<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended SEPTEMBER 30, 2000
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ________ to ______________.
COMMISSION FILE NO. 0 - 31593
BUSINESS BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0884369
--------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
140 SOUTH ARROWHEAD AVENUE, SAN BERNARDINO, CA 92408
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (909) 888-2265
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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[_] No[X]
Number of shares of common stock outstanding as of September 30, 2000:
2,026,869
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part 1: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets As Of September 30, 2000
and December 31, 1999 3
Consolidated Statements of Income for the Three Months
Ended September 30, 2000 and September 30, 1999 4
Consolidated Statements of Income for the Nine Months
Ended September 30, 2000 and September 30, 1999 5
Consolidated Statements of Cash Flows for Periods
Ended September 30, 2000 and September 30, 1999 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-16
Part 2: OTHER INFORMATION 17
Signatures 18
</TABLE>
2
<PAGE>
BUSINESS BANCORP
CONSOLIDATED BALANCE SHEETS
09/30/00 12/31/99
(UNAUDITED) (AUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 25,667 $ 13,971
Interest bearing deposits in financial institutions 4,364 0
Securities Available for sale (see note 2) 89,548 82,294
Securities held to maturity 1,007 1,012
Federal Home Loan Bank Stock, at cost 1,765 1,200
Loans held for sale 6,940 1,690
Loans held for investment (see note 3) 171,040 114,694
Less: allowance for loan losses (see note 3) (1,718) (1,242)
--------- --------
Net loans held for investment 169,322 113,452
Property, premises and equipment, net 5,795 3,885
Accrued interest receivable 2,141 1,441
Deferred tax asset 1,053 1,053
Other real estate owned 558 1,036
Other assets 10,507 4,409
--------- --------
TOTAL ASSETS $ 318,666 $225,443
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing $ 94,272 $ 74,534
NOW deposits 41,005 27,285
Savings and money market deposits 64,784 49,840
Time deposits of $100,000 or more 34,748 15,275
Time deposits under $100,000 29,617 19,874
--------- --------
Total deposits 264,426 186,808
Other borrowed money 20,150 18,200
Junior subordinated debentures 10,000 0
Other liabilities 2,162 1,404
--------- --------
Total liabilities 296,738 206,412
Stockholders' equity
Serial preferred stock - no par value,
2,000,000 shares authorized but unissued
Common stock - no par value,
10,000,000 shares authorized; issued and outstanding
2,026,869 and 1,975,961 for September 30, 2000
and December 31, 1999, respectively. 6,621 6,257
Retained earnings 15,312 13,652
Accumulated other comprehensive income (5) (878)
--------- --------
Total stockholders' equity 21,928 19,031
--------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 318,666 $225,443
========= ========
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
BUSINESS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
2000 1999
------ ------
(DOLLARS IN THOUSANDS) (AUDITED) (UNAUDITED)
<S> <C> <C>
Interest Income:
Interest and fees on loans $4,070 $2,858
Investment securities 1,449 852
Federal funds sold and commercial paper 3 105
Time certificates of deposit 25 0
------ ------
Total interest income 5,547 3,815
Interest Expense:
Now accounts 153 125
MMDA accounts 263 216
Savings accounts 158 138
Time deposits of $100,000 or more 371 161
Other time deposits 316 233
Other borrowed funds 399 30
Trust preferred securities 278 0
------ ------
Total interest expense 1,938 903
Net Interest Income Before Prov. for Possible Loan Losses 3,609 2,912
Provision for loan losses 50 45
------ ------
Net interest income after provision for loan losses 3,559 2,867
Non-interest Income:
Service charges on deposit accounts 551 492
Other income 142 111
------ ------
Total Non-interest Income 693 603
Non-interest Expense:
Salaries and employee benefits 1,684 1,379
Occupancy and equipment 457 393
Other expenses 1,217 1,001
------ ------
Total Noninterest Expenses 3,358 2,773
Income before provision for income taxes 894 697
Provision for applicable income taxes 312 221
------ ------
Net Income $ 582 $ 476
====== ======
Earnings per share: (See note #4)
Basic $ 0.29 $ 0.24
Fully Diluted $ 0.29 $ 0.23
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
BUSINESS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
2000 1999
------- -------
(DOLLARS IN THOUSANDS) UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest Income:
Interest and fees on loans $10,853 $ 8,186
Investment securities 4,132 1,786
Federal funds sold and commercial paper 27 565
Time certificates of deposit 26 0
------- -------
Total interest income 15,038 10,537
Interest Expense:
Now accounts 406 358
MMDA accounts 809 551
Savings accounts 418 393
Time deposits of $100,000 or more 816 444
Other time deposits 793 707
Other borrowed funds 1,112 30
