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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996. Commission File Number 0-11046
SC BANCORP
(Exact name of registrant as specified in its charter)
California 95-3585586
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3800 E. La Palma Ave., Anaheim, California 92807-1798
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 238-3110
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, no par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES. [ X ] NO. [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ].
There were 7,488,615 shares of common stock for the registrant issued
and outstanding as of March 14, 1997. The aggregate market value of
the voting stock, based on the $10.75 closing price of the Company's
common stock on the American Stock Exchange on March 14, 1997 as
reported on Bloomberg, held by nonaffiliates of the registrant was
approximately $73,926,793.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The registrant's annual report to shareholders relating to the fiscal
year ended December 31, 1996 is incorporated by reference into Part
II. Item 7. of this form 10-K. The registrant's definitive proxy
statement for the 1997 annual meeting of shareholders, which will be
filed within 120 days after the fiscal year ended December 31, 1996,
is incorporated by reference into Part III of this Form 10-K.
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SC BANCORP
FORM 10-K
INDEX
PAGES
PART I
ITEM 1. Business 1
ITEM 2. Properties 25
ITEM 3. Legal Proceedings 26
ITEM 4. Submission of Matters to a Vote of Shareholders 26
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Shareholder Matters 26
ITEM 6. Selected Financial Data 27
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 28
ITEM 8. Financial Statements and Supplementary Data 28
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 28
PART III
ITEM 10. Directors and Executive Officers of the Registrant 28
ITEM 11. Executive Compensation 28
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management 28
ITEM 13. Certain Relationships and Related Transactions 28
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 28
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PART I. ITEM 1. BUSINESS
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained under "Business," such as statements concerning the
potential for future losses relating to nonaccrual and delinquent loans and the
adequacy of the allowance for loan losses, are forward looking statements (as
such term is defined in the Securities Exchange Act of 1934, as amended).
Because such forward-looking statements include risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements.
SC Bancorp is a bank holding company incorporated in California on February 9,
1981, and registered under the Bank Holding Company Act of 1956, as amended
("BHCA"). SC Bancorp conducts operations through its sole, wholly-owned,
subsidiary, Southern California Bank, a California state-chartered commercial
bank. The Company's executive offices are located at 3800 East La Palma Avenue,
Anaheim, California 92807-1798.
References herein to the "Company" are to SC Bancorp and Southern California
Bank on a consolidated basis. References to "SC Bancorp" are to SC Bancorp on
an unconsolidated basis; and references to the "Bank" are to Southern California
Bank.
SOUTHERN CALIFORNIA BANK
Southern California Bank was formed in 1981 through the merger of the Bank of
Downey and the National Bank of Whittier, both founded in 1964. The Bank
provides general commercial banking services to individuals and to small- to
medium-sized businesses in its local service areas through its branch network,
which as of December 31, 1996, consisted of 14 branches, 3 of which include
corporate banking centers. The Bank concentrates on marketing to and serving
the needs of individuals and businesses in southeastern Los Angeles County, and
in Orange and San Diego counties.
The Bank's primary credit focus is to serve professionals and middle-market
companies, including manufacturers and service providers with sales of up to $50
million. Current commercial lending activities consist primarily of medium-term
commercial real estate loans secured by commercial properties, working capital
loans, and accounts receivable financing. The Bank is also active in loan
participation purchases and sales. Its primary focus in this area is to manage
potential credit risk by borrower, industry and concentration. The Bank's
consumer products are tailored to serve the financing needs of its retail
customers and the executives and employees of its business clients. Consumer
loans consist primarily of home equity lines of credit, personal lines of credit
to high net worth individuals and vehicle loans.
The Bank accepts deposits mostly from small to medium-sized businesses and their
employees, high net worth individuals, and other consumers. The Bank's deposit
accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") to
the extent permitted by law. The Company became a member of the Federal Reserve
System on July 1, 1996. The Company's primary regulator is now the Federal
Reserve Board.
The Company completed the sale of its Signal Hill and City of Industry branches
to other financial institutions and the consolidation of its Yorba Linda branch
into its Tustin/La Palma office during the first quarter of 1996. The
agreements to sell these branches were signed in the fourth quarter of 1995.
As part of the Company's strategic focus on growth, it acquired certain assets
and assumed certain liabilities of Independence One Bank of California, F.S.B.
("IOBC"), during the second quarter of 1995. As part of the IOBC transaction,
the Company acquired a full-service branch in southern Orange County and opened
a full-service branch in northern San Diego County to support the expansion of
its market area. During the third quarter of 1995, management implemented a
restructuring plan (the "1995 Restructuring") to improve the efficiency and
financial performance of the Bank. The Bank recorded approximately $1.7 million
of losses and other charges in conjunction with the 1995 Restructuring.
During the second and fourth quarters of 1993, the Company acquired certain cash
assets and deposits of American Commerce National Bank from the FDIC and a
branch centrally located in Downey, California from Community Bank. In
conjunction with these acquisitions, management initiated a consolidation of the
branch network. In the third quarter of 1993, the Company recorded nonrecurring
expenses of approximately $944,000 for severance expenses, lease terminations
and write-offs of other assets as part of a restructuring plan (the "1993
Restructuring").
1
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Part 1. Item 1. (continued)
COMPETITION
The banking and financial services business in California generally, and in the
Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation,
technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Bank competes for loans,
deposits and customers for financial services with other commercial banks,
savings and loan associations, securities and brokerage companies, mortgage
companies, insurance companies, finance companies, money market funds, credit
unions, and other nonbank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services than
the Bank. In order to compete with the other financial
services providers, the Bank principally relies upon local promotional
activities, personal relationships established by officers, directors and
employees with its customers, and specialized services tailored to meet its
customers' needs. In those instances where the Bank is unable to accommodate a
customer's needs, the Bank may arrange for those services to be provided by its
correspondents. The Bank has 14 offices located in Los Angeles, Orange and San
Diego counties.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended to
its customers and securities held in the Bank's portfolio comprises the major
portion of the Company's earnings. These rates are highly sensitive to many
factors that are beyond the control of the Company. Accordingly, the earnings
and growth of the SC Bancorp and the Bank are subject to the influence of
domestic and foreign economic conditions, including inflation, recession and
unemployment.
The commercial banking business is not only affected by general economic
conditions, but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial institutions subject to its reserve
requirements and by varying the discount rates applicable to borrowings by
depository institutions. The actions of the Federal Reserve Board in these
areas influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. Management of the
Company cannot accurately predict the nature and impact of any future changes in
monetary policies.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial services
providers. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
services providers are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
Management of the Company cannot predict the likelihood of any major legislative
changes and the impact such changes might have on SC Bancorp and the Bank. See
"-Supervision and Regulation."
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both federal
and state law. Set forth below is a summary description of certain laws which
relate to the regulation of SC Bancorp and the Bank. The description does not
purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations.
SC BANCORP
SC Bancorp, as a registered bank holding company, is subject to regulation under
the BHCA. SC Bancorp is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may
conduct examinations of SC Bancorp and its subsidiaries.
The Federal Reserve Board may require that SC Bancorp terminate an activity or
terminate control of or liquidate or divest certain of its subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve
2
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Part 1. Item 1. (continued)
Board also has the authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, SC Bancorp must file
written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a bank
holding company and its nonbanking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. Further, SC Bancorp is required by
the Federal Reserve Board to maintain certain levels of capital. See
"-Capital Standards."
SC Bancorp is required to obtain the prior approval of the Federal Reserve Board
for the acquisition of more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank holding
company. Prior approval of the Federal Reserve Board is also required for the
merger or consolidation of SC Bancorp and another bank holding company.
SC Bancorp is prohibited by the BHCA, except in certain statutorily prescribed
instances, from acquiring direct or indirect ownership or control of more than
5% of the outstanding voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks or furnishing services to
its subsidiaries. However, SC Bancorp, subject to the prior approval of the
Federal Reserve Board, may engage in any, or acquire shares of companies engaged
in, activities that are deemed by the Federal Reserve Board to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. In making any such determination, the Federal Reserve Board is
required to consider whether the performance of such activities by SC Bancorp or
an affiliate can reasonably be expected to produce benefits to the public, such
as greater convenience, increased competition or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. The Federal Reserve Board is also empowered to differentiate between
activities commenced DE NOVO and activities commenced by acquisition, in whole
or in part, of a going concern. In 1996, the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (the "Budget Act") eliminated the requirement
that bank holding companies seek Federal Reserve Board approval before engaging
DE NOVO in permissible nonbanking activities listed in Regulation Y, which
governs bank holding companies, if the holding company and its lead depository
institution are well-managed and well-capitalized and certain other criteria
specified in the statute are met. For purposes of determining the capital
levels at which a bank holding company shall be considered "well-capitalized"
under this section of the Budget Act and Regulation Y, the Federal Reserve Board
adopted as an interim rule, risk-based capital ratios (on a consolidated basis)
that are, with the exception of the leverage ratio (which is lower), the same as
the levels set for determining that a state member bank is well capitalized
under the provisions established under the prompt corrective action provisions
of federal law. See "-Prompt Corrective Action and Other Enforcement
Mechanisms."
Under Federal Reserve Board regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In addition,
it is the Federal Reserve Board's policy that in serving as a source of strength
to its subsidiary banks, a bank holding company should stand ready to use
available resources to provide adequate capital funds to its subsidiary banks
during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both.
SC Bancorp is also a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such, SC Bancorp and its subsidiaries are
subject to examination by, and may be required to file reports with, the
California State Banking Department.
Finally, SC Bancorp is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, including but not limited to,
filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
THE BANK
The Bank, as a California state chartered bank and member of the Federal Reserve
System, is subject to primary supervision, periodic examination and regulation
by the California Superintendent of Banks (the "Superintendent") and the Federal
Reserve
3
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Part 1. Item 1. (continued)
Board. If, as a result of an examination of a bank, the Federal Reserve Board
should determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity or other aspects of the bank's
operations are unsatisfactory or that the bank or its management is violating or
has violated any law or regulation, various remedies are available to the
Federal Reserve Board. Such remedies include the power to enjoin "unsafe or
unsound" practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order that
can be judicially enforced, to direct an increase in capital, to restrict the
growth of the Bank, to assess civil monetary penalties, to remove officers and
directors and ultimately to terminate a bank's deposit insurance, which for a
California state-chartered bank would result in a revocation of the bank's
charter. The Superintendent has many of the same remedial powers.
The deposits of the Bank are insured by the FDIC in the manner and to the extent
provided by law. For this protection, the Bank pays a semiannual statutory
assessment. See:-Premiums for Deposit Insurance. Because the Bank's deposits
are insured by the FDIC, the Bank is also subject to certain FDIC rules and
regulations.
Various requirements and restrictions under the laws of the State of California
and the United States affect the operations of the Bank. State and federal
statutes and regulations relate to many aspects of the Bank's operations,
including reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices and capital requirements. Further, the Bank is required to
maintain certain levels of capital. See "-Capital Standards."
RESTRICTIONS ON TRANSFERS OF FUNDS TO THE COMPANY BY THE BANK
SC Bancorp is a legal entity separate and distinct from the Bank. There are
statutory and regulatory limitations on the amount of dividends which may be
paid to SC Bancorp by the Bank. California law restricts the amount available
for cash dividends by state chartered banks to the lesser of retained earnings
or the bank's net income for its last three fiscal years (less any distributions
made to shareholders by the Bank or by any majority- owned subsidiary of the
Bank during such period). Notwithstanding this restriction, a bank may, with
the prior approval of the Superintendent, make a distribution to its
shareholders in an amount not exceeding the greatest of the retained earnings of
the bank, net income for such bank's last fiscal year or the net income of the
bank for its current year.
As a Federal Reserve Board member bank, there are separate limitations imposed
under applicable Federal Reserve Board regulations with respect to the Bank's
ability to pay dividends to SC Bancorp. In particular, the prior approval of
the Federal Reserve Board is required if the total of all dividends declared by
a Federal Reserve Board member bank in any calendar year exceeds the bank's net
income (as defined) for that year combined with its retained net income (as
defined) for the preceding two years, less any transfer to surplus or to a fund
for the retirement of preferred stock. Such authority may be delegated to the
local Federal Reserve Bank under certain circumstances.
The Federal Reserve Board and the Superintendent also have authority to prohibit
the Bank from engaging in activities that, in the Federal Reserve Board's or the
Superintendent's opinion, constitute unsafe or unsound practices in conducting
its business. It is possible, depending upon the financial condition of the
Bank in question and other factors, that the Federal Reserve Board or the
Superintendent could assert that the payment of dividends or other payments
might, under some circumstances, be considered such an unsafe or unsound
practice. Further, the Federal Reserve Board has established guidelines with
respect to the maintenance of appropriate levels of capital by banks or bank
holding companies under their jurisdiction. Compliance with the standards set
forth in such guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit the amount of
dividends which the Bank or SC Bancorp may pay. See "-Prompt Corrective
Regulatory Action and Other Enforcement Mechanisms and Capital Standards" for a
discussion of these additional restrictions on capital distributions.
At present, substantially all of SC Bancorp's revenues, including funds
available for the payment of dividends and other operating expenses, is, and
will continue to be, primarily dividends paid by the Bank. At December 31,
1996, the Bank had $13.1 million in retained earnings available for the payment
of cash dividends.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of SC Bancorp or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of SC Bancorp or other affiliates. Such
restrictions prevent SC Bancorp and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in SC
Bancorp, or to or in any other affiliate is
4
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Part 1. Item 1. (continued)
limited to an amount not to exceed 10% of the value of the Bank's capital stock
and surplus (as defined by federal regulations) and any such secured loans and
investments are limited to an amount not to exceed in the aggregate, 20% of the
value of the Bank's capital stock and surplus (as defined by federal
regulations). California law also imposes certain restrictions with respect to
transactions involving SC Bancorp and other controlling persons of the Bank.
Additional restrictions on transactions with affiliates may be imposed on the
Bank under the prompt corrective action provisions of federal law. See "-Prompt
Corrective Regulatory Action and Other Enforcement Mechanisms."
CAPITAL STANDARDS
The Federal Reserve Board has adopted risk-based minimum capital guidelines
intended to provide a measure of capital that reflects
the degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and
credit equivalent amounts of off balance sheet items are multiplied by one of
several risk adjustment percentages, which range from 0% for assets with low
credit risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as commercial loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets. The regulators measure
risk-adjusted assets, which includes off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists of, among other things:
(i) common stockholders' equity capital (includes common stock and related
surplus, and undivided profits); (ii) noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies), including any
related surplus; and (iii) minority interests in certain subsidiaries, less most
intangible assets. Tier 2 capital consists of: (i) a limited amount of the
allowance for possible loan and lease losses; (ii) cumulative perpetual
preferred stock; (iii) perpetual preferred stock (and any related surplus); and
(iv) term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements in Tier 2 capital is
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1
capital to risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets must
be 3%. For all banking organizations not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3%
minimum, or 4% to 5%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the bank's capital adequacy. A bank with
material weaknesses in its risk management process or high levels of exposure
relative to its capital will be directed by the agencies to take corrective
action. Such actions will include recommendations or directions to raise
additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
This policy statement augments the August 1995 regulations adopted by the
federal banking agencies which addressed risk-based capital standards for
interest rate risk.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses ("ALLL") which, among other
things, establishes certain benchmark ratios of loan loss reserves to classified
assets. The benchmark set forth by such policy statement is the sum of (a)
assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15
percent of assets classified substandard; and (d) estimated credit losses on
other assets over the upcoming 12 months. This amount is neither a "floor" nor
a "safe harbor" level for an institution's ALLL.
Federally supervised banks and savings associations are currently required to
report deferred tax assets in accordance with SFAS No. 109. The federal banking
agencies issued final rules, which became effective April 1, 1995, governing
banks and bank holding companies, which limit the amount of deferred tax assets
that are allowable in computing an institution's regulatory capital.
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Part 1. Item 1. (continued)
Deferred tax assets that can be realized for taxes paid in prior carryback years
and from future reversals of existing taxable temporary differences are
generally not limited. Deferred tax assets that can only be realized through
future taxable earnings are limited for regulatory capital purposes to the
lesser of (i) the amount that can be realized within one year of the quarter-end
report date, based on projected taxable income for that year or (ii) 10% of
Tier 1 Capital. The amount of any deferred tax in excess of this limit would be
excluded from Tier 1 Capital, total assets and regulatory capital calculations.
Future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of the Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends.
The following table presents the amounts of regulatory capital and the capital
ratios for the Bank, compared to its minimum regulatory capital requirements as
of December 31, 1996:
December 31, 1996
----------------
Actual Minimum
Capital
Amount Ratio Requirement
------ ----- -----------
(In thousands)
Leverage ratio $44,970 9.51% 4.0%
Tier 1 risk-based ratio $44,970 10.68% 4.0%
Total risk-based ratio $49,917 11.86% 8.0%
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. In accordance with federal law, each federal banking agency has
promulgated regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. An insured
depository institution will be classified in the following categories based, in
part, on the capital measures indicated below:
<TABLE>
<CAPTION>
<S> <C>
"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED"
------------------ ------------------------
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"UNDERCAPITALIZED" "SIGNIFICANTLY UNDERCAPITALIZED"
------------------ --------------------------------
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"CRITICALLY UNDERCAPITALIZED"
-----------------------------
Tangible equity to total assets less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or practice warrants such treatment. At each
successive lower capital category, an insured depository institution is subject
to more restrictions. The federal banking agencies, however, may not treat a
significantly undercapitalized institution as "critically undercapitalized"
unless its capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from paying management fees to
any controlling persons or, with certain limited exceptions, making capital
distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
6
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Part 1. Item 1. (continued)
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
receiving notice, or is deemed to have notice, that the institution is
undercapitalized. The appropriate federal banking agency cannot accept a capital
plan unless, among other things, it determines that the plan: (i) specifies: (a)
the steps the institution will take to become adequately capitalized; (b) the
levels of capital to be attained during each year in which the plan will be in
effect; (c) how the institution will comply with the restrictions or
requirements then in effect under Section 38 of the Federal Deposit Insurance
Act; and (d) the types and levels of activities in which the institution will
engage; (ii) is based on realistic assumptions and is likely to succeed in
restoring the depository institution's capital; and (iii) would not appreciably
increase the risk (including credit risk, interest-rate risk, and other types of
risk) to which the institution is exposed. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository
institution has been adequately capitalized on average during each of four
consecutive calendar quarters and must otherwise provide appropriate assurances
of performance. The aggregate liability of such guarantee is limited to the
lesser of (a) an amount equal to 5% of the depository institution's total assets
at the time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt corrective action provisions.
An insured depository institution that is significantly undercapitalized, or is
undercapitalized and fails to submit, or in a material respect to implement, an
acceptable capital restoration plan, is subject to additional restrictions and
sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
specified activities; (vi) replacement of directors or senior executive
officers; (vii) prohibitions on the receipt of deposits from correspondent
institutions; (viii) restrictions on capital distributions by the holding
companies of such institutions; (ix) required divestiture of subsidiaries by the
institution; or (x) other restrictions or sanctions as determined by the
appropriate federal banking agency. Although the appropriate federal banking
agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to: (i) force a sale of shares
or obligations of the bank, or require the bank to be acquired by or combine
with another institution; (ii) impose restrictions on affiliate transactions and
(iii) impose restrictions on rates paid on deposits, unless it determines that
such actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior executive officers or provide compensation to any of
them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository
institution would not be liable to the institution's shareholders or creditors
for consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency. See
"-Potential Enforcement Actions."
SAFETY AND SOUNDNESS STANDARDS
Effective July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by the Federal
Deposit Insurance Corporation Improvement Act. These standards are designed to
identify potential safety-and-soundness concerns and ensure that action is taken
to address those concerns before they pose a risk to the deposit insurance
funds. The standards relate to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
asset growth; (v) earnings; and (vi) compensation, fees and benefits. If a
federal banking agency determines
7
<PAGE>
Part 1. Item 1. (continued)
that an institution fails to meet any of these standards, the agency may require
the institution to submit to the agency an acceptable plan to achieve compliance
with the standard. In the event the institution fails to submit an acceptable
plan within the time allowed by the agency or fails in any material respect to
implement an accepted plan, the agency must, by order, require the institution
to correct the deficiency. Effective October 1, 1996, the federal banking
agencies promulgated safety and soundness regulations and accompanying
interagency compliance guidelines on asset quality and earnings standards.
These new guidelines provide six standards for establishing and maintaining a
system to identify problem assets and prevent those assets from deteriorating.
The institution should: (i) conduct periodic asset quality reviews to identify
problem assets; (ii) estimate the inherent losses in those assets and establish
reserves that are sufficient to absorb estimated losses; (iii) compare problem
asset totals to capital; (iv) take appropriate corrective action to resolve
problem assets; (v) consider the size and potential risks of material asset
concentrations; and (vi) provide periodic asset reports with adequate
information for management and the board of directors to assess the level of
asset risk. These new guidelines also set forth standards for evaluating and
monitoring earnings and for ensuring that earnings are sufficient for the
maintenance of adequate capital and reserves. If an institution fails to
comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC has adopted final regulations implementing a risk-based premium system
required by federal law. On November 14, 1995, the FDIC issued regulations
that establish a new assessment rate schedule ranging from $0.0 per $100 of
deposits to $0.27 per $100 of deposits applicable to members of the Bank
Insurance Fund ("BIF"). To determine the risk-based assessment for each
institution, the FDIC will categorize an institution as well capitalized,
adequately capitalized or undercapitalized based on its capital ratios using the
same standards used by the FDIC for its prompt corrective action regulations. A
well-capitalized institution is generally one that has at least a 10% total
risk-based capital ratio, a 6% Tier 1 risk-based capital ratio and a 5% Tier 1
leverage capital ratio. An adequately capitalized institution will generally
have at least an 8% total risk-based capital ratio, a 4% Tier 1 risk-based
capital ratio and a 4% Tier 1 leverage capital ratio. An undercapitalized
institution will generally be one that does not meet either of the above
definitions. The FDIC will also assign each institution to one of three
subgroups based upon reviews by the institution's primary federal or state
regulator, statistical analyses of financial statements and other information
relevant to evaluating the risk posed by the institution. The three
supervisory categories are: financially sound with only a few minor weaknesses
(Group A), demonstrates weaknesses that could result in significant
deterioration (Group B) and poses a substantial probability of loss (Group C).
The BIF assessment rates are set forth below for institutions based on their
risk- based assessment categorization.
Assessment Rates Effective January 1, 1996*
Group A Group B Group C
------- ------- -------
Well Capitalized 0 3 17
Adequately Capitalized 3 10 24
Undercapitalized 10 24 27
*Assessment figures are expressed in terms of cents per $100 of
deposits.
On September 30, 1996, Congress passed the Budget Act which capitalized the
Savings Association Insurance Fund ("SAIF") through a special assessment on
SAIF-insured deposits and required banks to share in part of the interest
payments on the Financing Corporation ("FICO") bonds which were issued to help
fund the federal government costs associated with the savings and loan crisis of
the late 1980's. The special thrift SAIF assessment was set at $0.657 per $100
insured by the thrift funds as of March 31, 1995. Effective January 1, 1997,
for the FICO payments, SAIF-insured deposits will be assessed at the rate of
$0.0648 per $100 of domestic deposits, and BIF-insured deposits will be assessed
at the rate of $0.013 per $100 of domestic deposits. Full pro rata sharing of
the FICO interest payments takes effect on January 1, 2000.
The federal banking regulators are also authorized to prohibit depository
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from SAIF to BIF for the purpose of evading thrift
assessment rates. The Budget Act also prohibits the FDIC from setting premiums
under the risk-based schedule above the amount needed to meet the designated
reserve ratio (currently 1.25%).
8
<PAGE>
Part 1. Item 1. (continued)
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Act"). Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed
may obtain approval under the BHCA to acquire an existing bank located in
another state without regard to state law. A bank holding company is not
permitted to make such an acquisition if, upon consummation, it would control
(a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank is located. A state may limit the percentage of
total deposits that may be held in that state by any one bank or bank holding
company if application of such limitation does not discriminate against
out-of-state banks or bank holding companies. An out-of-state bank holding
company may not acquire a state bank in existence for less than a minimum
length of time that may be prescribed by state law except that a state may
not impose more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit
such combinations earlier than June 1, 1997, and may adopt legislation to
prohibit interstate mergers after that date in that state or in other states
by that state's banks. The same concentration limits discussed in the
preceding paragraph apply. The Interstate Act also permits a national or
state bank to establish branches in a state other than its home state if
permitted by the laws of that state, subject to the same requirements and
conditions as for a merger transaction.
The Interstate Act is likely to increase competition in the Company's market
areas especially from larger financial institutions and their holding companies.
It is difficult to assess the impact such likely increased competition will have
on the Company's operations.
Under the Interstate Act, the extent of a commercial bank's ability to branch
into a new state will depend on the law of the state. In October 1995,
California adopted an early "opt in" statute under the Interstate Act that
permits out-of-state banks to acquire California banks that satisfy a
five-year minimum age requirement (subject to exceptions for supervisory
transactions) by means of merger or purchases of assets, although entry
through acquisition of individual branches of California institutions and de
novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from
out-of-state banks in the markets in which the Company operates, although it
is difficult to assess the impact that such increased competition may have on
the Company's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with such laws and CRA into
account when regulating and supervising other activities.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation
system which bases CRA ratings on an institution's actual lending service and
investment performance, rather than the extent to which the institution
conducts needs assessments, documents community outreach, activities or
complies with other procedural requirements.
In March 1994, the federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
In connection with its assessment of CRA performance, the Federal Reserve
Board assigns a rating of "outstanding," "satisfactory," "needs to improve"
or "substantial noncompliance." Based on an examination conducted during the
third quarter of 1996, the Bank was rated satisfactory.
9
<PAGE>
Part 1. Item 1. (continued)
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Bank, and their institution-
affiliated parties, which include SC Bancorp, may be subject to potential
enforcement actions by the Federal Reserve Board, the FDIC and the
Superintendent for unsafe or unsound practices in conducting their businesses or
for violations of any law, rule, regulation or any condition imposed in writing
by the agency or any written agreement with the agency. Enforcement actions may
include the imposition of a conservator or receiver, the issuance of a cease-
and-desist order that can be judicially enforced, the termination of insurance
of deposits (in the case of the Bank), the imposition of civil money penalties,
the issuance of directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition orders against
institution affiliated parties and the imposition of restrictions and sanctions
under the prompt corrective action provisions of the FDIC Improvement Act.
Additionally, a holding company's inability to serve as a source of strength to
its subsidiary banking organizations could serve as an additional basis for a
regulatory action against the holding company. Neither SC Bancorp nor the Bank
currently are subject to any such enforcement actions.
ACCOUNTING CHANGES
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange.
This statement also requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair value at the date of the
transfer. Furthermore, this statement requires that debtors reclassify
financial assets pledged as collateral, and that secured parties recognize those
assets and their obligation to return them in certain circumstances in which the
secured party has taken control of those assets. In addition, the statement
requires that a liability be derecognized if and only if either (a) the debtor
pays the creditor and is relieved of its obligation for the liability or (b) the
debtor is legally released from being the primary obligor under the liability
either judicially or by the creditor. Accordingly, a liability is not
considered extinguished by an in-substance defeasance. SFAS 125 is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Management does not believe that the application of this
statement will have a material impact on the Company's financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation." This statement establishes a fair value based method of
accounting for stock-based compensation plans and encourages, but does not
require, companies to adopt that method of accounting for all of their employee
stock compensation plans. Under the fair value based method, compensation cost
is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock. The statement
does require that Companies electing not to adopt the fair value accounting
method disclose the pro forma effect on net income and earnings per share if the
fair value method had been applied. These pro forma disclosures are contained
in NOTE 10-SHAREHOLDERS' EQUITY of the Company's consolidated financial
statements, which are located in Part 11. Item 8. of this form 10-K. The
accounting and disclosure requirements of this Statement are effective for the
Bank's fiscal year ending December 31, 1996.
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing
Rights." SFAS 122 amendes certain provisions of SFAS No. 65 "Accounting for
Certain Mortgage Banking Activities" to require that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. A mortgage banking
enterprise that acquires mortgage servicing rights through either the purchase
or origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair value, if it is practicable to estimate
those fair values. If it is not practicable to estimate those fair values, the
entire cost of the acquisition should be allocated to the mortgage loans only.
SFAS 122 is effective for the fiscal year covered by this annual report.
Adoption of this pronouncement did not have a material impact on the Company's
financial statements.
10
<PAGE>
Part 1. Item 1. (continued)
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. An impairment loss shall be measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. After an
impairment is recognized, the reduced carrying amount of the asset shall be
accounted for as its new cost. SFAS No. 121 is effective for the fiscal year
covered by this annual report. Adoption of this statement did not have a
material impact on the Company's financial statements.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 prescribes the recognition criterion for
loan impairment and the measurement methods for certain impaired loans and loans
whose terms are modified in troubled debt restructurings. SFAS No. 114 states
that a loan is impaired when it is probable that a creditor will be unable to
collect all principal and interest amounts due according to the contracted terms
of the loan agreement. A creditor is required to measure impairment by
discounting expected future cash flows at the loan's effective interest rate, or
by reference to an observable market price, or by determining that foreclosure
is probable. SFAS No. 114 also clarifies the existing accounting for in-
substance foreclosures by stating that a collateral-dependent real estate loan
would be reported as real estate owned only if the lender had taken possession
of collateral.
SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing methods
for recognizing interest income on an impaired loan. To accomplish that, it
eliminated the provisions in SFAS No. 114 that described how a creditor should
report income on an impaired loan. SFAS No. 118 did not change the provisions
in SFAS No. 114 that require a creditor to measure impairment based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the observable market price of
the loan or the fair value of the collateral if the loan is collateral
dependent. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to
require information about the recorded investments in certain impaired loans and
about how a creditor recognizes interest income related to those impaired loans.
The Company adopted SFAS No. 114 and No. 118 for the year ended December 31,
1995. Adoption of this statement has not had a material impact on the Company's
financial statements.
RESULTS OF OPERATIONS
The following table summarizes key performance indicators pertaining to the
Company's operating results. Certain figures for 1995 have been adjusted for
the 1995 Restructuring as indicated. Average balances are computed using daily
balances. Refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations" from the Company's 1996 annual report to shareholders
incorporated by reference into Part II. Item 7. of this Form 10-K for additional
discussion of the Company's operating results.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Return on average assets 0.96% 0.19% 0.67%
as adjusted for restructuring items (1) - 0.41% -
Return on average shareholders' equity 9.40% 2.14% 6.59%
as adjusted for restructuring items (1) - 4.62% -
Average shareholders' equity to average
total assets 10.23% 8.87% 10.15%
Net income $ 4,455 $ 869 $ 2,705
Earnings per share $ 0.60 $ 0.12 $ 0.49
Total average assets $ 463,084 $ 457,196 $ 404,504
- --------------------------------------------------------------------------------
(1) 1995 net income was adjusted to exclude 1995 Restructuring charges of
$1,006 thousand after tax.
NET INTEREST INCOME
Net interest income is the difference between interest earned on assets and
interest paid on liabilities. Net interest margin is net interest income
expressed as a percentage of average interest-earning assets. The following
table sets forth a comparison of net
11
<PAGE>
Part I. Item 1 (continued)
interest income and net interest margin for the years indicated.
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
Increase/ Increase/
1996 (decrease) 1995 (decrease) 1994
- --------------------------------------------------------------------------------
Interest income $ 34,967 4.70% $ 33,396 26.40% $ 26,420
Interest expense 11,727 (2.40%) 12,015 91.35% 6,279
- --------------------------------------------------------------------------------
Net interest income $ 23,240 8.69% $ 21,381 6.16% $ 20,141
- --------------------------------------------------------------------------------
Net interest margin 5.58% 5.30% 5.75%
- --------------------------------------------------------------------------------
Interest income and expense are affected by changes in the volume and mix of
average interest-earning assets and interest-bearing deposits and other
liabilities, as well as fluctuations in interest rates. The following tables
set forth certain information concerning average interest-earning assets and
average interest-bearing liabilities and the yields and rates thereon. The
tables also set forth a summary of the changes in interest income and interest
expense resulting from changes in average interest rates (rate) and changes
in average asset and liability balances (volume) for the years indicated. The
changes in interest income and interest expense attributable to the rate/volume
variance are allocated to the rate and volume variances based upon the absolute
value of each of those variances as a percentage of the sum of the absolute
values of the individual rate and volume variances. Average balances are
average daily balances. Nonaccrual loans are included in total average loans
outstanding.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
balance Expense Rate balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans, net of deferred fees (1) $ 321,843 $ 30,145 9.37% $ 261,631 $ 25,961 9.92%
Investment securities 83,607 4,256 5.09% 122,498 6,298 5.14%
Federal funds sold and other 10,670 566 5.30% 19,463 1,137 5.84%
- --------------------------------------------------------------------------------------------------------------------------
Total interest earning assets/interest income 416,121 34,967 8.40% 403,593 33,396 8.27%
- --------------------------------------------------------------------------------------------------------------------------
Other assets 15,106 15,291
- --------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets 46,963 53,604
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 463,084 $ 457,196
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 282,952 $ 11,090 3.92% $ 282,574 $ 10,998 3.89%
Other interest-bearing liabilities 9,756 637 6.53% 8,059 1,017 12.62%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 292,708 11,727 4.01% 290,633 12,015 4.13%
- --------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 122,998 125,988
Shareholders' equity 47,379 40,575
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 463,084 $ 457,196
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/NET INTEREST MARGIN $ 23,240 5.58% $ 21,381 5.30%
- --------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------
1994
- --------------------------------------------------------------------------------------------
Average Income/ Yield/
balance Expense Rate
- --------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Interest-earning assets:
Loans, net of deferred fees (1) $ 203,507 $ 18,970 9.32%
Investment securities 139,991 7,167 5.12%
Federal funds sold and other 6,480 283 4.37%
- --------------------------------------------------------------------------------------------
Total interest earning assets/interest income 349,978 26,420 7.55%
- --------------------------------------------------------------------------------------------
Other assets 18,858
- --------------------------------------------------------------------------------------------
Noninterest earning assets 54,526
- --------------------------------------------------------------------------------------------
Total assets $ 404,504
- --------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 237,105 $ 5,956 2.51%
Other interest-bearing liabilities 5,689 323 5.68%
- --------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 242,794 6,279 2.59%
- --------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 120,666
Shareholders' equity 41,043
- --------------------------------------------------------------------------------------------
Total liabilities and equity $ 404,504
- --------------------------------------------------------------------------------------------
NET INTEREST INCOME/NET INTEREST MARGIN $ 20,141 5.75%
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Includes loans on nonaccrual status of approximately $2.8 million,
$1.4 million and $1.6 million at December 31, 1996, 1995 and 1994,
respectively. Interest income foregone on loans that were on
nonaccrual status was $253,000, $207,000 and $93,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. Interest income
on loans includes amortization of net loan fees of approximately $1.0
million, $790,000 and $628,000 for the years ended December 31, 1996,
1995 and 1994, respectively. Additionally, net interest (expense)
income of ($563,000), ($929,000) and $141,000 relating to the interest
rate swap agreements was included in interest income from loans for
the years ended December 31, 1996, 1995 and 1994, respectively.
12
<PAGE>
Part 1. Item 1. (continued)
<TABLE>
<CAPTION>
1996 and 1995 1995 and 1994
Increase (decrease) Increase (decrease)
due to change in Net due to change in Net
(DOLLARS IN THOUSANDS) Rate Volume Change Rate Volume Change
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of deferred fees (1) $ (1,521) $ 5,705 $ 4,184 $ 1,288 $ 5,703 $ 6,991
Investment securities (62) (1,980) (2,042) 30 (899) (869)
Federal funds sold and other (97) (474) (571) 123 731 854
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets/interest income (1,680) 3,251 1,571 1,441 5,535 6,976
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits 77 15 92 3,738 1,304 5,042
Other interest-bearing liabilities (562) 183 (380) 517 177 694
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense (485) 197 (288) 4,255 1,481 5,736
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/NET INTEREST MARGIN $ (1,195) $ 3,054 1,859 $ (2,814) $ 4,054 1,240
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest income increased $1.9 million to $23.2 million for the year ended
December 31,1996, from $21.4 million for the year ended December 31, 1995. The
increase for 1996 is primarily due to higher average loan balances, which
increased by $60.2 million over 1995. The average balance of Fed funds sold
decreased by $8.8 million and the average balance of investment securities
decreased by $38.9 million compared to 1995. Proceeds from the sale and
maturity of available-for-sale securities totaling $17.2 million during 1996
were used to fund loan growth. In addition, the Company sold approximately $27
million of available-for-sale securities during the third quarter of 1995 to
fund loan growth. The average yield on total earning assets for 1996 increased
by 13 basis points to 8.40% from 8.27% for 1995; however, the average yield on
loans, including the effect of the interest rate swaps, decreased by 55 basis
points to 9.37% from 9.92% for 1995. The decrease can be attributed to the
decrease in the prime rate and other market rates, and to competitive pricing
pressures on commercial and consumer loan products. The national prime rate
remained at 8.25% through the end of the year following a decrease from 8.50% on
January 31, 1996. The average prime rate for 1995 was 8.80%.
Net interest income increased to $21.4 million for the year ended December 31,
1995, from $20.1 million for the year ended December 31, 1994. Average loan
balances for 1995 increased by $58.1 million over the prior year largely due to
the purchase of loans from IOBC and the purchase of approximately $20.0 million
of SBA loans. The average yield on total earning assets for 1995 increased by
72 basis points to 8.27% from 7.55% for 1994. The average yield on loans,
including the effect of the interest rate swaps, increased to 9.92% for 1995
from 9.32% for 1994. The increase in the average national prime rate to 8.80%
for 1995 from 7.15% for 1994 contributed to the increase in loan yields.
The Company's net interest margin increased to 5.58% for the year ended December
31, 1996 from 5.30% for the year ended December 31, 1995. The increase in the
net interest margin for 1996 can be attributed to the increase in loans as a
percentage of total earning assets and to a reduction in the Company's cost of
funds. The Company's overall cost of funds for 1996 decreased by approximately
12 basis points from 1995 primarily due to the managed reduction in higher-rate
certificate of deposit ("TCD") balances raised prior to the IOBC transaction.
The average rate paid on TCD accounts decreased to 5.36% for 1996 from 5.77% for
1995. The reduction in the average rate paid on TCD accounts was partially
offset by an increase of approximately 53 basis points in the average rate paid
on other interest-bearing transaction and savings accounts. The increase in the
rate paid on these accounts can be attributed to increased competition for
deposits in the Company's market area. Other interest expense in 1995 included
a $408,000 nonrecurring adjustment recorded on the Company's deferred
compensation plans.
The Company's net interest margin for the year ended December 31, 1995 decreased
to 5.30% from 5.75% for the year ended December 31, 1994. The increase in the
average yield on loans for 1995 (discussed above) was offset by higher funding
costs related to the deposit promotion program that raised funds for the IOBC
transaction. The average balance of TCDs increased to $145.6 million for 1995
from $79.7 million for 1994. The average rate paid on TCDs increased to 5.77%
for 1995 from 3.80% for 1994. Other interest expense for 1995 included the
previously-mentioned adjustment relating to the Company's deferred compensation
plans.
PROVISION FOR POSSIBLE LOAN LOSSES
The Company recorded a $470,000 recovery of the provision for possible loan
losses, a $1.5 million provision and a $850,000
13
<PAGE>
Part I. Item 1 (continued)
recovery of the provision for the years ended December 31, 1996, 1995 and 1994,
respectively. The reduction in the loan loss provision for 1996 is based on
management's assessment of the adequacy of the allowance for possible loan
losses. This assessment includes consideration of factors specific to
individual loans as well as economic conditions and historical loss experience.
