EXHIBIT 99.3
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FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20006
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 incorporation or organization I.R.S. Employer Identification 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, 10,667,975 shares outstanding as of
August 11, 2003.
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PACIFIC UNION BANK
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets -
June 30, 2003 and December 31, 2002
Statements of Operations -
Three months and six months ended June 30, 2003 and 2002
Statements of Cash Flows -
Six months ended June 30, 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 June 30, 2003 and December 31, 2002
(Unaudited)
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
ASSETS
Cash and due from banks - demand $ 32,292,875 $ 24,054,519
Federal funds sold 11,800,000 62,500,000
Due from banks - interest-bearing 177,068 210,654
Federal Home Loan Bank Stock 3,626,600 3,537,800
Securities held-to-maturity, at amortized cost (fair value of
$86,639,664 at June 30, 2003 and $90,798,966 at December 31,
2002) 85,225,522 89,313,683
Securities available-for-sale, at fair value 77,808,699 64,701,421
Loans receivable 778,827,859 683,131,191
Less allowance for loan losses (9,666,372) (8,872,995)
--------------- ---------------
Net loans receivable 769,161,487 674,258,196
--------------- ---------------
Loans held for sale 3,557,700 --
Customers' acceptance liabilities 1,936,301 657,760
Bank premises and equipment, net 6,187,913 6,610,142
Accrued interest receivable 3,380,170 3,404,574
Deferred tax assets 5,099,556 4,663,046
Income taxes receivable 1,636,542 1,116,038
Other assets 2,493,435 1,967,404
--------------- ---------------
Total assets $ 1,004,383,868 $ 936,995,237
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest-bearing $ 251,860,813 $ 223,377,195
Demand, interest-bearing 7,754,628 7,602,024
Money market and savings 171,492,839 170,486,917
Time certificates of deposit:
Less than $100,000 98,912,357 99,876,831
$100,000 or more 291,464,619 258,652,585
--------------- ---------------
Total deposits 821,485,256 759,995,552
Other borrowed funds 70,000,000 70,000,000
Acceptance liabilities 1,936,301 657,760
Accrued interest payable 3,492,604 3,140,064
Other liabilities 1,432,132 2,325,902
--------------- ---------------
Total liabilities 898,346,293 836,119,278
--------------- ---------------
Stockholders' equity:
Common stock, $6 par value. Authorized 30,000,000 shares;
issued and outstanding 10,667,237 shares at June 30,
2003 and 10,621,554 shares at December 31, 2002 63,998,599 63,724,507
Capital surplus 22,295,969 22,174,825
Retained earnings 19,266,053 14,283,984
Accumulated other comprehensive income - unrealized gain
on securities available-for-sale - net of taxes 476,954 692,643
--------------- ---------------
Total stockholders' equity 106,037,575 100,875,959
--------------- ---------------
Total liabilities and stockholders' equity $ 1,004,383,868 $ 936,995,237
=============== ===============
See accompanying notes to unaudited financial statements.
PACIFIC UNION BANK
Statements of Operations
For the Three and Six Months Ended June 30, 2003 and 2002
(Unaudited)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
2003 2002 2003 2002
----------- ---------- ----------- -----------
Interest income:
Interest and fees on loans $10,700,691 9,048,150 $20,639,137 17,794,251
Dividend on Federal Home Loan Bank stock 37,008 7,688 80,128 30,515
Interest on securities held-to-maturity 744,729 38,983 1,637,114 38,983
Interest on securities available-for-sale 678,080 1,566,308 1,351,453 3,379,821
Interest on Federal funds sold 238,857 317,162 510,381 602,662
Other interest income 7,540 4,257 16,965 8,333
----------- ---------- ----------- -----------
Total interest income 12,406,905 10,982,549 24,235,178 21,854,565
Interest expense:
Demand - interest bearing 5,212 10,237 11,481 19,773
Savings and money market 654,084 621,662 1,232,532 1,185,989
Time certificates of deposit:
Less than $100,000 658,353 762,594 1,378,705 1,573,919
$100,000 or more 1,509,673 1,463,150 2,918,992 3,036,104
Other borrowings 604,796 48,391 1,203,119 48,391
----------- ---------- ----------- -----------
Total interest expense 3,432,118 2,906,034 6,744,829 5,864,178
Net interest income before provision for loan losses 8,974,787 8,076,514 17,490,349 15,990,387
Provision for loan losses 300,000 100,000 900,000 200,000
----------- ---------- ----------- -----------
Net interest income after provision for loan losses 8,674,787 7,976,514 16,590,349 15,790,387
----------- ---------- ----------- -----------
Other income:
Service charges on deposit accounts 1,590,996 1,602,036 3,231,111 3,200,664
Remittance fees 245,514 239,426 461,320 452,913
Letter of credit related fees 206,919 209,772 398,727 403,100
Gain on sale of premises -- 1,193,797 -- 1,193,797
Gain on sale of loans 351,414 -- 780,406 --
Other operating income 423,131 364,539 884,537 897,288
----------- ---------- ----------- -----------
Total other income 2,817,974 3,609,570 5,756,100 6,147,762
----------- ---------- ----------- -----------
Other expenses:
Salaries and employee benefits 3,510,686 2,924,851 6,742,671 5,817,712
Security guards 221,684 241,829 440,221 476,033
Net occupancy expense 698,455 729,518 1,395,553 1,451,175
Equipment expense 375,889 380,069 715,636 730,762
Data processing 494,726 511,060 966,108 959,208
Net other real estate owned expense -- -- -- 41
Office supplies 123,155 139,348 199,257 254,700
Legal and professional 236,904 274,691 415,160 692,612
Advertising and public relations 204,003 237,076 356,604 364,964
Communication related expense 254,320 249,540 517,056 492,077
Other operating expenses 749,864 572,727 1,405,492 1,073,748
----------- ---------- ----------- -----------
Total other expenses 6,869,686 6,260,709 13,153,758 12,313,032
----------- ---------- ----------- -----------
Income before income taxes 4,623,075 5,325,375 9,192,691 9,625,117
Income taxes 1,829,000 2,127,000 3,678,000 3,846,000
----------- ---------- ----------- -----------
Net income $ 2,794,075 3,198,375 $ 5,514,691 5,779,117
=========== ========== =========== ===========
Net income per share:
Basic $ 0.26 0.30 $ 0.52 $ 0.54
Diluted $ 0.26 0.30 $ 0.52 $ 0.54
Weighted-average common shares outstanding:
Basic 10,646,089 10,613,277 10,633,889 10,610,513
Diluted 10,711,173 10,708,605 10,700,269 10,700,262
See accompanying notes to financial statements
PACIFIC UNION BANK
Statements of Cash Flows
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
06/30/2003 06/30/2002
---------- ----------
Cash flows from operating activities:
Net income $ 5,514,691 $ 5,779,117
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expenses 616,299 705,674
Provision for loan losses 900,000 200,000
Accretion of discount and amortization of premium
on securities held-to-maturity, net (290,332) (5,506)
Accretion of discount and amortization of premium
on securities available-for-sale, net (656,118) 96,815
Net loss (gain) on disposal of Bank premises and equipment 9,943 (1,200,897)
Gain on sale of loans (780,406) --
Origination of loans held for sale (12,974,299) --
Proceeds from sale of loans held for sale 13,913,727 --
