<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from____________to____________
Commission File No. 2-78293-LA
SOUTH VALLEY BANCORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
California 94-2818095
- ---------------------------------------- --------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
500 Tennant Station, Morgan Hill, CA 95037
- ------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(408) 848-2161
--------------
(Registrant's telephone number,
including area code)
Indicate by check or check mark whether the registrant (1) has filed all report
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock -- 1,315,438 shares outstanding as of October 15, 1996
Exhibit Index is at page 26
Page 1 of 27
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995*
(UNAUDITED)
------------- -----------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 6,998,000 $ 9,436,000
Federal funds sold 16,200,000 27,900,000
------------- -------------
Total cash and equivalents 23,198,000 37,336,000
------------- -------------
Securities available-for-sale (amortized cost-1996,
$43,535,000; 1995, $34,145,000) 42,921,000 34,247,000
Securities held-to-maturity (market value-1996,
$5,321,000; 1995, $7,213,000) 5,282,000 7,089,000
Loans:
Commercial 36,447,000 32,721,000
Real estate-construction 20,413,000 15,338,000
Real estate-other 32,920,000 28,524,000
Installment 14,206,000 13,496,000
------------- -------------
Total loans 103,986,000 90,079,000
Allowance for credit losses (1,339,000) (1,313,000)
Deferred loan fees-net (626,000) (528,000)
------------- -------------
Net loans 102,021,000 88,238,000
------------- -------------
Premises and equipment, net 5,850,000 5,984,000
Accrued interest receivable and other assets 3,958,000 4,379,000
------------- -------------
Total assets $ 183,230,000 $ 177,273,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand, noninterest bearing $ 41,283,000 $ 43,873,000
Demand, interest bearing 39,262,000 37,900,000
Savings 32,757,000 36,593,000
Time 49,315,000 39,323,000
------------- -------------
Total deposits 162,617,000 157,689,000
Other liabilities 2,364,000 2,027,000
------------- -------------
Total liabilities 164,981,000 159,716,000
------------- -------------
Commitments and contingencies (note 5)
Shareholders' equity:
Preferred stock-no par value; authorized 2,000,000
shares; no shares issued - -
Common stock-no par value; authorized 4,000,000
shares; issued and outstanding-1996, 1,315,438;
1995, 1,313,986 shares 13,138,000 11,331,000
Retained earnings 5,473,000 6,166,000
Net unrealized gain (loss) on securities
available-for-sale (362,000) 60,000
------------- -------------
Shareholders' equity 18,249,000 17,557,000
------------- -------------
Total liabilities and shareholders' equity $ 183,230,000 $ 177,273,000
============= =============
</TABLE>
*Derived from December 31, 1995 audited balance sheets included in the Company's
1995 Annual Report on Form 10-K.
See Notes to Condensed Consolidated Financial Statements
<PAGE> 3
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $ 2,797,000 $ 2,541,000 $ 7,899,000 $ 7,498,000
Investment securities 783,000 413,000 2,258,000 1,245,000
Other 182,000 279,000 655,000 661,000
----------- ----------- ----------- -----------
Total interest 3,762,000 3,233,000 10,812,000 9,404,000
income
INTEREST EXPENSE
Deposits 1,022,000 1,016,000 3,004,000 2,910,000
Other 5,000 29,000 22,000 78,000
----------- ----------- ----------- -----------
Total interest 1,027,000 1,045,000 3,026,000 2,988,000
expense
NET INTEREST INCOME
BEFORE PROVISION
FOR CREDIT LOSSES 2,735,000 2,188,000 7,786,000 6,416,000
Provision for credit
losses 6,000 90,000 185,000 240,000
----------- ----------- ----------- -----------
NET INTEREST INCOME
AFTER PROVISION OF
CREDIT LOSSES 2,729,000 2,098,000 7,601,000 6,176,000
Other income 304,000 241,000 863,000 869,000
Other expenses 2,245,000 1,775,000 5,964,000 5,245,000
----------- ----------- ----------- -----------
INCOME BEFORE
INCOME TAXES 788,000 564,000 2,500,000 1,800,000
Provision for income
taxes 363,000 231,000 1,040,000 684,000
----------- ----------- ----------- -----------
NET INCOME $ 425,000 $ 333,000 $ 1,460,000 $ 1,116,000
=========== =========== =========== ===========
NET INCOME PER
COMMON AND
EQUIVALENT SHARE $ 0.31 $ 0.25 $ 1.08 $ 0.85
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 4
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Change in cash and cash equivalents:
OPERATIONS:
Net income $ 1,460,000 $ 1,116,000
Reconciliation to net cash provided by operations:
Provision for credit losses 185,000 240,000
Depreciation and amortization 333,000 273,000
Origination of loans held for sale (746,000) (1,316,000)
Proceeds from sale of loans held for sale - 924,000
Gain on sale of OR)EO 25,000 -
Decrease (increase) in other assets 365,000 (1,020,000)
Increase (decrease) in other liabilities (551,000) 268,000
Increase in deferred loan fees, net 98,000 45,000
------------ ------------
Net cash provided by operations 1,169,000 530,000
INVESTING ACTIVITIES:
Proceeds from maturities of securities:
Held-to-maturity 1,807,000 4,400,000
Available-for-sale 5,057,000 10,355,000
Purchase of securities:
Held-to-maturity - (6,407,000)
Available-for-sale (14,153,000) (16,367,000)
Net (increase) decrease in loans (13,320,000) 2,369,000
Capital expenditures (168,000) (1,711,000)
------------ ------------
Net cash used for investing activities (20,777,000) (7,361,000)
FINANCING ACTIVITIES:
Net increase in deposit accounts 4,928,000 18,671,000
Net increase (decrease) in other borrowings 888,000 (714,000)
Exercise of stock options 15,000 -
Payment of cash dividends (361,000) (287,000)
------------ ------------
Net cash provided by financing activities 5,470,000 17,670,000
------------ ------------
Net increase (decrease) in cash and cash equivalents (14,138,000) 10,839,000
Cash and cash equivalents, beginning of period 37,336,000 19,715,000
------------ ------------
Cash and cash equivalents, end of period $ 23,198,000 $ 30,554,000
============ ============
Interest paid $ 3,049,000 $ 2,963,000
Income taxes paid $ 1,071,000 $ 844,000
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 5
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements include South
Valley Bancorporation (the "Company") and its wholly-owned subsidiary, South
Valley National Bank (the "Bank"). All material intercompany accounts and
transactions are eliminated in consolidation.