Net loan charge-offs for 1996 were 0.10% of total loans compared to 0.67% of
total loans for 1995 and 2.28% of total loans for 1994. The $1.5 million
provision recorded in 1995 included $900,000 booked in the third quarter. The
Company performed an extensive review of its loan portfolio with regard to
collateral adequacy during the third quarter. The provision for the quarter
included $600,000 relating to two commercial real estate loans. The reduction
to the provision recorded in 1994 was based on management's determination that
an excess existed in the allowance for possible loan losses following the
upgrade of several classified loans and a significant decrease in net loan
charge-offs from 1993 levels. The allowance for possible loan losses was 1.42%,
1.81% and 2.56% of gross loans outstanding at December 31, 1996, 1995 and 1994,
respectively. Additional information is provided in NOTE 4-LOANS of the
Company's consolidated financial statements, which are included in Part II. Item
8. of this Form 10-K.
NONINTEREST INCOME
The following table sets forth the major components of noninterest income, net
of restructuring activity, for the years indicated:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------------
1995
1996 1995 Restructure 1995 Net 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 1,406 $ 1,727 $ - $ 1,727 $ 1,754
Other fees and charges 2,769 2,542 - 2,542 2,637
Merchant bankcard income 523 518 - 518 1,249
Net gain (loss) on sales of investment securities 14 (620) (620) - 17
Net gains on sales of loans - 145 - 145 215
Net gain (loss) on sales of fixed assets (28) (87) (109) 22 409
Life insurance income 124 510 - 510 58
Other income 358 278 - 278 344
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 5,166 $ 5,013 $ (729) $ 5,742 $ 6,683
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest income decreased to $5.2 million for 1996, from $5.7 million, net of
restructuring activity, for 1995, and $6.7 million for 1994. A decrease in
service charge income in 1996 from the prior year was largely offset by
increases in other deposit-related fees. The sale of two branches and the
consolidation of a third branch in early 1996 contributed to the slight decline
in total deposit income. Noninterest income for 1995 included a $407,000
benefit payment on a corporate-owned life insurance policy. The 1995
Restructuring loss of $729,000 included the previously-discussed $620,000 loss
on the sale of investment securities, and a $109,000 loss on the sale of fixed
assets from the two branches sold. Merchant bankcard income decreased to
$518,000 for 1995 from $1.2 million in 1994. The Company's largest merchant
customer left during the third quarter of 1994. The reduction in merchant
bankcard activity led to a corresponding decrease in merchant bankcard expense.
Noninterest income in 1994 also included gains on sales of loans and sale of the
Company's headquarters facility of approximately $215,000 and $414,000,
respectively.
14
<PAGE>
Part 1. Item 1 (continued)
NONINTEREST EXPENSE
The following table provides a breakdown of the Company's noninterest expense by
category, net of restructuring charges, for the years indicated:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
1996 1995 Restructure 1995, Net 1994
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 10,147 $ 10,405 $ 179 $ 10,226 $ 9,518
Net occupancy, furniture and equipment 4,056 5,127 256 4,871 4,678
Professional and legal fees 1,676 1,288 86 1,202 1,476
Other real estate owned 439 219 - 219 1,832
Postage and delivery 624 586 - 586 543
Goodwill amortization 505 821 427 394 211
Advertising and promotions 472 530 - 530 426
Merchant bankcard 424 475 - 475 1,013
Telecommunications 351 481 - 481 352
Software 340 395 395 214
Office supplies 305 391 - 391 402
Data processing 291 253 - 253 235
FDIC assessment and other insurance 273 857 - 857 1,442
Other operating expense 1,325 1,465 - 1,465 1,493
- ---------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 21,228 $ 23,293 $ 948 $ 22,343 $ 23,835
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Noninterest expense as a %
of average total assets 4.58% 4.89% 5.89%
</TABLE>
The Company reported noninterest expense of $21.2 million, $22.3 million, net of
restructuring charges, and $23.8 million for the years ended December 31, 1996,
1995 and 1994, respectively. Salaries and benefits expense for 1996 decreased
by approximately $258,000 from 1995. Total full-time equivalent staff ("FTE"),
a staff count that includes a fractional equivalent for part-time staff,
decreased to 211 at December 31, 1996 from 226 at December 31, 1995. The
reduction in FTE is due to the 1995 Restructuring and selected additional staff
reductions. Occupancy expense for 1996 decreased by $815,000 from the prior
year, net of restructuring charges, following the 1995 Restructuring. FDIC
insurance expense decreased to $53,000 in 1996 from $498,000 in 1995 and $1.0
million in 1994 due to reductions in the FDIC assessment rate. The decreases in
1996 noninterest expense from 1995 were partially offset by a $388,000 increase
in professional and legal fees. The increase in professional fees includes
approximately $105,000 associated with outsourcing the Company's internal audit
function. The $948,000 of restructuring charges reflected in noninterest
expense for 1995 included: (1) staff reductions resulting from the sale of two
branches and the consolidation of a third branch - $179,000; (2) closure of an
administrative facility and write off of lease obligations on branch sales -
$256,000; (3) accruals for legal and professional fees relating to the branch
sale transactions - $86,000; and (4) write-off of $427,000 of goodwill
associated with one of the branches sold. It was originally anticipated that 20
positions would be eliminated in conjunction with the 1995 Restructuring. Eight
of the staff displaced were placed in other positions with the Company. The
amount of termination benefits charged against the $179,000 reserve established
when the restructuring program was announced totaled $147,000. The remaining
reserve of $32,000 was reversed.
Noninterest expense for 1995, net of restructuring charges, decreased to $22.3
million from $23.8 million for 1994. An increase in salary and benefits expense
due to the addition of staff to service the loans and deposits purchased from
IOBC, was offset by decreases in OREO, merchant bankcard (refer to the
discussion of merchant bankcard income above) and FDIC insurance expense.
FTE increased to 226 at December 31, 1995 from 222 at December 31, 1994.
The Company has improved its operating efficiencies and achieved lower
noninterest expense, as adjusted for the expenses and losses of the
restructuring plan and the branch consolidation, on a larger average earning
assets base. Noninterest expense as a percentage of average total assets
decreased to 4.58% for 1996 from 4.89% for 1995 and 5.89% for 1994.
15
<PAGE>
Part I. Item 1. (continued)
The following table sets forth the components of the Company's OREO expense for
the years indicated:
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------
1996 1995 1994
--------- --------- ---------
OREO income $ (104) $ (95) $ -
OREO holding expenses 200 316 655
writedowns and provisions for losses 428 128 1,182
net (gains) from sales (85) (130) (5)
- --------------------------------------------------------------------------
OREO expense, net $ 439 $ 219 $ 1,832
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
OREO expense increased to $439,000 for 1996 from $219,000 for 1995. The
increase was due to additional valuation reserves taken on one OREO property
that was sold during the fourth quarter of 1996. Five OREO properties were sold
during the year, resulting in a net gain of $85,000. Two properties remained in
OREO at December 31, 1996. OREO expense decreased to $219,000 for 1995 from
$1.8 million for 1994. Most of the decrease is due to lower charges for
writedowns of OREO properties.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, deposits at correspondent
banks and overnight investment of excess cash balances as Federal funds sold.
The Company maintains balances at correspondent banks adequate to cover daily
inclearings and other charges. In accordance with Federal regulations, reserve
balances of $1.5 million were maintained in the form of deposits with the
Federal Reserve Bank at December 31,1996.
INVESTMENT SECURITIES
The Company's securities portfolio includes U.S. Treasury securities and U.S.
federal agency securities, most of which are mortgage-backed securities. As a
member of the Federal Reserve Bank and the Federal Home Loan Bank, the Company
is required to hold stock in those institutions. The decrease in the balance of
investment securities due to sales and maturities is discussed in "NET INTEREST
INCOME" above.
The Company currently classifies its entire securities portfolio as available-
for-sale in order to maintain flexibility in managing the portfolio and in
responding to changing business and market conditions. While the Company
currently has no plans to liquidate securities in the portfolio, it has sold
securities in previous years. The likelihood that securities would be sold in
the future and the potential for losses to be realized remains uncertain. In
the event that securities held as available-for-sale were sold at a loss, any
loss would be reflected in the results of operations on an after-tax basis.
However, there would be no expected impact on the Company's financial condition,
given that the securities are carried at their estimated fair value, net of any
unrealized loss.
The unrealized loss on securities held as available-for-sale increased to $1.5
million at December 31, 1996 from $1.3 million at year-end 1995. The unrealized
loss on mortgage-backed securities increased from $910,000 to $1.2 million over
the same period, despite a reduction in the amortized cost of this portfolio
from $52.1 million to $43.1 million, reflecting the general increase in relevant
market interest rates, which had a modest negative impact on the market value of
these securities.
Additional information is provided in NOTE 1-SIGNIFICANT ACCOUNTING POLICIES and
NOTE 3-INVESTMENT SECURITIES of the Company's consolidated financial statements
which are located in Part II. Item 8. of this Form 10-K.
16
<PAGE>
Part I. Item 1. (continued)
The following table sets forth the maturity distribution of the Company's
investment securities at December 31, 1996:
<TABLE>
<CAPTION>
Maturing in
- -----------------------------------------------------------------------------------------------------
Over one Over five
One year year through years through Over
(DOLLARS IN THOUSANDS) or less five years ten years ten years Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 5,002 $ - $ - $ 79 $ 5,081
U.S. Agency securities 14,832 12,768 - - 27,600
Mortgage-backed securities 8,253 33,599 - - 41,852
- -----------------------------------------------------------------------------------------------------
Total $ 28,087 $ 46,367 $ - $ 79 $ 74,533
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
LOANS
The Company provides a full range of credit products designed to meet the credit
needs of borrowers in its market area. The Company engages in medium-term
commercial real estate loans secured by commercial properties, commercial loans,
term financing, SBA loans, loan participations, and consumer loans principally
in the form of home equity lines of credit, vehicle loans, and personal lines of
credit to high net worth individuals. The Company also offers construction loan
products principally for entry level housing and owner-user commercial
industrial properties.
The following table sets forth the amount of loans by type for the years
indicated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 % 1995 % 1994 % 1993 % 1992 %
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 160,633 46.17% $ 147,230 46.47% $ 79,369 38.22% $ 73,220 34.47% $ 88,761 34.37%
Real estate, construction 8,544 2.46% 4,416 1.39% 30 0.01% 1,991 0.94% 8,935 3.46%
Real estate, mortgage 105,123 30.22% 107,662 33.98% 83,712 40.31% 99,190 46.70% 117,280 45.41%
Consumer 73,564 21.15% 57,533 18.16% 44,577 21.46% 38,006 17.89% 43,271 16.76%
- -----------------------------------------------------------------------------------------------------------------------------------
Gross loans 347,864 100.00% 316,841 100.00% 207,688 100.00% 212,407 100.00% 258,247 100.00%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Deferred fee income (689) (531) (298) (274) (625)
Allowance for possible
loan losses (4,947) (5,734) (5,318) (10,800) (6,859)
- -------------------------------------- --------- --------- --------- ---------
Loans, net $ 342,228 $ 310,576 $ 202,072 $ 201,333 $ 250,763
- -------------------------------------- --------- --------- --------- ---------
- -------------------------------------- --------- --------- --------- ---------
</TABLE>
No industry constitutes a concentration in the Bank's loan portfolio.
COMMERCIAL LOANS. The balance of commercial loans increased to $160.6 million,
or 46.17%, of total loans at December 31, 1996 from $147.2 million, or 46.47%,
of total loans at December 31, 1995. Growth in unsecured and asset-based
commercial loan balances totaling $23.2 million for the year was partially
offset by a $8.6 million decrease in commercial real estate loans. Most of the
Company's commercial borrowers are small- to medium-sized businesses and
professionals. Most of the commercial loans are short term, are reviewed or
renewed annually and bear a floating rate of interest. Approximately 60% of the
commercial loan portfolio is secured. Collateral for these loans consists of
accounts receivable, inventories, equipment and other business assets, including
real estate. At December 31, 1996, $40.6 million, or 11.67%, of total loans
were secured by accounts receivable as compared to $29.5 million, or 9.31%, of
loans at December 31, 1995. Commercial loans secured by real estate comprise
$14.4 million, or 4.15%, of total loans at December 31, 1996, compared to $20.5
million, or 6.48%, of loans at December 31, 1995. In 1994, the Company began
participating in government-insured lending programs, including SBA loans. At
December 31, 1996, the Company had $20.2 million of SBA loans outstanding.
Commercial loans increased to $147.2 million, or 46.47% , of loans at December
31, 1995 from $79.4 million, or 38.22%, of loans at December 31, 1994. The
$67.8 million increase in loans includes the purchase of $37.4 million of
commercial loans from IOBC in the second quarter of 1995, and $29.2 million of
loan purchases, principally SBA loans, during the fourth quarter of 1995.
REAL ESTATE, CONSTRUCTION LOANS. Real estate construction loans comprise $8.5
million, or 2.46%, of outstanding loans at December 31, 1996. The increase from
$4.4 million, or 1.39%, of total loans at December 31, 1995 is the result of
the Company's modest expansion of its construction loan activity. Construction
loans were $30,000, or 0.01%, of loans at December 31, 1994. The Company's
construction loan products are primarily targeted to developers of quality
entry-level housing projects and to existing borrowers who are owner/users of
commercial industrial property.
17
<PAGE>
Part I. Item 1 (continued)
REAL ESTATE, MORTGAGE LOANS. Real estate mortgage loans comprise $105.1
million, or 30.22%, of the total loan portfolio at December 31,1996, down
slightly from $107.7 million, or 33.98%, of total loans outstanding at year end
1995. Real estate mortgage loans were $83.7 million, or 40.31%, of total loans
at December 31, 1994. The increase in mortage loan balances for 1995 was
primarily due to the purchase of $16.8 million of real estate loans from IOBC.
Commercial real estate loans comprise the majority of the Company's mortgage
loan portfolio. New real estate loans are generally made only to existing
borrowers who are owner/users or to new borrowers who provide a major new
banking relationship and demonstrate adequate cash flows. All new real estate
borrowers must provide financial reporting that meets FDICIA standards and the
loans must meet the Company's underwriting standards. The majority of the
Company's real estate loans are secured by first trust deeds; and approximately
50% are to owner/users.
CONSUMER LOANS. Consumer loans increased to $73.6 million, or 21.15%, of the
loan portfolio at December 31, 1996 from $57.5 million, or 18.16%, of total
loans at December 31, 1995. Consumer loans were $44.6 million, or 21.46%, of
total loans at December 31, 1994. The increase of $16.1 million from 1995
occurred primarily in unsecured lines of credit to high net worth borrowers.
The Company added this loan product in mid-1995 following the purchase of loans
from IOBC. At December 31, 1996, the consumer loan portfolio included $27.9
million of home equity loans and home equity lines representing 8.01% of total
loans; auto and RV loans totaling $20.0 million, or 5.74%, of total loans; and
lines of credit totaling $18.8 million, or 5.41%, of total loans. The levels of
consumer loans at period ends may fluctuate and may not necessarily be
representative of average levels experienced during the respective periods due
to the timing of advances and payments made on such loans by borrowers.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table sets forth the maturity distribution of the Company's loan
portfolio (excluding consumer and nonaccrual loans) at December 31, 1996 based
on remaining scheduled principal repayments:
Maturing in
---------------------------------------------------------------------------
Over one
One year year through Over
or less five years five years Total
---------------------------------------------------------------------------
(GROSS LOANS, IN THOUSANDS)
Commercial $ 83,589 $ 53,652 $ 21,993 $ 159,234
Real estate, construction 3,791 1,277 3,476 8,544
Real estate, mortgage 18,996 62,208 22,471 103,676
--------------------------------------------------------------------------
Total $ 106,376 $ 117,138 $ 47,940 $ 271,454
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following table sets forth information on sensitivity to changes in
interest rates for the Company's loan portfolio (excluding consumer and
nonaccrual loans) at December 31, 1996:
Repricing in
---------------------------------------------------------------------------
Over one
One year year through Over
or less five years five years Total
---------------------------------------------------------------------------
(GROSS LOANS, IN THOUSANDS)
Fixed interest rates $ 15,639 $ 46,839 $ 17,158 $ 79,636
Variable interest rates 191,818 - - 191,818
--------------------------------------------------------------------------
Total $ 207,457 $ 46,839 $ 17,158 $ 271,454
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The amounts reported in the categories in the tables do not reflect loan
prepayments or other factors which may cause the loans to react in different
degrees and at different times to changes in market interest rates.
ASSET QUALITY
NONACCRUAL, PAST DUE AND MODIFIED LOANS
The Company recognizes income principally on the accrual basis of accounting.
In determining income from loans, the Company
18
<PAGE>
Part I. Item 1 (continued)
generally adheres to a policy of not accruing interest on loans on which a
default of principal or interest has existed for a period of
90 days or more. The Company's policy is to assign nonaccrual status to a loan
if either (i) principal or interest payments are past due in excess of 90 days,
unless the loan is both well secured and in the process of collection; or (ii)
the full collection of interest or principal becomes uncertain, regardless of
the length of past due status. When a loan reaches nonaccrual status, any
interest accrued on such a loan is reversed and charged against current income.
Nonaccrual loans increased to $2.8 million, or 0.82%, of total loans at December
31, 1996 from $1.4 million, or 0.44%, of total loans at December 31, 1995. The
increase in nonaccrual loans in 1996 is primarily due to one real estate loan.
Nonaccrual loans were $1.6 million, or 0.78%, of total loans at December 31,
1994. Interest income that would have been collected on nonaccrual loans had
they performed in accordance with their original terms, was approximately
$253,000, $207,000, $93,000, $550,000 and $371,000 for the years ended December
31, 1996, 1995, 1994, 1993 and 1992, respectively.
The following table provides the balance of the Company's nonaccrual loans as of
the dates indicated. The Company had one loan of $193,000 that was past due
over 90 days and still accruing interest at December 31, 1996. The principal
and interest on the loan are guaranteed by the Small Business Administration.
The Company anticipates full payment of the amounts due. The Company had no
loans past due 90 days or more that were still accruing interest at December 31,
1995, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans (1) $ 2,846 $ 1,385 $ 1,612 $ 7,081 $ 7,426
Nonaccrual loans as a percentage of
total gross loans 0.82% 0.44% 0.78% 3.33% 2.88%
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes loans with modified terms of $5.5 million, $125,000, $100,000
and $1.4 million for the years ended December 31, 1996, 1995, 1994 and
1993, respectively.
Nonaccrual loans by category are summarized below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial $ 1,316 $ 620 $ 283 $ 1,269 $ 4,000
Real estate, construction - - - - 231
Real estate, mortgage 1,447 615 930 5,789 2,956
Consumer 84 150 399 23 239
- ----------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 2,846 $ 1,385 $ 1,612 $ 7,081 $ 7,426
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
<PAGE>
Delinquent loans (past due 30 to 89 days) by category are summarized below:
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial $ 1,273 $ 548 $ 998 $ 696 $ 4,160
Real estate, construction - - - - -
Real estate, mortgage 414 503 2,089 1,239 9,638
Consumer 1,125 411 416 436 520
- ----------------------------------------------------------------------------------------------------------------
Total delinquent loans $ 2,813 $ 1,462 $ 3,503 $ 2,371 $ 14,318
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Percentage of total gross loans:
Nonaccrual loans 0.82% 0.44% 0.78% 3.33% 2.88%
Nonaccrual and delinquent loans 1.63% 0.90% 2.46% 4.45% 8.42%
</TABLE>
19
<PAGE>
Part I. Item 1 (continued)
The increase in delinquent commercial loans to $1.3 million at December 31, 1996
from $548,000 at year-end 1995 is due to a limited number of purchased SBA
loans. The principal and interest on SBA loans is fully guaranteed. Management
does not expect to incur a loss on these loans. The increase in delinquent
consumer loans to $1.1 million at December 31, 1996 from $411,000 at December
31, 1995 is primarily due to purchased real estate loans secured by second trust
deeds. These loans are government insured and are serviced by a third party.
The reported delinquencies can largely be attributed to the delay between the
receipt of payment by the servicer and the remittance of the payment to the
Company. Management does not expect to incur a loss of principal or interest on
these loans.
The level of delinquent loans may fluctuate and may not necessarily be
representative of levels experienced during the respective periods due to the
variability of the timing of payments made on such loans by borrowers.
Management cannot predict the extent to which the changes in the current
economic environment may impact the Company's loan portfolio. Furthermore, the
Company's primary regulators review the loan portfolio as an integral component
of their regular examinations of the Company, and their assessment of specific
credits may affect the level of the Company's problem assets. Accordingly,
there can be no assurance that other loans will not become nonaccrual, potential
problem credits or delinquent loans in the future.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
A certain degree of risk is inherent in the extension of credit. Management has
adopted a policy to maintain the allowance for possible loan and lease losses at
a level considered by management to be adequate to absorb estimated known and
inherent risks in the existing portfolio.
Management performs a comprehensive analysis of the loan portfolio and its
current allowance for loan losses on a regular basis to determine that loans are
currently protected according to financial and collateral standards deemed
acceptable. The allowance for possible loan losses represents management's
recognition of the assumed risks of extending credit and the quality of the loan
portfolio. The allowance is management's estimate, which is inherently
uncertain and depends on the outcome of future events. A sudden and sustained
increase in interest rates could have an adverse impact of borrowers' ability to
repay. The evaluation of the quality of the loan portfolio considers the
borrower's management, financial condition, cash flow and repayment program, as
well as the existence of collateral and guarantees. External business and
economic factors beyond the borrower's control, combined with the Company's
previous loan loss experience, are considered in management's evaluation of the
allowance for possible loan losses. In addition, the bank regulatory
authorities, as an integral part of their examination process, periodically
review the Company's allowance for possible loan losses and may recommend
additions to the allowance based on their assessment of information available to
them at the time of their examination.
When it is determined that additions are required, additions to the allowance
are made through charges to operations and are reflected in the statements of
operations as a provision for loan losses. Loans which are deemed to be
uncollectible are charged to the allowance. Subsequent recoveries, if any, are
credited back to the allowance. Reference may be made to NOTE 4-LOANS of the
Company's consolidated financial statements, which are located in Part II. Item
8. of this Form 10-K, for additional detail concerning activity in the allowance
for possible loan losses, including loan charge-offs and recoveries.
20
<PAGE>
Part I. Item 1. (continued)
The following table provides a summary of net charge-offs for the years
indicated:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average balance of gross loans outstanding $ 321,843 $ 261,631 $ 203,507 $ 235,414 $ 282,991
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Gross loan balance at December 31, $ 347,864 $ 316,841 $ 207,688 $ 207,688 $ 212,407
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance at January 1, $ 5,734 $ 5,318 $ 10,800 $ 6,859 $ 4,575
Charge-offs:
Commercial 422 834 2,004 3,704 2,560
Real estate 279 1,227 3,453 4,488 4,146
Consumer 168 587 362 381 462
- ----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 869 2,648 5,819 8,573 7,168
Recoveries:
Commercial 477 587 915 607 195
Real estate 21 129 215 4 -
Consumer 54 192 57 153 185
- ----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 552 908 1,187 764 380
Net charge-offs 317 1,740 4,632 7,809 6,788
(Recovery) provision (credited) charged to expense (470) 1,539 (850) 11,750 9,072
Allowance on purchased loans - 617 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance at December 31, $ 4,947 $ 5,734 $ 5,318 $ 10,800 $ 6,859
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------------
Ratio of allowance for loan losses to loans
outstanding at December 31, 1.42% 1.81% 2.56% 5.20% 3.23%
Ratio of allowance for loan losses to
nonaccrual loans at December 31, 173.84% 414.01% 329.88% 152.53% 92.36%
Ratio of net charge-offs to average loans 0.10% 0.67% 2.28% 3.32% 2.40%
</TABLE>
Net loan charge-offs were $317,000, or 0.10%, of average outstanding loans for
1996 a decrease from $1.7 million, or 0.67%, of average loans for 1995, and $4.6
million, or 2.28%, of average loans for 1994. Net charge-offs for 1994 include
$2.8 million related to nonaccrual loans that were sold during the third quarter
of that year. Net charge-offs were $7.8 million and $6.8 million for 1993 and
1992, respectively. The higher level of net charge-offs recorded by the Company
in 1992, 1993 and 1994 reflect the economic downturn and declining real estate
values experienced in the Company's market area during the early 1990s. The
decrease in net charge-offs in 1995 and 1996 is reflective of the continued
improvement in the quality of the Company's loan portfolio and of the general
economic recovery in Southern California.
The following table sets forth the allocation of the allowance for possible loan
losses by category as of the dates indicated:
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
December 31, 1996 to total loans 1995 to total loans 1994 to total loans
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial $ 1,280 46.17% $ 1,821 46.47% $ 1,406 38.22%
Real estate, construction 77 2.46% 43 1.39% 10 0.01%
Real estate, mortgage 2,483 30.22% 2,172 33.98% 2,366 40.31%
Consumer 465 21.15% 660 18.16% 592 21.46%
Unallocated 643 - 1,038 - 944 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 4,947 100.00% $ 5,734 100.00% $ 5,318 100.00%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Part I. Item 1 (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Percent of loans Percent of loans
in each category in each category
December 31, 1993 to total loans 1992 to total loans
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial $ 2,563 34.47% $ 2,972 34.37%
Real estate, construction 139 0.94% 249 3.46%
Real estate, mortgage 4,415 46.70% 3,070 45.41%
Consumer 381 17.89% 568 16.76%
Unallocated 3,302 - - -
- ----------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 10,800 100% $ 6,859 100%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
Management establishes specific reserves where necessary, according to the
criteria for loans deemed to be impaired under the guidance of SFAS No. 114 and
No. 118. Loans are evaluated for impairment on an individual basis with the
exception of consumer loans, which are evaluated collectively. Specific
reserves related to impaired loans are included in the allowance for loan losses
shown above. The remainder of the allowance is general in nature and is
available for the loan portfolio in its entirety. Further discussion of the
Company's policies relating to impaired loans is proivded in NOTE 1-SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES of the Company's consolidated financial
statements, which are located in Part II. Item 8. of this Form 10-K.
OTHER REAL ESTATE OWNED
OREO primarily includes properties acquired through foreclosure or through full
or partial satisfaction of loans. The difference between the fair value of the
real estate collateral, less the estimated costs of disposal, and the loan
balance at the time of transfer to OREO is reflected in the allowance for
possible loan losses as a charge-off. Any subsequent declines in the fair value
of the OREO property after the date of transfer are recorded through a provision
for writedowns on OREO. Routine holding costs, net of any
income and net gains and losses on disposal, are reported as noninterest
expense. Activity in OREO for the years indicated is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Balance, January 1 $ 2,073 $ 5,837 $ 6,133
Additions 699 1,923 3,585
Sales (4,215) (5,689) (2,699)
Valuation and other adjustments 1,979 2 (1,182)
- -------------------------------------------------------------------------------------
Balance, December 31 $ 536 $ 2,073 $ 5,837
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
The OREO portfolio at December 31, 1996 consisted of 2 properties totaling
$536,000. The Bank is actively marketing these properties.
DEPOSITS
The following table sets forth the distribution of average deposit balances and
the average rates paid thereon for the years indicated:
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average % Average Average % Average Average %
balance Rate of total balance Rate of total balance Rate of total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Demand deposits(1) $119,570 29.70% $123,815 30.47% $118,044 33.24%
NOW/MMDA 95,098 2.58% 23.63% 81,815 1.77% 20.13% 78,860 1.73% 22.20%
Savings 44,273 2.11% 11.00% 55,204 2.08% 13.58% 78,558 1.99% 22.12%
TCDs 143,582 5.36% 35.67% 145,555 5.77% 35.82% 79,687 3.80% 22.44%
- ----------------------------------------------------------------------------------------------------------------------------------
Total average deposits $402,522 100.00% $406,389 100.00% $355,149 100.00%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company purchased approximately $19.8 million of noninterest bearing
demand deposits from IOBC in the second quarter of 1995. Following the
purchase, IOBC demand deposits decreased $7.4 million, primarily due to a
reduction in balances maintained by a large commercial customer. Most of
the IOBC customer base has been retained. Demand deposits, net of the
effects of the IOBC purchase, have remained flat since 1994.
22
<PAGE>
Part I. Item 1. (continued)
Average demand deposits decreased to $119.6 million, or 29.70%, of total
deposits for 1996 from $123.8 million, or 30.47%, of total deposits for 1995.
Factors contributing to the decrease in demand balances for 1996 include the
reduction of three branches from the prior year, and to growth in a cash
management product offered to commercial customers that provides for the
overnight investment of funds. Average demand deposits were $118.0 million, or
33.24%, of total deposits for 1994.
Average NOW/MMDA accounts increased to $95.1 million, or 23.63%, of total
deposits for 1996 from $81.8 million, or 20.13%, of total deposits for 1995.
The increase can be attributed to targeted product promotions. Average NOW/MMDA
accounts for 1994 were $78.9 million, or 22.20%, of total deposits. The Company
acquired $12.2 million of NOW/MMDA accounts from IOBC on April 30, 1995.
Average TCD balances were $143.6 million, or 35.67%, of total deposits for 1996
and $145.6million, or 35.82% , of total deposits for 1995. Average TCD balances
were $79.7, or 22.44%, of total deposit for 1994. The increase in TCD balances
for 1995 can be attributed to a promotional TCD program that was run during the
first quarter of 1995 to obtain funding for the IOBC transaction. The program
proved to be highly successful, procuring in excess of $70 million in 7 to 12
month TCDs. The Company retained 65%-75% of these balances as they matured at
average rates significantly lower than the rates offered through the initial
promotional program.
The following table sets forth the maturities of the Company's time certificates
of deposit outstanding at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1996 Maturing in
- ----------------------------------------------------------------------------------------------------------------------------------
Over three Over six
Three months months through months through Over
or less six months twelve months twelve months Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Under $100,000 $ 31,750 $ 20,563 $ 19,700 $ 9,565 $ 81,577
$100,000 and over 41,016 9,170 11,097 2,373 63,656
- ----------------------------------------------------------------------------------------------------------------------------------
Total time certificates of deposit $ 72,766 $ 29,733 $ 30,797 $ 11,938 $ 145,233
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OTHER BORROWED FUNDS
Other borrowed funds consist of overnight Federal funds purchased, Treasury tax
and loan notes ("TT&L"), obligations under securities repurchase agreements, the
principal portions of capitalized lease obligations, obligations to senior
lienholders for certain OREO properties, and deferred compensation liabilities.
The balance of other borrowed funds was $8.1 million, $6.4 million and $13.8
million at December 31, 1996, 1995 and 1994, respectively. Additional
discussion of the Company's borrowing arrangements is located in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" from the Company's annual report to shareholders incorporated by
reference into Part II. Item 7. of this Form 10-K, and in NOTE 8-BORROWED FUNDS
AND OTHER INTEREST-BEARING LIABILITIES of the Company's consolidated financial
statements located in Part II. Item 8. of this Form 10-K.
ASSET/LIABILITY MANAGEMENT
The objective of asset/liability management is to manage and control the
Company's exposure to interest rate fluctuations while maintaining adequate
levels of liquidity and capital. The Company seeks to achieve this objective by
matching its interest rate-sensitive assets and liabilities, and maintaining
the maturity and repricing of these assets and liabilities at appropriate levels
given the interest rate environment. Generally, if rate-sensitive assets exceed
rate sensitive liabilities, the net interest income will be positively impacted
during a rising rate environment and negatively impacted during a declining rate
environment. When rate-sensitive liabilities exceed rate-sensitive assets, the
net interest income will generally be positively impacted during a declining
rate environment and negatively impacted during a rising rate environment.
However, because interest rates for different asset and liability products
offered by depository institutions respond differently to changes in the
interest rate environment, the gap between rate-sensitive assets and rate-
sensitive liabilities can only be used as a general indicator of interest rate
sensitivity.
23
<PAGE>
Part I. Item 1. (continued)
The following gap repricing table sets forth information concerning the
Company's rate-sensitive assets and rate-sensitive liabilities, including the
off-balance sheet amounts for interest rate swaps, as of December 31, 1996.
Such assets and liabilities are classified by the earlier of maturity or
repricing date in accordance with their contractual terms. Certain shortcomings
are inherent in the method of analysis presented in the following gap table.
For example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees and at different
times to changes in market interest rates. Also, loan prepayments and changes
in the mix or level of deposits could cause the interest sensitivities to vary
from those which appear in the table.
<TABLE>
<CAPTION>
Three months One year
Three months through through Over
or less twelve months five years five years Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
INTEREST-EARNING ASSETS
Federal funds sold $ 3,800 $ - $ - $ - $ 3,800
Investment securities - 19,834 48,608 8,148 76,590
Loans (1) 230,190 23,160 64,327 27,341 345,018
Interest rate swaps 25,000 50,000 75,000
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 258,990 $ 42,994 $ 162,935 $ 35,489 $ 500,408
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing demand and
savings deposits $ - $ 25,954 $ 100,933 $ 17,303 $ 144,190
Time certificates of deposit 72,837 60,475 11,921 - 145,233
Other borrowings and interest-
bearing liabilities 6,940 1,156 - 8,096
Interest rate swaps 75,000 75,000
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 154,777 $ 87,585 $ 112,854 $ 17,303 $ 372,519
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 104,213 $ (44,591) $ 50,081 $ 18,186
Cumulative interest rate sensitivity gap 104,213 59,622 109,703 127,889
Cumulative interest rate sensitivity gap
as a percentage of total interest-
earning assets 20.83% 11.91% 21.92% 25.56%
</TABLE>
- -----------------------------------
(1) Loans exclude nonaccrual loans of $2,846.
At December 31,1996, the Company's rate-sensitive balance sheet was shown to be
in a positive gap position on a cumulative basis for all time periods reported.
The cumulative gap between assets and liabilities that reprice within 12 months
was $59.6 million, or 11.91%, of rate-sensitive assets. The cumulative positive
gap for all time periods is $127.9 million, or 25.56%, of rate-sensitve assets.
The table above implies that the Company is moderately asset-sensitive and that
its earnings would increase if interest rates rise. Repricing of the Company's
interest-bearing demand and savings deposits generally lags repricing on the
Company's variable rate loan portfolio. These core deposits tend to be fairly
stable over time and exhibit a low sensitivity to changes in interest rates. In
preparing the gap table, management distributes core deposit balances across the
maturity ranges in accordance with regulatory guidelines in order to incorporate
these characteristics of its core deposits.
In addition to utilizing the repricing gap table above in managing its interest
rate risk, the company performs a quarterly income simulation analysis. This
simulation analysis provides a dynamic evaluation of the Company's balance sheet
and income statement under varying yield curve scenarios, providing an estimate
of both the dollar amount and percentage change in net interest income under
various changes in interest rates. Based on the income simulation analysis
conducted as of December 31, 1996, the Company remains moderately asset-
sensitive. Thus, a rising rate environment would tend to lead to an increase in
net interest income, while a falling rate environment would tend to lead to a
decrease in net interest income.
In order to stabilize the Company's net interest income with respect to changing
rates, the Company entered into a $50 million 5-year interest rate swap
agreement in September 1993 ("Swap #1") and a $25 million 3-year interest rate
swap agreement in January
24
<PAGE>
Part I. Item 1 (continued)
1994 ("Swap #2"). The terms of these swap agreements require the Company to
pay a floating rate of interest tied to three-month LIBOR, and to receive
fixed rates of interest of 4.87% and 5.04% for Swap #1 and Swap #2,
respectively. The Company's combined break-even point on both swap
agreements is approximately 4.92%. Since the fourth quarter of 1994, the
three-month LIBOR has exceeded the Company's break-even point, so that
interest expense on the swap agreements has exceeded interest income. Net
interest income (expense)on the swaps for the years ended December 31, 1996,
1995 and 1994 was ($563,000),($929,000) and $141,000.
EMPLOYEES
The Company had 211 full-time equivalent employees at December 31, 1996. Full-
time equivalent employees include full-time employees plus part-time employees
expressed as a fractional equivalent of full-time employees based on the number
of hours worked. For example, a part-time employee who works 20 hours a week
would equal 0.5 full-time equivalent staff. Management believes that its
relations with its employees are satisfactory.
ITEM 2 PROPERTIES
The Company owns the following properties:
The Bellflower branch office, located at 17046 Bellflower Boulevard,
Bellflower, California. This 2,924 square foot facility houses the
Bank's Bellflower branch.
The Brea branch office, located at 275 West Central Avenue, Brea,
California. This 5,300 square foot facility houses the Bank's Brea
branch.
The Downey Main branch office, located at 10990 Downey Avenue, Downey,
California. This 8,795 square foot facility houses the Bank's Downey
branch and its Los Angeles County Corporate Banking Center.
The Orange branch office, located at 303 West Katella Avenue, Orange,
California. This 20,966 square foot facility houses the Bank's Orange
branch.
The Santa Fe Springs branch office, located at 13372 East Telegraph
Road, Santa Fe Springs, California. This 7,300 square foot facility
houses the Bank's Santa Fe Springs branch.
The Uptown Whittier branch office, located at 12802 East Hadley
Street, Whittier, California. This 5,460 square foot facility houses
the Bank's Uptown Whittier branch.
The Whittier branch office, located at 13525 West Whittier Boulevard,
Whittier, California. This 9,000 square foot facility houses the
Bank's Whittier branch.
The Company leases the following properties:
The Company leases 44,259 square feet for its operations center
offices, located at 16420 Valley View Avenue, La Mirada, California.
The Company leases 10,463 square feet for its executive offices,
located at 3800 East La Palma Avenue, Anaheim, California. This
location also houses the Bank's Tustin/La Palma branch.
The Company leases 441 square feet for its Anaheim Pavilions
Supermarket branch office, located at 8010 Santa Ana Canyon Road,
Anaheim Hills, California.
The Company leases 4,000 square feet for its Catalina branch office,
located at 303 Crescent Avenue, Avalon, California, on Santa Catalina
Island.
The Company leases 6,980 square feet for its Huntington Beach branch
office, located at 9042 Garfield Avenue, Huntington Beach, California.
25
<PAGE>
Part I. Item 2 (continued)
The Company leases 411 square feet for its La Habra branch office,
located at the Vons Supermarket, 2101 West Imperial Highway, La Habra,
California.
The Company leases 9,495 square feet for its Laguna Hills branch
office, located at 24061 Calle de la Plata, Laguna Hills, California.
This location also houses its Orange County Corporate Banking Center.
The Company leases 3,471 square feet for its La Jolla branch office,
located at 4180 La Jolla Village Drive, Suite 125, La Jolla,
California.
The Company leases 2,100 square feet for its San Diego Corporate Banking
Center, located at 4180 La Jolla Village Drive, Suite 430, La Jolla,
California.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation involving various aspects of its
business. As of the date of this Form 10-K, it is management's opinion after
consulting with legal counsel that none of the pending litigation will have a
material adverse impact on the consolidated financial condition or operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of 1996.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the American Stock Exchange ("AMEX") under the
symbol, "SCK". The following table sets forth the high and low closing sale
prices on a per share basis for the Common Stock as reported by the AMEX for the
periods indicated: The Company had approximately 531 shareholders of record of
its common stock as of March 14, 1997.
