EXHIBIT 99.4
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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 SEPTEMBER 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 I.R.S. Employer Identification Number
incorporation or organization
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, 10,673,739 shares outstanding as of
November 3, 2003.
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PACIFIC UNION BANK
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets -
September 30, 2003 and December 31, 2002
Statements of Operations -
Three months and nine months ended September 30, 2003 and 2002
Statements of Cash Flows -
Nine months ended September 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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFIC UNION BANK
Balance Sheets
As of September 30, 2003 and December 31, 2002
(Unaudited)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
ASSETS
Cash and due from banks - demand $ 21,426,702 $ 24,054,519
Federal funds sold 24,500,000 62,500,000
Due from banks - interest-bearing 466,030 210,654
Federal Home Loan Bank Stock 5,789,500 3,537,800
Securities held-to-maturity, at amortized cost (fair value of
$68,323,575 at September 30, 2003 and $90,798,966 at December
31, 2002) 68,271,548 89,313,683
Securities available-for-sale, at fair value 94,344,814 64,701,421
Loans receivable 825,495,501 683,131,191
Less allowance for loan losses (9,997,111) (8,872,995)
--------------- ---------------
Net loans receivable 815,498,391 674,258,196
--------------- ---------------
Loans held for sale 5,966,111 --
Customers' acceptance liabilities 1,321,142 657,760
Bank premises and equipment, net 6,387,210 6,610,142
Accrued interest receivable 3,340,159 3,404,574
Deferred tax assets 5,857,031 4,663,046
Income taxes receivable 1,566,542 1,116,038
Other assets 3,068,992 1,967,404
--------------- ---------------
Total assets $ 1,057,804,171 $ 936,995,237
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest-bearing $ 242,528,146 223,377,195
Demand, interest-bearing 8,606,956 7,602,024
Money market and savings 183,947,600 170,486,917
Time certificates of deposit:
Less than $100,000 96,631,660 99,876,831
$100,000 or more 306,252,523 258,652,585
--------------- ---------------
Total deposits 837,966,885 759,995,552
Other borrowed funds 105,000,000 70,000,000
Acceptance liabilities 1,321,142 657,760
Accrued interest payable 3,235,623 3,140,064
Other liabilities 2,068,174 2,325,902
--------------- ---------------
Total liabilities 949,591,824 836,119,278
--------------- ---------------
Stockholders' equity:
Common stock, $6 par value. Authorized 30,000,000 shares;
issued and outstanding 10,673,739 shares at September
30, 2003 and 10,621,554 shares at December 31, 2002 64,050,853 63,724,507
Capital surplus 22,309,108 22,174,825
Retained earnings 21,798,965 14,283,984
Accumulated other comprehensive income - unrealized gain
on securities available-for-sale - net of taxes 53,421 692,643
--------------- ---------------
Total stockholders' equity 108,212,347 100,875,959
--------------- ---------------
Total liabilities and stockholders' equity $ 1,057,804,171 $ 936,995,237
=============== ===============
See accompanying notes to unaudited financial statements.
PACIFIC UNION BANK
Statements of Operations
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
2003 2002 2003 2002
----------- ---------- ----------- ----------
Interest income:
Interest and fees on loans $11,202,615 9,348,476 $31,841,752 27,142,726
Dividend on Federal Home Loan Bank stock 42,886 16,186 123,014 46,701
Interest on securities held-to-maturity 718,348 925,123 2,355,462 964,106
Interest on securities available-for-sale 748,845 1,429,941 2,100,297 4,809,762
Interest on Federal funds sold 105,777 329,590 616,159 932,252
Other interest income 1,056 7,342 18,021 15,674
----------- ---------- ----------- ----------
Total interest income 12,819,527 12,056,658 37,054,705 33,911,221
Interest expense:
Demand - interest bearing 5,870 10,778 17,351 30,551
Savings and money market 700,339 653,382 1,932,871 1,839,371
Time certificates of deposit:
Less than $100,000 639,468 815,624 2,018,174 2,389,543
$100,000 or more 1,603,698 1,743,956 4,522,689 4,780,060
Other borrowings 578,169 503,576 1,781,288 551,967
----------- ---------- ----------- ----------
Total interest expense 3,527,544 3,727,316 10,272,373 9,591,492
Net interest income before provision for loan losses 9,291,983 8,329,342 26,782,332 24,319,729
Provision for loan losses 400,000 200,000 1,300,000 400,000
----------- ---------- ----------- ----------
Net interest income after provision for loan losses 8,891,983 8,129,342 25,482,332 23,919,729
----------- ---------- ----------- ----------
Other income:
Service charges on deposit accounts 1,550,299 1,602,043 4,781,409 4,802,707
Remittance fees 216,391 211,466 677,710 664,379
Letter of credit related fees 179,636 215,455 578,363 618,555
Gain on sale of premise -- -- -- 1,193,797
Gain on sale of investment securities 100,000 -- 100,000 --
Gain on sale of loans 1,020,597 -- 1,801,003 --
Other operating income 468,870 386,333 1,353,408 1,283,621
----------- ---------- ----------- ----------
Total other income 3,535,793 2,415,298 9,291,893 8,563,059
----------- ---------- ----------- ----------
Other expenses:
Salaries and employee benefits 3,784,154 3,108,228 10,526,824 8,925,940
Security guards 220,849 239,803 661,070 715,836
Net occupancy expense 713,345 716,737 2,108,898 2,167,912
Equipment expense 330,860 312,705 1,046,496 1,043,467
Data processing 486,125 482,244 1,452,233 1,441,452
Office supplies 115,484 99,740 314,741 354,439
Legal and professional 294,888 272,362 710,049 964,974
Advertising and public relations 190,317 209,609 546,921 574,573
Communication related expense 246,880 270,779 763,937 762,856
Other operating expenses 927,824 704,253 2,333,315 1,778,042
----------- ---------- ----------- ----------
Total other expenses 7,310,726 6,416,459 20,464,484 18,729,491
----------- ---------- ----------- ----------
Income before income taxes 5,117,050 4,128,181 14,309,741 13,753,297
Income taxes 2,050,000 1,491,000 5,728,000 5,337,000
----------- ---------- ----------- ----------
Net income $ 3,067,050 2,637,181 $ 8,581,741 8,416,297
=========== ========== =========== ==========
Net income per share:
Basic $ 0.29 0.25 $ 0.81 0.79
Diluted $ 0.29 0.25 $ 0.80 0.79
Weighted-average common shares outstanding:
Basic 10,669,716 10,621,554 10,645,963 10,614,150
Diluted 10,729,797 10,703,296 10,715,290 10,703,988
See accompanying notes to financial statements
PACIFIC UNION BANK
Statements of Cash Flows
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
09/30/2003 09/30/2002
------------- -------------
Cash flows from operating activities:
Net income $ 8,581,741 $ 8,416,297
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expenses 927,150 1,038,641
Provision for loan losses 1,300,000 400,000
Accretion of discount and amortization of premium
on securities held-to-maturity, net (121,424) (888,413)