Trust preferred securities 580 0
------- -------
Total interest expense 4,934 2,483
Net Interest Income Before Prov. for Possible Loan Losses 10,104 8,054
Provision for loan losses 130 150
------- -------
Net interest income after provision for loan losses 9,974 7,904
Non-interest Income:
Service charges on deposit accounts 1,560 1,360
Other income 456 468
------- -------
Total Non-interest Income 2,016 1,828
Non-interest Expense:
Salaries and employee benefits 4,831 3,914
Occupancy and equipment 1,249 1,132
Other expenses 3,505 2,703
------- -------
Total Noninterest Expenses 9,585 7,749
Income before provision for income taxes 2,405 1,983
Provision for applicable income taxes 745 581
------- -------
Net Income $ 1,660 $ 1,402
======= =======
Earnings per share: (See note #4)
Basic $ 0.84 $ 0.71
Fully Diluted $ 0.83 $ 0.69
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE>
BUSINESS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net Income $ 1,660 $ 1,402
Adjustments to reconcile net income to
Net cash provided by operating activities
Depreciation and amortization of premises and equipment 517 399
Amortization of intangibles 140 121
Provision for possible loan loss 130 150
Writedowns on other real estate owned 10 15
Net loss on sales of investment securities 12 26
Net(gain)/loss on sale of OREO (195) 1
Net (gain)/loss on sale of assets (26) (14)
Decrease/(increase) in accrued interest receivable (700) (409)
Decrease/(increase) in deferred assets 0 (383)
Amortization of premiums/(Discount accretion) on investment securities, net 550 426
Decrease/(increase) in other assets 639 (305)
Increase/(decrease) in other liabilities (362) 532
-------- --------
Net Cash Provided By Operating Activities 2,375 1,961
-------- --------
Cash Flows From Investing Activities
Proceeds from maturities of available-for-sale securities 1,879 3,302
Proceeds from maturities of held-to-maturity securities 0 910
Purchase of investment securities available-for-sale (10,932) (53,841)
Purchase of investment securities held-to-maturity 0 (1,514)
Proceeds from sales of securities 3,398 4,829
Principal reductions of mortgage-backed securities 6,066 6,074
Net decrease in interest bearing deposits in financial institutions 586 0
Net increase in FHLB Stock (565) (563)
Net increase in loans to customers (25,815) (4,940)
Purchase of Valley Merchants Bank (net of cash & cash equivalents acquired) (5,554) 0
Recoveries of loans previously written off 144 182
Capital expenditures (1,111) (181)
Proceeds from sale of equipment 26 14
Proceeds from sale of other real estate owned 852 346
-------- --------
Net Cash Used In Investing Activities (31,026) (45,382)
-------- --------
Cash Flows From Financing Activities
Increase (decrease) in deposits, net 9,386 14,334
Net increase in certificates of deposits 18,646 1,332
Net incresae in FHLB borrowing 1,950 8,000
Issuance of Company obligated manditorily redeemable preferred securities
of subsidiary trust holding solely junior subordinated debentures 10,000 0
Stock options exercised, net of tax effect 364 474
-------- --------
Net Cash Used In Financing Activities 40,346 24,140
-------- --------
Net (Decrease)/Increase in cash and cash equivalents 11,695 (19,281)
Cash and cash equivalents, Beginning of year 13,971 39,889
-------- --------
Cash and cash equivalents, End of period $ 25,667 $ 20,608
======== ========
Supplemental Disclosure of Cash Flows Information
Cash Paid for interest $ 4,575 $ 2,571
======== ========
Cash paid for taxes $ 693 $ 283
======== ========
Non-Cash Investing Activities
Net change in accumulated other comprehensive income $ 873 $ (623)
======== ========
Transfer from loans to OREO $ 189 $ 561
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
6
<PAGE>
Note 1: Basis of Presentation:
The interim financial statements included herein have been prepared by Business
Bancorp without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). The interim financial statements include
Business Bancorp and its wholly owned subsidiaries Business Bank of California
(the "Bank") and Business Capital Trust I (the "Trust"), (collectively, the
"Company") as consolidated with the elimination of all intercompany
transactions. Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted
pursuant to such SEC rules and regulations. Nevertheless, the Company believes
that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Form
10-SB Registration Statement, as amended, filed with the Securities and Exchange
Commission (The "Registration Statement"). In the opinion of management, all
adjustments, including normal recurring adjustments necessary to present fairly
the financial position of the Company with respect to the interim financial
statements and the results of its operations for the interim period ended
September 30, 2000, have been included. Certain reclassifications may have been
made to prior year amounts to conform to the 2000 presentation. The results of
operations for interim periods are not necessarily indicative of results for the
full year.
