Loan servicing
for the three months ended September 30, 2007 was $51,000, representing an
increase of $7,000 over the same period the prior year. This increase is
primarily the result of a increase in the number of loans that the Bank is
servicing. Loan servicing for the nine months ended September 30, 2007 was
$127,000, representing an increase of $18,000 over the same period the prior
year. This increase is primarily the result of an increase in the amount of
loans that the Bank is servicing.
Advisory
Services fee income increased $32,000, or 26.0% from the three month period
ended September 30, 2007 as compared to the three month period ended September
30, 2006. This increase is primarily attributable to the growth provided by EWM
in wealth management services inclusive of investment management and financial
planning to high-net worth individuals, families and institutions. Advisory
Services fee income increased $65,000, or 17.4% from the nine month period
ended September 30, 2007 as compared to the nine month period ended September
30, 2006. These increases are primarily attributable to the growth of EWM
providing wealth management services inclusive of investment management and
financial planning to high-net worth individuals, families and institutions.
As of
September 30, 2007, EWM had approximately $272 million in assets under
management of which $54 million represents the Bank’s investment portfolio. The
Company anticipates that EWM will grow in 2007; however, due to the
uncertainties involved in staffing, marketing, and growing the client base of
the new subsidiary, the Company makes no assurance that EWM will generate
significant revenue in 2007 or that it will be profitable on a stand-alone
basis.
EWM has
required capital infusions from the Company. For the three and nine months
ended September 30, 2007, capital infusions totaled $0 and $115,000,
respectively, versus $185,000 and $436,000 of capital infusions for the same
period prior year.
Other income
increased $156,000, or 87.2% and $335,000, or 71.9% for the three and nine
month period ended September 30, 2007, respectively, as compared to the same
period prior year. The increase for the third quarter 2007 as compared to the
same quarter prior period is primarily attributable to the Bank obtaining a
BOLI policy in April 2007 which attributed $137,000 to other income. NSF fees
increased $24,000 as a result of managements’ efforts to appropriately apply
service charge on checks drawn against insufficient funds and miscellaneous
income increased $19,000 partially offset by a decrease in miscellaneous fee
income of $14,000.
The increase
in other income for the first nine months of 2007 as compared to the same
period prior year was primarily attributable to BOLI income and NSF fees of
$250,000 and $75,000, respectively, as described above in the third quarter
2007 change as compared to third quarter 2006. Miscellaneous income increased
$63,000 which was partially offset by a decrease in miscellaneous fee income of
$27,000.
Non-interest Expense
The Company’s
non-interest expense for the three and nine month period ended September 30,
2007 was $3,552,000 and $10,098,000, respectively, representing an increase of
$258,000, or 7.8% and $180,000, or 1.8%, respectively, as compared with the same period in
2006. Non-interest expense consists of Salaries and benefits, Occupancy,
Advertising, Professional, Data processing, Equipment and depreciation and
Other administrative expenses.
Salaries and
benefits is the largest component of non-interest expense. For the three and
nine months ended September 30, 2007, salaries and benefits decreased by
$90,000, or 4.7% and $523,000, or 8.6%, respectively, primarily due to the
timing of when full time equivalent (“FTE”) employees were hired during the
respective periods as compared to the same periods prior year. The number of
FTE employees decreased to 73 as of September 30, 2007, down from 74 at September
30, 2006. Partially offsetting these decreases, the Company had regular salary
adjustments and higher medical benefits and workers’ compensation costs for the
three and nine months ended September 30, 2007 versus the same periods prior
year.
For the three
and nine month period ended September 30, 2007, the increase of $22,000, or
6.1% and $43,000, or 4.1%, respectively in occupancy costs is largely due to
the Company occupying new leased spaces which includes the addition of the
Bank’s Tiburon/Belvedere branch which opened in September 2006. Additionally,
there were annual rent increases in the branch and administrative facilities.
Advertising
costs increased $11,000 and $14,000, respectively, for the three and nine month
period ended September 30, 2007 as compared to the three and nine months ended
September, 30 2006 as a result of new marketing initiatives in 2007.
Professional
services decreased $42,000, or 34.2% and increased $60,000, or 20.5%,
respectively in the three and nine month period ended September 30, 2007 as
compared with the same period prior year. The decrease for the three months was
attributable to lower outside consulting fees as compared to the same period
prior year and the increase for the nine months ended September 30 was primarily
attributable to higher outside consulting fees as compared to the same period
prior year.
22
Data
processing expenses for the three and nine months ended September 30, 2007 were
$146,000 and $351,000, respectively, an increase over the same periods in 2006
of $42,000, or 40.5% and $50,000, or 16.8%, respectively. The increases are
largely attributable to additional data processing expenses as a result of the
growth of the Company.
For the three
and nine months ending September 30, 2007, an increase of $32,000, or 14.7% and
$65,000, or 10.7%, respectively in depreciation and amortization expense is
primarily attributable to new purchases and leasehold improvements of the
Company.
Other
administrative expenses of $761,000 and $1,750,000, respectively for the three
and nine months ending September 30, 2007 represents a $282,000, or 58.9% and
$471,000, or 36.8% increase over the same periods in 2006. For the three months
ended September 30, 2007 as compared to the same period prior year, the
increase in other expenses was primarily due to a nonrecurring expense of
$200,000 for the expensing of unamortized placement fees on the $10 million for
the trust preferred securities whose payoff was accrued as of September 30,
2007. Document preparations, ATM/debit card expense, amortization expense of
the investments made in a Affordable Housing Project, and loan loss reserve for
off balance sheet commitments increased which was partially offset by item
processing decrease for the third quarter 2007 as compared to the same period
prior year.
The change in
the first nine months of 2007 in other administrative expenses as compared to
the same period a year ago is due primarily due to the nonrecurring expense of
$200,000 as described above as well as increases in document preparation
expenses, ATM/debit card expenses, amortization expense of Affordable Housing
Project, and loan loss reserve for off balance sheet commitments partially
offset by a decrease in office supplies and branch supplies for the first nine
months of 2007 as compared to the same period prior year.
The Bank’s
efficiency ratio (the ratio of non-interest expense divided by the sum of
non-interest income and net interest income) was 69.3% and 67.9% for the three
and nine months ending September 30, 2007 as compared to 66.7% and 66.5% for
the same period prior year.
