-----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, KibbcD5mNdwgmqKsqCvhHfCnEuHHUy1I7Q6AirTKevpcswYuqCpZKp3i8Wgmx/ib 18aDy1rvQHX6hQwKKXf2eQ== 0000912057-97-026947.txt : 19970812 0000912057-97-026947.hdr.sgml : 19970812 ACCESSION NUMBER: 0000912057-97-026947 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970811 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SC BANCORP CENTRAL INDEX KEY: 0000351617 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953585586 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10699 FILM NUMBER: 97655482 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-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT to SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 Commission File Number 0-11046 SC BANCORP (Exact name of registrant as specified in its charter) California 95-3585586 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3800 E. La Palma Ave., Anaheim, California 92807-1798 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (714) 238-3110 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES. [ X ] NO. [ ] There were 7,498,365 shares of common stock for the registrant issued and outstanding as of August 1, 1997. Part I. Item 1. Financial Statements SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK Consolidated Balance Sheets
June 30, December 31, (DOLLARS IN THOUSANDS) 1997 1996 - ----------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 37,639 $ 29,968 Federal funds sold 27,804 3,800 - ----------------------------------------------------------------------------------------- Cash and cash equivalents 65,443 33,768 - ----------------------------------------------------------------------------------------- Securities available-for-sale, at fair value (Notes 1 and 2) 73,465 74,533 Investment in Federal Home Loan Bank stock, at cost 1,495 1,450 Investment in Federal Reserve Bank stock, at cost 621 607 Loans (Notes 1 and 3) 350,584 347,864 Less: Deferred fee income (638) (689) Allowance for possible loan losses (5,062) (4,947) - ----------------------------------------------------------------------------------------- Loans, net 344,884 342,228 - ----------------------------------------------------------------------------------------- Premises and equipment, net 7,017 7,740 Other real estate owned, net 654 536 Accrued interest receivable 3,748 3,931 Other assets 10,567 11,220 - ----------------------------------------------------------------------------------------- TOTAL ASSETS $ 507,894 $ 476,013 - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- LIABILITIES Deposits: Noninterest-bearing $ 137,616 $ 125,903 Interest-bearing 308,629 289,423 - ----------------------------------------------------------------------------------------- Total deposits 446,245 415,326 - ----------------------------------------------------------------------------------------- Borrowed funds and other interest-bearing liabilities 7,342 8,096 Accrued interest payable and other liabilities 2,522 2,672 - ----------------------------------------------------------------------------------------- Total liabilities 456,109 426,094 - ----------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock, no par or stated value: 10,000,000 shares authorized; no shares issued or outstanding - - Common stock, no par or stated value: 20,000,000 shares authorized; 7,498,365 and 7,486,375 shares issued and outstanding at June 30, 1997 and December 31, 1996, respectively. 37,807 37,738 Retained earnings 15,502 13,055 Dividends paid (749) - Unrealized loss on available-for-sale securities, net of taxes (Note 1) (775) (874) - ----------------------------------------------------------------------------------------- Total Shareholders' Equity 51,785 49,919 - ----------------------------------------------------------------------------------------- TOTAL LIABILITIES and SHAREHOLDERS' EQUITY $ 507,894 $ 476,013 - ----------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Part I. Item 1. (continued) SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK Consolidated Statements of Operations
Three Months Ended Six Months Ended (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) June 30, June 30, - -------------------------------------------------------------------------------------------------------- 1997 1996 1997 1996 -------- -------- --------- --------- INTEREST INCOME Interest and fees on loans $ 7,997 $ 7,390 $ 15,759 $ 14,768 Interest on investment securities 1,008 1,061 1,959 2,204 Interest on Federal funds sold 516 91 717 172 - -------------------------------------------------------------------------------------------------------- Total interest income 9,521 8,542 18,435 17,144 - -------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits: Interest-bearing demand 764 571 1,489 966 Savings 396 233 638 481 Time certificates of deposit 2,004 1,897 3,904 3,914 - -------------------------------------------------------------------------------------------------------- Total interest on deposits 3,164 2,701 6,031 5,361 Other interest expense 101 183 215 489 - -------------------------------------------------------------------------------------------------------- Total interest expense 3,265 2,884 6,246 5,850 - -------------------------------------------------------------------------------------------------------- Net interest income 6,256 5,658 12,189 11,294 Provision for (recovery of) possible loan losses (Note 3) 300 (750) 650 (470) - -------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 5,956 6,408 11,539 11,764 - -------------------------------------------------------------------------------------------------------- NONINTEREST INCOME 1,186 1,246 2,443 2,533 NONINTEREST EXPENSE: Salaries and benefits 2,424 2,559 4,951 5,178 Net occupancy, furniture and equipment 873 1,078 1,720 2,188 Other operating expense 1,614 2,436 3,119 4,031 - -------------------------------------------------------------------------------------------------------- Total noninterest expense 4,911 6,073 9,790 11,397 - -------------------------------------------------------------------------------------------------------- Income before provision for income taxes 2,231 1,581 4,192 2,900 Provision for income taxes 929 661 1,745 1,217 - -------------------------------------------------------------------------------------------------------- NET INCOME $ 1,302 $ 920 $ 2,447 $ 1,683 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 7,495 7,475 7,491 7,474 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Earnings per share $ 0.17 $ 0.12 $ 0.33 $ 0.23 - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2 Part I. Item 1. (continued) SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK Consolidated Statements of Cash Flows
Six months ended (DOLLARS IN THOUSANDS) June 30, - ---------------------------------------------------------------------------------------------- 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,447 $ 1,683 Adjustments to reconcile net income to net cash provided by operating activities: Provision for (recovery of) possible loan losses 650 (470) Provision for loss on OREO - 369 Gain on sale of available-for-sale investment securities - (14) Net amortization of premiums on investment securities 372 467 Loss on sale of OREO - 16 Gain on sale of loans (78) - Net (decrease) increase in deferred fees and unearned income on loans (51) 31 Depreciation and amortization 800 951 (Gain) loss on sale of fixed assets (4) 24 Decrease in accrued interest receivable and other assets 763 697 (Decrease) increase in accrued interest payable and other liabilities (150) 1,323 - ---------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,749 5,077 - ---------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of available-for-sale investment securities - 8,549 Proceeds from maturities of available-for-sale investment securities 8,867 4,005 Purchase of available-for-sale investment securities (8,000) - Purchase of FHLB and FRB stock (58) (202) Proceeds from sale of loans 1,299 - Loans funded, net of payments received (4,507) (6,749) Proceeds from sale of OREO - 567 Proceeds from sale of fixed assets and other assets 4 197 Purchase of fixed assets (77) (138) - ---------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (2,472) 6,229 - ---------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 69 23 Dividends paid (749) - Increase (decrease) in noninterest-bearing