Executive existing as of the Agreement Date. Any compensation or benefits to which the Executive is entitled under this Agreement shall be provided based solely upon its terms, without regard to any materials used in the preparation or consideration of this Agreement, including any summary of terms or estimate of amounts relating to this Agreement. B. ENFORCEABILITY. If any provision of this Agreement shall be determined by a court of competent jurisdiction to be, in whole or in part, unenforceable or contrary to any statute, law, order, rule, regulation, directive or other action of any federal or state regulatory agency having jurisdiction over the Company or its subsidiary, then the remaining provisions of this Agreement shall 11 remain in full force and effect to the fullest extent permitted by law. The validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California, without giving effect to the principles of conflict of laws thereof. C. MITIGATION. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable and benefits to be provided under this Agreement. D. ASSIGNMENT OF INTEREST. No right to or interest in any payments shall be assignable by the Executive; PROVIDED, HOWEVER, that this Agreement shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees after the Executive's death to the extent of any payments due in respect of the Executive hereunder. E. COMPANY, BANK AND SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company, the Bank and any successor thereof including, without limitation, any corporation or corporations acquiring directly or indirectly all or substantially all of the assets of the Company, whether by merger, consolidation, sale or otherwise (and such successor shall thereafter be deemed "the Company" for the purposes of this Agreement), but shall not otherwise be assignable by the Company. 12 F. AMENDMENT, MODIFICATION AND WAIVER. No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a written agreement signed by the Executive and by a duly authorized Company officer. G. NO GUARANTEE OF EMPLOYMENT. The parties hereto explicitly acknowledge that notwithstanding any provision to the contrary contained herein, this Agreement shall not, in any way, be interpreted to provide the Executive with any fixed or minimum term of employment with the Company or the Bank. [signature page follows] 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SC BANCORP BY ---------------------------- SOUTHERN CALIFORNIA BANK BY ---------------------------- ------------------------------ Michael V. Cummings 14 EX-13.1 10 MANAGEMENT'S DISCUSSION EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of SC Bancorp and its subsidiary, Southern California Bank (together, the "Company"). This information should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto. Reference is also made to Item 1. of the Company's Annual Report on Form 10-K which provides additional financial information regarding the Company. Copies of the Form 10-K are available without charge on written request directed to Southern California Bank, Finance Department, P.O. Box 588, La Mirada, CA 90637-0588. RESULTS OF OPERATIONS The Company reported net income for the years ended December 31, 1996, 1995 and 1994 of $4.5 million, $869,000 and $2.7 million, respectively. Current year net income reflects the full realization of reductions in ongoing operating expenses resulting from the restructuring program commenced in the third quarter of 1995 ("1995 Restructuring"), and increased interest income attributable to a 23% increase in average loan balances over the prior year. Net income for 1995 reflects approximately $1.7 million of restructuring charges and losses pretax, and a $600,000 additional loan loss provision related to selected commercial real estate loans. Net income for 1994 includes a $448,000 gain on the sale of the Company's headquarters building, a $215,000 gain on the sale of loans, and a $850,000 reversal of previously-recorded allowance for possible loan losses. Net interest income increased to $23.2 million for the year ended December 31,1996 from $21.4 million for 1995 and $20.1 million for 1994. The increase is primarily due to higher average loan balances. Average loan balances increased to $321.8 million for 1996 from $261.6 million for 1995 and $203.5 million for 1994. The $58.1 million increase in average loan balances in 1995 over 1994 is largely attributable to the purchase of $72.4 million in loans from Independence One Bank of California, F.S.B. ("IOBC") on April 30, 1995. The Company's net interest margin (net interest income expressed as a percentage of average interest-earning assets) increased to 5.58% for the year ended December 31, 1996 from 5.30% for 1995. The net interest margin for 1994 was 5.75%. The increase in the net interest margin for 1996 can be attributed to the increase in loans as a percentage of total earning assets compared to lower yielding investment securities. The Company's cost of funds for 1996 decreased by approximately 12 basis points from 1995 due to the managed reduction in higher-rate certificate of deposit balances raised prior to the IOBC transaction. Other interest expense in 1995 included a $408,000 nonrecurring adjustment recorded on the Company's deferred compensation plans. Despite the reduction from the prior year, the Company's overall cost of funds for 1996 remains above 1994 levels due to increased competition for deposits in the Company's market area. The decrease in net interest margin in 1995 compared to 1994 is largely due to the increased interest expense associated with the certificate of deposit program that provided funding for the IOBC transaction, and to the previously-mentioned deferred compensation interest