The following
table sets forth information regarding the non-interest expenses for the
periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
Increase/
(decrease)
amount
|
|
Increase/
(decrease)
percent
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Salaries and
benefits
|
|
$
|
5,568
|
|
$
|
6,091
|
|
$
|
(523
|
)
|
|
-8.6
|
%
|
|
Occupancy
|
|
|
1,101
|
|
|
1,058
|
|
|
43
|
|
|
4.1
|
%
|
|
Advertising
|
|
|
306
|
|
|
292
|
|
|
14
|
|
|
4.8
|
%
|
|
Professional
|
|
|
353
|
|
|
293
|
|
|
60
|
|
|
20.5
|
%
|
|
Data
processing
|
|
|
351
|
|
|
300
|
|
|
51
|
|
|
17.0
|
%
|
|
Equipment
and depreciation
|
|
|
669
|
|
|
605
|
|
|
64
|
|
|
10.6
|
%
|
|
Other
administrative
|
|
|
1,750
|
|
|
1,279
|
|
|
471
|
|
|
36.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,098
|
|
$
|
9,918
|
|
$
|
180
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
Income tax
provision for the three and nine month period ended September 30, 2007 amounted
to $469,000 and $1,664,000, respectively, which represents decreases of
$190,000, or 28.9% and $74,000, or 4.3%, respectively, over the amounts incurred
for the same periods in 2006, producing effective tax rates of 32.3% and 35.2%,
respectively. These provisions reflect accruals for taxes at the applicable
rates for Federal income and California franchise taxes based upon reported
pre-tax income and adjusted for the effects of all permanent differences
between income for tax and financial reporting purposes. The Company’s tax rate
reduction was primarily attributable to the Company obtaining a BOLI policy in
April 2007 (the income from BOLI is tax-free), earnings on
qualified municipal securities which were tax-free and Community
Reinvestment Act (“CRA”) investment credits. There are normal
fluctuations in the effective rate from quarter to quarter based on the relationship
of net permanent differences to income before tax.
23
FINANCIAL CONDITION
Loans
Loans, net,
increased by $23,561,000, or 5.6% as of September 30, 2007 as compared to
December 31, 2006. During the last three years, the Company has emphasized the
growth of its commercial loan portfolio and has augmented its traditional
commercial and multifamily loans and services with small business lending. The
Bank seeks to maintain a loan portfolio that is well balanced in terms of
borrowers, collateral, geographies, industries and maturities.
The following
table sets forth components of total net loans outstanding in each category at
the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
2007
|
|
At September 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
AMOUNT
|
|
%
|
|
AMOUNT
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
23,339
|
|
|
5.2
|
%
|
$
|
18,143
|
|
|
4.3
|
%
|
|
Multifamily residential
|
|
|
115,536
|
|
|
25.7
|
%
|
|
121,080
|
|
|
28.6
|
%
|
|
Commercial real estate
|
|
|
248,599
|
|
|
55.3
|
%
|
|
210,769
|
|
|
49.9
|
%
|
|
Land
|
|
|
7,664
|
|
|
1.7
|
%
|
|
7,299
|
|
|
1.7
|
%
|
|
Construction real estate
|
|
|
27,021
|
|
|
6.0
|
%
|
|
32,723
|
|
|
7.7
|
%
|
|
Consumer loans
|
|
|
5,707
|
|
|
1.3
|
%
|
|
2,978
|
|
|
0.7
|
%
|
|
Commercial, non real estate
|
|
|
20,313
|
|
|
4.5
|
%
|
|
28,229
|
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans
|
|
|
448,179
|
|
|
99.7
|
%
|
|
421,221
|
|
|
99.7
|
%
|
|
Net deferred loan costs
|
|
|
1,427
|
|
|
0.3
|
%
|
|
1,457
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable, net of deferred
loan costs
|
|
$
|
449,606
|
|
|
100.0
|
%
|
$
|
422,678
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
construction loans are primarily interim loans to finance the construction of
commercial and single family residential property. These loans are typically
short-term. Other real estate loans consist primarily of loans made based on
the property and/or the borrower’s individual and business cash flows and which
are secured by deeds of trust on commercial and residential property to provide
another source of repayment in the event of default. Maturities on real estate
loans other than construction loans are generally restricted to fifteen years
(on an amortization of thirty years with a balloon payment due in fifteen
years). Any loans extended for greater than five years generally have
re-pricing provisions that adjust the interest rate to market rates at times
prior to maturity.
Commercial and
industrial loans and lines of credit are made for the purpose of providing
working capital, covering fluctuations in cash flows, financing the purchase of
equipment, or for other business purposes. Such loans and lines of credit
include loans with maturities ranging from one to five years.
Consumer loans
and lines of credit are made for the purpose of financing various types of consumer goods
and other personal purposes. Consumer loans and lines of credits generally
provide for the monthly payment of principal and interest or interest only
payments with periodic principal payments.
Outstanding
loan commitments at September 30, 2007 and December 31, 2006 primarily
consisted of un-disbursed construction loans, lines of credit and commitments
to originate commercial real estate and multifamily loans. Based upon past
experience, the outstanding loan commitments are expected to grow throughout
the year as loan demand continues to increase, subject to economic conditions.
The Bank does not have any concentrations in the loan portfolio by industry or
group of industries; however as of September 30, 2007 and December 31, 2006,
approximately 91.2% and 93.6%, respectively, of the loans were secured by real
estate. The Bank has pursued a strategy emphasizing small business lending and commercial
real estate loans and seeks real estate collateral when possible.
24
During the
second quarter of 2006, the Company purchased $16.6 million of participated
construction loans. These loans consisted of 23 participated construction loans
purchased with balances ranging from $382,000 to $1,392,000. All of the loans
are residential spec construction loans, and the majority of the loans are
located in the Southern California beach communities of Manhattan Beach,
Hermosa Beach, and Redondo Beach. The loan participations were purchased with
original terms of twelve to eighteen months. The loans have floating interest
rates equal to the Prime rate. As of September 30, 2007, the remaining balance
of the participated loans was $1.7 million.
As of
September 30, 2007, the loan portfolio was primarily comprised of floating and
adjustable interest rate loans. The following table sets forth the repricing
percentages of the adjustable rate loans as of September 30, 2007 and December
31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
Reprice
within one year
|
|
|
44.8
|
%
|
|
56.4
|
%
|
|
Reprice
within one to two years
|
|
|
9.0
|
%
|
|
7.8
|
%
|
|
Reprice
within two to three years
|
|
|
9.2
|
%
|
|
5.0
|
%
|
|
Reprice
within three to four years
|
|
|
11.6
|
%
|
|
10.5
|
%
|
|
Reprice
within four to five years
|
|
|
14.8
|
%
|
|
10.1
|
%
|
|
Reprice
after five years
|
|
|
10.6
|
%
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
The following
table sets forth the maturity distribution of net of deferred loan costs as of
September 30, 2007 which includes net deferred loan costs. At those dates, the
Company had no loans with maturity greater than thirty years. In addition, the
table shows the distribution of such loans between those loans with
predetermined (fixed) interest rates and those with adjustable (floating)
interest rates. Adjustable interest rates generally fluctuate with changes in
the various pricing indices, primarily the six-month constant maturity treasury
index, six month LIBOR, and Prime Rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing
Within
One Year
|
|
Maturing
One to
Five Years
|
|
Maturing
After
Five Years
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$
|
10,472
|
|
$
|
11,948
|
|
$
|
919
|
|
$
|
23,339
|
|
|
Multifamily
residential
|
|
|
47,330
|
|
|
56,450
|
|
|
11,756
|
|
|
115,536
|
|
|
Commercial
real estate
|
|
|
82,981
|
|
|
129,642
|
|
|
35,976
|
|
|
248,599
|
|
|
Land
|
|
|
5,424
|
|
|
2,240
|
|
|
—
|
|
|
7,664
|
|
|
Construction
real estate
|
|
|
27,021
|
|
|
—
|
|
|
—
|
|
|
27,021
|
|
|
Consumer
loans
|
|
|
5,707
|
|
|
—
|
|
|
—
|
|
|
5,707
|
|
|
Commercial,
non real estate
|
|
|
18,144
|
|
|
2,145
|
|
|
24
|
|
|
20,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
197,079
|
|
$
|
202,425
|
|
$
|
48,675
|
|
$
|
448,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with
predetermined interest rates
|
|
|
—
|
|
|
1,430
|
|
|
146
|
|
|
1,576
|
|
|
Loans with
floating or adjustable interest rates
|
|
|
197,079
|
|
|
200,995
|
|
|
48,529
|
|
|
446,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
197,079
|
|
$
|
202,425
|
|
$
|
48,675
|
|
$
|
448,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming Assets
The Company’s
policy is to place loans on non-accrual status when, for any reason, principal
or interest is past due for ninety days or more unless they are both well
secured and in the process of collection. Any interest accrued, but unpaid, is
reversed against current income. Interest received on non-accrual loans is
credited to income only upon receipt and in certain circumstances may be
applied to principal until the loan has been repaid in full, at which time the
interest received is credited to income. When appropriate or necessary to
protect the Company’s interests, real estate taken as collateral on a loan may
be taken by the Company through foreclosure or a deed in lieu of foreclosure.