The accounting and reporting policies of the Company and the Bank
conform to generally accepted accounting principles and prevailing practices
within the banking industry. Certain information and footnote disclosures
normally presented in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. These interim consolidated
condensed financial statements contain all adjustments, consisting solely of
normal recurring adjustments necessary for a fair presentation of the financial
information and should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1995 Annual Report to
Shareholders. The results of operations for the three months and nine months
ended September 30, 1996 may not necessarily be indicative of the operating
results for the full year.
ESTIMATES. In preparing such financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheets and revenues and expenses for
the periods presented. Actual results could differ significantly from those
estimates. A material estimate that is particularly susceptible to significant
changes in the near term relates to the determination of the allowance for
credit losses. Management also uses information provided by an independent loan
review service in connection with its determination of the allowance for loan
losses.
SECURITIES. The Bank classifies debt and equity securities at time of
purchase into one of three categories: held-to-maturity, trading or
available-for-sale. Investment securities classified as held-to-maturity are
measured at amortized cost based on the Bank's positive intent and ability to
hold such securities to maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term and are carried at
market value with a corresponding recognition of unrecognized holding gain or
loss in the results of operations. The remaining investment securities are
classified as available-for-sale and are measured at market value with a
corresponding recognition of the unrealized holding gain or loss (net of tax
effect) as a separate component of shareholders' equity until realized. Any
gains and losses on sales of investments are computed on a specific
identification basis.
LOANS are stated at the principal amount outstanding, net of unearned
income. Unearned income consists of deferred loan fees net of deferred direct
incremental loan origination costs and is amortized to interest income by a
method approximating the effective interest method generally over the
contractual life of the loan.
The Bank originates small business loans. A portion of certain loans
is guaranteed by the Small Business Administration ("SBA"). In determining the
gain realized on the guaranteed
<PAGE> 6
portion of the loans sold, the recorded investment is allocated between the
portion of the loan sold and the portion retained based on an estimate of the
relative fair values of those portions as of the date the loan is sold. Loans
held for sale were $669,000 at September 30, 1996 and $445,000 at December 31,
1995. No losses on sale are anticipated.
Interest income is accrued as earned. The accrual of interest on
loans is discontinued and any accrued and unpaid interest is reversed when
principal or interest is ninety days past due, when payment in full of principal
or interest is not expected or when a portion of the principal balance has been
charged off. Income on such loans is then recognized only to the extent that
cash is received and future collection of principal is probable. Generally, a
loan may be returned to accrual status when all delinquent interest and
principal become current in accordance with the original terms of the loan
agreement or when the loan is both well secured and in process of collection.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. A loan is
considered impaired when it is probable that interest and principal will not be
collected according to the contractual terms of the loan agreement. Impaired
loans are required to be measured 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 loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The accrual of interest is
discontinued on loans determined to be impaired. Income on such loans is then
recognized only to the extent that cash is received and future collection of
principal is probable.
THE ALLOWANCE FOR CREDIT LOSSES is an amount that management believes
will be adequate to absorb losses inherent in existing loans and commitments to
extend credit, based on evaluations of collectability and prior loss experience.
The allowance is established through a provision charged to expense. Loans are
charged against the allowance when management believes that the collectability
of the principal is unlikely. In evaluating the adequacy of the reserve,
management considers numerous factors such as changes in the composition of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, and current and anticipated local economic conditions that may affect the
borrowers' ability to pay.
Management believes that the allowance for credit losses at September
30, 1996 is adequate, based on information currently available. However, no
prediction of the ultimate level of loans charged off in future years can be
made with any certainty.
OTHER REAL ESTATE OWNED. Real estate and other assets acquired in
satisfaction of indebtedness are recorded at the lower of the recorded loan
amount or the estimated fair market value net of anticipated selling costs, and
any difference between this and the loan amount is treated as a loan loss. Costs
of maintaining other real estate owned, subsequent declines in fair value, if
any, and gains or losses on sale are reflected in current earnings.
PREMISES AND EQUIPMENT are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed on a
straight-line basis over the lesser of the lease terms or estimated useful lives
of the assets, which are generally 3 to 30 years.
INCOME TAXES are provided at current rates. Deferred income taxes are
provided for temporary differences between financial statement and income tax
reporting purposes.
<PAGE> 7
NET INCOME PER COMMON AND EQUIVALENT SHARE is calculated using the
weighted average shares outstanding plus the dilutive effect of shares issuable
under stock option plans, adjusted retroactively for subsequent stock dividends
and splits. On January 25, 1996 the Company declared a 10% stock dividend for
shareholders of record of common stock as of February 16, 1996 and payable
February 23, 1996. The number of shares used to compute net income per common
and equivalent share amounts, adjusted for the stock dividend, for the nine
month periods ended September 30, 1996 and 1995 were 1,349,212 and 1,313,986,
respectively, and for the three month periods ended September 30, 1996 and 1995
were 1,384,455 and 1,313,986, respectively. The difference between primary and
fully diluted net income per share is not significant.
NOTE 2. CASH AND DUE FROM BANKS
The Company, through its bank subsidiary, is required to maintain
reserves with the Federal Reserve Bank. Reserve requirements are based on a
percentage of deposits. At September 30, 1996, the Company maintained reserves
of $1,301,000 in the form of vault cash and balances at the Federal Reserve to
satisfy regulatory requirements.
