<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter and nine months ended September 30, 1995.
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) 228-8200
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- --------------------
Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES. [ X ] NO. [ ]
There were 7,468,505 shares of common stock for the registrant issued
and outstanding as of November 1, 1995.
<PAGE>
SC BANCORP
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION Pages
ITEM 1. Financial Statements 1
A. Consolidated Balance Sheets 1
B. Consolidated Statements of Operations 2
C. Consolidated Statements of Cash Flows 3
D. Notes to Consolidated Financial Statements 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION 28
<PAGE>
Part I.
Item 1. Financial Statements
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks $ 36,745 $ 31,118
Federal funds sold 27,800 --
----------- -----------
Cash and cash equivalents 64,545 31,118
----------- -----------
Securities held-to-maturity, at amortized cost:
fair value 1995 - $52,501; 1994 - $54,680 (Note 2) 54,180 60,023
Securities available-for-sale, at fair value (Note 2) 42,411 71,858
Loans (Note 3) 278,699 207,688
Less: Deferred fee income (396) (298)
Allowance for possible loan losses (5,354) (5,318)
----------- -----------
Loans, net 272,949 202,072
----------- -----------
Premises and equipment, net 10,088 10,254
Other real estate owned, net 3,273 5,837
Accrued interest receivable 2,557 4,330
Other assets 18,224 13,063
----------- -----------
TOTAL ASSETS $ 468,227 $ 398,555
=========== ===========
LIABILITIES
Deposits:
Interest-bearing $ 282,062 $ 221,919
Noninterest-bearing 133,540 118,020
----------- -----------
Total deposits 415,602 339,939
----------- -----------
Borrowed funds and other interest-bearing liabilities 6,566 13,621
Accrued interest payable and other liabilities 1,380 3,151
----------- -----------
Total Liabilities 423,548 356,711
----------- -----------
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; 7,468,505 shares issued and
outstanding in 1995 and 1994, respectively 37,643 37,643
Retained earnings 7,598 7,731
Unrealized loss on available-for-sale securities,
net of taxes (562) (3,530)
----------- -----------
Total Shareholders' Equity 44,679 41,844
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 468,227 $ 398,555
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS END
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
1995 1994 1995 1994
------- ------- ------- ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans (Note 3) $ 7,090 $ 4,839 $18,790 $14,071
Interest on investment securities (Note 2): 1,618 1,798 5,060 5,379
Interest on Federal funds sold 88 137 727 189
------- ------- ------- -------
Total interest income 8,796 6,774 24,577 19,639
------- ------- ------- -------
INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 399 376 1,031 1,049
Savings 280 382 884 1,205
Time certificates of deposit 2,313 743 6,306 2,203
------- ------- ------- -------
Total interest on deposits 2,992 1,501 8,221 4,457
------- ------- ------- -------
Other interest expense 115 83 919 238
------- ------- ------- -------
Total interest expense 3,107 1,584 9,140 4,695
------- ------- ------- -------
NET INTEREST INCOME 5,689 5,190 15,437 14,944
Provision for (recovery of) possible
loan losses (Note 3) 900 - 1,224 (850)
------- ------- ------- -------
Net interest income after provision for
possible losses on loans 4,789 5,190 14,213 15,794
------- ------- ------- -------
Other income:
Service charges on deposit accounts 449 408 1,292 1,283
Other fees and charges 813 1,138 2,349 3,385
Net gain (loss) on sales of investment
securities (620) - (620) 17
Net gain on sale of loans 148 - 148 215
Net gain (loss) on sales of fixed assets (107) 1 (107) 454
Life insurance income 53 - 460 33
Other income 33 40 209 111
------- ------- ------- -------
Total other income 769 1,587 3,731 5,498
------- ------- ------- -------
Other expenses:
Salaries and employee benefits 3,062 2,468 8,282 7,295
Occupancy, furniture and equipment 1,492 1,143 3,700 3,334
Professional fees 558 373 1,479 1,373
Office supplies 316 268 824 763
Data processing 208 236 623 757
FDIC assessment (17) 248 415 758
Goodwill amortization 552 52 706 158
Other real estate owned 142 407 387 1,412
Merchant bankcard expense 132 294 352 742
Advertising and promotion 149 153 513 436
Other operating expense 249 315 810 1,024
------- ------- ------- -------
Total other expense 6,843 5,957 18,091 18,052
======= ======= ======= =======
Income (loss) before provision (benefit)
for income taxes (1,285) 820 (147) 3,240
Provision (benefit) for income taxes (377) 318 (14) 1,354
------- ------- ------- -------
NET INCOME (LOSS) $ (908) $ 502 $ (133) $ 1,886
======= ======= ======= =======
Weighted average number of shares
outstanding 7,469 7,469 7,469 4,831
======= ======= ======= =======
Earnings (loss) per share $ (0.12) $ 0.07 $ (0.02) $ 0.39
======= ======= ======= =======
See Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (133) $ 1,886
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for (recovery of) possible loan losses 1,224 (850)
Provision for loss on other real estate owned 128 882
(Gain)/loss on sale of other real estate owned 22 5
(Gain)/loss on sale of available-for-sale investment
securitities 620 (17)
Net amortization of premiums on investment securities 1,884 1,322
(Gain)/loss on sale of loans (148) 215
Net amortization of deferred fees and unearned income
on loans (106) (12)
Depreciation and amortization 2,203 1,605
(Gain)/loss on sale of fixed asset and other assets (109) (454)
(Increase)/decrease in accrued interest receivable
and other assets (5,556) 3,684
Increase/(decrease) in accrued interest payable and
other liabilities (504) (163)
------- ------
Net cash provided by (used in) operating activities (475) 8,103
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available-for-sale investment
securities 26,860 5,244
Proceeds from maturities of available-for-sale
investment securities 6,000 -
Proceeds from maturities of held-to-maturity
investment securities 5,562 8,613
Purchase of investment securities (1,205) (4,946)
Proceeds from sale of loans 2,142 -
Purchase of IOBOC loans (71,576) -
Loans funded, net of payments received (3,834) 4,942
Proceeds from sale of fixed assets and other assets 1 977
Purchase of fixed assets (1,333) (1,334)
Proceeds from sale of other real estate owned 3,835 2,834
------- ------
Net cash provided by (used in) investing activities (33,548) 16,330
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Rights Offering - 14,187
Purchase of IOBOC interest-bearing deposits 14,965 -
Purchase of IOBOC noninterest-bearing deposits 19,762 -
Increase/(decrease) in demand deposits, NOW accounts
and saving accounts (30,442) 3,989
Increase/(decrease) in time certificates of deposit 71,378 (18,447)
Increase/(decrease) in other borrowings (8,213) (2,122)
------- ------
Net cash provided by (used in) financing activities 67,450 (2,393)
------- ------
Increase/(decrease) in cash and cash equivalents 33,427 22,040
Cash and cash equivalents, beginning of period 31,118 23,564
------- ------
Cash and cash equivalents, end of period $64,545 $45,604
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Unrealized loss on investment securities,
available-for-sale, net of tax $2,968 $4,326
Change in deferred tax asset $1,463 $1,456
</TABLE>
3
<PAGE>
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, 1994)
NOTE 1 -- BASIS OF PRESENTATION
References to the "Company" are to SC Bancorp and Southern California Bank on
a consolidated basis. References to "SC Bancorp" are to SC Bancorp on an
unconsolidated basis, and references to the "Bank" are to Southern California
Bank. See notes to the consolidated financial statements presented in SC
Bancorp's 1994 Annual Report on Form 10-K.
The Company's accounting and reporting policies conform to generally accepted
accounting principles prescribed for bank holding companies and banks, and
predominant banking industry practice. 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 periods ending September 30, 1995, are not necessarily
indicative of results that may be expected for any other interim periods or
for the year as a whole.
SECURITIES:
At September 30, 1995, the Company's available-for-sale portfolio had a net
unrealized loss of $960 thousand. The tax-effected reduction to
shareholders' equity at September 30, 1995, was $562 thousand. In January
1995, the FDIC issued a final rule excluding unrealized holding gains and
losses on available-for-sale debt securities from the calculation of Tier 1
capital.
LOANS:
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," and Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures-An Amendment of FASB
Statement No. 114," effective January 1, 1995. The Company has determined
that the combined effect of adoption of Statements No. 114 and No. 118 is
immaterial to the consolidated financial statements due to the Company's
pre-existing methodology for calculation of its allowance for possible loan
losses, which is based on the value of the underlying collateral of
"impaired" loans, as defined by Statement No. 114.