deposits 11,713 (8,871) Increase in interest-bearing deposits 19,206 3,662 (Decrease) increase in other borrowings (841) 3,307 - ---------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 29,398 (1,879) - ---------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 31,675 9,427 Cash and cash equivalents, beginning of period 33,768 29,088 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 65,443 $ 38,515 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS Unrealized loss on investment securities available-for-sale, net of tax $ 99 $ 797 Transfers of loans to other real estate owned 31 699 Assumption of senior liens on other real estate owned 87 28 Asset sales offset to restructuring reserve - 91 Close out of capital lease accounts - 118 - ----------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 Part I. Item 1. (continued) SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, except for information as of and for the year ended December 31, 1996) NOTE 1-SIGNIFICANT ACCOUNTING POLICIES SC Bancorp, a California bank holding company (the "Company"), and its subsidiary, Southern California Bank, a California state-chartered bank (the "Bank"), 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. See the notes to SC Bancorp's consolidated financial statements contained in the Company's Annual Report on Form 10-K. The interim period financial statements are unaudited. It is the opinion of Company management that all adjustments consisting of normal, recurring accruals necessary for a fair presentation of the results of operations have been reflected therein. Results for the period ending June 30, 1997, are not necessarily indicative of results that may be expected for any other interim periods or for the year as a whole. 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. SECURITIES: At June 30, 1997, the Company's available-for-sale portfolio had a net unrealized loss of $1.3 million. The tax-effected reduction to shareholders' equity at June 30, 1997, was $775,000. 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. 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 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: 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. 4 Part I. Item 1. (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. There were no stock option grants during the period ended June 30, 1997. 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 adoption of SFAS No. 125 and SFAS No. 127 effective January 1, 1997 did not have a material impact on the Company's operations or financial condition. EARNINGS PER SHARE In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This Statement establishes standards for computing and presenting earnings per share (EPS) for entities with publicly held common stock or potential common stock. The Statement replaces the presentation of primary EPS with basic EPS, and requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. The Statement is effective for financial statements issued for periods ending after December 15, 1997, and requires restatement of all prior-period EPS data presented. Basic EPS as calculated under SFAS No. 128 for prior periods would not change from that previously reported. 5 Part I. Item 1. (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2-INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities as of June 30, 1997 and December 31, 1996 are as follows:
(DOLLARS IN THOUSANDS) June 30, 1997 - -------------------------------------------------------------------------------------- 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 $ 35,664 $ 29 $ (182) $ 35,511 Mortgage-backed securities 39,123 - (1,169) 37,954 - -------------------------------------------------------------------------------------- Total $ 74,787 $ 29 $ (1,351) $ 73,465 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- (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 - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
Investment securities with a carrying value of $14.0 million and $15.5 million were pledged to secure public deposits and as collateral for other borrowings at June 30, 1997 and December 31, 1996, respectively. The amortized cost and estimated fair value of debt securities at June 30, 1997 by contractual maturities are shown in the following table. Expected maturities will differ from contractual maturities, particularly with respect to mortgage- backed securities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(DOLLARS IN THOUSANDS) Maturing in - ----------------------------------------------------------------------------------------------------------- Over one Over five One year year through years through Over JUNE 30, 1997 or less five years ten years ten years Total --------- ------------ ------------- --------- -------- Available-for-sale, amortized cost $ 14,664 $ 54,584 $ 5,539 $ - $74,787 Available-for-sale, estimated fair value $ 14,653 $ 53,424 $ 5,388 $ - $73,465
There were no sales of investment securities during the first six months of 1997. Proceeds from the sales of available-for-sale investment securities during the same period in 1996 were $8.5 million. A gross gain of $14,000 was realized on sales of investment securities in 1996. 6 Part I. Item 1. (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3-LOANS Loans by category are summarized below:
June 30, December 31, (DOLLARS IN THOUSANDS) 1997 Percent 1996 Percent - ----------------------------------------------------------------------------------------------- Commercial $ 168,670 48.11% $ 160,633 46.17% Real estate, construction 6,899 1.97% 8,544 2.46% Real estate, mortgage 108,250 30.88% 105,123 30.22% Consumer 66,765 19.04% 73,564 21.15% - ----------------------------------------------------------------------------------------------- Gross loans 350,584 100.00% 347,864 100.00% - ----------------------------------------------------------------------------------------------- Deferred fee income (638) (689) Allowance for possible loan losses (5,062) (4,947) - ----------------------------------------------------------------------------------------------- Loans, net $ 344,884 $ 342,228 - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
No industry constitutes a concentration in the Company's loan portfolio. The following table summarizes the balances and changes in the allowance for possible loan losses for the periods indicated:
Six months Year Six months ended ended ended June 30, December 31, June 30, (DOLLARS IN THOUSANDS) 1997 1996 1996 - ----------------------------------------------------------------------------------------------------------- Average balance of gross loans outstanding $ 344,440 $ 321,843 $ 315,024 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Gross loan balance at end of period $ 350,584 $ 347,864 $ 322,953 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Allowance at beginning of period $ 4,947 $ 5,734 $ 5,734 Charge-offs: Commercial 617 422 79 Real estate - 279 138 Consumer 29 168 122 - ----------------------------------------------------------------------------------------------------------- Total charge-offs 646 869 339 Recoveries: Commercial 99 477 362 Real estate - 21 5 Consumer 12 54 35 - ----------------------------------------------------------------------------------------------------------- Total recoveries 111 552 402 Net charge-offs (recoveries) 535 317 (63) Provision (recovery) charged (credited) to operations 650 (470) (470) Allowance on purchased loans - - - - ----------------------------------------------------------------------------------------------------------- Allowance at end of period $ 5,062 $ 4,947 $ 5,327 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
7 Part I. Item 1. (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3-LOANS (CONTINUED)
June 30, December 31, June 30, 1997 1996 1996 - ------------------------------------------------------------------------------------------------------------------- Ratio of allowance for loan losses to loans outstanding at end of period 1.44% 1.42% 1.65% Ratio of allowance for loan losses to nonaccrual loans at end of period 69.43% 173.84% 778.60% Ratio of annualized net charge-offs to average loans 0.31% 0.10% (0.04%)