Accretion of discount and amortization of premium
on securities available-for-sale, net (654,698) 57,446
Net loss (gain) on disposal of Bank premises and equipment 9,943 (1,200,897)
Gain on sale of loans (1,801,003) --
Origination of loans held for sale (30,974,418) --
Proceeds from sale of loans held for sale 33,095,363 --
Decrease (Increase) in accrued interest receivable 64,415 (536,705)
(Increase) decrease in deferred income taxes (724,220) 326,252
Increase in income taxes receivable (450,504) (1,046,517)
Stock dividend on Federal Home Loan Bank stock (127,700) (64,900)
Increase in other assets (1,101,588) (234,957)
Increase (decrease) in accrued interest payable 95,559 (1,627,050)
(Decrease) increase in other liabilities (257,728) 336,137
------------- -------------
Net cash provided by operating activities 7,860,888 4,975,334
------------- -------------
Cash flows from investing activities:
Increase in Federal Home Loan Bank Stock (2,124,000) (1,931,300)
Proceeds from maturities and redemptions of securities held-to-maturity 46,128,693 2,451,925
Proceeds from maturities and redemptions of securities available-for-sale 69,636,759 49,297,215
Purchase of securities held-to-maturity (24,965,134) (100,474,411)
Purchase of securities available-for-sale (99,734,441) (16,172,981)
Proceeds from recoveries of written-off loans 325,583 97,550
Net increase in loans (149,151,830) (83,956,899)
Purchases of Bank premises and equipment (714,161) (584,094)
Proceeds from sale of Bank premises and equipment -- 3,574,300
------------- -------------
Net cash used in investing activities (160,598,531) (147,698,695)
------------- -------------
Cash flows from financing activities:
Net increase in demand deposits, non-interest-bearing 19,150,951 25,580,380
Net increase in demand deposits, interest-bearing 1,004,932 1,551,020
Net increase in money market and savings deposits 13,460,683 33,580,966
Net increase in time certificates of deposit 44,354,767 21,338,785
Proceeds in other borrowed funds 35,000,000 70,000,000
Proceeds from exercise of stock options 460,629 148,248
Cash dividend paid (1,066,760) --
Cash paid for fractional shares -- (425)
------------- -------------
Net cash provided by financing activities 112,365,202 152,198,974
------------- -------------
Net (decrease) increase in cash and cash equivalents (40,372,441) 9,475,613
Cash and cash equivalents at beginning of period 86,765,173 68,073,953
------------- -------------
Cash and cash equivalents at end of period $ 46,392,732 $ 77,549,566
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 10,176,814 $ 11,218,543
Income taxes $ 7,800,000 $ 5,837,000
============= =============
Supplemental disclosure of non-cash investing & financing activities:
Transfer of retained earnings to common stock and capital surplus for
Stock dividend $ -- $ 13,070,291
Transfer in of loans held for sale $ 5,966,111 $ 2,272,624
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 nine months ended September 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
$7.9 million, which included net income of $8.6 million and a decrease in
unrealized gain of $639,000, which is net of the tax effect of $470,000 for the
nine months ended September 30, 2003. The comprehensive income amounted to $8.3
million, which included net income of $8.4 million and a decrease in unrealized
gain of $150,000, which is net of the tax effect of $243,000 for the nine months
ended September 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 September
30, 2003 and 2002.
WEIGHTED
NET INCOME AVERAGE SHARES PER SHARE
2003 (NUMERATOR) (DENOMINATOR) AMOUNT
---------- -------------- ----------
Basic EPS -
Income available to common stockholders $3,067,050 10,669,716 $ 0.29
Effect of Dilutive Stock Options -- 60,081 --
---------- ------------ ----------
Diluted EPS -
Income available to common stockholders $3,067,050 10,729,797 $ 0.29
========== ============ ==========
WEIGHTED
NET INCOME AVERAGE SHARES PER SHARE
2002 (NUMERATOR) (DENOMINATOR) AMOUNT
---------- -------------- ----------
Basic EPS -
Income available to common stockholders $2,637,181 10,621,554 $ 0.25
Effect of Dilutive Stock Options -- 81,742 --
---------- ------------ ----------
Diluted EPS -
Income available to common stockholders $2,637,181 10,703,296 $ 0.25
========== ============ ==========
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computation for the nine months ended September
30, 2003 and 2002.
WEIGHTED
NET INCOME AVERAGE SHARES PER SHARE
2003 (NUMERATOR) (DENOMINATOR) AMOUNT
---------- -------------- ----------
Basic EPS -
Income available to common stockholders $ 8,581,741 10,645,963 0.81
Effect of Dilutive Stock Options -- 69,328 (0.01)
----------- ------------ ----------
Diluted EPS -
Income available to common stockholders $ 8,581,741 10,715,290 0.80
=========== ============ ==========
WEIGHTED
NET INCOME AVERAGE SHARES PER SHARE
2002 (NUMERATOR) (DENOMINATOR) AMOUNT
---------- -------------- ----------
Basic EPS -
Income available to common stockholders $8,416,297 10,614,150 $ 0.79
Effect of Dilutive Stock Options -- 89,838 --
----------- ------------ --------
Diluted EPS -
Income available to common stockholders $8,416,297 10,703,988 $ 0.79
=========== ============ ========
4. CAPITAL TRANSACTIONS
The Bank's outstanding number of shares was 10,673,739 at September 30,
2003. The Bank has declared a quarterly cash dividend of $0.05 per common share
on October 27, 2003. The cash dividend will be paid on November 28, 2003 to all
shareholders of record as of November 17, 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 nine months ended September 30, 2003 and September 30, 2002
would have been reduced to the pro forma amounts indicated below.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPT. 30, 2003 SEPT. 30, 2002 SEPT. 30, 2003 SEPT. 30, 2002
-------------- -------------- -------------- --------------
Net Income:
As reported $ 3,067,050 $ 2,637,181 $ 8,581,741 $ 8,416,297
Stock based compensation expense (16,636) (18,372) (45,555) (41,418)
----------- ------------ ------------ ------------
Pro-forma 3,050,414 2,618,809 8,536,186 8,374,879
=========== ============ ============ ============
Earnings per share:
As reported:
Basic $ 0.29 $ 0.25 $ 0.81 $ 0.79
Diluted 0.29 0.25 0.80 0.79
Pro-forma:
Basic $ 0.29 $ 0.25 $ 0.80 $ 0.79
Diluted 0.28 0.24 0.80 0.78
6. RECENT ACCOUNTING PRONOUNCEMENTS
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. The FASB deferred
the effective date for applying the provision of FIN 46 for interests held by
public entities in variable interest entities or potential variable interest
entities created before February 1, 2003 until the end of the first interim or
annual period after December 15, 2003. Certain disclosure requirements apply in
all financial statements issued after January 1, 2003, regardless when the
variable interest entity was established. The Bank has no business interests
that require consolidation or deconsolidation as a result of applying provisions
of FIN 46.
