-----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, L7zWYGQF756OwykZUAal6cjOQk/ylRCRM8heV2cPeXxB92Mms/3F42qz5n3sLC62 vfqTflrbLqTQK9g/EUaOGw== 0000701255-96-000025.txt : 19960816 0000701255-96-000025.hdr.sgml : 19960816 ACCESSION NUMBER: 0000701255-96-000025 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SDN BANCORP CENTRAL INDEX KEY: 0000701255 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953683748 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 002-76555 FILM NUMBER: 96612094 BUSINESS ADDRESS: STREET 1: 135 SAXONY RD STREET 2: P O BOX 230926 CITY: ENCINITAS STATE: CA ZIP: 92024 BUSINESS PHONE: 6194366888 MAIL ADDRESS: STREET 1: 7777 CENTER AVENUE CITY: HUNTINGTON BEACH STATE: CA ZIP: 92647 10QSB 1 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended June 30, 1996 Commission file number 2-76555 SDN BANCORP, INC. (Exact name of small business issuer in its charter) Delaware 95-3683748 --------------------------------- ------------------------ (State or other jurisdiction of (I.R.S. Employer or incorporation or organization) Identification No.) 135 Saxony Road, Encinitas, California 92024-0905 --------------------------------------- ------------- (Address of principal executive offices) (Zip Code) (619) 436-6888 -------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 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 [ ] Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 4,289,272 shares outstanding on August 10, 1996 2 SDN BANCORP, INC. U.S. SECURITIES AND EXCHANGE COMMISSION FORM 10-QSB INDEX Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Condition - 3 June 30, 1996 and December 31, 1995 Condensed Consolidated Statements of Operations 5 For the three months ended June 30, 1996 and 1995 Condensed Consolidated Statements of Operations 6 For the six months ended June 30, 1996 and 1995 Condensed Consolidated Statements of Cash Flows - 7 For the six months ended June 30, 1996 and 1995 Notes to the Condensed Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis or Plan of Operation 12 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 20 3 Part I - Financial Information ITEM 1. FINANCIAL STATEMENTS SDN BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Condition June 30, 1996 and December 31, 1995
June 30, December 31, 1996 1995 (Unaudited) -------------- ----------- Assets Cash and due from banks $14,163,000 $ 3,640,000 Federal funds sold 5,500,000 2,300,000 ------------ ---------- Total cash and cash equivalents 19,663,000 5,940,000 Interest bearing deposits in other financial institutions 1,606,000 989,000 Held-to-maturity investment securities at amortized cost, approximate fair value June 30, 1996 $6,117,000; December 31, 1995 $7,057,000 6,144,000 7,009,000 Available-for-sale investment securities 42,843,000 - Loans 125,787,000 38,977,000 Less allowance for loan loss 2,531,000 639,000 ----------- ---------- Loans, net 123,256,000 38,338,000 Premises and equipment, net 1,981,000 597,000 Real estate acquired through foreclosure, net 1,957,000 1,411,000 Goodwill 3,685,000 - Accrued interest receivable and other assets 4,057,000 1,621,000 ------------ ----------- Total assets $205,192,000 $55,905,000 ========== ========= See notes to condensed consolidated financial statements.
4 SDN BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Condition (Continued) June 30, 1996 and December 31, 1995
June 30, December 31, 1996 1995 (Unaudited) ------------ ------------ Liabilities and Shareholders' Equity Deposits: Demand: Non-interest bearing $44,182,000 $13,445,000 Interest bearing 17,531,000 10,582,000 Savings: Regular 23,700,000 4,714,000 Money market 12,923,000 8,558,000 Time: Under $100,000 80,263,000 11,580,000 $100,000 or more 7,191,000 2,552,000 ----------- ---------- Total deposits 185,790,000 51,431,000 Accrued expenses and other liabilities 1,674,000 396,000 Mandatory Convertible Debentures 537,000 537,000 ----------- ---------- Total liabilities 188,001,000 52,364,000 Shareholders' equity: Common stock, $.01 par value,12,000,000 shares authorized 4,289,272 issued and outstanding at June 30, 1996 43,000 9,000 Additional paid-in capital 20,966,000 7,593,000 Accumulated deficit (3,838,000) (4,061,000) Unrealized gain on securities available-for-sale 20,000 - ------------ ----------- Total shareholders' equity 17,191,000 3,541,000 ------------ ----------- Total liabilities and shareholders' equity $205,192,000 $55,905,000 ========== ========== See notes to condensed consolidated financial statements.