Loans on nonaccrual status were $7.3 million and $684,000, respectively at June 30, 1997 and 1996. Interest income that would have been collected on these loans had they performed in accordance with their original terms was approximately $365,000 and $96,000, for the six months ended June 30, 1997 and 1996, respectively. The Company's average recorded investment in impaired loans for the six months ended June 30, 1997 was $8.9 million. The Company's allowance for possible loan losses at June 30, 1997 includes $1.8 million related to impaired loans. Interest income recognized on impaired loans during the first six months of 1997 and 1996 was $167,000 and $180,000, of which $167,000 and $164,000, respectively, was collected in cash. NOTE 4-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 $5.8 million and $4.1 million at June 30, 1997 and December 31, 1996, respectively. In addition, the Company had unfunded loan commitments of $126.5 million and $110.5 million at June 30, 1997 and December 31, 1996, respectively. All of the commitments outstanding at June 30, 1997 and 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 entered into two interest rate swap agreements to reduce the impact of changes in interest rates on its floating-rate loan portfolio. At June 30, 1997, the Company had outstanding one interest rate swap agreement with a commercial bank having a total notional principal amount of $50 million (Swap #1). The second interest rate swap agreement was with a securities broker having a notional principal amount of $25 million (Swap #2). Swap #2 matured in January 1997. 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 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. The Company accrues monthly interest income and expense on the swaps, the net of which is included in income on loans. Net interest expense of $187,000 and $271,000 related to the swap agreements is included in interest income for the six months ended June 30, 1997 and 1996, respectively. The Company is required to pledge collateral on the swaps. A U.S. Agency note having a fair value of approximately $3.6 million was pledged as collateral for the outstanding agreement as of June 30, 1997. The Company is exposed to credit loss in the event of nonperformance by the counterparty to the remaining agreement. However, the Company does not anticipate nonperformance by the counterparty. 8 Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The following discussion presents information about the results of operations, financial condition, liquidity and capital resources of SC Bancorp and its subsidiary, Southern California Bank (together, the "Company"). This information should be read in conjunction with the audited 1996 consolidated financial statements of the Company and the notes thereto, and the accompanying quarterly unaudited consolidated financial statements and notes thereto. RESULTS OF OPERATIONS The Company reported net income of $1.3 million for the second quarter of 1997 compared to net income of $920,000 for the second quarter of 1996. The following table summarizes key performance indicators pertaining to the Company's operating results:
Three months ended Six months ended June 30, June 30, - ------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Return on average assets (1) 1.03% 0.82% 1.01% 0.74% Return on average shareholders' equity (1) 10.15% 8.08% 9.64% 7.39% Net income $ 1,302 $ 920 $ 2,447 $ 1,683 Earnings per share $ 0.17 $ 0.12 $ 0.33 $ 0.23 Total average assets $ 504,979 $ 452,972 $ 490,970 $ 454,303 - ---------------------------------------------------- (1) Annualized
9 Part I. Item 2. (continued) NET INTEREST INCOME Net interest income is the difference between interest earned on assets and interest paid on liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. The following table provides information concerning average interest-earning assets and interest-bearing liabilities yields and rates thereon for the three months ended June 30, 1997 and 1996, respectively. Average balances are average daily balances. Nonaccrual loans are included in total average loans outstanding.
THREE MONTHS ENDED -------------------------------------------------------------------------- 6/30/97 6/30/96 -------------------------------------------------------------------------- Average Yield/ Average Yield/ (DOLLARS IN THOUSANDS) Balance Interest Rate(1) Balance Interest Rate(1) - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans, net of deferred fees $ 345,687 $ 7,997 9.28% $ 316,709 $ 7,389 9.38% Investment securities 76,390 1,008 5.30% 83,943 1,061 5.08% Federal funds sold and other 37,591 516 5.51% 6,910 92 5.35% - --------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets/interest income 459,668 9,521 8.31% 407,562 8,542 8.43% - --------------------------------------------------------------------------------------------------------------------------------- Noninterest earning assets 45,311 45,553 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $ 504,979 $ 453,115 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $ 311,097 $ 3,164 4.08% $ 277,297 $ 2,701 3.92% Other interest-bearing liabilities 5,416 101 7.48% 10,386 183 7.09% - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities/interest expense 316,513 3,265 4.14% 287,683 2,884 4.03% - --------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing liabilities 137,040 119,636 Shareholders' equity 51,426 45,796 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 504,979 $ 453,115 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME/NET INTEREST MARGIN $ 6,256 5.46% $ 5,658 5.58% - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Annualized. Net interest income was $6.3 million for the three months ended June 30, 1997, compared to $5.7 million for the three months ended June 30, 1996. The increase in net interest income over the prior year is primarily due to a $29.0 million increase in average loan balances for the second quarter of 1997 compared to the second quarter of 1996. The increase in loan balances occurred largely in the commercial and consumer high-net worth and automobile loan categories. The increase in Fed funds sold for the second quarter of 1997 compared to the same period for 1996 resulted from the growth in average deposit balances. The growth in deposit balances can be attributed to deposit promotion programs run during the second quarter of 1997 that featured money market and savings deposit products. 10 Part I. Item 2. (continued) The following table provides information concerning the changes in interest income and interest expense resulting from changes in average interest rates (rate) and changes in average balances (volume) for the three months ended June 30, 1997 and 1996, respectively. The changes in interest income and interest expense attributable to the rate/volume variances 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. Comparison of three-month period ended June 30, 1997 and 1996 increase (decrease) in interest income or expense due to changes in ----------------------------------------- (DOLLARS IN THOUSANDS) Rate Volume Total - ------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans, net of deferred fees $ (78) $ 686 $ 608 Investment securities 45 (98) (53) Federal funds sold and other 3 421 424 - ------------------------------------------------------------------------------- Total interest income (30) 1,009 979 - ------------------------------------------------------------------------------- LIABILITIES Interest-bearing deposits $ 117 $ 346 $ 463 Other interest-bearing liabilities 10 (92) (82) - ------------------------------------------------------------------------------- Total interest expense 127 254 381 - ------------------------------------------------------------------------------- NET INTEREST INCOME $ (157) $ 755 $ 598 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 11 Part I. Item 2. (continued) The following table provides information concerning average interest-earning assets and interest-bearing liabilities yields and rates thereon for the six months ended June 30, 1997 and 1996, respectively. SIX MONTHS ENDED ----------------------------------------------------------------------- 6/30/97 6/30/96 ----------------------------------------------------------------------- Average Yield/ Average Yield/ (DOLLARS IN THOUSANDS) Balance Interest Rate(1) Balance Interest Rate(1) - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Interest-earning assets: Loans, net of deferred fees $ 343,792 $ 15,759 9.24% $ 314,508 $ 14,768 9.44% Investment securities 75,119 1,959 5.26% 86,709 2,204 5.11% Federal funds sold and other 26,444 717 5.47% 6,444 172 5.37% - ------------------------------------------------------------------------------------------------------------------------------ Total interest earning assets/interest income 445,355 18,435 8.35% 407,661 17,144 8.46% - ------------------------------------------------------------------------------------------------------------------------------ Noninterest earning assets 45,615 46,770 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 490,970 $ 454,431 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $ 301,669 $ 6,031 4.03% $ 275,578 $ 5,361 3.91% Other interest-bearing liabilities 5,778 215 7.50% 14,328 489 6.86% - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities/interest expense 307,447 6,246 4.10% 289,906 5,850 4.06% - ------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing liabilities 132,327 118,753 Shareholders' equity 51,196 45,772 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 490,970 $ 454,431 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME/NET INTEREST MARGIN $ 12,189 5.52% $ 11,294 5.57% - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