NOTE 3. SECURITIES
The carrying value and approximate market value of securities are as
follows (in thousands):
<TABLE>
<CAPTION>
-----------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Loss Market Value
-----------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
September 30, 1996
U.S. Treasury and agency securities $23,493 $ 6 $251 $23,248
Mortgage backed securities 18,989 - 377 18,612
Other 1,053 8 - 1,061
------- --- ---- -------
Total $43,535 $14 $628 $42,921
======= === ==== =======
SECURITIES HELD-TO-MATURITY:
September 30, 1996
State and municipal obligations $ 3,952 $24 $ 11 $ 3,965
Mortgage backed securities 1,330 40 14 1,356
------- --- ---- -------
Total $ 5,282 $64 $ 25 $ 5,321
======= === ==== =======
-----------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Loss Market Value
-----------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
December 31, 1995
U.S. Treasury and agency securities $23,492 $163 $56 $23,599
Mortgage backed securities 10,123 3 8 10,118
Other 530 - - 530
------- ---- --- -------
Total $34,145 $166 $64 $34,247
======= ==== === =======
SECURITIES HELD-TO-MATURITY:
December 31, 1995
State and municipal obligations $ 5,500 $ 56 $ 7 $ 5,549
Mortgage backed securities 1,589 80 5 1,664
------- ---- --- -------
Total $ 7,089 $136 $12 $ 7,213
======= ==== === =======
</TABLE>
<PAGE> 8
At September 30, 1996, securities with a book value of approximately
$2,916,000 were pledged to secure certain deposits of public funds as required
by law or contract. There were no sales of securities during the nine months
ended September 30, 1996 or 1995.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Bank's loans are virtually all made within its defined market
area of South Santa Clara and San Benito counties. Real estate-construction
loans represented 19.6% of total loans at September 30, 1996, almost all of
which are for the construction of single family residential properties. In
addition, 31.7% of the Bank's loans (excluding construction loans) were real
estate secured term loans. These loans were primarily made to Bank depositors
and are secured by first deeds of trust on commercial and residential properties
with original loan to value ratios not exceeding 75%. Commercial loans comprise
35.0% of total loans. The Bank's loans are not concentrated in any particular
industry. The Bank's service area is somewhat dependent on the economy of the
greater Santa Clara Valley which has a concentration of high technology
companies and, accordingly, the ability of the Bank's borrowers to repay loans
may be affected by the performance of this sector of the economy. Virtually all
loans are collateralized, and the majority have adjustable rates. Generally,
real estate loans are secured by real property, and commercial and other loans
are secured by bank deposits and business or personal assets.
For commercial and other loans, repayment is generally expected to
come from the cash flow of the borrower. In the case of construction loans,
repayment is generally expected from the sale of the related property or
refinance upon completion of construction.
The activity in the allowance for credit losses is summarized as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
In thousands 1996 1995 1996 1995
- ------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning balance $ 1,452 $ 1,165 $ 1,313 $ 1,331
Provision charged to expense 6 90 185 240
Loans charged-off (152) (29) (299) (424)
Recoveries 33 1 140 80
------- ------- ------- -------
Ending balance $ 1,339 $ 1,227 $ 1,339 $ 1,227
======= ======= ======= =======
</TABLE>
Management believes that the allowance for credit losses at September
30, 1996 is adequate, based on information currently available. However, no
prediction of the ultimate level of loans charged off in future years can be
made with any certainty.
<PAGE> 9
Past due, nonaccrual and restructured loans at September 30, 1996 and
December 31, 1995, are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
In thousands 1996 1995
- ------------ ---- ----
<S> <C> <C>
Past due 90 days or more and still accruing interest:
Real estate $ 459 $ 37
Commercial 30 83
Installment and other 21 -
------ ------
Subtotal 510 120
------ ------
Nonaccrual:
Real estate 525 363
Commercial 295 1,116
Installment and other 8 9
------ ------
Subtotal 828 1,488
====== ======
Restructured:
Real estate 147 255
Commercial 97 249
Installment and other 4 9
------ ------
Subtotal 248 513
------ ------
Total $1,586 $2,121
====== ======
Other real estate owned $1,212 $1,953
====== ======
</TABLE>
The recorded investment in impaired loans was $828,000 and the
portion of the allowance for credit losses related to loan impairment was
$160,000 at September 30, 1996. Average impaired loans for the quarter ended
September 30, 1996 were $705,000. The Bank recognized $29,000 and $2,000,
respectively, in interest income from impaired loans for the nine months and
three months ended September 30, 1996.
NOTE 5. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are various commitments
outstanding to extend credit which are not reflected in the financial
statements, including unused loan commitments of approximately $44,793,000 and
standby letters of credit of $637,000 at September 30, 1996. However, all such
commitments will not necessarily culminate in actual extensions of credit by the
Bank in the future. The Bank does not anticipate any losses as a result of these
transactions.
Approximately $19,340,000 of loan commitments outstanding at
September 30, 1996 relate to construction loans and are expected to fund within
the next twelve months. The remainder relate primarily to revolving lines of
credit or other commercial loans and many of these commitments are expected to
expire without being drawn upon. Therefore, the total commitments do not
necessarily represent future cash requirements.
Standby letters of credit are commitments written by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
issued primarily relating to purchases of inventory by the Bank's commercial
customers and are typically short term in nature. Credit risk is similar to that
involved in extending loan commitments to customers and
<PAGE> 10
the Bank accordingly uses evaluation and collateral requirements similar to
those for loan commitments. Virtually all such commitments are collateralized.
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and short term investments
For cash and short term instruments, the carrying amount is a
reasonable estimate of fair value.
Investment securities
For investment securities, fair value equals quoted market prices. If
a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans
The fair value of loans with fixed rates is estimated discounting the
future cash flows using current rates at which similar loans would be made to
borrowers with similar credit ratings. For loans with variable rates which
adjust with changes in market rates of interest, the carrying amount is a
reasonable estimate of fair value.
Deposit liabilities
The fair value of demand deposits, savings accounts and certain money
market deposits, is the amount payable on demand at the reporting date and is
equal to the carrying value. The fair value of fixed maturity certificates of
deposit is estimated using rates currently offered for deposits of similar
remaining maturities.
Commitments to extend credit and standby letters of credit
Commitments to extend credit and standby letters of credit are issued
in the normal course of business by the Bank. Commitments to extend credit are
issued with variable interest rates tied to market interest rates at the time
the commitment is funded. Standby letters of credit are supported by
commitments to extend credit with variable interest rates tied to market
interest rates at the time the commitment is funded. The fair values of
commitments to extend credit and standby letters of credit were not
significantly different from the carrying amounts.
<PAGE> 11
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1996 Carrying amount Fair value
------------------ --------------- ----------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments $ 23,198 $ 23,198
Investment securities 48,203 48,242
Loans 103,360 103,238
Allowance for credit losses (1,339) (1,339)
--------- ---------
Total $ 173,422 $ 173,339
========= =========
FINANCIAL LIABILITIES:
Deposits $ 162,617 $ 162,451
========= =========
</TABLE>
NOTE 7. MERGER
On July 18, 1996, the Company announced the signing of a definitive
agreement whereby it would be acquired by Pacific Capital Bancorp in a tax free
exchange to be accounted for as a pooling of interests. The agreement provides
for shareholders of the Company to receive 0.92 of a share, subject to
adjustment, of Pacific Capital Bancorp common stock for each outstanding share
of Company stock. The transaction is valued at approximately $35.1 million, or
$25.30 per Common share, based on the $27.50 per share market value of Pacific
Capital Bancorp on October 18, 1996. South Valley National Bank will become a
separate subsidiary of Pacific Capital Bancorp upon completion of the
transaction.