Real property acquired in this manner is known as other real estate owned, or
OREO. OREO would be carried on the books as an asset, at the lesser of the
recorded investment
25
or the fair
value less estimated costs to sell. OREO represents an additional category of
“nonperforming assets.” For the period commencing January 1, 1998 through
September 30, 2007, the Company has not had any OREO.
The following table provides information with respect to the components of the nonperforming assets
at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Non-accrual
loans
|
|
$
|
—
|
|
$
|
—
|
|
|
Other real
estate owned
|
|
|
—
|
|
|
—
|
|
|
Restructured
Loans
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets as a percent of total loans
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
Nonperforming
assets as a percent of total assets
|
|
|
0.00
|
%
|
|
0.00
|
%
|
As of
September 30, 2007, there were no loans on non-accrual status. There was one
loan totaling $2,110,000 that has a higher than normal risk of loss and has
been classified as substandard. The substandard loan that is still performing
is a $2,110,000 multifamily loan located in the Bank’s primary market area. In
addition, approximately $1,847,000 in three commercial real estate loans and
one $738,000 multi-family loan has been placed on the internal “watch list” for
special mention and loss potential and are being closely monitored.
The following
table provides information with respect to delinquent but still accruing loans
at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Loans
delinquent 60-89 days and accruing
|
|
$
|
1,760
|
|
$
|
1,936
|
|
|
Loans
delinquent 90 days or more and accruing
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total performing delinquent loans
|
|
$
|
1,760
|
|
$
|
1,936
|
|
|
|
|
|
|
|
|
|
|
Allowance and Provisions for Loan Losses
The Bank
maintains an allowance for loan losses to provide for potential losses in the
loan portfolio. Additions to the allowance are made by charges to operating
expenses in the form of a provision for loan losses. All loans that are judged
to be uncollectible are charged against the allowance while any recoveries are
credited to the allowance. Management has instituted loan policies, designed
primarily for internal use, to adequately evaluate and assess the analysis of
risk factors associated with its loan portfolio and to enable management to
assess such risk factors prior to granting new loans and to assess the
sufficiency of the allowance. Management conducts a critical evaluation of the
loan portfolio quarterly. This evaluation includes an assessment of the
following factors: the results of the internal loan review, any external loan
review and any regulatory examination, loan loss experience, estimated
potential loss exposure on each credit, concentrations of credit, value of
collateral, and any known impairment in the borrower’s ability to repay and
present economic conditions.
Each month the
Bank also reviews the allowance and makes additional transfers to the allowance
as needed. For the three month period ended September 30, 2007, the provision
for loan losses was $116,000 as compared to a recovery in the provision of
$(69,000) for the same period in 2006. This represents an increase of $185,000,
or 269.2% from 2006 to 2007. For the nine month period ended September 30,
2007, the provision for loan losses was $40,000 as compared to a provision of
$401,000 for the same period in 2006. This represents a decrease of $361,000
from 2006 to 2007. The decrease in the provision was necessitated by a
continued strong asset quality as calculated through our internal loan grading
system. Charge-offs of loans totaled $1,000 and $0 for the three and nine
months ended September 30, 2007 and 2006, respectively, and there were there no
recoveries on previously charged-off loans for the three and nine months ended
September 30, 2007 and 2006.
As of
September 30, 2007 and December 31, 2006, the allowance for loan losses was
1.05% and 1.10% of loans outstanding, respectively. There were no nonperforming
loans as of September 30, 2007, and the ratio of the allowance for loan losses
to nonperforming loans was 0% at September 30, 2007 and December 31, 2006.
Although the Company deems these levels adequate, no assurance can be given
that further economic difficulties or other circumstances which would adversely
affect the borrowers and their ability to repay outstanding loans will not
occur. These losses would be reflected in increased losses in the loan
portfolio, which losses could possibly exceed the amount then reserved for loan
losses.
26
The following
table summarizes the loan loss experience, transactions in the allowance for
loan losses and certain pertinent ratios for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
months ended
September 30, 2007
|
|
For the twelve
months ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
Net Loans Outstanding, Period End
|
|
$
|
444,896
|
|
$
|
421,335
|
|
|
Average amount of loans outstanding
|
|
|
433,900
|
|
|
415,368
|
|
|
Period end non-performing loans outstanding
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Loans Loss Reserve Balance, Beginning of Period
|
|
$
|
4,671
|
|
$
|
4,232
|
|
|
Charge-offs
|
|
|
(1
|
)
|
|
—
|
|
|
Recoveries
|
|
|
—
|
|
|
—
|
|
|
Additions/(Reductions) charged to
operations
|
|
|
41
|
|
|
439
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Loss, End of Period
|
|
$
|
4,711
|
|
$
|
4,671
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Net Charge-offs/(Recoveries) During the
Period to Average Loans Outstanding During the Period
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Ratio of Allowance for Loan Losses to Loans at Period
End
|
|
|
1.05
|
%
|
|
1.10
|
%
|
|
|
|
|
|
|
|
|
|
Investments
In order to
maintain a reserve of readily saleable assets to meet its liquidity and loan
requirements, the Company purchases mortgage-backed securities and other
investments. Sales of “Federal Funds,” short-term loans to other banks, are
regularly utilized. Placement of funds in certificates of deposit with other
financial institutions may be made as alternative investments pending
utilization of funds for loans or other purposes. Securities may be pledged to
meet security requirements imposed as a condition to secure Federal Home Loan
Bank advances, the receipt of public fund deposits and for other purposes. As
of September 30, 2007 and December 31, 2006, the carrying values of securities
pledged were $54,177,000 and $48,339,000, respectively, representing the entire
investment securities portfolio. Not all of the securities pledged as
collateral were required to securitize existing borrowings. The Company’s
policy is to stagger the maturities and to utilize the cash flow of the
investments to meet overall liquidity requirements.
