EXHIBIT 99.2
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FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20006
- --------------------------------------------------------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
FDIC Certificate Number 21765
PACIFIC UNION BANK
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2888370
State or other jurisdiction of I.R.S. Employer Identification
incorporation or organization Number
3530 WILSHIRE BLVD. #1800
LOS ANGELES, CALIFORNIA 90010
Address of principal executive offices Zip Code
(213) 385-0909
Registrant's telephone number, including area code
(Former name, former address and former fiscal year, if changed since last
report): Not applicable
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [ ] NO
Common stock, $6.00 par value, 10,652,452 shares outstanding as of May
9, 2003.
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PACIFIC UNION BANK
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets -
March 31, 2003 and December 31, 2002
Statements of Operations -
Three months ended March 31, 2003 and 2002
Statements of Cash Flows -
Three months ended March 31, 2003 and 2002
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFIC UNION BANK
Balance Sheets
As of March 31, 2003 and December 31, 2002
(Unaudited) (Audited)
MARCH 31, 2003 DECEMBER 31,2002
---------------- ----------------
ASSETS
Cash and due from banks - demand $ 30,993,172 $ 24,054,519
Federal funds sold 8,200,000 62,500,000
Due from banks - interest-bearing 230,367 210,654
Federal Home Loan Bank Stock 3,584,800 3,537,800
Securities held-to-maturity, at amortized cost (fair value of
$77,403,704 at March 31, 2003 and $90,798,966 at December
31, 2002) 76,164,366 89,313,683
Securities available-for-sale, at fair value 79,489,227 64,701,421
Loans receivable 732,079,225 683,131,191
Less allowance for loan losses (9,304,331) (8,872,995)
---------------- ----------------
Net loans receivable 722,774,894 674,258,196
---------------- ----------------
Customers' acceptance liabilities 1,147,762 657,760
Bank premises and equipment, net 6,320,172 6,610,142
Accrued interest receivable 3,280,869 3,404,574
Deferred tax assets 4,340,182 4,663,046
Income taxes receivable 1,116,038 1,116,038
Other assets 2,587,758 1,967,404
---------------- ----------------
Total assets $ 940,229,607 $ 936,995,237
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest-bearing $ 240,025,932 $ 223,377,195
Demand, interest-bearing 7,624,268 7,602,024
Money market and savings 146,995,051 170,486,917
Time certificates of deposit:
Less than $100,000 97,375,927 99,876,831
$100,000 or more 267,719,630 258,652,585
---------------- ----------------
Total deposits 759,740,808 759,995,552
Other borrowed funds 70,000,000 70,000,000
Acceptance liabilities 1,147,762 657,760
Accrued interest payable 3,106,403 3,140,064
Other liabilities 2,802,243 2,325,902
---------------- ----------------
Total liabilities 836,797,216 836,119,278
---------------- ----------------
Stockholders' equity:
Common stock, $6 par value. Authorized 30,000,000 shares;
issued and outstanding 10,621,554 shares at March 31,
2003 and December 31, 2002 63,724,507 63,724,507
Capital surplus 22,174,825 22,174,825
Retained earnings 17,004,601 14,283,984
Accumulated other comprehensive income - unrealized gain
on securities available-for-sale - net of taxes 528,459 692,643
---------------- ----------------
Total stockholders' equity 103,432,391 100,875,959
---------------- ----------------
Total liabilities and stockholders' equity $ 940,229,607 $ 936,995,237
================ ================
See accompanying notes to unaudited financial statements.
PACIFIC UNION BANK
Statements of Operations
For the Three Months Ended March 31, 2003 and 2002
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2003 2002
--------------- --------------
Interest income:
Interest and fees on loans $ 9,938,446 $ 8,746,100
Dividend on Federal Home Loan Bank stock 43,120 22,826
Interest on securities held-to-maturity 892,385 --
Interest on securities available-for-sale 673,373 1,813,513
Interest on Federal funds sold 271,524 285,500
Other interest income 9,425 4,076
--------------- --------------
Total interest income 11,828,273 10,872,015
Interest expense:
Demand - interest bearing 6,268 9,537
Savings and money market 578,448 564,327
Time certificates of deposit:
Less than $100,000 720,352 811,325
$100,000 or more 1,409,319 1,572,954
Other borrowings 598,323 --
--------------- --------------
Total interest expense 3,312,711 2,958,143
Net interest income before provision for loan losses 8,515,563 7,913,872
Provision for loan losses 600,000 100,000
--------------- --------------
Net interest income after provision for loan losses 7,915,563 7,813,873
--------------- --------------
Other income:
Service charges on deposit accounts 1,640,115 1,598,628
Remittance fees 215,806 213,488
Letter of credit related fees 191,807 193,328
Gain on sale of loans 428,992 --
Other operating income 461,406 532,749
--------------- --------------
Total other income 2,938,127 2,538,193
--------------- --------------
Other expenses:
Salaries and employee benefits 3,231,985 2,892,861
Security guards 218,538 234,204
Net occupancy expense 697,098 721,657
Equipment expense 339,747 350,693
Data processing 471,381 448,148
Net other real estate owned expense -- 41
Office supplies 76,102 115,351
Legal and professional 178,257 417,921
Advertising and public relations 152,601 127,889
Other operating expenses 918,364 743,558
--------------- --------------
Total other expenses 6,284,072 6,052,323
--------------- --------------
Income before income taxes 4,569,617 4,299,742
Income taxes 1,849,000 1,719,000
--------------- --------------
Net income $ 2,720,617 $ 2,580,742
=============== ==============
Net income per share:
Basic $ 0.26 $ 0.24
Diluted $ 0.25 $ 0.24
Weighted-average common shares outstanding
Basic 10,621,554 10,607,426
Diluted 10,683,470 10,681,124
See accompanying notes to financial statements
PACIFIC UNION BANK
Statements of Cash Flows
For the Three Months Ended March 31, 2003 and 2002
(Unaudited)
MARCH 31, MARCH 31,
2003 2002
-------------- -------------
Cash flows from operating activities:
Net income $ 2,720,617 $ 2,580,742
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expenses 305,570 345,341
Provision for loan losses 600,000 100,000
Accretion of discount and amortization of premium
on securities held-to-maturity, net 156,511 --
Accretion of discount and amortization of premium
on securities available-for-sale, net (283,382) 46,708
Net loss (gain) on disposal of Bank premises and equipment 9,943 (7,100)
Gain on sale of loans (428,992) --
Origination of loans held for sale --
Proceeds from sale of loans held for sale --
Decrease (Increase) in accrued interest receivable 123,705 (322,626)
Decrease in deferred income taxes 442,000 945,001
Stock dividend on Federal Home Loan Bank stock (47,000) (22,600)
Increase in other assets (620,354) (134,640)
Decrease in accrued interest payable (33,661) (1,926,489)
Increase in other liabilities 476,341 220,573
-------------- -------------
Net cash provided by operating activities 3,421,298 1,824,910
-------------- -------------
Cash flows from investing activities:
Proceeds from maturities and redemptions of securities held-to-maturity 12,992,806 --
Proceeds from maturities and redemptions of securities available-for-sale 19,870,481 16,356,355
Purchase of securities available-for-sale (34,658,226) --
Proceeds from recoveries of written-off loans 12,321 28,207
Net increase in loans (48,700,027) (4,650,770)
Purchases of Bank premises and equipment (25,543) (223,326)
Proceeds from sale of Bank premises and equipment -- 7,100
-------------- -------------
Net cash (used in) provided by investing activities (50,508,188) 11,517,566
-------------- -------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, non-interest-bearing 16,648,737 (992,094)
Net increase in demand deposits, interest-bearing 22,244 1,107,974
Net decrease in money market and savings deposits (23,491,866) (9,785,573)
Net increase (decrease) in time certificates of deposit 6,566,141 (12,886,956)
Proceeds from exercise of stock options -- 10,835
-------------- -------------
Net cash used in financing activities (254,744) (22,545,814)
-------------- -------------
Net decrease in cash and cash equivalents (47,341,634) (9,203,338)
Cash and cash equivalents at beginning of period 86,765,173 68,073,953
-------------- -------------
Cash and cash equivalents at end of period $ 39,423,539 $ 58,870,615
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,346,372 $ 4,884,632
Income taxes $ 1,000,000 $ 700,000
============== =============
See accompanying notes to unaudited financial statements.