Note 2: Investment Securities:
The Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" on January 1, 1994, which addresses the accounting for
investments in equity securities that have readily determinable fair values and
for investments in all debt securities. Securities are classified in three
categories and accounted for as follows: debt and equity securities that the
company has the positive intent and ability to hold to maturity are classified
as held-to-maturity and are measured at amortized cost; debt and equity
securities bought and held principally for the purpose of selling in the near
term are classified as trading securities and are measured at fair value, with
unrealized gains and losses included in earnings; debt and equity securities not
classified as either held-to-maturity or trading securities are deemed as
available-for-sale and are measured at fair value, with unrealized gains and
losses, net of applicable taxes, reported in a separate component of
stockholders' equity. Any gains and losses on sales of investments are computed
on a specific identification basis.
The amortized cost and fair values of investment securities available for sale
at September 30, 2000 and December 31, 1999 were:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- --------- ------- --------
<S> <C> <C> <C> <C>
Obligations of U.S. government agencies and corporations $ 346 $ 1 $ 0 $ 347
Mortgage-backed securities 64,032 368 (345) 64,055
Obligations of State and Political 22,064 296 (281) 22,079
Other Securities 3,114 0 (47) 3,067
------- ---- ------- -------
TOTAL $89,556 $665 $ (673) $89,548
======= ==== ======= =======
<CAPTION>
DECEMBER 31, 1999 GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- --------- ------- --------
<S> <C> <C> <C> <C>
Obligations of U.S. government agencies and corporations $ 0 $ 0 $ 0 $ 0
Mortgage-backed securities 69,018 93 (780) 68,331
Obligations of State and Political 12,647 15 (699) 11,963
Other Securities 2,044 0 (44) 2,000
------- ------ ------- -------
TOTAL $83,709 $ 108 $(1,523) $82,294
======= ====== ======= =======
</TABLE>
7
<PAGE>
Note 3: Loans and Reserve for Possible Loan Losses
Major classifications of loans were:
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
Real estate $121,296 $ 77,477
Commercial 39,647 29,250
Installment 10,188 7,515
All other loans (including overdrafts) 942 1,246
-------- --------
172,073 115,488
Less - unearned income (1,033) (794)
Less - reserve for possible loan losses (1,718) (1,242)
-------- --------
Total loans $169,322 $113,452
======== ========
Loans Held For Sale $ 6,940 $ 1,690
Concentration of Credit Risk
The Company's lending activities are concentrated primarily in Southern
California. Although the Company seeks to avoid undue concentrations of loans to
a single industry based upon a single class of collateral, real estate and real
estate associated business areas are among the principal industries in the
Company's market area. As a result, the Company's loan and collateral portfolios
are, to some degree, concentrated in those industries. The Company evaluates
each credit on an individual basis and determines collateral requirements
accordingly. When real estate is taken as collateral, advances are generally
limited to a certain percentage of the appraised value of the collateral at the
time the loan is made, depending on the type of loan, the underlying property
and other factors.
An analysis of the changes in the reserve for possible loan losses is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------ ------
<S> <C> <C>
Balance at beginning of year $1,242 $1,439
Adjustments: Purchase of Valley Merchants ALLL 465 0
------ ------
Adjusted balance 1,707 1,439
Charge-offs:
Real estate loans:
Construction 0 0
Mortgage 0 10
Commercial 220 482
Installment 18 39
All other loans (including overdrafts) 24 31
------ ------
Total Charge-offs 262 562
Recoveries:
Real estate loans:
Construction 0 0
Mortgage 28 2
Commercial 99 166
Installment 3 4
All other loans (including overdrafts) 13 13
------ ------
Total Recoveries 143 185
------ ------
Net loan charge-offs (recoveries) 119 377
Provision charged to operating expense 130 180
------ ------
Balance at end of period $1,718 $1,242
====== ======
</TABLE>
8
<PAGE>
At September 30, 2000, the Bank was contingently liable for letters of credit
accommodations made to its customers totaling $1.8 million and undisbursed loan
commitments in the amount of $63.0 million. The Bank makes commitments to extend
credit in the normal course of business to meet the financing needs of its
customers. Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total outstanding commitment amount does
not necessarily represent future cash requirements. Standby letters of credit
written are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank anticipates no losses as a result of such
transactions.
The allowance for credit losses related to loans that are identified for
evaluation, in accordance with FASB Statement No. 114, is based on discounted
cash flows using the loan's initial effect interest rate or the fair value of
the collateral for certain collateral dependent loans.
Management believes that the allowance for credit losses at September 30, 2000
is prudent and warranted, based on information currently available. However, no
prediction of the ultimate level of loans charged-off in future years can be
made with any certainty.