As of
September 30, 2007, the investment portfolio consisted of agency mortgage-backed
securities, U.S. agency securities, municipal securities and agency collateralized
mortgage obligations. As of December 31, 2006, the investment portfolio
consisted of agency mortgage-backed securities, U.S. agency securities and
agency collateralized mortgage obligations. The Company also owned $5,565,000 and
$5,892,000 in Federal Home Loan Bank stock and $50,000 of Pacific Coast
Banker’s Bank stock as of September 30, 2007 and December 31, 2006,
respectively. Interest-bearing time deposits in other financial institutions
amounted to $619,000 and $987,000 as of September 30, 2007 and December 31,
2006, respectively.
At September
30, 2007, $15,630,000 of the securities were classified as held-to-maturity and
$38,547,000 of the securities were classified as available-for-sale. At
December 31, 2006, $21,823,000, of the securities were classified as
held-to-maturity and $26,516,000 of the securities were classified as available-for-sale.
The Federal Home Loan Bank stock and the Pacific Coast Banker’s Bank stock are
not classified since they have no stated maturities. Available-for-sale
securities are bonds, notes, debentures, and certain equity securities that are
not classified as trading securities or as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of capital
until realized. Gains and losses on the sale of available-for-sale securities
are determined using the specific identification method. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity. Held-to-maturity securities consist of bonds, notes and debentures
for which the Company has the positive intent and the ability to hold to
maturity and are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity.
The following
tables summarize the amounts and distribution of the investment securities,
held as of the dates indicated, and the weighted average yields:
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
14,102
|
|
$
|
53
|
|
$
|
(143
|
)
|
|
14,012
|
|
|
U.S. Agency Securities
|
|
|
7,495
|
|
|
56
|
|
|
—
|
|
|
7,551
|
|
|
Muni Securities
|
|
|
4,805
|
|
|
55
|
|
|
—
|
|
|
4,860
|
|
|
Collateralized Mortgage Obligation
|
|
|
12,058
|
|
|
66
|
|
|
—
|
|
|
12,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-sale
|
|
$
|
38,460
|
|
$
|
230
|
|
$
|
(143
|
)
|
$
|
38,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
15,630
|
|
$
|
—
|
|
$
|
(231
|
)
|
$
|
15,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
13,202
|
|
$
|
27
|
|
$
|
(239
|
)
|
$
|
12,990
|
|
|
U.S. Agency Securities
|
|
|
5,858
|
|
|
6
|
|
|
—
|
|
|
5,864
|
|
|
Collateralized Mortgage Obligation
|
|
|
7,660
|
|
|
10
|
|
|
(8
|
)
|
|
7,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-sale
|
|
$
|
26,720
|
|
$
|
43
|
|
$
|
(247
|
)
|
$
|
26,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
21,823
|
|
$
|
—
|
|
$
|
(389
|
)
|
$
|
21,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
2007
|
|
As of December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
Yield
|
|
Balance
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
(Dollars in Thousands)
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
14,012
|
|
|
4.90
|
%
|
$
|
12,990
|
|
|
4.01
|
%
|
|
U.S. Agency Securities
|
|
|
7,551
|
|
|
5.39
|
%
|
|
5,864
|
|
|
5.20
|
%
|
|
Muni Securities
|
|
|
4,860
|
|
|
3.96
|
%
|
|
—
|
|
|
—
|
|
|
Collateralized Mortgage Obligation
|
|
|
12,124
|
|
|
5.58
|
%
|
|
7,662
|
|
|
5.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,547
|
|
|
5.09
|
%
|
$
|
26,516
|
|
|
3.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
15,630
|
|
|
4.28
|
%
|
$
|
21,823
|
|
|
4.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
Deposits are the Bank’s primary
source of funding. The deposits are obtained primarily from the retail branch
network in Marin County. The Company obtained wholesale deposits through one of
two deposit brokers and through non-brokered wholesale sources. These deposits,
some of which were certificates of deposit of $100,000 or more, were obtained
for generally longer terms than can be acquired through retail sources as a
means to control interest rate risk or were acquired to fund short term
differences between loan and deposit growth rates. However, based on the amount
of wholesale funds maturing in each month, the Company may not be able to
replace all wholesale deposits with retail deposits upon maturity. To the
extent that the Company needs to renew maturing wholesale deposits at then
current interest rates, the Company incurs the risk of paying higher interest
rates for these potentially volatile sources of funds.
28
In 2004, the
Bank established a relationship with Reserve Funds, an institutional money
manager that offers a money market savings based sweep product to community
banks. Under this program, end investors use the Reserve Funds as a conduit to
invest money market savings deposits in a consortium of community banks. The
end investors receive a rate of interest that is generally higher than
alternative money market funds, the community banks receive large money market
savings balances, and the Reserve Funds receives a fee by acting as the
conduit. The Bank began accepting deposits from this program in November 2004.
As of September 30, 2007 Reserve Fund deposits were $15,843,000 as compared to
deposit balance of $15,400,000 as of December 31, 2006. The Bank pays an
interest rate equivalent to the Federal Funds rate plus 40 basis points. As of
September 30, 2007 the rate was 5.45% as compared to a rate of 5.64% as of
December 31, 2006.
On August 2,
2007, the Bank renewed a $15.0 million time deposit from the State of
California through the State Treasurer. The time deposit bears interest at the
rate of 5.00% and matures on November 1, 2007. On September 4, 2007 the Bank
renewed a $5.0 million time deposit from the State of California through the
State Treasurer. The time deposit bears interest at the rate of 4.62% and
matures on February 27, 2008. Assets pledged as collateral to the State
consists of $23.9 million of the investment portfolio as of September 30, 2007.
In an effort
to expand the Company’s market share, the Company is continuing a business plan
to develop the retail presence in Marin County through an expanding network of
full service branches. The Company operated three branches during the first
quarter of 2004, opened two new branches in the second quarter of 2004, one new
branch in third quarter 2005, and one new branch in third quarter 2006.
