<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 June 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 June 30, 2000, 999,670 shares of Registrant's no par value common stock
were outstanding.
<PAGE>
CERRITOS VALLEY BANCORP
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 1
Consolidated Statements of Earnings for the three and six month
periods ended June 30, 2000 and 1999 3
Consolidated Statement of Stockholders' Equity for the six month
periods ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the six month
periods ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 2 Changes in Securities and Use of Proceeds 25
Item 3 Defaults upon Senior Securities 25
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Exhibits to Consolidated Financial Statement Schedules and INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES 26
</TABLE>
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31, Change
2000 (Unaudited) 1999 Amount Percent
---------------- --------------- -------------- -------
<S> <C> <C> <C> <C>
Cash and due from banks $ 11,120,805 $ 12,779,517 $ (1,658,712) -12.98%
Federal funds sold 1,102,000 2,000,000 (898,000) -44.90%
---------------- ---------------- --------------
Cash and cash equivalents 12,222,805 14,779,517 (2,556,712) -17.30%
Investment securities
Available for sale 33,028,755 33,515,501 (486,746) -1.45%
Held to maturity - fair value of $3,343,718
and $3,429,465 in 2000 and 1999, respectively 3,458,692 3,503,926 (45,234) -1.29%
Loans receivable, net of allowance for loan losses
of $1,493,857 and $1,277,141 in 2000 and
1999, respectively 63,467,163 66,805,672 (3,338,509) -5.00%
Bank premises and equipment 2,182,685 1,722,752 459,933 26.70%
Accrued interest receivable 1,031,228 1,072,048 (40,820) -3.81%
Prepaid expenses and other assets 7,039,934 5,452,383 1,587,551 29.12%
---------------- ---------------- --------------
Total assets $ 122,431,262 $ 126,851,799 $ (4,420,537) -3.48%
================ ================ ==============
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31, Change
2000 (Unaudited 1999 Amount Percent
---------------- --------------- -------------- -------
<S> <C> <C> <C> <C>
Liabilities
Deposits
Checking noninterest-bearing $ 32,204,584 $ 35,789,486 $ (3,584,902) -10.02%
Checking interest-bearing and savings 21,357,140 23,497,164 (2,140,024) -9.11%
Money market accounts 12,228,430 11,248,567 979,863 8.71%
Time certificates of deposit under
$100,000 14,650,266 13,363,696 1,286,570 9.63%
Time certificates of deposit $100,000
and over 17,031,880 17,765,391 (733,511) -4.13%
--------------- --------------- --------------
Total deposits 97,472,300 101,664,304 (4,192,004) -4.12%
FHLB advances 10,798,775 12,023,912 (1,225,137) -10.19%
Treasury, tax and loan 1,165,780 978,094 187,686 19.19%
Obligations under capital lease 220,189 229,885 (9,696) -4.22%
Accrued expenses and other liabilities 2,284,642 1,999,344 285,298 14.27%
--------------- --------------- --------------
Total liabilities 111,941,686 116,895,539 (4,953,853) -4.24%
Commitments and contingencies - - - 0.00%
Stockholders' equity
Contributed capital
Common stock - authorized, 20,000,000
shares, no par value; 999,670 and
991,667 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 3,562,036 2,927,514 634,522 21.67%
Accumulated other comprehensive income (902,919) (802,913) (100,006)
--------------- ---------------
Total stockholders' equity 10,489,576 9,956,260 533,316 5.36%
--------------- --------------- --------------
Total liabilities and
stockholders' equity $ 122,431,262 $ 126,851,799 $ (4,420,537) -3.48%
=============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three month period ending Six month period ended
June 30, June 30,
2000 1999 2000 1999
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
INTEREST REVENUES
Loans $ 1,592,035 $ 1,655,724 $ 3,167,423 $ 3,256,236
Investment securities 537,922 574,692 1,128,160 1,136,658
Federal funds sold 49,780 107,153 118,477 202,748
Other deposits 673 2,909 1,785 3,062
----------------- ---------------- ----------------- ----------------
TOTAL INTEREST REVENUES 2,180,410 2,340,478 4,415,845 4,598,704
INTEREST EXPENSE
Deposits 572,520 578,403 1,128,992 1,147,177
FHLB borowings 166,498 170,771 331,858 359,582
Other 14,924 19,543 30,346 19,543
----------------- ---------------- ----------------- ----------------
TOTAL INTEREST EXPENSE 753,942 768,717 1,491,196 1,526,302
----------------- ---------------- ----------------- ----------------
NET INTEREST INCOME 1,426,468 1,571,761 2,924,649 3,072,402
PROVISION FOR LOAN LOSSES 242,000 45,000 257,000 130,000