<TABLE>
<CAPTION>
(SHARE PRICES IN DOLLARS) High Low
- -------------------------------------------------------------------------------------
<S> <C> <C>
1995 First quarter $ 5 1/4 $ 4 5/16
Second quarter 5 1/4 4 5/8
Third quarter 6 5/8 4 3/4
Fourth quarter 6 1/8 5 7/16
1996 First quarter 6 3/4 6 1/16
Second quarter 7 1/8 6 3/8
Third quarter 7 6 3/16
Fourth quarter 9 7/8 7
1997 First quarter (through March 14, 1997) 11 3/4 9 3/8
</TABLE>
On March 14, 1997 the last reported sales price per share for the Company's
stock was $10.75.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
As of or for the year ended December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Interest income $ 34,967 $ 33,396 $ 26,420 $ 29,732 $ 35,915
Interest expense 11,727 12,015 6,279 9,619 13,665
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 23,240 21,381 20,141 20,113 22,250
Provision for loan losses (470) 1,539 (850) 11,750 9,072
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 23,710 19,842 20,991 8,363 13,178
- ----------------------------------------------------------------------------------------------------------------------------------
Net gains (losses) on sales of securities 14 (620) 17 7,074 2,395
Noninterest income 5,152 5,633 6,666 6,869 5,728
Noninterest expense 21,228 23,293 23,835 26,024 23,835
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 7,648 1,562 3,839 (3,718) (2,534)
Provision for income taxes (benefits) 3,193 693 1,134 (1,026) (1,131)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change
in accounting principle 4,455 869 2,705 (2,692) (1,403)
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle - - - (41) 0
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,455 $ 869 $ 2,705 $ (2,733) $ (1,403)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE AND STOCK DATA:
Net income (loss) $ 0.60 $ 0.12 $ 0.49 $ (0.79) $ (0.40)
Cash dividends declared $ - $ - $ - $ - $ -
Book value (1) $ 6.67 $ 6.09 $ 5.60 $ 8.21 $ 8.99
Weighted average shares outstanding (2) 7,476,464 7,468,760 5,507,000 3,468,505 3,468,505
BALANCE SHEET DATA (YEAR END BALANCES):
Investment securities $ 76,590 $ 94,030 $ 131,881 $ 149,543 $ 164,546
Loans, net 342,228 310,576 202,072 201,333 250,763
Total assets 476,013 461,779 398,555 407,889 464,229
Total deposits 415,326 406,811 339,939 368,388 402,892
Shareholders' equity 49,919 45,512 41,844 28,462 31,195
ASSET QUALITY:
Nonaccrual loans $ 2,846 $ 1,385 $ 1,612 $ 7,081 $ 7,426
OREO 536 2,073 5,837 6,133 6,318
ASSET QUALITY RATIOS:
Net charge-offs to average gross loans 0.10% 0.67% 2.28% 3.32% 2.40%
Nonaccrual loans to year-end gross loans 0.82% 0.44% 0.78% 3.33% 2.88%
Nonperforming assets to year-end assets (3) 0.71% 0.75% 1.87% 3.24% 2.96%
Allowance for possible loan losses to year-end
gross loans 1.42% 1.81% 2.56% 5.08% 2.66%
Allowance for possible loan losses to
nonaccrual loans 173.84% 414.01% 329.88% 152.53% 92.36%
SELECTED PERFORMANCE RATIOS:
Return on average assets 0.96% 0.19% 0.67% (0.59%) (0.30%)
Return on average shareholders' equity 9.40% 2.14% 6.59% (8.90%) (4.42%)
Average shareholders' equity to average assets 10.23% 8.87% 10.15% 6.61% 6.73%
Dividend payout ratio 0.00% 0.00% 0.00% 0.00% 0.00%
Noninterest expense to average assets 4.58% 5.09% 5.90% 5.61% 5.03%
Net interest margin (4) 5.58% 5.30% 5.75% 4.82% 5.27%
COMPANY CAPITAL RATIOS:
Leverage 9.97% 9.08% 10.74% 6.09% 6.30%
Tier 1 risk-based capital 11.20% 10.75% 15.72% 8.89% 9.10%
Total capital 12.37% 12.01% 16.98% 10.18% 10.60%
BANK CAPITAL RATIOS:
Leverage 9.51% 8.59% 8.86% 6.09% 6.30%
Tier 1 risk-based capital 10.68% 10.14% 12.96% 8.89% 9.10%
Total capital 11.86% 11.39% 14.22% 10.18% 10.60%
</TABLE>
- -----------------------------------
(1) Book value per share data is based on the number of shares outstanding at
year end.
(2) Excludes the effect of stock options as common stock equivalents as such
effect was antidilutive for the years presented.
(3) Includes nonaccrual loans and other real estate acquired by the Bank
through foreclosure.
(4) Computed on a tax-equivalent basis for 1992. The Company had no
investments in tax-exempt municipal securities for 1996, 1995, 1994 and
1993.
27
<PAGE>
Part II. (continued)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Incorporated by reference to pages 7-11 of the Company's 1996 annual report to
shareholders which pages are filed as Exhibit 13.1 to this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are listed in Item 14(a) and
are submitted at the end of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers is incorporated by
reference from the sections entitled "Nominees for Election as Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's
definitive Proxy Statement which will be filed within 120 days after the
Company's fiscal year ended December 31, 1996 (the "1997 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management remuneration and transactions is incorporated
by reference from the sections entitled "Executive Compensation", "Information
About the Board of Directors and Committees of the Board", and "Compensation
Committee Interlocks and Insider Participation" of the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference from the section entitled "Certain
Relationships and Related Transactions" of the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Information concerning certain relationships and related party transactions is
incorporated by reference from the section entitled "Certain Relationships and
Related Transactions" of the 1997 Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following consolidated financial statements of the Company and
subsidiary are filed as part of this Annual Report.
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995, and 1994
28
<PAGE>
Part IV. Item 14. (continued)
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
SC Bancorp (parent only) financial statements - Note 13
(a)(2) All other financial statement schedules are omitted because they are
not applicable, not material or because the information is included in
the consolidated financial statements or notes thereto.
(a)(3) Exhibits
3(i).1 SC Bancorp Articles of Incorporation (f)
3(i).2 Certificate of Amendment to SC Bancorp Articles of Incorporation dated
May 9, 1995(g)
3(ii).1 Amended and Restated Bylaws of SC Bancorp
4.1 Specimen Common Stock Certificate(a)
4.2 SC Bancorp 1989 Stock Option Plan(d)
4.3.1 Amended and restated Southern California Bank Employee Retirement
Plan(c)
4.3.2 First amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.3 Second amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.4 Third amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.5 Fourth amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.4 SC Bancorp Executive Deferral Plan (IV)(d)
4.5 Southern California Bank Executive Incentive Compensation Plans for
1994(a)
4.6 Southern California Bank Executive Incentive Compensation Plans for
1995(g)
4.7 Southern California Bank Executive Incentive Compensation Plans for
1996
10.1 Sublease between SC Bancorp and Denny's, dated December 24, 1992, for
office space in La Mirada, California(b)
10.2 Lease between Southern California Bank and Robert Stein, dated
September 1, 1981, amended June 19, 1990, for office space in Avalon,
California(c)
10.3 Assignment of lease between Southern California Bank and Garfield
Bank, dated December 27, 1985, amended January 1, 1987, for office
space in Huntington Beach, California(a)
10.4 Lease between Southern California Bank and Tustin-La Palma Business
Center, dated July 8, 1993 for office space in Anaheim, California(a)
10.5 License Agreement between Southern California Bank and The Vons
Companies, Inc., dated December 18, 1992 for supermarket space in
Anaheim Hills, California(a)
10.6 First amendment to license agreement between Southern California Bank
and The Vons Companies, Inc., dated
December 18, 1992 for supermarket space in Anaheim Hills,
California(h)
10.7 Consent to assignment of sublease and sublease between Southern
California Bank, Bank of America, NTSA, and The Taj dated May 12, 1995
for office space in Laguna Hills, California(g)
10.8 Sublease between Southern California Bank and Citicorp Savings, dated
November 30, 1995 for office space in La Jolla, California(g)
10.9 Lease between Southern California Bank and Regents Park Financial
Centre, Ltd., dated October 25, 1995 for
office space in La Jolla, California(g)
10.10 Forward lease between Southern California Bank and Regents Park
Financial Centre, Ltd., dated October 25, 1995 for
office space in La Jolla, California(g)
10.11 License Agreement between Southern California Bank and The Vons
Companies, Inc., dated February 22, 1996 for supermarket space in La
Habra, California(h)
10.12 Employment Agreement between SC Bancorp and Southern California Bank
and Larry D. Hartwig, dated January 1, 1997
10.13 Employment Agreement between SC Bancorp and Southern California Bank
and David A. McCoy, dated February 25, 1992
10.14 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and David A. McCoy, dated January 1, 1997
10.15 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and Bruce W. Roat, dated January 1, 1997
29
<PAGE>
Part IV. Item 14 (continued)
10.16 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and Ann E. McPartlin, dated January 1,
1997
10.17 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and M. V. Cummings, dated January 1, 1997
10.18 Form of Indemnification Agreement entered into with each Executive
Officer and Director of SC Bancorp(a)
10.19 Form of Indemnification Agreement entered into with each Executive
Officer and Director of Southern California Bank(a)
13.1 Pages 7-11 of the Company's 1996 annual report to shareholders
21.0 Subsidiaries of the Registrant(e)
23.1 Consent of the Company's independent auditor (Deloitte & Touche, LLP)
to the incorporation by reference in the Registration Statement of SC
Bancorp on Form S-8 (No. 33-38666) of their report dated January 24,
1997 appearing in the Annual Report on Form 10-K of SC Bancorp for the
year ended December 31, 1996.
27.1 Financial Data Schedule
(b) The Company filed the following reports on Form 8-K during the fourth
quarter of 1996:
None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) This exhibit is contained in SC Bancorp's Registration Statement on
Form S-2, filed with the Commission on March 9, 1994, (Commission File
No. 33-76274), and incorporated herein by reference.
(b) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31,1992, filed with the Commission on
March 30, 1993, (Commission File No. 0-11046) and incorporated herein
by reference.
(c) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31,1991, filed with the Commission on
March 30, 1992, (Commission File No. 0-11046) and incorporated herein
by reference.
(d) This exhibit is contained in SC Bancorp's Proxy Statement, filed with
the Commission on on March 23, 1990, (Commission File No. 0-11046) and
incorporated herein by reference.
(e) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31,1994, filed with the Commission on
March 30, 1995, (Commission File No. 0-11046) and incorporated herein
by reference.
(f) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10-
Q for the period ended March 31, 1995, filed with the Commission on
May 15, 1995, (Commission File No. 0-11046) and incorporated herein by
reference.
(g) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31,1995, filed with the Commission on
March 29, 1996, (Commission File No. 0-11046) and incorporated herein
by reference.
(h) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10-
Q for the period ended September 30, 1996, filed with the Commission
on November 14, 1996, (Commission File No. 0-11046) and incorporated
herein by reference.
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of SC Bancorp and
its subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of SC Bancorp and its subsidiary at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Los Angeles, California
January 24, 1997
Deloitte & Touche, LLP
31
<PAGE>
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 2) $ 29,968 $ 29,088
Federal funds sold 3,800 -
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents 33,768 29,088
- ---------------------------------------------------------------------------------------------------------
Securities available-for-sale, at fair value (Note 3) 74,533 92,825
Investment in Federal Home Loan Bank stock, at cost 1,450 1,205
Investment in Federal Reserve Bank stock, at cost 607 -
Loans (Notes 4 and 16) 347,864 316,841
Less: Deferred fee income (689) (531)
Allowance for possible loan losses (4,947) (5,734)
- ---------------------------------------------------------------------------------------------------------
Loans, net 342,228 310,576
- ---------------------------------------------------------------------------------------------------------
Premises and equipment, net (Note 5) 7,740 9,734
Other real estate owned, net (Note 6) 536 2,073
Accrued interest receivable 3,931 4,297
Other assets 11,220 11,981
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 476,013 $ 461,779
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits: (Note 7)
Interest-bearing $ 289,423 $ 276,433
Noninterest-bearing 125,903 130,378
- ---------------------------------------------------------------------------------------------------------
Total deposits 415,326 406,811
- ---------------------------------------------------------------------------------------------------------
Borrowed funds and other interest-bearing liabilities (Note 8) 8,096 6,407
Accrued interest payable and other liabilities 2,672 3,049
- ---------------------------------------------------------------------------------------------------------
Total Liabilities 426,094 416,267
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 11) - -
SHAREHOLDERS' EQUITY (NOTES 10 AND 15)
Preferred stock, no par or stated value: 10,000,000
shares authorized; no shares issued or outstanding - -
Common stock, no par or stated value: 20,000,000 shares
authorized; 7,486,375 shares issued and outstanding at
December 31, 1996, and 7,471,505 shares issued and
outstanding at December 31, 1995 37,738 37,658
Retained earnings 13,055 8,600
Unrealized loss on available-for-sale securities, net of taxes (874) (746)
- ---------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 49,919 45,512
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 476,013 $ 461,779
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 30,145 $ 25,960 $ 18,971
Interest on investment securities 4,256 6,299 7,166
Interest on Federal funds sold 566 1,137 283
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 34,967 33,396 26,420
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 2,457 1,451 1,363
Savings 932 1,150 1,564
Time certificates of deposit 7,701 8,397 3,029
- ------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 11,090 10,998 5,956
- ------------------------------------------------------------------------------------------------------------------------
Other interest expense 637 1,017 323
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 11,727 12,015 6,279
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 23,240 21,381 20,141
(Recovery of) provision for possible loan losses (Note 4) (470) 1,539 (850)
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 23,710 19,842 20,991
- ------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 1,406 1,727 1,754
Other fees and charges 2,769 2,542 2,637
Merchant bankcard income 523 518 1,249
Net gain (loss) on sales of available-for-sale investment securities 14 (620) 17
Other (loss) gain on sale of assets, net (28) 58 624
Other income 482 788 402
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 5,166 5,013 6,683
- ------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 10,147 10,405 9,518
Net occupancy, furniture and equipment 4,056 5,127 4,678
Professional and legal fees 1,676 1,288 1,476
Other real estate owned 439 219 1,832
Postage and delivery 624 586 543
Goodwill amortization 505 821 211
Advertising and promotion 472 530 426
Merchant bankcard 424 475 1,013
Telecommunications 351 481 352
Software 340 395 214
Office supplies 305 391 402
Data processing 291 253 235
FDIC assessment and other insurance 273 857 1,442
Other operating expense 1,325 1,465 1,493
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 21,228 23,293 23,835
- ------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 7,648 1,562 3,839
Provision for income taxes 3,193 693 1,134
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,455 $ 869 $ 2,705
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 7,476 7,469 5,507
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.60 $ 0.12 $ 0.49
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS AND SHARES OUTSTANDING IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED (LOSS)/
GAIN ON AVAILABLE-FOR-
COMMON STOCK RETAINED SALE SECURITIES,
SHARES AMOUNT EARNINGS NET OF TAX TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 3,469 $ 23,436 $ 5,026 $ - $ 28,462
Common stock issued 4,000 14,207 14,207
Unrealized loss on available-for-sale securities (3,530) (3,530)
Net income 2,705 2,705
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 7,469 37,643 7,731 (3,530) 41,844
Common stock issued 3 15 15
Unrealized gain on available-for-sale securities 2,784 2,784
Net income 869 869
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 7,472 37,658 8,600 (746) 45,512
Common stock issued 14 80 80
Unrealized loss on available-for-sale securities (128) (128)
Net income 4,455 4,455
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 7,486 $ 37,738 $ 13,055 $ (874) $ 49,919
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
34
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,455 $ 869 $ 2,705
Adjustments to reconcile net income to net cash provided
by operating activities:
(Recovery of) provision for possible loan losses (470) 1,539 (850)
Provision for loss on other real estate owned 428 128 1,182
Gain on sale of other real estate owned (85) (130) (5)
(Gain) loss on sale of available-for-sale investment securities (14) 620 (17)
Net amortization of premiums on investment securities 907 2,165 1,695
Gain on sale of loans - (145) (215)
Net amortization of deferred fees and unearned income on loans 158 29 24
Depreciation and amortization 2,311 2,876 2,106
Loss (gain) on sale of fixed assets and other assets 28 (1) (409)
Provision (benefit) for deferred income taxes 1,371 (541) 1,492
Increase in accrued interest receivable and other assets (659) (404) (16)
(Decrease) increase in accrued interest payable and other liabilities (417) (198) 645
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,013 6,807 8,337
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available-for-sale investment securities 8,549 26,860 5,245
Proceeds from maturities of available-for-sale investment securities 8,632 6,000 10,295
Proceeds from maturities of held-to-maturity investment securities - 7,530 -
Purchase of investment securities available-for-sale, FHLB and FRB stock (856) (1,206) (4,946)
Proceeds from sale of loans - 2,084 -
Purchase of IOBC loans - (71,576) -
Purchase of other loans (5,185) (26,432) -
Loans funded, net of payments received (26,854) (15,823) (3,283)
Proceeds from sale of premises and equipment and other assets 199 1 932
Purchase of premises and equipment (245) (1,535) (2,576)
Proceeds from sale of other real estate owned 1,791 5,689 2,704
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (13,969) (68,408) 8,371
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Rights Offering - - 14,207
Proceeds from exercise of stock options 80 15 -
Purchase of IOBC interest-bearing deposits - 14,965 -
Purchase of IOBC noninterest-bearing deposits - 19,762 -
Increase (decrease) in interest-bearing deposits 12,990 68,998 (15,105)
Decrease in noninterest-bearing deposits (4,475) (36,853) (13,344)
Increase (decrease) in other borrowings 2,041 (7,316) 5,088
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 10,636 59,571 (9,154)
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,680 (2,030) 7,554
Cash and cash equivalents, beginning of period 29,088 31,118 23,564
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 33,768 $ 29,088 $ 31,118
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
35
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Unrealized loss (gain) on investment securities available-for-sale, net of tax $ 128 $ (2,784) $ 3,530
Transfer of loans to other real estate owned 699 1,821 3,585
Assumption of senior liens on other real estate owned - 102 -
Transfer of held-to-maturity securities to available-for-sale - 51,991 -
Close out of capital lease accounts 118 - -
Asset sales offset to restructuring reserve 88 - -
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SC Bancorp, a bank holding company (the "Company"), and its subsidiary, Southern
California Bank, a California state-chartered bank (the "Bank"), operate 14
branches in Southern California. The Company's primary source of revenue is
providing loans to customers, who are predominantly small and mid-sized
businesses. The accounting and reporting policies of the Company conform to
generally accepted accounting principles and general practices within the
banking industry. The following are descriptions of the more significant of
these policies:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
the Bank. All material intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS:
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
For cash flow reporting purposes, cash, amounts due from banks, and short-term
investments with maturities of less than three months are considered cash and
cash equivalents.
SECURITIES:
The Company's securities portfolio includes U.S. Treasury and U.S. federal
agency securities, most of which are mortgage-backed securities. The Company
has classified its investment securities as available-for-sale; the Company has
no trading account assets.
Securities are classified as available-for-sale when the Company intends to hold
the securities for an indefinite period of time but not necessarily to maturity.
Any decision to sell a security classified as available-for-sale would be based
on various factors, including significant movements in interest rates, changes
in the maturity mix of the Company's assets and liabilities, liquidity demands,
regulatory capital considerations, and other similar factors. Securities
classified as available-for-sale are reported at their fair values. Unrealized
holding gains and losses on securities available-for-sale are reported, net of
tax, as a separate component of shareholders' equity. Realized gains and losses
from the sales of available-for-sale securities are reported separately in the
consolidated statements of operations using the specific identification method.
In January 1995, the FDIC issued a final rule excluding unrealized holding gains
and losses on available-for-sale debt securities from the calculation of Tier 1
capital. At December 31, 1996 and 1995, the Company's available-for-sale
portfolio had a net unrealized loss of $1.5 million and $1.3 million,
respectively. The tax-effected reduction to shareholders' equity at December
31, 1996 and 1995 was $874,000 and $746,000, respectively.
Securities are classified as held-to-maturity when the Company has both the
intent and ability to hold the securities to maturity on a long-term basis.
Securities held-to-maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts to maturity or, in the case of
mortgage-backed securities, over the estimated lives of the securities.
In December 1995, the Company reclassified its entire held-to-maturity
investment portfolio to the available-for-sale category under a special one-time
exemption authorized by the Financial Accounting Standards Board ("FASB") that
allowed companies to reclassify their investment securities portfolio
categories. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, held-to-maturity investment securities were transferred to
available-for-sale at their fair market values. The net result of the transfer
was an aggregate unrealized net loss of $910,000 at December 31, 1995.
STOCK OF FEDERAL HOME LOAN BANK OF SAN FRANCISCO:
As a member of the Federal Home Loan Bank of San Francisco ("FHLB"), the Bank is
required to own common stock in the FHLB
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
based upon a percentage of one of the following balances: residential mortgage
loans, total assets, or the outstanding balance of FHLB advances, whichever is
greater.
STOCK OF FEDERAL RESERVE BANK OF SAN FRANCISCO:
As a member of the Federal Reserve System, the Bank is required to own common
stock in the Federal Reserve Bank of San Francisco ("FRB") based upon a
percentage of capital and surplus at the time of initial membership.
LOANS-ALLOWANCE FOR POSSIBLE LOAN LOSSES AND INCOME RECOGNITION:
A certain degree of risk is inherent in the extension of credit. Credit losses
arise primarily from the loan portfolio, but may also be derived from other
credit-related sources, including commitments to extend credit, guarantees, and
standby letters of credit. Actual credit losses and other charges, net of
recoveries, are deducted from the allowance for possible loan losses. Other
charges to the allowance primarily include amounts related to loan foreclosures
at the time of transfer to other real estate owned. A provision for possible
loan losses, which is a charge against earnings, is added to the allowance based
on management's assessment of certain factors including, but not necessarily
limited to, estimated losses from loans and other credit arrangements; general
economic conditions; deterioration in pledged collateral; historical loss
experience; and trends in portfolio volume, maturity, composition,
delinquencies, and nonaccruals.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures-An Amendment of FASB Statement No. 114,"
effective January 1, 1995. Statement No. 114 prescribes that a loan is impaired
when it is probable that the creditor will be unable to collect all contractual
principal and interest payments under the terms of the loan agreement. Loans
are evaluated for impairment on an individual basis with the exception of
consumer loans, which are aggregated and evaluated collectively. This statement
generally requires impaired loans to be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
as an expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The Company has determined that
the combined effect of adoption of SFAS No. 114 and No. 118 was immaterial to
the consolidated financial statements due to the Company's pre-existing
methodology for calculating its allowance for possible loan losses, which was
based on the value of the underlying collateral of "impaired" loans, as defined
by SFAS No. 114.
All loans on nonaccrual are considered to be impaired; however, not all impaired
loans are on nonaccrual status. Impaired loans on accrual status must meet the
following criteria: all payments must be current and the loan underwriting must
support the debt service requirements. Factors that contribute to a performing
loan being classified as impaired include: a below market interest rate,
delinquent taxes and debts to other lenders that cannot be serviced out of
existing cash flow.
Nonaccrual loans are those which are past due 90 days as to either principal or
interest, or earlier when payment in full of principal or interest is not
expected. When a loan is placed on nonaccrual status, interest accrued but not
received is reversed against interest income. Thereafter, interest income is no
longer recognized and the full amount of all payments received, whether
principal or interest, are applied to the principal balance of the loan. A
nonaccrual loan may be restored to an accrual status when principal and interest
payments are current, and full payment of principal and interest is expected.
Loans are generally carried at the principal amount outstanding, net of unearned
discounts and deferred fees. Purchased loans are generally carried at the
principal amount outstanding, net of any unearned discounts or premiums.
Interest on loans, other than installment loans, is calculated using the simple
interest method. Interest income on discounted loans is generally recognized
over the estimated lives of the loans based on methods that approximate the
interest method. Net deferred loan origination fees are amortized to interest
income over the contractual lives of the related loans using the interest
method.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation and
amortization computed on a straight-line basis over the
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
estimated useful lives of the assets or the lease terms. Sublease rental income
is reported in noninterest expense. Net gains and losses on disposal or
retirement of premises and equipment are reported in net gains and losses on
sales of assets.
OTHER REAL ESTATE OWNED:
Other real estate owned ("OREO") is recorded at the lower of cost or fair value
less estimated costs of disposal at the time of foreclosure. Initial losses on
properties acquired through foreclosure are treated as credit losses at the time
of transfer to OREO. Routine holding costs, net of any income and net gains and
losses on disposal, are reported in the consolidated statements of operations as
noninterest expense. Allowances for OREO losses are recorded for any subsequent
declines in fair values.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS:
Goodwill represents the excess of the purchase price over the estimated fair
value of identifiable net assets acquired. The Company amortizes goodwill over
its estimated useful life, not to exceed 15 years.
Core deposit intangibles are amortized using the straight-line method based on
the estimated runoff of the related deposits. Other identifiable intangible
assets are amortized using the interest method or on a straight-line basis over
their estimated periods of benefit. Goodwill and identifiable intangible assets
are reported as part of other assets.
INCOME TAXES:
The Company files a consolidated Federal income tax return and a combined
California state franchise tax return. Deferred income taxes, which are
reported with other assets, result from the recognition of income and expense
items in different periods for tax and financial reporting purposes.
SFAS No. 109, "Accounting for Income Taxes," requires an asset and liability
approach for determining the amount of income taxes for financial reporting. A
current or deferred tax liability or asset is measured based on the amount of
taxes calculated at the current effective tax rates or refundable currently or
in future years. If it is more likely than not that any portion of a deferred
tax asset will not be realized, the statement requires a valuation allowance to
be recorded.
EARNINGS PER SHARE:
The computation of earnings per share is based on the weighted average number of
shares and common stock equivalents outstanding during the year. The weighted
average number of shares used for calculating earnings per share was 7,476,000,
7,469,000 and 5,507,000 for 1996, 1995 and 1994, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS:
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This Statement requires that long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, or
disposed of, be reviewed for impairment based on the fair value of the assets.
Furthermore, this statement requires that certain long-lived assets and
identifiable intangibles to be disposed of, be reported at the lower of carrying
amount or fair value less estimated disposal costs.
The Company has determined that the impact of this Statement on its operations
and financial position is not material for the year ended December 31, 1996.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION:
The Company maintains a stock option plan for the benefit of its executives. In
1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
which encourages, but does not require companies to record compensation expense
for stock-based employee compensation at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Accordingly,
compensation expense for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. The pro forma effects on net
income if the Company had adopted the fair value accounting provisions of SFAS
No. 123 are disclosed in Note 10.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES:
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities, and is applied
prospectively to financial statements for fiscal years beginning after December
31, 1996. In 1996, the FASB also issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," which defers
for one year the effective date of certain provisions within SFAS No. 125. The
Company does not believe that the impact on its operations and financial
position will be material upon adoption of SFAS 125 or SFAS No. 127.
INTEREST RATE SWAP AGREEMENTS:
The Company has entered into two interest rate swap agreements in the management
of its interest rate exposure. Revenue or expense associated with these
agreements, which are intended to convert the interest-rate characteristics of
interest-bearing assets, are accounted for on a settlement accounting basis and
are recognized as an adjustment to interest income, based on the interest rates
currently in effect for such contracts.
RECLASSIFICATIONS:
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Withdrawal and usage restrictions exist on a portion of the funds of the
Company, the majority of which arise from the requirements of the Federal
Reserve Board to maintain a certain average balance. Such restricted funds
amounted to approximately $1.4 million and $3.0 million at December 31, 1996 and
1995, respectively. These funds are included in Cash and Due from Banks in the
accompanying consolidated balance sheets.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities as of
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury securities and obligations
of U.S. government agencies $ 32,967 $ - $ (285) $ 32,682
Mortgage-backed securities 43,060 - (1,209) 41,851
--------- ---------- ---------- ---------
Total $ 76,027 $ - $ (1,494) $ 74,533
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury securities and obligations
of U.S. government agencies $ 42,036 $ - $ (363) $ 41,673
Mortgage-backed securities 52,062 - (910) 51,152
--------- ---------- ---------- ---------
Total $ 94,098 $ - $ (1,273) $ 92,825
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>
Investment securities with a carrying value of $15.5 million and $18.6 million
were pledged to secure public deposits and as collateral for other borrowings at
December 31, 1996 and 1995, respectively.
The amortized cost and estimated fair value of debt securities at December 31,
1996 by contractual maturities are shown in the following table. Expected
maturities will differ from contractual maturities, particularly with respect to
mortgage-backed securities, because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Maturing in
- -----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Over one Over five
One year year through years through Over
DECEMBER 31, 1996 or less five years ten years ten years Total
---------- ------------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Available-for-sale, amortized cost $ 28,141 $ 47,807 $ - $ 79 $ 76,027
Available-for-sale, estimated fair value $ 28,087 $ 46,367 $ - $ 79 $ 74,533
</TABLE>
Proceeds from sales of investments in securities during 1996, 1995 and 1994 were
$8.5 million, $26.9 million and $5.2 million, respectively. Gross gains of
$14,000 and $17,000 were realized on those sales in 1996 and 1994, respectively.
Gross losses of $620,000 were realized on the sales in 1995. No gross gains
were realized from sales in 1995, and no gross losses were realized from sales
in 1996 and 1994.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 4 - LOANS
Loans outstanding at December 31, 1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 % 1995 %
- ---------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial $ 160,633 46.17% $ 147,230 46.47%
Real estate, construction 8,544 2.46% 4,416 1.39%
Real estate, mortgage 105,123 30.22% 107,662 33.98%
Consumer 73,564 21.15% 57,533 18.16%
- ---------------------------------------------------------------------------------------------------------
Gross loans 347,864 100.00% 316,841 100.00%
------- -------
------- -------
Deferred fee income (689) (531)
Allowance for possible loan losses (4,947) (5,734)
- ------------------------------------------------------------ -----------
Loans, net $ 342,228 $ 310,576
- ------------------------------------------------------------ -----------
- ------------------------------------------------------------ -----------
</TABLE>
No industry constitutes a concentration in the Bank's loan portfolio.
The Bank commonly accepts real estate as abundance of collateral in extending
credits for commercial purposes. Real estate mortgage loans generally comprise
medium-term loans secured by first or second deeds of trust on real estate
located in the State of California. Real estate values in California have
generally stabilized in the Bank's market area. Management believes that the
level of the allowance for possible loan losses as of December 31, 1996, is
adequate to absorb losses inherent in the loan portfolio.
The changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average balance of gross loans outstanding $ 321,843 $ 261,631 $ 203,507
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Gross loan balance at December 31, $ 347,864 $ 316,841 $ 207,688
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Allowance at January 1, $ 5,734 $ 5,318 $ 10,800
Charge-offs:
Commercial 422 834 2,004
Real estate 279 1,227 3,453
Consumer 168 587 362
- --------------------------------------------------------------------------------------------------------------
Total charge-offs 869 2,648 5,819
Recoveries:
Commercial 477 587 915
Real estate 21 129 215
Consumer 54 192 57
- --------------------------------------------------------------------------------------------------------------
Total recoveries 552 908 1,187
Net charge-offs 317 1,740 4,632
(Recovery) provision (credited) charged
to expense (470) 1,539 (850)
Allowance on purchased loans - 617 -
- --------------------------------------------------------------------------------------------------------------
Allowance at December 31, $ 4,947 $ 5,734 $ 5,318
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 4 - LOANS (CONTINUED)
1996 1995 1994
--------------------------------
Ratio of allowance for loan losses to loans
outstanding at December 31, 1.42% 1.81% 2.56%
Ratio of allowance for loan losses to
nonaccrual loans at December 31, 173.84% 414.01% 329.88%
Ratio of net charge-offs to average loans 0.10% 0.67% 2.28%
At December 31, 1996 and 1995, the Bank had classified $7.1 million and $1.5
million, respectively, of its loans as impaired with specific reserves of $1.6
million and $143,000, respectively, as determined in accordance with SFAS No.
114, as amended by SFAS No. 118. The average recorded investment in impaired
loans during the years ended December 31, 1996 and 1995, was approximately $5.3
million and $3.2 million, respectively. Interest income recognized on impaired
loans during 1996 and 1995 was $359,000 and $260,000, of which $342,000 and
$260,000, respectively, was collected in cash.
NOTE 5 - PREMISES AND EQUIPMENT
The following schedule sets forth the cost and accumulated depreciation and
amortization of premises and equipment at
December 31, 1996 and 1995:
(DOLLARS IN THOUSANDS) December 31,
------------------------------------------------------------------
1996 1995
------------------------------------------------------------------
Land $ 2,122 $ 2,122
Buildings and improvements:
Owned 5,092 3,688
Capital leases - 401
Furniture, fixtures, and equipment 7,132 11,810
Leasehold improvements 3,146 5,598
------------------------------------------------------------------
Total 17,492 23,619
Less: accumulated depreciation and
amortization (9,752) (13,885)
------------------------------------------------------------------
Premises and equipment, net $ 7,740 $ 9,734
------------------------------------------------------------------
------------------------------------------------------------------
Depreciation expense was approximately $1.8 million, $2.1 million, and $1.9
million for the years ended December 31, 1996,
1995 and 1994. The Bank's former head office facility was sold in 1994, which
resulted in a gain of $414,000.
NOTE 6 - OTHER REAL ESTATE OWNED
The components of other real estate owned (OREO) at December 31, 1996 and 1995
are as follows:
(DOLLARS IN THOUSANDS) December 31,
--------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------
Other real estate owned - foreclosure $ 625 $ 4,243
Less: allowance for losses and selling expenses (89) (2,170)
--------------------------------------------------------------------------
Other real estate owned - net $ 536 $ 2,073
--------------------------------------------------------------------------
--------------------------------------------------------------------------
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 6 - OTHER REAL ESTATE OWNED (CONTINUED)
The changes in the allowance for OREO losses and selling expenses for the years
ended December 31, 1996 and 1995 were as follows:
(DOLLARS IN THOUSANDS) December 31,
------------------------------------------------------------------
1996 1995
------------------------------------------------------------------
Balance, January 1 $ 2,170 $ 2,761
Provisions charged to expense 428 128
Sales (2,509) (719)
------------------------------------------------------------------
Balance, December 31 $ 89 $ 2,170
------------------------------------------------------------------
------------------------------------------------------------------
NOTE 7 - DEPOSITS
Time certificates of deposit in denominations of $100,000 or more totaled $64.0
million and $46.4 million as of December 31, 1996 and 1995, respectively.
Interest paid on deposit accounts totaled $11.2 million, $10.7 million, and $6.2
million in 1996, 1995 and 1994, respectively.
NOTE 8 - BORROWED FUNDS AND OTHER INTEREST-BEARING LIABILITIES
Borrowed funds and other interest-bearing liabilities at December 31, 1996 and
1995 were as follows:
(DOLLARS IN THOUSANDS) December 31,
--------------------------------------------------------------
1996 1995
--------------------------------------------------------------
Federal funds purchased $ 1,852 $ -
Treasury, tax and loan (TT&L) 5,088 4,883
Deferred compensation 1,156 1,165
Capital lease obligations - 257
Other - 102
--------------------------------------------------------------
$ 8,096 $ 6,407
--------------------------------------------------------------
--------------------------------------------------------------
TT&L balances fluctuate based on the amounts deposited by customers and the
amounts called for payment by the Federal Reserve Bank. The Bank's limit on its
TT&L at the Federal Reserve Bank is $6.0 million. Any amounts in excess of this
limit will generally be automatically withdrawn by the Federal Reserve Bank the
following day.
Interest paid on borrowed funds and other interest-bearing liabilities totaled
$623,000, $548,000 and $294,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------
Current:
Federal $ 1,564 $ 1,045 $ (360)
State 258 189 2
- ---------------------------------------------------------------------
Total current 1,822 1,234 (358)
- ---------------------------------------------------------------------
Deferred:
Federal 758 (320) 1,811
State 613 (221) (319)
- ---------------------------------------------------------------------
Total deferred 1,371 (541) 1,492
- ---------------------------------------------------------------------
Total provision $ 3,193 $ 693 $ 1,134
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
The federal income tax provision for the years ended December 31, 1996, 1995 and
1994 differs from the statutory corporate rate of 35% as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rate reconciliation
Tax benefit at statutory rate $ 2,676 35.00% $ 547 35.00% $ 1,305 35.00%
Tax-exempt municipal interest (7) -0.09% (7) -0.48% (8) -0.21%
State franchise tax, net of federal benefit 575 7.51% 125 7.98% (211) -5.66%
Officer life insurance (40) -0.53% (167) -10.71% (11) -0.29%
Goodwill 40 0.52% 196 12.53% 54 1.45%
Other (51) -0.66% (1) 0.02% 5 0.13%
- -----------------------------------------------------------------------------------------------------------------------------
$ 3,193 41.75% $ 693 44.34% $ 1,134 30.42%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Federal income and California state franchise taxes paid totaled $3.4 million,
$865,000 and $152,000 in 1996, 1995 and 1994, respectively.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and tax credit carryforwards. The components of the Company's net deferred tax
asset are as follows:
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 9 - INCOME TAXES (CONTINUED)
(DOLLARS IN THOUSANDS) DECEMBER 31,
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Deferred Tax Assets
Bad debt reserve $ - $ 1,347
Deferred compensation 953 955
Effect of state taxes on federal liability 85 -
Unrealized loss on securities 619 528
Depreciation 514 582
Other 562 709
- -------------------------------------------------------------------------------
Gross deferred tax asset 2,733 4,121
- -------------------------------------------------------------------------------
Deferred Tax Liabilities
Bad debt reserve (137) -
Deductible prepaid expense (301) (301)
Effect of state taxes on federal liability - (209)
Other (84) (121)
- -------------------------------------------------------------------------------
Gross deferred tax liability (522) (631)
- -------------------------------------------------------------------------------
Total deferred tax asset $ 2,211 $ 3,490
Valuation allowance - -
- -------------------------------------------------------------------------------
Net deferred tax asset $ 2,211 $ 3,490
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No valuation allowance was required under SFAS No. 109 for federal or state
purposes as of December 31, 1996 or 1995, because management expects deferred
tax assets to be fully realized as an offset against future taxable income
exclusive of reversing temporary differences and carryforwards, reversing
temporary differences (which create net future tax liabilities), or through loss
carrybacks.
NOTE 10 - SHAREHOLDERS' EQUITY
COMMON STOCK
During the second quarter of 1994, the Company successfully completed a rights
offering which resulted in the issuance of an additional 4.0 million shares of
common stock at $4.00 per share. Net proceeds of $14.2 million were realized on
this offering after issuance costs of approximately $1.8 million.
On January 23, 1997, the Company declared a $0.05 per share cash dividend to be
paid to shareholders of record at the close of business on February 6, 1997.
The dividend will be paid on February 20, 1997.
STOCK OPTIONS
The Company's stock option plan (the "Plan") provides for the granting of
options to directors and full-time salaried officers and management level
employees to purchase shares of the Company's common stock at option prices per
share at a price equal to the fair market value of the common stock on the date
that each option is granted. Options granted pursuant to the Plan are intended
to qualify as Incentive Stock Options within the meaning of Section 422A of the
Internal Revenue Code of 1986, or Non-Qualified Stock Options ("NQSO") as
determined upon the grant of each option. The options outstanding at December
31, 1996 are all NQSOs. Options granted under the Plan have a maximum life of
ten years. The options become exercisable in installments of 20% beginning on
the date of grant and 20% upon each anniversary date of the original grant. The
total shares available under the Company's stock option plan are 650,000.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes the activity relating to the Company's stock
options for the years indicated.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
No. of Weighted-Avg. No. of Weighted-Avg. No. of Weighted-Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------- --------------- ------- --------------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1 472,100 $ 6.81 379,650 $ 6.54 235,250 $ 7.59
Options granted 138,250 6.93 174,750 5.00 152,200 4.99
Options exercised (14,870) 5.40 (3,000) 4.88 - -
Options expired (36,540) 6.15 (79,300) 6.46 (7,800) 8.20
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31 558,940 $ 6.23 472,100 $ 6.81 379,650 $ 6.54
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-average grant date
fair value of options granted
during the year $ 4.37 $ 3.12 $ 3.18
</TABLE>
The fair market value of options granted during 1996 and 1995 was estimated
using the Black-Scholes option-pricing model. The following assumptions were
incorporated into the valuation calculation: an option contract life of 10
years, a stock price volatility of 39.71% based on daily market prices for the
preceding five year period, the stock pays no dividends and a risk-free interest
rate equivalent to the 10-year Treasury rate on the date of each grant. The
weighted-average risk-free rate for options granted during 1996 is 6.87%.