adjustment. Noninterest income was $5.2 million, $5.0 million and $6.7 million for the years ended December 31, 1996, 1995 and 1994, respectively. A modest decrease in service charge income in 1996 from the prior year was largely offset by an increase in other deposit related fees. Noninterest income for 1995 includes a $620,000 loss on the sale of available-for-sale investment securities and a $407,000 benefit payment received on a corporate-owned life insurance policy. Noninterest income decreased in 1995 compared to 1994 due to the nonrecurring gains on asset sales discussed above, and to reductions in merchant bankcard fee income. The Company's merchant bankcard activity decreased following the departure of its largest bankcard customer during the third quarter of 1994. Noninterest expense decreased to $21.2 million for the year ended December 31, 1996 from $22.3 million for the year ended December 31, 1995, excluding 1995 restructuring charges of $948,000, and $23.8 million for the year ended December 31, 1994. Occupancy expense for 1996 decreased by $815,000, net of restructuring charges, from the prior year following the sale of two branches and the consolidation of a third branch in conjunction with the 1995 Restructuring. FDIC insurance expense decreased by $445,000 in 1996 compared to 1995 due to reductions in the FDIC assessment rate. The reductions in 1996 noninterest expense were partially offset by a $388,000 increase in professional and legal fees. The decrease in noninterest expense in 1995 compared to 1994 occurred primarily in occupancy, OREO, merchant bankcard and FDIC insurance expense. FINANCIAL CONDITION Total assets increased to $476.0 million at December 31, 1996 from $461.8 million at December 31, 1995 and $398.6 million at December 31, 1994. Gross loans increased 9.8% to $347.9 million from $316.8 million at December 31,1995. Total deposits at December 31, 1996 were $415.3 million, a $8.5 million increase from $406.8 million at year-end 1995, despite the sale or consolidation of three branches in the first quarter of 1996. The increase in loan balances at December 31, 1995 compared to December 31, 1994 is largely due to the purchase of loans from IOBC, and to SBA loan purchases completed during the fourth quarter of 1995. The increase in deposit balances for the same period reflects the acquisition of deposits from IOBC and the deposits raised through a promotional certificate of deposit program run during the first quarter of 1995. The following table provides a summary comparison of assets and liabilities in the Company's consolidated balance sheets and the percentage distribution of these items for the dates indicated:
- ------------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Balance % Balance % Balance % - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 33,768 7.1% $ 29,088 6.3% $ 31,118 7.8% Investment securities 76,590 16.1% 94,030 20.4% 131,881 33.1% Loans, net 342,228 71.9% 310,576 67.3% 202,0725 0.6% Premises and equipment, net 7,740 1.6% 9,734 2.1% 10,254 2.6% Other real estate owned, net 536 0.1% 2,073 0.4% 5,837 1.5% Accrued interest receivable 3,931 0.8% 4,297 0.9% 4,330 1.1% Other assets 11,220 2.4% 11,981 2.6% 13,063 3.3% - ------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 476,013 100.0% $ 461,779 100.0% $ 398,555 100.0% - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- LIABILITIES and SHAREHOLDERS' EQUITY Deposits Noninterest-bearing deposits $ 125,903 26.4% $ 130,378 28.2% $ 118,020 29.6% Interest-bearing demand & savings deposits 144,190 30.3% 130,301 28.2% 147,552 37.0% Time certificates of deposit 145,233 30.5% 146,132 31.7% 74,367 18.7% - ------------------------------------------------------------------------------------------------------------------- Total deposits 415,326 87.2% 406,811 88.1% 339,939 85.3% - ------------------------------------------------------------------------------------------------------------------- Borrowed funds and other interest-bearing liabilities 8,096 1.7% 6,407 1.4% 13,77 13.5% Accrued interest payable and other liabilities 2,672 0.6% 3,049 0.6% 3,001 0.7% Total Shareholders' Equity 49,919 10.5% 45,512 9.9% 41,844 10.5% - ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES and SHAREHOLDERS' EQUITY $ 476,013 100.0% $ 461,779 100.0% $ 398,555 100.0% - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
Nonaccrual loans increased to $2.8 million, or .082%, of total loans at December 31, 1996 from $1.4 million, or 0.44%, of total loans at December 31, 1995. The increase in nonaccrual loans in 1996 is primarily due to one real estate loan. Nonaccrual loans were $1.6 million, or 0.78%, of total loans at December 31, 1994. Net loan charge-offs were $317,000, or 0.10%, of average outstanding loans for 1996, a decrease from $1.7 million, or 0.67%, of average loans for 1995, and $4.6 million, or 2.28%, of average loans for 1994. The decrease in net charge-offs reflects the continued improvement in the quality of the Company's loan portfolio. 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. The Company has established policy guidelines to support the sound management of its liquidity position based on regulatory guidance and industry practice. It is the Company's policy to maintain a liquidity ratio (liquid assets to liquid liabilities) of between 20% and 40%, and to limit gross loans to no more than 85% of deposits. At December 31,1996, the Company's ratios were within these guidelines: the liquidity ratio was 21.64% and the loan to deposit ratio was 83.59%. 