PACIFIC UNION BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Pacific
Union Bank ("Bank") have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003.
2. COMPREHENSIVE INCOME
Comprehensive income consists of net income and net unrealized gain
(loss) on securities available-for-sale. The comprehensive income amounted to
$2.6 million which included net income of $2.7 million and decrease in
unrealized gain of $164,000, which is net of the tax effect of $119,000 for the
three months ended March 31, 2003.
3. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computation for the three months ended March 31,
2003 and 2002.
INCOME SHARES PER SHARE
2003 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ---------
Basic EPS -
Income available to common stockholders $2,720,617 10,621,554 $ 0.26
Effect of Dilutive Securities -
Options -- 61,916 (0.01)
---------- ---------- --------
Diluted EPS -
Income available to common stockholders $2,720,617 10,683,470 $ 0.25
========== ========== ========
INCOME SHARES PER SHARE
2002 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ---------
Basic EPS -
Income available to common stockholders $2,580,742 10,607,426 $ 0.24
Effect of Dilutive Securities -
Options -- 73,698 --
---------- ---------- --------
Diluted EPS -
Income available to common stockholders $2,580,742 10,681,124 $ 0.24
========== ========== ========
4. CAPITAL TRANSACTIONS
The Bank's outstanding number of shares was 10,621,554 at March 31,
2003. The Bank has declared a quarterly cash dividend of $0.05 per common share
on April 24, 2003. The cash dividend will be paid on or about May 27, 2003 to
all shareholders of record as of May 15, 2003.
5. STOCK OPTIONS
Had compensation cost for the Bank's stock option plan been determined
based on the fair values at the grant dates for awards under the plan consistent
with the fair value method of SFAS No. 123, the Bank's net income and earnings
per share for the three months ended March 31, 2003 and March 31, 2002 would
have been reduced to the pro forma indicated below.
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Net Income:
As reported $ 2,720,617 $ 2,580,742
Pro-forma 2,706,718 2,568,629
Earnings per share:
As reported:
Basic $ 0.26 $ 0.24
Diluted 0.25 0.24
Pro-forma:
Basic $ 0.25 $ 0.24
Diluted 0.25 0.24
6. RECENT ACCOUNTING PRONOUNCEMENTS
In, May 2002, Statement of Financial Accounting Standards No. 145,
Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical
Corrections (SFAS No. 145), was issued. SFAS No. 145 will require gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under SFAS No. 4. Extraordinary treatment will no longer be permitted for
certain extinguishments considered to be part of a company's risk management
strategy. SFAS 145 also amends SFAS No. 13 to require certain modifications to
capital leases be treated as a sale-leaseback and modifies the accounting for
sub-leases when the original lessee remains a secondary obligor (or guarantor).
SFAS No. 145 is effective for financial statements issued after May 15, 2002,
and with respect to the impact of the reporting requirements of changes made to
SFAS No. 4 for fiscal years beginning after May 15, 2002. The adoption of SFAS
No. 145 did not have any impact on its financial condition or results of
operations.
In November 2002, FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB No. 5, 57, and 107 and
Rescission of FASB Interpretation No. 34, (FIN No. 45) was issued. FIN No. 45
clarifies requirements relating to the guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. FIN No. 45 requires
that upon issuance of a guarantee, companies recognize a liability for the fair
value of the obligation it assumes under that guarantee. The Company has adopted
the annual disclosure provisions of FIN No. 45 in the year ended December 31,
2002 consolidated financial statements. The adoption of FIN 45 did not have a
material impact on the Bank's financial statements.
In October 2002, Statement of Financial Accounting No. 147,
Acquisitions of Certain Financial Institutions (SFAS No. 147). SFAS No. 147
applies to all acquisitions of financial institutions except those between
mutual enterprises. This Statement amends FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other long-lived assets
that are held and used. The provisions of this Statement relating to the
application of the purchase method of accounting, was effective for acquisitions
for which the date of acquisition is on or after October 1, 2002. The provisions
of this Statement relating to accounting for the impairment or disposal of
certain long-term customer-relationship intangible assets were effective on
October 1, 2002. Transition provisions for previously recognized unidentifiable
intangible assets in were effective on October 1, 2002, with earlier application
permitted. The adoption of FASB No. 147 did not have a material effect on the
financial statements.
In December 2002, Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment
of SFAS No. 123 (SFAS No. 148) was issued. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation ( SFAS No. 123 ), to provide alternative
methods of transition for a voluntary change to the fair-value-based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in not only annual, but also interim financial statements about the effect the
fair value method would have had on reported results. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure requirements are effective for
interim periods beginning after December 15, 2002, and the Bank has adopted
those disclosure requirements.
In January 2003, The Financial Accounting Standards Board (FASB or the
"Board") issued FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51 (FIN No. 46). This Interpretation
addresses consolidation by business enterprises of variable interest entities
and clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Certain disclosures are
effective immediately. The adoption of FIN No. 46 is not expected to have a
material effect on the financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis includes forward-looking
statements regarding management's beliefs, projections and assumptions
concerning future results and events. When used the words "anticipate",
"believe", "estimate", "expect", and "intend" and words or phrases of similar
meanings as they relate to the Bank or the Bank's management, are intended to
identify forward-looking statements. These statements are not guarantees and
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Bank to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, governmental
policies and actions of regulatory agencies, costs associated with the Bank's
future expansion, competition from other commercial banks and other competition
and market and general economic factors. Given these risks and uncertainties,
readers are cautioned not to place undue reliance on any forward-looking
statements, which speak as of the date hereof. All forward-looking statements
contained in this Form 10-Q are qualified in their entirety by this cautionary
statement.
The following discussion and analysis is intended to provide details of the
results of operations of the Bank for the three months ended March 31, 2003 and
2002 and financial condition at March 31, 2003 and at December 31, 2002. The
following discussion should be read in conjunction with Annual Report on Form
10-K/A for the year ended December 31, 2002 filed with the Federal Deposit
Insurance Corporation in particular as it relates to the critical accounting
policies as discussed in item 14 of the Form 10-K/A.
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 2003 increased by $140,000
or 5.42% to $2.7 million compared to $2.6 million for the same period in 2002.
Diluted earnings per share for the first quarter of 2003 was $0.25, as compared
to $0.24 for the same period of 2002. Income before income tax expense amounted
to $4.6 million for the first quarter of 2003, an increase of $270,000 or 6.28%
compared to $4.3 million for the same quarter a year ago.
The annualized return on average assets ("ROA") and return on average
stockholders' equity ("ROE") were 1.11% and 10.71%, respectively, for the first
quarter of 2003, compared to 1.29% and 11.53%, respectively, for the same
quarter of 2002.