The table below provides the range of exercise prices, weighted-average exercise
prices and weighted-average remaining contractual lives for options outstanding
at December 31, 1996.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- -----------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.50 to $5.19 259,350 8.1 years $ 5.03 125,060 $ 5.02
$6.00 to $7.63 274,340 7.6 years 6.91 150,592 6.89
$10.10 to $11.87 25,250 3.3 years 11.30 25,250 11.30
-------------------------------------------------------------------------------------------------------------------
$4.50 to $11.87 558,940 7.6 years $ 6.23 300,902 $ 6.48
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option and purchase plans.
Accordingly, no compensation cost has been recognized for its stock option plan.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant dates for awards under the plan consistent with
the method of SFAS No. 123, the Company's net income and earnings per share for
the years ended 1996 and 1995 would have been reduced to the pro forma amounts
indicated below:
1996 1995
Net Income to Common Shareholders --------------------------
As reported $ 4,455 $ 869
Pro forma $ 4,400 $ 834
Net Income per common and common
share equivalent
As reported $ 0.60 $ 0.12
Pro forma $ 0.59 $ 0.11
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 11 - COMMITMENTS AND CONTINGENCIES
CREDIT EXTENSION:
In the normal course of business, there are various outstanding commitments to
extend credit which are not reflected in the accompanying consolidated financial
statements. The Company does not anticipate losses as a result of these
transactions. However, the commitments are a component of the estimate of the
allowance for possible loan losses. Commercial and standby letters of credit
totaled approximately $4.1 million and $4.3 million at December 31, 1996 and
1995, respectively. In addition, the Company had unfunded loan commitments of
$110.5 million and $85.0 million at December 31, 1996 and 1995, respectively.
All of the commitments outstanding at December 31, 1996 represent unfunded loans
which bear a floating interest rate.
The Company uses the same credit policies in making commitments and conditional
obligations as it does in extending loan facilities to customers. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment, and income-producing commercial properties.
INTEREST RATE SWAPS:
The Company has entered into two interest rate swap agreements to reduce the
impact of changes in interest rates on its floating rate loan portfolio and does
not use them for trading purposes. At December 31, 1996, the Company had
outstanding one interest rate swap agreement with a commercial bank having a
total notional principal amount of $50 million (Swap #1), and one interest rate
swap agreement with a broker dealer having a notional principal amount of $25
million (Swap #2). The agreements were intended to reduce the Company's
exposure to declines in prime lending rates by artificially converting $75
million of the Company's prime-based loans to fixed rates for the duration of
the agreements. Swap #1 was entered into in September 1993. The terms of the
first agreement require the Company to pay interest quarterly based on
three-month LIBOR and to receive interest semi-annually at a fixed rate of
4.865%. The agreement matures in September 1998.
Swap #2 was entered into in January 1994. The terms of the second agreement
require the Company to pay interest quarterly based on three-month LIBOR in
arrears, and to receive interest semi-annually at a fixed rate of 5.04% through
the January 1997 maturity date. The Company accrues monthly interest income and
expense on the swaps, the net of which is included in interest income on loans.
For the years ended December 31, 1996, 1995, and 1994, net interest income or
(expense) of ($563,000), ($929,000), and $141,000 from the swap agreements is
included in interest income on loans in the consolidated statements of
operations. The Company is required to pledge collateral on the transactions.
U.S. Agency notes having a fair value of approximately $5.2 million were pledged
as collateral for the agreements as of December 31, 1996. The Company is
exposed to credit loss in the event of nonperformance by the counterparties to
the agreements. However, the Company does not anticipate nonperformance by the
counterparties. The following table summarizes the characteristics of the swap
agreements as of December 31, 1996:
<TABLE>
<CAPTION>
Notional Interest Rate Interest Rate Unrealized Estimated Maturity
(DOLLARS IN THOUSANDS) Amount Paid Received Loss Fair Value Date
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Swap #1 $50,000 3-mo LIBOR 4.865% $ 899 $ (899) September 14, 1998
Swap #2 $25,000 3-mo LIBOR 5.04% $ 1 $ (1) January 7, 1997
(in arrears)
</TABLE>
LEASE COMMITMENTS:
The Company leases parcels of land and buildings under operating leases, which
require the Company to pay all normal property taxes, insurance, and
maintenance. The Company had no capital leases at December 31, 1996. At
December 31, 1995, the Company had one building lease with an amortized cost of
$123,000 recorded as a capital lease and included in premises and equipment in
the accompanying consolidated balance sheets. The capital lease was terminated
during the first quarter of 1996. The costs associated with terminating the
lease are included in the accompanying consolidated statement of operations for
1995. Net rent expense for the years ended 1996, 1995 and 1994 was
approximately $800,000, $1.2 million and $900,000, respectively.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum payments required under noncancellable leases with initial or
remaining terms of one year or more are as follows as of December 31, 1996:
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------
Operating
YEARS ENDING DECEMBER 31, Leases
-----------------------------------------------------------------
1997 $ 783
1998 792
1999 933
2000 938
2001 951
Thereafter 6,161
-----------------------------------------------------------------
Total minimum payments $ 10,558
-----------------------------------------------------------------
-----------------------------------------------------------------
The payments shown above for operating leases take into consideration only one
lease option that the Company intends to exercise. The Company has options to
extend several of its other operating leases. However, because it is uncertain
whether or not these other options will be exercised, payments for those option
periods have been excluded.
BORROWING ARRANGEMENTS:
In the event that the Company experiences a temporary liquidity shortage, it has
available other sources of liquidity, including reverse repurchase arrangements
to borrow cash for short to intermediate periods of time using the Company's
available-for-sale investment securities as collateral, Federal funds lines of
credit that allow the Company to temporarily borrow an aggregate of up to $30.0
million from three commercial banks, and short-term borrowing lines of credit at
the Federal Reserve Bank and Federal Home Loan Bank. Federal funds arrangements
with correspondent banks are subject to the terms of the individual arrangements
and may be terminated at the discretion of the correspondent bank.
LITIGATION:
The Company is a party to routine litigation involving various aspects of its
business. In the opinion of management, none of the pending litigation at
December 31, 1996 would have a material adverse impact on the consolidated
financial condition or operations of the Company.
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan that covers substantially all full-time employees.
It permits voluntary contributions by employees, a portion of which is matched
by the Company. The plan may acquire Company shares on the open market as part
of the Company's matching contribution. The Company's expenses relating to its
contributions to the 401(k) plan were $129,000, $139,000, and $108,000 in 1996,
1995 and 1994, respectively.
The Company has established deferred compensation plans which permit certain
directors and management employees to defer portions of their compensation and
earn interest at a predetermined amount above a specified interest rate index on
the deferred amounts. Interest expense incurred on deferred balances was
approximately $177,000, $648,000 and $174,000 in 1996, 1995 and 1994,
respectively. The deferred compensation liability at December 31, 1996 and 1995
was approximately $2.1 million, of which $1.2 million represented principal and
was classified with other interest-bearing liabilities in the accompanying
consolidated balance sheets. Approximately $948,000 and $946,000 represented
accrued interest payable at December 31, 1996 and 1995, respectively, and was
classified as accrued interest payable on other liabilities in the accompanying
consolidated balance sheets. In conjunction with the plans, the Company has
purchased life insurance policies on the participants with the Company as
beneficiary. The cash surrender values of the life insurance policies were
included in other assets in the accompanying consolidated balance sheets
totaling approximately $3.5 million and $3.0 million at December 31, 1996 and
1995, respectively.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 13-PARENT COMPANY ONLY INFORMATION
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31,
- --------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 2,041 $ 2,305
Other assets 296 95
Investment in Southern California Bank 47,721 43,113
- --------------------------------------------------------------------------------------------------
Total Assets $ 50,058 $ 45,513
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 139 $ 1
Shareholders' Equity:
Common stock 37,738 37,658
Retained earnings 13,055 8,600
Unrealized loss on available-for-sale securities, net of tax (874) (746)
- --------------------------------------------------------------------------------------------------
Total Shareholders' Equity 49,919 45,512
- --------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 50,058 $ 45,513
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Interest income $ 63 $ 108 $ 93
Dividend income from subsidiary - - 163
- ----------------------------------------------------------------------------------------------------------------------
Total income 63 108 256
- ----------------------------------------------------------------------------------------------------------------------
EXPENSE
Management fees 90 66 24
Other professional fees 328 281 26
Other expenses 129 - 91
- ----------------------------------------------------------------------------------------------------------------------
Total expense 547 347 141
- ----------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and equity in undistributed
earnings of subsidiary (484) (239) 115
(Benefit) provision for income taxes (201) (99) -
Equity in undistributed earnings of subsidiary 4,738 1,009 2,590
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,455 $ 869 $ 2,705
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 13-PARENT COMPANY ONLY INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 4,455 $ 869 $ 2,705
Adjustments to reconcile net income to net cash
used in operating activities:
(Increase) decrease in other assets (199) 43 (43)
Undistributed earnings of subsidiary (4,738) (1,009) (2,753)
Increase (decrease) in other liabilities 138 (94) -
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities (344) (191) (91)
- -------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Dividends received from subsidiary - - 163
Additional investment in subsidiary - (5,000) (6,810)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities - (5,000) (6,647)
- -------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 80 15 14,207
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 80 15 14,207
- -------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (264) (5,176) 7,469
Cash, January 1 2,305 7,481 12
- -------------------------------------------------------------------------------------------------
Cash, December 31 $ 2,041 $ 2,305 $ 7,481
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE 14 - CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 Quarter Ended
- -----------------------------------------------------------------------------------------------------------
31-Dec 30-Sep 30-Jun 31-Mar
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 8,983 $ 8,840 $ 8,542 $ 8,602
Interest expense 2,905 2,972 2,884 2,966
- ----------------------------------------------------------------------------------------------------------
Net interest income 6,078 5,868 5,658 5,636
- ----------------------------------------------------------------------------------------------------------
(Recovery of) provision for possible loan losses - - (750) 280
Net gains on sales of securities - - - 14
Noninterest income 1,310 1,323 1,246 1,273
Noninterest expense 4,783 5,048 6,073 5,324
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 2,605 2,143 1,581 1,319
- -----------------------------------------------------------------------------------------------------------
Provision for income taxes 1,083 893 661 556
- -----------------------------------------------------------------------------------------------------------
Net income $ 1,522 $ 1,250 $ 920 $ 763
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Net income per share $ 0.20 $ 0.17 $ 0.12 $ 0.10
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Stock Data
Common stock price range: (1)
High 9 7/8 7 7 1/8 6 3/4
Low 7 6 3/16 6 3/8 6 1/16
</TABLE>
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 14 - CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 Quarter Ended
- -----------------------------------------------------------------------------------------------------------------------
31-Dec 30-Sep 30-Jun 31-Mar
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 8,819 $ 8,796 $ 8,544 $ 7,237
Interest expense 2,875 3,107 3,076 2,957
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 5,944 5,689 5,468 4,280
- -----------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses 314 900 200 124
Net losses on sales of securities - (620) - -
Noninterest income 1,281 1,379 1,337 1,636
Noninterest expense 5,202 6,833 5,997 5,262
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,709 (1,285) 608 530
- -----------------------------------------------------------------------------------------------------------------------
Provision for income taxes (benefits) 707 (377) 178 185
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,002 $ (908) $ 430 $ 345
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) per share $ 0.13 $ (0.12) $ 0.06 $ 0.05
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Stock Data
Common stock price range: (1)
High 6 1/8 6 5/8 5 1/4 5 1/4
Low 5 7/16 4 3/4 4 5/8 4 5/16
</TABLE>
(1) The common stock is listed on the American Stock Exchange ("AMEX") under
the symbol, "SCK". The preceding table sets forth the high and low closing
prices on a per share basis for the common stock as reported by the AMEX for
the periods indicated.
NOTE 15 - REGULATORY MATTERS
The Company became a member of the Federal Reserve System effective July 1,
1996. The Company's primary regulator is now the Federal Reserve Board.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
the regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the
Bank meets all capital adequacy requirements to which it is subject. As of
December 31, 1995, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. As of December 31, 1996, the
Bank continued to meet the requirements to be categorized as well-capitalized,
maintaining total risk-based, Tier I risk-based and Tier I leverage ratios as
set forth in the following table.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 15-REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
DOLLARS IN THOUSANDS Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (1) $ 49,917 11.86% $ 33,676 8.00% $ 42,095 10.00%
Tier 1 Capital (1) $ 44,970 10.68% $ 16,838 4.00% $ 25,257 6.00%
Leverage Capital (2) $ 44,970 9.51% $ 18,908 4.00% $ 23,635 5.00%
As of December 31, 1995:
Total Capital (1) $ 44,634 11.39% $ 31,342 8.00% $ 39,170 10.00%
Tier 1 Capital (1) $ 39,727 10.14% $ 15,671 4.00% $ 23,502 6.00%
Leverage Capital (2) $ 39,727 8.59% $ 18,493 4.00% $ 23,115 5.00%
</TABLE>
(1) Ratio of Total and Tier 1 capital to risk-weighted assets.
(2) Ratio of Tier 1 capital to average assets.
NOTE 16 - TRANSACTIONS WITH DIRECTORS & OFFICERS
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with its directors, principal
officers, their immediate families, and affiliated companies in which they are
principal shareholders. Any such transactions are on the same terms, including
interest rates and collateral requirements, as those prevailing at the time for
comparable transactions with others. These related parties were indebted to the
Company for loans totaling approximately $2.0 million, $2.0 million, and $2.5
million as of December 31, 1996, 1995, and 1994, respectively. New loans
granted in 1996 and 1995 were $490,000 and $714,000, respectively; repayments
were $581,000, $1.1 million, respectively.
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the Company's
financial instruments. However, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments except
marketable securities with quoted market prices, the fair value estimates
presented herein are not necessarily indicative of the amounts the Company could
have realized in sales transactions at either December 31, 1996 or 1995. The
estimated fair value amounts for 1996 and 1995 have been measured as of their
respective year ends, and have not been reevaluated or updated for purposes of
these consolidated financial statements subsequent to those respective dates.
As such, the estimated fair values of these financial instruments subsequent to
the respective reporting dates may be different than the amounts reported at
each year end.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following information should not be interpreted as an estimate of the fair
value of the entire company since a fair value calculation is only required for
a limited portion of the Company's assets.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(DOLLARS IN THOUSANDS) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 33,768 $ 33,768 $ 29,088 $ 29,088
Investments:
Securities available-for-sale 74,533 74,533 92,825 92,825
Investment in Federal Home Loan Bank stock, at cost 1,450 1,450 1,205 1,205
Investment in Federal Reserve Bank stock, at cost 607 607 - -
Loans, net (excludes nonaccrual loans):
Commercial 159,118 160,112 146,609 147,595
Real estate, construction 8,429 8,469 4,416 4,451
Real estate, mortgage 103,289 104,565 107,048 109,379
Consumer 73,493 73,995 57,383 58,427
Less: Allowance for possible loan losses 4,947 4,947 5,734 5,734
Accrued interest receivable 3,931 3,931 4,297 4,297
- ---------------------------------------------------------------------------------------------------------------------------------
Total financial assets $ 453,671 $ 456,483 $ 437,137 $ 441,533
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Deposits:
Deposits payable on demand $ 270,093 $ 270,093 $ 260,679 $ 260,679
Deposits with fixed maturities 145,233 145,347 146,132 146,663
Short-term borrowings 6,940 6,940 4,883 4,883
- ---------------------------------------------------------------------------------------------------------------------------------
Total financial liabilities $ 422,266 $ 422,380 $ 411,694 $ 412,225
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swap agreements in a net payable position $ - $ (900) $ - $ (1,070)
</TABLE>
This disclosure of fair value amounts does not include the fair values of any
intangible assets, such as core deposit intangibles, or loan servicing rights.
The carrying values of certain financial instruments approximated their fair
values. These financial instruments include cash and due from banks,
interest-bearing deposits in banks, Federal funds sold and purchased, customers'
acceptance liability, accrued interest receivable, demand deposits, other
short-term borrowings, acceptances outstanding, and other liabilities that are
considered financial instruments. Carrying values were assumed to approximate
fair values for these financial instruments because they are short term in
nature and their recorded amounts approximate fair values or are receivable or
payable on demand.
Fair value amounts of investment securities were based on quoted market prices.
For purposes of these fair value calculations, the aggregate fair value of the
loan portfolio, excluding nonaccrual loans, was adjusted by a related portion of
the allowance for possible loan losses. That portion of the allowance for
possible loan losses primarily represents the credit risk associated with loans
that reprice within relatively short time frames. The fair values of loans that
do not
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
reprice within relatively short time frames were calculated using discounted
cash flow models based on the maturities of the loans. The discount rates,
which were based on market interest rates for similar types of loans,
incorporated adjustments for credit risk. The fair values of nonaccrual loans
with recorded book values of $2.8 million and $1.4 million at December 31,
1996 and 1995, respectively, were not estimated because it was not practical
to reasonably estimate the amount or timing of future cash flows for such
loans. The fair market values of the interest rate swap agreements are based
on quoted market prices.
For deposits with defined maturities, the fair values were calculated using
discounted cash flow models based on market interest rates for different product
types and maturity dates for which the deposits were held.
The fair value of loan commitments is not material to the financial statements
taken as a whole.
55
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SC BANCORP
By: /s/ Larry D. Hartwig
----------------------------------------
Larry D. Hartwig
Chief Executive Officer and President
Date: May 9, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Larry D. Hartwig
- ------------------------------ Chief Executive Officer, May 9, 1997
Larry D. Hartwig President and Director
(Principal Executive Officer)
/s/ Bruce Roat
- ------------------------------ Executive Vice President, May 9, 1997
Bruce Roat Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ H. A. Beisswenger
- ------------------------------ Chairman of the Board May 9, 1997
H. A. Beisswenger
/s/ N. Keith Abbott
- ------------------------------ Director May 9, 1997
N. Keith Abbott
/s/ Robert C. Ball
- ------------------------------ Director May 9, 1997
Robert C. Ball
56
<PAGE>
/s/ James E. Cunningham
- ------------------------------ Director May 9, 1997
James E. Cunningham
/s/ William C. Greenbeck
- ------------------------------ Director May 9, 1997
William C. Greenbeck
/s/ Irving J. Pinsky
- ------------------------------ Director May 9, 1997
Irving J. Pinsky
/s/ Peer A. Swan
- ------------------------------ Director May 9, 1997
Peer A. Swan
/s/ Donald E. Wood
- ------------------------------ Director May 9, 1997
Donald E. Wood
57
<PAGE>
Exhibit Index
- --------------------------------------------------------------------------------
Exhibit Description Page
No. No.
- --------------------------------------------------------------------------------
3(i).1 SC Bancorp Articles of Incorporation (f)
3(i).2 Certificate of Amendment to SC Bancorp Articles of Incorporation dated
May 9, 1995(g)
3(ii).1 Amended and Restated Bylaws of SC Bancorp
4.1 Specimen Common Stock Certificate(a)
4.2SC Bancorp 1989 Stock Option Plan(d)
4.3.1 Amended and restated Southern California Bank Employee Retirement
Plan(c)
4.3.2 First amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.3 Second amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.4 Third amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.3.5 Fourth amendment to the amended and restated Southern California Bank
Employee Retirement Plan(g)
4.4 SC Bancorp Executive Deferral Plan (IV)(d)
4.5 Southern California Bank Executive Incentive Compensation Plans for
1994(a)
4.6 Southern California Bank Executive Incentive Compensation Plans for
1995(g)
4.7 Southern California Bank Executive Incentive Compensation Plans for
1996
10.1 Sublease between SC Bancorp and Denny's, dated December 24, 1992, for
office space in La Mirada, California(b)
10.2 Lease between Southern California Bank and Robert Stein, dated
September 1, 1981, amended June 19, 1990, for office space in Avalon,
California(c)
10.3 Assignment of lease between Southern California Bank and Garfield
Bank, dated December 27, 1985, amended January 1, 1987, for office
space in Huntington Beach, California(a)
10.4 Lease between Southern California Bank and Tustin-La Palma Business
Center, dated July 8, 1993 for office space in Anaheim, California(a)
10.5 License Agreement between Southern California Bank and The Vons
Companies, Inc., dated December 18, 1992 for supermarket space in
Anaheim Hills, California(a)
10.6 First amendment to license agreement between Southern California Bank
and The Vons Companies, Inc., dated December 18, 1992 for supermarket
space in Anaheim Hills, California(h)
10.7 Consent to assignment of sublease and sublease between Southern
California Bank, Bank of America, NTSA, and The Taj dated May 12, 1995
for office space in Laguna Hills, California(g)
10.8 Sublease between Southern California Bank and Citicorp Savings, dated
November 30, 1995 for office space in La Jolla, California(g)
10.9 Lease between Southern California Bank and Regents Park Financial
Centre, Ltd., dated October 25, 1995 for office space in La Jolla,
California(g)
10.10 Forward lease between Southern California Bank and Regents Park
Financial Centre, Ltd., dated October 25, 1995 for office space in La
Jolla, California(g)
10.11 License Agreement between Southern California Bank and The Vons
Companies, Inc., dated February 22, 1996 for supermarket space in La
Habra, California(h)
10.12 Employment Agreement between SC Bancorp and Southern California Bank
and Larry D. Hartwig, dated January 1, 1997
10.13 Employment Agreement between SC Bancorp and Southern California Bank
and David A. McCoy, dated February 25, 1992
10.14 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and David A. McCoy, dated January 1, 1997
10.15 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and Bruce W. Roat, dated January 1, 1997
10.16 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and Ann E. McPartlin, dated January 1,
1997
10.17 Amended and Restated Employment Security Agreement between SC Bancorp
and Southern California Bank and M. V. Cummings, dated January 1, 1997
58
<PAGE>
Exhibit Index (continued)
10.18 Form of Indemnification Agreement entered into with each Executive
Officer and Director of SC Bancorp(a)
10.19 Form of Indemnification Agreement entered into with each Executive
Officer and Director of Southern California Bank(a)
13.1 Pages 7-11 of the Company's 1996 annual report to shareholders
21.0 Subsidiaries of the Registrant(e)
23.1 Consent of the Company's independent auditor (Deloitte & Touche, LLP)
to the incorporation by reference in the Registration Statement of SC
Bancorp on Form S-8 (No. 33-38666) of their report dated January 24,
1997 appearing in the Annual Report on Form 10-K of SC Bancorp for the
year ended December 31, 1996.
27.1 Financial Data Schedule
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) This exhibit is contained in SC Bancorp's Registration Statement on
Form S-2, filed with the Commission on March 9, 1994, (Commission File
No. 33-76274), and incorporated herein by reference.
(b) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31,1992, filed with the Commission on
March 30, 1993, (Commission File No. 0-11046) and incorporated herein
by reference.
(c) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31,1991, filed with the Commission on
March 30, 1992, (Commission File No. 0-11046) and incorporated herein
by reference.
(d) This exhibit is contained in SC Bancorp's Proxy Statement, filed with
the Commission on on March 23, 1990, (Commission File No. 0-11046) and
incorporated herein by reference.
(e) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31,1994, filed with the Commission on
March 30, 1995, (Commission File No. 0-11046) and incorporated herein
by reference.
(f) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10-
Q for the period ended March 31, 1995, filed with the Commission on
May 15, 1995, (Commission File No. 0-11046) and incorporated herein by
reference.
(g) This exhibit is contained in SC Bancorp's Annual Report on Form 10-K
for the year ended December 31,1995, filed with the Commission on
March 29, 1996, (Commission File No. 0-11046) and incorporated herein
by reference.
(h) This exhibit is contained in SC Bancorp's Quarterly Report on Form 10-
Q for the period ended September 30, 1996, filed with the Commission
on November 14, 1996, (Commission File No. 0-11046) and incorporated
herein by reference.
59
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
SC BANCORP
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The Board of Directors shall fix the
location of the principal executive office of the corporation at any place
within or outside the State of California. If the principal executive office is
located outside the State of California, and the corporation has one or more
business offices in such state, the Board of Directors shall fix and designate a
principal business office in the State of California.
SECTION 2. OTHER OFFICES. Branch or other subordinate offices may at
any time be established by the Board of Directors at such other places as it
deems appropriate.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of shareholders shall be held
at any place within or outside the State of California designated by the Board
of Directors. In the absence of any such designation, shareholders' meetings
shall be held at the principal executive office of the corporation.
SECTION 2. ANNUAL MEETING. The annual meeting of shareholders shall
be held on the third Tuesday in May of each year at 1:30 p.m., or such other
date or such other time as may be fixed by the Board of Directors.
SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders
may be called at any time by the Board of Directors, the Chairman of the Board,
the President, or by the holders of shares entitled to cast not less than ten
percent (10%) of the votes at such meeting. If a special meeting is called by
any person or persons other than the Board of Directors, the request shall be in
writing,
<PAGE>
specifying the time of such meeting and the general nature of the business
proposed to be transacted, and shall be delivered personally or by registered
mail to the Chairman of the Board, the President, any Vice President or the
Secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote that a meeting
will be held at a time requested by the person or persons calling the meeting,
not less than 35 nor more than 60 days after receipt of the request. If the
notice is not given within 20 days after receipt of the request, the person or
persons requesting the meeting may give the notice. Nothing in this paragraph
shall be construed as limiting, fixing or affecting the time when a meeting of
shareholders called by action of the Board of Directors may be held.
SECTION 4. NOTICE OF MEETINGS. Written notice, in accordance with
Section 5 of this Article II, of each annual or special meeting of shareholders
shall be given not less than 10 nor more than 60 days before the date of the
meeting to each shareholder entitled to vote thereat. Such notice shall state
the place, date, and hour of the meeting and (a) in the case of a special
meeting, the general nature of the business to be transacted, and no other
business may be transacted, or (b) in the case of the annual meeting, those
matters which the Board of Directors, at the time of the mailing of the notice,
intends to present for action by the shareholders, but, subject to the
provisions of applicable law, any proper matter may be presented at the meeting
for such action. The notice of any meeting at which Directors are to be elected
shall include the names of nominees intended at the time of the notice to be
presented by the Board of Directors for election.
If action is proposed to be taken at any meeting for approval of (a) a
contract or transaction in which a Director has a direct or indirect financial
interest, pursuant to Section 310 of the California General Corporation Law,
(b) an amendment of the Articles of Incorporation, pursuant to Section 902 of
that Law, (c) a reorganization of the corporation, pursuant to Section 1201 of
that Law, (d) a voluntary dissolution of the corporation, pursuant to
Section 1900 of that Law, or (e) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to
Section 2007 of that Law, the notice shall also state the general nature of that
proposal.
SECTION 5. MANNER OF GIVING NOTICE. Notice of a shareholders'
meeting may be given either personally or by first-class mail, or by third-class
mail if the corporation has outstanding shares held of record by 500 or more
persons (determined as provided in Section 605 of the California General
Corporation Law) on the record date for the shareholders' meeting, or by
telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or is given,
notice shall be deemed to have
2
<PAGE>
been given if sent to that shareholder by mail or telegraphic or other written
communication to the corporation's principal office or if published at least
once in a newspaper of general circulation in the county in which that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication. An affidavit of mailing or other means of giving any
notice in accordance with the above provisions, executed by the Secretary,
Assistant Secretary or other transfer agent shall be prima facie evidence of the
giving of the notice.
If any notice addressed to the shareholder at the address of such
shareholder appearing on the books of the corporation is returned to the
corporation by the United States postal service marked to indicate that the
United States postal service is unable to deliver the notice to the shareholder
at such address, all future notices or reports shall be deemed to have been duly
given without further mailing if the same shall be available for the shareholder
upon written demand of the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice
to all other shareholders.
SECTION 6. QUORUM. The presence in person or by proxy of the holders
of a majority of the shares entitled to vote at any meeting shall constitute a
quorum for the transaction of business. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
SECTION 7. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders'
meeting, whether or not a quorum is present, may be adjourned from time to time
by the vote of a majority of the shares, the holders of which are either present
in person or represented by proxy thereat, but in the absence of a quorum
(except as provided in Section 6 of this Article) no other business may be
transacted at such meeting.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place are announced at the meeting at which the
adjournment is taken. However, when any shareholders' meeting is adjourned for
more than 45 days from the date set for the original adjourned meeting, or, if
after adjournment a new record date is fixed for the adjourned meeting, notice
of the adjourned meeting shall be given as in the case of an original meeting.
At any adjourned meeting the corporation may transact any business which may
have been transacted at the original meeting.
3
<PAGE>
SECTION 8. VOTING. The shareholders entitled to notice of any
meeting or to vote at any such meeting shall be only persons in whose name
shares stand on the stock records of the corporation on the record date
determined in accordance with Section 9 of this Article.
Voting shall in all cases be subject to the provisions of Sections 702
through 704, inclusive, of the California General Corporation Law (relating to
voting shares held by a fiduciary, in the name of a corporation, or in joint
ownership).
The shareholders' vote may be by voice or ballot; provided, however,
that any election for Directors must be by ballot if demanded by any shareholder
before the voting has begun. On any matter other than elections of Directors,
any shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares that the shareholder is entitled to
vote. If a quorum is present, the affirmative vote of the majority of the
shares represented at the meeting and entitled to vote on any matter (other than
the election of Directors) shall be the act of the shareholders, unless the vote
of a greater number or voting by classes is required by the California General
Corporation Law or by the Articles of Incorporation.
Pursuant to Section 301.5 of the California General Corporation Law,
this corporation shall not have cumulative voting as provided under Section 708
of such Law, provided that this corporation shall then be a listed corporation
as defined in Section 301.5 of such Law.
In any election of Directors, the candidates receiving the highest
number of votes of the shares entitled to be voted for them up to the number of
Directors to be elected, shall be elected.
SECTION 9. RECORD DATE. The Board of Directors may fix, in advance,
a record date for the determination of the shareholders entitled to notice of
any meeting or to vote or entitled to receive payment of any dividend or other
distribution, or any allotment of rights, or to exercise rights in respect of
any other lawful action. The record date so fixed shall be not more than 60
days nor less than 10 days prior to the date of the meeting nor more than 60
days prior to any other action. When a record date is so fixed, only
shareholders of record at the close of business on that date are entitled to
notice of and to vote at the meeting or to receive the dividend, distribution,
or allotment of rights, or to exercise of the rights, as the case may be,
notwithstanding any transfer of shares on the books of the corporation after the
record date. A determination of shareholders of record entitled to notice of or
to vote at a meeting of shareholders shall apply to any
4
<PAGE>
adjournment of the meeting unless the Board of Directors fixes a new record date
for the adjourned meeting. The Board of Directors shall fix a new record date
if the meeting is adjourned for more than 45 days from the date set for the
original meeting.
If no record date is fixed by the Board, the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the business day next preceding the day on which the meeting is
held. The record date for determining shareholders for any purpose other than
set forth in this Section 9 or Section 11 of this Article shall be at the close
of business on the day on which the Board of Directors adopts the resolution
relating thereto, or the sixtieth (60th) day prior to the date of such other
action, whichever is later.
SECTION 10. CONSENT OF ABSENTEES. The transactions of any meeting of
shareholders, however called and noticed, and wherever held, are as valid as
though had at a meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a waiver of notice, or a consent to the holding of the meeting or
an approval of the minutes thereof. All such waivers, consents, and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting. Attendance of a person at a meeting shall constitute a waiver of
notice of and presence at such meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters required by
Section 4 to be included in the notice but not so included, if such objection is
expressly made at the meeting. Neither the business to be transacted at nor the
purpose of any regular or special meeting of shareholders need be specified in
any written waiver of notice, except that if action is taken or proposed to be
taken for approval of any of those matters specified in the second paragraph of
Section 4 of this Article II, the waiver of notice or consent shall state the
general nature of the proposal.
SECTION 11. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Subject to
Section 603 of the California General Corporation Law, any action which may be
taken at any annual or special meeting of shareholders may be taken without a
meeting and without prior notice if a consent in writing, setting forth the
action so taken, is signed by the holders of the outstanding shares having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted, or their proxies. All such consents shall be filed with the
Secretary of the corporation and shall be maintained in the corporate records;
provided, however, that
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(1) unless the consents of all shareholders entitled to vote have been solicited
in writing, notice of any shareholder approval without a meeting by less than
unanimous written consent shall be given, as provided by Sections 603(b)(1) and
(2) of the California General Corporation Law, and (2) in the case of election
of Directors, such a consent shall be effective only if signed by the holders of
all outstanding shares entitled to vote for the election of Directors; provided,
however, that subject to applicable law, a Director may be elected by the
shareholders at any time to fill a vacancy on the Board of Directors that has
not been filled by the Directors within five (5) business days of the creation
of the vacancy. Any such election by written consent other than to fill a
vacancy created by removal requires the consent of the holders of a majority of
the outstanding shares entitled to vote for the election of Directors. Any
written consent may be revoked by a writing received by the Secretary of the
corporation prior to the time that written consents of the number of shares
required to authorize the proposed action have been filed with the Secretary.
Unless a record date for voting purposes be fixed as provided in
Section 9 of this Article, in order that the Corporation may determine the
shareholders entitled to consent to corporate action in writing without a
meeting pursuant to this Section 11, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than ten (10) days after the date upon which the resolution
fixing the record date is adopted by the Board of Directors. Any shareholder of
record seeking to have the shareholders authorize or take corporate action by
written consent shall, by written notice to the Secretary, request the Board of
Directors to fix a record date. The Board of Directors shall promptly, but in
all events within ten (10) days after the date on which such a request is
received, adopt a resolution fixing the record date (unless the record date has
previously been fixed by the Board of Directors pursuant to the first sentence
of this second paragraph of Section 11). If no record date has been fixed by
the Board of Directors pursuant to the first sentence of this second paragraph
of Section 11 or otherwise within ten (10) days of the date on which such a
request is received, the record date for determining shareholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is required by applicable law, shall be the first date
on which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the Secretary in accordance with this Section 11.
Delivery shall be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the Board of Directors and prior
action by the Board of Directors is required by applicable law, the record date
for determining shareholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the date on which the
Board of Directors adopts the resolution taking such prior action.
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In the event of the delivery, in the manner provided by this Section 11, to
the corporation of the requisite written consent or consents to take corporate
action and/or any related revocation or revocations, the corporation shall
engage independent inspectors of elections for the purpose of performing
promptly a ministerial review of the validity of the consents and revocations.
For the purpose of permitting the inspectors to perform such review, no action
by written consent without a meeting shall be effective until such date as the
independent inspectors certify to the corporation that the consents delivered to
the corporation in accordance with this Section 11 represent at least the
minimum number of votes that would be necessary to take the corporate action.
Nothing contained in this Section 11 shall in any way be construed to suggest or
imply that the Board of Directors or any shareholder shall not be entitled to
contest the validity of any consent or revocation thereof, whether before or
after such certification by the independent inspectors, or to take any other
action (including, without limitation, the commencement, prosecution, or defense
of any litigation with respect thereto, and the seeking of injunctive relief in
such litigation).
Every written consent shall bear the date of signature of each shareholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the
earliest dated written consent received in accordance with Section 11, a written
consent or consents signed by a sufficient number of holders to take such action
are delivered to the corporation in the manner prescribed in this Section 11.
SECTION 12. PROXIES. Every person entitled to vote shares or execute
written consents has the right to do so either in person or by one or more
persons authorized by a written proxy executed and dated by such shareholder and
filed with the Secretary of the corporation prior to the convening of any
meeting of the shareholders at which any such proxy is to be used or prior to
the use of such written consent. A validly executed proxy which does not state
that it is irrevocable continues in full force and effect unless (1) revoked by
the person executing it, before the vote pursuant thereto, by a writing
delivered to the corporation stating that the proxy is revoked or by a
subsequent proxy executed by, or by attendance at the meeting and voting in
person by, the person executing the proxy; or (2) written notice of the death or
incapacity of the maker of the proxy is received by the corporation before the
vote pursuant thereto is counted; provided, however, that no proxy shall be
valid after the expiration of 11 months from the date of its execution unless
otherwise provided in the proxy.
SECTION 13. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board of Directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting and any adjournment
thereof. If no inspectors of election are so appointed, or if any persons so
appointed fail to appear or fail or refuse to act, the Chairman of any such
meeting
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may, and on the request of any shareholder or shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request
of one or more shareholders or proxies, the holders of a majority of shares or
their proxies present shall determine whether one (1) or three (3) inspectors
are to be appointed.
The duties of such inspectors shall be as prescribed by Section 707(b)
of the California General Corporation Law and shall include: determining (1)
the number of shares outstanding and the voting power of each, (2) the shares
represented at the meeting, (3) the existence of a quorum, (4) the authenticity,
validity and the effect of proxies; receiving votes, ballots or consents;
hearing and determining all challenges and questions in any way arising in
connection with the right to vote; counting and tabulating all votes or
consents; determining when the polls shall close; determining the result; and
doing such acts as may be proper to conduct the election or vote with fairness
to all shareholders. If there are three inspectors of election, the decision,
act, or certificate of a majority is effective in all respects as the decision,
act or certificate of all.
ARTICLE III
DIRECTORS
SECTION 1. POWERS. Subject to the provisions of the California
General Corporation Law and any limitations in the Articles of Incorporation and
these By-Laws relating to action required to be approved by the shareholders or
by the outstanding shares, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the direction of
the Board of Directors. The Board of Directors may delegate the management of
the day-to-day operation of the business of the corporation to a management
company or other person provided that the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised under
the ultimate direction of the Board of Directors. Without prejudice to such
general powers, but subject to the same limitations, it is hereby expressly
declared that the Board of Directors shall have the following powers in addition
to the other powers enumerated in these By-Laws:
(a) To select and remove all the other officers, agents, and
employees of the corporation, prescribe any powers and duties for them that are
consistent with law, or with the Articles or these By-Laws, fix their
compensation, and require from them security for faithful service.
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(b) To conduct, manage, and control the affairs and business of the
corporation and to make such rules and regulations therefor not inconsistent
with law, or with the Articles or these By-Laws, as they may deem best.
(c) To adopt, make, and use a corporate seal, and to prescribe the
forms of certificates of stock, and to alter the form of such seal and of such
certificates from time to time as in their judgment they may deem best.
(d) To authorize the issuance of shares of stock of the corporation
from time to time, upon such terms and for such consideration as may be lawful.
(e) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory and capital notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations, or other evidences of debt and securities
therefor and any agreements pertaining thereto.
(f) To prescribe the manner in which and the person or persons by
whom any or all of the checks, drafts, notes, contracts and other corporate
instruments shall be executed.
(g) To appoint and designate, by resolution adopted by a majority of
the authorized number of Directors, one or more committees, each consisting of
two or more Directors, including the appointment of alternate members of any
committee who may replace any absent member at any meeting of the committee; and
(h) Generally, to do and perform every act or thing whatever that may
pertain to or be authorized by the Board of Directors of a commercial bank under
the laws of this state.
SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS.
(a) The number of Directors shall be nine (9). Commencing with the
1993 annual meeting of shareholders, the Board of Directors shall be divided
into three classes, Class I, Class II and Class III, each having three
Directors. At the 1993 annual meeting of shareholders, Directors of the first
class (Class I) shall be elected to hold office for a term expiring at the 1994
annual meeting of shareholders; Directors of the second class (Class II) shall
be elected to hold office for a term expiring at the 1995 annual meeting of
shareholders; and Directors of the third class (Class III) shall be elected to
hold office for a term expiring at the 1996 annual meeting of shareholders. At
each annual meeting of shareholders after 1993, the successors to the class of
Directors whose terms then shall expire shall be identified as being of the same
class as the Directors they succeed and
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elected to hold office for a term expiring at the third succeeding annual
meeting of shareholders. Notwithstanding the foregoing, whenever the holders of
the preferred stock or preference stock issued by the corporation shall have the
right, voting separately by class, to elect Directors at an annual or special
meeting of shareholders, the election, term of office and filling of vacancies
of such Directors shall be governed by the terms of the Articles of
Incorporation applicable thereto, and such Directors so elected shall not be
divided into classes pursuant to this paragraph. Directors elected by a vote of
the holders of preferred stock or preference stock as provided in the Articles
of Incorporation shall hold office only so long as is required by the Articles
of Incorporation.