At a special meeting of shareholders on October 16, 1996, the
shareholders of the Company approved the proposed merger with Pacific Capital
Bancorp. The shareholders of Pacific Capital Bancorp approved the merger at a
special meeting of shareholders on October 22, 1996. The merger is expected to
be completed before December 31, 1996, subject to applicable regulatory
approval.
Pacific Capital Bancorp, which is headquartered in Salinas,
California, is the holding company for First National Bank of Central
California, which has offices in Salinas, Monterey, Carmel and Watsonville.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 1996
Table I below presents a comparison of results for the quarters ended
September 30, 1996 and 1995:
TABLE I. EARNINGS COMPARISON
<TABLE>
<CAPTION>
Three months ended
September 30, Change
1996 1995 $ %
---- ---- - -
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $2,797,000 $2,541,000 $ 256,000 10.07%
Investment securities 783,000 413,000 370,000 89.59%
Other 182,000 279,000 (97,000) -34.77%
---------- ---------- --------- -------
Total interest income 3,762,000 3,233,000 529,000 16.36%
INTEREST EXPENSE
Deposits 1,022,000 1,016,000 6,000 0.59%
Other 5,000 29,000 (24,000) -82.76%
---------- ---------- --------- ------
Total interest expense 1,027,000 1,045,000 (18,000) -1.72%
NET INTEREST INCOME
BEFORE PROVISION FOR
CREDIT LOSSES 2,735,000 2,188,000 547,000 25.00%
Provision for credit
losses 6,000 90,000 (84,000) -93.33%
---------- ---------- --------- ------
NET INTEREST INCOME
AFTER PROVISION FOR
CREDIT LOSSES 2,729,000 2,098,000 631,000 30.08%
Other income 304,000 241,000 63,000 26.14%
Other expenses 2,245,000 1,775,000 470,000 26.48%
---------- ---------- --------- ------
INCOME BEFORE INCOME TAXES
788,000 564,000 224,000 39.72%
Provision for income taxes 363,000 231,000 132,000 57.14%
---------- ---------- --------- ------
NET INCOME $ 425,000 $ 333,000 $ 92,000 27.63%
========== ========== ========= ======
NET INCOME PER
COMMON AND
EQUIVALENT SHARE $ 0.31 $ 0.25 $ 0.06 24.00%
========== ========== ========= ======
</TABLE>
Earnings for the quarter ended September 30, 1996 increased from
$333,000 for the same quarter in 1995 to $425,000, primarily as the result of
higher net interest income and other income and a reduction in the provision for
credit losses, partially offset by an increase in other expenses. Other expenses
for the quarter ended September 30, 1996 include approximately $245,000 in
professional, consulting and data processing expenses related to the merger with
<PAGE> 13
Pacific Capital Bancorp. After adjusting for income taxes, merger related
expenses reduced net income by approximately $208,000, or $0.15 per share, in
the quarter ended September 30, 1996.
NET INTEREST INCOME
Net interest income refers to the difference between interest paid on
deposits and borrowings, and the interest earned on loans and investments. It is
the primary component of the net earnings of a financial institution. Factors to
consider in analyzing net interest income are the composition and volume of
earning assets and interest bearing liabilities including deposits, levels of
noninterest bearing liabilities and loans on nonaccrual, and changes in market
interest rates.
Table II presents an analysis of the Company's net interest income
for the quarters ended September 30, 1996 and 1995 respectively:
TABLE II. COMPOSITION OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Three months ended September 30,
1996 1995
--------------------------------------------------------------------------------------------------------------------
In thousands (except Average Average Average Average
percentages) Balance Interest Rate(1) Balance Interest Rate(1)
--------------------------------------------------------------------------------------------------------------------
ASSETS:
Earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans(2) $ 99,941 $ 2,797 11.2% $ 91,205 $2,541 11.1%
Investment securities:
Taxable 46,761 714 6.1% 22,657 337 5.9%
Non-taxable(3) 4,043 105 10.4% 5,974 116 7.8%
Other 14,093 182 5.2% 19,671 279 5.7%
-------- -------- ---- -------- ------ ----
Total earning assets 164,838 3,798 9.2% 139,507 3,273 9.4%
-------- -------- ---- -------- ------ ----
Cash and due from
banks 9,474 9,729
Other assets 9,374 9,422
-------- --------
Total Assets $183,686 $158,658
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Demand deposits $ 42,776 198 1.9% $ 36,663 242 2.6%
Savings deposits 35,999 224 2.5% 35,600 250 2.8%
Time deposits 46,947 600 5.1% 35,568 524 5.9%
Borrowed funds 667 5 3.0% 1,660 29 7.0%
-------- -------- ---- -------- ------ ----
Total interest bearing
liabilities 126,389 1,027 3.3% 109,491 1,045 3.8%
-------- -------- ---- -------- ------ ----
Demand deposits 37,845 30,378
Other liabilities 1,403 1,756
-------- --------
Total liabilities 165,637 141,625
Shareholders' equity 18,049 17,033
Total Liabilities and
Shareholders' Equity $183,686 $158,658
======== ========
Net interest income and margin (net
yield)(4) $ 2,771 6.7% $2,228 6.4%
======== === ====== ===
</TABLE>
1. Annualized.
2. Loan interest includes loan fees of $252,000 and $275,000 for
the quarters ended September 30, 1996 and 1995, respectively.
3. Tax exempt income includes $36,000 and $40,000 for the
quarters ended September 30, 1996 and 1995, respectively, to
adjust to a fully tax equivalent basis using the Federal
statutory rate of 34%.
4. Net interest margin is computed by dividing net interest
income by total average earning assets.
<PAGE> 14
The Company experienced an increase in net interest income in the
quarter ended September 30, 1996 as compared to the same quarter in 1995. This
increase was primarily attributable to a higher volume of earning assets,
partially offset by higher volumes of interest bearing liabilities, primarily
deposits, and a change in the composition of earning assets to a higher
percentage of investment securities and loans as compared to lower yielding
Federal funds sold. During this same period, the net interest margin increased
from 6.4% to 6.7%, as the result of higher volumes of earning assets, primarily
loans and investment securities, partially offset by increases in interest
bearing liabilities, primarily deposits. The interest expense associated with
increased volumes of interest bearing liabilities was partially offset by
reductions in market rates of interest.