(1) Annualized. Net interest income was $12.2 for the six months ended June 30, 1997, compared to $11.3 for the six months ended June 30, 1996. The increase in net interest income compared to the prior year is primarily due to a $29.3 million increase in average loan balances for the first six months of 1997 compared to the same period in 1996. The year-to-date average balance of commercial loans increased by $15.5 million, primarily in the unsecured and asset-based lending categories. In addition, the year-to-date average balance of consumer loans, excluding home equity loans, increased by $14.4 million over June 30,1996. The average yield on earning assets decreased to 8.35% for the six months ended June 30, 1997 from 8.46% for the six months ended June 30, 1996. The overall decrease in yield can be attributed to the decrease in the average yield on loans, including the effect of the interest rate swap, to 9.24% from 9.44%. The decrease in loan yield occurred despite a modest increase in the prime rate in March 1997 due to competitive pricing pressures experienced in the Company's market area for commercial and real estate loans, and to the increase in nonaccrual loans. The majority of the Company's variable-rate loans are indexed to the national prime rate. The national prime rate increased to 8.50% from 8.25% on March 26, 1997. Previously, the prime rate declined to 8.25% from 8.50% on January 31, 1996. The net interest margin decreased to 5.52% for the first half of 1997 from 5.57% for the comparable period of 1996. The decrease in the net interest margin can be attributed to the decrease in yield on earning assets discussed above, and to a modestly higher cost of funds related to the deposit promotions run during 1997. The Company's overall cost of interest-bearing funds increased on a year-to-date basis to 4.10% from 4.06% for the first six months of 1996. 12 PART I. ITEM 2. (CONTINUED) The following table provides information concerning the changes in interest income and interest expense resulting from changes in average interest rates (rate) and changes in average balances (volume) for the six months ended June 30, 1997 and 1996, respectively. Comparison of six-month period ended June 30, 1997 and 1996 increase (decrease) in interest income or expense due to changes in ---------------------------------------- (DOLLARS IN THOUSANDS) Rate Volume Total - ---------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans, net of deferred fees $ (325) $ 1,316 $ 991 Investment securities 61 (306) (245) Federal funds sold and other 3 542 545 - ---------------------------------------------------------------------------------- Total interest income (261) 1,552 1,291 - ---------------------------------------------------------------------------------- LIABILITIES Interest-bearing deposits $ 164 $ 506 $ 670 Other interest-bearing liabilities 41 (315) (274) - ---------------------------------------------------------------------------------- Total interest expense 205 191 396 - ---------------------------------------------------------------------------------- NET INTEREST INCOME $ (466) $ 1,361 $ 895 - ---------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES The Company recorded a $300,000 provision for possible loan losses for the second quarter of 1997. Gross loan charge-offs and recoveries for the quarter were $635,000 and $52,000, respectively. Nonaccrual loans increased to $7.3 million at June 30, 1997 from $2.8 million at December 31, 1996. The loan loss provision was increased in 1997 to support growth in the loan portfolio and to maintain appropriate reserves for a small number of commercial real estate loans placed on nonaccrual status during the first quarter of 1997. The ratio of the allowance for possible loan losses to total loans was 1.44% at June 30, 1997 and 1.65% at June 30, 1996. See "NOTE 3-LOANS" of the Company's consolidated financial statements which are included in Part I, Item 1. of this Form 10-Q and "-Asset Quality" below. The Company recorded a $750,000 reduction in the provision for possible loan losses for the second quarter of 1996. The reduction in the provision was made following the completion of an analysis of the Company's historical allocation of loan loan loss reserves and loan loss migration experience. Loan charge-offs and recoveries for the second quarter of 1996 were $292,000 and $218,000, respectively. Nonaccrual loans decreased to $684,000 at June 30, 1996 from $1.4 million at December 31, 1995. The Company recorded a $650,000 provision for possible loan losses for the first six months of 1997. Year-to-date loan charge-offs and recoveries were $646,000 and $111,000, respectively, representing year-to-date net loan charge-offs of $535,000. Year-to-date loan charge-offs and recoveries for the first six months of 1996 were $339,000 and $402,000, respectively, representing year-to-date net recoveries of $63,000. 13 PART I ITEM 2. (CONTINUED) NONINTEREST INCOME The following table sets forth the major components of noninterest income for the periods indicated: Three Months Ended Six Months Ended (DOLLARS IN THOUSANDS) June 30, June 30, - ----------------------------------------------------------------------------------------- 1997 1996 1997 1996 ------ ------ ------ ------ Service charges on deposit accounts $ 264 $ 377 $ 525 $ 764 Other fees and charges 633 655 1,287 1,265 Merchant bankcard income 145 126 264 243 Net gain on sales of securities - - - 14 Net gain on sale of SBA loans - - 78 - Net gain (loss) on sales of fixed assets - (23) 4 (24) Life insurance income 31 26 63 53 Other income 113 85 222 218 - ----------------------------------------------------------------------------------------- Total noninterest income $1,186 $1,246 $2,443 $2,533 - ----------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------
Noninterest income was $1.2 million for the three months ended June 30, 1997 and 1996, respectively. Service charge income on deposit accounts decreased for the three months ended June 30, 1997 over the comparable period of the prior year due to competitive pricing on commercial accounts. In addition, a recent deposit promotion featured a no service charge account for depositors using direct deposit. Noninterest income for the first six months of 1997 was $2.4 million compared to $2.5 million for the first six months of 1996. Noninterest income for the first six months of 1997 includes a $78,000 gain on sale of SBA loans. 14 PART I ITEM 2. (continued) NONINTEREST EXPENSE The following table provides detail of the Company's noninterest expense by category for the periods indicated: Three Months Ended Six Months Ended (DOLLARS IN THOUSANDS) June 30, June 30, - --------------------------------------------------------------------------------------- 1997 1996 1997 1996 ------ ------ ------ ------- Salaries and employee benefits $ 2,424 $ 2,559 $ 4,951 $ 5,178 Net occupancy, furniture and equipment 873 1,078 1,720 2,188 Professional and legal fees 417 680 757 1,001 Postage and delivery 158 155 307 315 Goodwill amortization 135 121 270 235 Software 115 61 236 122 Merchant bankcard expense 113 106 208 203 Office supplies 79 84 166 163 Advertising and promotion 92 132 173 228 Telecommunications 82 85 162 197 Insurance and assessment 70 48 138 149 Data processing 63 78 125 147 Operating losses 16 85 73 140 Professional and community 58 99 108 149 Other real estate owned, net (3) 426 (5) 482 Other noninterest expense 219 276 401 500 - --------------------------------------------------------------------------------------- Total noninterest expense $ 4,911 $ 6,073 $ 9,790 $11,397 - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- Annualized noninterest expense as a % of average earning assets 4.29% 5.91% 4.43% 5.62%