4
<PAGE>
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in debt
secuities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY:
US Treasury securities and obligations
of US government agencies $ 59 $ - $ - $ 59
Mortgage-backed securities 54,121 - (1,679) 52,442
------- ------- ------- -------
Total $54,180 $ - $(1,679) $52,501
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
US Treasury securities and obligations
of US government agencies $43,371 $ - $ (960) $42,411
------- ------- ------- -------
Total $43,371 $ - $ (960) $42,411
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY:
US Treasury securities and obligations
of US government agencies $ 59 $ - $ - $ 59
Mortgage-backed securities 59,964 - (5,343) 54,621
------- ------- ------- -------
Total $60,023 $ - $(5,343) $54,680
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
US Treasury securities and obligations
of US government agencies $77,249 $ 2 $(5,393) $71,858
------- ------- ------- -------
Total $77,249 $ 2 $(5,393) $71,858
======= ======= ======= =======
</TABLE>
Investment securities with a carrying value of $18,798,000 and $22,318,000
were pledged to secure public deposits and as collateral for other borrowings
at September 30, 1995, and December 31, 1994, respectively.
5
<PAGE>
NOTE 2 -- INVESTMENT SECURITIES (CON'T)
The amortized cost and estimated fair value of debt securities at
September 30, 1995, by contractual maturities are shown below. 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.
<TABLE>
<CAPTION>
MATURING IN
----------------------------------------------------------------------
OVER ONE OVER FIVE
ONE YEAR YEAR THROUGH YEARS THROUGH OVER
(IN THOUSANDS) OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
SEPTEMBER 30, 1995 ---------- ------------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Held-to-maturity, amortized cost $ -- $46,017 $8,104 $ 59 $54,180
Held-to-maturity, estimated fair value $ -- $44,650 $7,792 $ 59 $52,501
Available-for-sale, amortized cost $ 5 $42,166 $ -- $1,200 $43,371
Available-for-sale, estimated fair value $ 5 $41,206 $ -- $1,200 $42,411
</TABLE>
NOTE 3 -- LOANS
Loans by category are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1995 PERCENT 1994 PERCENT
------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Commercial $ 124,226 44.57% $ 79,369 38.22%
Real estate, construction 2,356 0.85% 30 0.01%
Real estate, mortgage 99,402 35.67% 83,712 40.31%
Consumer 52,715 18.91% 44,577 21.46%
-------- ------- ------- -------
Gross loans 278,699 100.00% 207,688 100.00%
======= =======
Deferred fee income (396) (298)
Allowance for possible loan losses (5,354) (5,318)
-------- --------
Loans, net $272,949 $202,072
======== ========
</TABLE>
No industry constitutes a concentration in the Bank's loan portfolio.
6
<PAGE>
NOTE -- 3 LOANS (CON'T)
The following table summarizes the balances and changes in the allowance for
possible loan losses:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
Average balance of gross loans outstanding $253,506 $203,760
======== ========
Gross loan balance at end of period $278,699 $207,688
======== ========
Allowance at beginning of period $ 5,318 $ 10,800
Charge-offs:
Commercial 734 2,004
Real estate 1,207 3,453
Consumer 500 362
-------- --------
Total charge-offs 2,441 5,819
Recoveries:
Commercial 421 915
Real estate 64 214
Consumer 151 58
-------- --------
Total recoveries 636 1,187
Net charge-offs 1,805 4,632
Provision (recovery) charged (credited)
to expense 1,224 (850)
Allowance on purchased loans 617
-------- --------
Allowance at end of period $ 5,354 $ 5,318
======== ========
Ratio of allowance for loan losses to loans
outstanding at end of period 1.92% 2.56%
Ratio of allowance for loan losses to
nonaccrual loans at end of period 292.73% 329.90%
Ratio of annualized net charge-offs to
average loans 0.95% 2.27%
</TABLE>
Loans on nonaccrual status were approximately $1,829,000 and $906,000 at
September 30, 1995 and 1994, respectively. Interest income that would have
been collected on these loans had they performed in accordance with their
original terms, was approximately $167,000 and $288,000, for the nine months
ended September 30, 1995 and 1994, respectively.
NOTE 4 -- PURCHASE OF LOANS AND DEPOSITS
On April 30, 1995, the Bank acquired substantially all of the corporate
and private banking loans and deposits from Independence One Bank of
California, F.S.B. (IOBOC). The loans purchased included approximately
$71.6 million of floating rate commercial, real estate and consumer loans.
The purchase price for the loans and deposits acquired was $39.4 million.
Funds for the acquisition were generated through a $5.0 million capital
contribution from SC Bancorp, and a promotional certificates of deposit
program held during the first quarter of 1995. Financial information on
the loans and deposits acquired is provided below:
7
<PAGE>
NOTE 4- PURCHASE OF LOANS AND DEPOSITS (CON'T)
<TABLE>
<CAPTION>
(IN THOUSANDS) BALANCE ANNUALIZED
APRIL 30, 1995 YIELD
-------------- ----------
<S> <C> <C>
Loans
Commercial $ 37,227 10.01%
Real Estate 16,761 10.02%
Construction 912 10.14%
Consumer 17,497 9.97%
-------------- ---------
Gross loans 72,397 10.01%
-------------- =========
Deferred fees (204)
Allowance for loan losses (617)
--------------
Loans, net $ 71,576
==============
Deposits
Interest-bearing $ 14,965 2.39%
Noninterest-bearing 19,762
--------------
Total deposits $ 34,727
==============
</TABLE>
The Bank recorded an intangible asset of approximately $2 million relating to
the loans and deposits acquired. The intangible is being amortized over a
period of seven years. Reference can be made to Form 8-K and Form 8-K/A
Current Reports for additional information on the acquisition transaction.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments
to extend credit which are not reflected in the accompanying consolidated
financial statements. The Company does not anticipate losses as a result of
these transactions. Commercial and standby letters of credit totaled
approximately $4,538,000 and $4,516,000 at September 30, 1995, and December
31, 1994, respectively. In addition, the Company had unfunded loan
commitments of $74,517,000 and $48,250,000 at September 30, 1995, and
December 31, 1994, respectively. The Company acquired approximately
$32,500,000 of unfunded loan commitments from IOBOC on April 30, 1995.
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 commercial properties.
In the third quarter of 1993 and first quarter of 1994, 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 September 30, 1995,
the Company had outstanding one interest rate swap agreement with a
commercial bank having a total notional principal amount of $50 million (Swap
#1), and one interest rate swap agreement with a broker dealer having a
notional principal amount of $25 million (Swap #2). The agreements were
intended to reduce the Company's exposure to declines in prime lending rates
by artificially converting $75 million of the Company's prime-based loans to
fixed rates for the durations of the agreements. Swap #1 was entered into in
September 1993. The terms of the first agreement require the Company to pay
interest quarterly based on 3-month LIBOR and to receive interest
semi-annually at a fixed rate of 4.865%. The agreement matures in September
1998. Swap #2 was entered into in January 1994. The terms of the second
agreement require the Company to pay interest quarterly based on 3-month
LIBOR in arrears, and to receive interest semi-annually at a fixed rate of
8
<PAGE>
5.04% through the January 1997 maturity date. The Company accrues monthly
interest income and expense on the swaps, the net of which is included in
income on loans. For the period ended September 30, 1995, net interest
expense of $751,000 from the swap agreements is included in interest income
on loans in the consolidated statements of operations. The Company is
required to pledge collateral on the transaction. US Agency notes having a
market value of approximately $ 6,443,000 were pledged as collateral for the
agreements as of September 30, 1995. The Company is exposed to credit loss
in the event of nonperformance by the counterparties to the agreements.
However, the Company does not anticipate nonperformance by the counterparties.
NOTE 6 -- SUBSEQUENT EVENTS
Subsequent to the end of the third quarter 1995, the Company implemented
various elements of its restructuring plan. The restructuring plan includes
actions designed to streamline the Bank's branch system. On October 17,
1995, the Company announced the signing of an agreement to sell the core
deposits, consisting of approximately $4.1 million, from the Bank's Signal
Hill branch to Home Bank, a subsidiary of Home Interstate Bancorp. The sale
is subject to regulatory approval. Management intends to close the Signal
Hill branch after customer notification, regulatory approval, and completion
of the sale transaction, which is expected by the end of January 1996. The
Bank is negotiating the sale of another small branch and has elected to
consolidate its Yorba Linda branch into the Tustin-La Palma office.
Additionally, the Company and the Bank have elected to outsource the internal
audit function. All of these actions are designed to improve the efficiency
and financial performance of the Bank.
9
<PAGE>
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion represents 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 1994
audited consolidated financial statements of the Company and the notes
thereto and the accompanying quarterly unaudited consolidated financial
statements and notes thereto.