NET INTEREST INCOME
The Bank's primary source of income is net interest income, which is
the difference between interest income from interest-bearing assets and interest
paid on interest-bearing liabilities, such as deposits and other borrowings used
to fund those assets. The Bank's net interest income is affected by changes in
the volume of interest-earning assets and interest-bearing liabilities as well
as by changes in yield earned on interest-earning assets and rates paid on
interest-bearing liabilities. The Bank also generates non-interest income,
including the service charges on deposit accounts and other transactional fees.
The Bank's non-interest expenses consist primarily of personnel, occupancy and
equipment expense and other operating expenses. The Bank's results of operations
are affected by its provision for loan losses and may also
be significantly affected by other factors including general economic and
competitive conditions, changes in market interest rates, governmental policies
and actions of regulatory agencies.
Net interest income before the provision for the loan losses increased
by $602,000 or 7.60% to $8.5 million in the first quarter of 2003, compared to
$7.9 million in the same quarter of 2002. Total interest income increased by
$956,000 or 8.80% to $11.8 million in the first quarter of 2003, compared to
$10.9 million in the same quarter of 2002 primarily due to an increase of $1.2
million in interest and fees on loans and partially offset by a $248,000
decrease in interest on investment securities.
The increase in interest income is contributed by the average volume
increase of $174.9 million in interest earning-assets to $933.3 million in the
first quarter of 2003 from $758.4 million in the same quarter of 2002 despite
the decrease in yield on average interest earning-assets by 66 basis points
compared to the same quarter of 2002. The yield on average interest
earning-assets was 5.07% in the first quarter of 2003 compared to 5.73% in the
same quarter of 2002. Average net loans increased $133.8 million or 24.0% to
$691.0 million in the first quarter of 2003 compared to $557.2 million for the
corresponding quarter of 2002. Offsetting the increase in average net loans, the
yield on average loans decreased by 53 basis points to 5.75% in the first
quarter of 2003 from 6.28% in the same quarter of 2002, which negatively
affected the loan interest income. The decrease in the interest income of
Federal funds sold and investment securities was mainly due to the decrease in
yields in the first quarter of 2003 compared with the same quarter of 2002. The
average Federal funds sold increased $19.9 million to $88.4 million in the first
quarter of 2003 compared with $68.5 million for the corresponding quarter of
2002. The yield on average Federal funds sold dropped 44 basis points to 1.23%
compared to 1.67% for the same quarter of 2002. Average investment securities
increased $16.2 million to $146.3 million in the first quarter of 2003 compared
with $130.1 million for the corresponding quarter of 2002. The yield on average
investment securities for the first quarter of 2003 was 4.28% which was a
decrease of 130 basis points from 5.58% for the correspondent quarter of 2002.
Total interest expense increased by $355,000 or 11.99% to $3.3 million
for the first quarter of 2003 compared to $3.0 million for the same quarter of
2002. The increase is mainly due to an increased interest expense of $598,000 on
$70.0 million in advances from Federal Home Loan Bank in the first quarter of
2003 compared to zero for the correspondent quarter of 2002. The interest
expense on time certificates of deposit of $100,000 or more decreased $164,000
or 10.40% to $1.4 million in the first quarter of 2003 compared to $1.6 million
for the same quarter of 2002. Average time certificates of deposit of $100,000
or more increased $15.2 million or 6.36% to $254.8 million in the first quarter
of 2003 compared with $239.6 million for the corresponding period of 2002. The
cost on average time certificates of deposit of $100,000 or more decreased 42
basis points to 2.24% in the first quarter of 2003 from 2.66% in the
corresponding quarter of 2002. The cost of funds decreased 16 basis points to
1.54% in the first quarter of 2003 compared with 1.70% in the same quarter of
2002.
NET INTEREST MARGIN
Net interest margin decreased by 52 basis points or 12.47% to 3.65% for
the first quarter of 2003 compared to 4.17% for the corresponding period of
2002. The decrease in net interest margin was primarily attributable to the
decrease in the average interest-earning assets yield of 66 basis points to
5.07% in the first quarter of 2003 compared with 5.73% in the same quarter of
2002. The decrease in the average interest-earning assets yield was offset by
the cost of funds decrease of 16 basis points to 1.54% in the first quarter of
2003 from 1.70% in the corresponding quarter of 2002. Approximately 80% of the
loan portfolio has yields based upon the prime rate which automatically reprice
based upon changes in the prime rate. In a declining rate environment, the
Bank's net interest rate margin decreases as the interest-earning assets are
repriced at a faster pace than the interest-bearing liabilities.
The following table presents condensed average balance sheet
information for the Bank, together with interest rates earned and paid on the
various sources and uses of funds for each of the periods indicated:
DISTRIBUTION, YIELD AND RATE ANALYSIS OF NET INCOME
For the Three Months Ended For the Three Months Ended
------------------------------------------ ----------------------------------------
March 31,2003 March 31,2002
------------------------------------------ ----------------------------------------
Average % to Average % to
Average Income/ Rate/ Earning Average Income/ Rate/ Earning
Balance Expense Yield(30) Assets Balance Expense Yield(1) Assets
------------------------------------------ ----------------------------------------
ASSETS:
Interest-earning assets:
Loans, net(31) $690,989 $ 9,938 5.75% 74.03% $557,226 $ 8,746 6.28% 73.47%
Federal Home Loan Bank stock 3,538 43 4.86 0.38 1,512 23 6.08 0.20
Taxable investment securities(32)
U.S. Treasury Securities 2,341 18 3.08 0.25 1,508 22 5.84 0.20
U.S. Governmental Agencies 144,009 1,548 4.30 15.43 128,432 1,790 5.58 16.93
Tax-exempt Investment Securities:
State & Municipal Obligation - - - - 200 2 3.85 0.03
Federal funds sold 88,359 272 1.23 9.47 68,462 285 1.67 9.03
Interest-earning deposits 4,098 9 0.89 0.44 1,061 4 1.53 0.14
-------- -------- ------ -------- -------- ------
Total interest-earning assets 933,334 11,828 5.07% 100.00% 758,401 10,872 5.73% 100.00%
-------- -------- ------ -------- -------- ------
Non-interest-earning assets:
Cash and due from banks 23,940 25,024
Premises and equipment, net 6,502 9,311
Other real estate owned - -
Customers' acceptance liabilities 595 583
Accrued interest receivable 3,208 3,394
Other assets 9,989 4,260
-------- --------
Total non-interest-earning assets 44,234 42,572
-------- --------
Total assets $977,568 $800,973
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Deposits:
Money market $156,766 $ 551 1.43% $113,589 $ 486 1.74%
Super NOW 7,718 6 0.32 7,116 10 0.57
Savings 45,373 27 0.24 42,413 78 0.75
Time certificates of deposit
of $100,000 or more 254,799 1,409 2.24 239,566 1,573 2.66
Other time certificates of
deposit 107,571 721 2.72 103,606 811 3.17
Other borrowings 70,031 598 3.42 - - -
-------- -------- -------- --------
Total interest-bearing liabilities 642,258 3,312 2.09% 506,290 2,958 2.37%
-------- -------- -------- --------
Non-interest-bearing liabilities:
Demand deposits 227,204 198,903
Other liabilities 6,465 6,241
-------- --------
Total non-interest-bearing
liabilities 233,669 1.54% 205,144 1.70%
-------- --------
Stockholders' equity 101,641 89,539
-------- --------
Total liabilities and stockholders'
equity 977,568 800,973
======== ========
Net interest income 8,516 7,914
======== ========
Net interest spread(33) 2.98% 3.36%
===== ======
Annualized net interest margin(34) 3.65% 4.17%
===== ======
Ratio of average interest-bearing
assets to average interest-bearing
liabilities 145.32% 149.80%
====== ======
The following table sets forth, for the years indicated, the dollar
amount of changes in interest earned and paid for interest-earning assets and
interest-bearing liabilities and the amount of change attributable to changes in
average daily balances (volume) or changes in interest rates (rate). The
variances attributable to both the volume and rate changes have been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amount of the changes in each:
- -----------------------------------
(30) Average rates/yields for these periods have been annualized.