Note 4: Earnings Per Share:
Basic earnings per share are based on the weighted average number of shares
outstanding before any dilution from common stock equivalents. Diluted earnings
per share include common stock equivalents from the effect of the exercise of
stock options. The total number of shares used for calculating basic and diluted
for the three months ending September 30, 1999 was 1,965,948 and 2,035,207,
respectively. The total number of shares used for calculating basic and diluted
for the three months ending September 30, 2000 was 1,985,038 and 2,011,820,
respectively. The total number of shares used for calculating basic and diluted
for the nine months ending September 30, 1999 was 1,965,948 and 2,026,207,
respectively. The total number of shares used for calculating basic and diluted
for the nine months ending September 30, 2000 was 1,985,038 and 2,006,368,
respectively.
Note 5: Contingencies:
Because of the nature of its activities, the Company is at all times subject to
pending and threatened legal actions, which arise out of the normal course of
its business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
Note 6: Formation of Holding Company:
The Company was formed through a holding company reorganization of Business Bank
of California, wherein Business Bank of California became the wholly owned
subsidiary of Business Bancorp as of January 21, 2000. The transaction was based
on a one for one exchange of shares of Business Bank of California stock for
shares of common stock of Business Bancorp, and was not considered a taxable
event for IRS purposes. Such business combination was accounted for at
historical cost, similar to a pooling of interest. All references to periods
prior to March 30, 2000 are references to financial statements of the Bank.
Note 7: Recent Accounting Developments:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 was effective for all fiscal quarters beginning after
June 15, 1999. In July 1999, SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," was issued, which delays the effective date of SFAS No. 133
to fiscal years beginning after June 15, 2000. Earlier application is
encouraged, but it is permitted only as of the beginning of any fiscal quarter
that begins after June 1998. The adoption of the provisions of SFAS No. 133, as
amended by SFAS No. 137 and by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment to FASB Statement No.
133" issued June 2000, is not expected to have a material impact on the results
of operations, the financial position, or cash flows of the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major factors that
influenced the financial performance of the Company for the nine and three
months ended September 30, 2000. This analysis should be read in conjunction
with the Company's audited financial statements and notes thereto and
Management's Discussion and Analysis and Results of Operations for the year
ended December 31, 1999 contained in the Registration Statement, and with the
unaudited financial statements and notes as set forth in this report.
Statements concerning future performance, developments or events concerning
expectation for growth and market forecasts, and any other guidance on future
periods, constitute forward-looking statements which are subject to a number of
risks and uncertainties which might cause actual results to differ materially
from stated expectations.
Business Bancorp is a California corporation registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended, and is
headquartered in San Bernardino, California. The Company was incorporated in
October 1999 and acquired all of the outstanding shares of Business Bank of
California in January 2000. The Company's principal subsidiary is the Bank. The
Company exists primarily for the purpose of holding the stock of this subsidiary
and of such subsidiaries as it may acquire or establish.
The Bank is a state-chartered commercial bank, which was incorporated under the
laws of the State of California on June 15, 1983, and opened for business in
April 1984. The Bank currently operates its main office in San Bernardino and
seven additional branch offices. All of the Bank's offices are located in the
counties of Riverside and San Bernardino, in an area of southern California
commonly known as the "Inland Empire."
On August 31, 2000, the Bank completed the acquisition of Valley Merchants Bank,
N.A. ("VMB"), a national banking association, for a purchase price of
approximately $12.2 million. The Bank paid consideration of $22.69 per share, or
an aggregate of approximately $12.2 million, for the issued and outstanding
shares of VMB. Such business combination was accounted for as a purchase
transaction. VMB's sole office, in Hemet, is operated as a branch of the Bank.
The acquisition of VMB increased the Company's assets by approximately 20%.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 COMPARED TO DECEMBER 31, 1999
Total assets of the Company increased to $318.7 million as of September 30, 2000
compared to $225.4 million as of December 31, 1999 and $207.5 million as of
September 30, 1999. The majority of this increase was attributable to the
purchase of Valley Merchants Bank, which had total assets at purchase of $56.7
million.
Deposits grew to $264.4 million as of September 30, 2000 compared to $186.8
million as of December 31, 1999 and were $179.5 million as of September 30,
1999. Cash and cash equivalents increased to $25.7 million as of September 30,
2000 compared to $14.0 million as of December 31, 1999 and were $16.6 million as
of September 30, 1999. The increase in cash and cash equivalents was due to the
increase in deposits combined with the proceeds received from the Trust
Preferred offering. See "Capital", below.
Shareholders' equity increased to $21.9 million as of September 30, 2000
compared to equity of $19.0 million as of December 31, 1999, and $18.7 million
as of September 30, 1999. See "Capital", below.
INVESTMENTS
The Company's investment portfolio consists primarily of obligations of
mortgage-backed securities, obligations of state and political authorities,
commercial paper, and interest bearing deposits in other financial institutions.