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. The financial impact of SFAS 149 did 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. Generally, 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 September 15, 2003. SFAS 150 is to be implemented by reporting
the cumulative effect of a change in an accounting principle for financial
instruments created before May 15, 2003 and still existing at the beginning of
the interim period of adoption. The financial impact of SFAS 150 did not have a
material effect on the Bank.
7. SUBSEQUENT EVENT
Korea Exchange Bank ("KEB"), which holds approximately 62% of the
Bank's outstanding shares, recently accepted a capital infusion from Lone Star
Fund IV (U.S.), L.P. and its affiliates (collectively, "Lone Star"), which
resulted in Lone Star holding a majority of the outstanding voting stock of KEB.
In connection with the infusion, KEB transferred all of the Bank shares that it
owns to a trust pursuant to a trust agreement dated October 31, 2003, which was
entered into between KEB, as grantor and Mr. L. Dale Crandall, as trustee. While
KEB retains all of the economic interest in the Bank shares transferred to the
trust, the trust agreement gives the trustee voting and dispositive power over
the Bank shares and directs the trustee to dispose of all or substantially all
of such interest either directly through a sale or in connection with a merger
or similar transaction of the Bank with a third party. The transfer of the
shares to the trustee does not affect the Bank's day-to-day business and
operations.
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 nine months ended
September 30, 2003 and 2002 and financial condition at September 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 September 30, 2003 increased by
$430,000 or 16.3% to $3.1 million compared to $2.6 million for the same period
in 2002. Diluted earnings per share increased by 16.0% to $0.29 for the three
months ended September 30, 2003 compared with $0.25 for the correspondent period
of 2002.
The annualized return on average assets ("ROA") and return on average
stockholders' equity ("ROE") were 1.16% and 11.52%, respectively, for the third
quarter of 2003, compared to 1.17% and 11.06%, respectively, for the same period
of 2002.
Net Income increased by $165,000 or 2.0 % to $8.6 million for the nine
months ended September 30, 2003 compared to $8.4 million for the same period of
2002. Diluted earnings per share increased to $0.80 for the nine months ended
September 30, 2003 compared to $0.79 for the same period of 2002. The annualized
ROA and ROE for nine months ended September 30, 2003 were 1.12% and 10.99%,
respectively, compared to 1.34% and 12.14%, 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-earning 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 $963,000 or 11.56% to $9.3 million in the third quarter of 2003, compared to
$8.3 million in the same quarter of 2002. Total interest income increased by
$764,000 or 6.33% to $12.8 million in the third quarter of 2003, compared to
$12.1 million in the same quarter of 2002 primarily due to an increase of $1.9
million in interest and fees on loans and partially offset by a $888,000
decrease in interest on investment securities.
The increase in interest income is primarily due to the average volume
increase of $148.5 million or 17.20% in interest earning-assets to $1 billion in
the third quarter of 2003 from $863.0 million in the same quarter of 2002. The
major increase in interest earning-assets is primarily due to the increase in
the average loans, including loans held for sale, which loans grew $202.1
million or 33.86% to $798.9 million in the third quarter of 2003 compared to
$596.8 million for the corresponding quarter of 2002. The yield on average
interest earning-assets was 5.02% in the third quarter of 2003 compared to 5.49%
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 5.55% in the third quarter of 2003 from 6.13% in the same quarter of
2002, which negatively affected loan interest income. The decrease in the loan
yield was mainly due to a decrease in the average prime rate of 75 basis points
in the third quarter of 2003 compared to the same period of prior year.
Total interest expense decreased by $200,000 or 5.34% to $3.5 million
for the third quarter of 2003 compared to $3.7 million for the same quarter of
2002. The decrease is mainly due to a decreased interest expense of $176,000
from Time Certificates of Deposit less than $100,000. Average money market
deposits increased $69.6 million or 62.65% to $180.8 million in the third
quarter of 2003 compared with $111.2 million for the corresponding period of
2002. The cost of money market deposits decreased 65 basis points to 1.39% for
the third quarter of 2003 from 2.04% for the corresponding period of 2002.
Average time certificates of deposit of $100,000 or more increased $31.8 million
or 12.20% to $292.0 million in the third quarter of 2003 compared with $260.3
million for the corresponding period of 2002. The cost of average time
certificates of deposit of $100,000 or more decreased 46 basis points to 2.20%
in the third quarter of 2003 from 2.66% in the corresponding quarter of 2002.
The cost of funds decreased 34 basis points to 1.50% in the third quarter of
2003 compared with 1.84% in the same quarter of 2002.
Net interest income before provision for loan losses increased
$2.5 million or 10.12% to $26.8 million for the nine months ended September 30,
2003 compared to $24.3 million for the same period of 2002. Total interest
income increased by $3.1 million or 9.27% to $37.1 million for the nine months
ended September 30, 2003 compared with $33.9 million in the same period in 2002.
The increase in total interest income was primarily due to a $4.7 million
increase in interest on loans and partially offset by a $1.3 million decrease in
interest on investment securities. The average net loans, including loans held
for sale, for the first nine months of 2003 increased by $170.1 million to
$745.2 million compared with $575.0 million for the same period of 2002.
Total interest expense increased by $681,000 or 7.10% to $10.3 million
for the nine months ended September 30, 2003, compared with $9.6 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 by $47.7 million to $68.6
million in the first nine months of 2003 compared to $20.1 million in the same
period of 2002. The increase in interest on Federal Home Loan Bank advances was
partially offset by a $257,000 decrease in interest expense from Time
Certificates of Deposit $100,000 or more.