The following
table summarizes the distribution of deposits and the period ending rates paid
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
Deposit
Mix
|
|
Weighted
Average
Rate
|
|
Balance
|
|
Deposit
Mix
|
|
Weighted
Average
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
23,762
|
|
|
6.4
|
%
|
|
0.00
|
%
|
$
|
18,135
|
|
|
4.9
|
%
|
|
0.00
|
%
|
|
Interest-bearing checking deposits
|
|
|
6,838
|
|
|
1.9
|
%
|
|
0.57
|
%
|
|
8,433
|
|
|
2.3
|
%
|
|
0.61
|
%
|
|
Money Market and savings deposits
|
|
|
154,046
|
|
|
41.7
|
%
|
|
3.73
|
%
|
|
150,012
|
|
|
40.6
|
%
|
|
4.48
|
%
|
|
Certificates of deposit over $100,000
|
|
|
114,532
|
|
|
31.0
|
%
|
|
5.02
|
%
|
|
129,011
|
|
|
34.9
|
%
|
|
5.14
|
%
|
|
Certificates of deposit less $100,000
|
|
|
70,426
|
|
|
19.1
|
%
|
|
4.88
|
%
|
|
64,214
|
|
|
17.4
|
%
|
|
4.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
369,604
|
|
|
100.0
|
%
|
|
4.05
|
%
|
$
|
369,805
|
|
|
100.0
|
%
|
|
4.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following
table summarizes the distribution and original source of certificates of
deposit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
Deposit
Mix
|
|
Weighted
Average
Rate
|
|
Balance
|
|
Deposit
Mix
|
|
Weighted
Average
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
Retail certificates of deposit
|
|
$
|
117,911
|
|
|
63.8
|
%
|
|
4.95
|
%
|
$
|
151,692
|
|
|
78.5
|
%
|
|
5.11
|
%
|
|
Brokered certificates of deposit
|
|
|
20,554
|
|
|
11.1
|
%
|
|
4.97
|
%
|
|
13,124
|
|
|
6.8
|
%
|
|
4.72
|
%
|
|
Non-brokered wholesale certificates of deposit
|
|
|
46,493
|
|
|
25.1
|
%
|
|
4.99
|
%
|
|
28,409
|
|
|
14.7
|
%
|
|
5.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
184,958
|
|
|
100.0
|
%
|
|
4.96
|
%
|
$
|
193,225
|
|
|
100.0
|
%
|
|
5.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
The following schedule
shows the maturity of the time deposits as of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$100,000 or more
|
|
Less than $100,000
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Three months or less
|
|
$
|
51,168
|
|
|
5.08
|
%
|
$
|
20,881
|
|
|
4.90
|
%
|
|
Over 3 through 6 months
|
|
|
28,424
|
|
|
4.95
|
%
|
|
15,487
|
|
|
4.87
|
%
|
|
Over 6 through 12 months
|
|
|
32,428
|
|
|
4.97
|
%
|
|
24,509
|
|
|
4.89
|
%
|
|
Over 12 months through 2 years
|
|
|
936
|
|
|
4.79
|
%
|
|
3,455
|
|
|
4.86
|
%
|
|
Over 2 through 3 years
|
|
|
731
|
|
|
4.71
|
%
|
|
2,118
|
|
|
4.78
|
%
|
|
Over 3 through 4 years
|
|
|
697
|
|
|
5.50
|
%
|
|
2,674
|
|
|
4.79
|
%
|
|
Over 4 through 5 years
|
|
|
148
|
|
|
5.21
|
%
|
|
1,302
|
|
|
4.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
114,532
|
|
|
5.01
|
%
|
$
|
70,426
|
|
|
4.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowed Funds
In response to
the current market’s strong competition for deposit accounts, the Company has
supplemented its funding base by increasing FHLB borrowings. The borrowings
obtained in 2007 have generally been at lower rates than alternative retail
certificate of deposits. The average term of FHLB borrowings has also been
extended as a means to control interest rate risk.
The Company
has secured advances from the Federal Home Loan Bank at September 30, 2007 and
December 31, 2006 amounting to $113.4 million and $86.3 million, respectively,
a 31.5% increase. The increase in FHLB borrowings was primarily due to funding the temporary differences of funds generated
from retail deposits versus the rate of growth of the loan portfolio. As of September 30, 2007, unused
borrowing capacity at the FHLB was $101.3 million. Assets pledged as collateral
to the FHLB consisted of $190.3 million of the loan portfolio and $24.4 million
of the investment securities portfolio as of September 30, 2007. Assets pledged
as collateral to the FHLB consisted of $188.3 million of the loan portfolio and
$25.0 million of the investment securities portfolio as of December 31, 2006.
The advances have been outstanding at varying levels during the three months
ended September 30, 2007. Total interest expense on FHLB borrowings for the
three and nine month period ended September 30, 2007 was $1,216,000 and
$3,073,000, respectively, representing a $200,000 and $288,000 increase from
the same period prior year.
The Company
will utilize FHLB borrowings to accommodate temporary differences in the rate
of growth of the loan and deposit portfolios and to minimize interest rate
risk. Over time the Company expects that funds provided by retail deposits
obtained through the increasing branch network will be utilized to decrease
FHLB borrowings during periods when the growth in deposits exceeds the growth
in loans.
Included in
the FHLB borrowings of $113.4 million, as of September 30, 2007, the Company
has borrowings outstanding of $62.1 million with FHLB for Advances for
Community Enterprise (“ACE”) program. ACE provides funds for projects and
activities that result in the creation or retention of jobs or provides
services or other benefits for low-and moderate-income people and communities.
ACE funds may be used to support community lending and economic development,
including small business, community facilities, and public works projects. An
advantage to using this program is that interest rates and fees are generally
lower than rates and fees on regular FHLB advances. The maximum amount of
advances that a bank may borrow under the ACE program depends on a bank’s total
assets as of the previous year end. For the Bank, the maximum amount of
advances that can be borrowed for the 2007 year is 5% of total assets as of
previous year end.
30
The following
tables sets forth certain information regarding the FHLB advances at or for the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007
|
|
At December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Three months or less
|
|
$
|
27,326
|
|
|
4.69
|
%
|
$
|
14,000
|
|
|
3.66
|
%
|
|
Over 3 through 6 months
|
|
|
4,000
|
|
|
3.52
|
%
|
|
9,000
|
|
|
3.12
|
%
|
|
Over 6 through 12 months
|
|
|
8,000
|
|
|
3.75
|
%
|
|
19,256
|
|
|
3.35
|
%
|
|
Over 12 months through 2 years
|
|
|
19,000
|
|
|
4.70
|
%
|
|
16,000
|
|
|
3.81
|
%
|
|
Over 2 through 3 years
|
|
|
32,090
|
|
|
4.84
|
%
|
|
10,000
|
|
|
4.85
|
%
|
|
Over 3 through 4 years
|
|
|
20,000
|
|
|
4.77
|
%
|
|
17,995
|
|
|
4.84
|
%
|
|
Over 4 through 5 years
|
|
|
2,995
|
|
|
4.82
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
113,411
|
|
|
4.64
|
%
|
$
|
86,251
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the nine months
ended September 30, 2007
|
|
At or for the twelve months
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
FHLB advances:
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
$
|
94,183
|
|
$
|
101,051
|
|
|
Maximum amount outstanding at any month-end
during the period
|
|
|
113,411
|
|
|
126,088
|
|
|
Balance outstanding at end of period
|
|
|
113,411
|
|
|
86,251
|
|
|
Average interest rate during the period
|
|
|
4.36
|
%
|
|
3.60
|
%
|
|
Average interest rate at end of period
|
|
|
4.64
|
%
|
|
3.95
|
%
|
During 2002,
the Bank issued a 30-year, $10,310,000 variable rate junior subordinated
debenture. The security matures on June 30, 2032 but is callable on September
30, 2007. The interest rate on the debenture was paid quarterly at the
three-month LIBOR plus 3.65%. As of September 30, 2007, the interest rate was
9.01% and the debenture was subordinated to the claims of depositors and other
creditors of the Bank. On September 30, 2007, the Bank accrued for the payoff
of the $10 million of the debentures.