5 SDN BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations Three months ended June 30, 1996 and 1995 (Unaudited)
Three Months Ended June 30, --------------------------- 1996 1995 ------------ ----------- Interest Income: Interest and fees on loans $ 3,765,000 $1,037,000 Interest on Federal funds sold 247,000 19,000 Interest on deposits with financial institutions 25,000 15,000 Interest on investment securities, substantially all taxable 540,000 73,000 -------------- ----------- Total interest income 4,577,000 1,144,000 Interest Expense: Deposits 1,729,000 421,000 Other borrowed funds 15,000 57,000 -------------- ----------- Total interest expense 1,744,000 478,000 -------------- ----------- Net interest income 2,833,000 666,000 Provision for loan losses 92,000 40,000 -------------- ----------- Net interest income after provision for loan losses 2,741,000 626,000 Non-interest income 337,000 130,000 Non-interest expense 2,740,000 1,076,000 -------------- ----------- Net income (loss) before taxes 338,000 (320,000) Income tax (133,000) - -------------- ----------- Net income (loss) $205,000 $ (320,000) ======== ======== Income (loss) per common and common equivalent share $ 0.05 $ (5.95) Average shares and common stock equivalents 4,289,257 53,728 See notes to condensed consolidated financial statements.
6 SDN BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations Six months ended June 30, 1996 and 1995 (Unaudited)
Six Months Ended June 30, ----------------------------------------- 1996 1995 -------------- -------------- Interest Income: Interest and fees on loans $ 4,684,000 $2,107,000 Interest on Federal funds sold 296,000 47,000 Interest on deposits with financial institutions 37,000 30,000 Interest on investment securities, substantially all taxable 626,000 138,000 -------------- ----------- Total interest income 5,643,000 2,322,000 Interest Expense: Deposits 2,021,000 826,000 Other borrowed funds 31,000 110,000 -------------- ----------- Total interest expense 2,052,000 936,000 -------------- ----------- Net interest income 3,591,000 1,386,000 Provision for loan losses 127,000 100,000 -------------- ----------- Net interest income after provision for loan losses 3,464,000 1,286,000 Non-interest income 499,000 264,000 Non-interest expense 3,602,000 2,000,000 -------------- ----------- Net income (loss) before taxes 361,000 (450,000) Income tax (138,000) - -------------- ----------- Net income (loss) $223,000 $ (450,000) ======== ======== Income (loss) per common and common equivalent share $ 0.08 $ (8.38) Average shares and common stock equivalents 2,666,920 53,728 See notes to condensed consolidated financial statements.
7 SDN BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1996 and 1995 (Unaudited)
For six months ended June 30, ---------------------------- 1996 1995 ----------------- ------------ Operating Activities: Net income (loss) $ 223,000 $ (450,000) Adjustments to reconcile net loss to net cash used by operating activities: Provision for loan losses and real estate acquired through foreclosure 127,000 100,000 Loss (gain) on sale of real estate acquired through foreclosure (76,000) 70,000 Depreciation and amortization 19,000 98,000 Decrease (increase) in other assets (237,000) 55,000 Decrease in other liabilities (151,000) (102,000) ----------------- ----------- Net cash used by operating activities (95,000) (229,000) Investing Activities: Decrease (increase) in interest bearing deposits with other financial institutions (20,000) 189,000 Purchases of investment securities (24,027,000) (1,500,000) Proceeds from sales and maturities of investment securities 17,867,000 1,608,000 Net decrease (increase) in loans (682,000) 3,909,000 Purchases of premises and equipment (337,000) (4,000) Proceeds from the sale of premises and equipment 48,000 - Proceeds from sale of real estate acquired through foreclosures 1,394,000 213,000 Capital expenditures for other real estate owned (310,000) - Purchase of Liberty National Bank, net of cash received 7,283,000 - ----------------- --------- Net cash provided by investing activities 1,216,000 4,415,000 Financing Activities: Net decrease in deposits (805,000) (2,873,000) Issuance of common stock 13,407,000 - ------------------ --------- Net cash provided by financing activities 12,602,000 (2,873,000) ------------------ ----------- Net Increase in cash and cash equivalents 13,723,000 1,313,000 Cash and cash equivalents at beginning of period 5,940,000 2,842,000 ----------------- ---------- Cash and cash equivalents at end of period $19,663,000 $4,155,000 ========== ======== See notes to condensed consolidated financial statements. 8 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Noncash transactions- Other real estate sold and financed by the bank - $115,000
[THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK] 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The accompanying financial information has been prepared in accordance with the Securities and Exchange Commission rules and regulations for quarterly reporting and therefore does not necessarily include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. The interim financial data is unaudited; however, in the opinion of Management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. This information should be read in conjunction with the Annual Report of SDN Bancorp, Inc. ("Bancorp" or the "registrant") on Form 10-K for the year ended December 31, 1995. NOTE 2 - EARNINGS PER SHARE Earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year and dilutive common stock equivalents by using the treasury stock method. The weighted average number of common shares used to compute earnings per share were 4,289,257 and 2,666,920 for the three and six months ended June 30, 1996, respectively, and 53,728 for the three and six months ended June 30, 1995. All per share amounts for the six months ended June 30, 1995 have been restated to give effect to the one for twenty-one reverse stock split and the 26,864 common stock dividend declared during September 1995. The assumed conversion of the mandatory convertible debentures ("Debentures") is anti-dilutive for the periods ended June 30, 1996 and 1995. Therefore, primary income and loss per share and income and loss per share assuming full dilution are the same for both periods. NOTE 3 - MERGER On March 31, 1996, completed its acquisition (the "Liberty Acquisition") of Liberty National Bank ("Liberty") for approximately $15.1 million in cash as contemplated by the October 26, 1995 Agreement and Plan of Merger by and among the registrant, Liberty, and Dartmouth Capital Group, L.P., a Delaware limited partnership ("the Partnership") and the registrant's controlling shareholder. Liberty is headquartered in Huntington Beach, California and had total assets of approximately $149 million prior to the Liberty Acquisition. 10 As of March 27, 1996, the Partnership invested approximately $13.4 million in the registrant to fund the Liberty Acquisition. In exchange for that investment, the registrant issued a total of 3,392,405 additional shares of Common Stock at a price per share of $3.95, the registrant's book value per share as of December 31, 1995. At the Partnership's direction the registrant issued 1,764,000 of those shares of Common Stock, in the aggregate, to certain limited partners of the Partnership (the "Direct Holders") and the remaining 1,628,405 shares of Common Stock directly to the Partnership. Giving effect to the issuance of those shares to fund the Liberty Acquisition, the Partnership owns 48.0% of the Common Stock and the Direct Holders own, in the aggregate, 50.75% of the Common Stock. The Liberty Acquisition was accounted for using the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations". Under this method of accounting, the purchase price was allocated to the assets acquired and deposits and liabilities assumed based on their fair values as of the acquisition date. The consolidated financial statements include the operations of Liberty from the date of acquisition. Goodwill arising from the transaction totaled approximately $3.8 million and is being amortized over ten years on a straight line basis. The following table sets forth selected unaudited pro forma combined financial information of Bancorp and Liberty for six months ended June 30, 1996 and 1995. The pro forma operating data reflects the effect of the acquisition of Liberty as if it was consummated at the beginning of each period presented. The pro forma results are not necessarily indicative of the results that would have occurred had the acquisition been in effect for the full years presented, nor are they necessarily indicative of the results of future operations.