OVERVIEW
The Company reported a net loss of $908 thousand for the third quarter of
1995 compared to net income of $502 thousand for the third quarter of 1994.
The net loss for the first nine months of 1995 was $133 thousand, compared to
net income of $1.9 million for the same period in 1994. The previous year's
results include a $448 thousand gain on the sale of the Company's
headquarters building, a $215 thousand gain on the sale of loans, and a $850
thousand reversal of previously recorded allowance for possible loan losses.
The year-to-date loss for 1995 reflects approximately $1.7 million of
restructuring charges and losses pretax, along with additional loan loss
provision specific to the collateral valuation of a few commercial loans for
$600 thousand pretax, and a nonrecurring adjustment to interest expense for
deferred compensation plans of $408 thousand. These expenses and losses are
offset by a $407 thousand gain resulting from benefit payment received on
corporate owned life insurance which is reflected in noninterest income; a
refund of FDIC insurance premiums of approximately $239 thousand which is
reported in noninterest expense; and a gain on sale of loans of approximately
$148 thousand which is also reported in noninterest income.
Net interest income was $5.7 million for the three months ended September 30,
1995 compared to $5.2 million for the three months ended September 30, 1994.
Year-to-date net interest income was $15.4 million, an increase of $493
thousand from the $14.9 million reported for 1994; however, the Company's net
interest margin decreased to 5.19% for the nine months ended September 30,
1995, compared to 5.72% for the prior year. The decrease in the net interest
margin can be attributed to the adjustment recorded on the Company's deferred
compensation plans and the increased interest expense associated with the
promotional certificates of deposit ("TCD") program that provided funding for
the IOBOC transaction. Most of these TCDs matured in September 1995 and many
were renewed at significantly lower rates.
Noninterest income was $769 thousand and $1.6 million for the three months
ended September 30, 1995 and 1994, respectively. Noninterest income was
$3.7 million and $5.5 million for the nine months ended September 30, 1995
and 1994, respectively. Noninterest income for the first half of 1994
included nonrecurring gains on the sale of assets as discussed above. On
September 28, 1995, the Company announced a restructuring plan, which
included reductions in staff and consolidation of selected operations to
improve operating efficiencies. As part of the restructuring plan, the
Company also sold approximately $27 million of its investment securities
classified as available-for-sale and realized a loss of approximately $620
thousand. Other fees and charges also declined compared to the prior year
due to a reduction in merchant bankcard fee income.
Operating expenses, as adjusted for the effects of approximately $948
thousand of restructuring charges, decreased from $6.0 million for the three
months ended September 30, 1994, to $5.9 million for the three months ended
September 30, 1995. Adjusted operating expenses also decreased for the nine
months ended September 30, 1995, and 1994, from $18.1 million to $17.1
million, respectively. The decrease in operating expense largely occurred in
the OREO and merchant bankcard expense categories.
10
<PAGE>
Total assets at September 30, 1995, were $468.2 million, an increase of 17.5%
from $398.6 million at year-end 1994. Total deposits at September 30, 1995,
were $415.6 million, an increase of 22.3% from $339.9 million at year-end
1994. Almost all of the increase in assets resulted from the purchase of
loans from IOBOC in the second quarter of 1995; approximately half of the
increase in deposits resulted from the IOBOC purchase and the rest of the
increase in deposits was due to a promotional TCD program in the first
quarter of 1995.
The following table summarizes key performance indicators pertaining to the
Company's operating results. Average balances are computed using daily
averages.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1995 1994
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Return on average assets (1) (0.76)% 0.49% (0.04)% 0.63%
as adjusted for restructuring items (2) 0.08% 0.26%
Return on average shareholders' equity (1) (7.96)% 5.83% (0.41)% 7.69%
as adjusted for restructuring items (2) 0.86% 2.66%
Net income (loss) $ (908) $ 502 $ (133) $ 1,886
Earnings (loss) per share $ (0.12) $ 0.07 $ (0.02) $ 0.39
Total average assets $ 472,612 $404,724 $455,091 $403,130
____________________
(1) Annualized
(2) Restructuring items:
loss on securities $ 620 $ 620
loss on fixed assets 109 109
noninterest expense 948 948
-------- --------
1,677 1,677
-------- --------
net of taxes $ 1,006 $ 1,006
========= ========
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased $499 thousand to $5.7 million for the quarter
ended September 30, 1995, from $5.2 million for the same quarter a year ago.
Most of the increase is due to higher average balances, principally average
loans outstanding, which increased $82.9 million over the third quarter of
1994 largely due to the purchase of IOBOC loans. The increase in average
loans was offset by lower average balances for investment securities and
Federal funds sold, which decreased by $20.0 million and $6.0 million,
respectively. The decrease in investment securities in the third quarter of
1995 reflects the sale of approximately $27 million of available-for-sale
securities and the maturity of approximately $6.0 million and $2.4 million of
securities classified as available-for-sale and held-to-maturity,
respectively, whereas during the third quarter of 1994 only $2.5 million of
securities matured. Average yields on earning assets for the third quarter
of 1995 increased by 90 basis points to 8.39% from 7.49% for the third
quarter of 1994.
However, the Company's net interest margin decreased 31 basis points from
5.74% to 5.43% for the third quarter ended September 30, 1995, and 1994,
respectively. Higher average interest rates, 4.05% as compared to
11
<PAGE>
2.43%, on higher average balances for TCDs, $155.9 million as compared to
$78.6 million, resulted in the lower margin.
The $48.3 million increase in average earning assets between September 30,
1994, and September 30, 1995, is primarily due to the loans purchased from
IOBOC. The increase in the national prime rate from 7.75% at September 30,
1994, to 8.75% at September 30, 1995, contributed to the increase in loan
yields. The average yield on loans, including the effect of the interest
rate swaps, was 9.92% for the nine months ended September 30, 1995, up 73
basis points from 9.19% for the same period in 1994. During September 1995,
the Company sold approximately $27 million of its investment securities
classified as available-for-sale. The Company plans to use the proceeds from
this sale to fund anticipated loan growth and to strengthen the Bank's
funding mix. Currently, funds raised through the securities sale have been
invested in overnight Federal funds.
The Company's net interest margin for the nine months ended September 30,
1995 decreased compared to the same period in 1994 despite an increase in
earning assets and loan yields due to an increase in interest expense. Most
of the increase in interest expense can be attributed to a $408 thousand
nonrecurring interest adjustment during the first quarter of 1995 relating to
the Company's deferred compensation plans, and to the increase in TCD
balances and rates compared to the prior year. The increase in deposit rates
can be attributed to the increase in overall market rates from the prior
year, and to the higher rates offered through a deposit promotion in the
first quarter of 1995. The average balance of TCDs increased by $62.9
million to $144.1 million for the nine months ended September 30, 1995, from
$81.2 million for the nine months ended September 30, 1994. The average
cost of funds on TCDs increased from 3.62 % in 1994 to 5.85% for the nine
months ended September 30, 1995. The Company lowered the average rates on
the promotional TCDs from 7.20% to approximately 5.89% and retained
approximately 70% of the promotional TCDs that matured in September 1995.
12
<PAGE>
NET INTEREST INCOME
The following tables present, for the periods indicated, condensed average
balance sheet information for the Company, together with interest income
and yields earned on average interest-earning assets and interest expense
and rates paid on average interet-bearing liabilities. Average balances are
average daily balances. Nonaccrual loans are included in total average loans
outstanding.
The Company's primary source of revenue is net interest income, which is the
difference between the interest and fees earned on loans and investments and
the interest paid on deposits and other funds. The Company's net interest
income is affected by changes in the amount and mix of interest-earnings
assets and interest-bearing liabilities and by changes in yields earned on
interest-earning assets and rates paid on interest-bearing liabilities. The
tables below set forth, for the periods indicated, a summary of the changes
in interest income and interest expense resulting from changes in average
interest rates (rate) and changes in average asset and liability balances
(volume). The change in interest due to both rate and volume has been
allocated to change due to volume and rate in proportion to the relationship
of absolute dollar amounts in each.