During the
second quarter of 2006, the Bank issued a 30-year, $3,093,000 variable rate
junior subordinated debenture. The security matures on September 1, 2036 but is
callable on September 1, 2011. The interest rate on the debenture is paid
quarterly at the three-month LIBOR plus 175 basis points. As of September 30,
2007, the interest rate was 7.11%. The debenture is subordinated to the claims
of depositors and other creditors of the Bank.
During the
third quarter of 2007, the Bank issued a 30-year, $10,310,000 variable rate
junior subordinated debentures. The security matures on December 1, 2037 but is
callable on December 1, 2012. The interest rate on the debenture is paid
quarterly at the three-month LIBOR plus 144 basis points. As of September 30,
2007, the interest rate was 6.80%. The debenture is subordinated to the claims
of depositors and other creditors of the Bank. The proceeds were used to pay off the debenture issued in 2007.
Total interest
expense attributable to the junior subordinated debentures during the three and
nine months of 2007 was $302,000 and $887,000, respectively, as compared to
$302,000 and $749,000, respectively, for the same period prior year.
Capital Resources
Stockholders’ equity was
$33,287,000 during the nine months ended September 30, 2007 as compared to
$30,881,000 as of December 31, 2006. The increase was attributable to net
income of $3,070,000, stock options exercised of $218,000, amortization of
deferred compensation – incentive stock options of $249,00, excess tax benefits
from share-based compensation of $17,000 and unrealized security holding gain
of $175,000 partially offset by $360,000 in dividends declared during the
period and $963,000 in redemption and retirement of stock.
Under regulatory capital
adequacy guidelines, capital adequacy is measured as a percentage of
risk-adjusted assets in which risk percentages are applied to assets on the
balance sheet as well as off-balance sheet such as unused loan commitments. The
guidelines require that a portion of total capital be core, or Tier 1 capital
consisting of common stockholders’ equity and perpetual preferred stock, less
goodwill and certain other deductions. Tier 2 capital consist of other
elements, primarily non-
31
perpetual
preferred stock, subordinated debt and mandatory convertible debt, plus the
allowance for loan losses, subject to certain limitations. The guidelines also
evaluate the leverage ratio, which is Tier 1 capital divided by average assets.
As of September
30, 2007 and December 31, 2006, the Bank’s capital exceeded all minimum
regulatory requirements and were considered to be “well capitalized” as defined
in the regulations issued by the FDIC. The Bank’s capital ratios have been
computed in accordance with regulatory accounting guidelines.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Capital
|
|
For Capital
Adequacy Purposes
|
|
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
As of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
|
$
|
49,979
|
|
|
10.7
|
%
|
$
|
37,402
|
|
|
8.0
|
%
|
$
|
46,753
|
|
|
10.0
|
%
|
|
Tier 1 capital to risk-weighted assets
|
|
|
45,268
|
|
|
9.7
|
%
|
|
18,706
|
|
|
4.0
|
%
|
|
28,059
|
|
|
6.0
|
%
|
|
Tier 1 capital to average assets
|
|
|
45,268
|
|
|
8.6
|
%
|
|
21,129
|
|
|
4.0
|
%
|
|
26,411
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
|
$
|
47,676
|
|
|
10.8
|
%
|
$
|
35,316
|
|
|
8.0
|
%
|
$
|
44,144
|
|
|
10.0
|
%
|
|
Tier 1 capital to risk-weighted assets
|
|
|
43,004
|
|
|
9.7
|
%
|
|
17,734
|
|
|
4.0
|
%
|
|
26,600
|
|
|
6.0
|
%
|
|
Tier 1 capital to average assets
|
|
|
43,004
|
|
|
8.6
|
%
|
|
19,955
|
|
|
4.0
|
%
|
|
24,944
|
|
|
5.0
|
%
|
Liquidity and Liability Management
Liquidity
management for banks requires that funds always be available to pay anticipated
deposit withdrawals and maturing financial obligations such as certificates of
deposit promptly and fully in accordance with their terms and to fund new
loans. The major source of the funds required is generally provided by payments
and maturities of loans, sale of loans, liquidation of assets, deposit inflows,
investment security maturities and paydowns, Federal funds lines, FHLB
advances, other borrowings and the acquisition of additional deposit
liabilities. One method that banks utilize for acquiring additional liquidity
is through the acceptance of “brokered deposits” (defined to include not only
deposits received through deposit brokers, but also deposits bearing interest
in excess of 75 basis points over market rates), typically attracting large
certificates of deposit at high interest rates. The Bank’s primary use of funds
are for origination of loans, the purchase of investment securities, maturing
CD’s, demand and saving deposit withdrawals, repayment of borrowings and
dividends to common shareholders.
To meet
liquidity needs, the Company maintains a portion of the funds in cash deposits
in other banks, Federal funds sold, and investment securities. As of September
30, 2007, liquid assets were comprised of $7,121,000 in Federal funds sold,
$619,000 in interest-bearing deposits in other financial institutions,
$5,730,000 in cash and due from banks, and $38,547,000 in available-for-sale
securities. These liquid assets equaled 9.6% of total assets at September 30,
2007. As of December 31, 2006, liquid assets were comprised of $8,526,000 in
Federal funds sold, $987,000 in interest-bearing deposits in other financial
institutions, $3,750,000 in cash and due from banks, and $26,516,000 in
available-for-sale securities. The liquid assets equaled 7.9% of total assets
at December 31, 2006.
In addition to
liquid assets, liquidity can be enhanced, if necessary, through short or long
term borrowings. The Bank anticipates that the Federal fund lines and FHLB
advances will continue to be important sources of funding in the future, and
management expects there to be adequate collateral for such funding
requirements. A decline in the Bank’s credit rating would adversely affect the
Bank’s ability to borrow and/or the related borrowing costs, thus impacting the
Bank’s liquidity. As of September 30, 2007, the Bank had lines of credit
totaling $121.3 million available. These lines of credit consist of $20.0
million in unsecured lines of credit with two correspondent banks, and
approximately $101.3 million in a line of credit through pledged loans and
securities with the FHLB San Francisco. In addition, there is a line of credit
with the Federal Reserve Bank of San Francisco, although currently no loans or
securities have been pledged.
For
non-banking functions, the Company is dependent upon the payment of cash
dividends from the Bank to service its commitments. The FDIC and the California
Department of Financial Institution (“DFI”) have authority to prohibit the Bank
from engaging in activities that, in their opinion, constitute unsafe or
unsound practices in conducting its business. It is possible, depending upon
the financial condition of the bank and other factors, that the FDIC and the
DFI could assert that the payment of dividends or other payments might, under
some circumstances, be an unsafe or unsound practice. Furthermore, the FDIC has
established guidelines with respect to the maintenance of appropriate levels of
capital by banks
32
under its
jurisdiction. The Company expects cash dividends paid by the Bank to the
Company to be sufficient to meet payment schedules.
