<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2000 Commission File No. 333-79193
CERRITOS VALLEY BANCORP
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4216236
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18300 Pioneer Blvd., Artesia CA 90701
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (562) 403-6900
--------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
As of September 30, 2000, 999,670 shares of Registrant's no par value common
stock were outstanding.
<PAGE>
<TABLE>
<CAPTION>
CERRITOS VALLEY BANCORP
INDEX
<S> <C>
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Earnings for the three and nine month
periods ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 28
Item 2 Changes in Securities and Use of Proceeds 28
Item 3 Defaults upon Senior Securities 28
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 5 Other Information 28
Item 6 Exhibits to Consolidated Financial Statement Schedules and INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES 29
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31, Change
2000 (Unaudited) 1999 Amount Percent
---------------- ----------- ------ -------
<S> <C> <C> <C> <C>
Cash and due from banks $10,079,802 $12,779,517 $(2,699,715) -21.13%
Federal funds sold 4,310,000 2,000,000 2,310,000 115.50%
--------- --------- ---------
Cash and cash equivalents 14,389,802 14,779,517 (389,715) -2.64%
Investment securities
Available for sale 33,170,615 33,515,501 (344,886) -1.03%
Held to maturity - fair value of $3,280,535 and
$3,429,465 in 2000 and 1999, respectively 3,342,044 3,503,926 (161,882) -4.62%
Loans receivable, net of allowance for loan losses
of $1,359,044 and $1,277,141 in 2000 and
1999, respectively 63,765,546 66,805,672 (3,040,126) -4.55%
Bank premises and equipment 3,426,196 1,722,752 1,703,444 98.88%
Accrued interest receivable 1,039,622 1,072,048 (32,426) -3.02%
Prepaid expenses and other assets 7,515,775 5,452,383 2,063,392 37.84%
--------- --------- ---------
Total assets $126,649,600 $126,851,799 $ (202,199) -0.16%
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31, Change
2000 (Unaudited) 1999 Amount Percent
------------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Liabilities
Deposits
Checking noninterest-bearing $ 34,905,005 $ 35,789,486 $ (884,481) -2.47%
Checking interest-bearing and savings 21,985,072 23,497,164 (1,512,092) -6.44%
Money market accounts 12,670,264 11,248,567 1,421,697 12.64%
Time certificates of deposit
under $100,000 13,661,924 13,363,696 298,228 2.23%
Time certificates of deposit
$100,000 and over 18,273,531 17,765,391 508,140 2.86%
------------------- ------------------- ----------------
Total deposits 101,495,796 101,664,304 (168,508) -0.17%
FHLB advances 10,683,435 12,023,912 (1,340,477) -11.15%
Treasury, tax and loan 858,988 978,094 (119,106) -12.18%
Obligations under capital lease 215,180 229,885 (14,705) -6.40%
Accrued expenses and other liabilities 2,285,681 1,999,344 286,337 14.32%
------------------- ------------------- ----------------
Total liabilities 115,539,080 116,895,539 (1,356,459) -1.16%
Commitments and contingencies - - - 0.00%
Stockholders' equity
Contributed capital
Common stock - authorized, 20,000,000
shares, no par value; 999,670 and 999,875
shares issued and outstanding in 2000
and 1999, respectively 6,089,659 6,090,859 (1,200) -0.02%
Additional paid in capital stock - warrants 1,740,800 1,740,800 - 0.00%
Retained earnings 3,935,885 2,927,514 1,008,371 34.44%
Accumulated other comprehensive income (655,824) (802,913) 147,089 -18.32%
------------------- ------------------- ----------------
Total stockholders' equity 11,110,520 9,956,260 1,154,260 11.59%
------------------- ------------------- ----------------
Total liabilities and stockholders' $ 126,649,600 $ 126,851,799 $ (202,199) -0.16%
equity =================== =================== ================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three month period ending Nine month period ended
September 30, September 30,
2000 1999 2000 1999
-------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
INTEREST REVENUES
Loans $1,519,679 $1,677,131 $4,687,102 $4,933,367
Investment securities 554,925 594,723 1,683,085 1,755,014
Federal funds sold 82,774 179,380 201,252 382,128
Other deposits 458 1,557 2,242 4,619
---------- ---------- ---------- ----------
TOTAL INTEREST REVENUES 2,157,836 2,452,791 6,573,681 7,075,128
INTEREST EXPENSE
Deposits 621,739 588,322 1,750,731 1,735,500
FHLB borowings 148,436 181,011 490,294 540,593
Other 20,906 12,738 41,251 32,282
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 791,081 782,071 2,282,276 2,308,375
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,366,755 1,670,720 4,291,405 4,766,753
PROVISION FOR LOAN LOSSES - - 257,000 130,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,366,755 1,670,720 4,034,405 4,636,753
NON INTEREST REVENUES
Service charges on deposit accounts 352,171 295,874 1,054,503 897,235
Other service charges and income 119,194 96,445 369,867 308,347
Gain on sale of loans 405 365 1,207 1,262
---------- ---------- ---------- ----------
TOTAL NON INTEREST REVENUES 471,770 392,684 1,425,577 1,206,844
NON INTEREST EXPENSE
Employee 559,054 628,879 1,663,310 1,637,853
Occupancy 95,266 89,414 266,680 269,558
Other operating expense 581,341 487,521 1,944,321 1,798,526
---------- ---------- ---------- ----------
TOTAL NON INTEREST EXPENSE 1,235,661 1,205,814 3,874,311 3,705,937
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 602,864 857,590 1,585,671 2,137,660
INCOME TAX PROVISION 229,015 311,782 577,300 874,904
---------- ---------- ---------- ----------
NET EARNINGS $ 373,849 $ 545,808 $1,008,371 $1,262,756
========== ========== ========== ==========
Basic earnings per share $ 0.37 $ 0.55 $ 1.01 $ 1.27
========== ========== ========== ==========
Diluted earnings per share $ 0.31 $ 0.51 $ 0.84 $ 1.19
========== ========== ========== ==========
Basic weighted average shares outstanding 999,670 1,000,753 999,852 996,854
========== ========== ========== ==========
Dilutive weighted average shares outstanding 1,197,384 1,063,292 1,197,566 1,062,700
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
<TABLE>
<CAPTION>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
----------------------------------------------------------------------------
For the period ended September 30, 2000
-----------------------------------------------------------------------------
Accumulated
Number Additional other
of shares Common Paid in Capital comprehensive Retained
outstanding stock and warrants income Earnings
------------- -------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1999 999,875 $ 6,090,859 $ 1,740,800 $ (802,913) $ 2,927,514
Comprehensive income
Net changes in unrealized gain on
securities available for sale,
net of tax benefit of $79,533 - - - 147,089 -
Net earnings for nine months ended
September 30, 2000 - - - - 1,008,371
Comprehensive income
Common Stock retired (205) (1,200)
------------- -------------- -------------- --------------- ------------
Balance - September 30, 2000 999,670 $ 6,089,659 $ 1,740,800 $ (655,824) $ 3,935,885
============= ============== ============== =============== ============
-----------------------------------------------------------------------------
For the period ended September 30, 1999