Decrease (Increase) in accrued interest receivable 24,404 (326,140)
Increase in prepaid income taxes (520,504) --
(Increase) decrease in deferred income taxes (280,001) 294,439
Increase in income taxes receivable -- (985,517)
Stock dividend on Federal Home Loan Bank stock (88,800) (43,600)
Increase in other assets (526,031) (449,165)
Increase (decrease) in accrued interest payable 352,540 (1,828,013)
(Decrease) increase in other liabilities (893,770) 665,369
------------- -------------
Net cash provided by operating activities 4,321,343 2,902,576
------------- -------------
Cash flows from investing activities:
Proceeds from maturities and redemptions of securities held-to-maturity 29,343,627 --
Proceeds from maturities and redemptions of securities available-for-sale 55,041,083 37,497,386
Purchase of securities held-to-maturity (24,965,134) (45,419,151)
Purchase of securities available-for-sale (67,864,441) (3,500,000)
Proceeds from recoveries of written-off loans 299,637 76,854
Net increase in loans (99,819,651) (16,822,001)
Purchases of Bank premises and equipment (204,013) (504,319)
Proceeds from sale of Bank premises and equipment -- 3,575,300
------------- -------------
Net cash used in investing activities (108,168,892) (25,391,825)
------------- -------------
Cash flows from financing activities:
Net increase in demand deposits, non-interest-bearing 28,483,618 8,634,641
Net increase in demand deposits, interest-bearing 152,604 560,019
Net increase (decrease) in money market and savings deposits 1,005,922 (5,924,384)
Net increase in time certificates of deposit 31,847,560 1,351,324
Proceeds from exercise of stock options 395,236 148,248
Cash dividend paid (532,623) --
Cash paid for fractional shares -- (425)
Net increase in other borrowed funds -- 30,000,000
------------- -------------
Net cash provided by financing activities 61,352,317 34,767,423
------------- -------------
Net (decrease) increase in cash and cash equivalents (42,495,230) 12,574,068
Cash and cash equivalents at beginning of period 86,765,173 68,073,953
------------- -------------
Cash and cash equivalents at end of period $ 44,269,943 80,648,021
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6,392,288 7,692,191
Income taxes $ 5,450,000 4,330,000
============= =============
Noncash investing and financing activities:
Transfers of loan receivables to loans held for sale $ 3,557,000 --
Stock dividend $ -- 13,070,291
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 accounting principles generally
accepted in the United State of America 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 six months ended June 30, 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
$5.3 million, which included net income of $5.5 million and decrease in
unrealized gain of $215,689, which is net of the tax effect of $156,509 for the
six months ended June 30, 2003. The comprehensive income amounted to $6.6
million which included net income of $5.8 million and change in unrealized gain
of $822,000, which is net of the tax effect of $804,000 for the six months ended
June 30, 2002.
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 June 30,
2003 and 2002.
INCOME SHARES PER SHARE
2003 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ------
Basic EPS -
Income available to common stockholders $2,794,075 10,646,089 $ 0.26
Effect of Dilutive Securities -
Options -- 65,084 --
---------- ---------- --------
Diluted EPS -
Income available to common stockholders $2,794,075 10,711,173 $ 0.26
========== ========== ========
INCOME SHARES PER SHARE
2002 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ------
Basic EPS -
Income available to common stockholders $3,198,375 10,613,277 $ 0.30
Effect of Dilutive Securities -
Options -- 95,328 --
---------- ---------- --------
Diluted EPS -
Income available to common stockholders $3,198,375 10,708,605 $ 0.30
========== ========== ========
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computation for the six months ended June 30,
2003 and 2002.
INCOME SHARES PER SHARE
2003 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ------
Basic EPS -
Income available to common stockholders $5,514,691 10,633,889 0.52
Effect of Dilutive Securities -
Options -- 66,380 --
---------- ---------- ----
Diluted EPS -
Income available to common stockholders $5,514,691 10,700,269 0.52
========== ========== ====
INCOME SHARES PER SHARE
2002 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ------
Basic EPS -
Income available to common stockholders $5,779,117 10,610,513 $ 0.54
Effect of Dilutive Securities -
Options -- 89,749 --
---------- ---------- --------
Diluted EPS -
Income available to common stockholders $5,779,117 10,700,262 $ 0.54
========== ========== ========
4. CAPITAL TRANSACTIONS
The Bank's outstanding number of shares was 10,667,237 at June 30,
2003. The Bank has declared a quarterly cash dividend of $0.05 per common share
on July 24, 2003. The cash dividend will be paid on or about August 27, 2003 to
all shareholders of record as of August 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 six months ended June 30, 2003 and June 30, 2002 would have
been reduced to the pro forma indicated below.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
---=--------- ------------- ------------- -------------
Net Income:
As reported $ 2,794,075 $ 3,198,375 $ 5,514,691 $ 5,779,117
Pro-forma 2,783,583 3,187,805 5,494,027 5,754,858
Earnings per share:
As reported:
Basic $ 0.26 $ 0.30 $ 0.52 $ 0.54
Diluted 0.26 0.30 0.52 0.54
Pro-forma:
Basic $ 0.26 $ 0.30 $ 0.52 $ 0.54
Diluted 0.26 0.30 0.51 0.54
6. RECENT ACCOUNTING PRONOUNCEMENTS
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 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. It is anticipated that the
financial impact of SFAS 148 will not have a material effect on the Bank.
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.
In April, 2003, The Financial Accounting Standards No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149")
was issued. SFAS No. 149 clarifies and amends financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). In general, SFAS 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. It is anticipated that the financial impact of
SFAS 149 will not have a material effect on the Bank.
In May, 2003, Statement of Financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150") was issued. FASB No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity that have been
presented either entirely as equity or between the liabilities section and the
equity section of the statement of financial position. SFAS 150 is effective for
financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is anticipated that the financial impact of
SFAS 150 will not have a material effect on the Bank.
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 and six months ended
June 30, 2003 and 2002 and financial condition at June 30, 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 June 30, 2003 decreased by $404,300 or
12.6% to $2.8 million compared to $3.2 million for the same period in 2002 which
included one time gain on sale of San Francisco premises of $1.2 million in June
2002. Diluted earnings per share decreased by 13.3% to $0.26 for the three
months ended June 30, 2003 compared with $0.30 for the second quarter of 2002.