NET INTEREST MARGIN
Net interest margin decreased by 19 basis points to 3.67% for the third
quarter of 2003 compared to 3.86% 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 47 basis points to 5.02% in the
third quarter of 2003 compared with 5.49% in the same quarter of 2002. The
decrease in the average interest-earning assets yield was offset by the cost of
funds decrease of 34 basis points to 1.50% in the third quarter of 2003 from
1.84% in the corresponding quarter of 2002.
Net interest margin decreased by 41 basis points or 10.05% to 3.67% for
the nine months ended September 30, 2003 compared to 4.08% 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 60 basis points
to 5.03% for the nine months ended September 30, 2003 compared with 5.63% in the
same period of 2002. The decrease in the average interest-earning assets yield
was offset by the cost of funds decrease of 21 basis points to 1.52% for the
nine months ended September 30, 2003 from 1.73% in the corresponding period 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
(DOLLARS IN THOUSANDS)
For the Three Months Ended For the Three Months Ended
September 30, 2003 September 30, 2002
--------------------------------------------- -------------------------------------------
Average % to Average % to
Average Income/ Rate/ Earning Average Income/ Rate/ Earning
Balance Expense Yield(45) Assets Balance Expense Yield(1) Assets
------------ -------- -------- ------- ----------- ------- ------- -------
ASSETS:
Interest-earning assets:
Loans, net(46) $ 798,906 11,203 5.55% 78.98% $ 596,800 9,348 6.13% 69.15%
Federal Home Loan Bank stock 4,246 43 4.05% 0.42% 2,853 17 2.38% 0.33%
Taxable investment securities(47)
U.S. Treasury Securities 1,004 23 9.16% 0.10% 1,008 15 5.95% 0.21%
U.S. Governmental Agencies 161,742 1,444 3.57% 15.99% 183,461 2,338 5.10% 21.26%
Tax-exempt Investment
Securities:
State & Municipal Obligation 0 0 0 0 200 2 4.00% 0.02%
Federal funds sold 45,129 106 0.93% 4.46% 76,648 329 1.68% 8.88%
Interest-earning deposits 479 1 0.84% 0.05% 2,066 7 1.34% 0.24%
------------ -------- ------ ----------- ------ ------
Total interest-earning assets 1,011,506 12,820 5.02% 100.00% 863,036 12,056 5.49% 100.00%
------------ -------- ------ ----------- ------ ------
Non-interest-earning assets:
Cash and due from banks 23,394 23,441
Premises and equipment, net 6,260 6,699
Other real estate owned 0 0
Customers' acceptance liabilities 1,713 1,678
Accrued interest receivable 3,298 3,433
Other assets 9,943 5,450
------------ -----------
Total non-interest-earning assets 44,608 40,701
------------ -----------
Total assets $ 1,056,114 $ 903,737
============ ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Deposits:
Money market $ 180,813 $ 625 1.39% $ 111,170 571 2.04%
Super NOW 8,000 6 0.30% 7,800 11 0.56%
Savings 46,406 75 0.65% 43,481 82 0.75%
Time certificates of deposit of
$100,000 or more 292,040 1,605 2.20% 260,284 1,744 2.66%
Other time certificates of deposit 108,078 639 2.37% 105,843 815 3.05%
Other borrowings 65,765 578 3.48% 57,066 504 3.46%
------------ -------- ----------- ------
Total interest-bearing liabilities 701,102 3,528 2.02% 585,644 3,727 2.52%
------------ -------- ----------- ------
Non-interest-bearing liabilities:
Demand deposits 241,197 215,886
Other liabilities 7,350 6,879
------------ -----------
Total non-interest-bearing
liabilities 248,547 1.50% 222,765 1.84%
------------ -----------
Stockholders' equity 106,465 95,328
------------ -----------
Total liabilities and $ 1,056,114 $ 903,737
stockholders' equity ============ ===========
Net interest income $ 9,292 8,329
======== ======
Net interest spread(48) 3.00% 2.97%
====== ======
Annualized net interest margin(49) 3.67% 3.86%
====== ======
Ratio of average interest-bearing
assets to average interest-bearing
liabilities 144.27% 147.37%
====== ======
DISTRIBUTION, YIELD AND RATE ANALYSIS OF NET INCOME
(DOLLARS IN THOUSANDS)
- -----------------
(45) Average rates/yields for these periods have been annualized.
(46) 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 $1.6 million and $1.3 million at September 30, 2003 and
2002.
(47) Yields on tax-exempt income have not been computed on a tax equivalent
basis because tax-exempt securities are minimal.
(48) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(49) Represents net interest income as a percentage of average interest-earning
assets.
For the Nine Months Ended For the Nine Months Ended
September 30, 2003 September 30, 2002
--------------------------------------------- -------------------------------------------
Average % to Average % to
Average Income/ Rate/ Earning Average Income/ Rate/ Earning
Balance Expense Yield(50) Assets Balance Expense Yield(1) Assets
------------ -------- -------- ------- ----------- ------- ------- -------
ASSETS:
Interest-earning assets:
Loans, net(51) $ 745,169 $ 31,841 5.63% 76.59% $ 575,031 27,143 6.22% 72.31%
Federal Home Loan Bank stock 3,799 123 4.32% 0.39% 1,974 47 3.17% 0.25%
Taxable investment securities(52)
U.S. Treasury Securities 2,360 56 3.16% 0.24% 1,329 59 5.92% 0.17%
U.S. Governmental Agencies 147,686 4,400 3.97% 15.18% 141,926 5,709 5.36% 17.85%
Tax-exempt Investment
Securities:
State & Municipal Obligation 0 0 0 0 199 6 3.86% 0.03%
Federal funds sold 71,282 616 1.14% 7.33% 73,397 932 1.67% 9.23%
Interest-earning deposits 2,612 18 0.92% 0.27% 1,427 15 1.41% 0.18%
------------ -------- ------- ----------- ------ ------
Total interest-earning assets 972,908 37,054 5.03% 100.00% 795,283 33,911 5.63% 100.00%
------------ -------- ------- ----------- ------ ------
Non-interest-earning assets:
Cash and due from banks 23,663 25,791
Premises and equipment, net 6,344 8,177
Other real estate owned 0 0
Customers' acceptance liabilities 1,310
1,172
Accrued interest receivable 3,242 3,364
Other assets 9,662 4,973
------------ -----------
Total non-interest-earning assets 44,221 43,477
------------ -----------
Total assets $ 1,017,129 $ 838,760
============ ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Deposits:
Money market $ 170,541 $ 1,847 1.45% $ 111,378 1,601 1.92%
Super NOW 7,710 17 0.29% 7,331 31 0.57%
Savings 45,973 86 0.25% 42,658 238 0.75%
Time certificates of deposit of
$100,000 or more 272,647 4,523 2.22% 246,633 4,780 2.59%
Other time certificates of deposit 107,125 2,018 2.52% 103,245 2,389 3.09%
Other borrowings 68,583 1,781 3.42% 20,926 552 3.48%
------------ -------- ----------- ------
Total interest-bearing liabilities 672,579 10,272 2.04% 532,171 9,591 2.41%
------------ -------- ----------- ------
Non-interest-bearing liabilities:
Demand deposits 233,447 208,080
Other liabilities 7,013 6,040
------------ -----------
Total non-interest-bearing
liabilities 240,460 1.52% 214,120 1.73%
------------ -----------
Stockholders' equity 104,090 92,469
------------ -----------
Total liabilities and
stockholders' equity $ 1,017,129 $ 838,760
============ ===========
Net interest income $ 26,782 24,320
======== ======
Net interest spread(53) 2.99% 3.22%
====== ======
Annualized net interest margin(54) 3.67% 4.08%
====== ======
Ratio of average
interest-bearing assets
to average interest-bearing
liabilities 144.65% 149.44%
====== ======
- -----------------
(50) Average rates/yields for these periods have been annualized.