(31) Loan includes loans held for sale and net of the allowance for loan losses,
deferred fees and related direct costs. Non-accrual loans are included in
the table for computation purposes, but the foregone interest of such loans
is excluded. Loan fees were $1.4 million and $1.1 million at March 31, 2003
and 2002.
(32) Yields on tax-exempt income have not been computed on a tax equivalent
basis because tax-exempt securities are minimal.
(33) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(34) Represents net interest income as a percentage of average interest-earning
assets.
FOR THE THREE MONTH ENDED
MARCH 31,
2003 VS. 2002
INCREASES (DECREASES)
DUE TO CHANGE IN
VOLUME RATE(1) TOTAL
------ ------- -----
(DOLLARS IN THOUSANDS)
EARNING ASSETS:
INTEREST INCOME:
Loans, net(2) .................... $ 1,969 (777) 1,192
Federal Home Loan Bank stock ..... 25 (5) 20
Taxable investment securities:
U. S. Treasury securities ...... 9 (13) (4)
U. S. Government agencies ...... 200 (442) (242)
Tax-exempt securities:(3)
State and Municipal Obligation.. (2) - (2)
Federal funds sold ............... 71 (84) (13)
Interest-earning deposits ........ 7 (2) 5
------- ------- -------
Total net change
in interest income ....... $ 2,279 ($1,323) $ 956
======= ======= =======
DEPOSITS AND BORROWED FUNDS:
INTEREST EXPENSE:
Money market deposits ............ 162 (97) 65
Super NOW ........................ 1 (4) (3)
Savings deposits ................. 5 (56) (51)
Time certificates of deposit in
denominations of $100,000
or more ........................ 95 (260) (165)
Other time deposits .............. 30 (120) (90)
Other borrowings ................. 598 (0) 598
------- ------- -------
Total net change
in interest expense ...... 891 (537) 354
------- ------- -------
Change in net interest income ....... $ 1,388 ($ 786) $ 602
======= ======= =======
PROVISION FOR LOAN LOSSES
Provision for loan losses are made monthly, in anticipation of credit
risks. Credit risk is inherent in making loans. The Bank sets aside an allowance
for loan losses through charges to earnings. The charges are reflected in the
income statement as the provision for loan losses. Specifically, the provision
for loan losses represents the amount charged against current period earnings to
achieve an allowance for loan losses that in Management's judgment is adequate
to absorb losses inherent in the Bank's loan portfolio.
For the first quarter of 2003 the provision for loan losses amounted to
$600,000 compared with $100,000 in the corresponding period of 2002. The
increase was mainly attributable to a strong loan growth in the first quarter of
2003. On a quarterly basis, management performs an analysis of the adequacy of
the allowance for loan losses. The results of this analysis for the quarter
ended March 31, 2003 determined that the allowance was adequate to cover losses
inherent in the portfolio. The procedures for monitoring the adequacy of the
allowance, as well as detailed information concerning the allowance itself, are
included below under "Allowance for loan losses."
NON-INTEREST INCOME
Non-interest income increased $400,000 or 15.76% to $2.9 million in the
first quarter of 2003 compared to $2.5 million in the same quarter of 2002. The
increase resulted mainly from the gain of $429,000 on the sale of SBA loans.
Management expects to continue to recognize gains from the sale of SBA loans.
Offsetting the increase, other operating income decreased by $72,000. The other
operating income consists of credit card related fees, mortgage loan related
fees, merchant discount fees, remittance and cable fees and other various fees.
The following table sets forth the various components of the Bank's
non-interest income for the periods indicated:
- ---------------------------
(1) Rates for these periods on which calculations are based have been
annualized.
(2) Loan fees net of direct cost have been included in the calculation of
interest income. Loan fees were $189,000 and $134,000 for the three months
ended March 31, 2003 and 2002, respectively. Loans are net of the allowance
for loan losses, deferred fees and related direct costs.
(3) Yields on tax-exempt income have not been computed on a tax equivalent
basis, because the percentage of tax-exempt securities is minimal.
NON-INTEREST INCOME
(Dollars in thousands)
Three Months Ended Increase (Decrease)
------------------ -------------------
03/31/03 03/31/02 Amount Percent(%)
-------- -------- ------ ----------
Service charges on deposit accounts $1,640 $1,599 $ 41 2.56 %
Remittance fees 216 213 3 1.41
Letter of credit related fees 192 193 (1) (1.04)
Gain on sale of loans 429 -- 429 100.00
Other operating income 461 533 (72) (13.32)
------ ------ ------ ------
Total $2,938 $2,538 $ 400 15.76 %
====== ====== ====== ======
NON-INTEREST EXPENSE
Non-interest expense increased by $232,000 or 3.83% to $6.3 million in
the first quarter of 2003, compared to $6.1 million in the corresponding quarter
of 2002. The increase is mainly attributable to an increase of $339,000 in
salaries and employee benefits offset by a decrease of $240,000 in legal and
professional expenses. An increase in salaries and employee benefits was
partially due to the increases in reserves for medical expenses and annual bonus
for 2003. The decrease in the legal and professional expenses was mainly due to
reduced consulting expenses associated with an enterprise-wide risk management
implementation which peaked in early 2002. For the first three months of 2003,
the consulting expenses amounted to $20,000 compared to $382,000 for the same
period of 2002. Other operating expenses consist of other loan related expenses,
regulatory assessment expenses, employee related fees and other outside fees.
The efficiency ratio for the first quarter of 2003 was 54.86% compared to
$57.91% for the correspondent quarter of 2002
The following table presents the components of the non-interest expense
with the amount and percentage changes for the periods indicated:
NON-INTEREST EXPENSE
(Dollars in thousands)
Three Months Ended Increase / (Decrease)
------------------ ---------------------
03/31/03 03/31/02 Amount Percent (%)
-------- -------- ------ -----------
Salaries and employee benefits $3,232 $2,893 $ 339 11.72 %
Security guards 219 234 (15) (6.41)
Net occupancy expense 697 722 (25) (3.46)
Equipment expense 340 351 (11) (3.13)
Data processing 471 448 23 5.13
Office supplies 76 115 (39) (33.91)
Legal and professional 178 418 (240) (57.42)
Advertising and public relations 153 128 25 19.53
Communication expenses 263 243 20 8.23
Other operating expenses 655 500 155 31.00
------ ------ ------ ------
Total $6,284 $6,052 $ 232 3.83 %
====== ====== ====== ======
INCOME TAX
The effective tax rate for the first quarter ended March 31, 2003 was
40.46% compared to 39.98% for the same period of 2002.
The Bank files its California tax return using the Water's Edge Unitary
method. When computing its California franchise tax liability, the California
law requires that the Bank consider the taxable income allocated from estimated
combined net taxable income using the apportionment factor of property, payroll
and revenues over combined property, payroll and revenue of its foreign-owned
majority shareholder.
FINANCIAL CONDITION
The Bank's total assets were $940.2 million at March 31, 2003, an
increase of $3.2 million or 0.35% from the $937.0 million at December 31, 2002.