Other income consists primarily of service charges related to deposit
accounts. The increase in other income for the quarter ended September 30, 1996
as compared to September 30, 1995 is primarily attributable to higher volumes of
consumer checking and money market accounts which resulted in higher fee income.
The Company had no gains or losses from the sale of investment securities in
either the third quarter of 1996 or 1995.
OTHER EXPENSES
Other expenses consist of the Company's noninterest expenses. The
increase in other expenses for the quarter ended September 30, 1996 as compared
to the same quarter in 1995 is primarily attributable to higher salary and
benefit expenses. The higher payroll expenses are directly related to higher
levels of full time equivalent staff associated with the Bank's growth in
assets.
<PAGE> 15
NINE MONTHS ENDED SEPTEMBER 30, 1996
Table III below presents a comparison of results for the nine months
ended September 30, 1996 and 1995:
TABLE III. EARNINGS COMPARISON
<TABLE>
<CAPTION>
Nine months ended
September 30, Change
1996 1995 $ %
---- ---- - -
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $ 7,899,000 $7,498,000 $ 401,000 5.35%
Investment securities 2,258,000 1,245,000 1,013,000 81.37%
Other 655,000 661,000 (6,000) -0.91%
----------- ---------- ----------- ------
Total interest income 10,812,000 9,404,000 1,408,000 14.97%
INTEREST EXPENSE
Deposits 3,004,000 2,910,000 94,000 3.23%
Other 22,000 78,000 (56,000) -71.79%
----------- ---------- ----------- ------
Total interest expense 3,026,000 2,988,000 38,000 1.27%
NET INTEREST INCOME
BEFORE PROVISION FOR
CREDIT LOSSES 7,786,000 6,416,000 1,370,000 21.35%
Provision for credit losses 185,000 240,000 (55,000) -22.92%
----------- ---------- ----------- ------
NET INTEREST INCOME
AFTER PROVISION FOR
CREDIT LOSSES 7,601,000 6,176,000 1,425,000 23.07%
Other income 863,000 869,000 (6,000) -0.69%
Other expenses 5,964,000 5,245,000 719,000 13.71%
----------- ---------- ----------- ------
INCOME BEFORE INCOME
TAXES 2,500,000 1,800,000 700,000 38.89%
Provision for income taxes 1,040,000 684,000 356,000 52.05%
----------- ---------- ----------- ------
NET INCOME $ 1,460,000 $1,116,000 $ 344,000 30.82%
=========== ========== =========== ======
NET INCOME PER
COMMON AND
EQUIVALENT SHAR $ 1.08 $ 0.85 $ 0.23 27.06%
=========== ========== =========== ======
</TABLE>
Earnings for the nine months ended September 30, 1996 increased from
$1,116,000 to $1,460,000, primarily as the result of higher net interest income
and a reduction in the provision for credit losses, partially offset by an
increase in other expenses. Other expenses for the nine months ended September
30, 1996 include approximately $245,000 in professional, consulting and data
processing expense related to the merger with Pacific Capital Bancorp. After
adjusting for income taxes, merger related expenses reduced net income by
approximately $208,000, or $0.16 per share, for the nine months ended September
30, 1996.
<PAGE> 16
Table IV presents an analysis of the Company's net interest income
for the nine months ended September 30, 1996 and 1995 respectively:
TABLE IV. COMPOSITION OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Nine months ended September 30,
1996 1995
-----------------------------------------------------------------------------------------------------------------------
In thousands (except Average Average Average Average
percentages) Balance Interest Rate(1) Balance Interest Rate(1)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans(2) $ 92,739 $ 7,899 11.4% $ 87,603 $7,429 11.3%
Investment securities:
Taxable 44,055 2,079 6.3% 22,483 1,070 6.3%
Non-taxable(3) 4,756 271 7.6% 6,540 371 7.6%
Other 16,373 655 5.3% 15,231 661 5.8%
-------- -------- ---- -------- ------ ----
Total earning assets 157,923 10,904 9.2% 131,857 9,531 9.6%
-------- -------- ---- -------- ------ ----
Cash and due from
banks 8,639 8,725
Other assets 9,481 9,579
-------- --------
Total Assets $176,043 $150,161
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Demand deposits 40,808 608 2.0% 34,931 714 2.7%
Savings deposits 37,223 715 2.6% 34,899 706 2.7%
Time deposits 43,634 1,681 5.1% 34,460 1,490 5.8%
Borrowed funds 638 22 4.6% 1,432 41 3.8%
-------- -------- ---- -------- ------ ----
Total interest bearing
liabilities 122,303 3,026 3.3% 105,722 2,951 3.7%
-------- -------- ---- -------- ------ ----
Demand deposits 34,529 26,867
Other liabilities 1,348 846
-------- --------
Total liabilities 158,180 133,435
Shareholders' equity 17,863 16,726
-------- --------
Total Liabilities and
Shareholders' Equity $176,043 $150,161
======== ========
Net interest income and margin (net
yield)(4) $ 7,878 6.7% $6,580 6.7%
======== ==== ====== ====
</TABLE>
1. Annualized.
2. Loan interest includes loan fees of $860,000 and $741,000 for the
nine months ended September 30, 1996 and 1995, respectively.
3. Tax exempt income includes $92,000 and $127,000 for the nine months
ended September 30, 1996 and 1995, respectively, to adjust to a fully
tax equivalent basis using the Federal statutory rate of 34%.
4. Net interest margin is computed by dividing net interest income by
total average earning assets.
The Company experienced an increase in net interest income in the
nine months ended September 30, 1996 as compared to the same period in 1995.
This increase was primarily attributable to a higher volume of earning assets,
partially offset by higher volumes of interest bearing liabilities, primarily
deposits and a change in the composition of earning assets to a higher
percentage of investment securities compared to higher yielding loans. During
these periods, the net interest margin remained 6.7%.
<PAGE> 17
OTHER INCOME
Other income consists primarily of service charges related to deposit
accounts. The increase in other income for the nine months ended September 30,
1996 as compared to September 30, 1995 is primarily attributable to higher
volumes of consumer checking and money market accounts which resulted in higher
fee income. The Company had no gains or losses from the sale of investment
securities in the nine months ended September 30, 1996 and 1995.
OTHER EXPENSES
Other expenses consist of the Company's noninterest expenses. The
increase in other expenses for the nine months ended September 30, 1996 as
compared to the same nine months in 1995 is primarily attributable to higher
salary and benefit expenses. The higher payroll expenses are directly related to
higher levels of full time equivalent staff associated with the Bank's growth in
assets.