Noninterest expense for the second quarter of 1997 decreased to $4.9 million from $6.1 million for the second quarter of 1996. In addition, noninterest expense decreased to $9.8 million for the first half of 1997 from $11.4 million for the prior year. The reductions in noninterest expense for the current quarter and year-to-date compared to the prior year occurred primarily in the occupancy, professional and legal, and other real estate owned categories. The reduction in occupancy expense is directly related to the sale of two branches and the consolidation of a third branch completed during the first quarter of 1996. The reduction in professional and legal fees is attributed to the resolution of certain legal matters in 1997 that had been ongoing in 1996. Expenses associated with other real estate owned also declined on both a quarterly and year-to-date basis due to valuation reserves taken in 1996 to facilitate the disposition of one property. No additional valuations have been recorded in 1997. FINANCIAL CONDITION Total assets at June 30, 1997 were $507.9 million, an increase of $31.9 million from $476.0 million at December 31, 1996. Gross loan balances increased slightly to $350.6 million at June 30, 1997 from $347.9 million at December 31, 1996. Total deposits increased to $446.2 million at June 30, 1997 from $415.3 million at December 31, 1996. The increase in deposit balances is primarily due to the Bank's core deposit generation programs which contributed to increases in retail savings and business money market deposits. 15 Part I. Item 2. (continued) The following table provides a summary comparison of assets and liabilities in the Company's consolidated balance sheets and the percentage change in these balances for the dates indicated:
June 30, December 31, Amount Percent (DOLLARS IN THOUSANDS) 1997 1996 Change Change - ---------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 65,443 $ 33,768 $ 31,675 93.80% Securities available-for-sale, at fair value 73,465 74,533 (1,068) (1.43%) Investment in Federal Home Loan Bank stock, at cost 1,495 1,450 45 3.10% Investment in Federal Reserve Bank stock, at cost 621 607 14 2.31% Loans, net 344,884 342,228 2,656 0.78% Premises and equipment, net 7,017 7,740 (723) (9.34%) Other real estate owned, net 654 536 118 22.01% Accrued interest receivable 3,748 3,931 (183) (4.66%) Other assets 10,567 11,220 (653) (5.82%) - ---------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 507,894 $ 476,013 $ 31,881 6.70% - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing deposits $ 137,616 $ 125,903 $ 11,713 9.30% Interest-bearing demand deposits 103,880 104,435 (555) (0.53%) Savings deposits 56,500 39,755 16,745 42.12% Time certificates of deposit 148,249 145,233 3,016 2.08% - ---------------------------------------------------------------------------------------------------------- Total deposits 446,245 415,326 30,919 7.44% - ---------------------------------------------------------------------------------------------------------- Borrowed funds and other interest-bearing liabilities 7,342 8,096 (754) (9.31%) Accrued interest payable and other liabilities 2,522 2,672 (150) (5.61%) Total shareholders' equity 51,785 49,919 1,866 3.74% - ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 507,894 $ 476,013 $ 31,881 6.70% - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand, deposits at correspondent banks and overnight investment of excess cash balances in Federal funds sold. The Company maintains balances at correspondent banks adequate to cover daily inclearings and other charges. The Company's net reserve requirement with the Federal Reserve Bank was $1.6 million at June 30, 1997. Cash and cash equivalents increased to $65.4 million at June 30, 1997 from $33.8 million at December 31, 1996. The increase is primarily due to a $24.0 million increase in investments in overnight Federal funds sold. INVESTMENT SECURITIES The Company's available-for-sale securities portfolio at June 30, 1997 includes U.S. government agency securities and mortgage-backed securities. 16 Part I. Item 2. (continued) The following table sets forth the maturity distribution of the Company's investment securities at their estimated fair values at June 30, 1997:
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 - ------------------------------------------------------------------------------------------------------------- Obligations of U.S. government agencies $ 14,653 $ 20,858 $ - $ - $ 35,511 Mortgage-backed securities - 32,566 5,388 - 37,954 - ------------------------------------------------------------------------------------------------------------- Total $ 14,653 $ 53,424 $ 5,388 $ - $ 73,465 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
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 loans to high net worth individuals. Additionally, the Company offers construction loan products principally for entry level housing and owner-user commercial industrial properties. Refer to NOTE 3-LOANS of the Company's consolidated financial statements which are included in Part 1, Item 1. of this Form 10-Q for a comparison of loans by category at June 30, 1997 and December 31, 1996. COMMERCIAL LOANS. Commercial loans totaled $168.7 million, or 48.1%, of total loans and $160.6 million, or 46.2%, of total loans at June 30, 1997 and December 31, 1996, respectively. Most of the Bank's commercial borrowers and customers are small-to medium-sized businesses and professionals. Most of the commercial loans are short term and bear a floating rate of interest. Approximately 62% of the commercial loan portfolio is secured. Collateral for these loans consists of accounts receivable, inventories, equipment and other business assets, including real estate. At June 30, 1997, $43.8 million, or 12.5%, of total loans were secured by accounts receivable as compared to $40.6 million, or 11.7%, of loans at December 31, 1996. Commercial loans secured by real estate comprised $18.5 million, or 5.3%, of total loans at June 30, 1997, compared to $14.4 million, or 4.2%, of loans at December 31, 1996. In 1995, the Company began participating in government-insured lending programs, including SBA loans. At June 30, 1997, the Company had $18.6 million of SBA loans. REAL ESTATE CONSTRUCTION LOANS. Real estate construction loans totaled $6.9 million, or 2.0%, of total loans at June 30, 1997 compared to $8.5 million, or 2.5%, of total loans at December 31, 1996. The Company's construction loan products are primarily targeted to developers of quality entry-level housing projects, to existing borrowers who are owner/users of commercial industrial property, and to CRA community projects. REAL ESTATE MORTGAGE LOANS. Real estate mortgage loans comprise $108.3 million, or 30.9%, of the total loan portfolio at June 30, 1997 compared to $105.1 million, or 30.2%, of the total loans outstanding at December 31, 1996. 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 new major banking relationship and demonstrate adequate cash flows. All new real estate borrowers must provide financial reporting that meets FDICIA standards and the loans must 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 decreased to $66.8 million, or 19.1%, of the loan portfolio at June 30, 1997 from $73.6 million, or 21.2%, of total loans at December 31, 1996. The decrease in consumer loan balances at June 30, 1997 occurred in homeowner equity loans, stock secured loans, and automobile or recreational vehicle loans. The consumer loan portfolio at June 30, 1997 includes $25.5 million of home equity loans and home equity lines of credit representing 7.3% of total loans. Auto and recreational vehicle loans comprise approximately $17.8 million, or 5.1%, of total loans, and lines of credit to high net worth individuals comprise $18.4 million, or 5.3% of total loans. The balance of consumer loans at period ends may fluctuate and may not necessarily be representative of average balances outstanding during the respective periods due to the timing of advances and payments made on 17 Part I. Item 2. (continued) such loans by borrowers. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES. The following table sets forth the maturity distribution of the Company's loan portfolio (excluding consumer and nonaccrual loans) at June 30, 1997, based on remaining scheduled principal repayments: Maturing in ---------------------------------------------------------------------------- Over one One year year through Over (DOLLARS IN THOUSANDS) or less five years five years Total ---------------------------------------------------------------------------- Commercial $ 97,070 $ 51,778 $ 19,338 $ 168,186 Real estate, construction 2,876 3,534 489 6,899 Real estate, mortgage 16,866 56,436 28,564 101,866 ---------------------------------------------------------------------------- Total $ 116,812 $ 111,748 $ 48,391 $ 276,951 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The following table sets forth information on sensitivity to changes in interest rates for the Company's loan portfolio (excluding consumer and nonaccrual loans) at June 30, 1997: Maturing or Repricing in ---------------------------------------------------------------------------- Over one One year year through Over (DOLLARS IN THOUSANDS) or less five years five years Total ---------------------------------------------------------------------------- Fixed interest rates $ 21,488 $ 49,530 $ 18,797 $ 89,815 Variable interest rates 186,482 155 499 187,136 ---------------------------------------------------------------------------- Total $ 207,970 $ 49,685 $ 19,296 $ 276,951 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The amounts reported in the categories in the tables do not reflect loan prepayments or other factors which may cause the loans to react in different degrees and at different times to changes in market interest rates. ASSET QUALITY NONACCRUAL, PAST DUE AND MODIFIED LOANS The Company recognizes income principally on the accrual basis of accounting. In determining income from loans, the Company generally adheres to a policy of not accruing interest on loans on which a default of principal or interest has existed for a period of 90 days or more. The Company's policy is to assign nonaccrual status to a loan if either (i) principal or interest payments are past due in excess of 90 days, unless the loan is both well secured and in the process of collection; or (ii) the full collection of interest or principal becomes doubtful, 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 $7.3 million, or 2.08% of total loans, at June 30, 1997 from $2.8 million, or 0.82% of total loans, at December 31, 1996. The increase in nonaccrual loans is primarily due to one matured real estate loan that was placed on nonaccrual status during the first quarter of 1997. The borrower continues to make payments on the loan and negotiations continue. A $1.1 million nonaccrual loan paid off subsequent to June 30, 1997. 18 Part I. Item 2. (continued) Nonaccrual loans by category are summarized below: June 30, December 31, (DOLLARS IN THOUSANDS) 1997 1996 ---------------------------------------------------------------------- Commercial $ 501 $1,316 Real estate, construction - - Real estate, mortgage 6,367 1,446 Consumer 422 84 ---------------------------------------------------------------------- Total nonaccrual loans $7,290 $2,846 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Delinquent loans (past due 30 to 89 days and still accruing interest) by category are summarized below: June 30, December 31, (DOLLARS IN THOUSANDS) 1997 1996 ---------------------------------------------------------------------- Commercial $ 888 $1,329 Real estate, construction - - Real estate, mortgage - 414 Consumer 1,235 1,070 ---------------------------------------------------------------------- Total delinquent loans $2,123 $2,813 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Percentage of total gross loans: Nonaccrual loans 2.08% 0.82% Delinquent loans, still accruing interest 0.61% 0.81% Nonaccrual and delinquent loans 2.68% 1.63% 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 if loans are currently protected according to financial and collateral standards deemed acceptable. The allowance for possible loan losses represents management's recognition of the assumed risks of extending credit and the quality of the loan portfolio. The allowance is management's estimate, which is inherently uncertain and depends on the outcome of future events. The evaluation of the quality of the loan portfolio considers the borrower's management, financial condition, cash flow and repayment program, as well as the existence of collateral and guarantees. External business and economic factors beyond the borrower's control, combined with the Company's previous loan loss experience, are considered in management's evaluation of the allowance for possible loan losses. In addition, bank regulatory authorities, as an integral part of their examination process, periodically review the Company's allowance for possible loan losses and may recommend additions to the allowance based on their assessment of information available to them at the time of their examination. When it is determined that additions are required, additions to the allowance are made through charges to operations and are reflected in the statements of operations as a provision for loan losses. Loans which are deemed to be uncollectible are charged to the allowance. Subsequent recoveries, if any, are credited back to the allowance. Management's analysis of the loan portfolio as of June 30, 1997 considered the factors discussed above and incorporated the 19 Part I. Item 2. (continued) Company's actual four year average charge-off experience for purposes of determining the adequacy of the allowance for possible loan losses. The valuation analysis supports a 1.22% ratio of allowance to total loans. The Company's 1.44% ratio of the allowance for possible loan losses to total loans at June 30, 1997 remains above this level. Refer to NOTE 3-LOANS of the Company's consolidated financial statements which are included in Part I. Item 1. of this Form 10-Q for additional information concerning activity in the allowance for possible loan losses, including charge-offs and recoveries. The provision for possible loan losses is discussed above. See "-Provision for Loan Losses." 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 or losses on disposal, are reported in noninterest expense. Activity in OREO for the periods indicated is as follows: Six months Ended Year Ended June 30, December 31, (DOLLARS IN THOUSANDS) 1997 1996 ---------------------------------------------------------------------- Balance, beginning of period $ 536 $ 2,073 Additions 118 699 Sales - (4,317) Valuation - 2,081 ---------------------------------------------------------------------- Balance, end of period $ 654 $ 536 ---------------------------------------------------------------------- ---------------------------------------------------------------------- At June 30, 1997, the OREO portfolio consisted of three properties. Escrow closed in July 1997 on the sale of one OREO property with a net book value of $329,000. A gain of $13,000 was recognized on the sale. The Company is actively marketing the remaining properties. DEPOSITS Total deposits at June 30, 1997 were $446.2 million, a $30.9 million increase from $415.3 million at December 31, 1996. The following table sets forth the distribution of average deposits and the rates paid thereon for the periods indicated:
Six Months Ended Year Ended June 30, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------ Average Average (DOLLARS IN THOUSANDS) Balance Rate (1) % of total Balance Rate % of total - ------------------------------------------------------------------------------------------ Demand deposits $ 129,606 30.04% $ 119,570 29.70% NOW/MMDA 105,965 2.83% 24.57% 95,098 2.58% 23.63% Savings 47,528 2.71% 11.02% 44,272 2.11% 11.00% TCDs 148,176 5.31% 34.37% 143,582 5.36% 35.67% ----------------------------------------------------------------------------------------- Deposits $ 431,275 100.00% $ 402,522 100.00% ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- (1) Annualized.