The net increase is attributable to a $48.5 million or 7.20% increase in net
loans, a $6.9 million or 28.85% increase in cash and due from banks, and offset
by a decrease in Federal funds sold of $54.3 million or 86.88%. Total deposits
decreased by $255,000 to $759.7 million at March 31, 2003 from $760.0 million at
December 31, 2002. The non-interest bearing deposits of $16.6 million or 7.45%
and time certificates of deposit of $100,000 or more of $9.1 million or 3.51%
increased in the first quarter of 2003 compared with December 31, 2002.
Offsetting these increases, money market deposits and savings deposits decreased
a $23.5 million or 13.78% in the first quarter of 2003 compared with the same
period of 2002. The Bank's advances from Federal Home Loan Bank remained at a
$70.0 million at March 31, 2003, the same as at December 31, 2002. Stockholders'
equity increased $2.6 million or 2.53% to $103.4 million at March 31, 2003 from
$100.9 million at December 31, 2002.
INTEREST-EARNING ASSET MIX
Total earning assets amounted to $890.4 million at March 31, 2003,
compared with $894.5 million at December 31, 2002, representing a decrease of
$4.1 million or 0.46%. The composition of the earning assets changed slightly at
March 31, 2003 compared with December 31, 2002. The net loans as a percentage of
total earning assets increased 5.79%
to 81.17% and the percentage of Federal funds sold to the total earning assets
decreased 6.07% to 0.92% at March 31, 2003 compared to December 31, 2002. On an
average basis, interest-earning assets amounted to $933.3 million, an increase
of $174.9 million or 23.07% for the first three months of 2003 compared to
$758.4 million for the same period of 2002.
The table below shows the changes in the earning asset mix as of the
dates indicated:
(Dollars in thousands)
As of 03/31/03 As of 12/31/02
--------------- --------------
Types of earning assets Amount Percent (%) Amount Percent (%)
------ ----------- ------ -----------
Federal funds sold $ 8,200 0.92% $ 62,500 6.99%
Federal Home Loan Bank stock 3,585 0.40 3,538 0.40
Securities held-to-maturity 76,164 8.55 89,314 9.98
Securities available-for-sale 79,489 8.93 64,701 7.23
Net loans 722,775 81.17 674,258 75.38
Interest-bearing deposits 230 0.03 211 0.02
-------- ------ -------- ------
Total earning assets $890,443 100.00% $894,522 100.00%
======== ====== ======== ======
SECURITIES
The Bank classifies its securities as held-to-maturity or
available-for-sale. The securities classified as held-to-maturity are those that
the Bank has the positive intent and ability to hold until maturity. These
securities are carried at amortized cost. The securities that could be sold in
response to changes in interest rate, increased loan demand, liquidity needs,
capital requirements or other similar factors, are classified as securities
available-for-sale. These securities are carried at fair value, with unrealized
gains or losses reflected net of tax as a component of comprehensive income. As
of March 31, 2003, the Bank had a net unrealized gain of $912,000 on its
available for sale portfolio. Accumulated other comprehensive income for the
first three months of 2003 was $164,000 representing the net unrealized loss,
net of tax.
The total investment securities increased $1.6 million or 1.06% to
$155.7 million at March 31, 2003 from $154.0 million at December 31, 2002.
During the first quarter of 2003, purchased available-for-sale securities
amounted to $34.7 million compared to zero for the correspondent quarter of
2002.
The following table summarizes the amortized cost, fair value and
distribution of the Bank's investment securities as of the dates indicated:
INVESTMENT PORTFOLIO
(Dollars in thousands)
As of 03/31/03 As of 12/31/02
--------------- --------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 20,994 $ 21,052 $ 1,003 $ 1,074
U.S. Government agencies 15,729 15,857 25,996 26,290
Mortgage-backed securities (1) 39,349 39,999 34,000 34,730
State and political subdivision 2,505 2,581 2,507 2,607
-------- -------- -------- --------
Total available-for-sale $ 78,577 $ 79,489 $ 63,506 $ 64,701
======== ======== ======== ========
HELD-TO-MATURITY:
Mortgage-backed securities (1) 76,164 77,404 89,314 90,799
Total held-to-maturity 76,164 77,404 89,314 90,799
-------- -------- -------- --------
Total investment securities $154,741 $156,893 $152,820 $155,500
======== ======== ======== ========
- ----------------------------------
(1) Principal balance may be prepaid before contracted maturity date.
INVESTMENT MATURITIES AND REPRICING SCHEDULE
(Dollars in thousands)
As of March 31, 2003
After One But After Five but
Within One Year Within Five Years Within Ten Years After Ten Years Total
-------------------- ----------------- ---------------- --------------------- ----------------
Amount Yield(1) Amount Yield (1) Amount Yield(1) Amount Yield (1) Amount Yield(1)
-------------------- ----------------- ---------------- --------------------- ----------------
AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 19,987 1.16% $ 1,065 5.82% $ - -% $ - -% $ 21,052 2.09%
U.S. Government agencies 6,105 5.94 9,752 2.89 - - - - 15,857 4.42
Mortgage-backed securities 18,520 5.65 11,011 5.94 - - 10,468 5.91 39,999 5.75
State and political 1,527 6.13 1,054 6.17 - - - - 2,581 6.14
------------------ --------------- ------------- ------------------ ---------------
Total available-for-sale $ 46,139 5.29% $ 22,882 5.61% $ - -% $ 10,468 5.91% $ 79,489 5.42%
================== =============== ============= ================== ===============
HELD-TO-MATURITY:
Mortgage-backed securities(2) - - 76,164 4.36 - - - - 76,164 4.36
------------------ --------------- ------------- ------------------ ---------------
Total held-to-maturity - - 76,164 4.36 - - - - 76,164 4.36
------------------ --------------- ------------- ------------------ ---------------
Total investment $ 46,139 5.29% $ 99,046 5.11% $ - -% $ 10,468 5.91% $155,653 5.26%
================== =============== ============= ================== ===============
(1) Yield on tax-exempt obligations has not been computed on a tax equivalent
basis because the percentage of tax-exempt securities is minimal.
(2) The mortgage-backed securities reflect stated maturities and not
anticipated prepayments.
LOANS
The Bank experienced strong loan demand in the first three months of
2003. Total gross loans increased $48.9 million or 7.17% to $732.1 million at
March 31, 2003 from $683.1 million at December 31, 2002. Total commercial and
industrial loans increased $13.5 million or 10.78% to $138.9 million at March
31, 2003 from $125.4 million at December 31, 2002. Commercial real estate loans
increased $44.7 million or 11.29% and residential mortgage loans decreased $8.2
million or 21.83% during the first three months of 2003. $6.1 million of the
guaranteed portion of SBA loans were sold during the first quarter of 2003.
The following table sets forth the composition of the Bank's loan
portfolio as of the dates indicated:
LOAN PORTFOLIO COMPOSITION
(Dollars in thousands)
As of 03/31/03 As of 12/31/02
-------------- --------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
Commercial and industrial $138,881 18.97% $125,363 18.35%
Installment loans 19,812 2.71 21,225 3.11
Real estate loans:
Commercial 440,492 60.17 395,807 57.94
Residential mortgage 29,283 4.00 37,459 5.48
Home equity 6,090 0.83 5,993 0.88
SBA 69,473 9.49 74,560 10.91
Other (1) 3,502 0.48 3,619 0.53
Trade Finance 12,566 1.72 12,488 1.83
Bills Bought 11,980 1.64 6,617 0.97
-------- ------ -------- ------
Total gross loans (2) $732,079 100.00% $683,131 100.00%
======== ====== ======== ======
- ---------------
(1) Consists predominantly of credit card loans.
(2) Net of unearned income and participation loans sold.