BALANCE SHEET
Total assets of the Company increased from $177,273,000 to
$183,230,000 from December 31, 1995 to September 30, 1996. Average assets for
the nine months ended September 30, 1996, were $176,043,000 as compared to
$150,161,000 at September 30, 1995.
Table V presents the composition of the Company's loan portfolio at
September 30, 1996 and December 31, 1995:
TABLE V. LOANS BY TYPE
<TABLE>
<CAPTION>
Loans: September 30, 1996 December 31, 1995 $ Change % Change
------------------ ----------------- -------- --------
<S> <C> <C> <C> <C>
Commercial $ 36,447,000 $ 32,721,000 $ 3,726,000 11.39%
Real estate-construction 20,413,000 15,338,000 5,075,000 33.09%
Real estate-other 32,920,000 28,524,000 4,396,000 15.41%
Installment 14,206,000 13,496,000 710,000 5.26%
------------- ------------ ------------ -----
Total loans 103,986,000 90,079,000 13,907,000 15.44%
Allowance for credit losses (1,339,000) (1,313,000) (26,000) 1.98%
Deferred loan fees-net (626,000) (528,000) (98,000) 18.56%
------------- ------------ ------------ -----
Net loans $ 102,021,000 $ 88,238,000 $ 13,783,000 15.62%
============= ============ ============ =====
</TABLE>
RISK ELEMENTS - The Company assesses and manages credit risk on an
ongoing basis through stringent credit review and approval policies, extensive
internal monitoring and established formal lending policies. Additionally, the
Bank contracts with an outside loan review consultant to periodically grade new
loans and to review the existing loan portfolio.
Management believes its ability to identify and assess risk and
return characteristics of the Company's loan portfolio is critical for
profitability and growth. Management strives to continue the historically low
level of credit losses by continuing its emphasis on credit quality in the loan
approval process, active credit administration and regular monitoring. With this
in mind, management has designed and implemented a comprehensive loan review and
grading system that functions to continually assess the credit risk inherent in
the loan portfolio. Additionally, management believes its ability to manage
portfolio credit risk is enhanced by the
<PAGE> 18
employment of lending personnel with knowledge of the Bank's service area. Each
Bank office is staffed with lending personnel who live in the communities served
by the office and virtually all of the directors of the Company and the Bank are
active members of the communities served by the Bank. Further, the senior
management and the Board of Directors of the Company and the Bank have
experienced minimal turnover since inception of the Company in 1982 and the Bank
in 1983.
At September 30, 1996, construction loans and other real estate
secured loans comprised 19.6% and 31.7% respectively, of total loans
outstanding. Management believes that its lending policies and underwriting
standards will tend to minimize losses in an economic downturn; however, there
is no assurance that losses will be limited to the extent provided for under
such circumstances. The Bank's loan policies and underwriting standards include,
but are not limited to, the following: 1) maintaining a thorough understanding
of the Bank's service area and limiting investments outside of this area, 2)
maintaining a thorough understanding of the borrowers' knowledge and capacity in
their field of expertise, 3) basing real estate construction loan approval not
only on salability of the project, but also on the borrowers' capacity to
support the project financially in the event it does not sell within the
original projected time period, and 4) maintaining conforming and prudent loan
to value and loan to cost ratios based on independent outside appraisals and
ongoing inspection and analysis by Bank construction lending officers. In
addition, the Bank strives to diversify the risk inherent in the construction
portfolio by avoiding concentrations to individual borrowers and on any one
project.
POTENTIAL PROBLEM LOANS - At September 30, 1996, the Company did not
have any loans other than those disclosed as nonaccrual loans, loans past due 90
days or more and still accruing interest and troubled debt restructurings, where
known information about possible credit problems of the borrowers cause
management to have serious doubts as to the ability of such borrowers to comply
with the present loan repayment terms.
CONCENTRATIONS - At September 30, 1996, the Company does not have any
concentration of loans to multiple borrowers engaged in similar activities which
would cause them to be similarly impacted by economic or other conditions, other
than real estate-construction loans.
PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES - The provision
for credit losses is based upon management's evaluation of the adequacy of the
existing allowance for loans outstanding. This allowance is increased by
provisions charged to expense and reduced by loan charge-offs net of recoveries.
Management determines an appropriate provision based upon the interaction of
three primary factors: (1) the loan portfolio growth in the period, (2) a
comprehensive grading and review formula for total loans outstanding, and (3)
actual previous charge-offs. At September 30, 1996, the allowance for credit
losses was $1,339,000, or 1.29% of total loans, as compared to $1,313,000, or
1.46% of total loans, at December 31, 1995. See Note 4 of Notes to Condensed
Consolidated Financial Statements.
In evaluating the adequacy of the allowance for loan losses, the
Company does not attempt to allocate the allowance for loan losses to specific
categories of loans. Management believes that any breakdown or allocation of the
allowance for possible loan losses into loan categories lends an appearance of
exactness which does not exist in that the allowance is utilized as a single
unallocated allowance available for all loans.
<PAGE> 19
FUNDING SOURCES
The Company's principal funding source is core deposits, primarily
obtained from local individuals and businesses. At September 30, 1996, core
deposits represented 86.8% of total deposits, as compared to 90.9% at December
31, 1995. Table VI presents the deposit portfolio by type of deposits at
September 30, 1996 and December 31, 1995:
TABLE VI. DEPOSITS BY TYPE
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995 $ Change % Change
------------------ ----------------- -------- --------
<S> <C> <C> <C> <C>
Demand, noninterest bearing $ 41,283,000 $ 43,873,000 $(2,590,000) -5.90%
Demand, interest bearing 39,262,000 37,900,000 1,362,000 3.59%
Savings 32,757,000 36,593,000 (3,836,000) -10.48%
Time 49,315,000 39,323,000 9,992,000 25.41%
------------ ------------ ----------- ------
Total deposits $162,617,000 $157,689,000 $ 4,928,000 3.13%
============ ============ =========== ======
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
LIQUIDITY - Liquidity management refers to the Bank's ability to
provide funds on an ongoing basis to meet fluctuations in deposit levels as well
as the credit needs and requirements of its clients. The liquidity position of
the Bank involves both assets and liabilities. In addition, off balance sheet
items such as loan commitments and available borrowing lines play an important
role in liquidity management. Cash and Federal funds lines, investment
securities, loan repayments and the acquisition of new deposits represent
sources of immediate, or short term, liquidity. This liquidity is available to
fund new loans and deposit withdrawals. The Bank assesses projected funding
requirements by reviewing historical funding patterns, current and forecasted
economic conditions and individual client funding needs. The Bank maintains a
line of credit with one of its correspondent banks for up to $10,000,000 which
is available on a short term basis. Formal and informal agreements are also in
place with various other banks to purchase participations in the Bank's loan
portfolio, if necessary.