----------------- ---------------- ----------------- ----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,184,468 1,526,761 2,667,649 2,942,402
NON INTEREST REVENUES
Service charges on deposit accounts 346,188 300,559 702,332 601,361
Other service charges and income 170,932 152,969 250,674 235,535
Gain on sale of loans 400 501 801 897
----------------- ---------------- ----------------- ----------------
TOTAL NON INTEREST REVENUES 517,520 454,029 953,807 837,793
NON INTEREST EXPENSE
Employee 568,293 505,467 1,104,256 1,008,974
Occupancy 82,650 90,405 171,413 180,146
Other operating expense 591,679 699,819 1,362,980 1,311,004
----------------- ---------------- ----------------- ----------------
TOTAL NON INTEREST EXPENSE 1,242,622 1,295,691 2,638,649 2,500,124
----------------- ---------------- ----------------- ----------------
EARNINGS BEFORE INCOME TAXES 459,366 685,099 982,807 1,280,071
INCOME TAX PROVISION 153,643 319,928 348,285 563,122
----------------- ---------------- ----------------- ----------------
NET EARNINGS $ 305,723 $ 365,171 $ 634,522 $ 716,949
================= ================ ================= ================
Basic earnings per share $ 0.31 $ 0.37 $ 0.63 $ 0.72
================= ================ ================= ================
Diluted earnings per share $ 0.26 $ 0.34 $ 0.53 $ 0.66
================= ================ ================= ================
Basic weighted average shares outstanding 999,805 993,334 999,840 993,334
================= ================ ================= ================
Dilutive weighted average shares outstanding 1,197,520 1,079,361 1,197,554 1,079,361
================= ================ ================= ================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
For ther period ended June 30, 2000
------------------------------------------------------------------------------------
Accumulated
Number Additional other
of shares Common Paid in Capital comprehensive Retained
outstanding stock and warrants income Earnings Total
------------ -------------- -------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1999 999,875 $6,090,859 $1,740,800 $ (802,913) $2,927,514 $ 9,956,260
Common Stock Retired (205) (1,200) (1,200)
Comprehensive income
Net changes in unrealized gain on
securities available for sale,
net of tax benefit of $92,177 - - - (100,006) - (100,006)
Net earnings for six months ended June
30, 2000 - - - - 634,522 634,522
------------
Comprehensive income 534,516
------------ -------------- -------------- ------------- ----------- ------------
Balance - June 30, 2000 999,670 $6,089,659 $1,740,800 $ (902,919) $3,562,036 $10,489,576
============ ============== ============== ============= =========== ============
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
For ther period ended June 30, 1999
------------------------------------------------------------------------------------
Accumulated
Number Additional other
of shares Common Paid in Capital comprehensive Retained
outstanding stock and warrants income Earnings Total
------------ -------------- -------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1998 991,667 $ 6,540,813 $ - $ 27,591 $5,848,246 $12,416,650
Comprehensive income
Net changes in unrealized gain on
securities available for sale,
net of tax benefit of $410,453 - - - (643,271) - (643,271)
Net earnings for six months ended June
30, 1999 - - - - 716,949 716,949
-----------
Comprehensive income 73,678
Issuance of Stock 10,000 60,000 60,000
------------ -------------- -------------- -------------- ------------ ------------
Balance - June 30, 1999 1,001,667 $6,600,813 $0 ($615,680) $6,565,195 $12,550,328
============ ============== ============== ============== ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Month Ended June 30,
-------------------------------------
2000 1999
----------------- ------------------
<S> <C> <C>
Cash flows from operatig activities:
Net earnings $ 634,522 $ 716,949
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Net amortization/accretion of
discount/premium on securities (1,108) 1,208
Depreciation 105,745 124,056
Deferred income tax (benefit) expense (92,398) (355,542)
Other (gains) and losses (802) -
Principal payments from and sale of loans held for sale - 153,457
Increase in interest receivable 40,820 (50,302)
Net decrease (increase) in other assets (2,111,829) (85,569)
Net increase in other liabilities 285,299 268,099
Provision for loan losses 257,000 130,000
----------------- ------------------
Net cash (used in) provided by operating activities (882,751) 902,356
Cash flows from investing activities:
Proceeds from maturities and principal collected
on sale of securities:
Available for sale 486,746 8,112,570
Held to maturity 45,234 1,101,338
Purchases of investment securities:
Available for sale - (4,495,781)
Held to maturity - (279,500)
Net (increase) decrease in loans 3,082,310 (3,487,605)
Purchases of premises and equipment (47,900) (27,450)
----------------- ------------------
Net cash provided by investing activities 3,566,390 923,572
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in interest and
noninterest bearing accounts, savings and
money market accounts $ (4,745,062) $ 4,238,572
Net (decrease) increase in time certificates of deposits 553,058 406,081
Payments made under capital lease obligations (9,696) (11,657)
Net increase (decrease) in treasury, tax and loan note 187,686 1,054,605
Net (decrease) increase in FHLB advances (1,225,137) 1,166,027
Proceeds from issuance of stock - 60,000
Payment for the retirement of capital stock (1,200) -
------------------ ------------------
Net cash used in financing activities (5,240,351) 6,913,628
------------------ ------------------
Increase (decrease) in cash and cash equivalents (2,556,712) 8,739,556
Cash and cash equivalents at beginning of year 14,779,517 15,063,342
------------------ ------------------
Cash and cash equivalents at end of year $ 12,222,805 $ 23,802,898
================== ==================
Supplemental disclosures of cash flow information
Interest paid $ 1,507,216 $ 1,566,666
================== ==================
Income taxes paid $ 297,000 $ 434,500
================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
6
<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 June 30, 2000, and the results of operations for the
six month period ended June 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.
Income (loss) 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 999,805 for the three months ended June 30,
2000 and 999,840 for the six months ended June 30, 2000. The weighted average
number of shares used to compute basic earnings per share was 993,334 for the
three and six months ended June 30, 1999.
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
1,197,520 for the three month period ended June 30, 2000 and 1,197,554 for the
six month period ended June 30, 2000 and 1,079,361 for the three and six month
periods ended June 30, 1999.
NOTE 3.
The Company's only subsidiary, Cerritos Valley Bank, ("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 June 30, 2000, the Bank had $15,071,440 in unused commitments to extend
credit and $595,000 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 consists of Tier 1 capital
(consisting primarily of common stock and retained earnings less intangibles.)
As of June 30, 2000, Cerritos Valley Bancorp's Tier 1 risk-based capital ratio
was 13.77%. The Bank's total Tier 1 and Tier 2 risk-based capital ratio was
15.02%.
7
<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 June 30, 2000, and for the six month period ended June 30,
2000 and June 30, 1999. This discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and financial statements
and notes as of June 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,
8
<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 $4,420,537, or 3.48% from $126,851,799 as of December 31,
1999 to $122,421,262 as of June 30, 2000. Total loans were $63,467,163 and
$66,805,672 as of June 30, 2000 and December 31, 1999, respectively, a decrease
of $3,338,509 or 5.00%. Deposits totaled $97,472,300 as of June 30, 2000, a
$4,192,004 or 4.12% 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 $3,070,000 at June 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 from .75% at December
31, 1999 to 2.15% at June 30, 2000.
Net income for the six months period ended June 30, 2000 was $634,522 or $.63
per basic earnings per share and $.53 per diluted earnings per share, compared
to net income of $716,949 or $.72 per basic earnings per share and $0.66 per
diluted earnings per share, for the six months period ended June 30, 1999.
Provision for loan losses was $257,000 for the period ended June 30, 2000 and
$130,000 for the same period ended June 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 $2,924,649 and
$3,072,402 for the six months period ending June 30, 2000 and 1999,
respectively. Non-interest income was $953,807 for the six months period ending
June 30, 2000, as compared to $837,793 for the six months period ending June 30,
1999. Non-interest expense increased $138,525 to $2,638,649 for the six months
period ending June 30, 2000 from $2,500,124 for the same period of 1999.