Pro Forma Combined for Six Months Ended June 30, ------------------------------ 1996 1995 (Unaudited) (Unaudited) --------------- -------------- Interest Income $9,157,000 $8,575,000 Interest Expense 3,494,000 3,539,000 --------------- -------------- Net interest income 5,663,000 5,036,000 Provision for loan losses 157,000 250,000 --------------- -------------- Net interest income after provision for loan losses 5,506,000 4,786,000 Non-interest income 619,000 1,380,000 Non-interest expense 5,404,000 5,910,000 --------------- -------------- Net income before taxes 721,000 256,000 Income tax 284,000 274,000 --------------- -------------- Net income (loss) $ 437,000 $ (18,000) ========= ========
11 On April 23, 1996, Bancorp entered into an Agreement and Plan of Reorganization with Commerce Security Bank ("Commerce") that provides for Bancorp's acquisition of Commerce (the "Commerce Acquisition") for a combination of cash and stock. As of June 30, 1996, Commerce Security had total assets of $228.2 million and total shareholders' equity of $16.3 million. The Commerce Acquisition is expected to be accounted for using the purchase method of accounting for business combinations. The completion of the Commerce Acquisition is subject to receipt of all regulatory and shareholder approvals. NOTE 4 - LONG LIVED ASSETS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (FAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which Bancorp adopted as required on January 1, 1996. Pursuant to this Statement, companies are required to investigate potential impairments of long-lived assets, certain identifiable intangibles, and associated goodwill, on an exception basis, when there is evidence that events or changes in circumstances have made recovery of an asset's carrying value unlikely. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. The adoption of FAS 121 did not have a significant impact on Bancorp's financial position or results of operations. [THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK] 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS This information should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 1995 contained in the 1995 Annual Report of SDN Bancorp, Inc. ("Bancorp") on Form 10-K. Except for the historical information contained herein, the following discussion contains forward looking statements that involve risks and uncertainties. Bancorp's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not specifically limited to, changes in regulatory climate, shifts in interest rate environment, change in economic conditions of various markets Bancorp serves, as well as the other risks detailed in this section, and in the sections entitled Results of Operations and Liquidity and Capital Resources, and those discussed in Bancorp's Form 10-K for the year ended December 31, 1995. SUMMARY Bancorp owns 100% of San Dieguito National Bank ("SDNB"). Additionally, as of March 31, 1996, the registrant completed the Liberty Acquisition as described in the footnotes to the accompanying consolidated condensed financial statements. The acquisition of Liberty was accounted for using the purchase method of accounting for business combinations . Accordingly, the following discussion relates to the operating results of SDNB for the six months ended June 30, 1996 and the operating results of Liberty for the three months ended June 30, 1996 and the financial condition of both Liberty and SDNB (collectively the "Banks"). On April 23, 1996, Bancorp entered into an Agreement and Plan of Reorganization with Commerce Security Bank ("Commerce") that provides for Bancorp's acquisition of Commerce (the "Commerce Acquisition") for a combination of cash and stock. As of June 30, 1996, Commerce had total assets of $228.2 million and total shareholders' equity of $16.3 million. The Commerce Acquisition is expected to be accounted for using the purchase method of accounting for business combinations. The Commerce Acquisition is subject to approval by the Board of Governors of the Federal Reserve System (the "FRB") and to the approval of the Superintendent of Banks of the State of California (the "Superintendent"). The Federal Reserve Bank of San Francisco, acting under authority delegated to it by the FRB, approved the Commerce Acquisition on July 22, 1996. Prior to the date of this quarterly report application has been made with the Superintendent with respect to the Commerce Acquisition but the Superintendent has not yet ruled on that application. The Commerce Acquisition will not proceed until all regulatory approvals required to consummate the Commerce Acquisition have been obtained, such approvals are in full force and effect and all statutory waiting periods in respect thereof have expired. There can be no assurance that the remaining approvals necessary to complete the Commerce Acquisition will be obtained. If such approvals are received, there can be no assurance as to the date of such approvals or the absence of any litigation challenging such approvals. The Commerce 13 Acquisition is also subject to receipt of shareholder approvals and to the satisfaction of other customary closing conditions. FINANCIAL CONDITION Total assets of Bancorp at June 30, 1996 were $205.1 million compared to total assets of $55.9 million at December 31, 1995. The increase in total assets since December 31, 1995 is