-----------------------------------------------------------------------------
Accumulated
Number Additional other
of shares Common Paid in Capital comprehensive Retained
outstanding stock and warrants income Earnings
------------- -------------- -------------- --------------- ------------
Balance - December 31, 1998 991,667 $ 6,540,813 $ - $ 27,591 $ 5,848,246
Comprehensive income
Net changes in unrealized gain on
securities available for sale, net
of tax benefit of $410,453 - - - (666,956) -
Net earnings for nine months ended
September 30, 1999 - - - - 1,262,756
Comprehensive income
Stock options exercised 11,000 84,567 - - -
Redemption of stock and deemed dividend (548,688) (11,149,340) - - (4,505,540)
Issuance of stock and warrants (net of
issuance costs of $384,371) 543,959 10,674,829 1,740,800 - -
------------- -------------- -------------- --------------- ------------
Balance - September 30, 1999 997,938 $ 6,150,869 $ 1,740,800 $ (639,365) $ 2,605,462
============= ============== ============== =============== ============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
<TABLE>
<CAPTION>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
-------------------------------------
2000 1999
----------------- ------------------
<S> <C> <C>
Cash flows from operatig activities:
Net earnings $ 1,008,371 $ 1,262,756
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Net amortization/accretion of
discount/premium on securities 161 (3,354)
Depreciation 183,329 193,381
Deferred income tax (benefit) expense 79,312 (371,332)
Other (gains) and losses (1,207) (1,202)
Principal payments from and sale of loans held for sale - 156,744
Decrease (Increase) in interest receivable 32,426 (245,686)
Net decrease (increase) in other assets (1,995,777) (57,431)
Net increase in other liabilities 286,337 296,754
Provision for loan losses 257,000 130,000
----------------- ------------------
Net cash (used in) provided by operating activities (150,048) 1,360,630
Cash flows from investing activities:
Proceeds from maturities and principal collected
on sale of securities:
Available for sale 344,886 8,926,663
Held to maturity 161,882 1,374,451
Purchases of investment securities:
Available for sale - (4,466,281)
Held to maturity - (3,178,226)
Net decrease (increase) in loans 2,784,333 (2,107,183)
Purchases of premises and equipment (1,886,773) (40,790)
Proceeds from sale of bank equipment - -
----------------- ------------------
Net cash provided by investing activities 1,404,328 508,634
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
<TABLE>
<CAPTION>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
(Unaudited)
Nine months ended September 30,
--------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in interest and
noninterest bearing accounts, savings and
money market accounts $ (974,875) $ 17,875,311
Net increase (decrease) in time certificates of deposits 806,368 (896,295)
Payments made under capital lease obligations (14,705) (16,227)
Net decrease in in treasury, tax and loan note (119,106) (517,065)
Net (decrease) increase in FHLB advances (1,340,477) 1,217,099
Proceeds from issuance of stock and warrants,
net of issuance costs of $384,371 - 12,415,629
Payment for the redemption of stock and deemed dividend - (15,654,880)
Proceeds from the exercise of stock options - 84,567
Payment for the retirement of capital stock (1,200) -
------------------ ------------------
Net cash (used in) provided by financing activities (1,643,995) 14,508,139
------------------ ------------------
(Decrease) increase in cash and cash equivalents (389,715) 16,377,403
Cash and cash equivalents at beginning of year 14,779,517 15,063,342
------------------ ------------------
Cash and cash equivalents at end of year $ 14,389,802 $ 31,440,745
------------------ ------------------
Supplemental disclosures of cash flow information
Interest paid $ 2,246,254 $ 2,332,877
================== ==================
Income taxes paid $ 663,000 $ 1,108,600
================== ==================
</TABLE>
The accompanying notes are an integral part of this statement.
8
<PAGE>
Cerritos Valley Bancorp and Subsidiary
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by Cerritos Valley Bancorp (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations for the periods covered
have been made. Certain information and note disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principals have been condensed or omitted pursuant to such rules and
regulations. Management believes that the disclosures are adequate to make the
information presented not misleading.
The financial position at September 30, 2000, and the results of operations for
the nine month period ended September 30, 2000 are not necessarily indicative of
the results of operations that may be expected for any other interim period or
for the full year ending December 31, 2000. These unaudited condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles on a basis consistent with the
Company's audited financial statements, and these interim financial statements
should be read in conjunction with the Company's audited financial statements
and notes thereto included in the Company's Form 10-K for the year ended
December 31, 1999.
NOTE 2.
Earnings per share is computed using the weighted average number of shares of
common stock outstanding. The weighted average number of shares used to compute
basic earnings per share was 999,670 for the three months ended September 30,
2000 and 999,852 for the nine months ended September 30, 2000. The weighted
average number of shares used to compute basic earnings per share was 1,000,753
and 996,854 for the three and nine months ended September 30, 1999,
respectively.
On a diluted basis, and giving full effect to exercisable stock options, the
weighted average number of shares used to compute diluted earnings per share was
1,197,384 for the three month period ended September 30, 2000 and 1,197,566 for
the nine month period ended September 30, 2000 and 1,063,292 and 1,062,700 for
the three and nine month periods ended September 30, 1999, respectively.
NOTE 3.
The Company's only subsidiary, Cerritos Valley Bank, (the "Bank") is a party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
As of September 30, 2000, the Bank had $12,981,969 in unused commitments to
9
<PAGE>
extend credit which includes $665,000 in standby letters of credit. The contract
or notional amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments. The Bank's exposure to
credit loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit and standby letters of credit is
equivalent to the contractual or notional amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. When collateral is
taken, the general policy is to secure loans by assets or stock of the borrower.
Loans are expected to be repaid from cash flow or proceeds from sale of selected
assets from the borrower.
NOTE 4.
The Bank is required to meet certain minimum risk-based and leverage capital
standards promulgated by bank regulatory authorities. The ratios required under
federal regulations mandate a minimum ratio of total qualifying capital
risk-weighted assets of 8.0%, of which 4.0% must consist of Tier 1 capital
(consisting primarily of common stock and retained earnings less intangibles.)