The Bank manages its liquidity by maintaining a majority of its
investment portfolio in Federal funds sold and other liquid investments.
Liquidity is measured by various ratios, the most common being the liquidity
ratio of cash, Federal funds sold and unpledged investment securities, compared
to total deposits. At September 30, 1996, this ratio was 42.1% compared to 48.0%
at December 31, 1995. Another key liquidity ratio is the ratio of loans to
deposits, which was 63.9% at September 30, 1996 and 57.1% at December 31, 1995.
During 1995 and 1996, the Bank has experienced higher levels of liquidity than
normal and compared to recent prior periods. The high levels of liquidity are
attributable, in part, to large increases in deposits which were deployed in
investment securities and Federal funds sold. Management of the Bank expects
that a portion of its liquid assets at September 30, 1996 will ultimately be
used to fund growth in the loan portfolio.
INTEREST RATE SENSITIVITY - Interest rate sensitivity is a measure of
the exposure of the Bank's future earnings to fluctuations in interest rates.
Generally, if assets and liabilities do not reprice simultaneously and in equal
volumes, the Bank's net interest margin and net interest income will change. It
is management's objective to maintain stability in the net interest margin in
times of fluctuating interest rates by maintaining an appropriate mix of
interest sensitive assets and liabilities. To achieve this goal, the Bank prices
the majority of its interest bearing liabilities
<PAGE> 20
at variable rates that adjust with the prime rate. At the same time, the
majority of its interest earning assets are also priced at variable rates that
float with the prime rate. This pricing structure tends to stabilize the net
interest margin.
Table VII sets forth the distribution of repricing for interest
sensitive earning assets and interest bearing liabilities included in the
Company's condensed consolidated balance sheet at September 30, 1996, and the
related interest rate sensitivity gap, both for each individual repricing period
and on a cumulative basis.
TABLE VII. INTEREST RATE SENSITIVITY (IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Immediately Over thirty Over three Over one year
Assets and liabilities which and within days and within months and and within
mature or reprice: 30 days three months within one year five years Over five years Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 16,200 $ - $ - $ - $ - $ 16,200
Investment securities 1,600 2,725 5,242 23,955 15,198 48,720
Loans excluding nonaccrual
loans and overdrafts 63,403 1,218 17,778 12,262 8,515 103,176
-------- --------- --------- -------- -------- --------
Period total $ 81,203 $ 3,943 $ 23,020 $ 36,217 $ 23,713 $168,096
-------- --------- --------- -------- -------- --------
Cumulative total $ 81,203 $ 85,146 $ 108,166 $144,383 $168,096
-------- --------- --------- -------- -------- --------
Interest bearing liabilities:
Interest bearing demand $ 39,262 $ - $ - $ - $ - $ 39,262
Savings 32,757 - - - - 32,757
Time certificates 17,704 10,130 17,283 4,198 - 49,315
Other borrowings - 765 - - - 765
-------- --------- --------- -------- -------- --------
Period total $ 89,723 $ 10,895 $ 17,283 $ 4,198 $ - $122,099
-------- --------- --------- -------- -------- --------
Cumulative total $ 89,723 $ 100,618 $ 117,901 $122,099 $122,099
-------- --------- --------- -------- -------- --------
Amounts:
Interest rate sensitivity gap $ (8,520) $ (6,952) $ 5,737 $ 32,019 $ 23,713 $ -
Cumulative interest rate
sensitivity gap $ (8,520) $ (15,472) $ (9,735) $ 22,284 $ 45,997 $ -
Ratios:
Interest rate sensitivity gap 0.91 0.36 1.33 8.63 N/A -
Cumulative interest rate
sensitivity gap 0.91 0.85 0.92 1.18 1.38 -
</TABLE>
The table indicates the time periods in which interest earning assets
and interest bearing liabilities will mature or reprice in accordance with their
contractual terms. The table does not necessarily indicate the impact of general
interest rate movements on the net interest margin since the repricing of
various categories of assets and liabilities is subject to competitive
pressures. The Company and the Bank have historically maintained a cumulative
interest rate sensitivity gap ratio approximating 1:1 for assets and liabilities
repricing within one month, that is, approximately an equal amount of interest
earning assets and interest bearing liabilities will reprice or mature within 30
days. At September 30, 1996, the cumulative interest rate sensitivity gap for
assets and liabilities that reprice within 30 days was 0.91:1. The Bank attempts
to maximize its net interest income while maintaining a stable net interest
margin through management of its interest bearing assets and liabilities.
<PAGE> 21
CAPITAL RESOURCES
The Company has been able to sustain its growth in capital through
profit retention and the exercise of stock options by directors and officers of
the Company. Prior to 1994, all earnings were retained to maintain the Company's
capital position and support additional growth in the future. In the third
quarter of 1994, the Company declared and paid an initial cash dividend of $0.08
per common share. An additional cash dividend of $0.08 per common share was
declared and paid in the fourth quarter of 1994. The Company declared and paid
four quarterly dividends of $0.08 per common share during 1995. In the first
quarter of 1996, the Company declared and paid a cash dividend of $0.08 per
common share and a 10% stock dividend. In the second and third quarters of 1996,
the Company declared and paid two cash dividends of $0.10 per common share. In
addition, the Company declared a cash dividend of $0.10 per share for
shareholders of record on October 25, 1996, to be paid on November 8, 1996.
The Company and Bank are subject to capital adequacy guidelines
issued by the Board of Governors of the Federal Reserve System (the "FRB") and
the Office of the Comptroller of the Currency (the "OCC"). The FRB and the OCC
have adopted risk based capital guidelines for bank holding companies and
national banks. The Company and the Bank are required to maintain capital equal
to at least 8% of assets and commitments to extend credit, weighted by risk. At
least 4% must consist primarily of common equity (including retained earnings)
and the remainder may consist of subordinated debt, cumulative preferred stock
or a limited amount of loan loss reserves. Certain assets and commitments to
extend credit present less risk than others and will be assigned to lower risk
weighted categories requiring less capital allocation than the 8% total ratio.