Mortgage-backed securities totaled $ 64.1 million as of September 30, 2000
compared to $68.3 million at December 31, 1999, and were $55.0 million as of
September 30, 1999. Securities issued by state and political authorities totaled
$ 22.1 million as of September 30, 2000 compared to $12.0 million at December
31, 1999, and were $8.4 million as of September 30, 1999. Commercial paper
securities totaled $3.1 million as of September 30, 2000 compared to $2.0
million at December 31, 1999, and September 30, 1999. As of September
10
<PAGE>
30, 2000, certificates of deposit with other financial institutions totaled $4.4
million, compared to $0 as of December 31, 1999 and September 30, 1999. These
securities are held as collateral for borrowings, public funds, and treasury,
tax and loan deposits.
LOANS
Loan balances, net of the allowance for loan losses, increased to $176.3 million
as of September 30, 2000 compared to $115.1 million as of December 31, 1999. The
majority of this increase was attributable to the purchase of Valley Merchants
Bank, which had net loans at purchase of $35.7 million.
NONPERFORMING ASSETS
Nonperforming assets consist of nonperforming loans and other real estate owned
("OREO"). Nonperforming loans are those loans which have (i) been placed on
nonaccrual status, (ii) been subject to troubled debt restructurings, or (iii)
become contractually past due 90 days or more with respect to principal or
interest and have not been restructured or placed on nonaccrual status.
The following table sets forth the Company's non-performing assets at the dates
indicated:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
Non-accrual loans:
Real estate:
Construction $ 0 $ 0
Mortgage 659 229
Commercial 146 247
Installment 0 1
All other loans (including overdrafts) 0 0
------ ------
Total non-accrual loans 805 477
Loans 90 days or more past due & still accruing (as to principal or interest):
Real estate:
Construction 0 0
Mortgage 0 0
Commercial 0 0
Installment 0 2
All other loans (including overdrafts) 0 5
------ ------
Total loans 90 days or more past due & still accruing 0 7
Restructured loans:
Real estate:
Construction 38 40
Mortgage 681 683
Commercial 0 0
Installment 0 0
All other loans (including overdrafts) 0 0
------ ------
Total restructured loans 719 723
------ ------
Total nonperforming loans 1,524 1,207
Other real estate owned 558 1,036
------ ------
Total nonperforming assets $2,082 $2,243
====== ======
Nonperforming loans as a percentage of total gross loans 0.86% 1.03%
====== ======
Nonperforming loans as a percentage of total assets 0.65% 1.00%
====== ======
Nonperforming loans as a percentage of total gross loans & OREO 1.17% 1.90%
====== ======
</TABLE>
11
<PAGE>
NON-ACCRUAL LOANS
Non-accrual loans are loans where the original contractual amount may not be
fully collectible. The Company measures its impaired loans by using the fair
value of the collateral if the loan is collateral-dependent and the present
value of the expected future cash flows discounted at the loan's effective
interest rate if the loan is not collateral-dependent. The Company places loans
on non-accrual status that are delinquent 90 days or more or when a reasonable
doubt exists as to the collectibility of interest and principal. Loans on non-
accrual status totaled $805,000 and $477,000 at September 30, 2000 and December
31, 1999, respectively. Interest income that would have been recognized on non-
accrual loans if they had performed in accordance with the terms of the loans
was approximately $63,000 and $37,000 for the period ended September 30, 2000
and December 31, 1999, respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses
based on management's evaluation of the risks inherent in its loan portfolio and
the general economy. The allowance is increased by provisions charged against
earnings and reduced by net loan chargeoffs. Loans are charged off when they are
deemed to be uncollectible, or partially charged off when portions of a loan are
deemed to be uncollectible. Recoveries are generally recorded only when cash
payments are received.
In determining the adequacy of the allowance for loan losses, management
initially considers the allowances specifically allocated to individual impaired
loans, and next considers the level of general loss allowances deemed
appropriate for the balance of the portfolio based on factors including the
levels of classified assets, general portfolio trends relative to asset and
portfolio size, asset categories, potential credit concentrations, non-accrual
loan levels, historical loss experience, risks associated with changes in
economic and business conditions, and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to make additional provisions for loan losses based upon
judgments, which differ from those of management.
As of September 30, 2000 the balance in the allowance for loan losses was $1.7
million compared to $1.2 million as of December 31, 1999. As a percentage of
total loans the allowance was 0.97% as of September 30, 2000 compared to 1.06%
as of December 31, 1999. Management believes the allowance at September 30, 2000
is adequate based upon its ongoing analysis of the loan portfolio, historical
loss trends and other factors.
OTHER REAL ESTATE OWNED
Other real estate owned was $558,000 as of September 30, 2000 compared to $1.0
million as of December 31, 1999. Other real estate owned properties are real
estate properties acquired through or in lieu of loan foreclosure. The Bank sold
nine OREO properties during the nine months ended September 30, 2000. The Bank
recognized gains on sale of OREO's of approximately $195,000 for the nine months
ended September 30, 2000.