Average deposit balances increased to $431.3 million at June 30, 1997 from $402.5 million at December 31, 1996. See "-Financial Condition" for a discussion of the factors contributing to the increase in deposit balances. 20 Part I. Item 2. (continued) The reduction in the average rate paid on time certificates of deposit ("TCD") to 5.31% for the six months ended June 30, 1997 from 5.36% for the year ended December 31, 1996, is largely due to the managed reduction in higher rate TCD accounts raised through TCD promotion programs during 1995 and 1996. These accounts have largely been replaced with lower cost deposits. The following table sets forth the maturities of the Company's time certificate of deposit accounts at the dates indicated:
June 30,1997 Maturing in - -------------------------------------------------------------------------------------------------- Over three Over six Three months months through months through Over (DOLLARS IN THOUSANDS) or less six months twelve months twelve months Total - -------------------------------------------------------------------------------------------------- Under $100,000 $ 29,810 $ 13,745 $ 41,183 $ 6,852 $ 91,590 $100,000 and over 36,092 6,572 12,117 1,878 56,659 - -------------------------------------------------------------------------------------------------- Total $ 65,902 $ 20,317 $ 53,300 $ 8,730 $ 148,249 - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
December 31, 1996 Maturing in - -------------------------------------------------------------------------------------------------- Over three Over six Three months months through months through Over (DOLLARS IN THOUSANDS) or less six months twelve months twelve months Total - -------------------------------------------------------------------------------------------------- Under $100,000 $ 31,750 $ 20,563 $ 19,700 $ 9,564 $ 81,577 $100,000 and over 41,016 9,170 11,097 2,373 63,656 - -------------------------------------------------------------------------------------------------- Total $ 72,766 $ 29,733 $ 30,797 $ 11,937 $ 145,233 - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
BORROWED FUNDS AND OTHER INTEREST-BEARING LIABILITIES Borrowed funds and other interest-bearing liabilities consist of overnight Federal funds purchased, Treasury, tax and loan notes ("TT&L"), obligations to senior lienholders for certain OREO properties and deferred compensation liabilities. The balance of borrowed funds and other interest-bearing liabilities decreased to $7.3 million at June 30, 1997 from $8.1 million at December 31, 1996. $1.9 million of overnight Federal funds purchased were outstanding at December 31, 1996. There were no Federal funds purchased as of June 30, 1997. 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. 21 Part I. Item 2. (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 notional balance of the interest rate swap as of June 30, 1997. 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 reprice, 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. Over three Over one Three months months through year through Over (DOLLARS IN THOUSANDS) or less twelve months five years five years Total - -------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS Federal funds sold $ 27,804 $ - $ - $ - $ 27,804 Investment securities, at cost 10,140 4,524 54,584 5,539 74,787 Gross Loans (1) 215,941 34,382 64,467 28,504 343,294 Interest rate swap - - 50,000 - 50,000 - -------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 253,885 $ 38,906 $ 169,051 $ 34,043 $ 495,885 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest-bearing demand and savings deposits $ - $ 33,672 $ 108,243 $ 18,465 $ 160,380 Time certificates of deposit 65,902 73,617 8,713 17 148,249 Other borrowings and interest- bearing liabilities 6,113 1,229 - - 7,342 Interest rate swap 50,000 - - - 50,000 - -------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 122,015 $ 108,518 $ 116,956 $ 18,482 $ 365,971 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap $ 131,870 $ (69,612) $ 52,095 $ 15,561 Cumulative interest rate sensitivity gap 131,870 62,258 114,353 129,914 Cumulative interest rate sensitivity gap as a percentage of total interest- earning assets 26.59% 12.55% 23.06% 26.20%
- ----------------------------------------------------------- (1) Excludes nonaccrual loans of $7.3 million. At June 30, 1997, the Company's rate-sensitive balance sheet was shown to be in a positive gap position over a one-year horizon. The gap between assets and liabilities that reprice within 12 months was $62.3 million or 12.55% of assets. The table above implies that the Company is moderately asset-sensitive and that its earnings would increase in the short-term if interest rates rise. Repricing of the Company's interest-bearing demand and savings deposits generally lags repricing on the Company's variable rate loan portfolio. These core deposits tend to be fairly stable over time and exhibit a low sensitivity to changes in interest rates. In preparing the gap table, management distributes core deposit balances across the maturity ranges in accordance with regulatory guidelines in order to incorporate these characteristics of its core deposits. In addition to utilizing the repricing gap table above in managing its interest rate risk, the Company performs a quarterly income simulation analysis. This simulation analysis provides a dynamic evaluation of the Company's balance sheet and income statement under varying scenarios, providing an estimate of both the dollar amount and percentage change in net interest income under various changes in interest rates. Based on the income simulation analysis conducted as of June 30, 1997, the Company remains moderately asset-sensitive. Thus, a rising rate environment would tend to lead to a moderate increase in net interest income. 22 Part I. Item 2. (continued) 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 liabilities) of between 20% and 40%, and to limit gross loans to no more than 85% of deposits. At June 30, 1997, the Company's ratios were within these guidelines: the liquidity ratio was 27.0% and the loan to deposit ratio was 78.6%. At December 31, 1996, the Company's 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 maintains a portion of its investment securities portfolio as available-for-sale. Available-for-sale securities can be sold in response to liquidity needs or used as collateral under reverse repurchase agreements. 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 decreased to $1.3 million at June 30, 1997 from $1.5 million at December 31, 1996. The Company's liquid assets were $119.7 million at June 30, 1997, an increase of $30.4 million from December 31, 1996. The increase can be attributed to the increase in deposit balances as previously discussed. 