As of September 30, 2000, Cerritos Valley Bancorp's Tier 1 risk-based capital
ratio was 13.57%. The Bancorp's total Tier 1 and Tier 2 risk-based capital ratio
was 14.82%.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD - LOOKING STATEMENT
Certain matters discussed in this Quarterly Report constitute "forward-looking
statements" under Section 27A of the Securities Act and Section 21E of The
Exchange Act, which involve risks and uncertainties. These "forward-looking
statements" relate to, among other things, operating results of Cerritos Valley
Bancorp (the "Company") and its subsidiary, Cerritos Valley Bank (the "Bank"),
level of problem credits, expectations of the business environment in which the
Company operates, projections of future performance, perceived opportunities in
the market and statements regarding the Company's mission and vision, the effect
of governmental supervision on the Company, general or specific economic
conditions, management results in resolving problem credits, the cost and other
effects of legal and administrative proceedings, changes in accounting policies
and practices or in the applications of such policies and practices, the effects
of changes within the Company's organization, and any activities of parties with
which the Company has an agreement or understanding. The Company's actual
results, performance, or achievements may differ significantly from the results,
performance, or achievements expressed or implied in such forward-looking
statements. Reference should be made to the Company's audited Annual Report for
the year ended December 31, 1999 on Form 10-K for a discussion of these factors.
OVERVIEW
Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to provide a better understanding of the material changes
in trends to the financial condition, results of operations, and liquidity of
the Cerritos Valley Bancorp and its subsidiary, Cerritos Valley Bank. The
following tables and data set forth certain statistical information relating to
the Company as of September 30, 2000, and for the nine month periods ended
September 30, 2000 and September 30, 1999. This discussion should be read in
conjunction with the unaudited condensed consolidated financial statements and
financial statements and notes as of September 30, 2000, included herein and the
consolidated financial statements and notes thereto included in the Company's
Annual Report filed on Form 10-K for the year ended December 31, 1999.
The Company's business strategy is to offer a broad range of commercial banking
products and services to individuals and business in its primary service area
with an emphasis upon customer service, efficiency, and personalized services.
The Company's business strategy is to increase its market share of loans and
deposits by focusing upon the banking needs of local businesses, including
retail, professional and real estate-related activities, and individuals living
and working in the Southern California communities of Norwalk, Artesia,
Huntington Park and Glendale.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its loan
portfolio,
11
<PAGE>
investment securities and other earning assets, and its cost of funds,
consisting of interest paid on its deposits and borrowings. The Company's
operating results are also impacted by provisions for loan losses, and to lesser
extent service charges on deposit accounts and other non-interest income. In
addition, the Company's operating expenses principally consist of salaries,
wages and employee benefits, occupancy expenses, professional services, and
other general economic and competitive conditions, particularly changes in
interest rates and actions of regulatory authorities.
SUMMARY
Total assets decreased $202,199, or .16% from $126,851,799 as of December 31,
1999 to $126,649,600 as of September 30, 2000. Total loans were $63,765,546 and
$66,805,672 as of September 30, 2000 and December 31, 1999, respectively, a
decrease of $3,040,126 or 4.55%. Deposits totaled $101,495,796 as of September
30, 2000, a $168,508 or .17% decrease from the December 31, 1999 total of
$101,664,304.
Non-performing assets, which include non-accrual loans, loans delinquent 90 days
or more but still accruing interest were $2,269,000 at September 30, 2000, as
compared to $1,868,000 at December 31, 1999. This increase was due to the
classification of two loans to non-accrual during the first quarter of 2000.
Non-performing loans as a percent of total loans increased to1.43% at September
30, 2000 from .75% at December 31, 1999.
Net income for the nine month periods ended September 30, 2000 was $1,008,371 or
$.1.01 per basic earnings per share and $.84 per diluted earnings per share,
compared to net income of $1,262,756 or $1.27 per basic earnings per share and
$1.19 per diluted earnings per share, for the nine month period ended September
30, 1999.
Provision for loan losses was $257,000 for the period ended September 30, 2000
and $130,000 for the same period ended September 30, 1999. The increase was the
result of the identification of additional non-performing loans and classified
assets.
Net interest income before provision for loan losses was $4,291,405 and
$4,766,753 for the nine month periods ending September 30, 2000 and 1999,
respectively. Non-interest income was $1,425,577 for the nine month period
ending September 30, 2000, as compared to $1,206,844 for the nine month period
ending September 30, 1999. Non-interest expense increased $168,374 to $3,874,311
for the nine month period ending September 30, 2000 from $3,705,937 for the same
period of 1999.
12
<PAGE>
The following table sets forth certain important ratios for the Company for the
periods indicated:
<TABLE>
Nine months ended September 30,
-------------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Net earnings on average assets 0.81% 1.16%
============ =============
Net earnings on average
stockholders' equity 9.22% 10.92%
============ =============
Average stockholders' equity to
average total assets 8.77% 10.66%
============ =============
</TABLE>
The following explains in greater detail the financial condition and results of
operations of the Company. This discussion should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report.
FINANCIAL CONDITION
Cerritos Valley Bancorp (the "Company"), holding company for Cerritos Valley
Bank (the "Bank"), recorded net earnings of $373,849, or $0.37 basic earnings
per share, for the three month period ended September 30, 2000, and $1,008,371
or $1.01 basic earnings per share for the nine month period ended September 30,
2000. Compared with net earnings of $545,808, or $0.55 basic earnings per share,
for the three month period ended September 30, 1999, and $1,262,756 or $1.27
basic earnings per share for the nine month period ended September 30, 1999. The
Company had diluted earnings per share for the nine month period ended September
30, 2000 of $0.84 per share and $1.19 diluted earnings per share for the nine
month period ended September 30, 1999.
Premises
The Bank is leasing the property located at 12100 Firestone Boulevard, Norwalk,
California. The standalone building situated on the property consists of 7,500
square feet. The lease was executed in 1978 and will expire in August 2001.
The Bank owns the branch office located at 3508 E. Florence Avenue, Huntington
Park, California. The Bank purchased the building that houses the Huntington
Park branch in 1995 from the FDIC when it acquired the branch. The building
consists of 13,350 square feet of which the Huntington Park branch utilizes
4,797 square feet. The Bank leases the rest of the space to several tenants that
are renting with terms from 2 to 5 years.
The Bank owns the branch office located at 18300 Pioneer Boulevard, Artesia,
California. The first floor consists of 7,106 square feet and houses the Bank's
Artesia branch office and the Bank's loan center. The second floor consists of
7,565 square feet and houses the administration offices of the Company and the
Bank.
13
<PAGE>
The Bank leases its Glendale branch office. The Glendale branch office is
located at 411 N. Central Avenue, Glendale, California. The branch space at this
site consists of approximately 3,500 square feet. The premises are leased for a
term expiring on March 1, 2008.
Loans
The Bank engages in commercial lending to businesses, and although the Bank
looks principally to borrowers' cash flow as the source of repayment, many
commercial loans are real estate secured. The Bank also engages in real estate
lending, including construction loans. The Bank's real estate and construction
loans are concentrated geographically in Southern California. In addition to the
collateralized position on its lending activities, all lending transactions are
subject to the Bank's credit evaluation, underwriting criteria and monitoring
standards.
The Bank is emphasizing loan growth in order to increase the size and quality of
the loan portfolio. It is the intention of management to continue increasing the
loan portfolio throughout the remainder of 2000, however, no assurance can be
given that the Bank will be able to do so.