attributed primarily to the assets of Liberty, acquired on March 31, 1996, that had total assets of $149.9 million at June 30, 1996. Total earning assets of Bancorp at June 30, 1996 were $181.9 million compared to total earning assets of $49.3 million at December 31, 1995. Earning assets increased primarily due to the Liberty Acquisition. Liberty had total earning assets of $135.3 million at June 30, 1996. Total loans of Bancorp at June 30, 1996 were $125.8 million compared to $39.0 million at December 31, 1995. Loans acquired in the Liberty Acquisition account for the increase in total loans, loans at Liberty at June 30, 1996 were $86.5 million. The Bank's four largest lending categories are: (i) commercial real estate loans; (ii) other loans secured by real estate; (iii) commercial loans and (iv) loans to individuals. At June 30, 1996, these categories accounted for approximately 53%, 20%, 17% and 10% of total loans, respectively. Included among the Banks' portfolio of loans are SBA loans made by the Banks guaranteed by the United States Government to the extent of 75% to 90% of the principal and interest due on such loans. Liberty and SDNB are active in originating this type of loan. Liberty generally sells the government guaranteed portion of these loans to participants in the secondary market and retains servicing responsibilities and the unguaranteed portion of the loans while SDNB generally retains the entire loan for its own portfolio. Liberty may in the future retain a greater portion of these loans as more loans may be made for construction purposes for which Liberty holds the entire principal until completion of the project and then sells the government guaranteed portion. The government guaranteed portion of the SBA loans are sold at a premium, a portion of which is immediately recognized as income. The remaining premium, representing estimated normal servicing fees or a yield adjustment on the portion of the SBA loan retained by the Banks, is deferred and recognized as income over the estimated life of the loan. Deferred SBA servicing fees for Liberty were approximately $1.6 million at June 30, 1996. The total SBA loan portfolio serviced by Liberty at June 30, 1996 was approximately $140.7 million and included in this amount was approximately $32.4 million representing the portion of the SBA loans retained by Liberty. The total SBA loan portfolio serviced by SDNB at June 30, 1996 was approximately $4.8 million and included in this amount was approximately $4.2 million representing the portion of the SBA loans retained by SDNB. Total investments of Bancorp at June 30, 1996 were $56.1 million compared to $10.3 million at December 31, 1995. Investment securities increased largely due to the Liberty Acquisition, investments at Liberty at June 30, 1996 were $48.8 million. The investment portfolio is largely comprised of U.S. government and municipal securities, Federal funds sold and certificates of deposits held at other depository institutions. U.S. government and municipal securities were $49.0 million, or 87.3% of the total portfolio, of which $6.1 million are held to maturity and $42.8 million are available for sale. Federal funds sold and certificates of deposit 14 were $5.5 million and $1.6 million, respectively, or 9.8% and 2.9% of the total portfolio, respectively. Total deposits were $185.8 million at June 30, 1996 compared to $51.4 million at December 31, 1995. The increase in total deposits since December 31, 1995 is attributed to the addition of Liberty's deposits that were $136.1 million at June 30, 1996. Non-interest bearing demand accounts were $44.2 million, or 23.8% of total deposits, at June 30,1996. Interest bearing deposits are comprised of interest bearing demand accounts, regular savings accounts, money market accounts, time deposits of under $100,000 and time deposits of $100,000 or more which were $17.5 million, $23.7 million, $12.9 million, $80.3 million and $7.2 million, respectively, or 9.4%, 12.8%, 6.9%, 43.2% and 3.9% of total deposits, respectively. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 For the three months ended June 30, 1996, Bancorp had net income of $205,000 compared to a net loss of $320,000 for the same period in 1995. The improvement in 1996 earnings over the same period in 1995 is primarily attributable to the acquisition of Liberty, for which the results of operations for the three months ended June 30, 1996 are included in the Bancorp results of operations for the three months ended June 30, 1996. Compared to the prior year results, the improvements stem from a combination of increased net interest income of approximately $2.1 million and non-interest income of approximately $207,000 partially offset by increased loan loss provision of $52,000, non-interest expense of approximately $1.7 million and provision for taxes of $133,000. Net Interest Income and Net Interest Margin Net interest income was approximately $2.7 million for the three months ended June 30, 1996, an increase of $2.1 million over the same period in 1995. An increase in interest and fee income of approximately $3.4 million partially offset by increased interest expense of $1.3 million contributed to this earnings improvement. Loans, the largest component of earning assets, increased to an average balance of $122.8 million for the three months ended June 30, 1996 from $42.4 