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 $35.0 million from three commercial banks and a $5.3 million line of credit with the Federal Home Loan Bank ("FHLB") collateralized by mortgage loans. At June 30, 1997, the Company had approximately $59.4 million in unpledged securities that could be used to secure borrowings such as reverse repurchase agreements. During the six months ended June 30, 1997, the largest amount of funds so borrowed was $9.8 million. Federal funds arrangements with correspondent banks are subject to the terms of the individual arrangements and may be terminated at the discretion of the correspondent bank. Federal funds purchases of up to $10.0 million were borrowed during the six months ended June 30, 1997. CAPITAL RESOURCES The Company and its bank subsidiary are subject to risk-based capital regulations adopted by the federal banking regulators in January 1990. These guidelines are used to evaluate capital adequacy, and are based on an institution's asset risk profile and off-balance sheet exposures, such as unused loan commitments and letters of credit. The regulations require that a portion of total capital be core, or Tier 1, capital consisting of common shareholders' equity and perpetual preferred stock, less goodwill and certain other deductions, with the remaining, or Tier 2, capital consisting of other elements, primarily subordinated debt, mandatory convertible debt, and grandfathered senior debt, plus the allowance for possible loan losses, subject to certain limitations. As of December 1992, the risk-based capital rules were further supplemented by a leverage ratio defined as Tier 1 capital divided by quarterly average assets after certain adjustments. The minimum leverage ratio is 3 percent for banking organizations that do not anticipate significant growth and have well-diversified risk (including no undue interest rate exposure), excellent asset quality, high liquidity and good earnings. Other banking organizations not meeting these standards are expected to have ratios of at least 4 to 5 percent, depending on their particular condition and growth plans. Higher capital ratios can be mandated by the regulators if warranted by the particular circumstances or risk profile of a banking organization. In the current regulatory environment, banking companies must stay well-capitalized, as defined in the banking regulations, in order to receive favorable regulatory treatment on acquisitions and favorable risk-based deposit insurance assessments. Management seeks to maintain capital ratios in excess of the regulatory minimums. As of June 30, 1997, the capital ratios of the Company and the Bank exceeded the well-capitalized thresholds prescribed in the rules. 23 Part I. Item 2. (continued) The following table sets forth the Company's and the Bank's leverage and risk-based capital ratios at June 30, 1997: Company Bank - ----------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Amount % Amount % - ----------------------------------------------------------------------------------- Leverage ratio $ 49,155 9.80% $ 47,907 9.56% Regulatory minimum 20,064 4.00% (c) 20,055 4.00% (c) Excess 29,091 5.80% 27,852 5.56% Risk-based ratios Tier 1 capital $ 49,155 (a) 11.65% (b) $ 47,907 (a) 11.37% (b) Tier 1 minimum 16,870 4.00% (c) 16,857 4.00% (c) Excess 32,285 7.65% 31,050 7.37% Total capital $ 54,217 (d) 12.86% (b) $ 52,969 (d) 12.57% (b) Total capital minimum 33,740 8.00% 33,714 8.00% (c) Excess 20,477 4.86% 19,255 4.57%
- --------------------------------------------------------------------------- (a) Includes common shareholders' equity (excluding unrealized losses on available-for-sale securities) less goodwill and other intangibles. The Tier 1 capital ratio is adjusted for the disallowed portion of deferred tax assets, if applicable. (b) Risk-weighted assets of $421.8 million and $421.4 million were used to compute these percentages for the Company and the Bank, respectively. (c) Insured institutions, such as the Bank, must maintain a leverage capital ratio of at least 4% or 5%, a Tier 1 captial ratio of at least 4% or 6%, and a Total captial ratio of at least 8% or 10% in order to be categorized adequately capitalized or well-capitalized, respectively. (d) Tier 1 capital plus the allowance for loan losses, limited to 1.25% of total risk-weighted assets. 24 Part II. Other Information Item 1. Legal Proceedings Not Applicable Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders SC Bancorp held its annual meeting of shareholders on May 22, 1997. Harold A. Beisswenger, Larry D. Hartwig, and Peer A. Swan were elected to serve as Class I Directors until the annual meeting in the year 2000. The following persons also continued as directors after the meeting: N. Keith Abbott, Robert C. Ball, James E. Cunningham, William C. Greenbeck, Irving J. Pinsky, and Donald E. Wood. 5,345,883 votes were cast for, no votes cast against and 95,991 withheld for Mr. Beisswenger. 5,314,854 votes were cast for, no votes cast against and 127,020 withheld for Mr. Hartwig. 5,347,460 votes were cast for, no votes cast against and 94,414 withheld for Mr. Swan. Shareholders also voted to ratify the appointment of Deloitte & Touche LLP as SC Bancorp's auditors for 1997. 5,415,557 votes were cast for and 9,801 cast against the appointment of Deloitte & Touche LLP. There were 16,516 abstentions. Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Index - ------------------------------------------------------------------------------- Exhibit Description No. - ------------------------------------------------------------------------------- 2.1 Agreement and Plan of Reorganization, dated as of April 29, 1997, by and between Monarch Bancorp and SC Bancorp(d) 3(i).1 SC Bancorp Articles of Incorporation(a) 3(i).2 Certificate of Amendment to SC Bancorp Articles of Incorporation dated May 9, 1995(b) 3(ii).1 Amended and Restated Bylaws of SC Bancorp(c) 10.1 Stock Option Agreement, dated as of April 29, 1997, between Monarch Bancorp and SC Bancorp(d) 10.2 Shareholder Agreement, dated as of April 29, 1997, by and between N. Keith Abbott and Monarch Bancorp(d) 10.3 Shareholder Agreement, dated as of April 29, 1997, by and between Robert C. Ball and Monarch Bancorp(d) 10.4 Shareholder Agreement, dated as of April 29, 1997, by and between Harold A. Beisswenger and Monarch Bancorp(d) 10.5 Shareholder Agreement, dated as of April 29, 1997, by and between James E. Cunningham and Monarch Bancorp(d) 10.6 Shareholder Agreement, dated as of April 29, 1997, by and between William C. Greenbeck and Monarch Bancorp(d) 10.7 Shareholder Agreement, dated as of April 29, 1997, by and between Larry D. Hartwig and Monarch Bancorp(d) 10.8 Shareholder Agreement, dated as of April 29, 1997, by and between Irving J. Pinsky and Monarch Bancorp(d) 10.9 Shareholder Agreement, dated as of April 29, 1997, by and between Peer A. Swan and Monarch Bancorp(d) 10.10 Shareholder Agreement, dated as of April 29, 1997, by and between Donald E. Wood and Monarch Bancorp(d) 27.1 Financial Data Schedule 99.1 Joint Press Release of Monarch Bancorp and SC Bancorp, dated April 29, 1997(d) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (a) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10- Q for the period ended March 31, 1995, filed with the Commission on May 15, 1995, (Commission File No. 0-11046) and incorporated herein by reference. (b) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996, (Commission File No. 0-011046) and incorporated herein by reference. (c) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K/A for the year ended December 31, 1996, filed with the Commission on May 9, 1997, (Commission File No. 0-01146) and incorporated herein by reference. (d) This exhibit is contained in SC Bancorp's Form 8-K, filed with the Commission on May 5, 1997, (Commission File No. 0-11046) and incorporated herein by reference. 25 - ----------------- (b) Reports filed on Form 8-K Date of Report on Form 8-K: April 29, 1997. Items Reported: Items 5 and 7, Agreement and Plan of Reorganization by and between Monarch Bancorp and SC Bancorp. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: 8 AUGUST, 1997 SC BANCORP (Registrant) By: /S/ Bruce Roat -------------------------- Bruce Roat E.V.P./C.F.O. (Principal Financial and Accounting Officer) 26 EX-27 2 FDS
9 1,000 6-MOS DEC-31-1996 JAN-01-1997 JUN-30-1997 37,639 0 27,804 0 73,465 0 0 350,584 5,062 507,894 446,245 7,342 2,522 0 0 0 37,807 13,978 507,894 15,759 1,959 717 18,435 6,031 6,246 12,189 650 0 9,790 4,192 0 0 0 2,447 0.33 0 5.52 7,290 0 0 0 4,947 646 111 5,062 0 0 0
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