The following table sets forth the type and amount of loans outstanding in each
category, the percent of total loans outstanding for each category and the
allowance for the loan losses as of the dates indicated:
<TABLE>
September 30, 2000 December 31, 1999
---------------------------- -----------------------------
Amount % of Total Amount % of Total
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Commercial $ 29,092,303 44.64% $ 27,913,786 40.95%
Construction 3,206,413 4.92% 6,487,052 9.52%
Real estate 31,132,979 47.77% 31,241,895 45.83%
Installment 1,735,572 2.66% 2,526,134 3.71%
---------------------------- -----------------------------
Subtotal 65,167,267 100.00% 68,168,867 100.00%
Less:
Deferred loan fees (42,677) (86,054)
Allowance for loan losses (1,359,044) (1,277,141)
---------------- ---------------
Net loans $ 63,765,546 $ 66,805,672
================ ===============
</TABLE>
Except as otherwise set forth in the table above, as of September 30, 2000, the
Bank did not have any concentration of loans in any particular industry
exceeding 10% of total loans outstanding.
The Company actively monitors maturities and repricing activities within its
loan portfolio. Construction loans decreased 50.57% during the period ended
September 30, 2000 to $3,206,413 from $6,487,052 at December 31, 1999, as a
result of scheduled maturities and principal pay-downs. Installment loans
decreased 31.30% during the period ended September 30, 2000 to $1,735,572 from
$2,526,134 at December 31, 1999, as a result of scheduled maturities and
principal pay-downs.
14
<PAGE>
In accordance with management's credit administration and regulatory policy,
loans are placed on non-accrual status when the collection of principal or
interest is 90 days or more past due, unless the loan is well secured and in the
process of collection or in the process of renewal.
Non-performing loans increased 81.5% or $419,032 to $933,446 as of September 30,
2000, compared to $514,414 as of December 31, 1999. This increase relates
primarily to the classification of two loans to a non-accrual status.
The following table sets forth information concerning non-performing assets,
delinquent loans and loans 90 days or more past due and continuing to accrue and
certain ratios as of the dates indicated:
<TABLE>
September 30, 2000 December 31, 1999
--------------------- ---------------------
<S> <C> <C>
(dollars in thousands)
Nonperforming loans (1) $ 933 $ 514
Other real estate owned - -
--------------------- ---------------------
Total nonperforming assets $ 933 $ 514
====== ======
Accruing loans 90 days or more past due $ 1,336 $ 1,354
======== =======
Nonperforming loans to total loans 1.43% 0.75%
Nonperforming assets
to total loans 1.43% 0.75%
to total assets 0.74% 0.41%
</TABLE>
The policy of the Bank is to review each loan in the portfolio to identify
problem credits. There are three classifications for problem loans:
"substandard", "doubtful", and "loss". Substandard loans have one or more
defined weaknesses and are characterized by the possibility that the Bank will
sustain some loss if the deficiencies are not corrected. Doubtful loans have the
weaknesses of substandard loans with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. A loan classified as loss is considered uncollectible and
of such little value that its continuance as an asset of the Bank is not
warranted. Another category designated "special mention" is maintained for loans
which do not currently expose the Bank to a sufficient degree of risk to warrant
classification as substandard, doubtful or loss, but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Management is not aware of any other loans at September 30, 2000 where known
credit problems of the borrower would cause the Bank to have serious doubts
about the ability of such borrowers to comply with their present loan repayment
terms and which would result in such loans being classified as non-performing
loans at some future date. While the California economy appears to be still
going strong, management cannot predict the effect the economy will have on the
Bank's loan portfolio. Furthermore, the Bank's
15
<PAGE>
primary regulators review the loan portfolio as an integral part of their
routine, periodic examinations which may affect the balance of the allowance for
loan losses. Accordingly, there is no assurance that other loans will not be
placed on non-accrual, become 90 days or more past due, or have terms modified
in the future.
Allowance for Loan Losses
The allowance for loan losses was $1,359,044 or 2.09% of loans outstanding at
September 30, 2000, as compared to $1,277,141 or 1.87% of loans outstanding, at
December 31, 1999.
Management has credit policies in place to monitor and control the level of loan
losses and non-performing loans. The Bank's credit risk management policy
provides for the maintenance of the allowance for loan losses at a level
considered by management to be adequate to absorb estimated known and inherent
losses in the existing portfolio, including commitments and standby letters of
credit. The allowance for loan losses is established through charges to
operations in the form of provisions for loan losses.
The allowance is based upon a regular review by management of current economic
conditions, which might affect a borrower's ability to pay, collateral values,
risk in and the composition of the loan portfolio, prior loss experience and
industry averages. In addition, the Bank's primary regulators, as an integral
part of their examination process, periodically review the Bank's allowance for
loan losses and may recommend additions to the allowance based on their
assessment of information available to them at the time of their examination.
Loans that are deemed to be uncollectible are charged-off and deducted from the
allowance. The provisions for loan losses and recoveries on loans previously
charged-off are added to the allowance.
Management believes that the allowance for loan losses was adequate at September
30, 2000, to absorb known and inherent losses in the existing portfolio.
However, the allowance is an estimate, which is inherently uncertain and depends
on the outcome of future events. While the California economy appears to be
still performing well, management cannot predict the extent to which the
economic environment may perform in the future or the full impact that such
environment may have on the Bank's loan portfolio. A decline in the local
economy would result in deterioration in the quality of the loan portfolio and
high levels of non-performing assets and charge-offs, which would require
increased provisions for loan losses and would adversely affect the financial
condition and results of operations of the Bank. Irrespective of a deterioration
in economic conditions, it is possible that the Bank will be required to make
additional provisions to the allowance for loan losses to absorb future losses,
which could be material in amount and which could adversely affect the results
of operations.
For the nine month period ended September 30, 2000, the allowance for loan
losses was increased by $81,903 as the result of a provision for the same period
of $257,000, net of charge-offs in the amount of $175,097. The increase in
allowance for loan losses was
16
<PAGE>
6.41% and 3.19% for the nine month period ending September 30, 2000 and year
ended December 31, 1999, respectively.
The following table sets forth certain information regarding the allowance for
loan losses:
<TABLE>
September 30, 2000 December 31, 1999
--------------------- --------------------
<S> <C> <C>
Balance at beginning of period $ 1,277,141 $ 1,237,680
Provision for loan losses 257,000 240,000
Loan charge-offs (293,105) (225,747)
Recoveries on loans previously charged-off 118,008 25,208
--------------------- --------------------
Net (charge-offs) recoveries (175,097) (200,539)
--------------------- --------------------
Balance at end of period $ 1,359,044 $ 1,277,141
===================== ====================
Loans outstanding at end of period $ 65,167,267 $ 68,168,867
Average loans outstanding during period $ 65,255,420 $ 65,745,280
Net charge-offs (recoveries) to average loans
outstanding 0.27% 0.31%
Allowance for loan losses:
to total loans 2.09% 1.87%
to nonperforming loans 145.59% 248.27%
to nonperforming assets 145.59% 248.27%
</TABLE>
Investment Securities
The Bank's investment portfolio provides investment income and serves as a
source to meet liquidity needs.