9
<PAGE>
The following table sets forth certain important ratios for the Company for the
periods indicated:
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Net earnings on average assets 0.51% 0.56%
============ =============
Net earnings on average
stockholders' equity 6.24% 5.71%
============ =============
Average stockholders' equity to
average total assets 8.18% 9.77%
============ =============
</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 $305,723, or $0.31 basic earnings
per share, for the three month period ended June 30, 2000, and $634,522 or $0.63
basic earnings per share for the six months period ended June 30, 2000. Compared
with net earnings of $365,171, or $0.37 basic earnings per share, for the three
month period ended June 30, 1999, and $716,949 or $0.72 basic earnings per share
for the six months period ended June 30, 1999. The Company had diluted earnings
per share for the six months period ended June 30, 2000 of $0.53 per share and
$0.66 diluted earnings per share for the six months period ended June 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 leases its Artesia branch office. The Artesia branch office is
located at 18300 Pioneer Boulevard, Artesia, California in a two-story
building. 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. The current lease on the first floor would have expired on July 16,
2002. The current lease on the second floor would have expired on July 16,
10
<PAGE>
2004. During the first quarter of 2000, the Bank exercised its option to
purchase the entire building. The purchase price of $1.25 million is expected
to close escrow during the third quarter 2000.
The Bank also 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>
<CAPTION>
June 30, 2000 December 31, 1999
---------------------------- ----------------------------
Amount % of Total Amount % of Total
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Commercial $ 30,511,542 46.92% $ 27,913,786 40.95%
Construction 3,248,937 5.00% 6,487,052 9.52%
Real estate 29,579,142 45.48% 31,241,895 45.83%
Installment 1,692,056 2.60% 2,526,134 3.71%
---------------------------- ----------------------------
Subtotal 65,031,677 100.00% 68,168,867 100.00%
Less:
Deferred loan fees (70,657) (86,054)
Allowance for loan
losses (1,493,857) (1,277,141)
---------------- ---------------
Net loans $ 63,467,163 $ 66,805,672
================ ===============
</TABLE>
Except as otherwise set forth in the table above, as of June 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. Constructions loans decreased 50.08% during the period ended
June 30, 2000 to $3,248,937 from $6,487,052 at December 31, 1999, as a result of
scheduled maturities
11
<PAGE>
and principal pay-downs. Real estate loans decreased 5.32% during the period
ended June 30, 2000 to $29,579,142 from $31,241,895 at December 31, 1999, as
a result of scheduled maturities and principal pay-downs.
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 172% or $884,552 to $1,398,966 as of June 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>
<CAPTION>
June 30, 2000 December 31, 1999
--------------------- ---------------------
(dollars in thousands)
<S> <C> <C>
Nonperforming loans (1) $ 1,399 $ 514
Other real estate owned - -
--------------------- ---------------------
Total nonperforming assets $ 1,399 $ 514
===================== =====================
Accruing loans 90 days or more past due $ 1,677 $ 1,354
===================== =====================
Nonperforming loans to total loans 2.15% 0.75%
Nonperforming assets
to total loans 2.15% 0.75%
to total assets 1.14% 0.41%
</TABLE>
(1) Nonperforming loans and nonperforming assets do not include
accruing loans 90 days or more past due.
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 weakness deserving management's close attention.
12
<PAGE>
Management is not aware of any other loans at June 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 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 $1,493,857 or 2.30% of loans outstanding at
June 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 June 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.
13
<PAGE>
For the six months period ended June 30, 2000, the allowance for loan losses was
increased by $216,716 as the result of a provision for the same period of
$257,000 net of charge-offs in the amount of $40,284. The increase in allowance
for loan losses was 14.51% and 3.09% for the six months period ending June 30,
2000 and year ended December 31, 1999, respectively.
The following table sets forth certain information regarding the allowance for
loan losses:
<TABLE>
<CAPTION>
June 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 (53,923) (225,747)
Recoveries on loans previously charged-off 13,639 25,208
--------------------- --------------------
Net charge-offs (recoveries) (40,284) (200,539)
--------------------- --------------------
Balance at end of period $ 1,493,857 $ 1,277,141
===================== ====================
Loans outstanding at end of period $ 64,961,019 $ 68,168,867
Average loans outstanding during period $ 65,689,571 $ 65,745,280
Net charge-offs (recoveries) to average loans
outstanding 0.06% 0.31%
Allowance for loan losses:
to total loans 2.30% 1.87%
to nonperforming loans 106.78% 248.27%
to nonperforming assets 106.78% 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.
14
<PAGE>
At June 30, 2000, the Bank held $3,458,692 classified as held to maturity and
$33,028,755 market value of securities classified as available for sale. The
Banks does not have any securities classified as trading securities.
The net after tax unrealized loss from securities available for sale was
$902,919 at June 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 June 30, 1999 and December 31, 1999:
<TABLE>
<CAPTION>
June 30, 2000
------------------------------------------------------------------
Amortized Estimated
cost Gains Losses fair value
--------------- ------------ -------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 498,807 $ - $ 1,777 $ 497,030
Obligations of other U.S.