If at any meeting for the election of Directors, more than one
class of stock, voting separately as classes, shall be entitled to elect one or
more Directors and there shall be a quorum of only one such class of stock, that
class of stock shall be entitled to elect its quota of Directors notwithstanding
the absence of a quorum of the other class or classes of stock.
(b) No person shall be eligible for or shall be elected to the
Board of Directors of the corporation unless he or she (1) shall be a citizen of
the United States of America, (2) has resided within 150 miles of the principal
executive offices of the Company or any branch office of its principal
subsidiary existing at the time of such election for at least 1 year immediately
preceding such election, (3) owns in his or her own right at least 1,000 shares
of the common stock of the corporation, and (4) has never been convicted of a
felony crime in any jurisdiction within the United States, or of any crime
punishable by more than 6 months imprisonment in any jurisdiction.
(c) Nominations for election of members of the Board of
Directors may be made by the Board of Directors, by a nominating committee or
person appointed by the Board of Directors or by any holder of any outstanding
class of capital stock of the corporation entitled to vote for the election of
Directors. Notice of intention to make any nominations (other than those made
by or at the direction of the Board of Directors) shall be made pursuant to a
timely notice in writing to the Secretary of the corporation, with a copy
thereof to the Chairman of the Board. To be timely, a shareholder's notice
shall be delivered to or mailed and received at the principal executive offices
of the corporation by the latter of: (i) the close of business 21 days prior to
the meeting of shareholders called for the election of Directors or (ii) 10 days
after the date of mailing of notice of the meeting to shareholders. Such
shareholder's notice to the Secretary shall set forth (a) as to each person whom
the shareholder proposes to nominate for election or reelection as a Director,
(i) the name, age, business address and residence address of the person, (ii)
the principal occupation or employment of the person, (iii) the class and number
of shares of capital stock of the corporation which are beneficially owned by
the person, (iv) the number of shares of any bank,
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bank holding company, savings and loan association or other depositary
institution owned beneficially by the person and the identities and locations of
any such institutions, (v) whether the person has ever been convicted of or
pleaded nolo contendere to any criminal offense involving dishonesty or breach
of trust, filed a petition in bankruptcy or been adjudged bankrupt, and (vi) any
other information relating to the person that is required to be disclosed in
solicitations for proxies for election of Directors pursuant to Schedule 14A
under the Securities Exchange Act of 1934, as amended; and (b) as to the
shareholder giving the notice (i) the name and record address of the
shareholder, (ii) the class and number of shares of capital stock of the
corporation which are beneficially owned by the shareholder, and (iii) the
number of shares of capital stock of any bank, bank holding company, savings and
loan association or other depositary institution owned beneficially by the
shareholder and the identities and locations of any such institutions. The
notice shall be signed by the nominating shareholder and by each nominee, and
shall be accompanied by a written consent to be named as a nominee for election
as a Director from each proposed nominee. The corporation may require any
proposed nominee to furnish such other information as may reasonably be required
by the corporation to determine the eligibility of any such proposed nominee to
serve as a Director of the corporation. No person shall be eligible for
election as a Director of the corporation unless nominated in accordance with
the procedures set forth herein. Nominations not made in accordance with these
procedures shall be disregarded by the chairman of the meeting, and upon his
instructions, the inspectors of elections shall disregard all votes cast for
each such nominee. The foregoing requirements do not apply to the nomination of
a person to replace a proposed nominee who has become unable to serve as a
Director between the last day for giving notice in accordance with this
paragraph and the date of election of Directors if the procedure called for in
this paragraph was followed with respect to the nomination of the proposed
nominee.
SECTION 3. ELECTION AND TERM OF OFFICE. If any annual meeting is not
held or the Directors to then be elected are not elected thereat, the Directors
to then be elected may be elected at any special meeting of shareholders held
for that purpose. Each Director shall hold office until expiration of the term
for which such Director was elected and until a successor has been elected and
qualified pursuant to Section 2(a) of this Article III.
SECTION 4. VACANCIES. Any Director may resign effective upon giving
written notice to the Chairman of the Board, the President, Secretary, or the
Board of Directors, unless the notice specifies a later time for the
effectiveness of such resignation. If the resignation is effective at a future
time, a successor may be elected to take office when the resignation becomes
effective.
Except for a vacancy created by the removal of a Director, vacancies
on the Board of Directors may be filled by approval of a majority of the
remaining
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Directors, or, if the number of Directors then in office is less than a quorum,
by (1) the unanimous written consent of the Directors then in office, (2) the
affirmative vote of a majority of the Directors then in office at a meeting held
pursuant to notice or waivers of notice complying with Section 307 of the
California General Corporation Law or (3) a sole remaining Director, and each
Director so elected shall hold office until such expiration of the term for
which such Director was elected and until such Director's successor has been
elected and qualified pursuant to Section 2(a) of this Article III. A vacancy
on the Board of Directors existing as the result of a removal of a Director may
be filled only by approval of the shareholders, unless the Articles of
Incorporation or a by-law adopted by the shareholders so provides.
A vacancy or vacancies in the Board of Directors shall be deemed to
exist in case of death, resignation, or removal of any Director, or if the
authorized number of Directors be increased, or if the shareholders fail, at any
annual or special meeting of shareholders at which any Director or Directors are
elected, to elect the full authorized number of Directors to be voted for at
that meeting.
The Board of Directors may declare vacant the office of a Director who
has been declared of unsound mind by an order of court or convicted of a felony.
The shareholders may elect a Director or Directors at any time to fill
any vacancy or vacancies not filled by the Directors within five (5) business
days of the creation of the vacancy. Any such election by written consent other
than to fill a vacancy created by removal requires the consent of a majority of
the outstanding shares entitled to vote. Any such election by written consent
to fill a vacancy created by removal requires the unanimous consent of the
outstanding shares entitled to vote. If the Board of Directors accepts the
resignation of a Director tendered to take effect at a future time, the Board of
Directors or the shareholders shall have power to elect a successor to take
office when the resignation is to become effective.
No reduction of the authorized number of Directors or amendment
reducing the number of classes of Directors shall have the effect of removing
any Director prior to the expiration of the Director's term of office.
SECTION 5. PLACE OF MEETING. Regular meetings of the Board of
Directors shall be held at any place within or without the State of California
which has been designated in the notice of meeting or if there is no notice, at
the principal office of the corporation, or at a place designated by resolution
of the Board of Directors or by the written consent of the Board of Directors.
Any regular or special meeting is valid wherever held if held upon written
consent of all
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members of the Board of Directors given either before or after the meeting and
filed with the Secretary of the corporation.
SECTION 6. REGULAR MEETINGS. Immediately following each annual
meeting of shareholders and at the same place, the Board of Directors shall hold
a regular meeting for the purpose of organization, any desired election of
officers, and the transaction of other business. Notice of this meeting shall
not be required.
Other regular meetings of the Board of Directors shall be held without
notice either on the third Tuesday of each month at the hour of 4:00 p.m. or at
such different date and time as the Board of Directors may from time to time fix
by resolution; provided, however, should said day fall upon a legal holiday
observed by the corporation at its principal office, then said meeting shall be
held at the same time and place on the next succeeding full business day. Call
and notice of all regular meetings of the Board of Directors are hereby
dispensed with.
SECTION 7. SPECIAL MEETINGS. Special meetings of the Board of
Directors for any purpose or purposes may be called at any time by the Chairman
of the Board, the President, or the Secretary or by any two Directors.
Special meetings of the Board of Directors shall be held upon no less
than four days' written notice by mail or 48 hours' notice delivered personally
or by telephone or telegraph. Any such written or telegraphic notice shall be
addressed or delivered to each Director at such Director's address as it is
shown upon the records of the corporation or as may have been given to the
corporation by the Director for purposes of notice or, if such address is not
shown on such records or is not readily ascertainable, at the place in which the
meetings of the Directors are regularly held. Such notice may, but need not,
specify the purpose of the meeting, nor the place if the meeting is to be held
at the principal office of the corporation. Notice of any meeting of the Board
of Directors need not be given to any Director who signs a waiver of notice or a
consent to holding the meeting, or who attends the meeting without protesting,
either prior thereto or at its commencement, the lack of notice to such
Director.
Notice by mail shall be deemed to have been given at the time a
written notice is deposited in the United States mails, postage prepaid. Any
other written notice shall be deemed to have been given at the time it is
personally delivered to the recipient or is delivered to a common carrier for
transmission, or actually transmitted by the person giving the notice by
electronic means, to the recipient. Oral notice shall be deemed to have been
given at the time it is communicated, in person or by telephone or wireless, to
the recipient or to a person at the office of the recipient who the person
giving the notice has reason to believe will promptly communicate it to the
recipient.
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SECTION 8. QUORUM. A majority of the authorized number of Directors
constitutes a quorum of the Board of Directors for the transaction of business,
except to adjourn as hereinafter provided. Every act or decision done or made
by a majority of the Directors present at a meeting duly held at which a quorum
is present shall be regarded as the act of the Board of Directors, unless a
greater number be required by the Articles and subject to the provisions of
Section 310 of the California General Corporation Law (as to approval of
contracts or transactions in which a Director has a direct or indirect material
financial interest), Section 311 (as to appointment of committees), and
Section 317 (e) (as to indemnification of Directors). A meeting at which a
quorum is initially present may continue to transact business notwithstanding
the withdrawal of Directors, if any action taken is approved by at least a
majority of the required quorum for such meeting.
SECTION 9. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE.
Members of the Board of Directors may participate in a meeting through use of a
conference telephone or similar communications equipment, so long as all members
participating in such meeting can hear one another. Participation in a meeting
pursuant to this Section 9 constitutes "presence" in person at such meeting.
SECTION 10. WAIVER OF NOTICE. The transactions of any meeting of the
Board of Directors, however called and noticed or wherever held, are as valid as
though had at a meeting duly held after regular call and notice if a quorum is
present and if, either before or after the meeting, each of the Directors not
present signs a written waiver of notice, a consent to holding such meeting or
an approval of the minutes thereof. All such waivers, consents, or approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
SECTION 11. ADJOURNMENT. A majority of the Directors present,
whether or not a quorum is present, may adjourn any Directors' meeting to
another time and place. Notice of the time and place of holding an adjourned
meeting need not be given, unless the meeting is adjourned for more than twenty-
four hours, in which case notice of the time and place shall be given before the
time of the adjourned meeting, in the manner specified in Section 7 of this
Article III, to the Directors who were not present at the time of the
adjournment.
SECTION 12. ACTION WITHOUT MEETING. Any action required or permitted
to be taken by the Board of Directors may be taken without a meeting if all
members of the Board of Directors shall individually or collectively consent in
writing to such action. Such action by written consent shall have the same
effect as a unanimous vote of the Board of Directors. Such consent or consents
shall be filed with the minutes of the proceedings of the Board of Directors.
SECTION 13. FEES AND COMPENSATION. Directors and members of
committees may receive such compensation, if any, for their services, and such
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reimbursement for expenses, as may be fixed or determined by resolution of the
Board of Directors. This Section shall not be construed to preclude any
Director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for those services.
SECTION 14. RIGHTS OF INSPECTION. Every Director of the corporation
shall have the absolute right at any reasonable time to inspect and copy all
books, records, and documents of every kind and to inspect the physical
properties of the corporation and also of its subsidiary corporations, domestic
or foreign. Such inspection by a Director may be made in person or by agent or
attorney and includes the right to copy and obtain extracts.
SECTION 15. COMMITTEES OF THE BOARD. The Board of Directors may
designate, by resolution adopted by a majority of the authorized number of
Directors, one or more committees, consisting of two or more Directors, to serve
at the pleasure of the Board of Directors. The Board of Directors may designate
one or more Directors as alternate members of any committee, and such alternate
members may replace any absent member at any meeting of the committee. The
appointment of members or alternate members of a committee requires the vote of
a majority of the authorized number of Directors. Any such committee, to the
extent provided in the resolution of the Board of Directors, shall have all the
authority of the Board except as otherwise provided by law.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of the corporation shall be a
President, one or more Vice Presidents, a Secretary, and a Chief Financial
Officer. The corporation may also have, at the discretion of the Board of
Directors, a Chairman of the Board, a Vice Chairman of the Board, one or more
Assistant Vice Presidents, one or more Assistant Financial Officers, one or more
Assistant Secretaries and such other officers as may be elected or appointed in
accordance with provisions of Section 3 of this Article. One person may hold
two or more offices, except those of President and Chief Financial Officer.
SECTION 2. ELECTION. The officers of the corporation, except such
officers as may be elected or appointed in accordance with the provisions of
Section 3 or Section 5 of this Article, shall be chosen by, and shall serve at
the pleasure of, the Board of Directors, and shall hold their respective offices
until their resignation, removal, or other disqualification from service, or
until their respective successors shall be elected, subject to the rights, if
any, of an officer under any contract of employment.
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SECTION 3. SUBORDINATE OFFICERS. The Board of Directors may elect,
and may empower the President to appoint, such other officers as the business of
the corporation may require, each of whom shall hold office for such period,
have such authority, and perform such duties as are provided in these By-Laws or
as the Board of Directors may from time to time determine.
SECTION 4. REMOVAL AND RESIGNATION. Subject to the rights, if any,
of an officer under any contract of employment, any officer may be removed,
either with or without cause, by the Board of Directors at any time, or, except
in the case of an officer chosen by the Board of Directors, by any officer upon
whom such power of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation, but without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these By-Laws for regular election or appointment to such
office.
SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if
there shall be such an officer, shall, if present, preside at all meetings of
the Board of Directors and of the shareholders, and exercise and perform such
other powers and duties as may be from time to time assigned by the Board of
Directors.
SECTION 7. VICE CHAIRMAN. The Vice Chairman of the Board, if there
shall be such an officer, shall in the absence of the Chairman of the Board,
preside at all meetings of the Board of Directors and of the shareholders, and
exercise and perform such other powers and duties as may be from time to time
assigned by the Board of Directors.
SECTION 8. PRESIDENT. Subject to such powers, if any, as may be
given by the Board of Directors to the Chairman of the Board, if there be such
an officer, the President is the General Manager and Chief Executive Officer of
the corporation and has, subject to the control of the Board of Directors,
general supervision, direction, and control of the business and officers of the
corporation. In the absence of both the Chairman of the Board and the Vice
Chairman, or if there be none, the President shall preside at all meetings of
the shareholders and at all meetings of the Board of Directors. The President
has the general powers and duties of management usually vested in the office of
President and General
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Manager of a corporation and such other powers and duties as may be prescribed
by the Board of Directors.
SECTION 9. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors or, if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or the By-Laws, and the President, or the Chairman of the
Board.
SECTION 10. SECRETARY. The Secretary shall keep or cause to be kept,
at the principal office and such other place as the Board of Directors may
order, a book of minutes of all meetings of shareholders, the Board of
Directors, and its committees, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice thereof given,
the names of those present or represented at shareholders' meetings, and the
proceedings thereof.
The Secretary shall keep, or cause to be kept, a copy of the By-Laws
of the corporation at the principal office or business office in accordance with
Section 213 of the California General Corporation Law. The Secretary shall
keep, or cause to be kept, at the principal office or at the office of the
corporation's transfer agent or registrar, if one be appointed, a share
register, or a duplicate share register, showing the names of the shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the
meetings of the shareholders, of the Board of Directors and of any committees
thereof required by these By-Laws or by law to be given, shall keep the seal of
the corporation in safe custody, and shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors.
SECTION 11. ASSISTANT SECRETARY. The Assistant Secretary or the
Assistant Secretaries, in the order of their seniority, shall, in the absence or
disability of the Secretary, or in the event of such officer's refusal to act,
perform the duties and exercise the powers and discharge such duties as may be
assigned from time to time by the President or by the Board of Directors.
SECTION 12. CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall keep and maintain, or cause to be kept and maintained, adequate and
correct books and records of the properties and business transactions of the
corporation,
17
<PAGE>
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, retained earnings and shares, and shall send or cause to be
sent to the shareholders of the corporation such financial statements and
reports as are by law or these By-Laws required to be sent to them. The books
of account shall at all times be open to inspection by any Director of the
corporation.
The Chief Financial Officer shall deposit all monies and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the Board of Directors. The Chief
Financial Officer shall disburse the funds of the corporation as may be ordered
by the Board of Directors, shall render to the President and Directors, whenever
they request it, an account of all transactions as Treasurer and of the
financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the Board of Directors.
SECTION 13. ASSISTANT FINANCIAL OFFICER. The Assistant Financial
Officer or the Assistant Financial Officers, in the order of their seniority,
shall, in the absence or disability of the Chief Financial Officer, or in the
event of such officer's refusal to act, perform the duties and exercise the
powers of the Chief Financial Officer, and shall have such additional powers and
discharge such duties as may be assigned from time to time by the President or
by the Board of Directors.
SECTION 14. SALARIES. The salaries of the officers shall be fixed
from time to time by the Board of Directors and no officer shall be prevented
from receiving such salary by reason of the fact that such officer is also a
Director of the corporation.
SECTION 15. OFFICERS HOLDING MORE THAN ONE OFFICE. Any two or more
offices, except those of President and Chief Financial Officer, may be held by
the same person, but no officer shall execute, acknowledge or verify any
instrument in more than one capacity.
SECTION 16. INABILITY TO ACT. In the case of absence or inability to
act of any officer of the corporation and of any person herein authorized to act
in his place, the Board of Directors may from time to time delegate the powers
or duties of such officer to any other officer, or any Director or other person
whom it may select.
18
<PAGE>
ARTICLE V
OTHER PROVISIONS
SECTION 1. INSPECTION OF CORPORATE RECORDS. The corporation shall
keep at its principal executive office a record of its shareholders, giving the
names and addresses of all shareholders and the number and class of shares held
by each shareholder. A shareholder or shareholders of the corporation holding
at least five percent (5%) in the aggregate of the outstanding voting shares of
the corporation may:
(a) Inspect and copy the record of shareholders' names and addresses
and shareholdings during usual business hours upon five business days' prior
written demand upon the corporation; or
(b) Obtain from the transfer agent, if any, for the corporation, upon
written demand and upon the tender of its usual charges for such a list (the
amount of which charges shall be stated to the shareholder by the transfer agent
upon request), a list of the shareholders' names and addresses who are entitled
to vote for the election of Directors and their shareholdings, as of the most
recent record date for which it has been compiled, or as of a date specified by
the shareholder subsequent to the date of demand. The list shall be made
available on or before the later of five business days after the demand is
received or the date specified therein as the date as of which the list is to be
compiled.
SECTION 2. INSPECTION OF BY-LAWS. The corporation shall keep in its
principal executive office the original or a copy of these By-Laws as amended to
date, which shall be open to inspection by shareholders at all reasonable times
during office hours.
SECTION 3. ENDORSEMENT OF DOCUMENTS; CONTRACTS. Subject to the
provisions of applicable law, any note, mortgage, evidence of indebtedness,
contract, share certificate, initial transaction statement or written statement,
conveyance, or other instrument in writing, and any assignment or endorsement
thereof executed or entered into between this corporation and any other person,
when signed by (i) the Chairman of the Board, the President or any Vice
President and (ii) the Secretary, any Assistant Secretary, the Chief Financial
Officer or any Assistant Treasurer of this corporation shall be valid and
binding upon this corporation in the absence of actual knowledge on the part of
the other person that the signing officers had not the authority to execute the
same. Any such instruments may be signed by any other persons or persons and in
such manner as from time to time shall be determined by the Board of Directors,
and unless so authorized by the Board of Directors, no officer, agent, or
employee shall have any
19
<PAGE>
power or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or amount.
SECTION 4. CERTIFICATES OF STOCK. Every holder of shares of the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the President or a Vice President and by the Chief Financial
Officer or Assistant Financial Officer or by the Secretary or Assistant
Secretary, certifying the number of shares and the class or series of shares
owned by the shareholder. Signatures on the certificates may be facsimile. If
any officer, transfer agent or registrar who has signed a certificate or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if such person were an
officer, transfer agent or registrar at the date of issue.
The Board of Directors may, in case any certificate for shares is
alleged to have been lost, stolen, or destroyed, authorize the issuance of a new
certificate in lieu thereof, and the corporation may require that the
corporation be given a bond or other adequate security sufficient to indemnify
it against any claim that may be made against it (including any expense or
liability) on account of the alleged loss, theft, or destruction of any such
certificate or the issuance of such new certificate.
Prior to the due presentment for registration of transfer in the stock
transfer book of the corporation, the registered owner shall be treated as the
person exclusively entitled to vote, to receive notifications and otherwise to
exercise all the rights and powers of an owner, except as expressly provided
otherwise by the laws of the State of California.
SECTION 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
President or any other officer or officers authorized by the Board of Directors
or the President are each authorized to vote, represent, and exercise on behalf
of the corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of the corporation. The
authority herein granted may be exercised by any such officer in person or by
any other person authorized to do so by proxy or power of attorney duly executed
by said officer.
SECTION 6. ANNUAL REPORT TO SHAREHOLDERS. Not later than 120 days
after the close of the fiscal year, the Board of Directors shall cause an annual
report to be sent to shareholders of the corporation, complying with
Section 1501 of the California General Corporation Law.
SECTION 7. SEAL. The corporate seal of the corporation shall consist
of two concentric circles, between which shall be the name of the corporation,
and in
20
<PAGE>
the center shall be inscribed the word "Incorporated" and the date of its
incorporation.
SECTION 8. FISCAL YEAR. The fiscal year of this corporation shall
begin on the first day of January and end on the 31st day of December of each
year.
SECTION 9. CONSTRUCTION AND DEFINITIONS. Unless the context
otherwise requires, the general provisions, rules of construction, and
definitions contained in the California General Corporation Law shall govern the
construction of these By-Laws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
SECTION 10. BY-LAW PROVISIONS CONTRARY TO OR INCONSISTENT WITH
PROVISIONS OF LAW. Any article, section, subsection, subdivision, sentence,
clause or phrase of these By-Laws which, upon being construed in the manner
provided in Section 9 of this Article, shall be contrary to or inconsistent with
any applicable provision of the Accountancy Corporation Board of the State of
California or other applicable law of the State of California or of the United
States shall not apply so long as said provisions of law shall remain in effect,
but such result shall not affect the validity or applicability of any other
portions of these By-Laws, it being hereby declared that these By-Laws would
have been adopted and each article, section, subsection, subdivision, sentence,
clause or phrase thereof, irrespective of the fact that any one or more
articles, sections, subsections, subdivisions, sentences, clauses or phrases is
or are illegal.
ARTICLE VI
INDEMNIFICATION
SECTION 1. DEFINITIONS. For the purposes of this Article, "agent",
includes any person who is or was a Director, officer, employee, or other agent
of the corporation, or is or was serving at the request of the corporation as a
Director, officer, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, or other enterprise, or was a
Director, officer, employee, or agent of a foreign or domestic corporation which
was a predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation; "proceeding" includes any threatened,
pending, or completed action or proceeding, whether civil, criminal,
administrative or investigative; and "expenses" includes, without limitation,
attorneys' fees and expenses of establishing a right to indemnification pursuant
to law.
SECTION 2. EXTENT OF INDEMNIFICATION.
21
<PAGE>
(a) The corporation shall, to the maximum extent permitted by the
California General Corporation Law, indemnify any person who was or is a party
or is threatened to be made a party to any proceeding (other than an action by
or in the right of the corporation to procure a judgment in its favor) by reason
of the fact that the person is or was an agent of the corporation, against
expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with the proceeding.
(b) The corporation shall, to the maximum extent permitted by the
California General Corporation Law, indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending, or completed
action by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that the person is or was an agent of the corporation,
against expenses actually and reasonably incurred by that person in connection
with the defense or settlement of the action.
(c) The corporation shall, to the maximum extent permitted by the
California General Corporation Law, advance the expenses incurred by any agent
of the corporation in defending any proceeding prior to the final disposition of
the proceeding.
SECTION 3. INSURANCE. The corporation shall have power to purchase
and maintain insurance on behalf of any agent of the corporation against any
liability asserted against or incurred by the agent in that capacity or arising
out of the agent's status as such whether or not the corporation would have the
power to indemnify the agent against that liability under the provisions of this
Article.
ARTICLE VII
AMENDMENTS
New By-Laws may be adopted or these By-Laws may be amended or repealed
by the approval of the outstanding shares or by the approval of the Board of
Directors; provided, however, that a by-law specifying or changing a fixed
number of Directors or the maximum or minimum number or changing from a fixed to
a variable Board of Directors or vice versa may only be adopted by approval of
the outstanding shares, complying, if applicable, with Section 212 of the
California General Corporation Law. If the Articles of Incorporation of the
corporation set forth the authorized number of Directors of the corporation, the
authorized number of Directors may be changed only by an amendment of the
Articles of Incorporation.
22
<PAGE>
(as amended through January 30, 1997)
23
<PAGE>
EXHIBIT 4.7
SOUTHERN CALIFORNIA BANK
- --------------------------------------------------------------------------------
EXECUTIVE INCENTIVE
COMPENSATION PLAN
FOR 1996
- --------------------------------------------------------------------------------
CONFIDENTIAL
------------
December 19, 1995
<PAGE>
BUSINESS STRATEGY
Southern California Bank believes our key responsibility is to provide high
quality, relationship-based financial services to businesses and consumers
within our market area. We work constantly to satisfy our customer needs and to
provide services that are convenient, reliable and fairly priced.
TOTAL COMPENSATION PHILOSOPHY
The cornerstone of any effective compensation program is the philosophy on which
it is based. Southern California Bank's compensation philosophy is to provide
its executives with a TOTAL COMPENSATION PROGRAM, including base salaries,
incentives, stock options and benefits that is:
- - Based on achievement of key results and performance.
- - True to our organization values and culture.
- - Highly competitive within the external marketplace.
To accomplish this, we have established base salary levels fully competitive
with market rates. Incentives enable you to increase your compensation
significantly based on the Bank's annual performance results. Stock options
provide the necessary link to increased shareholder value. Benefits consider
your needs as well as program costs and tax efficiency.
GOALS OF THE PROGRAM
The goals of our total compensation program are to:
- - Attract, motivate and retain high-caliber executives.
- - Make sure we are all working towards those objectives critical to our
growth and profitability.
- - Recognize and reward your contribution to that success.
- - Inspire teamwork.
- - Pay above competitive market levels in total compensation based on results.
<PAGE>
TOTAL COMPENSATION PROGRAM
Four major elements make up our total compensation program:
- - Base salary
- - Incentive compensation
- - Executive benefits, including deferred compensation
- - Stock options.
1. BASE SALARY
In pricing our services/products, we consider market conditions and what our
competitors charge for similar services/products. Likewise, to determine
competitive compensation levels, we look outside to see what other banks pay for
similar jobs.
Competitive compensation levels were obtained through participation in industry
surveys and a proxy review of banking institutions in Northern and Southern
California with assets primarily between $400 million and $1 billion. Based on
that data, we have developed base salaries for each executive position and
ensured that these salaries reflect competitive compensation levels within our
industry peer group.
Your base salary is intended to reflect a compensation level for your individual
skills, experience and performance, as well as the competitive level paid for
your position within our industry peer group.
For 1996, participants in the Executive Incentive Compensation Plan, and other
formal incentive plans, will not be eligible for merit increases as the Bank is
looking to stabilize base salaries.
Opportunity for additional compensation will be dependent upon meeting or
exceeding the goals in the Executive Incentive Compensation Plan and on the
Executives' attainment of individual performance objectives.
2
<PAGE>
2. INCENTIVE COMPENSATION
The 1996 Executive Incentive Compensation Plan is based on how well the Bank
performs and how well you, individually, perform.
- - Bank and individual performance are viewed as independent components of the
incentive award, with Bank performance weighted 75% and individual, 25%.
- - Bank performance will be measured by 1996 bank average return on equity
(ROE), and capital, asset quality, and liquidity requirements.
- - Individual performance is measured on achievement of specific functional
area objectives and management performance.
- - Target for average ROE for the Bank has been established for the incentive
period, January 1, 1996 to December 31, 1996.
INCENTIVE AWARD OPPORTUNITY
- - Target awards, defined as a percentage of base salary, are established for
each executive. This is the amount you will receive if the Bank achieves
target goals and objectives, and your performance is rated at a level of
"Achieves Expectations" or greater.
- - These target awards increase when results exceed the goal and decrease when
results are less than the goal.
3
<PAGE>
2. INCENTIVE COMPENSATION (CONTINUED)
INCENTIVE AWARD OPPORTUNITY (Continued):
- - Specifically, the elements to be evaluated in calculating executive
incentive awards are as follows:
- --------------------------------------------------------------------------------
BANK PERFORMANCE (75%)
- --------------------------------------------------------------------------------
THRESHOLD:
- Minimum Level Average ROE of 8.54% for the Bank for 1996.
- Capital: Tier 1 Leverage Ratio not to fall below 7.0% based on an
average of four quarterly calculations for 1996.
- Asset Quality: Net Loan Losses, as a percentage of average loans
outstanding, for the calendar year ending December 31, 1996, not to
exceed 1.2%.
- Liquidity Ratio within policy guidelines of 20 to 40% as measured at
the end of each quarter in 1996.
- --------------------------------------------------------------------------------
TARGET:
- Average Bank ROE of 10.05% for 1996.
- --------------------------------------------------------------------------------
INDIVIDUAL PERFORMANCE (25%)
- --------------------------------------------------------------------------------
THRESHOLD:
- "Achieves Expectations"
- --------------------------------------------------------------------------------
TARGET:
- Goal attainment
- Managerial/Team Performance
- --------------------------------------------------------------------------------
- - The following pages present the incentive earnings schedule and examples of
award calculations.
- - Incentive awards will be paid in cash within 30 days after annual
performance figures have been verified by the Bank's external auditors and
the CEO and Board of Directors.
4
<PAGE>
1996 INCENTIVE SCHEDULE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
AVERAGE ROE (75%) INDIVIDUAL
PERFORMANCE* (25%)
- ----------------------------------------------------------------------------------------------------
1996 PERCENTAGE PERCENTAGE GOAL ACHIEVEMENT
ATTAINED ATTAINED INCENTIVE MANAGERIAL
ROE EARNED
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8.53 LESS THAN 85% 0%
- ----------------------------------------------------------------------------------------------------
THRESHOLD 8.54 85% 50% "ACHIEVES EXPECTATIONS"
- ----------------------------------------------------------------------------------------------------
8.84 87% 60%
9.14 90% 70%
9.44 94% 80%
9.74 97% 90%
- ----------------------------------------------------------------------------------------------------
TARGET 10.05 100% 100% 100% OF TARGET AWARD
- ----------------------------------------------------------------------------------------------------
10.51 104% 105%
10.97 108% 110%
11.43 112% 115%
11.89 116% 120%
12.35 119% 125%
12.81 123% 130%
13.27 127% 135%
13.73 131% 140%
14.19 135% 145%
14.65 139% 150%
15.11 143% 160%
15.58 149% 170%
16.05 156% 180%
16.52 162% 190%
- ----------------------------------------------------------------------------------------------------
MAXIMUM 16.99 169% 200% "EXCEEDS EXPECTATIONS"
150% OF TARGET AWARD
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Individual performance for EVPs will be determined via assessment of
performance as done by the CEO and reviewed by the Board Compensation and
Benefits Committee; the rating for individual performance of the CEO will
be determined by the Chairmen of the various Board Committees. Percentage
of incentive earned for individual performance component does not
accelerate beyond average ROE% attained until Bank achieves target level
(100%) of average ROE performance.
5
<PAGE>
EXAMPLE OF CALCULATION
- --------------------------------------------------------------------------------
(SCENARIO I - BANK EXCEEDS AVERAGE ROE TARGET)
- --------------------------------------------------------------------------------
ASSUMPTIONS PERFORMANCE RESULTS
- --------------------------------------------------------------------------------
- - Base Salary: $130,000 - Bank meets all threshold goals
- - Target Incentive (25%): $32,500 - ROE is 108% of goal
- - Target Annual Total Cash: $162,500 - Individual performance "Achieves
Expectations"
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
TARGET INCENTIVE AWARD INCENTIVE AWARD CALCULATIONS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK ELEMENT AVERAGE ROE
(75% WEIGHTING)
- - Target ROE: $24,375 108% of Goal 110% X $24,375 = $26,813
INDIVIDUAL ELEMENT
(25% WEIGHTING)
- - Target: $8,125 100% 100% X $8,125 = $8,125
------ (ACHIEVES ------
Total Target Incentive: $32,500 EXPECTATIONS) TOTAL EARNED INCENTIVE $34,938
- ----------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
EXAMPLE OF CALCULATION
- --------------------------------------------------------------------------------
(SCENARIO II - BANK FAILS TO ATTAIN AVERAGE ROE TARGET)
- --------------------------------------------------------------------------------
ASSUMPTIONS PERFORMANCE RESULTS
- --------------------------------------------------------------------------------
- - Base Salary: $130,000 - Bank meets all threshold goals
- - Target Incentive (25%): $32,500 - ROE is 85% of goal
- - Target Annual Total Cash: $162,500 - Individual performance "Exceeds
Expectations"
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
TARGET INCENTIVE INCENTIVE AWARD CALCULATIONS
AWARD
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK ELEMENT AVERAGE ROE
(75% WEIGHTING)
- - Target ROE: $24,375 85% of Goal 50% X $24,375 = $12,187
INDIVIDUAL ELEMENT
(25% WEIGHTING)
- - Target: $8,125 50% * 50% X $8,125 = $4,063
------ (EXCEEDS ------
EXPECTATIONS)
TOTAL EARNED INCENTIVE $16,250
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Percentage incentive earned for individual performance component does
not accelerate beyond average ROE% attained until Bank achieves target
ROE performance.
7
<PAGE>
3. EXECUTIVE BENEFIT PROGRAMS
The Bank recognizes that the well being of our executives and their families is
an important factor in your individual performance and, therefore, to our
overall success.
Our benefits and perquisites are designed to provide protection, savings,
security, and rest and relaxation. They are also designed to be flexible and
tax efficient. These plans are so much a part of our lives that we often take
them for granted and forget how valuable they are. Our programs are highly
competitive and comprehensive, adding approximately 40% to your annual pay,
including:
- - Deferred Compensation
- - Medical, dental and vision insurance
- - 401(k) savings plan
- - Long-term disability insurance
- - Life insurance
- - Leased automobile
- - Vacations and holidays.
4. STOCK OPTIONS
Our executive stock option program is intended to reward your continued tenure
with Southern California Bank and to reward your contributions over time.
Holding options provides you with an excellent opportunity to achieve
considerable capital accumulation longer term, and to participate in the Bank's
success and growth along with our external shareholders.
Options are most frequently used at the executive level and optionee holdings
are reviewed on an annual basis.
8
<PAGE>
SOUTHERN CALIFORNIA BANK
1996 EXECUTIVE INCENTIVE COMPENSATION PLAN
TERMS AND CONDITIONS
- --------------------------------------------------------------------------------
1. PARTICIPATION
Executive positions that are eligible to participate for Plan Year 1996, their
targeted incentive award levels and the weighting between Bank and individual
performance are listed in EXHIBIT I. Executives must have been employed for at
least one full calendar quarter, in an eligible position, to be eligible for an
award under the plan.
2. EFFECTIVE DATE
This program supersedes all previous incentive compensation or bonus plans. It
became effective January 1, 1996 and, subject to Southern California Bank's
rights as described below to amend, modify or discontinue the program at any
time during the specified period, the program will remain in effect until
December 31, 1996.
3. PROGRAM ADMINISTRATION
This program is authorized and administered annually by the Compensation and
Benefits Committee of the Board of Directors through the Chief Executive Officer
(CEO), with process and procedural assistance from the Executive Vice President,
Human Resources. The Board Compensation and Benefits Committee has final
authority to interpret the program and to make or nullify any rules and
procedures as necessary for proper program administration. Any determination of
the Committee about the program will be final and binding on all participants.
4. PROGRAM CHANGES OR DISCONTINUANCE
Southern California Bank has developed this program based on existing business,
market and economic conditions; current services; and personnel assignments.
If substantial changes occur at the Bank which affect these conditions,
services, assignments, or forecasts, the Compensation and Benefits Committee may
add to, amend, modify or discontinue any of the terms or conditions of the
program at any time during the program's specified period, provided that this
action does not reduce the amount of awards earned before the date of the
action. Any modifications to the Plan must be in writing; the Plan cannot be
modified orally.
9
<PAGE>
5. INCENTIVE COMPENSATION CALCULATION AND PAYMENT
All incentive awards will be based on a combination of Bank performance and
individual performance and the percentages of earned incentive will be
calculated using the Incentive Schedule chart for respective participants.
Incentive amounts will be calculated on the actual base salary of the executive
as of December 31, 1996, less any bonuses or incentives, car allowances, housing
allowances, relocation payments or other non-base compensation elements.
Incentive awards will be paid in cash after the end of the fiscal year and
within 30 days after annual performance figures have been verified by the Bank's
external auditors and the CEO and Board of Directors.
Any rights accruing to a participant or his/her beneficiary under the program
shall be solely those of an unsecured general creditor of Southern California
Bank. Nothing contained in the program and no action taken pursuant to the
provisions hereof will create or be construed to create a trust of any kind, or
a pledge, or a fiduciary relationship between Southern California Bank or the
CEO and the participant or any other person. Nothing herein will be construed
to require Southern California Bank or its CEO or Board of Directors to maintain
any fund or to segregate any amount for a participant's benefit.
Incentive payments will be included as compensation in the year paid for
determining compensation under benefit programs. Incentive compensation will be
considered taxable income to participants in the year paid and will be subject
to all legally required withholdings. Actual tax liability is the participant's
responsibility.
- --------------------------------------------------------------------------------
Participants must have attained an overall individual performance rating of
"Achieves Expectations" for their performance for the Plan Year period to be
eligible to receive an incentive award.
In all cases, the Bank's performance will serve as the threshold for any
payments made under this Executive Incentive Plan. If the Bank fails to attain
its capital, credit quality or liquidity thresholds, or if it fails to attain
the specified minimum profitability level, no payments will be made to
participants even if individual and functional area performance goals have been
met and/or exceeded.
- --------------------------------------------------------------------------------
10
<PAGE>
6. TERMINATION OF EMPLOYMENT
A participant, to receive his or her award, must be an active full-time employee
of Southern California Bank on the last day of the incentive period for which an
award is earned (i.e., December 31, 1996).
Voluntary resignation, prior to the end of the incentive period, will serve as a
forfeiture of any award. A person being terminated involuntarily will not be
eligible for any awards under this plan.
7. NEW HIRES, PROMOTIONS, TRANSFERS, APPROVED LEAVES OF ABSENCE
Participants who are not employed by Southern California Bank at the beginning
of the Plan Year may receive a proration of their earned award based on their
length of employment, except that an executive hired, transferred or promoted
into an eligible position on or after October 1, 1996 will not be eligible for
any incentive award under this Plan.
Participants who are on an approved Leave of Absence may be eligible for a pro-
rated payment of earned incentive awards provided that the leave does not exceed
90 days in length.
8. DISABILITY, DEATH, OR RETIREMENT
If a participant is disabled by an accident or illness, and is disabled long
enough to be placed on long-term disability, his or her incentive award for the
incentive period shall be prorated so that no award shall be earned during the
period of long-term disability.
In the event of death, Southern California Bank will pay to the estate or the
beneficiary of the participant the pro rata portion of the earned award that the
participant would have received if he/she had lived to the end of the Plan Year.
Incentive award payments will be prorated in the event that a participant
retires before the end of the Plan Year.