Debt and equity securities are classified in one of three categories - held to
maturity, available for sale or trading securities. For securities classified as
held to maturity, the Bank must have the positive intent and ability to hold
them to maturity. These securities are carried at amortized cost. Should the
Bank wish to establish a trading portfolio, this would contain securities
purchased and held principally for the purpose of selling them in the near term
and would be carried at fair value with unrealized gains and losses included in
the income statement. The available for sale portfolio contains securities not
classified as held to maturity or trading and will be carried at fair value with
unrealized gains or losses reported net of tax, as a separate component of
stockholders' equity until realized.
At September 30, 2000, the Bank held $3,342,044 classified as held to maturity
and $33,170,615 market value of securities classified as available for sale. The
Banks does not have any securities classified as trading securities.
17
<PAGE>
The net after tax unrealized loss from securities available for sale was
$655,824 at September 30, 2000 as compared to an unrealized loss of $802,913 at
December 31, 1999.
The following table sets forth the amortized cost and fair value of securities
available for sale as of September 30, 1999 and December 31, 1999:
<TABLE>
September 30, 2000
------------------------------------------------------------------
Amortized Estimated
cost Gains Losses fair value
--------------- ------------ -------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 499,229 $ - $ 634 $ 498,595
Obligations of other U.S.
Government agencies
and corporations 26,182,030 - 815,664 25,366,366
Mortgage-backed securities 1,757,750 - 12,101 1,745,649
Obligations of state and
political subdivisions 1,809,829 6,887 12,021 1,804,695
Corporate bonds 4,033,343 - 278,033 3,755,310
--------------- ------------ -------------- -----------------
$ 34,282,181 $ 6,887 $ 1,118,453 $ 33,170,615
=============== ============ ============== =================
December 31, 1999
-----------------------------------------------------------------
Amortized Estimated
cost Gains Losses fair value
--------------- ------------- ------------- ------------------
U.S. Treasury securities $ 497,853 $ - $ 508 $ 497,345
Obligations of other U.S.
Government agencies
and corporations 26,406,357 - 1,034,314 25,372,043
Mortgage-backed securities 2,103,941 - 13,884 2,090,057
Obligations of state and
political subdivisions 1,808,300 494 25,748 1,783,046
Corporate bonds 4,037,237 - 264,227 3,773,010
--------------- ------------- ------------- ------------------
$ 34,853,688 $ 494 $ 1,338,681 $ 33,515,501
=============== ============= ============= ==================
</TABLE>
18
<PAGE>
The amortized cost and fair value of securities held to maturity as of September
30, 2000 and December 31, 1999 are as follows:
<TABLE>
September 30, 2000
--------------------------------------------------------------------
Amortized Estimated
cost Gains Losses fair value
--------------- ------------- --------------- -------------------
<S> <C> <C> <C> <C>
Obligations of other U.S.
Government agencies
and corporations $ 2,000,000 $ - $ 59,685 $ 1,940,315
Mortgage-backed securities 628,118 1,922 7,021 623,019
Obligations of state and -
political subdivisions 713,926 6,475 3,200 717,201
--------------- ------------- --------------- -------------------
$ 3,342,044 $ 8,397 $ 69,906 $ 3,280,535
=============== ============= =============== ===================
December 31, 1999
----------------------------------------------------------------
Amortized Estimated
cost Gains Losses fair value
--------------- ------------- ------------ ------------------
Obligations of other U.S.
Government agencies
and corporations $ 2,000,000 $ - $ 71,772 $ 1,928,228
Mortgage-backed securities 680,124 2,666 2,629 680,161
Obligations of state and
political subdivisions 823,802 14,133 16,860 821,075
--------------- ------------- ------------ ------------------
$ 3,503,926 $ 16,799 $ 91,261 $ 3,429,464
=============== ============= ============ ==================
</TABLE>
During the nine months ended September 30, 2000, and the nine months ended
September 30, 1999, there were no sales of available for sale securities.
Deposits
Deposits totaled $101,495,796 as of September 30, 2000, as compared to
$101,664,304 as of December 31, 1999. The decrease in deposits of $168,508, or
.17%, is attributable to a decrease in interest -bearing checking and savings
deposits as well as a decrease in non-interest bearing demand deposits. Time
deposits with balances less than $100,000 increased from $13,363,696 as of
December 31, 1999, to $13,661,924 or 2.23%, as of September 30, 2000. Time
deposits with balances greater than $100,000 increased from $17,765,391 as of
December 31, 1999, to $18,273,531 or 2.86%, as of September 30, 2000. The Bank
is actively pursuing the acquisition of new deposit relationships.
At September 30, 2000 and December 31, 1999, the Bank had no brokered deposits.
19
<PAGE>
The following table sets forth information regarding the amount of deposits by
category and the percentage of each category to all deposits as of September 30,
2000 and December 31, 1999:
<TABLE>
September 30, 2000 December 31, 1999
---------------- ------------ ----------------- -----------
Amount % of Total Amount % of Total
---------------- ------------ ----------------- -----------
<S> <C> <C> <C> <C>
Checking noninterest $ 34,905,005 34.39% $ 35,789,486 35.20%
Checking interest-bearing and savings 21,985,072 21.66% 23,497,164 23.11%
Money market accounts 12,670,264 12.48% 11,248,567 11.06%
Time certificates of deposit under $100,000 13,661,924 13.46% 13,363,696 13.14%
Time certificates of deposit $100,000 and over 18,273,531 18.00% 17,765,391 17.47%
---------------- ----------- ----------------- -----------
$ 101,495,796 100.00% $ 101,664,304 100.00%
============= ====== ============= ======
</TABLE>
Capital
The Federal Reserve Bank (the "FRB"), the Company's, and the Bank's, primary
regulator, has established minimum leverage ratio guidelines. For institutions
which have received the highest composite regulatory rating and which are not
experiencing or anticipating significant growth are required to maintain a
minimum leverage ratio of 3% Tier 1 capital to total assets. All other
institutions are required to maintain a minimum leverage capital ratio of at
least 100 to 200 basis points above the 3% minimum requirements.
Risk-based capital standards were implemented on December 31, 1992. Since
December 31, 1992, banking organizations have been expected to meet the minimum
ratio for qualifying total capital to risk-weighted assets of 8.0%, 4.0% of
which must be Tier 1 capital. A banking organization's risk-based capital ratios
are obtained by dividing its qualifying capital by its total risk-adjusted
assets and risk-weighted off-balance sheet items.