Government agencies
and corporations 26,323,895 - 1,080,856 25,243,039
Mortgage-backed securities 1,892,329 - 22,369 1,869,960
Obligations of state and
political subdivisions 1,809,340 1,908 34,873 1,776,375
Corporate bonds 4,034,756 - 392,405 3,642,351
--------------- ------------ -------------- -----------------
$ 34,559,127 $ 1,908 $1,532,280 $ 33,028,755
=============== ============ ============== =================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------
Amortized Estimated
cost Gains Losses fair value
--------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
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>
15
<PAGE>
The amortized cost and fair value of securities held to maturity as of June 30,
2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
June 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 $ 0 $ 97,939 $ 1,902,061
Mortgage-backed securities 644,812 953 14,795 630,970
Obligations of state and
political subdivisions 813,880 15,477 18,670 810,687
--------------- ------------- --------------- -------------------
$ 3,458,692 $ 16,430 $ 131,404 $ 3,343,718
=============== ============= =============== ===================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------
Amortized Estimated
cost Gains Losses fair value
--------------- ------------- ------------ ------------------
<S> <C> <C> <C> <C>
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 six months ended June 30, 2000, and the six months ended June 30,
1999, there were no sales of available for sale securities.
Deposits
Deposits totaled $97,472,300 as of June 30, 2000, as compared to $101,664,304 as
of December 31, 1999. The decrease in deposits of $4,192,004, or 4.12%, is
attributable to a decrease in higher rate time deposits as well as a decrease in
non-interest bearing demand deposits and interest bearing demand deposits. Time
deposits with balances less than $100,000 increased from $13,363,696 as of
December 31, 1999,to $14,650,266 as of June 30, 2000. The Bank is actively
pursuing the acquisition of new deposit relationships.
At June 30, 2000 and December 31, 1999, the Bank had no brokered deposits.
The following table sets forth information regarding the amount of deposits by
category and the percentage of each category to all deposits as of June 30, 2000
and December 31, 1999:
16
<PAGE>
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------------ ------------------------------
Amount % of Total Amount % of Total
---------------- ------------ ----------------- -----------
<S> <C> <C> <C> <C>
Checking noninterest $ 32,204,584 33.04% $ 35,789,486 35.20%
Checking interest-bearing and savings 21,357,140 21.91% 23,497,164 23.11%
Money market accounts 12,228,430 12.55% 11,248,567 11.06%
Time certificates of deposit under $100,000 14,650,266 15.03% 13,363,696 13.14%
Time certificates of deposit $100,000 and over 17,031,880 17.47% 17,765,391 17.47%
---------------- ------------ ---------------- -----------
$ 97,472,300 100.00% $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 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 June 30, 2000.
17
<PAGE>
<TABLE>
<CAPTION>
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 $ 11,369 9.13% $ 6,223 5.00% $ 4,979 4.00%
Tier 1 risk-based $ 11,369 13.77% 4,955 6.00% 3,303 4.00%
Total risk-based 12,402 15.02% 8,259 10.00% 6,607 8.00%
Bank
Leverage $ 11,369 9.14% $ 6,221 5.00% $ 4,977 4.00%
Tier 1 risk-based 11,369 13.77% 4,953 6.00% 3,302 4.00%
Total risk-based 12,402 15.02% 8,255 10.00% 6,604 8.00%
</TABLE>
As indicated in the above table, the Company and the Bank have exceeded all
applicable regulatory capital guidelines at June 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:
- the retained earnings of the bank,
- the net income of the bank for its last fiscal year, or
- 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
18
<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 $16,851,000 with an available amount of
$6,052,000 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 23.51% as of June 30, 2000, as compared to 35.48%
as of December 31, 1999. The decrease of 11.97% from December 31, 1999 to June
30, 2000 was a result of decreased deposits. Deposits decreased $4,192,004 to
$97,432,300 as of June 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 June 30, 2000 and December 31, 1999,
the loan to deposit ratios were 64.94% and 66.35%, respectively.
For the six months ended June 30, 2000, federal funds sold average balance was
$4,805.225 compared to $8,852,376 for the six months ended June 30, 1999, a
decrease of 45.7%. In addition, securities in the available for sale portfolio
can be sold in response to liquidity needs or used as collateral for 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 June 30, 2000 were $33,028,755 and $3,458,692,
respectively.