NON-PERFORMING ASSETS
Non-performing assets include loans past due 90 days or more and still
accruing interest, non-accrual loans and OREO. Total non-performing assets at
March 31, 2003 increased by $135,000 to $2.2 million, compared with December 31,
2002. Total non-performing assets were 0.23% of total assets at March 31, 2003,
compared to 0.22 % of total assets at December 31, 2002. The majority balance of
the non-accrual home mortgage loans represented a single commercial loan secured
by the business owners' home of $696,000 at March 31, 2003 which the Bank
anticipates a full collection.
The non-accrual on home mortgage loans, which include a single loan balance of
$696,000, amounted to $802,000 in total at March 31, 2003.
As of March 31, 2003, the Bank had no OREO. The non-performing loan
coverage ratio, defined as the allowance for loan losses to non-performing
loans, slightly decreased to 430.54 % as of March 31, 2003 from 437.96% at
December 31, 2002.
The following table provides information with respect to the components
of the Bank's non-performing assets as of the dates indicated.
NON-PERFORMING ASSETS
(Dollars in thousands)
3/31/2003 12/31/2002 3/31/2002
--------- ---------- ---------
NON-ACCRUAL LOANS:
Commercial and industrial $1,137 $1,091 $1,436
Installment loans 37 28 9
Real estate loans:
Commercial - - 3,294
Home mortgage 802 805 117
Home equity - - 127
SBA 159 - 170
Other 1 - 5
Trade Finance - 74 -
Bills Bought - - -
------ ------ ------
Total $2,136 $1,998 $5,158
(Table continues on following page.)
3/31/2003 12/31/2002 3/31/2002
--------- ---------- ---------
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
(AS TO PRINCIPAL OR INTEREST):
Commercial and industrial $ - $ - $ -
Installment loans - - -
Real estate loans:
Commercial - - -
Home mortgage - - -
Home equity - - -
SBA
Other 25 28 75
Trade Finance - - -
Bills Bought - - -
------ ------ ------
Total $ 25 $ 28 $ 75
RESTRUCTURED LOANS:
Commercial and industrial $ - $ - $ -
Installment loans - - -
Real estate loans:
Commercial - - -
Home mortgage - - -
Home equity - - -
SBA
Other - - -
Trade Finance - - -
Bills Bought - - -
------ ------ ------
Total $ - $ - $ -
------ ------ ------
Total non-performing loans $2,161 $2,026 $5,233
Other real estate owned - - -
------ ------ ------
Total non-performing assets $2,161 $2,026 $5,233
====== ====== ======
Non-performing loans as a percentage of total gross loans 0.30% 0.30% 0.91%
Non-performing assets as a percentage of total gross loans
and other real estate owned 0.30% 0.30% 0.91%
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses amounted to $9.3 million or 1.27% of
total loans as of March 31, 2003 compared to $8.9 million or 1.30% of total
loans at December 31, 2002.
The following table presents information relating to the allowance for
loan losses for the periods indicated
(Dollars in thousands)
YTD YTD YTD
03/31/03 12/31/02 03/31/02
--------- --------- ----------
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 8,873 $ 9,467 $ 9,467
Provision for loan losses 600 1,100 100
Loans charged-off (181) (1,805) (393)
Recoveries of charged-off loans 12 111 28
--------- --------- ----------
Balance at end of period 9,304 8,873 9,202
========= ========= ==========
RATIOS:
Net loan charge-offs to average total loans 0.10% 0.28% 0.26%
Provision for loan losses to average total loans 0.34 0.18 0.02
Allowance for loan losses to gross loans at end of period 1.27 1.30 1.60
Allowance for loan losses to total non-performing loans 430.54 437.96 175.85
Net loan charge-offs to allowance for loan losses at end of 7.25 19.10 3.97
period
Net loan charge-offs to provision for loan losses 28.11 154.05 365.48
In determining the allowance for loan losses, management continues to
assess the risk inherent in the loan portfolio, the possible impact of known and
potential problem loans, and other factors such as portfolio composition, loan
concentration, and trends in local economic conditions.
The Bank formally assesses the allowance for loan losses on a quarterly
basis. The allowance for loan losses begins with Management reviewing each
individual classified and criticized loan in detail, and evaluating, among other
things, the adequacy of collateral, payment record, current loan status and
borrowers' financial capacity. A loan loss allowance is assigned to each
impaired loan. Loans categorized as impaired from this quarterly allocation of
loan loss allowance are based upon the specifics of the loans' circumstances,
including updated collateral value, borrowers' or guarantors' financial
capacity, payment record and recent conversations with the borrower.
Additionally, each quarter the Bank updates its twelve-quarter loss migration
analysis for its commercial loan pool, six-quarter loss migration analysis for
its homogeneous loan pool and four-quarter loss migration analysis for its
credit card loan pool to drive the rolling respective loan loss experience
percentages. These loan pools are assigned an appropriate reserve factor based
upon the Bankss.s historical charge off experience, other factors, and then
accounts for qualitative adjustments that take into consideration current
conditions. The allowance is maintained at a level the Bank considers adequate
to cover inherent risk of probable loss associated with its loan portfolio under
prevailing and anticipated economic conditions.
Based on the Bank's evaluation process and the methodology to determine
the level of the allowance for loan losses, management believes the allowance
level as of March 31, 2003 to be adequate to absorb the estimated known and
inherent risks identified through its analysis. However, no assurance can be
given that the Bank will not sustain losses in any given period which could be
substantial in relation to the size of the allowance.
DEPOSITS
The Bank's total deposits amounted to $759.7 million at March 31, 2003,
a decrease of $254,000 from $760.0 million at December 31, 2002. The Bank's
average deposits increased $94.2 million or 13.36% to $799.4 million for the
first quarter of 2003 from $705.2 million for the same quarter of 2002. The
average money market accounts increased $43.2 million or 38.01% to $156.8
million for the first quarter of 2003 from $113.6 million for the same quarter
of 2002. The average non-interest bearing accounts increased $28.3 million or
14.22% to $227.2 million for the first quarter of 2003 from $198.9 million for
the same quarter of 2002. The ratio of average noninterest-bearing deposits to
average total deposits was 28.42% for the first quarter of 2003 and 28.21% for
the same quarter of 2002. The Bank's average total cost
of deposits was 1.38% for the first quarter of 2003 and 1.70% for the same
quarter of 2002. The Bank does not hold any brokered deposits.
The following table illustrates the deposit mix as of the dates
indicated:
(Dollars in thousands)
As of March 31, 2003 As of December 31, 2002
--------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
Types of deposits:
Demand, non-interest-bearing $240,026 31.59% $223,377 29.39%
Money market accounts 101,736 13.39 126,272 16.61
Super Now 7,624 1.00 7,602 1.00
Savings 45,259 5.96 44,215 5.82
Time certificates of deposits of
$100,000 or more 267,720 35.24 258,652 34.03
Other time deposits 97,376 12.82 99,877 13.15
-------- ------ -------- ------
Total deposits $759,741 100.00% $759,995 100.00%
======== ====== ======== ======
OTHER BORROWINGS
The Bank's borrowings from Federal Home Loan Bank amounted to $70.0
million at March 31, 2003 and December 31, 2002.
CAPITAL RESOURCES
As of March 31, 2003, stockholders' equity was $103.4 million or 10.99%
of total assets, compared with $100.9 million or 10.77% as of December 31, 2002.