CAPITAL
Shareholders' equity increased to $21.9 million as of September 30, 2000
compared to equity of $19.0 million as of December 31, 1999, and $18.7 million
as of September 30, 1999.
The Company's strategic plan addresses the future capital needs of the Company.
During March, 2000, the Company's wholly owned subsidiary, Business Capital
Trust I (the "Trust"), a Delaware business trust, issued $10 million of 10 7/8%
Fixed Rate Capital Trust Pass-through Securities ("TRUPS-Registered
Trademark-"), with a liquidation value of $1,000 per share. The securities have
semi-annual interest payments, with principal due at maturity in 2030. The Trust
used the proceeds from the sale of the trust preferred securities to purchase
junior subordinated debentures of the Company. The Company received $9.7 million
from the Trust upon issuance of the junior subordinated debentures, of which
$8.7 million was contributed to the Bank to increase its capital. The $10
million is shown as other borrowings on the books of the Company.
At September 30, 2000 and December 31, 1999, all capital ratios were above all
current Federal capital guidelines for a "well capitalized" bank. As of
September 30, 2000, the Bank's regulatory total capital to risk-weighted assets
ratio was 11.24% compared to 12.23% as of December 31, 1999. The Bank's
regulatory tier 1 capital to risk-weighted assets ratio was 10.44% as of
September 30, 2000 compared to 11.41% as of December 31, 1999. The Bank's
regulatory tier 1 capital to average assets ratio was 8.38% as of September 30,
2000 compared to 7.85% as of December 31, 1999.
12
<PAGE>
As of September 30, 2000, the Company's regulatory total capital to risk-
weighted assets ratio was 11.84%. The Company's regulatory tier 1 capital to
risk-weighted assets ratio was 9.74% as of September 30, 2000. The Company's
regulatory tier 1 capital to average assets ratio was 7.82% as of September 30,
2000.
LIQUIDITY
The Bank closely monitors its liquidity so that the cash requirements for loans
and deposit withdrawals are met in an economical manner. Management monitors
liquidity in relation to trends of loans and deposits for short term and long
term requirements. Liquidity sources are cash, deposits with other banks,
overnight Federal Funds investments, unpledged interest bearing deposits in
other financial institutions, investment securities and the ability to sell
loans. As of September 30, 2000 liquid assets as a percentage of deposits were
19.6% compared to 11.0% as of December 31, 1999.
RESULTS OF OPERATIONS
NET INCOME
Net income increased 18.35% to $1.7 million for the nine months ended September
30, 2000 compared to $1.4 million for the nine months ended September 30, 1999.
Basic earnings per share were $0.84 and $0.71 for the nine months ended
September 30, 2000 and 1999, respectively. Diluted earnings per share were $0.83
and $0.69 for the nine months ended September 30, 2000 and 1999, respectively.
The increase in net income was mainly due to an increase in net interest income
after provision for loan losses and a slight increase in non-interest income.
Interest income increased due to an increase in average interest earning assets.
Net income increased 22.14% to $582,000 for the three months ended September 30,
2000 compared to $476,000 for the three months ended September 30, 1999. Basic
earnings per share were $0.29 and $0.24 for the three months ended September 30,
2000 and 1999, respectively. Diluted earnings per share were $0.28 and $0.23 for
the three months ended September 30, 2000 and 1999, respectively. The increase
in net income was mainly due to an increase in net interest income after
provision for loan losses. Interest income increased due to an increase in
average interest earning assets during the three months ended September 30,
2000.
INTEREST INCOME
Net interest income is the most significant component of the Company's income
from operations. Net interest income is the difference (the "interest rate
spread") between the gross interest and fees earned on the loan and investment
portfolios and the interest paid on deposits and other borrowings. Net interest
income depends on the volume of and interest rate earned on interest earning
assets and the volume of and interest rate paid on interest bearing liabilities.
Interest income for the nine months ended September 30, 2000 increased to $15.0
million compared to $10.5 million for the nine months ended September 30, 1999.
This increase was due to an increase in the average balance of interest earning
assets, partially offset by a decrease in the yield on those assets. In
addition, increased competition by other financial intermediaries has resulted
in tighter margins than had previously been experienced by the Company. The
largest single component of interest earning assets was loans receivable.
Interest expense for the nine months ended September 30, 2000 increased to $4.9
million compared to $2.5 million for the nine months ended September 30, 1999.
This increase was due to an increase in average deposits and other borrowings,
combined with a change in the composition of those liabilities, and by an
increase in the cost of those liabilities. The resulting increase in total loans
is being funded by both retail and wholesale certificates of deposit, with the
wholesale deposits having a higher interest rate than the retail deposits. Other
borrowings have also increased over the same time period. In addition, interest
rates in general have risen considerably from the third quarter of 1999 to the
third quarter of 2000.