The Federal Deposit Insurance Act of 1991 contains "prompt corrective action"
provisions pursuant to which insured depository institutions are to be
classified into one of five categories based primarily upon capital adequacy,
ranging from "well-capitalized" to "critically undercapitalized" and which
require, subject to certain exceptions, the appropriate federal banking agency
to take prompt corrective action with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized."
The following table presents the capital ratios for the Company and the Bank,
compared with the standards for "well-capitalized" depository institutions
(which standards do not apply to bank holding companies) and the minimum
required capital ratios to be deemed "adequately capitalized" under applicable
federal regulations, as of September 30, 2000.
20
<PAGE>
<TABLE>
Ratios for Well Ratios for Adequately
Actual Capitalized Purposes Capitalized Purposes
-----------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------------ ----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Company
Leverage $ 11,767 9.40% $ 6,261 5.00% $ 5,009 4.00%
Tier 1 risk-based $ 11,767 13.57% 5,204 6.00% 3,469 4.00%
Total risk-based 12,855 14.82% 8,673 10.00% 6,938 8.00%
Bank
Leverage $ 11,687 9.34% $ 6,259 5.00% $ 5,008 4.00%
Tier 1 risk-based 11,687 13.48% 5,201 6.00% 3,468 4.00%
Total risk-based 12,775 14.74% 8,669 10.00% 6,935 8.00%
</TABLE>
As indicated in the above table, the Company and the Bank have exceeded all
applicable regulatory capital guidelines at September 30, 2000. The Company's
management believes that, under the current regulations, the Company and the
Bank will continue to meet its minimum capital requirements in the foreseeable
future.
Liquidity
The Company's primary source of liquidity is dividends from the Bank. Dividends
from the Bank to the Company are subject to the restrictions set forth in the
California Financial Code. The California Financial Code provides that a bank
may not make a cash distribution to its shareholder in an amount which exceeds
the lesser of (1) the retained earnings or (2) the net income of the bank for
its last three fiscal years, less the amount of any distributions made by the
bank to its shareholders during that period; however, a bank may, with the
approval of the Department of Financial Institutions, make a distribution to its
shareholders in an amount not exceeding the greatest of:
o the retained earnings of the bank,
o the net income of the bank for its last fiscal year, or
o the net income of the bank for its current fiscal year.
If the Commissioner of the Department of Financial Institutions finds that the
shareholders' equity of a bank is not adequate or that the payment of a dividend
would be unsafe or unsound for the bank, the Commissioner of the Department of
Financial Institutions may order the bank not to a pay dividend to the
shareholders. In addition, the Bank, as a state-chartered bank, is also subject
to dividend restrictions set forth by the Federal Reserve Bank.
The objective of liquidity management is to maintain a balance between sources
and uses of funds in such a way that the cash requirements of customers for
loans and deposit withdrawals are met in the most economical manner. Management
monitors the liquidity position continuously in relation to trends of loans and
deposits for short term and long
21
<PAGE>
term requirements. Liquid assets are monitored on a daily basis to assure
sufficiency of readily marketable assets and access to short term funding
sources. The Bank has several federal funds borrowing lines, which would enable
the Bank to borrow on an unsecured basis from a non-affiliated financial
institution. The Bank also has a line of credit, secured by selected investment
securities in the amount of $2,000,000 with the Federal Reserve Bank of San
Francisco at their Loan & Discount Window. In addition, the Bank has a line of
credit, secured by selected investment securities and pledged loans in the
amount of $17,922,000 with an available amount of $7,239,000 with the Federal
Home Loan Bank of San Francisco.
The Bank's primary sources of liquidity are federal funds sold, unpledged
marketable securities, borrowing capacity from the Federal Home Loan Bank and
cash and due from banks. The Bank's liquidity ratio (the sum of liquid assets
divided by net deposits) was 33.55% as of September 30, 2000, as compared to
35.48% as of December 31, 1999. The decrease of 1.93% from December 31, 1999 to
September 30, 2000 was a result of decreased deposits. Deposits decreased
$168,508 to $101,495,796 as of September 30, 2000, from $101,644,304, as of
December 31, 1999. Management also monitors and controls the loan to deposit
ratio to ensure that the ratio remains within policy limits. At September 30,
2000 and December 31, 1999, the average loan to deposit ratios were 64.48% and
66.35%, respectively.
For the nine months ended September 30, 2000, federal funds sold average balance
was $4,436,723 compared to $10,833,000 for the nine months ended September 30,
1999, a decrease of 59.04%. In addition, securities in the available for sale
portfolio can be sold in response to liquidity needs or used as collateral for
banking activities including advances from the Federal Home Loan Bank.
Securities held to maturity are available for liquidity needs primarily as
collateral. The fair value of securities available for sale and held to maturity
at September 30, 2000 were $33,170,615 and $3,280,535, respectively.
RESULTS OF OPERATIONS
The Company reported consolidated net earnings of $373,849 for the three month
period ended September 30, as compared to net earnings of $545,808 for the three
month period ended September 30,1999. The Company reported consolidated net
earnings of $1,008,371 for the nine month period ended September 30, 2000, as
compared to $1,262,756 for the nine month period ended September 30, 1999. Basic
earnings per share for the three month period ended September 30, 2000 and 1999
were $0.37 and $0.55, respectively. Basic earnings per share for the nine month
periods ended September 30, 2000 and 1999, were $1.01 and $1.27, respectively.
On a fully diluted basis, the earnings per share for the nine month period ended
September 30, 2000 was $0.84, as compared to $1.19 for the same period ended
September 30, 1999.
Net Interest Income
22
<PAGE>
Net interest income is the major source of operating income of the Bank. Net
interest income is the difference between the interest income from earning
assets and the interest paid on interest bearing liabilities. Net interest
income before provision for loan losses was $4,291,405 for the nine month period
ended September 30, 2000, and $4,766,753 for the nine month period ended
September 30, 1999. The average cost of funds was 3.90% and 3.77% for the nine
month periods ended September 30, 2000 and 1999, respectively. Average loans
outstanding were $65,323,000and $65,922,000 for the nine month periods ended
September 30, 2000 and 1999, respectively. Average investments, including
Federal Funds sold, were $42,216,000 and $51,067,000 for the nine months ended
September 30, 2000 and 1999, respectively.
The preponderance of loans and investments earn interest at rates which vary
with reference to the published rate charged by money center banks to their best
customers (Prime Rate). During the first nine months of 2000, the Prime Rate, or
the Bank's reference rate, averaged 10.14%, which compares to 9.50% during the
first nine months of 1999. Average earning assets were $107,539,000 and
$117,084,000 for the nine month periods ending September 30, 2000 and 1999,
respectively. Non-performing assets, a non-earning asset, adversely impacted
this average for the nine month period ending September 30, 2000.
Interest expense decreased during the first nine months of 2000 to $2,282,276,
as compared to $2,308,375 for the like period in 1999. The average rate paid on
interest bearing deposits and other borrowings was 3.90% and 3.77% for the nine
months ended September 30, 2000 and 1999, respectively. Average interest bearing
deposits were $65,914,000 and $68,352,000 for the nine month periods ending
September 30, 2000 and 1999, respectively. Thus, the decrease in interest
expense was attributable to a decrease in interest bearing deposits.