9. MISCELLANEOUS
The Plan will not be deemed to give any participant the right to be retained in
the employ of Southern California Bank, which is an "at-will" employer, nor will
the Plan interfere with the right of the Bank to discharge any participant for
any reason, with or without cause or notice, at any time.
11
<PAGE>
The Plan will not be deemed to constitute a contract of employment with any
participant or to be a consideration for the employment of any participant;
rather, I understand that Southern California Bank and I have the right to
terminate my employment for any reason at any time, and that this policy may be
modified only in a written document signed by Southern California Bank's
President and CEO.
Participation in the 1996 Executive Compensation Plan does not guarantee
participation in future incentive plans or other bonus or profit sharing
programs. Plan structures and participation will be determined on a year-to-
year basis.
12
<PAGE>
EXHIBIT I
---------
SOUTHERN CALIFORNIA BANK
1996 EXECUTIVE INCENTIVE COMPENSATION PLAN
TERMS AND CONDITIONS
- --------------------------------------------------------------------------------
ELIGIBLE POSITIONS
------------------
- - President and Chief Executive Officer
- - EVP/Chief Operating Officer
- - EVP/Chief Credit Officer & Chief Administrative Officer
- - EVP/Corporate Banking
- - EVP/Chief Financial Officer
- - EVP/Human Resources
TARGET AWARD STRUCTURE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Position Target Incentive Calculation Incentive Opportunity
Award Weighting (% of Base Salary)
--------------------- --------------------------------------
Bank Individual Minimum* Target ** Max***
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRES/CEO 40% 75% 25% 20% 40% 75%
EVP/COO 30% 75% 25% 15% 30% 56%
EVP/CCO 25% 75% 25% 12.5% 25% 47%
EVP/CB 25% 75% 25% 12.5% 25% 47%
EVP/CFO 25% 75% 25% 12.5% 25% 47%
EVP/HR 20% 75% 25% 10% 20% 37.5%
- ----------------------------------------------------------------------------------------------------
</TABLE>
* MINIMUM = MINIMUM THRESHOLDS AND PERFORMANCE RATING OF "ACHIEVES
EXPECTATIONS"
** TARGET = 100% AVERAGE ROE AND PERFORMANCE RATING OF "ACHIEVES EXPECTATIONS"
*** MAXIMUM = 200% OF BANK AVERAGE ROE AND PERFORMANCE RATING OF "EXCEEDS
EXPECTATIONS"
13
<PAGE>
SOUTHERN CALIFORNIA BANK
1996 EXECUTIVE INCENTIVE COMPENSATION PLAN
EFFECTIVE JANUARY 1, 1996 THROUGH DECEMBER 31, 1996
PARTICIPATION AGREEMENT
-----------------------
I have read and reviewed the 1996 Executive Incentive Compen-sation Plan,
including the Terms and Conditions, and understand their applicability. I
understand the Plan will not be deemed to constitute a contract of employment or
to be a consideration for my employment; rather, I understand that Southern
California Bank is an "at-will" employer and that the Bank and I have the right
to terminate my employment for any reason, at any time, and that this policy may
be modified only in a written document signed by Southern California Bank's
President and CEO or Chairman.
- ----------------------------------- --------------------
Participant's Signature Date
In the event of my death, any awards payable under this plan shall be payable to
the following beneficiary.
- ----------------------------------- --------------------
Beneficiary Name Social Security #
If you are married and the beneficiary you have named is someone other than your
spouse, your spouse must sign below to indicate consent to the designated
beneficiary.
- ----------------------------------- --------------------
Signature of Spouse Date
14
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
This Employment Agreement (sometimes referred to as the "Agreement")
is effective January 1, 1997, between SC Bancorp ("Bancorp") and Southern
California Bank ("Bank") (collectively referred to as "Employers"), and Larry D.
Hartwig ("Employee").
RECITALS
A. Employee entered into an Employment Agreement with Employers
effective as of January 1, 1995 (the "Prior Agreement").
B. Employers desire to continue to employ Employee in the full-time
employ of Employers as the President and Chief Executive Officer of the
Employers and to provide hereby the terms of that employment.
C. Employee has advised Employers' Boards of Directors of his
willingness to continue to act in a full-time capacity as the President and
Chief Executive Officer of Employers on the terms provided herein.
D. Employee and Employers wish to terminate the Prior Agreement in
its entirety and enter into a new agreement encompassing the terms of Employee's
employment with Employers as contained herein.
NOW, THEREFORE, in consideration of the foregoing Recitals, and the
terms, conditions and covenants contained herein, it is agreed as follows:
1. EMPLOYMENT. Employers hereby employ Employee and Employee hereby
accepts this employment and agrees to exercise and perform faithfully,
exclusively, and to the best of his ability on behalf of each of the Employers
the powers and duties customarily exercised and performed by its President and
Chief Executive Officer on the terms and conditions set forth herein and as
determined from time to time by the Employers' Boards of Directors. Employee
acknowledges and agrees that he is hereby also making a moral commitment to
honor this Agreement and to further the Employers' best interests during the
full term of this Agreement. Employers acknowledge and agree that they are
hereby making a moral commitment to honor this Agreement, to provide Employee
with the authority necessary to fulfill his responsibilities and to direct the
affairs of Employers in a manner which is consistent with safe and sound banking
practices and in compliance with all applicable laws and regulations.
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<PAGE>
2. EMPLOYEE'S SERVICES AND DUTIES.
2.1 During the term hereof, Employee shall:
a. Observe and conform to the policies and directions
promulgated by Employers' Boards of Directors;
b. Assume and perform those duties customarily performed
by the Chief Executive Officer and President of a bank as determined from time
to time by the Employers' Boards of Directors, including general executive
duties and other powers and duties pertaining by law, regulations, or practice
to the office of Chief Executive Officer and President, or otherwise imposed by
the Bylaws of Employers;
c. Serve as full-time employee, and devote his ability and
attention to the business of Employers during the term of this Agreement, and
neither directly nor indirectly render any services of a business, commercial,
or professional nature, whether as employee, partner, officer, director or
shareholder, to any other person, firm, corporation or organization which in any
manner competes with Employers, whether for compensation or otherwise, nor
engage in any activity which is adverse to the Employers' business or welfare,
without the prior written consent of Employers' Boards of Directors; and
d. Act as a member of the Boards of Directors of Employers
if so elected by the shareholders of the Employers, and if appointed or elected
as a member of any committees established by the Employers' Boards of Directors,
to perform all of the duties and functions incident thereto.
The precise services to be performed by Employee may be extended
or curtailed, from time to time, at the discretion of the Employers' Boards of
Directors, provided such services shall at all times be of the nature
customarily performed by the Chief Executive Officer and President of a bank and
bank holding company, as the case may be.
2.2 Nothing contained herein shall be construed to prevent
Employee from investing his assets in any form or manner, or supervising these
investments, provided that such investment-related activities do not, in any
manner nor for any significant amount of time, interfere with his performance of
services on behalf of Employers, and provided further Employee shall not acquire
any direct or indirect ownership interest in any bank or financial institution,
other than Employers, where such ownership interest exceeds one tenth of one
percent of the total ownership interest in any bank or financial institution
other than Employers. This restriction shall only apply to banks or financial
institutions that are located within the service
2
<PAGE>
areas of any of Employers' offices and are in direct competition with Employers.
2.3 During the term hereof Employee shall not have a margin
account with any entity without the prior written consent of the Employers'
Boards of Directors.
2.4 Employee is a director of Bancorp and Bank and Employee and
Employers desire that Employee continue to serve as a director. Bancorp and
Bank shall use their reasonable best efforts to cause Employee to be elected a
director of both Boards of Directors at any meeting of the Boards or of the
shareholders held for the purpose of electing directors during the term of this
Agreement.
3. TERM. Unless terminated by other provisions contained herein,
the term of Employee's employment by Employers pursuant to this Agreement shall
be for a period of one and one half (1-1/2) consecutive calendar years,
commencing as of January 1, 1997 and terminating on June 30, 1998; PROVIDED,
HOWEVER, that Employers agree that on or before December 31, 1997, and on each
December 31 thereafter so long as this Agreement shall remain in force and not
terminate (each a "Consideration Date"), Employers' Boards of Directors will
consider an extension of this Agreement for an additional one year term
commencing on July 1, immediately following such Consideration Date and
terminating one year thereafter. If on, or within the twelve (12) month period
preceding, any Consideration Date the Employers' Boards of Directors do not by
written notice to Employee affirmatively extend the term of this Agreement for
one year, this Agreement shall terminate on June 30, immediately following such
Consideration Date, unless terminated earlier by the operation of other
provisions contained herein.
4. COMPENSATION AND OTHER BENEFITS. As compensation for the
services to be rendered by Employee hereunder, Employers shall pay and the
Employee shall accept the following compensation:
a. Employers shall pay to Employee a minimum base salary of
$210,000 per year, payable in equal semi-monthly installments, less usual
withholding deductions. The Employers' Boards of Directors will consider on an
annual basis on or before the end of the calendar year whether it is appropriate
or desirable to increase the amount of the base salary as of January 1 of the
next calendar year. Notwithstanding that the INITIAL TERM of this Agreement
commences as of January 1, 1995, the first consideration of an increase in base
salary shall occur before the end of calendar year 1994 for possible
implementation in calendar year 1995. Nothing herein shall be construed to
impose upon the Employers any obligation to increase the Employee's base salary,
but rather the Employers' Boards of Directors may
3
<PAGE>
increase Employee's base salary at any time in their absolute discretion.
b. Employers shall provide Employee during the term of this
Agreement with an automobile, purchased or leased new, comparable to a domestic
luxury sedan. Employers shall pay all reasonable operating expenses with regard
to such automobile and shall procure and maintain in force at Employers' expense
an insurance policy on such automobile which shall include collision,
comprehensive, medical payments and liability coverage with the limits mutually
agreed to by Employers and Employee.
c. As additional compensation, Employee shall, in the absolute
discretion of Employers' Boards of Directors, be entitled to participate in the
Employees' Senior Management Incentive Compensation Program or any other similar
program from time to time in effect.
d. During the term of Employee's employment under this
Agreement, Employee shall be entitled to receive other benefits of employment
made available to other employees of Employers, such as life, health and
accident insurance on Employee in the form, kind and amount made available under
group insurance coverage to employees of Employers plus directors and executive
officers (D&O) insurance coverage. Employee shall also be entitled to
participate in all of Employers' ERISA type plans in existence during the term
of this Agreement. Employee shall not be entitled to participate in any profit
sharing plans, incentive compensation programs or other benefit plans made
available to employees of Employers except as described in paragraph 4(c) or
other paragraphs of this Agreement.
e. In addition to any benefits payable to the Employee in
accordance with the provisions of any plan, agreement or arrangement described
above, Employers will purchase a term life insurance policy in the amount of
$400,000 on the life of the Employee, over and above the standard group
insurance benefits provided by the Employers, with the proceeds thereof to be
paid to the Employee's beneficiary or beneficiaries or to his estate, PROVIDED,
HOWEVER, that Employers' obligation to purchase such term life insurance policy
shall cease if it is reasonably determined by the Employers' Boards of Directors
that such purchase would in any way violate any applicable banking laws or
regulations. Such term life insurance policy shall remain in effect during the
term of this Agreement and shall be subject to Employee's passing any required
physical examination for such insurance coverage. In addition, the obligations
of Employers to purchase a term life insurance policy are subject to Employee
being insurable and the premiums for such policy being reasonable and in
conformity with those paid on an average person of Employee's age. Such term
life insurance policy shall be transferred to Employee at no cost to Employee
upon Employee's
4
<PAGE>
cessation of employment for any reason; PROVIDED that (i) the terms of such term
life insurance policy permit such transfer; (ii) that such transfer is in
compliance with all applicable banking laws and regulations as reasonably
determined by the Employers' Boards of Directors; (iii) that the Employers incur
no additional costs as a result of such transfer, other than payment of a
reasonable transfer fee; and (iv) that premiums relating to such term life
insurance policy shall thereafter be the responsibility of Employee.
f. Employee shall not be entitled to fees for service as a
director of Employers, including committee fees or any other fees or
compensation available to outside directors.
5. EXPENSES. Employee is authorized to incur reasonable expenses
for promoting the business of Employers, including expenses for entertainment,
travel, service club memberships and similar items. Any reasonable business
related costs incurred by Employee for conventions, meetings, and seminars will
be reimbursed by Employers as will all such reasonable expenses incurred by
Employee on behalf of Employers upon presentation by Employee, from time to
time, of an itemized account of his business related expenditures.
6. VACATIONS. Employee shall be entitled to an annual vacation
according to the Employers' personnel policy of not less than four (4) weeks
without reduction in salary. In the event that Employee has not utilized all
vacation days during a year, Employee shall be entitled to utilize such vacation
days during the first quarter of the next calendar year. Except as specified in
the preceding sentence, vacation days shall be non-cumulative. Employee shall
also be entitled to all paid holidays provided to Employers' senior officers.
Employee agrees to utilize his vacation in a manner which complies with all
applicable banking laws and regulations.
7. STOCK OPTIONS. Employers' Boards of Directors shall annually
consider the grant to Employee of stock options in such amounts which, when
aggregated with stock options already held by Employee, are commensurate with
amounts customarily awarded to executives with comparable responsibilities,
PROVIDED, HOWEVER, that the grant of such stock options shall be solely in the
discretion of the Employers' Boards of Directors and PROVIDED, FURTHER, that
Employers' Boards of Directors shall be under no obligation to grant stock
options to Employee at any time.
In an event constituting a Change in Control (as hereinafter defined)
shall be expected to occur, all previously granted stock options then
outstanding and not then otherwise fully exercisable shall, during the five
business day period immediately prior to the effective date of such Change of
5
<PAGE>
Control, be fully exercisable. If the anticipated Change in Control does not
occur for any reason, such options shall be reinstated on their previous terms
(and any exercise of options which would not otherwise have been exercisable
shall be unwound). This paragraph supersedes the terms of any option agreement
now or hereafter outstanding.
8. CLUB MEMBERSHIPS. Employers shall provide the use of a country
club membership to Employee for the promotion of Employers' business. Employers
shall be responsible for all costs related to such membership to the extent such
costs are business related (without regard, however, to whether such costs are
deductible for income tax purposes). If Employers are incapable of holding such
membership in corporate name, Employers shall provide to Employee funds
necessary to acquire such membership. Employee shall be entitled to use of such
membership during the term of this Agreement. During the term of this
Agreement, Employee shall be entitled to purchase such membership interest from
Employers at a purchase price equal to the then fair market value of such
membership. Upon Employee ceasing employment with Employers, Employee shall
transfer any and all ownership of such membership to Employers or a designee of
Employers unless Employee has purchased such memberships as provided above.
9. TERMINATION PRIOR TO EXPIRATION OF TERM.
9.1 TERMINATION BY EMPLOYERS FOR CAUSE. Employers, by vote or
written approval of the Boards of Directors duly taken in accordance with the
law and the Employers' Bylaws, may terminate this Agreement immediately, at
which time all obligations and liability of Employers under this Agreement shall
cease (except as to benefits then accrued), upon determination in good faith
that Employee (i) has been adjudged guilty of a felony or a misdemeanor
involving moral turpitude by a court of competent jurisdiction; (ii) has
committed any act which would cause termination of coverage under the Employers'
Bankers' Blanket Bond as to Employee (as distinguished from termination of
coverage as to the Employers as a whole); or (iii) has been grossly negligent or
has engaged in criminal misfeasance or willful misconduct in the performance of
his duties. For purposes of this section, an act, or failure to act, on the
Employee's part shall be considered "willful" only if done, or omitted to be
done, by him in bad faith and without reasonable belief that such act, or
failure to act, is in the best interest of the Employers.
9.2 TERMINATION BY EMPLOYERS WITHOUT CAUSE. Employers, by vote
or written approval of the Boards of Directors duly taken in accordance with the
law and Employers' Bylaws, may terminate this Agreement and rights hereunder,
without cause or any reason whatsoever, upon payment to Employee of the sum of
6
<PAGE>
eighteen (18) months base salary as in effect on the date of termination. Any
pay in lieu of vacation accrued to Employee, but not taken as of the date of
termination, will be deemed included in the termination pay. In the event of
termination under this Section 9.2 all stock options granted pursuant to
Section 7 hereunder shall become fully vested and immediately exercisable for a
period of not less than ninety (90) days following termination. In the event of
termination under this paragraph 9.2, insurance benefits provided to Employee by
Employers shall be extended at Employers' sole cost for twelve (12) months
following the date of termination. All remaining obligations and liability of
Employers under this Agreement shall cease at the date of termination, except as
to benefits then accrued.
9.3 ACQUISITION OR DISSOLUTION OF EMPLOYERS. This Agreement
shall not be terminated by the voluntary or involuntary dissolution of Employers
or by any merger or consolidation where Employers or either of them are not the
surviving or resulting corporation, or upon any transfer of all or substantially
all of the assets of Employers or either of them. In the event of any such
merger, consolidation or transfer of assets, the provisions of this Agreement
shall be binding upon and inure to the benefit of the surviving or resulting
corporation or the corporation to which such assets shall be transferred.
Notwithstanding the foregoing, in the event proceedings for
liquidation of Employers are commenced by regulatory authorities, this Agreement
and all rights and benefits hereunder shall terminate; PROVIDED, HOWEVER,
Employee will have the sole option to demand and receive the lesser of (i) one
year base salary based upon the salary being paid to Employee at the time of
such termination, or (ii) the balance payable under this Agreement.
9.4 DEATH OF EMPLOYEE. If Employee dies during the term of this
employment, Employers shall pay to the estate of Employee the compensation and
other rights hereunder which would otherwise be payable to Employee up to the
end of the month following the month in which his death occurs, and Employers
shall have no further obligations or liability under this Agreement (except as
to benefits then accrued). In the event of Employee's death, all stock options
granted pursuant to Section 7 hereunder shall become fully vested and
immediately exercisable by the estate of Employee for a period of not less than
ninety (90) days following Employee's death.
9.5 DISABILITY OF EMPLOYEE. If Employee becomes disabled during
the term of this Agreement and such disability continues for a period of one
hundred eighty (180) days, Employers, by vote or written approval of the Boards
of Directors
7
<PAGE>
duly taken in accordance with the law and Employers' Bylaws, may, at their
option, after the expiration of such period, terminate this Agreement by giving
written notice to Employee, at which time all obligations and liability of
Employers under this Agreement shall cease (except as to benefits then accrued).
While Employee is disabled, Employers shall pay to Employee one-hundred percent
(100%) of the monthly salary installments as provided in paragraph 3, but such
installments shall be reduced by all amounts paid to Employee on account of
disability insurance, worker's compensation or social security payments made to
Employee arising out of his disability other than medical, hospital or similar
health insurance; provided, however, that such payments by Employers shall cease
upon the earlier of (a) the expiration of the term of this Agreement, (b) the
earlier termination of this Agreement pursuant to its provisions, or (c) the
continuation of Employee's disability for a period of one hundred eighty (180)
days. For the purpose of this Agreement, the term "disabled" shall be defined
as Employee's inability, through physical or mental illness or other cause, to
perform normal and customary duties which he is required to perform under this
Agreement. In determining whether Employee is disabled, Employers' Boards of
Directors may rely upon the written statement provided by a licensed physician
acceptable to Employers' Boards of Directors. Employee shall allow himself to
be examined from time to time by any licensed physician selected by Employers'
Boards of Directors and agreed to by Employee. All such examinations will be
conducted within a reasonable time period.
9.6 TERMINATION BY EMPLOYEE. Employee shall give a minimum of
ninety (90) days prior notice, in writing, to Employers' Boards of Directors in
the event Employee resigns or voluntarily terminates employment. The Employers'
Boards of Directors, at their absolute discretion, may reduce the number of days
of prior notice required or may waive the provision in its entirety.
9.7 MISCELLANEOUS PROVISIONS REGARDING TERMINATION.
a. The paragraph in this Agreement providing for
Employers' right to terminate this Agreement shall be interpreted wholly
independent from and without reference to one another and shall not be construed
to impair or in any manner limit Employers' right to otherwise terminate this
Agreement pursuant to the laws of the State of California.
b. Subject to Section 7 hereof, Employee may exercise
Employee's rights to exercise any stock options vested prior to termination or
resignation, if any, and as provided in a Stock Option Plan and Stock Option
Agreement to which Employee is a party.
8
<PAGE>
10. NOTICE. Any written notice to be given to Employee by Employers
or their Boards of Directors may be given either by personal delivery to
Employee, or by mail, registered and certified, postage prepaid with return
receipt requested, addressed to Employee at his then current residence. Any
written notice to be given to Employers or their Boards of Directors by Employee
shall be given either by personal delivery to the Chairman of the Board of
Directors of Bancorp, or by Mail, registered or certified, postage prepaid with
return receipt requested, addressed to the Chairman of the Board of Directors of
Bancorp at the administrative office of Bancorp.
11. PAYMENTS RESULTING FROM "CHANGE IN CONTROL".
11.1 DEFINITION OF "CHANGE IN CONTROL". For purposes of the
Agreement, a "Change in Control" shall be deemed to have occurred if and when:
(a) the Bancorp shall consummate a merger or consolidation
(a "Transaction") with another corporation, association or similar entity;
PROVIDED, HOWEVER, that a Change of Control shall not be deemed to have occurred
with respect to a Transaction if the beneficial owners of the outstanding shares
entitled to vote in the election of directors of Bancorp immediately prior to
such Transaction will beneficially own more than sixty percent (60%) of the
outstanding shares entitled to vote in the election of directors of the
corporation resulting from the consummation of the Transaction; or
(b) twenty-five percent (25%) of the Bancorp's securities
then entitled to vote in the election of directors shall be acquired by any
"person" (as such term is used in Sections 13(d) of the Securities Exchange Act
of 1934, as amended); or
(c) during any period of twenty-four (24) consecutive
months, individuals who at the beginning of such period were members of the
Board of Directors of the Bancorp (the "Incumbent Board") shall cease to
constitute a majority of the Board of Directors of the Bancorp or any successor
to the Bancorp, provided that any person becoming a director subsequent to the
beginning of such period whose election or nomination for election was approved
by a vote of at least eighty-five percent (85%) of the directors comprising the
Incumbent Board shall be, for purposes hereof, considered as though such person
were a member of the Incumbent Board; or
(d) the Bancorp or the Bank shall sell all, or
substantially all, of its assets to another corporation.
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<PAGE>
11.2 COVERED TERMINATION.
(a) The benefits described in Section 11.4 hereof shall be
provided to the Employee in the event that his employment with the Employers is
terminated following, or in contemplation of, a Change of Control on account of
a "Covered Termination."
(b) "Covered Termination" shall mean (i) termination of
employment by the Employers other than for "Cause," as described in Section 9.1
hereof or the disability of Employee as described in Section 9.5 hereof or (ii)
termination of Employee's employment by the Employee for "Good Reason" as
described in Section 11.3 hereof.
11.3 TERMINATION BY EMPLOYEE FOR GOOD REASON.
(a) For purposes hereof, following a Change in Control the
Employee may terminate his employment for Good Reason if:
(i) the Employee's then-current level of annual base
salary (whether payable by the either of the Employers) is reduced; or
(ii) there is any reduction in the employee benefit
coverage provided to the Employee (including pension, profit sharing
and welfare benefits and perquisites, but not including incentive
bonuses) from the coverage levels in effect immediately prior to the
Change in Control, unless, however, the Employers provide
substantially equivalent employee benefits to the Employee; or
(iii) the Employee suffers a material diminution in his
title, position, reporting relationship, responsibilities, authority
or offices; or
(iv) there is a relocation of the Employee's principal
business office by more than ten (10) miles, and (a) the Employee's
new commute is more than fifty (50) miles from the Employee's current
primary residence or (b) the Employee's new commute is more than the
Employee's current commute which is at least fifty (50) miles; or
(v) the Employers fail to obtain assumption of this
agreement by any successor or assign;
10
<PAGE>
PROVIDED, HOWEVER, that any termination by the Employee for Good Reason must be
made in good faith.
(b) Notwithstanding the provisions of Section 11.3(a), no
such termination of the Employee's employment for Good Reason shall be treated
as a Covered Termination unless (i) the Employee shall give written notice to
the Employers' Boards of Directors, not later than thirty (30) days prior to the
effective date of any such termination for Good Reason and within six (6) months
after the date the Employee first becomes entitled to terminate for Good Reason
on account of the event(s) forming the basis for such termination, setting forth
in specific detail the basis for such termination for Good Reason, and (ii) the
Employers' Boards of Directors shall not, within thirty (30) days after receipt
of such notice, take actions reasonably acceptable to the Employee to remedy the
circumstances leading to the termination for Good Reason.
11.4 BENEFITS RESULTING FROM A COVERED TERMINATION.
In the event that the employment of the Employee shall have been
terminated after, or in contemplation of, a Change in Control in a manner that
shall constitute a Covered Termination, the Employers shall make payments to,
and provide benefit coverage for, the Employee as described below in Section
11.4, PROVIDED, HOWEVER, that any such benefits resulting from a "Covered
Termination" shall be in lieu of any termination benefits to which Employee
might otherwise be entitled pursuant to Section 9.2 hereof.
(a) BASE SALARY. The Employee shall receive a payment
equal to two and one half (2 1/2) times the highest annual base salary amount
paid to the Employee within the three years preceding the Covered Termination.
Such payment shall be made to the Employee within fifteen (15) business days
following the Covered Termination. The highest annual base salary amount shall
not include any bonuses awarded to the Employee.
(b) TARGET BONUS. The Employee shall also receive a payment
equal to the amount of the Employee's target bonus in the year that the Covered
Termination occurs under any Employers' incentive compensation plan in which the
Employee then participates ; PROVIDED HOWEVER, that if a Covered Termination
shall take place between January 1 and June 30, such payment to the Employee
shall be prorated and reduced to an amount equal to the product of (i) the
Employee's target bonus in the year that the Covered Termination occurs, and
(ii) a quotient of which the numerator will be the number of months that have
elapsed between January 1 immediately preceding the Covered Termination and the
date of the Covered Termination, rounded up to the next whole number, and the
denominator shall be twelve (12). Such payment
11
<PAGE>
shall be made to the Employee within fifteen (15) business days following the
Covered Termination.
(c) WELFARE BENEFITS. The Employers shall continue to
maintain, in full force and effect, any "Welfare Benefits," such as life
insurance coverage and health and disability benefits, which were being provided
to the Employee at the time of the Covered Termination during the "Continuation
Period." The Continuation Period shall mean the thirty (30) month period
following the date of a Covered Termination.
Notwithstanding the above, the Employers may provide
coverage and benefits under separate insured arrangements that provide benefits
substantially identical to those being provided to the Employee at the time of
the Covered Termination.
In addition, the Employee's right to any particular
type of Welfare Benefit shall be subject to cancellation by the Employers if the
Employee obtains alternative coverage of a similar type during the Continuation
Period that is at least as favorable to the Employee as the corresponding
Welfare Benefit. The Employee shall be obligated to notify the Employers'
Boards of Directors of any such alternative coverage within thirty (30) days of
it first becoming applicable to him.
(c) WITHHOLDING FOR TAXES. All payments required to be
made by the Employers to the Employee under this Agreement shall be subject to
the withholding of such amounts, if any, relating to tax, excise tax and other
payroll deductions as the Employers may reasonably determine it should withhold
pursuant to any applicable law or regulation.
(d) MITIGATION. The Employee shall not be obligated to
seek other employment in mitigation of the amounts payable and benefits to be
provided under this Agreement.
12. EXCISE TAX LIMIT. Notwithstanding anything elsewhere in this
Agreement to the contrary, if any of the payments provided for in this
Agreement, together with any other payments or benefits which the Employee has
the right to receive from the Employers (or its affiliated companies), would
constitute a "parachute payment" (as defined in Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code")), the payments pursuant
to this Agreement shall be reduced so that the present value of the total amount
received by the Employee that would constitute a "parachute payment" will be one
dollar ($1.00) less than three (3) times the Employee's base amount (as defined
in Section 280G of the Code) and so that no portion of the payments or benefits
received by the Employee shall be subject to the excise tax imposed by Section
4999 of the Code. If through error or otherwise the Employee should receive
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<PAGE>
payments under this Agreement or otherwise in excess of one dollar ($1.00) less
than three (3) times his base amount, the Employee shall immediately repay such
excess to the Employers upon notification that an overpayment has been made.
13. ASSIGNMENT. This Agreement shall be binding upon and inure to
the benefit of Employers, their successors and assigns. Employee may not assign
all or any part of his interest under this Agreement without the prior written
consent of Employers' Boards of Directors.
14. RECEIPT OF AGREEMENT. Each of the parties hereto acknowledges
that he or it has Agreement in its entirety and does hereby acknowledge receipt
of a fully executed copy thereof. A fully executed copy shall be an original
for all purposes, and is a duplicate original.
15. ARBITRATION AND ATTORNEYS' FEES. Any controversy between the
Employers and Employee involving the construction or application of any of the
terms, provisions or conditions of this Agreement shall, on the written request
of either party served on the other, be submitted to arbitration, and such
arbitration shall comply with and be governed by the provisions of the
California Arbitration Act, Sections 1280 through 1294.2 of the California Code
of Civil Procedure. Both parties shall agree upon an arbitrator from the
Los Angeles County Superior Court panel and, if they are unable to agree on an
arbitrator, then each will choose an arbitrator, who together will select a
third impartial arbitrator whose decision shall be final and conclusive upon all
parties. The cost of arbitration shall be borne by the losing party or in such
proportion as the arbitrator shall decide. In any arbitration proceeding and in
action at law or in equity to enforce or interpret the terms of this Agreement,
the prevailing party shall be entitled to reasonable attorneys' fees and costs
and necessary disbursements in addition to any other relief to which he may be
entitled, except to the extent arbitrator(s) may otherwise be permitted to
apportion costs and disbursements.
16. CALIFORNIA LAW. This Agreement is to be governed by and
construed under the laws of the State of California except to the extent that
any federal law regulating banks may apply.
17. CAPTIONS AND SECTION HEADINGS. Captions and paragraph headings
used herein are for convenience only and are not a part of this Agreement and
shall not be used in construing it.
18. INVALID PROVISIONS. Should any part of this Agreement for any
reason be declared invalid, the validity and binding effect of any remaining
portion shall not be affected,
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and the remaining portions of this Agreement shall remain in force and effect as
if this Agreement had been executed with the invalid provisions eliminated.
19. ENTIRE AGREEMENT. This Agreement contains the entire Agreement
between the Parties with respect to the employment of Employee by Employers, and
supersedes all prior and contemporaneous agreements, representations and
understandings of the parties. No modification, amendment or waiver of any of
the provisions of this Agreement shall be effective unless in writing
specifically referring hereto and signed by both parties.
20. WAIVER OF BREACH. The failure to enforce at any time any of the
provisions of this Agreement, or to require at any time performance by the other
party of any of the provisions hereof, shall in no way be construed to be a
waiver of such provisions or to effect either the validity of this Agreement or
any part hereof or the right of either party thereafter to enforce each and
every provision in accordance with the terms of this Agreement.
21. INDEMNIFICATION. To the fullest extent permitted by law,
Employers shall pay as and when incurred all expenses, including legal and
attorney costs, incurred by, or shall satisfy as and when entered or levied a
judgment or fine rendered or levied against, Employee in an action brought by a
third party against Employee (whether or not Employers are joined as party
defendants) to impose a liability or penalty on Employee for an act alleged to
have been committed by Employee while an officer of Employers or each of them;
provided, that Employee was acting in good faith, within what Employee
reasonably believed to be the scope of Employee's employment or authority and
for a purpose which Employee reasonably believed to be in the best interests of
Employers or Employers' shareholders, and in the case of a criminal proceeding,
that Employee had no reasonable cause to believe that Employee's conduct was
unlawful. Payments authorized hereunder include amounts paid and expenses
incurred in settling any such action or threatened action. All rights hereunder
are limited by any applicable state or Federal laws.
22. EXPENSES. Employers shall pay or reimburse Employee for legal
fees and expenses incurred by him in the review and negotiation of this
Agreement.
23. JOINT AND SEVERAL OBLIGATIONS. The obligations of the Bancorp
and the Bank hereunder are joint and several; provided, however, that if, based
upon the written advice of the Bank's regulatory legal counsel, the Board of
Directors of the Bank determines in its sole discretion that the portion of the
compensation and other benefits actually paid by the Bank (as opposed to
Bancorp) under Section 4 hereunder would otherwise violate any regulatory order,
regulation or statute, including
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Sections 23A or 23B of the Federal Reserve Act, such obligations of the Bank
shall be limited to the extent necessary to comply with such provisions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective on the day and year herein before set forth.
SC BANCORP
By
- ------------------------------ -------------------------------------
Larry D. Hartwig
SOUTHERN CALIFORNIA BANK
By
-------------------------------------
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EXHIBIT 10.13
EMPLOYMENT AGREEMENT
This Employment Agreement (sometimes referred to as this "Agreement") is
effective February 25, 1992, between SC Bancorp ("Bancorp") and Southern
California Bank ("Bank") (collectively refereed to as "Employers"), and David A.
McCoy ("Employee").
RECITALS
A. Employers desire to employ Employee in the full-time position of
Executive Vice President and Chief Operating Officer and the Employee has
advised Employers of his willingness to accept such employment by Employers.
B. Employers and Employee hereby enter into this Agreement setting forth
each and all of the terms and conditions of the employment.
NOW, THEREFORE, in consideration of the foregoing Recitals, and the terms,
conditions and covenants contained herein, it is agreed as follows:
1. EMPLOYMENT. Employers hereby employ Employee and Employee hereby
accepts this employment and agrees to exercise and perform faithfully,
exclusively, and to the best of his ability on behalf of each of the Employers
the powers and duties customarily exercised and performed by its Chief Operating
Officer for a period of three years from March 23, 1992, ("Employment Date")
until March 24, 1995, on the terms and conditions set forth herein. Employee
acknowledges and agrees that he is hereby also making a moral commitment to
honor this Agreement and to further the Employers' best interest during the full
term of this Agreement. Employers acknowledge and agree that they are hereby
making a moral commitment to honor this Agreement, to provide Employee with the
authority necessary to fulfill his responsibilities and to carry out the affairs
of Employers in a manner which is consistent with safe and sound banking
practices and in compliance with all applicable laws and regulations.
2. EMPLOYEE'S SERVICES AND DUTIES.
2.1 During the term hereof, Employee shall:
(a) Observe and conform to the policies, and directions,
promulgated by Employers' Board of Directors and/or President;
(b) Assume and perform those duties customarily performed by the
Chief Operating Officer of a bank, including general duties and other powers and
duties pertaining by law,
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regulations, or practice to the office of Director of Branch Banking or as
assigned or delegated to Employee by the President or as otherwise imposed by
the Bylaws of Employers; and
(c) Shall report directly to the President who shall set
performance goals in consultation with employee and shall review his performance
on an annual basis and
(d) Serve as a full-time employee, and devote his ability and
attention to the business of Employers during the term of this Agreement, and
neither directly nor indirectly render any services of a business, commercial,
or professional nature, whether as employee, partner, officer, director or
shareholder, to any other person, firm, corporation or organization which in any
manner competes with Employer, whether for compensation or otherwise, nor engage
in any activity which is adverse to the Employers' business or welfare, without
the prior written consent of Employers.
The precise services to be performed by Employee may be extended or
curtailed, from time to time, at the discretion of Employers' Board of Directors
and/or President provided such services shall at all times be of the nature
customarily performed by the Chief Operating Officer of a bank and bank holding
company, as the case may be.
2.2 Nothing contained herein shall be construed to prevent Employee
from investing his assets in any form or manner, or supervising these
investments, provided that such investment-related activities do not, in any
manner nor for any significant amount of time, interfere with his performance of
services on behalf of Employers, and provided further Employee shall not acquire
any direct or indirect ownership interest in any bank or financial institution,
other than Employers, where such ownership interest exceeds one tenth of one
percent of the total ownership interest in any bank or financial institution
other than Employers. This restriction shall only apply to banks or financial
institutions that are located within the service areas of any Employers' offices
and are in direct competition with Employers.
2.3 During the term hereof Employee shall not have a margin account
with any entity without the prior written consent of Employers' Board of
Directors or President.
3. TERM. The term of Employee's employment by Employers pursuant to this
Agreement shall be for a period of three consecutive years, commencing on the
Employment Date of March 23, 1992, and terminating on March 24, 1995, subject to
earlier termination as hereinafter provided. Provided further that,
notwithstanding the foregoing, two years after the employment date the term of
this Agreement shall be automatically renewed
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for an additional two year term so that the agreement shall be for a three year
term unless either party provides thirty days written notice of this party's
intent not to renew. In the event this agreement is not renewed it shall remain
in effect for a one year period.
4. COMPENSATION AND OTHER BENEFITS. As compensation in full for the
services to be rendered by Employee hereunder, Employers shall pay and the
Employee shall accept the following compensation:
(a) Employers shall pay to Employee a base salary of $130,000 per
year, commencing with the Employment Date, payable in equal semi-monthly
installments, less usual withholding deductions. Such base salary shall be a
minimum salary. As of January 1, 1993 and each January 1 thereafter during the
term of this Agreement, Employee's minimum base salary will be reviewed by the
Board of Directors on the basis of his performance to such date and the progress
of Employers and shall be increased as of such dates if so determined by the
Board of Directors in its absolute discretion. The Board of Directors may also
increase Employee's base salary at any other time in its absolute discretion.
(b) Employers shall provide Employee with a leased automobile of the
kind provided to other Employees with similar duties, responsibilities and
title. Employers shall pay for all maintenance and insurance on such
automobile.
(c) As additional compensation, Employee shall be entitled to
participate in the Senior Management Incentive Compensation Program.
(d) During the term of Employee's employment under this Agreement,
Employee shall be entitled to receive other benefits of employment, such as
life, health and accident insurance on Employee in the form, kind and amount
made available under group insurance coverage to other employees of Employers
with responsibilities and duties similar to those of Employee. Employee shall
also be entitled to participate in all of Employers' ERISA type plans in
existence during the term of this Agreement. Employee shall not be entitled to
participate in any profit sharing plans, incentive compensation programs or
other benefit plans made available to employees of Employers except as described
in paragraph 4(c) or other paragraphs of this Agreement.
(e) Employers shall provide the use of a country club membership to
Employee for the promotion of Employers' business. Employers shall be
responsible for all costs related to such membership. If Employers are
incapable of holding such membership in corporate name, Employers shall provide
to Employee
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funds necessary to acquire such membership. Employee shall be entitled to use
of such membership during the terms of this Agreement. Upon Employee ceasing
employment with Employers, Employee shall transfer any and all ownership of such
membership to Employers or a designee of Employers.
5. EXPENSES. Employee is authorized to incur reasonable expenses for
promoting the business of Employers and other customary, ordinary and business
activities. Such expenses will be reimbursed only upon presentation by Employee
with an itemized account of his expenditures with appropriate documentation to
substantiate such expenses on behalf of Employers.
6. VACATIONS AND HOLIDAYS. Employee shall be entitled to an annual
vacation according to Employers' personnel policy of four weeks without
reduction in salary. In the event that Employee has not utilized all his
vacation days during a year, his unused vacation may carry over to the next
calendar year up to a cap of two weeks. Once Employee reaches his vacation cap,
he ceases earning vacation until the unused vacation is reduced. Employee shall
also be entitled to all paid holidays provided to Employers' employees with
similar responsibilities and duties.
7. STOCK OPTIONS. Employee shall be entitled to participate in the
Employer's Stock Option Plan pursuant to the terms of said plan. Within 21 days
of employment, Employer shall grant to Employee stock options to acquire 7500
shares of common Stock at such terms as determined by the Board of Directors.