Income before income tax expense amounted to $4.6 million for the second quarter
of 2003, a decrease of $702,000 or 13.2% compared to $5.3 million for the same
quarter a year ago.
The annualized return on average assets ("ROA") and return on average
stockholders' equity ("ROE") were 1.10% and 10.73%, respectively, for the second
quarter of 2003, compared to 1.58% and 13.83%, respectively, for the same period
of 2002.
Net Income decreased by $ 264,000 or 4.6 % to $5.5 million for the six
months ended June 30, 2003 compared to $5.8 million for the same period of 2002.
Diluted earnings per share decreased to $0.52 for the six months ended June 30,
2003 compared to $0.54 for the same period of 2002. Income before income tax
expense amounted to $9.2 million and $9.6 million, respectively, for the six
months ended June 30, 2003 and 2002. The annualized ROA and ROE for the first
six months ended June 30, 2003 were 1.11% and 10.72%, respectively, compared to
1.43% and 12.70%, respectively, for the same period 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 $898,000 or 11.1% to $9.0 million in the second quarter of 2003, compared to
$8.1 million in the same quarter of 2002. Total interest income increased by
$1.4 million or 13.0% to $12.4 million in the second quarter of 2003, compared
to $11.0 million in the same quarter of 2002 primarily due to an increase of
$1.7 million in interest and fees on loans and partially offset by a $182,000
decrease in interest on investment securities.
The increase in interest income is contributed by the average volume
increase of $192.5 million in interest earning-assets to $972.5 million in the
second quarter of 2003 from $763.3 million in the same quarter of 2002. The
major increase of the interest earning-assets is contributed by the average loan
growth of $173.3 million or 30.4% to $743.9 million in the second quarter of
2003 compared to $570.6 million for the corresponding quarter of 2002. The yield
on average interest earning-assets was 5.05% in the second quarter of 2003
compared to 5.70% in the same quarter of 2002. Offsetting the increase in
average net loans, the yield on average loans including loans held for sale
decreased by 58 basis points to 5.69% in the second quarter of 2003 from 6.27%
in the same quarter of 2002, which negatively affected the loan interest income.
Total interest expense increased by $526,000 or 18.1% to $3.4 million
for the second quarter of 2003 compared to $2.9 million for the same quarter of
2002. The increase is mainly due to an increased interest expense of $556,000
from Federal Home Loan Bank borrowings in the second quarter of 2003 compared to
zero for the correspondent quarter of 2002. Average money market deposits
increased $64.4 million or 58.8% to $173.8 million in the second quarter of 2003
compared with $109.4 million for the corresponding period of 2002. The cost of
money market deposits decreased 46 basis points to 1.44% for the second quarter
of 2003 from 1.99% for the corresponding period of 2002. Average time
certificates of deposit of $100,000 or more increased $30.9 million or 12.9% to
$270.7 million in the second quarter of 2003 compared with $239.8 million for
the corresponding period of 2002. The cost on average time certificates of
deposit of $100,000 or more decreased 21 basis points to 2.24% in the first
quarter of 2003 from 2.45% in the corresponding quarter of 2002. The cost of
funds decreased 11 basis points to 1.52% in the second quarter of 2003 compared
with 1.63% in the same quarter of 2002.
Net interest income before provision for loan losses increased $1.5
million or 9.4% to $17.5 million for the six months ended June 30, 2003 compared
to $16.0 million for the same period of 2002. Total interest income increased by
$2.4 million or 10.9% to $24.2 million for the six months ended June 30, 2003
compared with $21.9 million in the same period in 2002. The increase in total
interest income was primarily due to a $2.8 million increase in interest on
loans and partially offset by a $430,000 decrease in interest on investment
securities. The average net loans including loans held for sale for the first
six months of 2003 increased by $153.9 million to $717.9 million compared with
$564.0 million for the same period of 2002.
Total interest expense increased by $881,000 or 15.0% to $6.7 million
for the six months ended June 30, 2003, compared with $5.9 million for the
corresponding period of 2002. The increase was primarily attributable to a $1.2
million increase in interest on Federal Home Loan Bank advances. The average
balance of Federal Home Loan Bank advances increased to $70.0 million in the
first six months of 2003 compared to zero in the same period of 2002.
NET INTEREST MARGIN
Net interest margin decreased by 54 basis points or 12.77% to 3.69% for
the second quarter of 2003 compared to 4.23% 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 65 basis points to
5.05% in the second quarter of 2003 compared with 5.70% in the same quarter of
2002. The decrease in the average interest-earning assets yield was offset by
the cost of funds decrease of 11 basis points to 1.52% in the second quarter of
2003 from 1.63% in the corresponding quarter of 2002.
Net interest margin decreased by 53 basis points or 12.62% to 3.67% for
the six months ended June 30, 2003 compared to 4.20% 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 5.06% in the second quarter of 2003 compared with 5.72% in the same quarter
of 2002. The decrease in the average interest-earning assets yield was offset by
the cost of funds decrease of 11 basis points to 1.52% in the second quarter of
2003 from 1.63% in the corresponding quarter of 2002.