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
--------------------------- --------------------------
YIELD/ YIELD
AVG. BAL. INTEREST RATE(1) AVG. BAL. INTEREST RATE(1) RATE VOLUME
-------- -------- ------- -------- ------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net of deferred fees(2) $285,502 $7,090 9.85% $202,108 $4,839 9.50% $ 185 $2,067
Investment securities 124,363 1,618 5.16% 144,602 1,798 4.93% 454 (634)
Federal funds sold and other 5,880 88 5.93% 12,113 137 4.50% 195 (245)
-------- ------ ---- -------- ------ ---- -------- ------
Total interest earning
assets/interest income 415,745 8,796 8.39% 358,823 6,774 7.49% 871 1,150
-------- ------ ---- -------- ------ ---- -------- ------
Noninterest earning assets 56,867 45,901
-------- --------
Total assets $472,612 $404,724
======== ====== ==== ======== ====== ==== ======== ======
DEPOSITS $291,075 $2,992 4.08% $245,401 $1,501 2.43% $ 1,170 $ 321
Other interest-bearing liabilities 5,405 115 8.45% 4,682 83 7.06% 18 14
-------- ------ ---- -------- ------ ---- -------- ------
Total interest-bearing
liabilities/interest expense 296,480 3,107 4.16% 250,083 1,584 2.51% 1,188 335
-------- ------ ---- -------- ------ ---- -------- ------
Demand deposits 129,417 119,422
Other liabilities 1,465 1,039
Shareholders' equity 45,250 34,180
-------- --------
Total liabilities and equity $472,612 $404,724
======== ====== ==== ======== ====== ==== ======== ======
Net interest income/net
interest margin $5,689 5.43% $5,190 5.74% $ (1,533) $2,032
======== ====== ==== ======== ====== ==== ======== ======
</TABLE>
- ----------------------
(1) Annualized.
(2) Includes loans on nonaccrual status of approximately $1.8 million and
$0.9 million at September 30, 1995 and 1994, respectively. The amounts
of interest income foregone on loans that were on nonaccrual status were
approximately $42 thousand and $14 thousand for the quarter ended
September 30, 1995 and 1994, respectively. Interest income on loans
includes amortization of net loan fees of approximately $208 thousand
and $157 thousand for the quarter ended September 30, 1995 and 1994,
respectively. Additionally, net interest (expense) of ($203) thousand
and ($26) thousand relating to the interest rate swap agreements was
included in interest income on loans for the quarter ended September 30,
1995 and 1994, respectively.
13
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
--------------------------- --------------------------
YIELD/ YIELD
AVG. BAL. INTEREST RATE(1) AVG. BAL. INTEREST RATE(1) RATE VOLUME
-------- -------- ------- -------- ------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net of deferred fees(2) $253,163 $18,790 9.92% $204,805 $14,071 9.19% $ 1,188 $3,531
Investment securities 128,062 5,060 5.28% 138,405 5,379 5.20% 129 (448)
Federal funds sold and other 16,401 727 5.93% 6,108 189 4.13% 111 428
-------- ------- ---- -------- ------ ---- -------- -----
Total interest earning
assets/interest income 397,626 24,577 8.26% 349,318 19,639 7.52% 2,053 2,885
-------- ------- ---- -------- ------ ---- -------- -----
Noninterest earning assets 57,465 53,812
-------- --------
Total assets $455,091 $403,130
======== ======= ==== ======== ====== ==== ======== ======
Deposits $277,418 $ 8,221 3.96% $245,047 $4,457 2.43% $ 3,111 $ 653
Other interest-bearing liabilities 9,440 919 13.02% 6,110 238 5.20% 500 181
-------- ------- ----- -------- ------ ---- -------- ------
Total interest-bearing
liabilities/interest expense 286,858 9,140 4.26% 251,157 4,695 2.50% 3,698 747
-------- ------- ---- -------- ------ ---- -------- ------
Demand deposits 122,092 116,810
Other liabilities 2,274 2,383
Shareholders' equity 43,867 32,780
-------- ------- ---- -------- ------ ---- -------- ------
Total liabilities and equity $455,091 $403,130
======== ======= ==== ======== ====== ==== ======== ------
Net interest income/net
interest margin $15,437 5.19% $14,944 5.72% $ (2,020) $2,512
======== ======= ==== ======== ====== ==== ======== ======
</TABLE>
- ----------------------
(1) Annualized.
(2) Includes loans on nonaccrual status of approximately $1.8 million and
$0.9 million at September 30, 1995 and 1994, respectively. The amounts
of interest income foregone on loans that were on nonaccrual status were
approximately $167 thousand and $288 thousand for the nine months ended
September 30, 1995 and 1994, respectively. Interest income on loans
includes amortization of net loan fees of approximately $569 thousand
and $444 thousand for the nine months ended September 30, 1995 and 1994,
respectively. Additionally, net interest (expense) income of ($727)
thousand and $320 thousand relating to the interest rate swap agreements
was included in interest income on loans for the nine months ended
September 30, 1995 and 1994, respectively.
PROVISION FOR LOAN LOSSES
During the third quarter of 1995, the Company recorded a $900 thousand
provision for loan losses. Management took this action to provide against
the impact on the collateral of a few large commercial real estate loans in
the weak Southern California commercial real estate market, approximately
$600 thousand of additional loan loss provision.
The Company's provision for loan losses was $1.2 million in the first nine
months of 1995. Gross loan charge-offs totaled $2.4 million and recoveries
totaled $637 thousand during this period. The net increase in the allowance
for loan losses from $5.3 million at year-end 1994 to $5.4 million at
September 30, 1995, also reflects the addition of $617 thousand relating to
the purchase of IOBOC loans during the second quarter. Nonaccrual loans
increased from $1.6 million at year-end 1994 to $1.8 million at September 30,
1995. Net loan charge-offs for the first nine months of 1994 were $4.6
million. The Company reduced the allowance for possible loan losses by $850
thousand in the third quarter of 1994 due to a sale of classified loans
outstanding at September 30, 1994. (Please refer to NOTE 3 - LOANS.)
14
<PAGE>
NONINTEREST INCOME
The following tables set forth the major components of noninterest income for
the period indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------------
1995 RESTRUCTURING 1995, NET 1994
---- ------------- --------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 449 $ -- $ 449 $ 408
Other fees and charges 813 -- 813 1,138
Net gain (loss) on sales of investment securities (620) (620) -- --
Net gains on sales of loans 148 -- 148 --
Net gain (loss) on sales of fixed assets (107) (109) 2 1
Life insurance income 53 -- 53 --
Other income 33 -- 33 40
-------- -------------- ------- ------
Total noninterest income $ 769 $ (729) $ 1,498 $1,587
======== ============== ======= ======
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------------
1995 RESTRUCTURING 1995, NET 1994
---- ------------- --------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges on deposit accounts $1,292 $ -- $ 1,292 $1,283
Other fees and charges 2,350 -- 2,350 3,385
Net gain (loss) on sales of investment securities (620) (620) -- 17
Net gains on sales of loans 148 -- 148 215
Net gain (loss) on sales of fixed assets (107) (109) 2 454
Life insurance income 460 -- 460 33
Other income 209 -- 209 111
-------- -------------- ------- ------
Total noninterest income $3,731 $ (729) $ 4,460 $5,498
======== ============== ======= ======
</TABLE>
During the third quarter 1995, the Company implemented a restructuring plan.
In connection with the restructuring plan, the Company recorded losses on
fixed assets for approximately $109 thousand that it expects to incur from
the sales of branches and realized a loss of approximately $620 thousand from
the sale of $27 million of securities from its available-for-sale investment
portfolio. The Company also realized a gain of approximately $148 thousand
on the sale of $2.0 million of loans. As adjusted for these losses,
noninterest income for the third quarter of 1995 was approximately $1.5
million, a decrease of $88 thousand from the third quarter of 1994. Most of
the adjusted decrease is in other fees and charges, which is due to declines
in merchant bankcard income of $253 thousand, and lower charges for returned
checks and NSF items for $72 thousand. Offsetting these decreases were
increases in service charges on deposit accounts, a gain on sale of loans,
and insurance income. The Company settled several months' service charges
with a large commercial customer for $45 thousand in the third quarter of
1995; the customer has subsequently transferred its business to another bank.
During the third quarter of 1995, the Company recorded an adjustment for
$53 thousand to the 1995 cash surrender values of life insurance policies it
maintains in connection with its deferred compensation plans. Last year, the
Company recorded this adjustment in the second quarter.
Noninterest income, as adjusted for restructuring losses, decreased to $4.5
million for the first nine months of 1995 from $5.5 million for the same
period in 1994. The decrease in other fees and charges is largely due to the
decline in merchant bankcard income. The Bank's largest merchant customer
left the Bank during the third quarter of 1994. The reduction in merchant
bankcard activity led to a corresponding decrease in merchant bankcard
expense. The remainder of the decrease in noninterest income can be
attributed to other nonrecurring items. The Company received a benefit
payment of $407 thousand on corporate owned life insurance in the first
quarter of 1995. In the first half of 1994, the Company recorded a $448
thousand gain on sale of its head office facility and gains totaling $215
thousand on the sale of loans.