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 holds investment securities classified as available-for-sale. Available-for-sale securities can be sold in response to liquidity needs or used as collateral under reverse repurchase agreements. While the Company currently has no plans to liquidate securities in the portfolio, it has sold securities in previous years. The likelihood that securities would be sold in the future and the potential for losses to be realized remains uncertain. In the event that securities held as available-for-sale were sold at a loss, any loss would be reflected in the results of operations on an after-tax basis. However, there would be no expected impact on the Company's financial condition, given that the securities are carried at their estimated fair value, net of any unrealized loss. The unrealized loss on available-for-sale securities increased to $1.5 million at December 31, 1996 from $1.3 million at December 31, 1995. The Company's liquid assets were $89.3 million at December 31,1996 compared to $101.2 million at December 31, 1995. Liquid assets have decreased due to the use of proceeds received from the sale and maturity of investment securities to fund loan growth. 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, Federal funds lines of credit that allow the Company to temporarily borrow an aggregate of up to $30.0 million from three commercial banks, and a $6.5 million line of credit with the Federal Home Loan Bank ("FHLB") collateralized by mortgage loans. At December 31,1996, the Company had unpledged securities with a fair value of approximately $53.6 million that could be used for reverse repurchases. 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. The largest amount borrowed during 1996 through reverse repurchase arrangements, Federal funds lines, and FHLB lines was $20.5 million, $8.8 million and $1.0 million, respectively. CAPITAL RESOURCES The Company and its bank subsidiary are subject to risk-based capital regulations adopted by the federal banking regulators in January 1990. These guidelines are used to evaluate capital adequacy, and are based on an institution's asset risk profile and off balance sheet exposures, such as unused loan commitments and standby letters of credit. The regulations require that a portion of total capital be core, or Tier 1, capital consisting of common shareholders' equity and perpetual preferred stock, less goodwill and certain other deductions, with the remaining, or Tier 2, capital consisting of other elements, primarily subordinated debt, mandatory convertible debt, and grandfathered senior debt, plus the allowance for loan losses, subject to certain limitations. As of December 1992, the risk-based capital rules were further supplemented by a leverage ratio, defined as Tier 1 capital divided by quarterly average assets after certain adjustments. The minimum leverage ratio is 3 percent for banking organizations that do not anticipate significant growth and have well-diversified risk (including no undue interest rate exposure), excellent asset quality, high liquidity, and good earnings. Other banking organizations not in this category are expected to have ratios of at least 4 to 5 percent, depending on their particular condition and growth plans. Higher capital ratios can be mandated by the regulators if warranted by the particular circumstances or risk profile of a banking organization. In the current regulatory environment, banking companies must stay well-capitalized, as defined in the banking regulations, in order to receive favorable regulatory treatment on acquisitions and favorable risk-based deposit insurance assessments. Management seeks to maintain capital ratios in excess of the regulatory minimums. As of December 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 risk-based and leverage capital ratios for the Company and the Bank at December 31, 1996:
Company Bank - --------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Amount % Amount % - --------------------------------------------------------------------------------------------- Leverage ratio $ 47,166 9.97% $ 44,970 9.51% Regulatory minimum 18,917 4.00% 18,908 4.00% Excess 28,249 5.97% 26,062 5.51% Risk-based ratios Tier 1 capital $ 47,166 (a) 11.20% (b) $ 44,970 (a) 10.68% (c) Tier 1 minimum 16,850 4.00% (d) 16,838 4.00% (d) Excess 30,316 7.20% 28,132 6.68% Total capital $ 52,113 (e) 12.37% (b) $ 49,917 (e) 11.86% (c) Total capital minimum 33,700 8.00% 33,676 8.00% Excess 18,413 4.37% 16,241 3.86% - ---------------------------------------------------------------------------------------------
(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 $421.2 million were used to compute these percentages. (c) Risk-weighted assets of $420.9 million were used to compute these percentages. (d) Insured institutions, such as the Bank, must maintain a leverage ratio of 4% or 5%, a Tier 1 capital ratio of at least 4% or 6%, and a Total capital ratio of at least 8% or 10% in order to be categorized adequately capitalized or well-capitalized, respectively. (e) Tier 1 capital plus the allowance for loan losses, limited to 1.25% of total risk-weighted assets. EX-23.1 11 INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of SC Bancorp on Form S-8 (No. 33-38666) of our report dated January 24, 1997, appearing in the Annual Report on Form 10-K of SC Bancorp for the year ended December 31, 1996, which is part of this Registration Statement and to the reference to us under the heading "Independent Auditors" in such Annual Report. Los Angeles, California March 20, 1997 EX-27 12 FDS
9 1,000 12-MOS DEC-31-1995 JAN-01-1996 DEC-31-1996 29,968 0 3,800 0 74,533 0 0 347,864 4,947 476,013 415,326 8,096 2,672 0 0 0 37,738 12,181 476,013 30,145 4,256 566 34,967 11,090 11,727 23,240 (470) 14 21,228 7,648 7,648 0 0 4,455 0.60 0 5.58 2,846 0 0 0 5,734 869 552 4,947 0 0 0
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