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
June 30, 2003
--------------------------------------------------------
Average % to
Average Income/ Rate/ Earning
Balance Expense Yield(35) Assets
--------------------------------------------------------
ASSETS:
Interest-earning assets:
Loans, net(36) $ 743,907 $ 10,701 5.69% 76.49%
Federal Home Loan Bank stock 3,604 37 4.11% 0.37%
Taxable investment securities(37)
U.S. Treasury Securities 3,751 23 2.45% 0.39%
U.S. Governmental Agencies 137,111 1,400 4.08% 14.10%
Tax-exempt Investment Securities:
State & Municipal Obligation 0 0
Federal funds sold 80,833 239 1.17% 8.31%
Interest-earning deposits 3,300 7 0.85% 0.34%
----------- ----------- -----------
Total interest-earning assets 972,506 12,407 5.05% 100.00%
----------- ----------- -----------
Non-interest-earning assets:
Cash and due from banks 23,655
Premises and equipment, net 6,273
Other real estate owned 0
Customers' acceptance liabilities 1,611
Accrued interest receivable 3,220
Other assets 9,569
-----------
Total non-interest-earning assets 44,328
-----------
Total assets $ 1,016,834
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market $ 173,779 $ 625 1.44%
Super NOW 7,411 5 0.27%
Savings 46,127 29 0.25%
Time certificates of deposit of
$100,000 or more 270,693 1,510 2.24%
Other time certificates of deposit 105,720 658 2.50%
Other borrowings 70,000 605 3.42%
----------- -----------
Total interest-bearing liabilities 673,730 3,432 2.04%
----------- -----------
Non-interest-bearing liabilities:
Demand deposits 231,786
Other liabilities 7,206
-----------
Total non-interest-bearing liabilities 238,992 1.52%
-----------
Stockholders' equity 104,112
-----------
Total liabilities and stockholders' equity $ 1,016,834
===========
Net interest income $ 8,975
===========
Net interest spread(38) 3.01%
===========
Annualized net interest margin(39) 3.69%
===========
Ratio of average interest-bearing assets
to average interest-bearing liabilities 144.35%
===========
For the Three Months Ended
June 30, 2002
--------------------------------------------------------
Average % to
Average Income/ Rate/ Earning
Balance Expense Yield(1) Assets
--------------------------------------------------------
ASSETS:
Interest-earning assets:
Loans, net(36) $ 570,632 9,048 6.27% 74.76%
Federal Home Loan Bank stock 1,536 8 2.08% 0.20%
Taxable investment securities(37)
U.S. Treasury Securities 1,475 22 5.97% 0.19%
U.S. Governmental Agencies 113,282 1,581 5.58% 14.84%
Tax-exempt Investment Securities:
State & Municipal Obligation 197 2 4.06% 0.03%
Federal funds sold 74,990 317 1.67% 9.83%
Interest-earning deposits 1,142 4 1.40% 0.15%
----------- ----------- -----------
Total interest-earning assets 763,254 10,982 5.70% 100.00%
----------- ----------- -----------
Non-interest-earning assets:
Cash and due from banks 28,925
Premises and equipment, net 8,548
Other real estate owned 0
Customers' acceptance liabilities 1,243
Accrued interest receivable 3,271
Other assets 5,198
-----------
Total non-interest-earning assets 47,185
-----------
Total assets $ 810,439
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market $ 109,402 $ 543 1.99%
Super NOW 7,070 10 0.57%
Savings 42,158 79 0.75%
Time certificates of deposit of
$100,000 or more 239,822 1,463 2.45%
Other time certificates of deposit 100,172 763 3.06%
Other borrowings 5,084 48 3.74%
----------- -----------
Total interest-bearing liabilities 503,708 2,906 2.31%
----------- -----------
Non-interest-bearing liabilities:
Demand deposits 209,264
Other liabilities 4,991
-----------
Total non-interest-bearing liabilities 214,255 1.63%
-----------
Stockholders' equity 92,476
-----------
Total liabilities and stockholders' equity $ 810,439
===========
Net interest income $ 8,076
===========
Net interest spread(38) 3.39%
===========
Annualized net interest margin(39) 4.23%
===========
Ratio of average interest-bearing assets
to average interest-bearing liabilities 151.53%
===========
- ----------
(35) Average rates/yields for these periods have been annualized.
(36) 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 $769,161 and $579,432 at June 30, 2003 and 2002.
(37) Yields on tax-exempt income have not been computed on a tax equivalent
basis because tax-exempt securities are minimal.
(38) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(39) Represents net interest income as a percentage of average interest-earning
assets.
DISTRIBUTION, YIELD AND RATE ANALYSIS OF NET INCOME
For the Six Months Ended
June 30, 2003
--------------------------------------------------------
Average % to
Average Income/ Rate/ Earning
Balance Expense Yield(40) Assets
--------------------------------------------------------
ASSETS:
Interest-earning assets:
Loans, net(41) $ 717,856 $ 20,639 5.72% 75.30%
Federal Home Loan Bank stock 3,571 80 4.48% 0.37%
Taxable investment securities(42)
U.S. Treasury Securities 3,050 41 2.69% 0.32%
U.S. Governmental Agencies 140,542 2,948 4.20% 14.74%
Tax-exempt Investment Securities:
State & Municipal Obligation 0 0
Federal funds sold 84,575 510 1.20% 8.87%
Interest-earning deposits 3,697 17 0.93% 0.39%
----------- ----------- -----------
Total interest-earning assets 953,291 24,235 5.03% 100.00%
----------- ----------- -----------
Non-interest-earning assets:
Cash and due from banks 23,798
Premises and equipment, net 6,387
Other real estate owned 0
Customers' acceptance liabilities 1,106
Accrued interest receivable 3,214
Other assets 9,517
-----------
Total non-interest-earning assets 44,022
-----------
Total assets $ 997,313
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market $ 165,320 $ 1,176 1.43%
Super NOW 7,563 11 0.29%
Savings 45,752 57 0.25%
Time certificates of deposit of
$100,000 or more 262,790 2,919 2.24%
Other time certificates of deposit 106,640 1,379 2.61%
Other borrowings 70,015 1,203 3.42%
----------- -----------
Total interest-bearing liabilities 673,730 6,745 2.07%
----------- -----------
Non-interest-bearing liabilities:
Demand deposits 229,508
Other liabilities 6,842
-----------
Total non-interest-bearing liabilities 236,350 1.53%
-----------
Stockholders' equity 102,883
-----------
Total liabilities and stockholders' equity $ 997,313
===========
Net interest income $ 17,490
===========
Net interest spread(43) 2.99%
===========
Annualized net interest margin(44) 3.67%
===========
Ratio of average interest-bearing assets
to average interest-bearing liabilities 144.86%
===========
For the Six Months Ended
June 30, 2002
--------------------------------------------------------
Average % to
Average Income/ Rate/ Earning
Balance Expense Yield(1) Assets
--------------------------------------------------------
ASSETS:
Interest-earning assets:
Loans, net(41) $ 563,966 917,794 6.28% 74.12%
Federal Home Loan Bank stock 1,524 30 3.94% 0.20%
Taxable investment securities(42)
U.S. Treasury Securities 1,492 45 6.03% 0.20%
U.S. Governmental Agencies 120,815 3,370 5.58% 15.88%
Tax-exempt Investment Securities:
State & Municipal Obligation 198 4 3.88% 0.03%
Federal funds sold 71,744 603 1.67% 9.43%
Interest-earning deposits 1,102 8 1.46% 0.14%
----------- ----------- -----------
Total interest-earning assets 760,841 21,854 5.72% 100.00%
----------- ----------- -----------
Non-interest-earning assets:
Cash and due from banks 26,985
Premises and equipment, net 8,928
Other real estate owned 0
Customers' acceptance liabilities 915
Accrued interest receivable 3,332
Other assets 4,731
-----------
Total non-interest-earning assets 44,891
-----------
Total assets $ 805,732
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market $ 111,484 $ 1,029 1.86%
Super NOW 7,093 20 0.57%
Savings 42,255 159 0.75%
Time certificates of deposit of
$100,000 or more 239,695 3,036 2.55%
Other time certificates of deposit 101,909 1,574 3.11%
Other borrowings 2,556 48 3.74%
----------- -----------
Total interest-bearing liabilities 504,992 5,864 2.34%
----------- -----------
Non-interest-bearing liabilities:
Demand deposits 204,112
Other liabilities 5,613
-----------
Total non-interest-bearing liabilities 209,725 1.67%
-----------
Stockholders' equity 91,015
-----------
Total liabilities and stockholders' equity $ 805,732
===========
Net interest income $ 15,990
===========
Net interest spread(43) 3.38%
===========
Annualized net interest margin(44) 4.20%
===========
Ratio of average interest-bearing assets
to average interest-bearing liabilities 150.66%
===========
- ----------
(40) Average rates/yields for these periods have been annualized.