15
<PAGE>
NONINTEREST EXPENSE
The following table sets forth information by category on the Company's
noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------------------
1995 RESTRUCTURING 1995,NET 1994
------ ------------- -------- ------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Salaries and employee benefits $3,062 $179 $2,883 $2,468
Occupancy, furniture and equipment 1,492 256 1,236 1,143
Professional fees 558 86 472 373
Office supplies 316 - 316 268
Data processing 208 - 208 236
FDIC assessment (17) - (17) 248
Goodwill amortization 552 427 125 52
Other real estate owned 142 - 142 407
Merchant bankcard expense 132 - 132 294
Advertising and promotion 149 - 149 153
Other operating expense 249 - 249 315
------ ---- ------ ------
Total noninterest expense $6,843 $948 $5,895 $5,957
====== ==== ====== ======
Annualized noninterest expense as a %
of average earning assets 5.63% 6.59%
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------------------
1995 RESTRUCTURING 1995,NET 1994
------ ------------- -------- ------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Salaries and employee benefits $8,282 $179 $8,103 $7,295
Occupancy, furniture and equipment 3,700 256 3,444 3,334
Professional fees 1,479 86 1,393 1,373
Office supplies 824 - 824 763
Data processing 623 - 623 757
FDIC assessment 415 - 415 758
Goodwill amortization 706 427 279 158
Other real estate owned 387 - 387 1,412
Merchant bankcard expense 352 - 352 742
Advertising and promotion 513 - 513 436
Other operating expense 810 - 810 1,024
------- ---- ------- -------
Total noninterest expense $18,091 $948 $17,143 $18,052
======= ==== ======= =======
Annualized noninterest expense as a %
of average earning assets 5.76% 6.91%
</TABLE>
16
<PAGE>
The Company reported noninterest expense of $6.8 million for the third
quarter of 1995. This included $948 thousand of restructuring charges for
(1) staff reductions, including branch sales - $179 thousand; (2) closure of
an administrative facility and branch lease obligations on branch sales -
$256 thousand; (3) accruals for legal and professional fees anticipated for
the branch sale transactions - $86 thousand; and (4) write-off of $427
thousand of goodwill associated with one of the branches being sold. As
adjusted for restructuring charges, noninterest expense for the third quarter
was $5.9 million as compared to approximately $6.0 million for the third
quarter of 1994. The net decrease reflects decreases in FDIC assessment, net
expenses for OREO, and merchant bankcard expenses offset by increases in
salaries and benefits, occupancy, professional fees, and goodwill
amortization. In August and September 1995, the Bank received refunds of
$288 thousand for excess FDIC premiums paid during the first nine months of
1995 that were partly offset by increased assessments on higher deposit
balances resulting from the IOBOC purchase. Additionally, the Bank's FDIC
assessment rate has been lowered from 23 cents to 4 cents per $100 of insured
deposits. Net OREO expenses decreased by $265 thousand for the quarter ended
September 30, 1995 from $407 thousand for the third quarter of 1994. This
decrease in expenses corresponds to lower OREO balances: $3.3 million at
September 30, 1995, as compared to $6.2 million at September 30, 1994.
Merchant bankcard expenses dropped $162 thousand from $294 thousand to $132
thousand for the third quarter ended September 30, 1994 and 1995,
respectively. Salaries and benefits, occupancy and goodwill amortization all
exceeded the amounts reported for the third quarter 1994 due to the
additional offices and staff assumed from IOBOC in April 1995.
The $907 thousand decrease in noninterest expense for the nine months
ended September 30, 1995, after adjusting for restructuring charges, compared
to the same period in 1994 is primarily due to decreases in FDIC assessment,
net expenses for OREO, and merchant bankcard expenses. FDIC assessments
decreased by $343 thousand, OREO expense decreased by $1.0 million, and
merchant bankcard expense decreased by $390 thousand compared to the first
nine months of 1994. The decrease in FDIC assessment resulted primarily from
the premium refunds received in August and September 1995. The decrease in
OREO expense is due mostly to a $754 thousand reduction in OREO writedowns.
The decrease in merchant bankcard expense is due to a decline in merchant
card activity following the departure of a significant merchant customer.
The Company has improved its operating efficiencies and achieved lower
noninterest expense, as adjusted for the expenses and losses of the Plan, on
a larger average earning assets base. As adjusted, noninterest expense as a
percentage of average earning assets has decreased 0.96% and 1.15% for the
quarter and nine months ended September 30, 1995, respectively, from the
prior year's periods.
17
<PAGE>
The following table summarizes the components of salaries and employee
benefits for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------------------------
(IN THOUSANDS) 1995 RESTRUCTURING 1995, NET 1994
--------- ------------- --------- --------
<S> <C> <C> <C> <C>
Exempt and nonexempt salaries $ 2,553 $119 $ 2,434 $ 1,981
Incentives and referral awards 52 -- 52 101
Payroll taxes 169 13 156 149
Medical and other benefits 288 47 241 237
------- ----- ------ -------
Total salaries and employee benefits $ 3,062 179 $ 2,883 $ 2,468
======= ===== ======= =======
Salaries & benefits/Avg FTE(1) $51,597 $ -- $48,581 $41,687
</TABLE>
(1) Annualized
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------------------------
(IN THOUSANDS) 1995 RESTRUCTURING 1995, NET 1994
--------- ------------- --------- --------
<S> <C> <C> <C> <C>
Exempt and nonexempt salaries $ 6,574 $119 $ 6,455 $ 5,931
Incentives and referral awards 340 -- 340 151
Payroll taxes 568 13 555 511
Medical and other benefits 800 47 753 702
------- ----- ------ -------
Total salaries and employee benefits $ 8,282 179 $ 8,103 $ 7,295
======= ===== ======= =======
Full-time equivalent staff, period end 235 -- -- 234
Salaries & benefits/Avg FTE(1) $47,030 $ -- $46,014 $41,524
</TABLE>
(1) Annualized
The increase in salaries, after adjusting for restructuring charges, for
the three and nine month periods ended September 30, 1995, compared to the
previous year is due to the addition of the IOBOC corporate banking staff.
Average salaries and benefits per full-time equivalent employee ("FTE"), as
adjusted for restructuring charges, increased $6 thousand and $5 thousand for
the quarter and nine months ended September 30, 1995, over the prior-year
periods. The increase in incentives expense for the nine months ended
September 30, 1995, is primarily due to payment of 1994 incentives during the
first quarter of 1995. The Company had 235 and 234 full-time equivalent
staff at September 30, 1995 and 1994, respectively.
OREO EXPENSE
The following table sets forth the components of net OREO expense for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
(IN THOUSANDS) 1995 1994 1995 1994
--------- -------- -------- --------
<S> <C> <C> <C> <C>
OREO income $ (23) $ -- $ (56) $ --
OREO holding expenses 97 344 293 535
Writedowns -- -- 128 882
Net (gains)/losses from sales 68 62 22 (5)
--------- -------- -------- --------
Total noninterest expense $ 142 $ 406 $ 387 $ 1,412
========= ======== ======== ========
</TABLE>
OREO expense decreased by $265 thousand and $1.0 million for the quarter
and nine months ended September 30, 1995, respectively, from the same periods
a year ago. Most of the decrease for the quarter is reflected in lower
holding costs for OREO properties, which decreased $249 thousand, primarily
as the result of fewer OREO properties. The $1.0 million decrease in net
OREO holding costs for the nine months ended September 30, 1995, includes
$243 thousand of lower OREO holding costs, as well as a decrease in
writedowns of OREO properties of $754 thousand from $882 thousand for the
nine months ended September 30, 1994, to $128 thousand for the nine months
ended September 30, 1995.
18
<PAGE>
FINANCIAL CONDITION
The following table provides a summary comparison of assets and liabilities in
the Company's consolidated balance sheets for the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, AMOUNT PERCENT
(IN THOUSANDS) 1995 1994 CHANGE CHANGE
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 64,545 $ 31,118 $ 33,427 107.42%
Investment securities 96,591 131,881 (35,290) (26.76)%
Loans, net 272,949 202,072 70,877 35.08%
Premises and equipment, net 10,088 10,254 (166) (1.62)%
Other real estate owned, net 3,273 5,837 (2,564) (43.93)%
Accrued interest receivable 2,557 4,330 (1,773) (40.94)%
Other assets 18,224 13,063 5,161 39.51%
-------- -------- -------- -------
TOTAL ASSETS $468,227 $398,555 $ 69,672 17.48%
======== ======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $133,540 $118,020 $ 15,520 13.15%
Interest-bearing demand & savings deposits 133,550 147,302 (13,752) (9.34)%
Time certificates of deposit 148,512 74,617 73,895 99.03%
-------- -------- -------- -------
Total deposits 415,602 339,939 75,663 22.26%
-------- -------- -------- -------
Borrowed funds and other
interest-bearing liabilities 6,566 13,621 (7,055) (51.80)%
Accrued interest payable and other liabilities 1,380 3,151 (1,771) (56.20)%
Total Shareholders' Equity 44,679 41,844 2,835 6.78%
-------- -------- -------- -------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $468,227 $398,555 $ 69,672 17.48%
======== ======== ======== =======
</TABLE>
TOTAL ASSETS
Total assets increased by $69.7 million, or 17.48%, from $398.6 million at
year-end 1994 to $468.2 million at September 30, 1995. The increase in assets
was largely due to the purchase of loans from IOBOC.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, deposits at correspondent
banks and overnight investment of excess cash balances as Federal funds sold.