For example, cash and government securities are assigned to a 0% risk weighted
category; most home mortgage loans are assigned to a 50% risk weighted category
requiring a 4% capital allocation; and commercial loans are assigned to a 100%
risk weighted category requiring an 8% capital allocation.
In addition, the FRB and the OCC have adopted a 3% minimum leverage
ratio for banking organizations as a supplement to the risk weighted capital
guidelines. The minimum leverage ratio is intended to limit the ability of
banking organizations to leverage their equity capital base by increasing assets
and liabilities without increasing capital proportionately. The 3% ratio
constitutes a minimum ratio for well-run banking organizations under the FRB
standards and organizations experiencing or anticipating significant growth or
failing to meet such standards will be required to maintain a minimum leverage
ratio ranging from 100 to 200 basis points in excess of the 3% ratio.
Table VIII presents the capital and leverage ratios of the Company as
of September 30, 1996 and December 31, 1995:
TABLE VIII. RISK BASED CAPITAL AND LEVERAGE RATIOS
<TABLE>
<CAPTION>
Risk Based Capital Ratios September 30, 1996 December 31, 1995
------------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Tier 1 capital $ 18,259 14.5% $ 17,141 14.8%
Total capital $ 19,598 15.6% $ 18,448 16.0%
Total risk adjusted assets $125,856 $115,452
LEVERAGE RATIOS
-------- ---- -------- ----
Tier 1 capital $ 18,259 9.9% $ 17,141 10.1%
Quarterly average total assets $183,686 $170,132
-------- ---- -------- ----
</TABLE>
<PAGE> 22
On December 19, 1991, the President signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "FDICIA"). The FDICIA, among
other matters, substantially revises banking regulations and establishes a
framework for determination of capital adequacy of financial institutions. Under
the FDICIA, financial institutions are placed into one of five capital adequacy
categories as follows: (1) "well capitalized" consisting of institutions with a
total risk based capital ratio of 10% or greater, a Tier 1 risk based capital
ratio of 6% or greater and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "adequately capitalized" consisting of
institutions with a total risk based capital ratio of 8% or greater, a Tier 1
risk based capital ratio of 4% or greater and a leverage ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized"
institution; (3) "undercapitalized" consisting of institutions with a total risk
based capital ratio less than 8%, a Tier 1 risk based capital ratio of less than
4%, or a leverage ratio of less than 4%; (4) "significantly undercapitalized"
consisting of institutions with a total risk based capital ratio of less than
6%, a Tier 1 risk based capital ratio of less than 3%, or a leverage ratio of
less than 3%; and, (5) "critically undercapitalized" consisting of an
institution with a ratio of tangible equity to total assets that is equal to or
less than 2%.
Financial institutions classified as undercapitalized or below are
subject to various limitations including, among other matters, certain
supervisory actions by bank regulatory authorities and restrictions related to
(i) growth of assets, (ii) payment of interest on subordinated indebtedness,
(iii) payment of dividends or other capital distributions, and (iv) payment of
management fees to a parent holding company. The FDICIA requires the bank
regulatory authorities to initiate corrective action regarding financial
institutions which fail to meet minimum capital requirements. Such action may,
among other matters, require a financial institution to augment capital and
reduce total assets. Critically undercapitalized financial institutions may also
be subject to appointment of a receiver or conservator unless the financial
institution submits an adequate capitalization plan.
RETURN ON EQUITY AND ASSETS
Table IX presents return on average assets, return on beginning
equity, dividend payout ratio and the average equity to average assets ratio.
TABLE IX. RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
- ---------------------------------------------- --------- -------- ------- -------
<S> <C> <C> <C> <C>
Return on average assets 0.93% 0.83% 1.11% 0.99%
Return on beginning equity 9.51% 7.87% 11.09% 9.16%
Dividend payout ratio 32.26% 32.00% 26.67% 28.23%
Average equity to average assets ratio 9.82% 10.74% 10.15% 11.14%
</TABLE>
INFLATION
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other commercial concerns,
primarily because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company indirectly through its effect on market
rates of interest, and thus the ability of the Bank to attract loan customers.
Inflation affects the growth of total assets by increasing the level of loan
demand, and potentially
<PAGE> 23
adversely affects the Company's capital adequacy because loan growth in
inflationary periods can increase at rates higher than the rate that capital
grows through retention of earnings which the Company may generate in the
future. In addition to its effects on interest rates, inflation directly affects
the Company by increasing the Company's operating expenses.
<PAGE> 24
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits -
(27.1) Financial Data Schedule
(b) Reports on Form 8-K -
- Form 8-K dated October 22, 1996 reporting on actions
at the Special Meeting of Shareholders held October
16, 1996 and reporting on the declaration of a cash
dividend, filed on October 25, 1996.
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
October 29, 1996 SOUTH VALLEY BANCORPORATION
By: s/s RICHARD L. CONNIFF
-----------------------------------------------
Richard L. Conniff, Chief Financial Officer
(Principal Financial and Accounting Officer)
By: s/s BRAD L. SMITH
-----------------------------------------------
Brad L. Smith, Chief Executive Officer
(Principal Executive Officer & Director)
<PAGE> 26
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
27.1 Financial Data Schedule 27
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,998
<INT-BEARING-DEPOSITS> 121,334
<FED-FUNDS-SOLD> 16,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,921
<INVESTMENTS-CARRYING> 5,282
<INVESTMENTS-MARKET> 48,242
<LOANS> 103,986
<ALLOWANCE> 1,339
<TOTAL-ASSETS> 183,230
<DEPOSITS> 162,617
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,364
<LONG-TERM> 0
0
0
<COMMON> 13,138
<OTHER-SE> 5,111
<TOTAL-LIABILITIES-AND-EQUITY> 183,230
<INTEREST-LOAN> 2,797
<INTEREST-INVEST> 783
<INTEREST-OTHER> 182
<INTEREST-TOTAL> 3,762
<INTEREST-DEPOSIT> 1,022
<INTEREST-EXPENSE> 1,027
<INTEREST-INCOME-NET> 2,735
<LOAN-LOSSES> 6
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,245
<INCOME-PRETAX> 788
<INCOME-PRE-EXTRAORDINARY> 788
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
<YIELD-ACTUAL> .092
<LOANS-NON> 828
<LOANS-PAST> 510
<LOANS-TROUBLED> 248
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,452
<CHARGE-OFFS> 152
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 1,339
<ALLOWANCE-DOMESTIC> 1,339
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