(51) 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 $1.6 million and $1.3 million at September 30, 2003 and
2002.
(52) Yields on tax-exempt income have not been computed on a tax equivalent
basis because tax-exempt securities are minimal.
(53) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(54) 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 NINE MONTH ENDED
SEPTEMBER 30,
2003 VS. 2002
INCREASES (DECREASES)
DUE TO CHANGE IN
VOLUME RATE(1) TOTAL
------ ---------------------- -------
(DOLLARS IN THOUSANDS)
EARNING ASSETS:
INTEREST INCOME:
Loans, net(2).................. $7,455 (2,757) 4,698
Federal Home Loan Bank stock... 55 21 76
Taxable investment securities:
U. S. Treasury securities.... 32 (35) (3)
U. S. Government agencies.... 224 (1,533) (1,309)
Tax-exempt securities:(3)
State and Municipal Obligation (6) - (6)
Federal funds sold............. (26) (290) (316)
Interest-earning deposits...... 9 (6) 3
------ ------- ------
Total net change
in interest income..... $7,743 ($4,600) $3,143
------ ------- ------
DEPOSITS AND BORROWED FUNDS:
INTEREST EXPENSE:
Money market deposits.......... 707 (461) 246
Super NOW...................... 2 (15) (13)
Savings deposits............... 17 (169) (152)
Time certificates of deposit in
denominations of $100,000
or more..................... 473 (731) (258)
Other time deposits............ 87 (458) (371)
Other borrowings............... 1,237 (8) 1,229
------ ------- ------
Total net change
in interest expense.... 2,523 (1,842) 681
------ ------- ------
Change in net interest income..... $5,220 ($2,758) $2,462
====== ======= ======
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 third quarter of 2003 the provision for loan losses amounted to
$400,000 compared with $200,000 in the corresponding period of 2002. The
provision for loan losses amounted to $1,300,000 for the nine months ended
September 30, 2003 compared with $400,000 for the same period of 2002. The
increase was mainly attributable to a strong loan growth in 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 September 30, 2003
determined that the allowance was adequate to absorb incurred 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 $571,000 and $436,000 for the nine months ended
September 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 increased $1.1 million or 46.42% to $3.5 million in
the third quarter of 2003 compared to $2.4 million in the same quarter of 2002.
The increase resulted mainly from a $1.0 million gain recognized from the sale
of SBA loans, a $100,000 gain recognized from the sale of investment securities
and a $83,000 increase in other operating income in the third quarter of 2003.
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 increase was partially offset by a decrease of $52,000 on
service charges on deposit accounts in the third quarter of 2003.
Non-interest income increased $729,000 or 8.51% to $9.3 million for the
nine months of 2003 compared to $8.6 million in the same period of 2002. The
increase resulted mainly from a $1.8 million gain recognized from the sale of
loans during the first nine months of 2003 and was partially offset by a
decrease of $1.2 million on the sale of San Francisco premises during the first
nine months of 2002. The Bank is planning to continue to originate and sell the
guaranteed portion of SBA loans in the last quarter of 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)
--------------------------- -------------------------
09/30/03 09/30/02 Amount Percent(%)
---------- ---------- ----------- ---------
Service charges on deposit accounts $ 1,550 $ 1,602 $ (52) (3.25)%
Remittance fees 216 211 5 2.37
Letter of credit related fees 180 216 (36) (16.67)
Gain on sale of loans 1,021 -- 1,021 NMV
Gain on sale of investment securities 100 -- 100 NMV
Other operating income 469 386 83 21.50
---------- ---------- ----------- -----
Total $ 3,536 $ 2,415 $ 1,121 46.42%
========== ========== =========== =====
Nine Months Ended Increase (Decrease)
--------------------------- -------------------------
09/30/03 09/30/02 Amount Percent(%)
---------- ---------- ----------- ---------
Service charges on deposit accounts $ 4,781 $ 4,803 $ (22) (0.46)%
Remittance fees 678 664 14 2.11
Letter of credit related fees 578 619 (41) (6.05)
Gain on sale of premise -- 1,194 (1,194) (100.00)
Gain on sale of loans 1,801 -- 1,801 NMV
Other operating income 1,354 1,283 71 5.53
Gain on sale of investment securities 100 -- 100 NMV
---------- ---------- ----------- -----
Total $ 9,292 $ 8,563 $ 729 8.51%
========== ========== =========== =====
NON-INTEREST EXPENSE
Non-interest expense increased by $895,000 or 13.95% to $7.3 million in
the third quarter of 2003, compared to $6.4 million in the corresponding quarter
of 2002. The increase is mainly attributable to an increase of $676,000 in
salaries and employee benefits and a $225,000 increase in other expenses offset
by a decrease of $24,000 in communication related expenses and a decrease of
$20,000 in advertising and public relations. 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. Other operating
expenses consist of other loan related expenses, regulatory assessment expenses,
employee related fees and other outside fees. The efficiency ratio for the third
quarter of 2003 was 56.99% compared to 59.72% for the corresponding quarter of
2002.