The Company maintains balances at correspondent banks adequate to cover daily
inclearings and other charges. In accordance with Federal regulations,
reserve balances of $3.3 million were maintained in the form of deposits with
the Federal Reserve Bank at September 30, 1995.
Cash and cash equivalents increased $33.4 million from $31.1 million at year
end 1994 to $64.5 million at September 30, 1995. Most of the increase is
comprised of $27.8 million of overnight investments in Federal funds sold
from the proceeds of the Company's sale of certain securities from its
available-for-sale investment portfolio as part of its restructuring plan.
LOANS
The Company provides a full range of credit products designed to meet the
credit needs of borrowers in its service area. The Company engages in
medium-term commercial real estate loans secured by commercial properties,
commercial loans, term financing, SBA loans, and consumer loans principally
in the form of home equity lines of credit, vehicle loans, and loans to high
net worth individuals. Additionally, the Company has added construction loan
products principally for entry level housing and owner-user commercial
industrial properties. Construction loans outstanding at September 30, 1995,
were $2,356,305.
Please refer to NOTE 3 - LOANS as a basis for the following discussion of
changes in the Company's loan portfolio from December 31, 1994 to September
30, 1995.
COMMERCIAL LOANS. Commercial loans totaled $124.2 million or 44.57% of total
loans and $79.4 million or 38.22% of total loans at September 30, 1995, and
December 31, 1994, respectively. Most of the increase of $44.8 million
resulted from the purchase of $37.2 million of commercial loans from IOBOC in
the second quarter of 1995. As adjusted for the purchased loans, commercial
and industrial loans increased $7.6 million or 9.61% from year end 1994.
Most of the Bank's commercial borrowers and customers are small to medium
size businesses and professionals. Most of the commercial loans are short
term, are reviewed and renewed annually, and bear a floating rate of
interest. Approximately 65% of the commercial loan portfolio is secured.
Collateral for these loans consists of accounts receivable, inventories,
equipment, and other business assets, including real estate. At September
30, 1995, $32.3 million or 11.58% of total loans were secured by accounts
receivable as compared to $26.0 or 12.53% of loans at December 31, 1994.
Commercial loans secured by real estate were $22.5 million or 8.09% at
September 30, 1995, as compared to $13.7 million or 6.60% of loans at
December 31, 1994. In 1994, the Company began participating in
government-insured lending programs, including SBA loans. At September 30,
1995, the Company reported $1.4 million of SBA loans.
REAL ESTATE CONSTRUCTION LOANS. Real estate construction loans comprised
$2.4 million or 0.85% of outstanding loans at September 30, 1995.
Construction loans were not part of the Bank's previous market strategy.
However, during the first quarter of 1995, the Bank created a Real Estate
19
<PAGE>
Industries Department and appointed an experienced real estate lender to
manage the department. Going forward, the Bank plans to conservatively enter
the recovering real estate market and to offer construction financing on
quality projects.
REAL ESTATE MORTGAGE LOANS. Real estate mortgage loans comprised $99.4
million or 35.67% of the total loan portfolio at September 30, 1995, as
compared to $83.7 million or 40.31% of the total loans outstanding at year
end 1994. Approximately $16.8 million of real estate loans were purchased
from IOBOC. Therefore, adjusted real estate loans have decreased $1.1 million
or 1.28% since year end. This decrease resulted from deliberate actions by
the Bank's management to reduce the concentration of real estate loans in the
Bank's loan portfolio. During 1994, the Bank limited new real estate loans
to existing borrowers who were owner/users or to new borrowers who provided a
new major banking relationship and demonstrated adequate cash flows. All new
real estate borrowers must provide financial reporting that meets FDICIA
standards and the loans must have conservative loan to value ratios.
Approximately 80% of the Bank's real estate loans are secured by first trust
deeds; and approximately 50% are to owner/users.
CONSUMER LOANS. Approximately $52.7 million or 18.91% of the loan portfolio
was made up of consumer loans at September 30, 1995. At September 30, 1995,
$30.6 million or 11.00% of total loans were comprised of home equity loans
and home equity lines of credit. Vehicle loans comprised approximately $12.8
million of outstanding consumer loans at September 30, 1995. Approximately
$5.2 million of consumer loans outstanding at September 30, 1995 consisted
of a successful new loan product, "Loans to High Net Worth Individuals,"
which was acquired from IOBOC and has been integrated into the Bank's
portfolio of products. The levels of consumer loans at period ends may
fluctuate and may not necessarily be representative of average levels
experienced during the respective periods due to the timing of advances and
payments made on such loans by borrowers.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table sets forth the maturity distribution of the Company's
loan portfolio (excluding consumer and nonaccrual loans) at September 30,
1995, based on remaining scheduled principal repayments:
<TABLE>
<CAPTION>
MATURING IN
----------------------------------------------------
OVER ONE
ONE YEAR YEAR THROUGH OVER
(GROSS LOANS, IN THOUSANDS) OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ -------------- ------------- ----------
<S> <C> <C> <C> <C>
Real estate $19,236 $ 65,153 $13,639 $ 98,028
Commercial 74,286 41,087 8,447 123,820
Construction 747 1,609 -- 2,356
------------ -------------- ------------- ----------
Total $94,269 $107,849 $22,086 $224,204
============ ============== ============= ==========
</TABLE>
The following table sets forth sensitivity of the amounts due to changes in
interest rates for the Company's loan portfolio (excluding consumer and
nonaccrual loans) at September 30, 1995:
<TABLE>
<CAPTION>
REPRICING IN
----------------------------------------------------
OVER ONE
ONE YEAR YEAR THROUGH OVER
(GROSS LOANS, IN THOUSANDS) OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ -------------- ------------- ----------
<S> <C> <C> <C> <C>
Fixed interest rates $ 16,418 $ 48,534 $10,748 $ 75,700
Variable interest rates 148,504 -- -- 148,504
------------ -------------- ------------- ----------
Total $164,922 $ 48,534 $10,748 $224,204
============ ============== ============= ==========
</TABLE>
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.
20
<PAGE>
ASSET QUALITY
NONACCRUAL, PAST DUE AND MODIFIED LOANS
The Company recognizes income principally on the accrual basis of accounting.
In determining income from loans, the Company generally adheres to a policy
of not accruing interest on loans on which a default of principal or interest
has existed for a period of 90 days or more. The Company's policy is to
assign nonaccrual status to a loan if either (i) principal or interest
payments are past due in excess of 90 days, unless the loan is both well
secured and in the process of collection; or (ii) the full collection of
interest or principal becomes uncertain, regardless of the length of past due
status. When a loan reaches "nonaccrual" status, any interest accrued on
such a loan is reversed and charged against current income.
ASSET QUALITY
The Company analyzes the adequacy of the collateral securing all loans
quarterly. Impaired loans for $9.5 million had been identified as of
September 30, 1995, in accordance with the provisions of Statements of
Financial Accounting Standards Nos. 114 and 118. These loans have been
reported in the balance sheets at their fair values based on the appraised
value of the collateral, including estimated estimated disposal costs. All
nonaccrual loans are classified as impaired. At September 30, 1995, the
Company had $6 thousand of loans past due 90 days or more past due and still
accruing interest.
Nonaccrual loans by category are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1995 1994
------------- ------------
<S> <C> <C>
Commercial $ 406 $ 283
Real estate, construction - -
Real estate, mortgage 1,116 930
Consumer 307 399
------------- ------------
Total nonaccrual loans $1,829 $1,612
============= ============
</TABLE>
Delinquent loans (past due 30 to 89 days) by category are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1995 1994
------------- ------------
<S> <C> <C>
Commercial $609 $ 998
Real estate, construction - -
Real estate, mortgage 153 2,089
Consumer 162 416
------------- ------------
Total nonaccrual loans $924 $3,503
============= ============
Percentage of total gross loans:
Nonaccrual loans 0.66% 0.78%
Delinquent loans, still accruing interest 0.33% 1.69%
Nonaccrual and delinquent loans 0.99% 2.47%
</TABLE>
21
<PAGE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
A certain degree of risk is inherent in
the extension of credit. Management has adopted a policy to maintain the
allowance for possible loan and lease losses at a level considered by
management to be adequate to absorb estimated known and inherent risks in the
existing portfolio.