In March 2000, the Company's subsidiary, Business Capital Trust I, issued $10
million of 10 7/8% Fixed Rate Capital Trust Pass-through Securities ("TRUPS-
Registered Trademark-"), with a liquidation value of $1,000 per share. The
Company invested an additional $8.7 million in the Bank.
Interest income for the three months ended September 30, 2000 increased to $5.5
million, compared to $3.8 million for the three months ended September 30, 1999.
This increase was due to an increase in the average balance of interest earning
assets, partially offset by a decrease in the yield on those assets. In
addition, increased competition by other financial intermediaries has resulted
in
13
<PAGE>
tighter margins than had previously been experienced by the Company. The largest
single component of interest earning assets was loans receivable.
Interest expense for the three months ended September 30, 2000 increased to $1.9
million compared to $0.9 million for the three months ended September 30, 1999.
This increase was due to an increase in average deposits and other borrowings,
combined with a change in the composition of those liabilities, and by an
increase in the cost of those liabilities. The resulting increase in total loans
is being funded by both retail and wholesale certificates of deposit, with the
wholesale deposits having a higher interest rate than the retail deposits. Other
borrowings have also increased over the same time period. In addition, interest
rates in general have risen considerably from the third quarter of 1999 to the
third quarter of 2000.
NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES
Net interest income before provision for estimated loan losses for the nine
months ended September 30, 2000 was $10.1 million, compared to $8.1 million for
the nine months ended September 30, 1999. This increase was primarily due to the
increase in average interest earning assets and partially offset by a decrease
in the net interest margin. The decline in the net interest margin was primarily
due to the rising interest rate environment, combined with the use of other
borrowed funds in order to support its expanding loan portfolio.
Net interest income before provision for estimated loan losses for the three
months ended September 30, 2000 was $3.6 million, compared to $2.9 million for
the three months ended September 30, 1999. This increase was primarily due to
the increase in average interest earning assets and partially offset by a
decrease in the net interest margin. The decline in the net interest margin was
primarily due to the rising interest rate environment, combined with the
increased use of other borrowed funds in order to support its expanding loan
portfolio.
PROVISION FOR LOAN LOSSES
Net charge-offs totaled $118,000 for the nine months ended September 30, 2000
compared to $58,000 during the nine months ended September 30, 1999. Due to the
historical loss experience associated with the various loan types, the provision
for loan losses totaled $130,000 for the nine months ended September 30, 2000
compared to $150,000 for the nine months ended September 30, 1999. As a result
of the increase in total loans outstanding, management increased the allowance
for loan losses to $1.7 million as of September 30, 2000 compared to $1.5
million as of September 30, 1999. As of September 30, 2000, the allowance as a
percentage of total loans was 0.97% compared to 1.06% as of December 31, 1999.
For the three months ended September 30, 2000, net charge-offs totaled $30,000
compared to net recoveries of $133,000 for the three months ended September 30,
1999. Provisions for loan losses totaled $50,000 for the three months ended
September 30, 2000 compared to $45,000 for the three months ended September 30,
1999.
In determining the adequacy of the allowance for loan losses, management
initially considers the allowances specifically allocated to individual impaired
loans, and next considers the level of general loss allowances deemed
appropriate for the balance of the portfolio based on factors including the
levels of classified assets, general portfolio trends relative to asset and
portfolio size, asset categories, potential credit concentrations, non-accrual
loan levels, historical loss experience, risks associated with changes in
economic and business conditions, and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to make additional provisions for loan losses based upon
judgments, which differ from those of management.
OTHER OPERATING INCOME
Other operating income represents non-interest types of revenue and is comprised
primarily of other fee income, loan servicing fees and service charges on
deposit accounts. Other operating income was $2.0 million for the nine months
ended September 30, 2000 compared to $1.8 million months ended September 30,
1999. This represents an increase of $0.2 million, or 10.3%, when comparing the
nine month period ended September 30, 2000 to the nine month period ended
September 30, 1999. The increase was mainly due to a higher balance of deposits
outstanding.
Other operating income was $693,000 for the three months ended September 30,
2000 compared $603,000 to for the three months ended September 30, 1999. This
represents an increase of $90,000, or 15.1%, when comparing the three month
period ended September 30, 2000 to the three month period ended September 30,
1999. The increase was mainly due to a higher balance of deposits outstanding.
14
<PAGE>
Other fee income totaled $456,000 for the nine months ended September 30, 2000
compared to $468,000 for the nine months ended September 30, 1999. For the three
months ended September 30, 2000 and 1999 other fee income totaled $142,000 and
$111,000 respectively.