(41) 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 $769,161 and $579,432 at June 30, 2003 and
2002.
(42) Yields on tax-exempt income have not been computed on a tax equivalent
basis because tax-exempt securities are minimal.
(43) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(44) Represents net interest income as a percentage of average interest-earning
assets.
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:
FOR THE SIX MONTH ENDED
JUNE 30,
2003 VS. 2002
INCREASES (DECREASES)
DUE TO CHANGE IN
VOLUME RATE(1) TOTAL
------- ------- -------
(DOLLARS IN THOUSANDS)
EARNING ASSETS:
INTEREST INCOME: $ 4,530 (1,685) 2,845
Loans, net(2)............................
Federal Home Loan Bank stock............. 45 5 50
Taxable investment securities:
U. S. Treasury securities............ 30 (34) (4)
U. S. Government agencies............ 496 (918) (422)
Tax-exempt securities:(3)
State and Municipal Obligation....... (4) - (4)
Federal funds sold....................... 96 (189) (93)
Interest-earning deposits................ 13 (4) 9
------- ------- -------
Total net change
in interest income.......... $ 5,206 ($2,825) $ 2,381
------- ------- -------
DEPOSITS AND BORROWED FUNDS:
INTEREST EXPENSE:
Money market deposits.................... 420 (273) 147
Super NOW................................ 1 (10) (9)
Savings deposits......................... 12 (112) (100)
Time certificates of deposit in
denominations of $100,000
or more............................. 277 (394) (117)
Other time deposits...................... 70 (265) (195)
Other borrowings......................... 1,159 (4) 1,155
------- ------- -------
Total net change
in interest expense......... 1,939 (1,058) 881
------- ------- -------
Change in net interest income................. $ 3,267 ($1,767) $ 1,500
======= ======= =======
PROVISION FOR LOAN LOSSES
Provisions for loan losses are made monthly, to cover incurred losses
as a result 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 incurred losses inherent in the
Bank's loan portfolio.
For the second quarter of 2003 the provision for loan losses amounted
to $300,000 compared with $100,000 in the corresponding period of 2002. The
Provision for loan losses amounted to $900,000 for the six months ended June 30,
2003 compared with $200,000 for the same period of 2002. The increase was mainly
attributable to a strong loan growth in the second 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
June 30, 2003 determined that the allowance was adequate to cover losses
inherent in the portfolio. The procedures for monitoring the adequacy of the
- --------------
(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 $384,000 and $279,000 for the six months ended
June 30, 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.
allowance, as well as detailed information concerning the allowance itself, are
included below under "Allowance for loan losses."
NON-INTEREST INCOME
Non-interest income decreased $792,000 or 21.93% to $2.8 million in the
second quarter of 2003 compared to $3.6 million in the same quarter of 2002. The
decrease resulted mainly from a $1.2 million gain recognized from the sale of
San Francisco premises in the second quarter of 2002 and was partially offset by
an increase of $351,000 on the sale of SBA loans in the second quarter of 2003.
The other operating income increased by $59,000. 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.
Non-interest income decreased $392,000 or 6.38% to $5.8 million in the
six months of 2003 compared to $6.1 million in the same period of 2002. The
decrease resulted mainly from a $1.2 million gain recognized from the sale of
San Francisco premises during the first half of 2002 and was partially offset by
an increase of $780,000 on the sale of SBA loans in the same period of 2003. The
Bank is planning to continue to originate and sell the guaranteed portion of SBA
loans in 2003.
The following table sets forth the various components of the Bank's
non-interest income for the periods indicated:
NON-INTEREST INCOME
(Dollars in thousands)
Three Months Ended Increase (Decrease)
------------------- --------------------
06/30/03 06/30/02 Amount Percent(%)
-------- -------- -------- --------
Service charges on deposit accounts $ 1,591 $ 1,602 $ (11) (0.69)%
Remittance fees 246 239 7 2.93
Letter of credit related fees 207 210 (3) (1.43)
Gain on sale of loans 351 -- 351 NMV
Gain on sale of premise -- 1,194 (1,194) NMV
Other operating income 423 365 58 15.89
-------- -------- -------- --------
Total $ 2,818 $ 3,610 $ (792) 21.94%
======== ======== ======== ========
Six Months Ended Increase (Decrease)
------------------- --------------------
06/30/03 06/30/02 Amount Percent(%)
-------- -------- -------- --------
Service charges on deposit accounts $ 3,231 $ 3,201 $ 30 0.94%
Remittance fees 461 453 8 1.77
Letter of credit related fees 399 403 (4) 0.99
Gain on sale of loans 780 -- 780 NMV
Other operating income 885 897 (12) (1.34)
Gain on sale of premises -- 1,194 (1,194) NMV
-------- -------- -------- --------
Total $ 5,756 $ 6,148 $ (392) 6.38%
======== ======== ======== ========
NON-INTEREST EXPENSE
Non-interest expense increased by $609,000 or 9.73% to $6.9 million in
the second quarter of 2003, compared to $6.3 million in the corresponding
quarter of 2002. The increase is mainly attributable to an increase of $586,000
in salaries and employee benefits and a $177,000 increase in other expenses
offset by decreases in legal and professional expenses by $38,000 and
advertising and public relations by $33,000. An increase in salaries and
employee benefits was mainly attributable to the increase in number of
employees, medical expenses and annual bonus accrual 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. Other operating expenses consist of other loan related
expenses, regulatory assessment expenses, employee related fees and other
outside fees. The efficiency ratio for the second quarter of 2003 was 58.25%
compared to 53.57% for the corresponding quarter of 2002.