Management performs a comprehensive analysis of the loan portfolio on a
regular basis and its current allowance for loan losses to determine that
loans are currently protected according to financial and collateral standards
deemed acceptable. The allowance for possible loan losses represents
management's recognition of the assumed risks of extending credit and the
quality of the loan portfolio. The allowance is management's estimate, which
is inherently uncertain and depends on the outcome of future events. The
evaluation of the quality of the loan portfolio considers the borrower's
management, financial condition, cash flow and repayment program, as well as
the existence of collateral and guarantees. External business and economic
factors beyond the borrower's control, combined with the Company's previous
loan loss experience, are considered in management's evaluation of the
allowance for possible loan losses. In addition, the bank regulatory
authorities, as an integral part of their examination process, periodically
review the Company's allowance for possible loan losses and may recommend
additions to the allowance based on their assessment of information available
to them at the time of their examination.
When it is determined that additions are required, additions to the allowance
are made through charges to operations and are reflected in the statements of
operations as a provision for loan losses. Loans which are deemed to be
uncollectible are charged to the allowance. Subsequent recoveries, if any,
are credited back to the allowance.
OTHER REAL ESTATE OWNED
Real estate acquired in satisfaction of debts includes properties acquired
through foreclosures and, in 1994, properties that have been determined to be
in-substance repossessions. These properties are carried at the lower of cost
or net fair value. The difference between the fair value of the real estate
collateral, net of any estimated disposal costs, and the loan balance is
reflected through the allowance for loan losses as a loan charge-off.
Subsequent declines in the fair value of the property, routine holding costs,
net of any income, and net gains or losses on disposal are included in
noninterest expense.
Activity in OREO for the periods indicated is as follows:
NINE MONTHS FISCAL YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1995 1994
------------- -------------
Balance, beginning of period $ 5,837 $ 6,133
Additions 1,421 3,585
Sales (3,857) (2,699)
Valuation and other adjustments (128) (1,182)
------- -------
Balance, end of period $ 3,273 $ 5,837
======= =======
The OREO portfolio at September 30, 1995 consisted of five properties valued
at $3.3 million. In October 1995, two of the properties were sold for a net
gain of $145,000. The Company is actively marketing the remaining OREO
properties.
22
<PAGE>
DEPOSITS
Total deposits increased by $75.7 million, or 22.26%, from $339.9 million at
year-end 1994 to $415.6 million at September 30, 1995. Noninterest-bearing
deposits increased $15.5 million, and interest-bearing deposits increased,
net, $60.1 million from year-end 1994. The increase in deposits is due to the
funding raised for the IOBOC purchase of loans and deposits. Time
certificates of deposit increased from 22.06% of total average deposits at
year-end 1994, to 36.07% of total average deposits at September 30, 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------------------- -------------------------------
(IN THOUSANDS) AVG. BAL. RATE(1) % OF TOTAL AVG. BAL. RATE(1) % OF TOTAL
--------- ------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $122,092 30.56% $118,066 32.58%
NOW/MMDA 76,543 1.80% 19.16% 121,338 1.60% 33.48%
Savings 56,761 2.08% 14.21% 43,039 2.30% 11.88%
TCDs 144,114 5.85% 36.07% 79,937 3.80% 22.06%
-------- ------- -------- -------
Deposits $399,510 100.00% $362,380 100.00%
======== ======= ======== =======
</TABLE>
(1) Annualized
The Company purchased approximately $19.8 million of noninterest bearing
demand deposits from IOBOC in the second quarter of 1995. Since the
purchase, IOBOC demand deposits have decreased $4.7 million, primarily due
to a significant reduction in balances maintained by a large commercial
customer. Most of the IOBOC customer base has been retained. Demand
deposits, net of the effects of the IOBOC purchase, have remained flat since
year end 1994.
Interest-bearing demand and savings accounts have decreased $22.9 million or
15.6% since year end 1994, after adjusting for the acquired IOBOC deposits.
Much of the decrease represents a shift in the Company's deposit mix as
customers have transferred lower yielding savings and idle MMDA balances into
higher rate certificates of deposit, which have increased 27.3% since year end
on an adjusted basis.
During the first quarter of 1995, the Company introduced a promotional time
certificates of deposit program. This program proved to be highly successful,
procuring in excess of $70 million in 7 to 12 month TCDs. The majority of the
TCDs, approximately $52.6 million, matured during a two week period from August
31, 1995, to September 15, 1995. The Company retained $36.2 million or about
70% of the maturing TCDs at an average rate of 5.89%, with maturities ranging
from 7 months to 15 months. Approximately another $20 million of promotional
TCDs will mature by February 1996.
23
<PAGE>
The following table sets forth the maturities of the Company's time
certificates of deposit outstanding at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
MATURING IN
-----------------------------------------------------------------------------
OVER THREE OVER SIX
THREE MONTHS MONTHS THROUGH MONTHS THROUGH OVER
(IN THOUSANDS) OR LESS SIX MONTHS TWELVE MONTHS TWELVE MONTHS TOTAL
------------ -------------- -------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Under $100,000 $ 7,891 $11,814 $65,779 $18,055 $103,539
$100,000 and over 9,711 7,794 20,804 6,664 44,973
------- ------- ------- ------- --------
Total $17,602 $19,608 $86,583 $24,719 $148,512
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
MATURING IN
-----------------------------------------------------------------------------
OVER THREE OVER SIX
THREE MONTHS MONTHS THROUGH MONTHS THROUGH OVER
(IN THOUSANDS) OR LESS SIX MONTHS TWELVE MONTHS TWELVE MONTHS TOTAL
------------ -------------- -------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Under $100,000 $16,467 $ 9,541 $ 9,905 $ 9,497 $45,410
$100,000 and over 15,806 6,249 4,532 2,620 29,207
------- ------- ------- ------- --------
Total $32,273 $15,790 $14,437 $12,117 $74,617
======= ======= ======= ======= ========
</TABLE>
ASSET/LIABILITY MANAGEMENT
The objective of asset/liability management is to reduce the Company's
exposure to interest rate fluctuations. The Company seeks to achieve this
objective by matching its interest sensitive assets and liabilities, and
maintaining the maturity and repricing of these assets and liabilities at
appropriate levels given the interest rate environment. Generally, if rate
sensitive assets exceed rate sensitive liabilities, the net interest income
will be positively impacted during a rising rate environment and negatively
impacted during a declining rate environment. When rate sensitive
liabilities exceed rate sensitive assets, the net interest income will
generally be positively impacted during a declining rate environment and
negatively impacted during a rising rate environment. However, because
interest rates for different asset and liability products offered by
depository institutions respond differently to changes in the interest rate
environment, the gap is only a general indicator of interest rate sensitivity.
24
<PAGE>
The following table sets forth information concerning the Company's rate
sensitive assets and rate sensitive liabilities as of September 30, 1995.
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 table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees and at different times to changes in market interest rates. Also,
loan prepayments and early withdrawals of certificates of deposit could cause
the interest sensitivities to vary from those which appear in the table.
The following table sets forth information concerning the Company's
rate-sensitive liabilities at September 30, 1995. Such assets and
liabilities are classified by the earlier of maturity or repricing date.
<TABLE>
<CAPTION>
THREE MONTHS ONE YEAR
THREE MONTHS THROUGH THROUGH OVER
(IN THOUSANDS) OR LESS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
------------ ------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold $ 27,800 $ - $ - $ - $ 27,800
Investment securities 2,428 7,094 84,976 3,053 97,551
Loans (1) 179,032 21,074 62,500 14,264 276,870
Interest rate swap - - 75,000 - 75,000
-------- ------- -------- ------- --------
Total interest-earning assets $209,260 $ 28,168 $222,476 $ 17,317 $477,221
======== ======= ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing demand and
savings deposits $133,550 $ - $ - $ - $133,550
Time certificates of deposit 17,601 106,192 24,682 37 148,512
Other borrowings and interest-
bearing liabilities 6,566 - - - 6,566
Interest rate swap 75,000 - - - 75,000
-------- -------- -------- -------- --------
Total interest-bearing liabilities $232,717 $106,192 $ 24,682 $ 37 $363,627
======== ======== ======== ======== ========
Interest rate sensitivity gap $(23,457) $ (78,024) $197,794 $ 17,280
Cumulative interest rate sensitivity gap (23,457) (101,481) 96,313 113,593
Cumulative interest rate sensitivity gap
as a percentage of total interest-
earning assets -4.92% -21.26% 20.18% 23.80%
</TABLE>
____________________________________________
(1) Loans exclude nonaccrual loans of $1,829
At September 30, 1995, the Company's rate sensitive balance sheet was shown
to be in a negative gap position. The gap between assets and liabilities
that reprice within 3 months was $23.5 million or 4.92% of assets. The
cumulative negative gap increases to $101.5 million or 21.26% of total assets
that mature or reprice within one year. After one year, the gap turns
positive. The table above implies that the Company's earnings would
25
<PAGE>
be reduced in the short-term if interest rates rise. However, repricing of
the Company's interest-bearing demand and savings deposits generally lags
repricing on the Company's variable rate loan portfolio.