The Bank is required to maintain a minimum ratio of qualifying total
capital to total risk-weighted assets of 8.0% ("Total Risk-Based Capital
Ratio"), at least one-half of which must be in the form of Tier 1 capital, and a
ratio of Tier 1 capital to total risk-weighted assets of 4.0% ("Tier 1
Risk-Based Capital Ratio"). As of March 31, 2003 and December 31, 2002, the
Bank's Total Risk-Based Capital Ratios were 15.38% and 15.95%, respectively, and
its Tier 1 Risk Based Capital Ratios were 14.13% and 14.70%, respectively. The
Bank's regulatory capital continued to well exceed the regulatory minimum
requirements on March 31, 2003; however, the Bank is no longer considered to be
"well capitalized" as a result of Consent Agreement entered into with Federal
Deposit Insurance Corporation in March 2002. See Part II. Item 1. "Legal
Proceedings." To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth
in the table and not be subject to any regulatory order, agreement or directive.
Banks are also required to maintain a leverage capital ratio designed
to supplement the risk-based capital guidelines. Banks that have received the
highest rating of the five categories used by regulators to rate banks and are
not anticipating or experiencing any significant growth must maintain a ratio of
Tier 1 capital (net of all intangibles) to adjusted total assets ("Leverage
Capital Ratio") of at least 3%. Pursuant to federal regulations, banks must
maintain capital levels commensurate with the level of risk to which they are
exposed, including the volume and severity of problem loans, and federal
regulators may, however, set higher capital requirements when a bank's
particular circumstances warrant. The Bank's Leverage Capital Ratio was 10.52%
and 11.56% at March 31, 2003 and December 31, 2002, respectively.
The following table presents the Bank's regulatory capital amount and
ratios as of March 31, 2003.
AS OF MARCH 31, 2003
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSE ACTION PROVISIONS
-------------------- --------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ---------- -------- -----------
Total capital (to risk-weighted assets) $111,990 15.38% $ 58,252 > or = 8.0% $ 72,815 > or = 10.0%
Tier I capital (to risk-weighted assets) 102,884 14.13 29,125 > or = 4.0 43,687 > or = 6.0
Tier I capital (to average assets) 102,884 10.52 39,103 > or = 4.0 48,878 > or = 5.0
======== ===== ======== ========== ======== ===========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is the Bank's ability to maintain sufficient cash flow to
meet deposit withdrawals and loan demands and to take advantage of investment
opportunities as they arise. The Bank's principal sources of liquidity have been
growth in deposits and proceeds from the maturity of securities and repayments
from loans. To supplement its primary sources of liquidity, the Bank maintained
$178.7 million of borrowing capacity under a collateralized line of credit with
the Federal Home Loan Bank of San Francisco.
At March 31, 2003, the Bank's available liquidity totaled $295.0
million, which was approximately 38.83% of total deposits and 113.62% of total
volatile liabilities compared to $186.4 million at December 31, 2002, which was
approximately 24.52% of total deposits and 71.85% of total volatile liabilities.
The volatile liabilities are comprised of time certificates of deposit of
$100,000 or more and other volatile deposits. The Bank's policy is to maintain a
minimum fund availability to total deposit and borrowing ratio of 20% and a
minimum fund availability to total volatile liability ratio of 50%. The Bank
considers any excessive cash holdings or balances in due from banks, overnight
Fed funds sold, uncollateralized available-for-sale securities and readily
available Federal Home Loan Bank advances as funds availability. The Bank
follows the regulatory definition of volatile liabilities, which is Jumbo CD's.
The ratios of the average balance of Jumbo CD's to average total deposits for
March 31, 2003 and December 31, 2002 were 31.87% and 33.99%, respectively.
The Bank had a significant portion of its time deposits maturing within
one year or less as of March 31, 2003. Management anticipates that there may be
some outflow of these deposits upon maturity due to the keen competition in the
Bank's market place. However, based on its historical runoff experience, the
Bank expects the outflow will be minimal and can be replenished through its
normal growth in deposits.
Market risk is the risk of loss from adverse changes in market prices
and rates. The Bank's market risk arises primarily from interest rate risk
inherent in its lending, investment and deposit taking activities. The Bank's
profitability is affected by fluctuations in interest rates. A sudden and
substantial change in interest rates may adversely impact the Bank's earnings to
the extent that the interest rates borne by assets and liabilities do not change
at the same speed, to the same extent or on the same basis. To that end,
Management actively monitors and manages its interest rate risk exposure.
The Bank actively monitors and manages its interest rate risk through
analyzing the repricing characteristics of its loans, securities, and deposits
on an on-going basis. One of the primary goals is to optimize net income under
varying interest rate environments. The focus of this process is the
development, analysis, implementation and monitoring of earnings enhancement
strategies that provide stable earnings and capital levels during periods of
changing interest rates. Management uses both interest rate sensitivity
analysis, and a simulation model to measure and quantify the impact to the
Bank's profitability on the market value of its assets and liabilities.
The interest rate sensitivity analysis measures the repricing
mismatches between assets and liabilities. The interest rate sensitivity gap is
determined by subtracting the amount of liabilities from the amount of assets
that reprice in a particular time interval. A liability sensitivity results when
more liabilities than assets reprice or mature within a given
period. Conversely, an asset sensitive position results when more assets than
liabilities reprice within a given period. At March 31, 2003, the Bank
maintained positive one-year gap position of $147.0 million or 15.63% of total
assets. This compared with a positive one-year gap position of $86.5 million or
9.23% of total assets at December 31, 2002. The increase in gap was primarily
due to a net increase in rate sensitive assets over rate sensitive liabilities.
Because the Bank's assets tend to reprice more frequently than its liabilities
over a twelve months horizon, the Bank will realize lower net interest income in
a falling rate environment.
Since an interest rate sensitivity analysis does not measure the timing
differences in the repricing of assets and liabilities, the Bank uses a
simulation model to quantify the extent of the differences in the behavior of
the lending and funding rates, so as to project future earnings or market values
under alternative interest scenarios.
The following table presents the interest rate sensitivity of the
Bank's interest-earning assets and interest-bearing liabilities as of March 31,
2003 using the interest rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or matures within its contractual
terms. Actual payment patterns may differ from contractual payment patterns.
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in thousands)
At March 31, 2003
-----------------
Amounts Subject to Repricing Within
---------------------------------------------------------
3-12 After 5
0-3 Months Months 1-5 Years Years Total
--------- --------- --------- --------- ---------
INTEREST-EARNING ASSETS:
Total Loans* $ 590,888 $ 17,544 $ 52,787 $ 70,169 $ 731,388
Federal Home Loan Bank Stock 3,585 -- -- -- 3,585
Investment securities 24,836 21,303 99,046 10,468 155,653
Federal Funds sold 8,200 -- -- -- 8,200
Interest-earning deposits 230 -- -- -- 230
--------- --------- --------- --------- ---------
Total 627,739 38,847 151,833 80,637 899,056
--------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market 101,736 -- -- -- 101,736
NOW 7,624 -- -- -- 7,624
Savings deposits 45,259 -- -- -- 45,259
Time deposits of $100,000 or more 119,314 146,863 1,543 -- 267,720
Other Time deposits 42,004 46,804 8,568 -- 97,376
Borrowed funds -- 10,000 60,000 -- 70,000
--------- --------- --------- --------- ---------
Total $ 315,937 $ 203,667 $ 70,111 $ -- $ 598,715
========= ========= ========= ========= =========
Interest rate sensitivity gap $ 311,802 $(164,820) $ 81,722 $ 80,637 $ 309,341
Cumulative interest rate sensitivity gap $ 311,802 $ 146,982 $ 228,704 $ 309,341
Cumulative interest rate sensitivity
gap ratio as a percentage of total
assets 33.16% 15.63% 24.32% 32.90%
*Loans including loan held for sale and unearned fees and excluding Non-Accrual
Loans
Although interest rate sensitivity gap is a useful measurement and
contributes to effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, the Asset/Liability Management Committee also regularly uses simulation
modeling as a tool to measure the sensitivity of earnings and net portfolio
value ("NPV") to interest rate changes. Net portfolio value is defined as the
net present value of an institution's existing assets, liabilities and
off-balance sheet instruments. The simulation model captures all assets,
liabilities, and off-balance sheet financial instruments, accounting for
significant variables that are believed to be affected by interest rates. These
include prepayment speeds on loans, cash flows of loans and deposits, principal
amortization, call options on securities, balance sheet growth assumptions and
changes in rate relationships as various rate indices react differently to
market rates. The simulation measures the volatility of net interest income and
net portfolio value under immediate rising or falling market interest rate
scenarios in 100 basis point increments.