Net cash
provided by operating activities totaled $13.7 million for the first nine
months of 2007 as compared to $1.7 million for the same period in 2006. The
increase was primarily the result of an increase in net income and accrued
interest payable and other liabilities partially offset by a decrease in the
provision for loan losses.
Net cash used
by investing activities totaled $39.0 million for the first nine months of 2007
as compared $39.6 million used by investing activities for the same period in
2006. The increase was primarily the result of a decrease in the rate of growth
of loan portfolio in the first nine months of 2007 partially offset by the
purchase of bank owned life insurance in the first nine months of 2007.
Funds used by
financing activities totaled $25.9 million for the first nine months of 2007 as
compared to funds provided by financing activities of $16.2 million for the
same period in 2006. The increase in net cash provided by financing activities
was primarily the result of a decrease in deposits and stock repurchases in the
first nine months of 2007, partially offset by an increase in FHLB borrowings.
The careful
planning of asset and liability maturities and the matching of interest rates
to correspond with this maturity matching is an integral part of the active
management of an institution’s net yield. To the extent maturities of assets
and liabilities do not match in a changing interest rate environment, net
yields may be affected. Even with perfectly matched re-pricing of assets and
liabilities, risks remain in the form of prepayment of assets, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates and basis risk. In an overall attempt to match assets and
liabilities, the Company takes into account rates and maturities to be offered
in connection with the certificates of deposit and variable rate loans. Because
of the ratio of rate sensitive assets to rate sensitive liabilities, the
Company has been negatively affected by the increasing interest rates.
Conversely, the Company would be positively affected in a decreasing rate
environment.
The Company has
generally been able to control the exposure to changing interest rates by
maintaining a large percentage of adjustable interest rate loans and the
majority of the time certificates in relatively short maturities. The majority
of the loans have periodic and lifetime interest rate caps and floors. The
Company has also controlled the interest rate risk exposure by locking in
longer term fixed rate liabilities, including FHLB borrowings, brokered
certificates of deposit, and non-brokered wholesale certificates of deposit.
Since interest
rate changes do not affect all categories of assets and liabilities equally or
simultaneously, a cumulative gap analysis alone cannot be used to evaluate the
interest rate sensitivity position. To supplement traditional gap analysis, the
Company can perform simulation modeling to estimate the potential effects of
changing interest rates. The process allows the Company to explore the complex
relationships within the gap over time and various interest rate environments.
33
The following
table shows the Bank’s cumulative gap analysis as of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007
|
|
|
|
|
|
|
|
|
|
Within
Three
Months
|
|
Three to
Twelve
Months
|
|
One to
Five Years
|
|
Over
Five Years
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
6,088
|
|
$
|
12,389
|
|
$
|
25,644
|
|
$
|
10,056
|
|
$
|
54,177
|
|
|
Federal Funds
|
|
|
7,121
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,121
|
|
|
Interest-bearing deposits in other financial institutions
|
|
|
—
|
|
|
96
|
|
|
523
|
|
|
—
|
|
|
619
|
|
|
Loans
|
|
|
146,604
|
|
|
106,401
|
|
|
168,465
|
|
|
28,136
|
|
|
449,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
159,813
|
|
$
|
118,886
|
|
$
|
194,632
|
|
$
|
38,192
|
|
$
|
511,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking
|
|
$
|
6,838
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6,838
|
|
|
Money market and savings
|
|
|
154,045
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
154,045
|
|
|
Time deposits
|
|
|
72,049
|
|
|
100,848
|
|
|
12,061
|
|
|
—
|
|
|
184,958
|
|
|
FHLB advances
|
|
|
27,326
|
|
|
12,000
|
|
|
74,085
|
|
|
—
|
|
|
113,411
|
|
|
Junior Subordinated Debentures
|
|
|
13,403
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
273,661
|
|
$
|
112,848
|
|
$
|
86,146
|
|
$
|
—
|
|
$
|
472,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap
|
|
|
(113,848
|
)
|
|
6,038
|
|
|
108,486
|
|
|
38,192
|
|
|
38,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cummulative interest rate sensitivity gap
|
|
$
|
(113,848
|
)
|
$
|
(107,810
|
)
|
$
|
676
|
|
$
|
38,868
|
|
$
|
38,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cummulative interest rate sensitivity gap as a percentage of
interest-earning assets
|
|
|
-22.3
|
%
|
|
-21.1
|
%
|
|
0.1
|
%
|
|
7.6
|
%
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The target
cumulative one-year gap ratio is -15% to 15%. The policy limit for net earnings
at risk for a +/- 200 basis points change in rates is –25%, indicating a worst
case 25% decrease in earnings given a 200 basis point change in interest rates.
The policy limit for a +/- 200 basis points change in rates is –15%, indicating
a 15% decrease in net interest income. Management will strive to maintain rate
sensitive assets on its books.
Management
will also evaluate the uses of FHLB products including longer-term bullet
advances, amortizing advances, and interest rate swaps as tools to control
interest rate risk. If one of the interest rate risk measures exceeds the
policy limits management will adjust product offerings and will reposition
assets and liabilities to bring the interest rate risk measure back within
policy limits within a reasonable timeframe. The current one year gap ratio is
-21.1%. A negative gap indicates that in an increasing interest rate
environment, it is expected that net interest margin would decrease, and in a
decreasing interest rate environment, net interest margin would increase.
The Company
believes that there are some inherent weaknesses in utilizing the cumulative
gap analysis as a means of monitoring and controlling interest rate risk.
Specifically, the cumulative gap analysis does not address loans at their floor
rates that cannot reset as rates change and does not incorporate varying
prepayment speeds as interest rates change. The Company, therefore, relies more
heavily on the dynamic simulation model to monitor and control interest rate
risk.
Interest Rate Sensitivity
The Company
uses a dynamic simulation model to forecast the anticipated impact of changes
in market interest rates on its net interest income and economic value of
equity. The model is used to assist management in evaluating, and in
determining and adjusting strategies designed to reduce, its exposure to these
market risks, which may include, for example, changing the mix of earning
assets or interest-bearing deposits. The current net interest earnings at risk
given a +/– 200 basis point rate shock is -11.48% and the current estimated
change in the economic value of equity given a +/– 200 basis point rate shock
is -12.51%.
|
|
|
|
|
|
|
|
|
|
Simulated
Rate Changes
|
|
Estimated Net
Interest
Income
Sensitivity
|
|
Estimated
Change in
Economic
Value of
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+ 200 basis points
|
|
|
-11.48
|
%
|
|
-12.51
|
%
|
|
- 200 basis points
|
|
|
9.60
|
%
|
|
19.84
|
%
|
34
As illustrated
in the above table, the Company is currently liability sensitive. The
implication of this is that the Company’s earnings will increase in a falling
rate environment, as there are more rate-sensitive liabilities subject to
reprice downward than rate-sensitive assets; conversely, earnings would decrease
in a rising rate environment. Therefore, an increase in market rates could
adversely affect net interest income. In contrast, a decrease in market rates
may improve net interest income.