million for the three months ended June 30, 1995, with an average yield of 10.6% and 10.0%, respectively. Investments in securities and Federal funds sold rose to an average of $61.4 million for the three months ended June 30, 1996 from an average of $7.0 million for the three months ended June 30, 1995, with an average yield of 5.3% and 6.2%, respectively. Further, loan fee income increased to $85,000 for the three months ended June 30, 1996 compared to $26,000 for the same period in 1995. The yield on earning assets declined to 8.8% for the three months ended June 30, 1996 from 9.5% for the same period in 1995. The decline in yield on earning assets can largely be attributed to a shift in the mix of loans as a percent of earning assets where the percent of average loans to average earning assets during the three months ended June 30, 1996 declined to 66.7% from the 85.9% for the same period in 1995. Additionally, the average prime rate (the rate to which the majority of rates the Banks' loans are indexed) during the three months ended June 30, 1996 was 8.25% compared to 9.00% for the same period in 1995. Average interest-bearing deposits increased to $150.1 million for the three months ended 15 June 30, 1996 from $44.1 million for the same period in 1995. Additionally, the average rate paid on these deposits increased to 4.6% during the three months ended June 30, 1996 compared to 3.9% during the same period in 1995. Further, as a result of the recapitalization of Bancorp that occurred in September 1995, other borrowing declined to $537,000 with an average rate of 11.3% from $1.9 million at an average rate of 11.8%. The average rate paid on interest-bearing liabilities was 3.7% for the three months ended June 30, 1996 compared to 4.3% for the same period in 1995. This decrease represents an overall increase in rates paid on deposit liabilities and offset by a change in the mix of interest bearing liabilities. As a result of these forgoing factors, the average yield on earning assets decreased to 5.0% for the three months ended June 30, 1996 compared to 5.5% for the same period in 1995. Allowance and Provision for Loan Losses The allowance for loan losses represents the amounts which have been set aside for the specific purpose of absorbing losses which may occur in the Banks' loan portfolio. The provision for loan losses is an expense charged against operating income and added to the allowance for loan losses. Management of the Banks continue to carefully monitor the allowance for loan losses in relation to the size of the Banks' loan portfolio and known risks or problem loans. The allowance for loan losses at Bancorp was approximately $2.5 million at June 30, 1996 compared to approximately $639,000 at December 31, 1995. The increase in the allowance for loan losses is primarily attributable to the Liberty Acquisition where Liberty's allowance at March 31, 1996 was approximately $1.8 million. During the three months ended June 30, 1996, the provision for loan losses was $92,000, loan charge-offs were $33,000 and recoveries were $79,000. The allowance for loan losses for Bancorp represented 2.0% of net loans at June 30, 1996 and 1.6% at December 31, 1995. Non-Interest Income Non-interest income for the three months ended June 30, 1996 was $337, 000 compared to $130,000 for the same period in 1995. Non-interest income from Liberty for the quarter, approximately $134,000, is primarily attributable to this improvement in non-interest income. Additionally, SDNB received an insurance settlement of approximately $70,000 during the quarter that accounts for most of the balance of this improvement. Non-Interest Expenses Non-interest expense for the three months ended June 30, 1996 was approximately $2.7 million, an increase of $1.6 million from $1.1 million for the same period in 1995. Non-interest expense at Liberty for the three months ended June 30, 1996 was approximately $1.8 million that was partially offset by improvements in non-interest expense at SDNB. The majority of this improvement at SDNB occurred in the area of other expenses of approximately $160,000 related primarily to foreclosure costs and the costs associated with foreclosed properties. Additionally, SDNB had reduced costs for salaries and benefits due to staffing reductions of approximately $87,000 partially offset by an increase in occupancy expense of approximately $55,000 associated with a one time mark-to-market adjustment of $61,000 made in conjunction with the 16 sub-leasing of space in SDNB's Encinitas office. Provision for Income Taxes As a result of the earnings for the three months ended June 30, 1996, a $133,000 provision for income taxes was made where there was no provision for income tax made for the same period in 1995. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 For the six months ended June 30, 1996, Bancorp had net income of $223,000 compared to a net loss of $450,000 for the same period in 1995. The improvement in 1996 earnings over the same period in 1995 is primarily attributable to the acquisition of Liberty, for which the results of operations for the three months ended June 30, 1996 are included in the Bancorp results of operations for the six months ended June 30, 1996. Compared to the prior year results the improvements stem from a combination of increased net interest income of approximately $2.2 million and non-interest income of approximately $235,000 partially offset by increased loan loss provision of $27,000, non-interest expense of approximately $1.6 million and provision for taxes of $138,000. Net Interest Income and Net Interest Margin Net interest income was approximately $3.6 million for the six months ended June 30, 1996, an increase of $2.2 million over the same period in 1995. An increase in interest and fee income of approximately $3.3 million partially offset by increased interest expense of $1.1 million contributed to this earnings improvement. Loans, the largest component of earning assets, increased to an average balance of $80.2 million for the first six months of 1996 from $43.3 million for the first six months of 1995, with an average yield of 10.4% and 8.4% respectively. Investments in securities and Federal funds sold rose to an average of $35.9 million for the first six months of 1996 from an average of $7.3 million for the first six months of 1995, with an average yield of 5.4% and 5.9% respectively. Further, loan fee income increased to $142,000 for the first six months of 1996 compared to $56,000 for the same period in 1995. The yield on earning assets declined to 8.9% for the first six months of 1996 from 9.2% for the same period in 1995. The decline in yield on earning assets can largely be attributed to a shift in the mix of loans as a percent of earning assets where the percent of average loans to average earning assets during the first six months of 1996 declined to 69.1% from 85.8% for the same period in 1995. Additionally, the average prime rate (the rate to which the majority of rates the Banks' loans are indexed) during the six months ended June 30, 1996 was 8.29% compared to 9.09% for the same period in 1995. Average interest-bearing deposits increased to $94.6 million for the six months ended June 30, 1996 from $44.9 million for the same period in 1995. Additionally, the average rate paid on these deposits increased to 4.3% during the first six months in 1996 compared to 3.7% during the first six months in 1995. Further, as a result of the recapitalization of Bancorp that occurred in September 1995, other borrowing declined to $537,000 with an average rate of 11.4% from $1.9 million at an average rate of 11.7%. The average rate paid on interest-bearing liabilities was 3.4% for the first six months of 1996 compared to 4.0% for the same period in 17 1995. This decrease represents an overall increase in rates paid on deposit liabilities offset by a change in the mix of interest bearing liabilities. As a result of these forgoing factors, the average yield on earning assets decreased to 5.3% for the first six months of 1995 from 5.5% for the same period in 1995. Allowance and Provision for Loan Losses The allowance for loan losses represents the amounts which have been set aside for the specific purpose of absorbing losses which may occur in the Banks' loan portfolio. The provision for loan losses is an expense charged against operating income and added to the allowance for loan losses. Management of the Banks continue to carefully monitor the allowance for loan losses in relation to the size of the Banks' loan portfolio and known risks or problem loans. The allowance for loan losses at Bancorp was approximately $2.5 million at June 30, 1996 compared to approximately $639,000 at December 31, 1995. The increase in the allowance for loan losses is primarily attributable to the Liberty Acquisition where Liberty's allowance at March 31, 1996 was approximately $1.8 million. During the first six months of 1996, the provision for loan losses was $127,000, loan charge-offs were $69,000 and recoveries were $91,000. The allowance for loan losses for Bancorp represented 2.0% of net loans at June 30, 1996 and 1.6% at December 31, 1995. Non-Interest Income Non-interest income for the six months ended June 30, 1996 was $499,000 compared to $264,000 for the same period in 1995. Non-interest income at Liberty for the quarter, approximately $134,000, and an insurance settlement of approximately $70,000 received during the quarter by SDNB, are primarily attributable to this improvement in non-interest income. Additionally, increases in various deposit related income and other non-interest income accounts for the balance of this improvement. Non-Interest Expenses Non-interest expense for the six months ended June 30, 1996 was approximately $3.6 million, an increase of $1.6 million from $2.0 million for the same period in 1995. Non-interest expense at Liberty for the three months ended June 30, 1996 was approximately $1.8 million that was partially offset by improvements in non-interest expense at SDNB. The majority of this improvement at SDNB occurred in the area of other expenses of approximately $174,000 related primarily to foreclosure costs and the costs associated with foreclosed properties. Additionally, SDNB had reduced costs for salaries and benefits due to staffing reductions of approximately $141,000 partially offset by an increase in premises expense of approximately $67,000 associated with a one time mark-to-market adjustment of $61,000 made in conjunction with the sub-leasing of space in SDNB's Encinitas office. 