NON-INTEREST EXPENSE
Non-interest expenses are incurred by the Company in its normal course of
business. Salaries and employee benefits, occupancy, advertising, insurance,
data processing, stationary & supplies, professional services, office,
administrative, other real estate owned, and other expenses are the major
categories of non-interest expense.
The following table compares each of the components of non-interest expense for
the nine months and three months ended September 30, 2000 and 1999,
respectively:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPT.30, FOR THE THREE MONTHS ENDED SEPT. 30,
--------------------------------- ------------------------------------
(DOLLARS IN THOUSANDS)
2000 1999 CHANGE $ 2000 1999 CHANGE $
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Non-interest expense:
Salaries and employee benefits $4,831 $3,914 $917 $1,684 $1,379 $305
Occupancy and equipment 1,249 1,132 117 457 393 64
Advertising and promotions 319 224 95 106 90 16
Insurance and assessments 134 90 44 50 33 17
Data processing 662 468 194 236 207 29
Stationary and supplies 266 210 56 119 85 34
Professional 409 272 137 163 97 66
Office 306 321 (15) 106 108 (2)
Administrative 695 572 123 232 248 (16)
Other real estate owned 95 67 28 47 3 44
Other 619 479 140 158 130 28
------ ------ ------ ------ ------ ----
TOTAL NON-INTEREST EXPENSE $9,585 $7,749 $1,836 $3,358 $2,773 $585
------ ------ ------ ------ ------ ----
</TABLE>
Non-interest expenses increased to $3.4 million for the three months ended
September 30, 2000 compared to $2.8 million for the three months ended September
30, 1999, an increase of $585,000 or 21.1%. For the nine months ended September
30, 2000 and 1999, other operating expenses increased to $9.6 million from $7.7
million, an increase of $1.9 million or 23.7%. The increase in the Company's
overhead cost is primarily a function of the Company's growth, including
increased staffing, the purchase of Valley Merchants Bank ('VMB"), as well as
obtaining additional administrative space during the period.
Salaries and employee benefits increased $305,000 or 22.1% for the third quarter
of 2000 and $900,000 or 23.4% for the nine months ended September 30, 2000 as
compared to the same periods in 1999 due to (i) the addition of 32 employees
associated with the purchase of Valley Merchants Bank; (ii) increased staffing
in the branches and administration; and (iii) periodic merit and promotional
increases for employees.
Occupancy costs increased $64,000 or 16.3% for the third quarter of 2000 and
$117,000 or 10.3% for the nine months ended September 30, 2000 as compared to
the same periods in 1999 primarily due to opening additional administrative
space and the additional occupancy costs associated with the purchase of Valley
Merchants Bank.
Professional services expense increased 66,000 or 68.0% for the third quarter of
2000 and $137,000 or 50.4% for the nine months ended September 30, 2000 as
compared to the same periods in 1999 due to legal/accounting services incurred
in conjunction with filing the Company's Registration Statement, as well as the
costs associated with the acquisition of Valley Merchants Bank.
Data processing costs increased $29,000 or 14.0%; stationary & supplies
increased $34,000 or 40.0%; and other expenses increased $28,000 or 21.5% for
the three month period ended September 30, 2000 as compared to the same period
in 1999. Advertising costs increased $95,000 or 42.4%; stationary & supplies
increased $56,000 or 26.7%; administrative costs increased $123,000 or 21.5%;
and other expenses increased $140,000 or 29.2% for the nine month period ended
September 30, 2000 as compared to the same period in 1999.
15
<PAGE>
Other real estate owned ("OREO") increased $44,000 or 1,466.7% for the third
quarter of 2000 and $28,000 or 41.8% for the nine months ended September 30,
2000 as compared to the same periods in 1999.The increase is primarily due to
the writedown of one of the Bank's OREO properties by $36,600 during the third
quarter 2000.
PROVISION FOR INCOME TAXES
The effective income tax rate was 31.0% for the nine months ended September 30,
2000 compared to 29.3% for the nine months ended September 30, 1999. Provisions
for income taxes totaled $745,000 and $581,000 for the nine months ended
September 30, 2000 and 1999, respectively.
For the three months ended September 30, 2000 and 1999, the effective income tax
rate was 34.9% and 31.7%, respectively. Provisions for income taxes totaled
$312,000 and $221,000 for the three months ended September 30, 2000 and 1999,
respectively.
16
<PAGE>
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None to report.
ITEM 2 CHANGES IN SECURITIES
None to report.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None to report.
ITEM 4 SUBMISSION OF MATTERS TO SECURITY HOLDERS
None to report.
ITEM 5 OTHER INFORMATION
None to report.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BUSINESS BANCORP
DATE: November 20, 2000
/S/ ALAN J. LANE
----------------
Alan J. Lane
President
Chief Executive Officer
/S/ JEFFREY L. BLAKE
--------------------
Jeffrey L. Blake
Senior Vice President - Finance
18