Non-interest expense increased by $1.7 million or 9.26% to $20.5
million for the nine months ended September 30, 2003, compared to $18.7 million
in the corresponding period of 2002. The increase is mainly attributable to an
increase of $1.6 million in salaries and employee benefits and an increase of
$555,000 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 nine
months of 2003 was 56.73% compared to 56.96% 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)
-------------------------- --------------------------
09/30/03 09/30/02 Amount Percent(%)
--------- -------- -------- -----------
Salaries and employee benefits $ 3,784 $ 3,108 $ 676 21.75%
Security guards 221 240 (19) (7.90)
Net occupancy expense 713 717 (4) (0.47)
Equipment expense 331 313 18 5.81
Data processing 486 482 4 0.80
Office supplies 115 99 16 15.79
Legal and professional 295 272 23 8.27
Advertising and public relations 190 210 (20) (9.20)
Communication expenses 247 271 (24) (8.83)
Other operating expenses 929 704 225 31.75
--------- -------- -------- -----
Total $ 7,311 $ 6,416 $ 895 13.94%
========= ======== ======== =====
Nine Months Ended Increase / (Decrease)
-------------------------- --------------------------
09/30/03 09/30/02 Amount Percent(%)
--------- -------- -------- ------------
Salaries and employee benefits $ 10,527 8,926 $ 1,601 17.94%
Security guards 661 716 (55) (7.65)
Net occupancy expense 2,109 2,168 (59) (2.72)
Equipment expense 1,046 1,043 3 0.29
Data processing 1,452 1,441 11 0.75
Office supplies 315 354 (40) (11.20)
Legal and professional 710 965 (254) (26.42)
Advertising and public relations 547 575 (28) (4.81)
Communication related expense 764 763 1 0.14
Other operating expenses 2,333 1,778 555 31.23
--------- -------- -------- -----
Total $ 20,464 18,729 $ 1,735 9.26%
========= ======== ======== =====
INCOME TAX
The effective tax rate for the third quarter of 2003 was 40.06%
compared to 36.12% for the same period of 2002. The effective tax rate for the
nine months ended September 30, 2003 was 40.03% compared to 38.81% for the same
period of 2002. The effective tax rate fluctuations are strongly influenced by
California state franchise taxes net of Federal tax benefits under the Water's
Edge Unitary method.
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 $1.1 billion at September 30, 2003, an
increase of $120.8 million or 12.89% from the $937.0 million at December 31,
2002. The net increase is attributable to a $148.3 million or 21.71% increase in
total gross loans, including loans held for sale, and offset by a $38.0 million
or 60.8% decrease in Federal funds sold and a decrease of $2.6 million or 10.92%
in cash and due from banks. Total deposits increased by $78.0 million or 10.26%
to $838.0 million at September 30, 2003 from $760.0 million at December 31,
2002. Time certificates of deposit of $100,000 or more increased $47.6 million
or 18.40% to $306.3 million at September 30, 2003 from $258.7 million at
December 31, 2003. Noninterest bearing deposits increased $19.2 million or 8.57%
to $242.5 million at September 30, 2003 from $223.4 million at December 31,
2003. Money market deposits and savings deposits increased $13.5 million or
7.90% to $183.9 million at September 30, 2003 from $170.5 million from December
31, 2002. The Bank's borrowings from the Federal Home Loan Bank were $105.0
million at September 30, 2003 compared to $70.0 million at December 31, 2002.
Stockholders' equity increased $7.3 million or 7.27% to $108.2 million at
September 30, 2003 from $100.9 million at December 31, 2002.
INTEREST-EARNING ASSET MIX
Total earning assets amounted to $1.0 billion at September 30, 2003,
compared with $894.5 million at December 31, 2002, representing an increase of
$120.3 million or 13.45%. The composition of the earning assets changed slightly
at September 30, 2003 compared with December 31, 2002. The net loans as a
percentage of total earning assets increased 7.39% to 80.95% and the percentage
of Federal funds sold to the total earning assets decreased 65.45% to 2.41% at
September 30, 2003 compared to December 31, 2002. On an average basis,
interest-earning assets amounted to $1.0 billion, an increase of $148.5 million
or 17.21% for the three months ended September 30, 2003 compared to $863.0
million for the same period of 2002. On an average basis, interest-earning
assets amounted to $972.9 million, an increase of $177.6 million or 22.33% for
the first nine months of 2003 compared to $795.3 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 09/30/03 As of 12/31/02
-------------------------- ----------------------------
Types of earning assets Amount Percent(%) Amount Percent(%)
----------- --------- ---------- ----------
Federal funds sold $ 24,500 2.41% $ 62,500 6.99%
Federal Home Loan Bank stock 5,790 0.57 3,538 0.40
Securities held-to-maturity 68,272 6.73 89,314 9.98
Securities available-for-sale 94,345 9.30 64,701 7.23
Net loans, including loans available for 821,464 80.95 674,258 75.38
sale
Interest-bearing due from banks 466 0.04 211 0.02
----------- ------ ---------- ------
Total earning assets $ 1,014,837 100.00% $ 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
Accumulated other comprehensive income (net of tax) at September 30, 2003 was
$53,421.
Total investment securities increased $8.6 million or 5.59% to $162.6
million at September 30, 2003 from $154.0 million at December 31, 2002. During
the third quarter of 2003, the Bank purchased available-for-sale securities in
the amount of $31.9 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 09/30/03 As of 12/31/02
------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 1,002 $ 1,043 $ 1,003 $ 1,074
U.S. Government agencies 39,730 39,826 25,996 26,290
Mortgage-backed securities (1) 50,509 50,469 34,000 34,730
State and political subdivision 3,018 3,007 2,507 2,607
--------- --------- --------- ---------
Total available-for-sale $ 94,259 $ 94,345 $ 63,506 $ 64,701
========= ========= ========= =========
HELD-TO-MATURITY:
Mortgage-backed securities (1) 68,272 68,323 89,314 90,799
--------- --------- --------- ---------
Total held-to-maturity 68,272 68,323 89,314 90,799
--------- --------- --------- ---------
Total investment securities $ 162,531 $ 162,668 $ 152,820 $ 155,500
========= ========= ========= =========
- -----------------
(1) Principal balance may be prepaid before contracted maturity date.
The following table summarizes the monthly and repricing schedule of
the Bank's investment securities at their carrying values and their average
weighted yield at September 30, 2003.