18 Provision for Income Taxes As a result of the earnings for the first six months of 1996, a $138,000 provision for income taxes was made where there was no provision for income tax made in the first six months of 1995. CAPITAL RESOURCES As of March 27, 1996, the Partnership invested approximately $13.4 million in the registrant to fund the Liberty Acquisition. In exchange for that investment, the registrant issued a total of 3,392,405 additional shares of Common Stock at a price per share of $3.95, the registrant's book value per share as of December 31, 1995. At the Partnership's direction the registrant issued 1,764,000 of those shares of Common Stock, in the aggregate, to certain limited partners of the Partnership (the "Direct Holders") and the remaining 1,628,405 shares of Common Stock directly to the Partnership. Giving effect to the issuance of those shares to fund the Liberty Acquisition, the Partnership owns 48.0% of the Common Stock and the Direct Holders own, in the aggregate, 50.75% of the Common Stock. Current risk-based regulatory capital standards generally require banks and holding companies to maintain a ratio of "core" or "Tier 1" capital (consisting principally of common equity) to risk-weighted assets of at least 4%, a ratio of Tier 1 capital to adjusted total assets (leverage ratio) of at least 3% and a ratio of total capital (which includes Tier 1 capital plus certain forms of subordinated debt, a portion of the allowance for loan losses and preferred stock) to risk-weighted assets of at least 8%. Risk-weighted assets are calculated by multiplying the balance in each category of assets according to a risk factor which ranges from zero for cash assets and certain government obligations to 100% for some types of loans, and adding the products together. As of March 31, 1996, Bancorp's combined leverage ratio was 6.5%, the Tier 1 risk-weighted capital ratio was 10.1%, and the total risk-weighted capital ratio was 11.8%. Liberty's and SDNB's leverage ratio, Tier 1 risk-weighted capital ratio, and total risk-weighted capital ratios were 5.9%, 9.2%, 10.4% and 6.5%, 9.3%, 10.5% respectively, on June 30, 1996. Bancorp, Liberty and SDNB were well capitalized as of June 30, 1996 for federal regulatory purposes. Bancorp has agreed to fund the Commerce Acquisition in part by raising not less than $15.3 million of additional equity through the sale of Bancorp common stock. The Partnership has agreed to purchase up to $16.0 million of common stock at a price per share of $3.95 in connection with the Commerce Acquisition. LIQUIDITY The asset-liability management process determines the size and composition of the balance sheet and focuses on the management of liquidity and interest rate risk. The purpose of liquidity and balance sheet management is to ensure that funds are available to meet customer needs, meet the financial commitments of the Banks, and to reduce the Banks' exposure to changing interest rates. 19 The Banks manage liquidity from both sides of the balance sheet through the coordination of the relative maturities of its assets and liabilities. The Banks enhance their liquidity through the ability to raise additional funds in money markets through Federal funds lines, repurchase agreements and selling of a specified portion of its securities (securities available for sale). The Banks maintain a level of liquidity that is considered adequate to meet current needs. Liquid assets include cash and due from banks, Federal funds sold, and securities available for sale. At June 30, 1996, liquid assets totaled approximately $62.5 million, or 30.5% of total assets, which compares to $5.9 million, or 10.6% of total assets, at December 31, 1995. At June 30, 1996 the Banks had net repriceable liabilities (a "negative gap") as measured at one year of approximately $17.8 million or 8.6% of total assets. The Banks had net repriceable assets (a "positive gap") as measured at a 90-day time horizon of approximately $24.4 million, or 11.8% of total assets. With a positive gap, a bank would anticipate higher net yields over the near term in a rising rate environment and lower net yields in a declining rate environment. Conversely, with a negative gap, a bank would anticipate lower net yields over the near term in a rising rate environment and higher net yields in a declining rate environment. 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings Not Applicable Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: 1) Reorganization Agreement signed with Commerce Security Bank to form a new holding company into which both companies will merge, dated April 23, 1996 21 SDN BANCORP, INC. AND SUBSIDIARIES U.S. SECURITIES AND EXCHANGE COMMISSION FORM 10-QSB SIGNATURES Pursuant to the requirements of the U.S. Securities Exchange Act of 1934, the Issuer has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SDN BANCORP, INC. DATE: August 14, 1996 /s/ Robert P. Keller ------------------------------------------ Robert P. Keller President and Chief Executive Officer DATE: August 14, 1996 /s/ Curt A. Christianssen ----------------------------------------- Curt A. Christianssen Senior Vice President and Chief Financial Officer EX-27 2
9 1000 U.S. DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 14163 1606 5500 0 42843 6144 6117 125787 2531 205192 185790 0 1674 537 0 0 21009 (3818) 205192 4684 959 0 5643 2021 2052 3591 127 0 3602 361 361 0 0 223 .08 .08 8.9 5614 14 2505 0 639 69 91 2531 2531 0 0
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