8. TERMINATION PRIOR TO EXPIRATION OF TERM.
8.1 TERMINATION BY EMPLOYERS FOR CAUSE. Employers have the
unrestricted right to terminate this Agreement at any time for cause, at which
time all obligations and liability of Employees under this Agreement shall cease
(except as to benefits then accrued), upon determination in good faith that
Employee (i) has been adjudged guilty of a felony or a misdemeanor involving
moral turpitude by a court of competent jurisdiction; (ii) has committed any act
which would cause termination of coverage under the Employers' Bankers' Blanket
Bond as to Employee (as distinguished from termination of coverage as to the
Employers as a whole); (iii) was involved in a criminal misfeasance or willful
misconduct in the performance of his duties; (iv) refused or failed to perform
his duties as provided in this Agreement; (v) refused or failed to follow the
rules and policies established by the Employers' Board of Directors or
President; (vi) was dishonest with respect to his relationship with Employers;
(vii) committed act(s) of gross negligence or reckless behavior which resulted
in harm to Employers; (viii) breached any of the covenants set forth in this
Agreement resulting in, or which reasonably may be expected to have, an adverse
effect upon
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Employers; or (ix) became disabled as discussed in Paragraph 8.4 of this
Agreement.
8.2 TERMINATION BY EMPLOYERS WITHOUT CAUSE. Either Employers' Board
of Directors and or President may terminate this Agreement and rights hereunder,
without cause or any reason whatsoever, upon payment to Employee of the sum of
twelve (12) months pay if terminated during the first year of this Agreement and
Six (6) months pay during any year thereafter at Employee's base salary in
effect on the date of termination. Any pay in lieu of vacation accrued to
Employee, but not taken as of the date of termination, will be deemed included
in the termination pay. All remaining obligations and liability of Employers
under this Agreement shall cease at the date of termination, (except as to
benefits then accrued).
Upon any termination of this Agreement without cause, payment to
Employee by Employers as provided in the preceding paragraph of this Section 8.2
shall constitute full and complete satisfaction of each and every obligation of
the Employers to the Employee.
8.3 DEATH OF EMPLOYEE. If Employee dies during the term of this
Agreement, Employers shall pay to the estate of Employee the compensation and
other rights hereunder which would otherwise be payable to Employee up to the
end of the following month in which his death occurs, and Employers shall have
no further obligations or liability under this Agreement (except as to benefits
then accrued).
8.4 DISABILITY OF EMPLOYEE. If Employee becomes disabled during the
term of this Agreement and such disability continues for a period of ninety (90)
days in any twelve month period, Employers may, at their option, after the
expiration of such period, terminate this Agreement by giving written notice to
Employee, at which time all obligations and liability of Employers under this
Agreement shall cease (except as to benefits then accrued). For the purposes of
this Agreement, the term "disabled" shall be defined as Employee's inability,
through physical or mental illness or other cause, to perform normal and
customary duties which he is required to perform under this Agreement. In
determining whether Employee is disabled, Employers may rely upon the written
statement provided by a licensed physician acceptable to Employers. Employee
shall allow himself to be examined from time to time by any licensed physician
selected by Employers. All such examinations will be conducted within a
reasonable time period.
8.5 TERMINATION BY EMPLOYEE. Employee shall have the right to
terminate this Agreement with or without cause or with or without notice.
However, Employers request that Employee give a minimum of ninety (90) days
prior notice, in writing, to
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Employers in the event Employee resigns or voluntarily terminates employment
during the term of this Agreement. The Employers' Board of Directors or
President, at their sole discretion, may reduce the number of days of prior
notice required or may waive the provision in its entirety.
8.6 MISCELLANEOUS PROVISION REGARDING TERMINATION. The paragraphs in
this Agreement providing for Employers' right to terminate this Agreement shall
be interpreted wholly independent from and without reference to one another and
shall not be construed to impair or in any manner limit Employers' right to
otherwise terminate this Agreement pursuant to the laws of the State of
California.
8.7 CHANGE OF CONTROL. In the event of a change of control during
the term of this Agreement or any renewal thereof, Employee shall receive twelve
(12) months severance pay if he is not retained in the same or similar position
for a period of one year after the change of control. Change of control shall
mean the purchase of a majority of the outstanding shares of common stock of the
Employers other than by an affiliate of the Employers or any purchase or sale of
substantially all of the property and assets of the Employers to a person or
entity other than an affiliate of the Employers or the merger or consolidation
of the Employer with or into another Corporation unless the Employer is to be
the surviving Corporation.
9. NOTICE. Any written notice to be given to Employee by Employers may
be given either by personal delivery to Employee, or by mail, registered or
certified, postage prepaid with return receipt requested, addressed to Employee
at his then current residence. Any written notice to be given to Employers by
Employee shall be given either by personal delivery to Employers' President, or
by mail, registered or certified, postage prepaid with return receipt requested,
addressed to Employers' President, at the administrative office of the
Employers.
10. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of Employers, their successors and assigns. Employee may not assign all
or any part of his interest under this Agreement without the prior written
consent of Employers.
11. RECEIPT OF AGREEMENT. Each of the parties hereto acknowledges that he
or they have read this Agreement in its entirety and does hereby acknowledge
receipt of a fully executed copy thereof. A fully executed copy shall be an
original for all purposes, and is a duplicate original.
12. ARBITRATION AND ATTORNEY'S FEES. Any controversy between Employers
and Employee involving the construction or application of any of the terms,
provisions or conditions of this Agreement shall, on the written request of
either party served on
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the other, be submitted to arbitration, and such arbitration shall comply with
and be governed by the provisions of the California Arbitration Act, Sections
1280 through 1294.2 of the California Code of Civil Procedure. Both parties
shall agree upon an arbitrator from the Los Angeles County Superior Court panel
and, if they are unable to agree on an arbitrator, then each will choose an
arbitrator, who together will select a third impartial arbitrator whose decision
shall be final and conclusive upon all parties. Employers and Employee shall
each pay the fees and/or expenses of their or his attorneys, witnesses and all
other expenses connected with presenting their or his case in arbitration. All
other costs of arbitration, including without limitation, the costs of any
record or transcript of the arbitration proceedings, administrative fees, the
fee and expenses of the arbitration(s) and all other fees and costs shall be
borne equally by Employers and Employee.
The arbitrator(s) who hears and decides any controversy, dispute
and/or claim between Employers and Employee shall, in determining a remedy, have
jurisdiction and authority only to award compensatory damages to make whole a
party suffering foreseeable economic damages, and, the arbitrator(s) shall not
have any authority or jurisdiction to make any award of any kind or nature
whatsoever or compensation for any damages including, without limitation, any
award for punitive damages and/or any award of damages for pain and suffering,
emotional distress or any other kind of form of non-economic damages and/or non-
foreseeable economic damages.
13. CALIFORNIA LAW. This Agreement is to be governed by and construed
under the laws of the State of California except to the extent that any federal
law regulating banks may apply.
14. CAPTIONS AND PARAGRAPH HEADINGS. Captions and paragraph headings used
herein are for convenience only and are not a part of this Agreement and shall
not be used in construing it.
15. INVALID PROVISIONS. Should any part of this Agreement for any reason
be declared invalid, the validity and binding effect of any remaining portion
shall not be affected, and the remaining portions of this Agreement shall remain
in force and effect as if this Agreement had been executed with the invalid
provisions eliminated.
16. ENTIRE AGREEMENT. This Agreement contains the entire Agreement
between the parties with respect to the employment of Employee by Employers, and
supersedes all prior and contemporaneous agreements, representations and
understandings of the parties. No modification, amendment or waiver of any of
the provisions of this Agreement shall be effective unless in writing
specifically referring hereto and signed by both parties.
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17. WAIVER OF BREACH. The failure to enforce at any time any of the
provisions of this Agreement, or to require at any time performance by the other
party of any of the provisions hereof, shall in no way be construed to be a
waiver of such provisions or to effect either the validity of this Agreement or
any part hereof or the right of either party thereafter to enforce each and
every provision in accordance with the terms of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective on the day and year herein before set forth.
By
-----------------------------------
David A. McCoy
SOUTHERN CALIFORNIA BANK
By
-----------------------------------
Its:
-----------------------------------
SC BANCORP
By
-----------------------------------
Its:
-----------------------------------
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EXHIBIT 10.14
AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT (the "Agreement")
by and among SC BANCORP, a California corporation (the "Company"), SOUTHERN
CALIFORNIA BANK, a California corporation and a wholly owned subsidiary of the
Company (the "Bank"), and David McCoy (the "Executive"), is entered into as of
January 1, 1997 (the "Agreement Date").
W I T N E S S E T H
WHEREAS the Company, the Bank and the Executive are parties to that certain
Employment Security Agreement dated as of September 15, 1994, as amended (the
"Initial Agreement"); and
WHEREAS, the Company and the Bank wish to continue to assure themselves and
the Executive of continuity of senior management during the term of this
Agreement and to provide the Executive with certain termination benefits in the
event the Executive's employment is terminated under certain circumstances; and
WHEREAS, should the possibility of a change in control of the Company
arise, the Board of Directors believes it imperative that the Company, the Bank
and the Board be able to rely upon the Executive to continue in his position,
and that the Company and the Bank be able to receive and rely upon the
Executive's advice, if it requests such advice, as to the best interests of the
Company, without concern that he might be distracted by the
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personal uncertainties and risks created by the possibility of a change in
control; and
WHEREAS, should the possibility of a change in control arise, in addition
to the Executive's regular duties, the Executive may be called upon to assist in
the assessment of such possible change in control, to advise management and the
Board as to whether such change in control would be in the best interests of the
Company and to take such other actions as the Board might determine to be
appropriate; and
WHEREAS, the Company, the Bank and the Executive agree that the terms and
conditions of the Agreement shall supersede and render ineffective Section 8.7
of that certain Employment Agreement dated February 25, 1992 between the
Company, the Bank and the Executive (the "Employment Agreement"), as well as any
other provisions of the Employment Agreement which are inconsistent with the
terms and conditions of the Agreement; and
WHEREAS, the Company, the Bank and the Executive wish to amend and restate
the Initial Agreement in its entirety as hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties do hereby agree as follows:
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SECTION 1. TERM OF AGREEMENT
This Agreement shall be effective as of the Agreement Date and shall
continue in effect until the Expiration Date (as defined below). The
"Expiration Date" shall initially be July 31, 1998, but commencing on August 1,
1997 and each August 1 thereafter, the Expiration Date shall automatically be
extended by one additional year unless, not later than April 30 of such year,
the Company shall have given notice to the Executive that it does not wish to
extend the Expiration Date; PROVIDED, HOWEVER, that if a Change in Control (as
defined in Section 2, below) shall have occurred prior to the original or
extended Expiration Date, the Expiration Date shall automatically become the
second anniversary of the last day of the month in which the Change in Control
occurred. Notwithstanding the foregoing, the Expiration Date shall be any
earlier date on which the Executive's employment with the Company or the Bank
terminates, in the event such termination occurs prior to a Change in Control.
SECTION 2. DEFINITION OF "CHANGE IN CONTROL"
For purposes of the Agreement, a "Change in Control" shall be deemed to
have occurred if and when:
(a) the Company shall consummate a merger or consolidation (a
"Transaction") with another corporation; PROVIDED, HOWEVER, that
a Change of Control shall not be deemed to have occurred with
respect to a Transaction if the beneficial owners of the
outstanding shares entitled to vote in the election of directors
immediately prior to such Transaction will beneficially own more
than sixty
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percent (60%) of the outstanding shares entitled to vote in the
election of directors of the corporation resulting from the
consummation of the Transaction; or
(b) twenty-five percent (25%) of the Company's securities then
entitled to vote in the election of directors shall be acquired
by any "person" (as such term is used in Sections 13(d) of the
Securities Exchange Act of 1934, as amended); or
(c) during any period of twenty-four (24) consecutive months,
individuals who at the beginning of such period were members of
the Board of Directors of the Company (the "Incumbent Board")
shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company, provided that any
person becoming a director subsequent to the beginning of such
period whose election or nomination for election was approved by
a vote of at least eighty-five percent (85%) of the directors
comprising the Incumbent Board shall be, for purposes hereof,
considered as though such person were a member of the Incumbent
Board; or
(d) the Company or the Bank shall sell all, or substantially all, of
its assets to another corporation.
SECTION 3. COVERED TERMINATION
The termination benefits described in Section 4 hereof shall be provided to
the Executive in the event that his employment with the Company or the Bank is
terminated following, or in contemplation of, a Change of Control on account of
a "Covered Termination".
"Covered Termination" shall mean (i) termination of employment by the
Company or the Bank other than for "Cause" as described below or (ii)
termination of employment by the Executive for "Good Reason" as described below.
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A. TERMINATION BY COMPANY OR BANK FOR CAUSE.
For purposes hereof, the Company and the Bank shall have "Cause" to
terminate the Executive's employment if:
(i) the Executive is grossly negligent or engages in willful
misconduct in the performance of his material duties; or
(ii) the Executive commits an act or acts of dishonesty resulting or
intended to result directly or indirectly in gain or personal
enrichment at the expense of the Company or the Bank; or
(iii) the Executive discloses to a third party information that is of a
confidential or proprietary nature to the Company or the Bank,
other than as appropriate in the normal course of the performance
of his duties; or
(iv) the Executive suffers from an illness, injury or other incapacity
that prevents him from performing his material duties for a total
of six (6) months, whether or not consecutive, within a twelve
(12) month period; or
(v) the Executive's death occurs.
B. TERMINATION BY EXECUTIVE FOR GOOD REASON.
For purposes hereof, following a Change in Control the Executive may
terminate his employment for Good Reason if:
(i) the Executive's then-current level of annual base salary (whether
payable by the Company or the Bank) is reduced; or
(ii) there is any reduction in the employee benefit coverage provided
to the Executive (including pension, profit sharing and welfare
benefits and perquisites, but not including incentive bonuses)
from the coverage levels in effect immediately prior to the
Change in Control, unless, however, the Company or the Bank
provides substantially equivalent employee benefits to the
Executive; or
(iii) the Executive suffers a material diminution in his title,
position, reporting relationship, responsibilities, authority or
offices; or
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(iv) there is a relocation of the Executive's principal business
office by more than ten (10) miles, and (a) the Executive's new
commute is more than fifty (50) miles from the Executive's
current primary residence or (b) the Executive's new commute is
more than the Executive's current commute which is at least fifty
(50) miles; or
(v) the Company fails to obtain assumption of this agreement by any
successor or assign of the Company;
PROVIDED, HOWEVER, that any termination by the Executive for Good Reason must be
made in good faith.
C. NOTICE.
Notwithstanding the foregoing provisions of this Section 3, no such
termination of the Executive's employment for Good Reason under paragraph B
above shall be treated as a Covered Termination unless (i) the Executive shall
give written notice to the Company, not later than thirty (30) days prior to the
effective date of any such termination for Good Reason and within six (6) months
after the date the Executive first becomes entitled to terminate for Good Reason
on account of the event(s) forming the basis for such termination, setting forth
in specific detail the basis for such termination for Good Reason, and (ii) the
Company or the Bank shall not, within thirty (30) days after receipt of such
notice, take actions reasonably acceptable to the Executive to remedy the
circumstances leading to the termination for Good Reason.
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SECTION 4. CONSEQUENCES OF COVERED TERMINATION
In the event that the employment of the Executive shall have been
terminated after, or in contemplation of, a Change in Control in a manner that
shall constitute a Covered Termination under Section 3 above, the Company shall
make payments to, and provide benefit coverage for, the Executive as described
below in this Section 4.
A. BASE SALARY.
The Executive shall receive a payment equal to one and one-half (1 1/2)
times the highest annual base salary amount paid (by either the Company or the
Bank) to the Executive within the three years preceding the Covered Termination.
Such payment shall be paid to the Executive within fifteen (15) business days
following the Covered Termination. The highest annual base salary amount shall
not include any bonuses awarded to the Executive.
B. TARGET BONUS. The Executive shall also receive a payment equal to
the amount of the Executive's target bonus in the year that the Covered
Termination occurs under any of the Company's or the Bank's incentive
compensation plans in which the Executive then participates; PROVIDED HOWEVER,
that if a Covered Termination shall take place between January 1 and June 30,
such payment to the Executive shall be prorated and reduced to an amount equal
to the product of (i) the amount of the Executive's target bonus in the year
that the Covered Termination occurs, and (ii) a quotient of which the numerator
will be the number of
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months that have elapsed between January 1 immediately preceding the Covered
Termination and the date of the Covered Termination, rounded up to the next
whole number, and the denominator shall be twelve (12). Such payment shall be
made to the Executive within fifteen (15) business days following the Covered
Termination.
C. STOCK OPTIONS.
Immediately upon a Covered Termination, any stock options granted to the
Executive under any Company incentive plan that were not fully vested and
exercisable shall become fully vested and immediately exercisable. Such options
will be exercisable for a period of 90 days from the date of the Covered
Termination (or such greater period as may be provided in the related plan).
Any restrictions on payment or transfer of previously granted incentive awards
shall immediately lapse.
D. WELFARE BENEFITS.
The Company and the Bank shall continue to maintain, in full force and
effect, any "Welfare Benefits," such as life insurance coverage and health and
disability benefits, which were being provided to the Executive at the time of
the Covered Termination during the "Continuation Period." The Continuation
Period shall mean the eighteen (18) month period following the date of a Covered
Termination.
Notwithstanding the above, the Company or the Bank may provide coverage and
benefits under separate insured arrangements that provide benefits substantially
identical to those being provided to the Executive at the time of the Covered
Termination.
8
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In addition, the Executive's right to any particular type of Welfare
Benefit shall be subject to cancellation by the Company or the Bank if the
Executive obtains alternative coverage of a similar type during the Continuation
Period that is at least as favorable to the Executive as the corresponding
Welfare Benefit. The Executive shall be obligated to notify the Company of any
such alternative coverage within thirty (30) days of it first becoming
applicable to him.
E. WITHHOLDING FOR TAXES.
All payments required to be made by the Company to the Executive under this
Agreement shall be subject to the withholding of such amounts, if any, relating
to tax, excise tax and other payroll deductions as the Company may reasonably
determine it should withhold pursuant to any applicable law or regulation.
SECTION 5. EXCISE TAX LIMIT
Notwithstanding anything elsewhere in this Agreement to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments or benefits which the Executive has the right to receive from the
Company or the Bank (or its affiliated companies), would constitute a "parachute
payment" (as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986,
as amended (the "Code")), the payments pursuant to this Agreement shall be
reduced so that the present value of the total amount received by the Executive
that would constitute a
9
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"parachute payment" will be one dollar ($1.00) less than three (3) times the
Executive's base amount (as defined in Section 280G of the Code) and so that no
portion of the payments or benefits received by the Executive shall be subject
to the excise tax imposed by Section 4999 of the Code. If through error or
otherwise the Executive should receive payments under this Agreement or
otherwise in excess of one dollar ($1.00) less than three (3) times his base
amount, the Executive shall immediately repay such excess to the Company or the
Bank upon notification that an overpayment has been made.
SECTION 6. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators in the State of California, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction. If the Company or the
Bank is found to have breached this Agreement, the Company shall bear the
expense of the arbitration proceeding and shall reimburse the Executive for all
of his reasonable costs and expenses relating to such arbitration proceeding,
including, without limitation, reasonable attorneys' fees and expenses. In no
event shall the Executive be required to reimburse the Company or the Bank for
any of the costs or expenses relating to such arbitration proceeding.
10
<PAGE>
SECTION 7. NOTICES
All notices, requests, demands and other communications provided for by
this Agreement shall be in writing and shall be sufficiently given if and when
mailed in the continental United States by registered or certified mail or
personally delivered to the party entitled thereto at the address stated below
or to such changed address as the addressee may have given by a similar notice:
TO THE COMPANY:
SC Bancorp
9040 East Telegraph Road
P.O. Box 869
Downey, California 90241-0869
TO THE EXECUTIVE:
David McCoy
25571 Harrington Court
Laguna Hills, California 92653
SECTION 8. GENERAL PROVISIONS
A. ENTIRETY OF AGREEMENT.
This Agreement constitutes the entire agreement between the Company, the
Bank and the Executive relating to the subject matter hereof and shall supersede
any right under any other agreement relating to the subject matter hereof
between the Company or the Bank and the Executive existing as of the Agreement
Date. Any compensation or benefits to which the Executive is entitled under
this Agreement shall be provided based solely upon its terms, without regard to
any materials used in the preparation or consideration of this Agreement,
including
11
<PAGE>
any summary of terms or estimate of amounts relating to this Agreement.
B. ENFORCEABILITY.
If any provision of this Agreement shall be determined by a court of
competent jurisdiction to be, in whole or in part, unenforceable or contrary to
any statute, law, order, rule, regulation, directive or other action of any
federal or state regulatory agency having jurisdiction over the Company or its
subsidiary, then the remaining provisions of this Agreement shall remain in full
force and effect to the fullest extent permitted by law. The validity,
interpretation, performance and enforcement of this Agreement shall be governed
by the laws of the State of California, without giving effect to the principles
of conflict of laws thereof.
C. MITIGATION.
The Executive shall not be obligated to seek other employment in mitigation
of the amounts payable and benefits to be provided under this Agreement.
D. ASSIGNMENT OF INTEREST.
No right to or interest in any payments shall be assignable by the
Executive; PROVIDED, HOWEVER, that this Agreement shall inure to the benefit of,
and be enforceable by, the Executive's personal or legal representatives,
executors, administrators, heirs, distributees, devisees and legatees after the
Executive's death to the extent of any payments due in respect of the Executive
hereunder.
12
<PAGE>
E. COMPANY, BANK AND SUCCESSORS.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Bank and any successor thereof including, without limitation, any
corporation or corporations acquiring directly or indirectly all or
substantially all of the assets of the Company, whether by merger,
consolidation, sale or otherwise (and such successor shall thereafter be deemed
"the Company" for the purposes of this Agreement), but shall not otherwise be
assignable by the Company.
F. AMENDMENT, MODIFICATION AND WAIVER.
No provision of this Agreement may be amended, modified or waived unless
such amendment, modification or waiver shall be agreed to in a written agreement
signed by the Executive and by a duly authorized Company officer.
G. NO GUARANTEE OF EMPLOYMENT.
The parties hereto explicitly acknowledge that notwithstanding any
provision to the contrary contained herein, this Agreement shall not, in any
way, be interpreted to provide the Executive with any fixed or minimum term of
employment with the Company or the Bank.
H. AMENDMENT TO EMPLOYMENT AGREEMENT.
The Company, the Bank and the Executive explicitly acknowledge that this
Agreement shall supersede and render ineffective Section 8.7 of the Employment
Agreement, as well as any other provisions of the Employment Agreement which are
inconsistent with the terms and conditions of the Agreement. The Company, the
13
<PAGE>
Bank and the Executive further acknowledge that the term of the Employment
Agreement shall not hereafter be extended (whether by the provisions thereof or
otherwise) without the affirmative consent of the Boards of Directors of the
Company and the Bank.
[signature page follows]
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
SC BANCORP
BY
----------------------------
SOUTHERN CALIFORNIA BANK
BY
----------------------------
------------------------------
David McCoy
15
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EXHIBIT 10.15
AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT (the "Agreement")
by and among SC BANCORP, a California corporation (the "Company"), SOUTHERN
CALIFORNIA BANK, a California corporation and a wholly owned subsidiary of the
Company (the "Bank"), and Bruce W. Roat (the "Executive"), is entered into as of
January 1, 1997 (the "Agreement Date").
W I T N E S S E T H
WHEREAS, the Company, the Bank and the Executive are parties to that
certain Employment Security Agreement dated as of March 17, 1995 (the "Initial
Agreement"); and
WHEREAS, the Company and the Bank wish to continue to assure themselves and
the Executive of continuity of senior management during the term of this
Agreement and to provide the Executive with certain termination benefits in the
event the Executive's employment is terminated under certain circumstances; and
WHEREAS, should the possibility of a change in control of the Company
arise, the Board of Directors believes it imperative that the Company, the Bank
and the Board be able to rely upon the Executive to continue in his position,
and that the Company and the Bank be able to receive and rely upon the
Executive's advice, if it requests such advice, as to the best interests of the
Company, without concern that he might be distracted by the
1
<PAGE>
personal uncertainties and risks created by the possibility of a change in
control; and
WHEREAS, should the possibility of a change in control arise, in addition
to the Executive's regular duties, the Executive may be called upon to assist in
the assessment of such possible change in control, to advise management and the
Board as to whether such change in control would be in the best interests of the
Company and to take such other actions as the Board might determine to be
appropriate; and
WHEREAS, the Company, the Bank and the Executive wish to amend and restate
the Initial Agreement in its entirety as hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties do hereby agree as follows:
SECTION 1. TERM OF AGREEMENT
This Agreement shall be effective as of the Agreement Date and shall
continue in effect until the Expiration Date (as defined below). The
"Expiration Date" shall initially be July 31, 1998, but commencing on August 1,
1997 and each August 1 thereafter, the Expiration Date shall automatically be
extended by one additional year unless, not later than April 30 of such year,
the Company shall have given notice to the Executive that it does not wish to
extend the Expiration Date; PROVIDED,
2
<PAGE>
HOWEVER, that if a Change in Control (as defined in Section 2, below) shall have
occurred prior to the original or extended Expiration Date, the Expiration Date
shall automatically become the second anniversary of the last day of the month
in which the Change in Control occurred. Notwithstanding the foregoing, the
Expiration Date shall be any earlier date on which the Executive's employment
with the Company or the Bank terminates, in the event such termination occurs
prior to, and not in contemplation of, a Change in Control.
SECTION 2. DEFINITION OF "CHANGE IN CONTROL"
For purposes of the Agreement, a "Change in Control" shall be deemed to
have occurred if and when:
(a) the Company shall consummate a merger or consolidation (a
"Transaction") with another corporation; PROVIDED, HOWEVER, that
a Change of Control shall not be deemed to have occurred with
respect to a Transaction if the beneficial owners of the
outstanding shares entitled to vote in the election of directors
immediately prior to such Transaction will beneficially own more
than sixty percent (60%) of the outstanding shares entitled to
vote in the election of directors of the corporation resulting
from the consummation of the Transaction; or
(b) twenty-five percent (25%) of the Company's securities then
entitled to vote in the election of directors shall be acquired
by any "person" (as such term is used in Sections 13(d) of the
Securities Exchange Act of 1934, as amended); or
(c) during any period of twenty-four (24) consecutive months,
individuals who at the beginning of such period were members of
the Board of Directors of the Company (the "Incumbent Board")
shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company, provided that any
person becoming a director
3
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subsequent to the beginning of such period whose election or
nomination for election was approved by a vote of at least
eighty-five percent (85%) of the directors comprising the
Incumbent Board shall be, for purposes hereof, considered as
though such person were a member of the Incumbent Board; or
(d) the Company or the Bank shall sell all, or substantially all, of
its assets to another corporation.
SECTION 3. COVERED TERMINATION
The termination benefits described in Section 4 hereof shall be provided to
the Executive in the event that his employment with the Company or the Bank is
terminated following, or in contemplation of, a Change of Control on account of
a "Covered Termination".
"Covered Termination" shall mean (i) termination of employment by the
Company or the Bank other than for "Cause" as described below or (ii)
termination of employment by the Executive for "Good Reason" as described below.
A. TERMINATION BY COMPANY OR BANK FOR CAUSE.
For purposes hereof, the Company and the Bank shall have "Cause" to
terminate the Executive's employment if:
(i) the Executive is grossly negligent or engages in willful
misconduct in the performance of his material duties; or
(ii) the Executive commits an act or acts of dishonesty resulting or
intended to result directly or indirectly in gain or personal
enrichment at the expense of the Company or the Bank; or
(iii) the Executive discloses to a third party information that is of a
confidential or proprietary nature to the Company or the Bank,
4
<PAGE>
other than as appropriate in the normal course of the performance
of his duties; or
(iv) the Executive suffers from an illness, injury or other incapacity
that prevents him from performing his material duties for a total
of six (6) months, whether or not consecutive, within a twelve
(12) month period; or
(v) the Executive's death occurs.
B. TERMINATION BY EXECUTIVE FOR GOOD REASON.
For purposes hereof, following a Change in Control the Executive may
terminate his employment for Good Reason if:
(i) the Executive's then-current level of annual base salary (whether
payable by the Company or the Bank) is reduced; or
(ii) there is any reduction in the employee benefit coverage provided
to the Executive (including pension, profit sharing and welfare
benefits and perquisites, but not including incentive bonuses)
from the coverage levels in effect immediately prior to the
Change in Control, unless, however, the Company or the Bank
provides substantially equivalent employee benefits to the
Executive; or
(iii) the Executive suffers a material diminution in his title,
position, reporting relationship, responsibilities, authority or
offices; or
(iv) there is a relocation of the Executive's principal business
office by more than ten (10) miles, and (a) the Executive's new
commute is more than fifty (50) miles from the Executive's
current primary residence or (b) the Executive's new commute is
more than the Executive's current commute which is at least fifty
(50) miles; or
(v) the Company fails to obtain assumption of this agreement by any
successor or assign of the Company;
PROVIDED, HOWEVER, that any termination by the Executive for Good Reason must be
made in good faith.
5
<PAGE>
C. NOTICE.
Notwithstanding the foregoing provisions of this Section 3, no such
termination of the Executive's employment for Good Reason under paragraph B
above shall be treated as a Covered Termination unless (i) the Executive shall
give written notice to the Company, not later than thirty (30) days prior to the
effective date of any such termination for Good Reason and within six (6) months
after the date the Executive first becomes entitled to terminate for Good Reason
on account of the event(s) forming the basis for such termination, setting forth
in specific detail the basis for such termination for Good Reason, and (ii) the
Company or the Bank shall not, within thirty (30) days after receipt of such
notice, take actions reasonably acceptable to the Executive to remedy the
circumstances leading to the termination for Good Reason.
SECTION 4. CONSEQUENCES OF COVERED TERMINATION
In the event that the employment of the Executive shall have been
terminated after, or in contemplation of, a Change in Control in a manner that
shall constitute a Covered Termination under Section 3 above, the Company shall
make payments to, and provide benefit coverage for, the Executive as described
below in this Section 4.
A. BASE SALARY.
The Executive shall receive a payment equal to one and one-half (1 1/2)
times the highest annual base salary amount paid
6
<PAGE>
(by either the Company or the Bank) to the Executive within the three years
preceding the Covered Termination. Such payment shall be paid to the Executive
within fifteen (15) business days following the Covered Termination. The
highest annual base salary amount shall not include any bonuses awarded to the
Executive.
B. TARGET BONUS. The Executive shall also receive a payment equal to
the amount of the Executive's target bonus in the year that the Covered
Termination occurs under any of the Company's or the Bank's incentive
compensation plans in which the Executive then participates; PROVIDED HOWEVER,
that if a Covered Termination shall take place between January 1 and June 30,
such payment to the Executive shall be prorated and reduced to an amount equal
to the product of (i) the amount of the Executive's target bonus in the year
that the Covered Termination occurs, and (ii) a quotient of which the numerator
will be the number of months that have elapsed between January 1 immediately
preceding the Covered Termination and the date of the Covered Termination,
rounded up to the next whole number, and the denominator shall be twelve (12).
Such payment shall be made to the Executive within fifteen (15) business days
following the Covered Termination.
C. STOCK OPTIONS.
Immediately upon a Covered Termination, any stock options granted to the
Executive under any Company incentive plan that were not fully vested and
exercisable shall become fully vested and immediately exercisable. Such options
will be exercisable
7
<PAGE>
for a period of 90 days from the date of the Covered Termination (or such
greater period as may be provided in the related plan). Any restrictions on
payment or transfer of previously granted incentive awards shall immediately
lapse.
D. WELFARE BENEFITS.
The Company and the Bank shall continue to maintain, in full force and
effect, any "Welfare Benefits," such as life insurance coverage and health and
disability benefits, which were being provided to the Executive at the time of
the Covered Termination during the "Continuation Period." The Continuation
Period shall mean the eighteen (18) month period following the date of a Covered
Termination.
Notwithstanding the above, the Company or the Bank may provide coverage and
benefits under separate insured arrangements that provide benefits substantially
identical to those being provided to the Executive at the time of the Covered
Termination.
In addition, the Executive's right to any particular type of Welfare
Benefit shall be subject to cancellation by the Company or the Bank if the
Executive obtains alternative coverage of a similar type during the Continuation
Period that is at least as favorable to the Executive as the corresponding
Welfare Benefit. The Executive shall be obligated to notify the Company of any
such alternative coverage within thirty (30) days of it first becoming
applicable to him.
8
<PAGE>
E. WITHHOLDING FOR TAXES.
All payments required to be made by the Company to the Executive under this
Agreement shall be subject to the withholding of such amounts, if any, relating
to tax, excise tax and other payroll deductions as the Company may reasonably
determine it should withhold pursuant to any applicable law or regulation.
SECTION 5. EXCISE TAX LIMIT
Notwithstanding anything elsewhere in this Agreement to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments or benefits which the Executive has the right to receive from the
Company or the Bank (or its affiliated companies), would constitute a "parachute
payment" (as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986,
as amended (the "Code")), the payments pursuant to this Agreement shall be
reduced so that the present value of the total amount received by the Executive
that would constitute a "parachute payment" will be one dollar ($1.00) less than
three (3) times the Executive's base amount (as defined in Section 280G of the
Code) and so that no portion of the payments or benefits received by the
Executive shall be subject to the excise tax imposed by Section 4999 of the
Code. If through error or otherwise the Executive should receive payments under
this Agreement or otherwise in excess of one dollar ($1.00) less than three (3)
times his base amount, the Executive shall immediately
9
<PAGE>
repay such excess to the Company or the Bank upon notification that an
overpayment has been made.
SECTION 6. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators in the State of California, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction. If the Company or the
Bank is found to have breached this Agreement, the Company shall bear the
expense of the arbitration proceeding and shall reimburse the Executive for all
of his reasonable costs and expenses relating to such arbitration proceeding,
including, without limitation, reasonable attorneys' fees and expenses. In no
event shall the Executive be required to reimburse the Company or the Bank for
any of the costs or expenses relating to such arbitration proceeding.
SECTION 7. NOTICES
All notices, requests, demands and other communications provided for by
this Agreement shall be in writing and shall be sufficiently given if and when
mailed in the continental United States by registered or certified mail or
personally delivered to the party entitled thereto at the address stated below
or to such
10
<PAGE>
changed address as the addressee may have given by a similar notice:
TO THE COMPANY:
SC Bancorp
9040 East Telegraph Road
P.O. Box 869
Downey, California 90241-0869
TO THE EXECUTIVE:
Bruce W. Roat
1631 Michael Lane
Pacific Palisades, California 90272
SECTION 8. GENERAL PROVISIONS
A. ENTIRETY OF AGREEMENT.
This Agreement constitutes the entire agreement between the Company, the
Bank and the Executive relating to the subject matter hereof and shall supersede
any right under any other agreement relating to the subject matter hereof
between the Company or the Bank and the Executive existing as of the Agreement
Date. Any compensation or benefits to which the Executive is entitled under
this Agreement shall be provided based solely upon its terms, without regard to
any materials used in the preparation or consideration of this Agreement,
including any summary of terms or estimate of amounts relating to this
Agreement.
B. ENFORCEABILITY.
If any provision of this Agreement shall be determined by a court of
competent jurisdiction to be, in whole or in part, unenforceable or contrary to
any statute, law, order, rule, regulation, directive or other action of any
federal or state
11
<PAGE>
regulatory agency having jurisdiction over the Company or its subsidiary, then
the remaining provisions of this Agreement shall remain in full force and effect
to the fullest extent permitted by law. The validity, interpretation,
performance and enforcement of this Agreement shall be governed by the laws of
the State of California, without giving effect to the principles of conflict of
laws thereof.
C. MITIGATION.
The Executive shall not be obligated to seek other employment in mitigation
of the amounts payable and benefits to be provided under this Agreement.
D. ASSIGNMENT OF INTEREST.
No right to or interest in any payments shall be assignable by the
Executive; PROVIDED, HOWEVER, that this Agreement shall inure to the benefit of,
and be enforceable by, the Executive's personal or legal representatives,
executors, administrators, heirs, distributees, devisees and legatees after the
Executive's death to the extent of any payments due in respect of the Executive
hereunder.
E. COMPANY, BANK AND SUCCESSORS.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Bank and any successor thereof including, without limitation, any
corporation or corporations acquiring directly or indirectly all or
substantially all of the assets of the Company, whether by merger,
consolidation, sale or otherwise (and such successor shall thereafter be deemed
"the Company" for
12
<PAGE>
the purposes of this Agreement), but shall not otherwise be assignable by the
Company.
F. AMENDMENT, MODIFICATION AND WAIVER.
No provision of this Agreement may be amended, modified or waived unless
such amendment, modification or waiver shall be agreed to in a written agreement
signed by the Executive and by a duly authorized Company officer.
G. NO GUARANTEE OF EMPLOYMENT.
The parties hereto explicitly acknowledge that notwithstanding any
provision to the contrary contained herein, this Agreement shall not, in any
way, be interpreted to provide the Executive with any fixed or minimum term of
employment with the Company or the Bank.
[signature page follows]
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
SC BANCORP
BY
----------------------------
SOUTHERN CALIFORNIA BANK
BY
----------------------------
------------------------------
Bruce W. Roat
14
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EXHIBIT 10.16
AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT (the "Agreement")
by and among SC BANCORP, a California corporation (the "Company"), SOUTHERN
CALIFORNIA BANK, a California corporation and a wholly owned subsidiary of the
Company (the "Bank"), and Ann McPartlin (the "Executive"), is entered into as of
January 1, 1997 (the "Agreement Date").
W I T N E S S E T H
WHEREAS the Company, the Bank and the Executive are parties to that certain
Employment Security Agreement dated as of September 15, 1994, as amended (the
"Initial Agreement"); and
WHEREAS, the Company and the Bank wish to continue to assure themselves and
the Executive of continuity of senior management during the term of this
Agreement and to provide the Executive with certain termination benefits in the
event the Executive's employment is terminated under certain circumstances; and
WHEREAS, should the possibility of a change in control of the Company
arise, the Board of Directors believes it imperative that the Company, the Bank
and the Board be able to rely upon the Executive to continue in her position,
and that the Company and the Bank be able to receive and rely upon the
Executive's advice, if it requests such advice, as to the best interests of the
Company, without concern that she might be distracted by the
1
<PAGE>
personal uncertainties and risks created by the possibility of a change in
control; and
WHEREAS, should the possibility of a change in control arise, in addition
to the Executive's regular duties, the Executive may be called upon to assist in
the assessment of such possible change in control, to advise management and the
Board as to whether such change in control would be in the best interests of the
Company and to take such other actions as the Board might determine to be
appropriate; and
WHEREAS, the Company, the Bank and the Executive wish to amend and restate
the Initial Agreement in its entirety as hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties do hereby agree as follows:
SECTION 1. TERM OF AGREEMENT
This Agreement shall be effective as of the Agreement Date and shall
continue in effect until the Expiration Date (as defined below). The
"Expiration Date" shall initially be July 31, 1998, but commencing on August 1,
1997 and each August 1 thereafter, the Expiration Date shall automatically be
extended by one additional year unless, not later than April 30 of such year,
the Company shall have given notice to the Executive that it does not wish to
extend the Expiration Date; PROVIDED,
2
<PAGE>
HOWEVER, that if a Change in Control (as defined in Section 2, below) shall have
occurred prior to the original or extended Expiration Date, the Expiration Date
shall automatically become the second anniversary of the last day of the month
in which the Change in Control occurred. Notwithstanding the foregoing, the
Expiration Date shall be any earlier date on which the Executive's employment
with the Company or the Bank terminates, in the event such termination occurs
prior to, and not in contemplation of, a Change in Control.