The following table sets forth the Bank's estimated net interest income
over a twelve month period and NPV based on the indicated changes in market
interest rates as of March 31, 2003.
%CHANGE IN
CHANGE NET INTEREST INCOME %CHANGE
(IN BASIS POINTS) (NEXT TWELVE MONTHS) IN NPV
- ----------------- -------------------- ------
+200 10.48% 7.42%
+100 5.73 4.05
0 - -
-100 -8.06 -4.28
-125 -9.95 -5.95
As indicated above, the net interest income increases (decreases) as
market interest rates rise (fall). This is due to the fact that the Bank
maintained a positive gap and also a substantial portion of the interest earning
assets reprice immediately after the rate change, interest-bearing liabilities
reprice slower than interest-earning assets, and interest-bearing liabilities do
not reprice to the same degree as interest earning assets, given a stated change
in the interest rate. The NPV increases (declines) as the interest income
increases (decreases) since the change in the discount rate has a greater impact
on the change in the NPV than does the change in the cash flows.
Management believes that the assumptions used by it to evaluate the
vulnerability of the Bank's operations to changes in interest rates approximate
actual experience and considers them reasonable; however, the interest rate
sensitivity of the Bank's assets and liabilities and the estimated effects of
changes in interest
rates on the Bank's net interest income and NPV could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which they are based.
The Bank's historical strategies in protecting both net interest income
and economic value of equity investments from significant movements in interest
rates have involved restructuring its investment portfolio and using FHLB
advances. Bank policies also permit the purchase of rate caps and floors, and
engaging in interest rate swaps, although the Bank has not yet engaged in either
of these activities. At March 31, 2003, the Bank had no derivative instruments
outstanding.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Bank's Chief Executive Officer and its Chief Financial Officer,
after evaluating the effectiveness of the Bank's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c) as of a
date within 90 days of the filing date of this report (the "Evaluation Date")
have concluded that as of the Evaluation Date, the Bank's disclosure controls
and procedures were adequate and effective to ensure that material information
relating to the Bank would be made known to them by others within the Bank,
particularly during the period in which this quarterly report was being
prepared.
Disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
(b) CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Bank's internal controls or in
other factors that could significantly affect these internal controls subsequent
to the Evaluation Date, nor any significant deficiencies or material weaknesses
in such controls requiring corrective actions. As a result, no corrective
actions were taken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Bank is a party to claims and legal proceedings
arising in the ordinary course of business. After taking into consideration
information furnished by counsel to the Bank as to the current status of these
claims or proceedings to which the Bank is a party, Management is of the opinion
that the ultimate aggregate liability represented thereby if any, will not have
a material adverse affect on the financial condition of the Bank.
The Bank has been subject to a Consent Agreement with the FDIC pursuant
to Section 8(b)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section
1818(b)(1) since April 14, 2002. The Consent Agreement addresses actions
necessary to correct certain Bank Secrecy Act ("BSA") compliance deficiencies
including inadequate training and internal controls, and ineffective independent
testing of such controls, which deficiencies are alleged by the FDIC but not
admitted to by the Bank. Even prior to entering into the Consent Agreement, the
Bank began taking proactive steps in 2001 to improve its BSA compliance. For
example, in late 2001, the Bank implemented an enterprise-wide risk management
infrastructure, which includes a comprehensive compliance and training program.
This step was taken with the assistance of a leading financial services
consulting firm, The Secura Group, which the Bank retained in November 2001 to
advise and assist the Bank in its compliance efforts. In addition, the Bank
created a new senior executive position of Chief Risk Officer and hired this
officer in May 2002 to enhance overall Risk Management processes. The Bank has
also taken other steps to
ensure the accuracy of the customer exemption process. Finally, to improve the
overall efficiency and effectiveness of BSA monitoring, the Bank purchased a new
automated BSA tracking/monitoring system which was installed in 2002 and is in
the process of implementation. The Bank has experienced certain technical
difficulties with respect to the integration of this software with the Bank's
existing customer database information system, resulting in a delay in the
Bank's ability to fully comply with certain requirements of the Consent
Agreement. The Bank expects this system to be fully functional and to resolve
these technical difficulties shortly, which should enable the Bank to satisfy
one of the most critical requirements of the Consent Agreement. Until the new
software is fully functional, the Bank is making every effort to implement
alternative procedures for those aspects of compliance which will ultimately be
achieved through the use of the computer tracking system. In addition, the Bank
is in the process of improving its due diligence efforts to identify and monitor
high-risk accounts, improve internal controls to assure the accuracy and
completeness of internal reports, and intensify personnel training. The Board of
Directors, Management, Officers, and employees of the Bank are fully committed
to complying with all of the terms of the Consent Agreement, and the Bank has
been working and will continue to work closely with the FDIC towards this end.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Exhibit Table Exhibit Table
Reference Number Item Number
- ---------------- ---- ------
3.1 Articles of Incorporation, as Amended(1).........................
3.2 2002 Amendment to Articles of Incorporation(2)...................
3.3 Bylaws, as Amended(1)............................................
3.4 2001 Amendment to Bylaws(3)......................................
- ---------------------------
(1) Incorporated by reference to the Exhibits to the Bank's Form 10 Registration
Statement, as filed with the FDIC on June 12, 2000.
(2) Incorporated by reference to the Exhibits to the Bank's Form 10K, as filed
with the FDIC on April 1, 2003.
(3) Incorporated by reference to the Exhibits to the Bank's Form 10-K/A, as
filed with the FDIC on April 20, 2001.
Exhibit Table Exhibit Table
Reference Number Item Number
- ---------------- ---- ------
4.1 Specimen of Common Stock Certificate(1)..........................
10.1 2000 Stock Option Plan(1)........................................
10.2 401(k) Plan(3)...................................................
10.3 Lease for Corporate Headquarters(1)..............................
10.4 Lease for Western Branch Office(1)...............................
10.5 Lease for Wilshire Branch Office(1)..............................
10.6 Lease for Downtown Branch Office(1)..............................
10.7 Lease for Van Nuys Branch Office(1)..............................
10.8 Lease for Torrance Branch Office(1)..............................
10.9 Lease for Rowland Heights Branch Office(1).......................
11.1 Statement Regarding Computation of Earnings Per Share(4).........
99.1 Certification of Chief Executive Officer and Chief Financial
Officer(1).......................................................
(b) Reports on Form 8-K
The Bank filed no report on Form 8-K during the first quarter of 2003.
- -------------------------
(4) The information required by this exhibit is incorporated herein by reference
from Note of the Bank's Financial Statements included herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this to report be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Union Bank
Date: May 13, 2003 By /s/ Dianne Kim
Dianne Kim
Senior Vice President and Chief Financial
Officer (Principal financial or accounting
officer and duly authorized signatory)