Non-interest expense increased by $841,000 or 6.83% to $13.2 million
for the six months ended June 30, 2003, compared to $12.3 million in the
corresponding period of 2002. The increase is mainly attributable to an increase
of $925,000 in salaries and employee benefits and an increase of $332,000 in
other operating expenses. The increase in salaries and employee benefits mainly
resulted from the increases in number of employees, medical expenses and annual
bonus accrual for 2003. The efficiency ratio for the six months of 2003 was
56.58% compared to 55.62% for the corresponding period 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)
------------------- --------------------
06/30/03 06/30/02 Amount Percent (%)
-------- -------- -------- --------
Salaries and employee benefits $ 3,511 $ 2,925 $ 586 20.03%
Security guards 222 242 (20) (8.33)
Net occupancy expense 698 729 (31) (4.25)
Equipment expense 376 380 (4) (1.10)
Data processing 495 511 (16) (3.20)
Office supplies 123 139 (16) (11.62)
Legal and professional 237 275 (38) (13.76)
Advertising and public relations 204 237 (33) (13.95)
Communication expenses 254 250 5 1.92
Other operating expenses 750 573 177 30.93
-------- -------- -------- --------
Total $ 6,870 $ 6,261 $ 609 9.73%
======== ======== ======== ========
Six Months Ended Increase / (Decrease)
------------------- --------------------
06/30/03 06/30/02 Amount Percent (%)
-------- -------- -------- --------
Salaries and employee benefits $ 6,743 $ 5,818 $ 925 15.90%
Security guards 440 476 (36) (7.52)
Net occupancy expense 1,396 1,451 (55) (3.79)
Equipment expense 716 731 (15) (2.07)
Data processing 966 959 7 0.72
Office supplies 199 255 (55) (21.77)
Legal and professional 415 693 (278) (40.06)
Advertising and public relations 357 365 (8) (2.29)
Communication related expense 517 492 25 5.08
Other operating expenses 1,405 1,073 332 30.94
-------- -------- -------- --------
Total $ 13,154 $ 12,313 $ 841 6.83%
======== ======== ======== ========
INCOME TAX
The effective tax rate for the six months ended June 30, 2003 was
40.01% compared to 39.96% 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 $1.0 billion at June 30, 2003, an increase
of $67.4 million or 7.19% from the $937.0 million at December 31, 2002. The net
increase is attributable to a $98.5 million or 14.6% increase in net loans
including loans held for sale, a $8.2 million or 34.25% increase in cash and due
from banks offset by a decrease in Federal funds sold of $50.7 million or
81.12%. Total deposits increased by $61.5 million or 8.09% to $821.5 million at
June 30, 2003 from $760.0 million at December 31, 2002. The non-interest bearing
deposits increased $28.5 million or 12.75% and time certificates of deposit of
$100,000 or more increased $32.8 million or 12.68% during the first six months
of 2003 from December 31, 2002. Money market deposits and savings deposits
increased $1.0 million or 0.59% in the six months of 2003 compared with the same
period of 2002. The Bank's borrowings from Federal Home Loan Bank were at a
$70.0 million at June 30, 2003 and December 31, 2002. Stockholders' equity
increased $5.2 million or 5.12% to $106.0 million at June 30, 2003 from $100.9
million at December 31, 2002.
INTEREST-EARNING ASSET MIX
Total earning assets amounted to $951.4 million at June 30, 2003,
compared with $894.5 million at December 31, 2002, representing an increase of
$56.9 million or 6.36%. The composition of the earning assets changed slightly
at June 30, 2003 compared with December 31, 2002. The net loans as a percentage
of total earning assets increased 5.84% to 81.22% and the percentage of Federal
funds sold to the total earning assets decreased 5.75% to 1.24% at June 30, 2003
compared to December 31, 2002. On an average basis, interest-earning assets
amounted to $972.5 million, an increase of $209.2 million or 27.40% for the
three months ended June 30, 2003 compared to $763.3 million for the same period
of 2002. On an average basis, interest-earning assets amounted to $953.3
million, an increase of $192.5 million or 25.30% for the first six months of
2003 compared to $760.8 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 06/30/03 As of 12/31/02
--------------------- -------------------
Types of earning assets Amount Percent(%) Amount Percent(%)
-------- ---------- -------- --------
Federal funds sold $ 11,800 1.24% $ 62,500 6.99%
Federal Home Loan Bank stock 3,627 0.38 3,538 0.40
Securities held-to-maturity 85,225 8.96 89,314 9.98
Securities available-for-sale 77,809 8.18 64,701 7.23
Net loans 772,719 81.22 674,258 75.38
Interest-bearing deposits 177 0.02 211 0.02
-------- ---------- -------- --------
Total earning assets $951,357 100.00% $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 June 30, 2003, the Bank had a net unrealized gain of $824,000 on its
available-for-sale portfolio. Accumulated other comprehensive loss for the first
six months of 2003 was $216,000 representing the net unrealized loss, net of
tax.
The total investment securities increased $9.0 million or 5.86% to
$163.0 million at June 30, 2003 from $154.0 million at December 31, 2002. During
the second quarter of 2003, available-for-sale securities and held-to-maturity
securities were purchased in the amount of $58.2 million.
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 06/30/03 As of 12/31/02
------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 1,002 $ 1,055 $ 1,003 $ 1,074
U.S. Government agencies 25,730 25,959 25,996 26,290
Mortgage-backed securities (1) 47,649 48,146 34,000 34,730
State and political subdivision 2,604 2,649 2,507 2,607
-------- -------- -------- --------
Total available-for-sale $ 76,985 $ 77,809 $ 63,506 $ 64,701
======== ======== ======== ========
HELD-TO-MATURITY:
Mortgage-backed securities (1) 85,225 86,640 89,314 90,799
-------- -------- -------- --------
Total held-to-maturity 85,225 86,640 89,314 90,799
-------- -------- -------- --------
Total investment securities $162,210 $164,449 $152,820 $155,500
======== ======== ======== ========
- ------------
(1) Principal balance may be prepaid before contracted maturity date.
INVESTMENT MATURITIES AND REPRICING SCHEDULE
(Dollars in thousands)
As of June 30, 2003
After One But After Five but
Within One Year Within Five Years Within Ten Years
--------------------- --------------------- ---------------------
Amount Yield (1) Amount Yield (1) Amount Yield (1)
--------- --------- --------- --------- --------- ---------
AVAILABLE-FOR-SALE:
U.S. Treasury securities $ - - $ 1,055 5.82% $ - -%
U.S. Government agencies 6,035 5.94 19,924 2.91 - -
Mortgage-backed securities (2) 17,016 5.65 8,135 5.93 5,175 2.98
State and political subdivisions 1,506 6.13 1,042 6.17 101 3.00
--------- --------- --------- --------- --------- ---------
Total available-for-sale $ 24,557 5.68% $ 30,156 5.27% $ 5,276 2.99%
========= ========= ========= ========= ========= =========
HELD-TO-MATURITY:
Mortgage-backed securities (2) - - 75,078 4.59 - -
--------- --------- --------- --------- --------- ---------
Total held-to-maturity - - 75,078 4.59 - -
--------- --------- --------- --------- --------- ---------
Total investment securities $ 24,557 5.68% $ 105,234 4.96% $ 5,276 2.99%
========= ========= ========= ========= ========= =========
After Ten Years Total
--------------------- ----------------------
Amount Yield (1) Amount Yield (1)
--------- --------- --------- ---------
AVAILABLE-FOR-SALE:
U.S. Treasury securities $ - -% $ 1,055 5.82%
U.S. Government agencies - - 25,959 3.92
Mortgage-backed securities (2) 17,820 4.77 48,146 5.58
State and political subdivisions - - 2,649 5.36
--------- --------- --------- ---------
Total available-for-sale $ 17,820 4.77% $ 77,809 5.43%
========= ========= ========= =========
HELD-TO-MATURITY:
Mortgage-backed securities (2) 10,147 3.30 85,225 4.44
--------- --------- --------- ---------
Total held-to-maturity 10,147 3.30 85,225 4.44
--------- --------- --------- ---------
Total investment securities $ 27,967 4.81% $ 163,03 5.25%
========= ========= ========= =========
- -------------
(3) Yield on tax-exempt obligations has not been computed on a tax equivalent
basis because the percentage of tax-exempt securities is minimal.