INVESTMENT MATURITIES AND REPRICING SCHEDULE
(Dollars in thousands)
As of September 30, 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 $ 1,043 5.82% $ % $ - -% $ - -% $ 1,043 5.82%
U.S. Government agencies 34,904 2.83 4,922 3.00 - - 39,826 2.85
Mortgage-backed securities(2) 14,596 3.24 5,673 6.07 14,887 3.86 15,313 4.34 50,469 4.07
State and political subdivisions - - 1,029 6.17 1,978 2.76 3,007 3.93
-------- ---- -------- ---- -------- ---- -------- ---- ------- ----
Total available-for-sale $ 15,639 3.41% $ 41,606 3.35% $ 21,787 3.56% $ 15,313 4.34% $ 94,345 3.57%
======== ==== ======== ==== ======== ==== ======== ==== ======= ====
HELD-TO-MATURITY:
Mortgage-backed securities(2) - - 58,652 4.10 - - 9,620 3.98 68,272 4.09
-------- ---- -------- ---- -------- ---- -------- ---- ------- ----
Total held-to-maturity - - 58,652 4.10 - - 9,620 3.98 68,272 4.09
-------- ---- -------- ---- -------- ---- -------- ---- ------- ----
Total investment securities $ 15,639 3.41% $100,258 3.79% $ 21,787 3.56% $ 24,933 4.20% 162,617 3.78%
======== ==== ======== ==== ======== ==== ======== ==== ======= ====
(5) Yield on tax-exempt obligations has not been computed on a tax equivalent
basis because the percentage of tax-exempt securities is minimal.
(6) The mortgage-backed securities reflect stated maturities and repricing
schedule and not anticipated prepayments.
LOANS
The Bank experienced strong loan growth in the first nine months of
2003. The Bank achieved record loan production of $327.3 million during the
first nine months of 2003 resulting in a $148.3 million increase in gross loans
to $831.5 million at September 30, 2003 from $683.1 million at December 31,
2002. Total commercial and industrial loans increased $23.4 million or 18.63% to
$148.7 million at September 30, 2003 from $125.4 million at December 31, 2002.
Commercial real estate loans increased $123.3 million or 31.16% and residential
mortgage loans decreased $30,000 or 0.08% during the first nine 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 09/30/03 As of 12/31/02
----------------------- -------------------------
Percent Percent
Amount of Total Amount of Total
--------- --------- --------- ---------
Commercial and industrial $ 148,719 17.89% $ 125,363 18.35%
Installment loans 21,300 2.56 21,225 3.11
Real estate loans:
Commercial 519,134 62.44 395,807 57.94
Residential mortgage 37,429 4.50 37,459 5.48
Home equity 5,983 0.72 5,993 0.88
SBA 78,261 9.41 74,560 10.91
Other (1) 3,269 0.39 3,619 0.53
Trade Finance 15,330 1.84 12,488 1.83
Bills Bought 2,037 0.24 6,617 0.97
--------- ------ --------- ------
Total gross loans (2) $ 831,462 100.00% $ 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
September 30, 2003 decreased $734,000 to $1.3 million, compared with December
31, 2002. Total non-performing assets were 0.16% of total assets at September
30, 2003, compared to 0.30 % of total assets at December 31, 2002.
As of September 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 773.76% as of September 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)
9/30/2003 12/31/2002 9/30/2002
--------- ---------- ---------
NON-ACCRUAL LOANS:
Commercial and industrial $ 1,013 $ 1,091 $ 1,342
Installment loans 15 28 30
Real estate loans:
Commercial - - 2,273
Home mortgage 99 805 861
SBA 81 - 230
Trade Finance - 74 58
------- ------- -------
Total $ 1,208 $ 1,998 $ 4,794
(Table continues on the following page.)
9/30/2003 12/31/2002 9/30/2002
--------- ---------- ---------
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
(AS TO PRINCIPAL OR INTEREST):
Installment loans - - 16
Other 84 28 -
------ ------ ------
Total $ 84 $ 28 $ 16
------ ------ ------
Total non-performing loans $1,292 $2,026 $4,810
Other real estate owned - - -
------ ------ ------
Total non-performing assets $1,292 $2,026 $4,810
====== ====== ======
Non-performing loans as a percentage of total gross loans 0.16% 0.30% 0.73%
Non-performing assets as a percentage of total gross loans
and other real estate owned 0.16% 0.30% 0.73%
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses amounted to $10.0 million or 1.20% of
total loans as of September 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
09/30/03 12/31/02 09/30/02
-------- -------- --------
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 8,873 $ 9,467 $ 9,467
Provision for loan losses 1,300 1,100 400
Loans charged-off (502) (1,805) (1,323)
Recoveries of charged-off loans 326 111 98
------- ------- --------
Balance at end of period $ 9,997 $ 8,873 $ 8,642
======= ======= ========
RATIOS:
Net loan charge-offs to average total loans 0.03% 0.28% 0.28%
Provision for loan losses to average total loans 0.23 0.18 0.09
Allowance for loan losses to gross loans at end of period 1.20 1.30 1.32
Allowance for loan losses to total non-performing loans 773.76 437.96 179.67
Net loan charge-offs to allowance for loan losses at end of
period 2.35 19.10 18.91
Net loan charge-offs to provision for loan losses 13.53 154.05 306.45
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 Bank'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 September 30, 2003 to be adequate to absorb the incurred losses
inherent in the loan portfolio. 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 $838.0 million at September 30,
2003, an increase of $78.0 million from $760.0 million at December 31, 2002. The
Bank's average deposits increased $118.1 million or 16.42% to $837 million for
the first nine months of 2003 from $719.3 million for the same period of 2002.
The average money market accounts increased $59.2 million or 53.12% to $170.5
million for the first nine months of 2003 from $111.4 million for the same
period of 2002. The average non-interest bearing deposits increased $26.3
million or 12.30% to $240.5 million for the first nine months of 2003 from
$214.1 million for the same period of 2002. The ratio of average
noninterest-bearing
deposits to average total deposits was 26.34% for the first nine months of 2003
and 28.89% for the same period of 2002. The Bank's average total cost of
deposits was 1.52% for the first nine months of 2003 and 1.73% 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 September 30, 2003 As of December 31, 2002
------------------------- -----------------------
Amount Percent Amount Percent
--------- ------- --------- -------
Types of deposits:
Demand, non-interest-bearing $ 242,528 28.94% $ 223,377 29.39%
Money market accounts 137,790 16.44 126,272 16.61
Super Now 8,607 1.03 7,602 1.00
Savings 46,158 5.51 44,215 5.82
Time certificates of deposits of
$100,000 or more 306,252 36.55 258,653 34.03
Other time deposits 96,632 11.53 99,877 13.15
--------- ------ --------- ------
Total deposits $ 837,967 100.00% $ 759,996 100.00%
========= ====== ========= ======
OTHER BORROWINGS
The Bank's borrowings from Federal Home Loan Bank amounted to $105.0
million at September 30, 2003 and $70.0 million at December 31, 2002.