During the declining rate environment in 1992 and 1993, the Company entered
into a $50 million 5-year interest rate swap agreement in September 1993 and
a $25 million 3-year interest rate swap agreement in January 1994, in order
to stabilize interest income from the Company's variable rate loan portfolio.
The terms of these swap agreements require the Company to pay a floating
rate of interest tied to three-month LIBOR, and to receive fixed rates of
interest of 4.87% and 5.04% for swap #1 and swap #2, respectively. The
Company's combined break-even point on both swap agreements is approximately
4.92%. Since the fourth quarter of 1994, three-month LIBOR has exceeded the
Company's break-even point, so that interest expense on the swap agreements
has exceeded interest income. Net interest expense on the swaps for the nine
months ended September 30, 1995 was $751.2 thousand, as compared to net
interest income of $320 thousand for the nine months ended September 30, 1994.
The Company's held-to-maturity investment portfolio consists primarily of
fixed-rate mortgage-backed securities with final maturities principally of
four to six years. Cash flows from these securities help to reduce the
impact of the Company's short-term negative gap.
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 and those classified as held-to-maturity. It is the Company's
policy to maintain a liquidity ratio (liquid assets to liabilities) of
between 25% and 50%, and to limit loans to no more than 75% to 85% of
deposits. At September 30, 1995, the Company's ratios were well within these
guidelines: liquidity was 33.0% and gross loans to deposits was 67.1%.
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. As part of its restructuring plan, the Company liquidated a
portion of its available-for-sale investment securities portfolio during the
quarter ended September 30, 1995. These securities sales were undertaken to
provide a funding source for future loan growth, and to strengthen the
Bank's funding mix. The Company's liquid assets were $136.1 million at
September 30, 1995, up from $125.3 million at December 31, 1994.
Secondary sources of liquidity include reverse repurchase arrangements to
borrow cash for short to intermediate periods of time using the Company's
available-for-sale securities as collateral and Federal funds lines of credit
that allow the Company to temporarily borrow an aggregate of up to $25.0
million from three commercial banks. At September 30, 1995, the Company had
approximately $23.4 million in unpledged securities that could be used for
reverse repurchases. During the nine months ended September 30, 1995, the
largest amount of funds so borrowed was $20.6 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 $5.0 million and
$17.3 million were borrowed during the quarter and nine months ended
September 30, 1995, respectively.
26
<PAGE>
CAPITAL RESOURCES
The Company and its bank subsidiary are subject to risk-based capital
regulations adopted by the federal banking regulators in January 1990. These
guidelines are used to evaluate capital adequacy, and are based on an
institution's asset risk profile and off balance sheet exposures, such as unused
loan commitments and standby letters of credit. The regulations require that a
portion of total capital be core, or Tier 1, capital consisting of common
stockholders' equity and perpetual preferred stock, less goodwill and certain
other deductions, with the remaining, or Tier 2, capital consisting of other
elements, primarily subordinated debt, mandatory convertible debts, and
grandfathered senior debt, plus the allowance for loan losses, subject to
certain limitations. As of December 1992, the risk-based capital rules were
further supplemented by a leverage ratio, defined as Tier 1 capital divided by
quarterly average assets after certain adjustments. The minimum leverage ratio
is 3 percent for banking organizations that do not anticipate significant growth
and have well-diversified risk (including no undue interest rate exposure),
excellent asset quality, high liquidity, and good earnings. Other banking
organizations not in this category are expected to have ratios of at least 4 to
5 percent, depending on their particular condition and growth plans. Higher
capital ratios can be mandated by the regulators if warranted by the particular
circumstances or risk profile of a banking organization. In the current
regulatory environment, banking companies must stay "well capitalized", as
defined in the banking regulations, in order to receive favorable regulatory
treatment on acquisitions and favorable risk-based deposits insurance
assessments. Management seeks to maintain capital ratios in excess of the
regulatory minimums. Prior to December 1994, the Bank was required to attain a
minimum leverage ratio of 7.0% under the conditions of a Memorandum of
Understanding ("MOU") the Bank entered into with the FDIC and the California
State Banking Department in November 1993. The FDIC and State Banking
Department released the Bank from the MOU effective February 15, 1995. As of
September 30, 1995, the capital ratios of the Company and the Bank exceeded the
"well capitalized" thresholds prescribed in the rules.
The following table sets forth the Company's and the Bank's risk-based capital
and leverage ratios at September 30, 1995:
<TABLE>
<CAPTION>
COMPANY BANK
------------------------- ----------------------
(IN THOUSANDS) AMOUNT % AMOUNT %
--------- ------- --------- ------
<S> <C> <C> <C> <C>
Leverage ratio $40,994 8.67% $38,569 8.16%
Regulatory minimum 18,904 4.00% 18,904 4.00%
Excess 22,090 4.67% 19,665 4.16%
Risk-based ratios
Tier 1 capital $40,994(a) 11.25%(b) $38,569(a) 10.58%(b)
Tier 1 minimum 14,573 4.00%(c) 14,582 4.00%(c)
Excess 26,421 7.25% 23,987 6.58%
Total capital $45,558(d) 12.50%(b) $43,135(d) 11.83%(b)
Total capital minimum 29,146 8.00% 29,164 8.00%
Excess 16,412 4.50% 13,971 3.83%
</TABLE>
- ------------
(a) Includes common shareholders' equity (excluding unrealized losses on
available-for-sale securities) less goodwill. The Tier 1 capital ratio is
adjusted for the disallowed portion of deferred tax assets, if
applicable.
(b) Risk-weighted assets of $364.3 million and $364.5 million were used to
compute these percentages.
(c) Insured institutions, such as the Bank, must maintain a Tier 1 capital
ratio of at least 4% or 6%, and a Total capital ratio of at least 8% or
10% in order to be categorized "adequately capitalized" or "well
capitalized", respectively.
(d) Tier 1 capital plus the allowance for loan losses, limited to 1.25% of
total risk-weighted assets.
27
<PAGE>
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
Not Applicable
28
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: 10 November, 1995 SC BANCORP
(Registrant)
By: /s/ BRUCE ROAT
---------------------------
Bruce Roat
E.V.P./C.F.O.
(Principal Financial and
Accounting Officer)
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 36,745
<INT-BEARING-DEPOSITS> 282,062
<FED-FUNDS-SOLD> 27,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,411
<INVESTMENTS-CARRYING> 54,180
<INVESTMENTS-MARKET> 52,501
<LOANS> 278,699
<ALLOWANCE> 5,354
<TOTAL-ASSETS> 468,227
<DEPOSITS> 415,602
<SHORT-TERM> 6,566
<LIABILITIES-OTHER> 1,380
<LONG-TERM> 0
<COMMON> 37,643
0
0
<OTHER-SE> 7,598
<TOTAL-LIABILITIES-AND-EQUITY> 468,227
<INTEREST-LOAN> 18,789
<INTEREST-INVEST> 5,060
<INTEREST-OTHER> 727
<INTEREST-TOTAL> 24,577
<INTEREST-DEPOSIT> 8,221
<INTEREST-EXPENSE> 9,140
<INTEREST-INCOME-NET> 15,437
<LOAN-LOSSES> 1,224
<SECURITIES-GAINS> (620)
<EXPENSE-OTHER> 18,092
<INCOME-PRETAX> (147)
<INCOME-PRE-EXTRAORDINARY> (133)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (133)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
<YIELD-ACTUAL> 5.19
<LOANS-NON> 1,829
<LOANS-PAST> 6
<LOANS-TROUBLED> 1,300
<LOANS-PROBLEM> 13,233
<ALLOWANCE-OPEN> 5,318
<CHARGE-OFFS> 2,441
<RECOVERIES> 637
<ALLOWANCE-CLOSE> 5,354
<ALLOWANCE-DOMESTIC> 5,354
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