(4) The mortgage-backed securities reflect stated maturities and repricing
schedule and not anticipated prepayments.
LOANS
The Bank experienced strong loan growth in the first six months of
2003. The Bank achieved record loan production of $218.6 million during the
first six months of 2003 resulting in a $99.3 million increase in gross loans to
$782.4 million at June 30, 2003 from $683.1 million at December 31, 2002. Total
commercial and industrial loans increased $14.7 million or 11.71% to $140.0
million at June 30, 2003 from $125.4 million at December 31, 2002. Commercial
real estate loans increased $81.1 million or 20.48% and residential mortgage
loans decreased $10.2 million or 27.27% during the first six months 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 06/30/03 As of 12/31/02
------------------- -------------------
Percent Percent
Amount of Total Amount of Total
-------- -------- -------- --------
Commercial and industrial $140,045 17.90% $125,363 18.35%
Installment loans 20,199 2.58 21,225 3.11
Real estate loans:
Commercial 476,877 60.95 395,807 57.94
Residential mortgage 27,245 3.48 37,459 5.48
Home equity 6,404 0.82 5,993 0.88
SBA 77,087 9.85 74,560 10.91
Other (1) 3,387 0.43 3,619 0.53
Trade Finance 13,798 1.77 12,488 1.83
Bills Bought 17,344 2.22 6,617 0.97
-------- -------- -------- --------
Total gross loans (2) $782,386 100.00% $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
June 30, 2003 decreased $541,000 to $1.5 million, compared with December 31,
2002. Total non-performing assets were 0.19% of total assets at June 30, 2003,
compared to 0.30 % 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 June 30, 2003 which the Bank
anticipates a full collection.
As of June 30, 2003, the Bank had no OREO. The non-performing loan
coverage ratio, defined as the allowance for loan losses to non-performing
loans, increased to 659.80% as of June 30, 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)
6/30/2003 12/31/2002 6/30/2002
---------- ---------- ----------
NON-ACCRUAL LOANS:
Commercial and industrial $ 413 $ 1,091 $ 1,302
Installment loans 45 28 5
Real estate loans:
Commercial - - 2,314
Home mortgage 798 805 864
Home equity - - 123
SBA 159 - 162
Other 1 - 4
Trade Finance - 74 58
Bills Bought - - -
---------- ---------- ----------
Total $ 1,416 $ 1,998 $ 4,832
(Table continues on the following page.)
6/30/2003 12/31/2002 6/30/2002
---------- ---------- ----------
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 49 28 49
Trade Finance - - -
Bills Bought - - -
---------- ---------- ----------
Total $ 49 $ 28 $ 49
---------- ---------- ----------
Total non-performing loans $ 1,465 $ 2,026 $ 4,881
Other real estate owned - - -
Total non-performing assets $ 1,465 $ 2,026 $ 4,881
========== ========== ==========
Non-performing loans as a percentage of total gross loans 0.19% 0.30% 0.83%
Non-performing assets as a percentage of total gross loans
and other real estate owned 0.19% 0.30% 0.83%
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses amounted to $9.7 million or 1.24% of
total loans as of June 30, 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
06/30/03 12/31/02 06/30/02
-------- -------- --------
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 8,873 $ 9,467 $ 9,467
Provision for loan losses 900 1,100 200
Loans charged-off (407) (1,805) (949)
Recoveries of charged-off loans 300 111 77
-------- -------- --------
Balance at end of period $ 9,666 $ 8,873 $ 8,795
======== ======== ========
RATIOS:
Net loan charge-offs to average total loans 0.03% 0.28% 0.30%
Provision for loan losses to average total loans 0.25 0.18 0.07
Allowance for loan losses to gross loans at end of period 1.24 1.30 1.50
Allowance for loan losses to total non-performing loans 659.80 437.96 180.20
Net loan charge-offs to allowance for loan losses at end of period 2.21 19.10 19.85
Net loan charge-offs to provision for loan losses 11.85 154.05 436.48
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 its 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 allowance 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 June 30, 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 $821.5 million at June 30, 2003,
an increase of $61.5 million from $760.0 million at December 31, 2002. The
Bank's average deposits increased $111.0 million or 15.71% to $817.6 million for
the first six months of 2003 from $706.5 million for the same period of 2002.
The average money market accounts increased $53.8 million or 48.25% to $165.3
million for the first six months of 2003 from $111.5 million for the same period
of 2002. The average non-interest bearing deposits increased $25.4 million or
12.44% to $229.5 million for the first six months of 2003 from $204.1 million
for the same period of 2002. The ratio of average noninterest-bearing deposits
to average total deposits was 28.07% for the first six months of 2003 and 28.89%
for the same period of 2002. The Bank's average total cost of deposits was 1.53%
for the first six months of 2003 and 1.67% for the same period 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 June 30, 2003 As of December 31, 2002
------------------- -------------------------
Amount Percent Amount Percent
-------- -------- -------- --------
Types of deposits:
Demand, non-interest-bearing $251,861 30.66% $223,377 29.39%
Money market accounts 125,447 15.27 126,272 16.61
Super Now 7,754 0.94 7,602 1.00
Savings 46,046 5.61 44,215 5.82
Time certificates of deposits of
$100,000 or more 291,465 35.48 258,653 34.03
Other time deposits 98,912 12.04 99,877 13.15
-------- -------- -------- --------
Total deposits $821,485 100.00% $759,996 100.00%
======== ======== ======== ========
OTHER BORROWINGS
The Bank's borrowings from Federal Home Loan Bank amounted to $70.0
million at June 30, 2003 and December 31, 2002.
CAPITAL RESOURCES
As of June 30, 2003, stockholders' equity was $106.0 million or 10.55%
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 June 30, 2003 and December 31, 2002, the
Bank's Total Risk-Based Capital Ratios were 14.36% and 15.95%, respectively, and
its Tier 1 Risk Based Capital Ratios were 13.15% and 14.70%, respectively. The
Bank's regulatory capital continued to well exceed the regulatory minimum
requirements on June 30, 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 10.38%
and 11.56% at June 30, 2003 and December 31, 2002, respectively.