CAPITAL RESOURCES
As of September 30, 2003, stockholders' equity was $108.2 million or
10.23% 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 September 30, 2003 and December 31, 2002, the
Bank's Total Risk-Based Capital Ratios were 14.71% and 15.95%, respectively, and
its Tier 1 Risk Based Capital Ratios were 13.46% and 14.70%, respectively. The
Bank's regulatory capital continued to well exceed the regulatory minimum
requirements on September 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 10.40%
and 11.56% at September 30, 2003 and December 31, 2002, respectively.
The following table presents the Bank's regulatory capital amount and
ratios as of September 30, 2003 and December 31, 2002.
AS OF SEPTEMBER 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) $ 118,106 14.71% $ 64,232 > or = 8.0% $ 80,290 > or = 10.0%
Tier I capital (to risk-
weighted assets) 108,109 13.46 32,127 > or = 4.0 48,191 > or = 6.0
Tier I capital (to average
assets) 108,109 10.40 41,580 > or = 4.0 51,975 > 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
$131.6 million of borrowing capacity under a collateralized line of credit with
the Federal Home Loan Bank of San Francisco.
At September 30, 2003, the Bank's available liquidity totaled $277.5
million, which was approximately 33.11% of total deposits and 89.92% 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
September 30, 2003 and December 31, 2002 were 32.06% and 33.99%, respectively.
The Bank had a significant portion of its time deposits maturing within
one year or less as of September 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 September 30, 2003, the Bank
maintained positive one-year gap position of $57.0 million or 5.4% 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 September
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 September 30, 2003
---------------------
Amounts Subject to Repricing Within
-----------------------------------
3-12 After 5
0-3 Months Months 1-5 Years Years Total
---------- --------- --------- -------- -----------
INTEREST-EARNING ASSETS:
Total Loans* $ 691,166 $ 5,894 $ 55,073 $ 79,689 $ 831,822
Federal Home Loan Bank Stock 5,790 -- -- -- 5,790
Investment securities 11,930 3,709 100,258 46,720 162,617
Federal Funds sold 24,500 -- -- -- 24,500
Interest-earning deposits 466 -- -- -- 466
---------- --------- --------- -------- -----------
Total 733,852 9,603 155,331 126,409 1,025,195
INTEREST-BEARING LIABILITIES:
Money market 137,790 -- -- -- 137,790
NOW 8,607 -- -- -- 8,607
Savings deposits 46,158 -- -- -- 46,158
Time deposits of $100,000 or more 128,806 172,699 4,747 -- 306,252
Other Time deposits 38,879 48,549 9,204 -- 96,632
Borrowed funds 70,000 35,000 -- -- 105,000
---------- --------- --------- -------- -----------
Total $ 430,240 $ 256,248 $ 13,951 $ -- $ 700,439
========== ========= ========= ======== ===========
Interest rate sensitivity gap $ 303,612 $(246,645) $141,380 $126,409 $ 324,756
Cumulative interest rate sensitivity gap $ 303,612 $ 56,967 $198,347 $324,756
Cumulative interest rate sensitivity gap
ratio as a percentage of total assets 28.70% 5.39% 18,75% 30.70%
*Loans including loans held- for-sale, 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 September 30, 2003.
% CHANGE IN
-----------
CHANGE NET INTEREST INCOME % CHANGE IN
------ ------------------- -----------
(IN BASIS POINTS) (NEXT TWELVE MONTHS) NPV
- ----------------- -------------------- ---
+200 10.99% 8.07%
+100 5.37 3.81
0 - -
-100 -8.34 -1.23
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 September 30, 2003 the Bank had no derivative
instruments outstanding.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer directly
supervised and participated in evaluating the effectiveness of the design and
operation of our disclosure controls and procedures as of September 30, 2003 and
concluded that these controls and procedures are effective. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
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 our
financial reporting during the quarter ended September 30, 2003 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
Not Applicable
ITEM 5. OTHER INFORMATION
Korea Exchange Bank ("KEB"), which holds approximately 62% of the
Bank's outstanding shares, recently accepted a capital infusion from Lone Star
Fund IV (U.S.), L.P. and its affiliates (collectively, "Lone Star"), which
resulted in Lone Star holding a majority of the outstanding voting stock of KEB.
In connection with the infusion, KEB transferred all of the Bank shares that it
owns to a trust pursuant to a trust agreement dated October 31, 2003, which was
entered into between KEB, as grantor and Mr. L. Dale Crandall, as trustee. While
KEB retains all of the economic interest in the Bank shares transferred to the
trust, the trust agreement gives the trustee voting and dispositive power over
the Bank shares and directs the trustee to dispose of all or substantially all
of such interest either directly through a sale or in connection with a merger
or similar transaction of the Bank with a third party. The transfer of the
shares to the trustee does not affect the Bank's day-to-day business and
operations.
The Board of Directors of the Bank has appointed a Special Committee
comprised of its independent, outside directors who are not affiliated with KEB
to evaluate any potential transaction that may involve the Bank. The Special
Committee will participate with the trustee in evaluating possible alternatives
and transactions. The Special Committee has engaged Friedman, Billings, Ramsey &
Co., Inc. as its financial advisor and Manatt, Phelps & Phillips, LLP as legal
counsel. There can be no assurance that any disposition by the trustee of the
Bank shares will involve a merger or similar transaction of the Bank.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(c) Exhibit
Exhibit Table
Reference Number Item
- ---------------- ----
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 Downtown Branch Office(1)............................
10.6 Lease for Van Nuys Branch Office(1)............................
10.7 Lease for Torrance Branch Office(1)............................
10.8 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
- -----------------
(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.
On August 27, 2003, the Bank filed a report on Form 8-K with respect to
the issuance of a press release by Korea Exchange Bank, which holds
approximately 62% of the Bank's outstanding shares ("KEB"), with respect to an
agreement entered into between KEB and Lone Star under which Lone Star would
acquire 51% of the issued and outstanding shares of KEB from KEB and two of its
largest shareholders.
On September 16, 2003, the Bank filed a report on Form 8-K with respect
to a special shareholders meeting of KEB at which KEB obtained shareholders
approval of the agreement between KEB and Lone Star.
On November 3, 2003, the Bank filed a report on Form 8-K reporting that
Lone Star had acquired the majority of the shares of KEB.
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: November 13, 2003 By: /s/ Dianne Kim
----------------------------------------------------
Dianne Kim
Senior Vice President and Chief Financial
Officer
(Principal financial or accounting officer and
duly authorized signatory)