As a result of the foregoing, the net interest margin and the net interest
earned as a percentage of average earnings were as follows for the period
indicated:
<TABLE>
Three months ended Nine months ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net interest margin 3.98% 4.34% 4.27% 4.31%
Net interest income earned as a
percentage of average earning assets 5.11% 5.51% 5.32% 5.43%
</TABLE>
The following tables present the distribution of average assets, liabilities and
shareholders' equity as well as the total dollar amount of interest income from
average interest-earning assets and resultant yields, and the dollar amounts of
interest expense and average interest-bearing liabilities, expressed both in
dollars and rates for the nine months ended September 30, 2000 and 1999.
23
<PAGE>
<TABLE>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
----------------------------------- -----------------------------------
Average Yield/ Average Yield/
(dollars in thousands) Balance Rate Interest Balance Rate Interest
--------- ------ ---------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities $ 37,779 5.95% $ 1,683 $ 40,234 5.83% $ 1,755
Loans 65,323 9.58% 4,687 65,922 10.00% 4,933
Federal funds sold 4,437 6.08% 202 10,833 4.72% 382
Interest-earning deposits - 0.00% 2 95 6.50% 5
----------- ------------------------- ----------
Total interest-earning assets 107,539 8.17% 6,574 117,084 8.08% 7,075
----------- ------------------------- ----------
Deferred loan fees (68) (102)
Allowance for loan losses (1,339) (1,197)
Noninterest-earning assets
Cash and due from banks 9,843 9,183
Premises and equipment 2,189 1,853
Other assets 6,519 4,184
----------- -----------
Total assets $ 124,683 $ 131,005
=========== ===========
Liabilities and Shareholders' Equity
Interest-bearing liabilities
Interest-bearing demand deposits $ 11,836 1.49% 132 $ 11,600 1.47% 128
Savings and money market deposits 22,719 2.55% 433 24,189 2.69% 487
Time deposits under $100,000 14,739 4.83% 533 14,133 4.49% 475
Time deposits over $100,000 16,620 5.25% 653 18,430 4.68% 645
Other borrowings - FHLB 11,497 5.69% 490 13,223 5.62% 556
Capital lease & TT&L & Other 697 7.86% 41 241 9.58% 17
----------- ------------------------- ------------
78,108 3.90% 2,282 81,816 3.77% 2,308
----------- ------------------------- ------------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits 33,817 34,840
Other liabilites 2,399 1,965
Shareholders' equity 10,359 12,384
----------- -----------
Total liabilities and shareholders'
equity $ 124,683 $ 131,005
=========== ===========
5.32% $ 4,292 5.43% $ 4,767
================= =================
</TABLE>
Provision for Loan Losses
The provision for loan losses creates an allowance for potential losses in the
loan portfolio. These provisions increase the allowance for loan losses.
For the nine month period ended September 30, 2000, the provision for loan
losses was $257,000 as compared to $130,000, for the nine month period ended
September 30, 1999.
24
<PAGE>
Management believes that the allowance for loan losses at September 30, 2000 was
adequate to absorb known and inherent risks in the loan portfolio. However, no
assurances can be given that changes in economic conditions or other factors
will not lead to a higher amount of problem loans, provision for loan losses, or
charge-offs. Moreover, under certain circumstances, it is possible that
additional provisions to the allowance could be required in the future.
For further information on non-performing and classified loans, the allowance
for loan losses, and the resulting effect on results of operations, see
Financial Condition - Allowance for Loan Losses, and Financial Condition -
Non-performing Assets.
Non-interest Revenue
For the nine months ended September 30, 2000, non-interest revenue totaled
$1,425,577 compared to $1,206,844 for the same period in 1999. The increase was
primarily related to an increase in service charges on deposit accounts and
other service charge and income.
Non-interest Expense
Non-interest expenses for the nine months ended September 30, 2000, increased to
$3,874,311 or 4.54%, from $3,705,937 for the same period in 1999. The increase
occurred primarily in other operating expenses, which includes Professional
expense categories and employee expense.
The increase in Professional expense category is primarily in legal fees and
other professional fees, which increased $75,161 from $345,211 for the nine
months ended September 30, 1999 to $420,373 for the same period in 2000. The
increase in legal is primarily due to litigation arising from credit resolution.
Income Taxes
For the nine months ended September 30, 2000, the provision for income taxes was
$577,300 compared to $874,904 for the same period in 1999.
ASSET/LIABILITY MANAGEMENT
The Bank's policy is to match the level of rate sensitive assets to rate
sensitive liabilities within limited ranges, thereby reducing the exposure to
interest rate fluctuations. While no single measure can completely identify the
impact of changes in interest rates on net interest income, one gauge of
interest rate sensitivity is to measure, over a variety of time periods, the
difference in the amounts of the Bank's rate sensitive assets and rate sensitive
liabilities. The differences, or "gaps", provide an indication of the extent to
which net interest income may be affected by future changes in interest rates. A
positive gap exists when rate sensitive assets exceed rate sensitive liabilities
and indicates that a greater volume of assets than liabilities will reprice
during a given period. This mismatch
25
<PAGE>
may enhance earnings in a rising interest rate environment, and may reduce
earnings when interest rates decline. Conversely, when rate sensitive
liabilities exceed rate sensitive assets, referred to as a "negative gap", it
indicates that a greater volume of liabilities than assets will reprice during
the period. In this case a rising interest rate environment may reduce earnings
and declining interest rates may enhance earnings. However, because interest
rates for different asset and liability products offered by depository
institutions respond in a different manner, both in terms of responsiveness as
well as to the extent of responsiveness to changes in the interest rate
environment, the gap is only a general indicator of interest rate sensitivity
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Bank's market risk arises primarily from interest rates risk inherent in its
loan and deposit functions and management actively monitors and manages this
interest rate risk exposure. The Bank does not have any market risk sensitive
instruments entered into for trading purposes. Management uses several different
tools to monitor its interest rate risk. One measure of exposure to interest
rate risk is gap analysis. A positive gap for a given period means that the
amount of interest-earning assets maturing of otherwise repricing within such
period is greater than the amount of interest-bearing liabilities maturing or
otherwise repricing within the same period. The Bank has a negative gap measured
within the 12 month period. From one year and beyond, the negative gap changes
to a positive gap. In addition, the Bank uses interest rate shock analysis to
estimate the effect of certain hypothetical rate changes on income and capital
on a present value basis. The Bank uses an internal reference rate index to
price its loans. This reference rate is not automatically adjusted when the Wall
Street prime rate is lowered. As a result, the Bank does not pay any broker to
obtain deposits and therefore is able to price its deposit below competitive
prices. Based upon the Bank's shock analysis, net interest income is expected to
rise with increasing rates and fall with declining rates.