Management
believes that all of the assumptions used in the analysis to evaluate the
vulnerability of its projected net interest income and economic value of equity
to changes in interest rates approximate actual experiences and considers them
to be reasonable. However, the interest rate sensitivity of the Bank’s assets and
liabilities and the estimated effects of changes in interest rates on the Banks
projected net interest income and economic value of equity may vary
substantially if different assumptions were used or if actual experience
differs from the projections on which they are based.
The Asset
Liability Committee meets quarterly to monitor the investments, liquidity needs
and oversee the asset-liability management. In between meetings of the
Committee, management oversees the liquidity management.
Return on Equity and Assets
The following
table sets forth key ratios for the periods ending September 30, 2007 and
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months
Ended September 30,
2007
|
|
For The Twelve
Months Ended
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net income as a percentage of average assets
|
|
|
0.60
|
%
|
|
0.81
|
%
|
|
Annualized net income as a percentage of average equity
|
|
|
12.55
|
%
|
|
13.81
|
%
|
|
Average equity as a percentage of average assets
|
|
|
6.35
|
%
|
|
5.85
|
%
|
|
Dividends declared per share as a percentage of diluted net income
per share
|
|
|
5.84
|
%
|
|
3.77
|
%
|
In 2007, the
Company grew its earning asset base and produced additional fee income through
investment advisory services fee income. Also, in 2007, the Company increased
the dividends declared from $.0374 for 2006 as compared to $.045 declared in
August 2007 and $.05 dividend declared in October 2007.
Inflation
The impact of
inflation on a financial institution can differ significantly from that exerted
on other companies. Banks, as financial intermediaries, have many assets and
liabilities that may move in concert with inflation both as to interest rates
and value. However, financial institutions are affected by inflation’s impact
on non-interest expenses, such as salaries and occupancy expenses.
Because of the
Bank’s ratio of rate sensitive assets to rate sensitive liabilities, the Bank
tends to benefit slightly in the short-term from a decreasing interest rate
market and, conversely, suffer in an increasing interest rate market. As such,
the management of the Federal Funds rate by the Federal Reserve has an impact
on the Company’s earnings. The changes in interest rates may have a
corresponding impact on the ability of borrowers to repay loans with the Bank.
Current Accounting Pronouncements
In February 2006, the FASB
issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an
amendment of FASB Statements No. 133 and 140.” SFAS No. 155 simplifies
accounting for certain hybrid instruments currently governed by SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” by allowing
fair value remeasurement of hybrid instruments that contain an embedded
derivative that otherwise would require bifurcation. SFAS No. 155 also
eliminates the guidance in SFAS No. 133 Implementation Issue No. D1,
“Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets,” which provides such beneficial interests are not subject to SFAS No.
133. SFAS No. 155 amends SFAS No. 140, “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities – a Replacement of FASB
Statement No. 125,” by eliminating the restriction on passive derivative
instruments that qualify special-purpose entity may hold. This statement was
effective for financial instruments
35
acquired or
issued after the beginning of the fiscal year 2007 and was adopted January 1,
2007. The adoption of this statement did not have a material impact on the
financial condition, results of operations or cash flows.
In March 2006,
the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 156, “Accounting for Servicing of Financial
Assets” (SFAS No. 156), which amends FASB Statement No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.” SFAS No. 156 requires an entity to separately recognize servicing
assets and servicing liabilities and to report these balances at fair value
upon inception. Future methods of assessing values can be performed using either
the amortization or fair value measurement techniques. SFAS No. 156 was adopted
on January 1, 2007 and did not have a material impact on the financial
condition, results of operations or cash flows.
In July 2006,
the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty
in Income Taxes – an interpretation of FASB Statement No. 109. FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or expected to be
taken on a tax return, including a decision whether to file or not to file in a
particular jurisdiction. FIN 48 was adopted on January 1, 2007 and did not have
a material impact on the Company’s financial condition.
In September
2006, the FASB issued FASB Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS 157 is effective
for the Company on January 1, 2008 and is not expected to have a significant
impact on the Company’s financial statements.
In September
2006, the FASB issued FASB Statement of Financial Accounting Standards No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88 106, and 132 (R) (SFAS 158).
SFAS 158 requires an employer to recognize the overfunded or underfunded status
of defined benefit postretirement plans as an asset or a liability in its
statement of financial position. The funded status is measured as the
difference between plan assets at fair value and the benefit obligation (the
projected benefit obligation for pension plans or the accumulated benefit
obligation for other postretirement benefit plans). An employer is also
required to measure the funded status of a plan as of the date of its year-end
statement of financial position with changes in the funded status recognized
through comprehensive income. SFAS 158 also requires certain disclosures
regarding the effects on net periodic benefit cost for the next fiscal year
that arise from delayed recognition of gains or losses, prior service costs or
credits, and the transition asset or obligation. The Company was required to
recognize the funded status of its defined benefit postretirement benefit plans
in its financial statements for the year ended December 31, 2006. The
requirement to measure plan assets and benefit obligations as of the date of
the year-end statement of financial position is effective for the Company’s
financial statements beginning with the year ended after December 31, 2008.
SFAS 158 is not expected to have a significant impact on the Company’s
financial statements.
In September
2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108,
“Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements.” SAB 108 provides guidance
on quantifying and evaluating the materiality of unrecorded misstatements. It
requires the use of both the “iron curtain” and “rollover” approaches in
quantifying and evaluating the materiality of a misstatement. Under the iron
curtain approach the error is quantified as the cumulative amount by which the
current year balance sheet is misstated. The rollover approach quantifies the
error as the amount by which the current year income statement is misstated. If
either approach results in a material misstatement, financial statement
adjustments are required. SAB 108 was effective for the year ended December 31,
2006. At adoption, there was no impact on the Company’s financial position or
results of operations.
In February
2007, the FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115 (“FAS 159”). This standard permits entities to choose to
measure many financial assets and liabilities and certain other items at fair
value. An enterprise will report unrealized gains and losses on items for which
the fair value option has been elected in earnings at each subsequent reporting
date. The fair value option may be applied on an instrument-by-instrument
basis, with several exceptions, such as those investments accounted for by the
equity method, and once elected, the option is irrevocable unless a new
election date occurs. The fair value option can be applied only to entire
instruments and not to portions thereof. FAS 159 is effective as of the
beginning of an entity’s fiscal year beginning after November 15, 2007. Early
adoption is permitted as of the beginning of the previous fiscal year provided
that the entity makes that choice in the first 120 days of that fiscal year and
also elects to apply the provisions of FASB Statement No. 157, Fair Value
Measurements. Management is currently evaluating the effects of adopting FAS
No. 159 on its consolidated financial statements.
36