SECTION 2. DEFINITION OF "CHANGE IN CONTROL"
For purposes of the Agreement, a "Change in Control" shall be deemed to
have occurred if and when:
(a) the Company shall consummate a merger or consolidation (a
"Transaction") with another corporation; PROVIDED, HOWEVER, that
a Change of Control shall not be deemed to have occurred with
respect to a Transaction if the beneficial owners of the
outstanding shares entitled to vote in the election of directors
immediately prior to such Transaction will beneficially own more
than sixty percent (60%) of the outstanding shares entitled to
vote in the election of directors of the corporation resulting
from the consummation of the Transaction; or
(b) twenty-five percent (25%) of the Company's securities then
entitled to vote in the election of directors shall be acquired
by any "person" (as such term is used in Sections 13(d) of the
Securities Exchange Act of 1934, as amended); or
(c) during any period of twenty-four (24) consecutive months,
individuals who at the beginning of such period were members of
the Board of Directors of the Company (the "Incumbent Board")
shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company, provided that any
person becoming a director subsequent to the beginning of such
period whose election or nomination for election was approved
3
<PAGE>
by a vote of at least eighty-five percent (85%) of the directors
comprising the Incumbent Board shall be, for purposes hereof,
considered as though such person were a member of the Incumbent
Board; or
(d) the Company or the Bank shall sell all, or substantially all, of
its assets to another corporation.
SECTION 3. COVERED TERMINATION
The termination benefits described in Section 4 hereof shall be provided to
the Executive in the event that her employment with the Company or the Bank is
terminated following, or in contemplation of, a Change of Control on account of
a "Covered Termination".
"Covered Termination" shall mean (i) termination of employment by the
Company or the Bank other than for "Cause" as described below or (ii)
termination of employment by the Executive for "Good Reason" as described below.
A. TERMINATION BY COMPANY OR BANK FOR CAUSE.
For purposes hereof, the Company and the Bank shall have "Cause" to
terminate the Executive's employment if:
(i) the Executive is grossly negligent or engages in willful
misconduct in the performance of her material duties; or
(ii) the Executive commits an act or acts of dishonesty resulting or
intended to result directly or indirectly in gain or personal
enrichment at the expense of the Company or the Bank; or
(iii) the Executive discloses to a third party information that is of a
confidential or proprietary nature to the Company or the Bank,
other than as appropriate in the normal course of the performance
of her duties; or
4
<PAGE>
(iv) the Executive suffers from an illness, injury or other incapacity
that prevents her from performing her material duties for a total
of six (6) months, whether or not consecutive, within a twelve
(12) month period; or
(v) the Executive's death occurs.
B. TERMINATION BY EXECUTIVE FOR GOOD REASON.
For purposes hereof, following a Change in Control the Executive may
terminate her employment for Good Reason if:
(i) the Executive's then-current level of annual base salary (whether
payable by the Company or the Bank) is reduced; or
(ii) there is any reduction in the employee benefit coverage provided
to the Executive (including pension, profit sharing and welfare
benefits and perquisites, but not including incentive bonuses)
from the coverage levels in effect immediately prior to the
Change in Control, unless, however, the Company or the Bank
provides substantially equivalent employee benefits to the
Executive; or
(iii) the Executive suffers a material diminution in her title,
position, reporting relationship, responsibilities, authority or
offices; or
(iv) there is a relocation of the Executive's principal business
office by more than ten (10) miles, and (a) the Executive's new
commute is more than fifty (50) miles from the Executive's
current primary residence or (b) the Executive's new commute is
more than the Executive's current commute which is at least fifty
(50) miles; or
(v) the Company fails to obtain assumption of this agreement by any
successor or assign of the Company;
PROVIDED, HOWEVER, that any termination by the Executive for Good Reason must be
made in good faith.
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C. NOTICE.
Notwithstanding the foregoing provisions of this Section 3, no such
termination of the Executive's employment for Good Reason under paragraph B
above shall be treated as a Covered Termination unless (i) the Executive shall
give written notice to the Company, not later than thirty (30) days prior to the
effective date of any such termination for Good Reason and within six (6) months
after the date the Executive first becomes entitled to terminate for Good Reason
on account of the event(s) forming the basis for such termination, setting forth
in specific detail the basis for such termination for Good Reason, and (ii) the
Company or the Bank shall not, within thirty (30) days after receipt of such
notice, take actions reasonably acceptable to the Executive to remedy the
circumstances leading to the termination for Good Reason.
SECTION 4. CONSEQUENCES OF COVERED TERMINATION
In the event that the employment of the Executive shall have been
terminated after, or in contemplation of, a Change in Control in a manner that
shall constitute a Covered Termination under Section 3 above, the Company shall
make payments to, and provide benefit coverage for, the Executive as described
below in this Section 4.
A. BASE SALARY.
The Executive shall receive a payment equal to one and one-half (1 1/2)
times the highest annual base salary amount paid
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(by either the Company or the Bank) to the Executive within the three years
preceding the Covered Termination. Such payment shall be paid to the Executive
within fifteen (15) business days following the Covered Termination. The
highest annual base salary amount shall not include any bonuses awarded to the
Executive.
B. TARGET BONUS. The Executive shall also receive a payment equal to
the amount of the Executive's target bonus in the year that the Covered
Termination occurs under any of the Company's or the Bank's incentive
compensation plans in which the Executive then participates; PROVIDED HOWEVER,
that if a Covered Termination shall take place between January 1 and June 30,
such payment to the Executive shall be prorated and reduced to an amount equal
to the product of (i) the amount of the Executive's target bonus in the year
that the Covered Termination occurs, and (ii) a quotient of which the numerator
will be the number of months that have elapsed between January 1 immediately
preceding the Covered Termination and the date of the Covered Termination,
rounded up to the next whole number, and the denominator shall be twelve (12).
Such payment shall be made to the Executive within fifteen (15) business days
following the Covered Termination.
C. STOCK OPTIONS.
Immediately upon a Covered Termination, any stock options granted to the
Executive under any Company incentive plan that were not fully vested and
exercisable shall become fully vested and immediately exercisable. Such options
will be exercisable
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for a period of 90 days from the date of the Covered Termination (or such
greater period as may be provided in the related plan). Any restrictions on
payment or transfer of previously granted incentive awards shall immediately
lapse.
D. WELFARE BENEFITS.
The Company and the Bank shall continue to maintain, in full force and
effect, any "Welfare Benefits," such as life insurance coverage and health and
disability benefits, which were being provided to the Executive at the time of
the Covered Termination during the "Continuation Period." The Continuation
Period shall mean the eighteen (18) month period following the date of a Covered
Termination.
Notwithstanding the above, the Company or the Bank may provide coverage and
benefits under separate insured arrangements that provide benefits substantially
identical to those being provided to the Executive at the time of the Covered
Termination.
In addition, the Executive's right to any particular type of Welfare
Benefit shall be subject to cancellation by the Company or the Bank if the
Executive obtains alternative coverage of a similar type during the Continuation
Period that is at least as favorable to the Executive as the corresponding
Welfare Benefit. The Executive shall be obligated to notify the Company of any
such alternative coverage within thirty (30) days of it first becoming
applicable to her.
8
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E. WITHHOLDING FOR TAXES.
All payments required to be made by the Company to the Executive under this
Agreement shall be subject to the withholding of such amounts, if any, relating
to tax, excise tax and other payroll deductions as the Company may reasonably
determine it should withhold pursuant to any applicable law or regulation.
SECTION 5. EXCISE TAX LIMIT
Notwithstanding anything elsewhere in this Agreement to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments or benefits which the Executive has the right to receive from the
Company or the Bank (or its affiliated companies), would constitute a "parachute
payment" (as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986,
as amended (the "Code")), the payments pursuant to this Agreement shall be
reduced so that the present value of the total amount received by the Executive
that would constitute a "parachute payment" will be one dollar ($1.00) less than
three (3) times the Executive's base amount (as defined in Section 280G of the
Code) and so that no portion of the payments or benefits received by the
Executive shall be subject to the excise tax imposed by Section 4999 of the
Code. If through error or otherwise the Executive should receive payments under
this Agreement or otherwise in excess of one dollar ($1.00) less than three (3)
times his base amount, the Executive shall immediately
9
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repay such excess to the Company or the Bank upon notification that an
overpayment has been made.
SECTION 6. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators in the State of California, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction. If the Company or the
Bank is found to have breached this Agreement, the Company shall bear the
expense of the arbitration proceeding and shall reimburse the Executive for all
of her reasonable costs and expenses relating to such arbitration proceeding,
including, without limitation, reasonable attorneys' fees and expenses. In no
event shall the Executive be required to reimburse the Company or the Bank for
any of the costs or expenses relating to such arbitration proceeding.
SECTION 7. NOTICES
All notices, requests, demands and other communications provided for by
this Agreement shall be in writing and shall be sufficiently given if and when
mailed in the continental United States by registered or certified mail or
personally delivered to the party entitled thereto at the address stated below
or to such
10
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changed address as the addressee may have given by a similar notice:
TO THE COMPANY:
SC Bancorp
9040 East Telegraph Road
P.O. Box 869
Downey, California 90241-0869
TO THE EXECUTIVE:
Ann McPartlin
7917 Nardian Way
Los Angeles, California 90045
SECTION 8. GENERAL PROVISIONS
A. ENTIRETY OF AGREEMENT.
This Agreement constitutes the entire agreement between the Company, the
Bank and the Executive relating to the subject matter hereof and shall supersede
any right under any other agreement relating to the subject matter hereof
between the Company or the Bank and the Executive existing as of the Agreement
Date. Any compensation or benefits to which the Executive is entitled under
this Agreement shall be provided based solely upon its terms, without regard to
any materials used in the preparation or consideration of this Agreement,
including any summary of terms or estimate of amounts relating to this
Agreement.
B. ENFORCEABILITY.
If any provision of this Agreement shall be determined by a court of
competent jurisdiction to be, in whole or in part, unenforceable or contrary to
any statute, law, order, rule,
11
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regulation, directive or other action of any federal or state regulatory agency
having jurisdiction over the Company or its subsidiary, then the remaining
provisions of this Agreement shall remain in full force and effect to the
fullest extent permitted by law. The validity, interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws thereof.
C. MITIGATION.
The Executive shall not be obligated to seek other employment in mitigation
of the amounts payable and benefits to be provided under this Agreement.
D. ASSIGNMENT OF INTEREST.
No right to or interest in any payments shall be assignable by the
Executive; PROVIDED, HOWEVER, that this Agreement shall inure to the benefit of,
and be enforceable by, the Executive's personal or legal representatives,
executors, administrators, heirs, distributees, devisees and legatees after the
Executive's death to the extent of any payments due in respect of the Executive
hereunder.
E. COMPANY, BANK AND SUCCESSORS.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Bank and any successor thereof including, without limitation, any
corporation or corporations acquiring directly or indirectly all or
substantially all of the assets of the Company, whether by merger,
consolidation, sale or otherwise
12
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(and such successor shall thereafter be deemed "the Company" for the purposes of
this Agreement), but shall not otherwise be assignable by the Company.
F. AMENDMENT, MODIFICATION AND WAIVER.
No provision of this Agreement may be amended, modified or waived unless
such amendment, modification or waiver shall be agreed to in a written agreement
signed by the Executive and by a duly authorized Company officer.
G. NO GUARANTEE OF EMPLOYMENT.
The parties hereto explicitly acknowledge that notwithstanding any
provision to the contrary contained herein, this Agreement shall not, in any
way, be interpreted to provide the Executive with any fixed or minimum term of
employment with the Company or the Bank.
[signature page follows]
13
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
SC BANCORP
BY
----------------------------
SOUTHERN CALIFORNIA BANK
BY
----------------------------
------------------------------
Ann McPartlin
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EXHIBIT 10.17
AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT SECURITY AGREEMENT (the "Agreement")
by and among SC BANCORP, a California corporation (the "Company"), SOUTHERN
CALIFORNIA BANK, a California corporation and a wholly owned subsidiary of the
Company (the "Bank"), and Michael V. Cummings (the "Executive"), is entered into
as of January 1, 1997 (the "Agreement Date").
W I T N E S S E T H
WHEREAS the Company, the Bank and the Executive are parties to that certain
Employment Security Agreement dated as of September 15, 1994, as amended (the
"Initial Agreement"); and
WHEREAS, the Company and the Bank wish to continue to assure themselves and
the Executive of continuity of senior management during the term of this
Agreement and to provide the Executive with certain termination benefits in the
event the Executive's employment is terminated under certain circumstances; and
WHEREAS, should the possibility of a change in control of the Company
arise, the Board of Directors believes it imperative that the Company, the Bank
and the Board be able to rely upon the Executive to continue in his position,
and that the Company and the Bank be able to receive and rely upon the
Executive's advice, if it requests such advice, as to the best interests of the
Company, without concern that he might be distracted by the
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personal uncertainties and risks created by the possibility of a change in
control; and
WHEREAS, should the possibility of a change in control arise, in addition
to the Executive's regular duties, the Executive may be called upon to assist in
the assessment of such possible change in control, to advise management and the
Board as to whether such change in control would be in the best interests of the
Company and to take such other actions as the Board might determine to be
appropriate; and
WHEREAS, the Company, the Bank and the Executive wish to amend and restate
the Initial Agreement in its entirety as hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties do hereby agree as follows:
SECTION 1. TERM OF AGREEMENT
This Agreement shall be effective as of the Agreement Date and shall
continue in effect until the Expiration Date (as defined below). The
"Expiration Date" shall initially be July 31, 1998, but commencing on August 1,
1997 and each August 1 thereafter, the Expiration Date shall automatically be
extended by one additional year unless, not later than April 30 of such year,
the Company shall have given notice to the Executive that it does not wish to
extend the Expiration Date; PROVIDED,
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HOWEVER, that if a Change in Control (as defined in Section 2, below) shall have
occurred prior to the original or extended Expiration Date, the Expiration Date
shall automatically become the second anniversary of the last day of the month
in which the Change in Control occurred. Notwithstanding the foregoing, the
Expiration Date shall be any earlier date on which the Executive's employment
with the Company or the Bank terminates, in the event such termination occurs
prior to, and not in contemplation of, a Change in Control.
SECTION 2. DEFINITION OF "CHANGE IN CONTROL"
For purposes of the Agreement, a "Change in Control" shall be deemed to
have occurred if and when:
(a) the Company shall consummate a merger or consolidation (a
"Transaction") with another corporation; PROVIDED, HOWEVER, that
a Change of Control shall not be deemed to have occurred with
respect to a Transaction if the beneficial owners of the
outstanding shares entitled to vote in the election of directors
immediately prior to such Transaction will beneficially own more
than sixty percent (60%) of the outstanding shares entitled to
vote in the election of directors of the corporation resulting
from the consummation of the Transaction; or
(b) twenty-five percent (25%) of the Company's securities then
entitled to vote in the election of directors shall be acquired
by any "person" (as such term is used in Sections 13(d) of the
Securities Exchange Act of 1934, as amended); or
(c) during any period of twenty-four (24) consecutive months,
individuals who at the beginning of such period were members of
the Board of Directors of the Company (the "Incumbent Board")
shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company, provided that any
person becoming a director subsequent to the beginning of such
period whose election or nomination for election was approved
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<PAGE>
by a vote of at least eighty-five percent (85%) of the directors
comprising the Incumbent Board shall be, for purposes hereof,
considered as though such person were a member of the Incumbent
Board; or
(d) the Company or the Bank shall sell all, or substantially all, of
its assets to another corporation.
SECTION 3. COVERED TERMINATION
The termination benefits described in Section 4 hereof shall be provided to
the Executive in the event that his employment with the Company or the Bank is
terminated following, or in contemplation of, a Change of Control on account of
a "Covered Termination".
"Covered Termination" shall mean (i) termination of employment by the
Company or the Bank other than for "Cause" as described below or (ii)
termination of employment by the Executive for "Good Reason" as described below.
A. TERMINATION BY COMPANY OR BANK FOR CAUSE.
For purposes hereof, the Company and the Bank shall have "Cause" to
terminate the Executive's employment if:
(i) the Executive is grossly negligent or engages in willful
misconduct in the performance of his material duties; or
(ii) the Executive commits an act or acts of dishonesty resulting or
intended to result directly or indirectly in gain or personal
enrichment at the expense of the Company or the Bank; or
(iii) the Executive discloses to a third party information that is of a
confidential or proprietary nature to the Company or the Bank,
other than as appropriate in the normal course of the performance
of his duties; or
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<PAGE>
(iv) the Executive suffers from an illness, injury or other incapacity
that prevents him from performing his material duties for a total
of six (6) months, whether or not consecutive, within a twelve
(12) month period; or
(v) the Executive's death occurs.
B. TERMINATION BY EXECUTIVE FOR GOOD REASON.
For purposes hereof, following a Change in Control the Executive may
terminate his employment for Good Reason if:
(i) the Executive's then-current level of annual base salary (whether
payable by the Company or the Bank) is reduced; or
(ii) there is any reduction in the employee benefit coverage provided
to the Executive (including pension, profit sharing and welfare
benefits and perquisites, but not including incentive bonuses)
from the coverage levels in effect immediately prior to the
Change in Control, unless, however, the Company or the Bank
provides substantially equivalent employee benefits to the
Executive; or
(iii) the Executive suffers a material diminution in his title,
position, reporting relationship, responsibilities, authority or
offices; or
(iv) there is a relocation of the Executive's principal business
office by more than ten (10) miles, and (a) the Executive's new
commute is more than fifty (50) miles from the Executive's
current primary residence or (b) the Executive's new commute is
more than the Executive's current commute which is at least fifty
(50) miles; or
(v) the Company fails to obtain assumption of this agreement by any
successor or assign of the Company;
PROVIDED, HOWEVER, that any termination by the Executive for Good Reason must be
made in good faith.
C. NOTICE.
Notwithstanding the foregoing provisions of this Section 3, no such
termination of the Executive's employment for Good Reason
5
<PAGE>
under paragraph B above shall be treated as a Covered Termination unless (i) the
Executive shall give written notice to the Company, not later than thirty (30)
days prior to the effective date of any such termination for Good Reason and
within six (6) months after the date the Executive first becomes entitled to
terminate for Good Reason on account of the event(s) forming the basis for such
termination, setting forth in specific detail the basis for such termination for
Good Reason, and (ii) the Company or the Bank shall not, within thirty (30) days
after receipt of such notice, take actions reasonably acceptable to the
Executive to remedy the circumstances leading to the termination for Good
Reason.
SECTION 4. CONSEQUENCES OF COVERED TERMINATION
In the event that the employment of the Executive shall have been
terminated after, or in contemplation of, a Change in Control in a manner that
shall constitute a Covered Termination under Section 3 above, the Company shall
make payments to, and provide benefit coverage for, the Executive as described
below in this Section 4.
A. BASE SALARY.
The Executive shall receive a payment equal to one and one-half (1 1/2)
times the highest annual base salary amount paid (by either the Company or the
Bank) to the Executive within the three years preceding the Covered Termination.
Such payment shall be paid to the Executive within fifteen (15) business days
following
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the Covered Termination. The highest annual base salary amount shall not
include any bonuses awarded to the Executive.
B. TARGET BONUS. The Executive shall also receive a payment equal to
the amount of the Executive's target bonus in the year that the Covered
Termination occurs under any of the Company's or the Bank's incentive
compensation plans in which the Executive then participates; PROVIDED HOWEVER,
that if a Covered Termination shall take place between January 1 and June 30,
such payment to the Executive shall be prorated and reduced to an amount equal
to the product of (i) the amount of the Executive's target bonus in the year
that the Covered Termination occurs, and (ii) a quotient of which the numerator
will be the number of months that have elapsed between January 1 immediately
preceding the Covered Termination and the date of the Covered Termination,
rounded up to the next whole number, and the denominator shall be twelve (12).
Such payment shall be made to the Executive within fifteen (15) business days
following the Covered Termination.
C. STOCK OPTIONS.
Immediately upon a Covered Termination, any stock options granted to the
Executive under any Company incentive plan that were not fully vested and
exercisable shall become fully vested and immediately exercisable. Such options
will be exercisable for a period of 90 days from the date of the Covered
Termination (or such greater period as may be provided in the related plan).
Any restrictions on payment or transfer of previously granted incentive awards
shall immediately lapse.
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<PAGE>
D. WELFARE BENEFITS.
The Company and the Bank shall continue to maintain, in full force and
effect, any "Welfare Benefits," such as life insurance coverage and health and
disability benefits, which were being provided to the Executive at the time of
the Covered Termination during the "Continuation Period." The Continuation
Period shall mean the eighteen (18) month period following the date of a Covered
Termination.
Notwithstanding the above, the Company or the Bank may provide coverage and
benefits under separate insured arrangements that provide benefits substantially
identical to those being provided to the Executive at the time of the Covered
Termination.
In addition, the Executive's right to any particular type of Welfare
Benefit shall be subject to cancellation by the Company or the Bank if the
Executive obtains alternative coverage of a similar type during the Continuation
Period that is at least as favorable to the Executive as the corresponding
Welfare Benefit. The Executive shall be obligated to notify the Company of any
such alternative coverage within thirty (30) days of it first becoming
applicable to him.
E. WITHHOLDING FOR TAXES.
All payments required to be made by the Company to the Executive under this
Agreement shall be subject to the withholding of such amounts, if any, relating
to tax, excise tax and other payroll deductions as the Company may reasonably
8
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determine it should withhold pursuant to any applicable law or regulation.
SECTION 5. EXCISE TAX LIMIT
Notwithstanding anything elsewhere in this Agreement to the contrary, if
any of the payments provided for in this Agreement, together with any other
payments or benefits which the Executive has the right to receive from the
Company or the Bank (or its affiliated companies), would constitute a "parachute
payment" (as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986,
as amended (the "Code")), the payments pursuant to this Agreement shall be
reduced so that the present value of the total amount received by the Executive
that would constitute a "parachute payment" will be one dollar ($1.00) less than
three (3) times the Executive's base amount (as defined in Section 280G of the
Code) and so that no portion of the payments or benefits received by the
Executive shall be subject to the excise tax imposed by Section 4999 of the
Code. If through error or otherwise the Executive should receive payments under
this Agreement or otherwise in excess of one dollar ($1.00) less than three (3)
times his base amount, the Executive shall immediately repay such excess to the
Company or the Bank upon notification that an overpayment has been made.
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<PAGE>
SECTION 6. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators in the State of California, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction. If the Company or the
Bank is found to have breached this Agreement, the Company shall bear the
expense of the arbitration proceeding and shall reimburse the Executive for all
of his reasonable costs and expenses relating to such arbitration proceeding,
including, without limitation, reasonable attorneys' fees and expenses. In no
event shall the Executive be required to reimburse the Company or the Bank for
any of the costs or expenses relating to such arbitration proceeding.
SECTION 7. NOTICES
All notices, requests, demands and other communications provided for by
this Agreement shall be in writing and shall be sufficiently given if and when
mailed in the continental United States by registered or certified mail or
personally delivered to the party entitled thereto at the address stated below
or to such changed address as the addressee may have given by a similar notice:
10
<PAGE>
TO THE COMPANY:
SC Bancorp
9040 East Telegraph Road
P.O. Box 869
Downey, California 90241-0869
TO THE EXECUTIVE:
Michael V. Cummings
2323 Flintridge Drive
Glendale, California 91206
SECTION 8. GENERAL PROVISIONS
A. ENTIRETY OF AGREEMENT.
This Agreement constitutes the entire agreement between the Company, the
Bank and the Executive relating to the subject matter hereof and shall supersede
any right under any other agreement relating to the subject matter hereof
between the Company or the Bank and the Executive existing as of the Agreement
Date. Any compensation or benefits to which the Executive is entitled under
this Agreement shall be provided based solely upon its terms, without regard to
any materials used in the preparation or consideration of this Agreement,
including any summary of terms or estimate of amounts relating to this
Agreement.
B. ENFORCEABILITY.
If any provision of this Agreement shall be determined by a court of
competent jurisdiction to be, in whole or in part, unenforceable or contrary to
any statute, law, order, rule, regulation, directive or other action of any
federal or state regulatory agency having jurisdiction over the Company or its
subsidiary, then the remaining provisions of this Agreement shall
11
<PAGE>
remain in full force and effect to the fullest extent permitted by law. The
validity, interpretation, performance and enforcement of this Agreement shall be
governed by the laws of the State of California, without giving effect to the
principles of conflict of laws thereof.
C. MITIGATION.
The Executive shall not be obligated to seek other employment in mitigation
of the amounts payable and benefits to be provided under this Agreement.
D. ASSIGNMENT OF INTEREST.
No right to or interest in any payments shall be assignable by the
Executive; PROVIDED, HOWEVER, that this Agreement shall inure to the benefit of,
and be enforceable by, the Executive's personal or legal representatives,
executors, administrators, heirs, distributees, devisees and legatees after the
Executive's death to the extent of any payments due in respect of the Executive
hereunder.
E. COMPANY, BANK AND SUCCESSORS.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Bank and any successor thereof including, without limitation, any
corporation or corporations acquiring directly or indirectly all or
substantially all of the assets of the Company, whether by merger,
consolidation, sale or otherwise (and such successor shall thereafter be deemed
"the Company" for the purposes of this Agreement), but shall not otherwise be
assignable by the Company.
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F. AMENDMENT, MODIFICATION AND WAIVER.
No provision of this Agreement may be amended, modified or waived unless
such amendment, modification or waiver shall be agreed to in a written agreement
signed by the Executive and by a duly authorized Company officer.
G. NO GUARANTEE OF EMPLOYMENT.
The parties hereto explicitly acknowledge that notwithstanding any
provision to the contrary contained herein, this Agreement shall not, in any
way, be interpreted to provide the Executive with any fixed or minimum term of
employment with the Company or the Bank.
[signature page follows]
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
SC BANCORP
BY
----------------------------
SOUTHERN CALIFORNIA BANK
BY
----------------------------
------------------------------
Michael V. Cummings
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EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion provides information about the results of operations,
financial condition, liquidity and capital resources of SC Bancorp and its
subsidiary, Southern California Bank (together, the "Company"). This
information should be read in conjunction with the audited consolidated
financial statements of the Company and the notes thereto. Reference is also
made to Item 1. of the Company's Annual Report on Form 10-K which provides
additional financial information regarding the Company. Copies of the Form 10-K
are available without charge on written request directed to Southern California
Bank, Finance Department, P.O. Box 588, La Mirada, CA 90637-0588.
RESULTS OF OPERATIONS
The Company reported net income for the years ended December 31, 1996, 1995 and
1994 of $4.5 million, $869,000 and $2.7 million, respectively. Current year net
income reflects the full realization of reductions in ongoing operating expenses
resulting from the restructuring program commenced in the third quarter of 1995
("1995 Restructuring"), and increased interest income attributable to a 23%
increase in average loan balances over the prior year. Net income for 1995
reflects approximately $1.7 million of restructuring charges and losses pretax,
and a $600,000 additional loan loss provision related to selected commercial
real estate loans. Net income for 1994 includes a $448,000 gain on the sale of
the Company's headquarters building, a $215,000 gain on the sale of loans, and a
$850,000 reversal of previously-recorded allowance for possible loan losses.
Net interest income increased to $23.2 million for the year ended December
31,1996 from $21.4 million for 1995 and $20.1 million for 1994. The increase is
primarily due to higher average loan balances. Average loan balances increased
to $321.8 million for 1996 from $261.6 million for 1995 and $203.5 million for
1994. The $58.1 million increase in average loan balances in 1995 over 1994 is
largely attributable to the purchase of $72.4 million in loans from Independence
One Bank of California, F.S.B. ("IOBC") on April 30, 1995.
The Company's net interest margin (net interest income expressed as a percentage
of average interest-earning assets) increased to 5.58% for the year ended
December 31, 1996 from 5.30% for 1995. The net interest margin for 1994 was
5.75%. The increase in the net interest margin for 1996 can be attributed to
the increase in loans as a percentage of total earning assets compared to lower
yielding investment securities. The Company's cost of funds for 1996 decreased
by approximately 12 basis points from 1995 due to the managed reduction in
higher-rate certificate of deposit balances raised prior to the IOBC
transaction. Other interest expense in 1995 included a $408,000 nonrecurring
adjustment recorded on the Company's deferred compensation plans. Despite the
reduction from the prior year, the Company's overall cost of funds for 1996
remains above 1994 levels due to increased competition for deposits in the
Company's market area. The decrease in net interest margin in 1995 compared to
1994 is largely due to the increased interest expense associated with the
certificate of deposit program that provided funding for the IOBC transaction,
and to the previously-mentioned deferred compensation interest adjustment.
Noninterest income was $5.2 million, $5.0 million and $6.7 million for the years
ended December 31, 1996, 1995 and 1994, respectively. A modest decrease in
service charge income in 1996 from the prior year was largely offset by an
increase in other deposit related fees. Noninterest income for 1995 includes a
$620,000 loss on the sale of available-for-sale investment securities and a
$407,000 benefit payment received on a corporate-owned life insurance policy.
Noninterest income decreased in 1995 compared to 1994 due to the nonrecurring
gains on asset sales discussed above, and to reductions in merchant bankcard fee
income. The Company's merchant bankcard activity decreased following the
departure of its largest bankcard customer during the third quarter of 1994.
Noninterest expense decreased to $21.2 million for the year ended December 31,
1996 from $22.3 million for the year ended December 31, 1995, excluding 1995
restructuring charges of $948,000, and $23.8 million for the year ended December
31, 1994. Occupancy expense for 1996 decreased by $815,000, net of
restructuring charges, from the prior year following the sale of two branches
and the consolidation of a third branch in conjunction with the 1995
Restructuring. FDIC insurance expense decreased by $445,000 in 1996 compared to
1995 due to reductions in the FDIC assessment rate. The reductions in 1996
noninterest expense were partially offset by a $388,000 increase in professional
and legal fees. The decrease in noninterest expense in 1995 compared to 1994
occurred primarily in occupancy, OREO, merchant bankcard and FDIC insurance
expense.
<PAGE>
FINANCIAL CONDITION
Total assets increased to $476.0 million at December 31, 1996 from $461.8
million at December 31, 1995 and $398.6 million at December 31, 1994. Gross
loans increased 9.8% to $347.9 million from $316.8 million at December 31,1995.
Total deposits at December 31, 1996 were $415.3 million, a $8.5 million increase
from $406.8 million at year-end 1995, despite the sale or consolidation of three
branches in the first quarter of 1996. The increase in loan balances at
December 31, 1995 compared to December 31, 1994 is largely due to the purchase
of loans from IOBC, and to SBA loan purchases completed during the fourth
quarter of 1995. The increase in deposit balances for the same period reflects
the acquisition of deposits from IOBC and the deposits raised through a
promotional certificate of deposit program run during the first quarter of 1995.
The following table provides a summary comparison of assets and liabilities in
the Company's consolidated balance sheets and the percentage distribution of
these items for the dates indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Balance % Balance % Balance %
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 33,768 7.1% $ 29,088 6.3% $ 31,118 7.8%
Investment securities 76,590 16.1% 94,030 20.4% 131,881 33.1%
Loans, net 342,228 71.9% 310,576 67.3% 202,0725 0.6%
Premises and equipment, net 7,740 1.6% 9,734 2.1% 10,254 2.6%
Other real estate owned, net 536 0.1% 2,073 0.4% 5,837 1.5%
Accrued interest receivable 3,931 0.8% 4,297 0.9% 4,330 1.1%
Other assets 11,220 2.4% 11,981 2.6% 13,063 3.3%
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 476,013 100.0% $ 461,779 100.0% $ 398,555 100.0%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 125,903 26.4% $ 130,378 28.2% $ 118,020 29.6%
Interest-bearing demand & savings deposits 144,190 30.3% 130,301 28.2% 147,552 37.0%
Time certificates of deposit 145,233 30.5% 146,132 31.7% 74,367 18.7%
- -------------------------------------------------------------------------------------------------------------------
Total deposits 415,326 87.2% 406,811 88.1% 339,939 85.3%
- -------------------------------------------------------------------------------------------------------------------
Borrowed funds and other
interest-bearing liabilities 8,096 1.7% 6,407 1.4% 13,77 13.5%
Accrued interest payable and other liabilities 2,672 0.6% 3,049 0.6% 3,001 0.7%
Total Shareholders' Equity 49,919 10.5% 45,512 9.9% 41,844 10.5%
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
and SHAREHOLDERS' EQUITY $ 476,013 100.0% $ 461,779 100.0% $ 398,555 100.0%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonaccrual loans increased to $2.8 million, or .082%, of total loans at December
31, 1996 from $1.4 million, or 0.44%, of total loans at December 31, 1995. The
increase in nonaccrual loans in 1996 is primarily due to one real estate loan.
Nonaccrual loans were $1.6 million, or 0.78%, of total loans at December 31,
1994. Net loan charge-offs were $317,000, or 0.10%, of average outstanding
loans for 1996, a decrease from $1.7 million, or 0.67%, of average loans for
1995, and $4.6 million, or 2.28%, of average loans for 1994. The decrease in
net charge-offs reflects the continued improvement in the quality of the
Company's loan portfolio.
LIQUIDITY
Liquidity management involves the Company's ability to meet the cash flow
requirements of its customers who may be depositors wanting to withdraw funds or
borrowers needing assurance that sufficient funds will be available to meet
their credit needs. The
<PAGE>
Company's liquid assets consist of cash and cash equivalents and investment
securities, excluding those pledged as collateral. The Company has
established policy guidelines to support the sound management of its
liquidity position based on regulatory guidance and industry practice. It is
the Company's policy to maintain a liquidity ratio (liquid assets to liquid
liabilities) of between 20% and 40%, and to limit gross loans to no more than
85% of deposits. At December 31,1996, the Company's ratios were within these
guidelines: the liquidity ratio was 21.64% and the loan to deposit ratio was
83.59%.
The Company maintains short-term sources of funds to meet periodic planned and
unplanned increases in loan demand and deposit withdrawals and maturities. The
initial source of liquidity is the excess funds sold daily to other banks in the
form of Federal funds. Besides cash and cash equivalents, the Company holds
investment securities classified as available-for-sale. Available-for-sale
securities can be sold in response to liquidity needs or used as collateral
under reverse repurchase agreements. While the Company currently has no plans
to liquidate securities in the portfolio, it has sold securities in previous
years. The likelihood that securities would be sold in the future and the
potential for losses to be realized remains uncertain. In the event that
securities held as available-for-sale were sold at a loss, any loss would be
reflected in the results of operations on an after-tax basis. However, there
would be no expected impact on the Company's financial condition, given that the
securities are carried at their estimated fair value, net of any unrealized
loss. The unrealized loss on available-for-sale securities increased to $1.5
million at December 31, 1996 from $1.3 million at December 31, 1995.
The Company's liquid assets were $89.3 million at December 31,1996 compared to
$101.2 million at December 31, 1995. Liquid assets have decreased due to the
use of proceeds received from the sale and maturity of investment securities to
fund loan growth.
Secondary sources of liquidity include reverse repurchase arrangements to borrow
cash for short to intermediate periods of time using the Company's available-
for-sale securities as collateral, Federal funds lines of credit that allow the
Company to temporarily borrow an aggregate of up to $30.0 million from three
commercial banks, and a $6.5 million line of credit with the Federal Home Loan
Bank ("FHLB") collateralized by mortgage loans. At December 31,1996, the
Company had unpledged securities with a fair value of approximately $53.6
million that could be used for reverse repurchases. Federal funds arrangements
with correspondent banks are subject to the terms of the individual arrangements
and may be terminated at the discretion of the correspondent bank. The largest
amount borrowed during 1996 through reverse repurchase arrangements, Federal
funds lines, and FHLB lines was $20.5 million, $8.8 million and $1.0 million,
respectively.
CAPITAL RESOURCES
The Company and its bank subsidiary are subject to risk-based capital
regulations adopted by the federal banking regulators in January 1990. These
guidelines are used to evaluate capital adequacy, and are based on an
institution's asset risk profile and off balance sheet exposures, such as unused
loan commitments and standby letters of credit. The regulations require that a
portion of total capital be core, or Tier 1, capital consisting of common
shareholders' equity and perpetual preferred stock, less goodwill and certain
other deductions, with the remaining, or Tier 2, capital consisting of other
elements, primarily subordinated debt, mandatory convertible debt, and
grandfathered senior debt, plus the allowance for loan losses, subject to
certain limitations. As of December 1992, the risk-based capital rules were
further supplemented by a leverage ratio, defined as Tier 1 capital divided by
quarterly average assets after certain adjustments. The minimum leverage ratio
is 3 percent for banking organizations that do not anticipate significant growth
and have well-diversified risk (including no undue interest rate exposure),
excellent asset quality, high liquidity, and good earnings. Other banking
organizations not in this category are expected to have ratios of at least 4 to
5 percent, depending on their particular condition and growth plans. Higher
capital ratios can be mandated by the regulators if warranted by the particular
circumstances or risk profile of a banking organization. In the current
regulatory environment, banking companies must stay well-capitalized, as defined
in the banking regulations, in order to receive favorable regulatory treatment
on acquisitions and favorable risk-based deposit insurance assessments.
Management seeks to maintain capital ratios in excess of the regulatory
minimums. As of December 31,1996, the capital ratios of the Company and the
Bank exceeded the well-capitalized thresholds prescribed in the rules.
<PAGE>
The following table sets forth the risk-based and leverage capital ratios for
the Company and the Bank at December 31, 1996:
<TABLE>
<CAPTION>
Company Bank
- ---------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Amount % Amount %
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage ratio $ 47,166 9.97% $ 44,970 9.51%
Regulatory minimum 18,917 4.00% 18,908 4.00%
Excess 28,249 5.97% 26,062 5.51%
Risk-based ratios
Tier 1 capital $ 47,166 (a) 11.20% (b) $ 44,970 (a) 10.68% (c)
Tier 1 minimum 16,850 4.00% (d) 16,838 4.00% (d)
Excess 30,316 7.20% 28,132 6.68%
Total capital $ 52,113 (e) 12.37% (b) $ 49,917 (e) 11.86% (c)
Total capital minimum 33,700 8.00% 33,676 8.00%
Excess 18,413 4.37% 16,241 3.86%
- ---------------------------------------------------------------------------------------------
</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 $421.2 million were used to compute these
percentages.
(c) Risk-weighted assets of $420.9 million were used to compute these
percentages.
(d) Insured institutions, such as the Bank, must maintain a leverage ratio of
4% or 5%, a Tier 1 capital ratio of at least 4% or 6%, and a Total capital
ratio of at least 8% or 10% in order to be categorized adequately
capitalized or well-capitalized, respectively.
(e) Tier 1 capital plus the allowance for loan losses, limited to 1.25% of
total risk-weighted assets.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of SC Bancorp on Form S-8
(No. 33-38666) of our report dated January 24, 1997, appearing in the Annual
Report on Form 10-K of SC Bancorp for the year ended December 31, 1996, which is
part of this Registration Statement and to the reference to us under the heading
"Independent Auditors" in such Annual Report.
Los Angeles, California
March 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 29,968
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 74,533
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 347,864
<ALLOWANCE> 4,947
<TOTAL-ASSETS> 476,013
<DEPOSITS> 415,326
<SHORT-TERM> 8,096
<LIABILITIES-OTHER> 2,672
<LONG-TERM> 0
0
0
<COMMON> 37,738
<OTHER-SE> 12,181
<TOTAL-LIABILITIES-AND-EQUITY> 476,013
<INTEREST-LOAN> 30,145
<INTEREST-INVEST> 4,256
<INTEREST-OTHER> 566
<INTEREST-TOTAL> 34,967
<INTEREST-DEPOSIT> 11,090
<INTEREST-EXPENSE> 11,727
<INTEREST-INCOME-NET> 23,240
<LOAN-LOSSES> (470)
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 21,228
<INCOME-PRETAX> 7,648
<INCOME-PRE-EXTRAORDINARY> 7,648
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,455
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0
<YIELD-ACTUAL> 5.58
<LOANS-NON> 2,846
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,734
<CHARGE-OFFS> 869
<RECOVERIES> 552
<ALLOWANCE-CLOSE> 4,947
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