The Bank's positive gap after one year is the result of the majority of
investments having terms greater than one year on the asset side. Also,
approximately 53.1% of its loan portfolio reprices and matures over a 1 year
period. On the liability side, the majority of the Bank's time deposits have an
average term life of less than 1 year while savings accounts, NOW accounts and
money market accounts are recorded for gap analysis in the next day to three
month category because they do not have a contractual maturity date. The
borrowings from the Federal Home Loan Bank have an average term life greater
than three years.
Taking into consideration that savings accounts and other interest-bearing
transaction accounts typically do not react immediately to changes in interest
rates, management has taken the following steps to manage its positive interest
rate gap. The Bank uses an internal reference rate for pricing loans, which
changes at a slower rate than prime. For fixed term loans, The Bank uses Federal
Home Loan Bank advances to match the funding of the loans in order to protect
the spread over the life of the loan. Also, the Bank holds
26
<PAGE>
the majority of its investments in the available-for-sale category in order to
be able to react to changes in interest rates.
The following table sets forth the distribution of repricing opportunities of
the Bank's interest-earning assets and interest-bearing liabilities, the
interest rate sensitivity gap, i.e. interest rate sensitive assets less interest
rate sensitive liabilities, the cumulative interest rate sensitivity gap and the
cumulative gap as a percentage of total interest-earning assets as of September
30, 2000. The table also sets forth the time periods within which
interest-earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. The interest rates
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant. The table should be used only as a guide as to the
possible effect changes in interest rates might have on the net margins of the
Company.
<TABLE>
September 30, 2000
--------------------------------------------------------------
Over
Three
Months Over
Next Day Through One Year Over
to Three Twelve Through Five
(dollars in thousands) Months Months Five Years Years Total
--------- ---------- ------------- ------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Federal funds sold $ 4,310 $ - $ - $ - $ 4,310
Taxable investment securities - 2,974 24,935 7,185 35,094
Nontaxable investment securities - 380 980 909 2,269
Loans (1) 29,825 260 11,994 22,112 64,191
------- ------- ------- ------ ------
Total interest-earning assets 34,135 3,614 37,909 30,206 105,864
LIABILITIES:
Savings deposits (2) 34,655 - 34,655
Time deposits 14,808 11,401 5,726 - 31,935
Other borrowed funds - - 4,924 5,759 10,683
------- ------- ------- ------ ------
Total interest-bearing
liabilities 49,463 11,401 10,650 5,759 77,273
------- ------- ------- ------ ------
Net (interest-bearing liabilities)
interest-earning assets $ (15,328) $ (7,787) $ 27,259 $ 24,447 $ 28,591
========= ======== ======== ======== =======
Cumulative net (interest-bearing
liabilities) interest-earning
assets (GAP) $ (15,328) $(23,115) $ 19,472 $ 51,706 $ 53,038
========== ========= ======== ======== =======
Cumulative GAP as a
percentage of total
interest-earning assets -44.90% -639.60% 51.37% 171.18% 50.10%
====== ======= ===== ====== =====
</TABLE>
(1) Gross loans net of nonaccrual.
(2) Savings deposits include interest-bearing transaction accounts.
27
<PAGE>
PART 11. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not subject to any legal proceedings. From time to time, the Bank
is a party to claims and legal proceedings arising in the ordinary course of
business. The Company's management is not aware of any material pending
litigation proceedings to which either it or the Bank is a party or has recently
been a party, which will have a material adverse effect on the financial
condition or results of operations of the Company or the Bank, taken as a whole.
Item 2. Changes in Securities and use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits to Consolidated Financial Statement Schedules and INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
(a)
1. Financial Statements.
See Part I Item I of this document for Financial Statements and
Supplementary Data.
2. None, except Financial Data Schedule as Exhibit 27 of this document.
3. Exhibits
3.1 Articles of Incorporation as amended of Registrant is contained as
Exhibit 3.1 within the Company's S-4 filing dated May 24, 1999, file
number 333-79193, and is hereby incorporated by reference herein.
3.2 By Laws as amended of Registrant is contained as Exhibit 3.2 within the
Company's S-4 filing dated May 24, 1999, file number 333-79193, and is
hereby incorporated by reference herein.
4.1 Specimen stock certificate of Registrant is contained as Exhibit 4.1
within the Company's S-4 filing dated May 24, 1999, file number
333-79193, and is hereby incorporated by reference herein.
10.2 Stock Purchase Amendment Agreement for James N. Koury is contained as
exhibit 10.2 within the Company's S-4 filing dated May 24, 1999, file
number 333-79193, and is hereby incorporated by reference herein.
10.3 Cerritos Valley Bank Deferred Compensation Agreement for James N.
Koury is contained as Exhibit 10.3 within the Company's S-4 filing
dated May 24, 1999, file number 333-79193, and is hereby incorporated
by reference herein.
10.4 Amendment to Cerritos Valley Bank Deferred Compensation Agreement for
James N. Koury is contained as Exhibit 10.4 within the Company's S-4
filing dated May 24, 1999, file number 333-79193, and is hereby
incorporated by reference herein.
10.5 Cerritos Valley Bancorp 1993 Stock Option Plan is contained as Exhibit
10.5 within the Company's S-4 filing dated May 24, 1999, file number
333-79193, and is hereby incorporated by reference herein.
10.6 Cerritos Valley Bancorp 1993 Stock Option Plan and form of incentive
stock option and nonqualified stock option agreement is contained as
Exhibit 10.6 within the Company's S-4 filing dated May 24, 1999, file
number 333-79193, and is hereby incorporated by reference herein.
<PAGE>
10.7 Form of indemnification agreement is contained as Exhibit 10.7 within
the Company's S-4 filing dated May 24, 1999, file number 333-79193,
and is hereby incorporated by reference herein.
10.8 Directors Agreement form for directors of Registrant is contained as
Exhibit 10.8 within the Company's S-4 filing dated May 24, 1999, file
number 333-79193, and is hereby incorporated by reference herein.
11. Statement re: computation of per share earnings is included in Part I
Item 1 Notes to Interim Consolidated Financial Statements and Part I
Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of this Registration Statement
21. Sole Subsidiary of the Registrant is Cerritos Valley Bank, a California
state-chartered banking corporation.
(b)
Reports on Form 8K. None filed during the reporting period, 2nd quarter 2000.
(c)
Financial Data Schedule as Exhibit 27 of this document.
(d)
Financial Data Schedule as Exhibit 27 of this document
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
CERRITOS VALLEY BANCORP
/s/ James N. Koury
-----------------------------
James N. Koury, Chief Executive Officer and President
Dated November 14, 2000
---------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Paula-Rose Wihongi
-----------------------------
Paula-Rose Wihongi, Principal Financial Officer
and Principal Accounting Officer
Dated November 14, 2000
---------------------------