The following table presents the Bank's regulatory capital amount and
ratios as of June 30, 2003 and December 31, 2002.
AS OF JUNE 30, 2003
(DOLLARS IN THOUSANDS)
----------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSE ACTION PROVISIONS
------------------- ------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- -----------
Total capital (to risk-weighted assets) $115,195 14.36% $ 64,175 > or = 8.0% $ 80,219 > or =10.0%
Tier I capital (to risk-weighted assets) 105,528 13.15 32,100 > or = 4.0 48,150 > or = 6.0
Tier I capital (to average assets) 105,528 10.22 41,303 > or = 4.0 51,628 > or = 5.0
======== ======== ======== ========== ======== ==========
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSE ACTION PROVISIONS
------------------- ------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- -----------
Total capital (to risk-weighted assets) $108,689 15.95% $ 54,515 > or = 8.0% $ 68,144 > or = 10.0%
Tier I capital (to risk-weighted assets) 100,169 14.70 27,257 > or = 4.0 40,885 > or = 6.0
Tier I capital (to average assets) 100,169 11.56 34,671 > or = 4.0 43,338 > 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
$222.9 million of borrowing capacity under a collateralized line of credit with
the Federal Home Loan Bank of San Francisco.
At June 30, 2003, the Bank's available liquidity totaled $270.3
million, which was approximately 30.32% of total deposits and 88.45% 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
June 30, 2003 and December 31, 2002 were 32.14% and 33.99%, respectively.
The Bank had a significant portion of its time deposits maturing within
one year or less as of June 30, 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 June 30, 2003, the Bank maintained
positive one-year gap position of $105.9 million or 10.54% 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 June 30,
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 June 30, 2003
----------------
Amounts Subject to Repricing Within
-----------------------------------------------------------------
After 5
0-3 Months 3-12 Months 1-5 Years Years Total
---------- ---------- ---------- ---------- ----------
INTEREST-EARNING ASSETS:
Total Loans* $ 627,509 $ 21,413 $ 55,549 $ 77,979 $ 782,450
Federal Home Loan Bank Stock 3,627 -- -- -- 3,627
Investment securities 11,930 21,627 105,234 33,243 163,034
Federal Funds sold 11,800 -- -- -- 11,800
Interest-earning deposits 177 -- -- -- 177
---------- ---------- ---------- ---------- ----------
Total 655,043 34,040 160,783 111,222 961,088
INTEREST-BEARING LIABILITIES:
Money market 125,447 -- -- -- 125,447
NOW 7,754 -- -- -- 7,754
Savings deposits 46,046 -- -- -- 46,046
Time deposits of $100,000 or more 156,378 132,784 9,148 -- 291,465
Other Time deposits 41,447 48,317 8,568 -- 98,912
Borrowed funds 10,000 15,000 45,000 -- 70,000
---------- ---------- ---------- ---------- ----------
Total $ 387,072 $ 196,101 $ 56,451 $ -- $ 639,624
========== ========== ========== ========== ==========
Interest rate sensitivity gap $ 267,971 $ (162,061) $ 104,332 $ 111,222 $ 321,464
Cumulative interest rate sensitivity gap $ 267,971 $ 105,910 $ 210,242 $ 321,464
Cumulative interest rate sensitivity gap
ratio as a percentage of total assets 26.68% 10.54% 20.93% 32.01%
*Loans including loan held forsale 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 June 30, 2003.
% CHANGE IN
NET INTEREST
CHANGE INCOME (NEXT % CHANGE IN
(IN BASIS POINTS) TWELVE MONTHS) NPV
- ----------------- ----------------- -----------------
+200 10.72% 7.26%
5.12 3.63
+100
0 - -
-100 -8.71 -3.73
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 June 30, 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 the
end of the period covered by 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 the General Counsel as to the current status of these
claims or proceedings to which the Bank is a defendant, Management is of the
opinion that the ultimate aggregate liability represented thereby, if any, will
not have a material adverse effect on the financial condition of the Bank.
The Bank has been subject to a Consent Order by 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 Order 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. Even before the Consent Order, the Bank had begun taking
proactive steps to improve its BSA compliance. For example, 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. To improve the overall efficiency and effectiveness of BSA
monitoring, the Bank implemented an automated BSA tracking/monitoring system. In
addition, the Bank is in the process of improving its due diligence efforts to
identify and monitor high-risk accounts, internal controls to assure the
accuracy and completeness of internal reports, and has intensified employee
training. Finally, the Audit Committee has engaged Deloitte & Touche to conduct
ongoing independent testing to validate the BSA monitoring controls, systems and
processes including the implementation of the BSA Tracking System and also to
oversee the bank-wide risk management. The Board of Directors, Management,
Officers, and employees of the Bank are fully committed to complying with all of
the terms of the Consent Order, and have been working and will continue to work
closely with the FDIC towards this goal.
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
The Bank's annual meeting of shareholders was held on May 22, 2003.
Proxies were solicited by the Bank's management pursuant to Regulation 14
under the Securities Exchange Act of 1934. There was no solicitation in
opposition to Management's nominees for directorship as listed in the proxy
statement, and all of such nominees were elected pursuant to the vote of
shareholders. The directors noted below were elected to serve in office
until the next annual meeting of shareholders. The votes were as follows:
FOR AGAINST ABSTAIN
Jin Kon Park 8,411,775 257,702 None
Oh Kyung Kwon 8,400,075 269,402 None
Yong Koo Kim 8,400,075 269,402 None
Oh Hoon Kwon 8,309,475 360,002 None
Donald D. Byun 8,653,402 16,075 None
Kraig A. Kupiec 8,603,402 66,075 None
Sun Kee Kim 8,603,402 66,075 None
David B. Warner 8,181,175 488,302 None
Ernest E. Dow 8,603,402 66,075 None
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) 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).....................................................................
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)........................................
31.1 Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002..
31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002..
32.1 Certification of Chief Financial Officer and Chief Financial Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002......................................................................
(b) Reports on Form 8-K
On April 10, 2003, the Bank filed a Form 8-K announcing that KEB will
no longer recommend its retired executives to serve as president of the Bank and
the Bank expects to retain an experienced President & CEO in American community
banking.
On July 26, 2003, the Bank filed a Form 8-K announcing the change of
accounting firm. The accounting firm of KPMG, LLP was selected as independent
auditors for the Bank's 2003 fiscal year and the Bank dismissed
PricewaterhouseCoopers LLP as independent auditors for the Bank.
- --------------
(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.
(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: August 13, 2003 By: /s/ Dianne Kim
----------------------------------------------------
Dianne Kim
Senior Vice President and Chief Financial
Officer
(Principal financial or accounting officer and
duly authorized signatory)