RESULTS OF OPERATIONS
The Company reported consolidated net earnings of $305,723 for the three month
period ended June 30, as compared to net earnings of $365,171 for the three
month period ended June 30,1999. The Company reported consolidated net earnings
of $634,522 for the six months period ended June 30, 2000, as compared to
$716,949 for the six months period ended June 30, 1999. Basic earnings per share
for the three month period ended June 30, 2000 and 1999 were $0.31 and $0.37,
respectively. Basic earnings per share for the six months period ended June 30,
2000 and 1999, were $0.63 and $0.72, respectively. On a fully diluted basis, the
earnings per share for the six months period ended June 30, 2000 was $0.53, as
compared to $0.66 for the same period ended June 30, 1999.
Net Interest Income
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
19
<PAGE>
was $2,924,649 for the six months period ended June 30, 2000, and $3,072,402
for the six months period ended June 30, 1999. The average cost of funds was
3.83% and 3.80% for the six months period ended June 30, 2000 and 1999,
respectively. Average loans outstanding were $65,767,000 and $65,685,000 for
the six months period ended June 30, 2000 and 1999, respectively. Average
investments, including Federal Funds sold, were $42,045,000 and $49,111,000
for the six months ended June 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 six months of 2000, the Prime Rate, or
the Bank's reference rate, averaged 9.96%, which compares to 9.50% during the
first six months of 1999. Average earning assets were $107,812,000 and
$114,890,000 for the six months period ending June 30, 2000 and 1999,
respectively. Non-performing assets, a non-earning asset, adversely impacted
this average for the six months period ending June 30, 2000.
Interest expense decreased during the first six months of 2000 to $1,491,196, as
compared to $1,526,302 for the like period in 1999. The average rate paid on
interest bearing deposits was 3.44% and 3.39% for the six months ended June 30,
2000 and 1999, respectively. Average interest bearing deposits were $67,571,000
and $67,642,000 for the six months period ending June 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>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net interest margin 4.40% 4.49% 4.40% 4.27%
Net interest income earned as a
percentage of average earning assets 5.39% 5.62% 5.43% 5.35%
</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 six months ended June 30, 2000 and 1999.
20
<PAGE>
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 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 $ 37,960 5.99% $ 1,131 $ 40,259 5.70% $ 1,137
Loans 65,767 9.68% 3,167 65,685 10.00% 3,256
Federal funds sold 4,085 5.81% 118 8,852 4.61% 203
Interest-earning deposits - 0.00% - 95 6.37% 3
----------- --------------------------- ------------
Total interest-earning assets 107,812 8.24% 4,416 114,891 8.07% 4,599
----------- --------------------------- ------------
Deferred loan fees (77) (101)
Allowance for loan losses (1,270) (1,207)
Noninterest-earning assets
Cash and due from banks 9,988 9,012
Premises and equipment 1,872 1,879
Other assets 6,101 4,058
----------- -----------
Total assets $ 124,426 $ 128,532
=========== ===========
Liabilities and Shareholders' Equity
Interest-bearing liabilities
Interest-bearing demand deposits $ 12,001 1.49% 89 $ 11,583 1.46% 84
Savings and money market deposits 22,494 2.50% 280 22,248 2.23% 246
Time deposits under $100,000 15,039 4.77% 357 15,039 5.06% 377
Time deposits over $100,000 16,037 5.05% 403 18,772 4.73% 440
Othr borrowings - FHLB 11,881 5.62% 332 12,712 5.69% 359
Capital lease & TT&L & Other 784 7.70% 30 643 6.28% 20
----------- --------------------------- ------------
78,236 3.83% 1,491 80,997 3.80% 1,526
----------- --------------------------- ------------
Noninterest-bearing liabilities
Noninterest-bearing demand
deposits 33,721 33,094
Other liabilites 2,293 1,879
Shareholders' equity 10,176 12,562
----------- -----------
Total liabilities and
shareholders' equity $ 124,426 $ 128,532
=========== ===========
5.43% $ 2,925 5.35% $ 3,073
======================== ========================
</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 six months period ended June 30, 2000, the provision for loan losses was
$257,000 as compared to $130,000, for the six months period ended June 30, 1999.
Management believes that the allowance for loan losses at June 30, 2000 was
adequate to absorb known and inherent risks in the loan portfolio. However, no
assurances can be given that the changes in economic conditions or other factors
will not lead to a higher
21
<PAGE>
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 six months ended June 30, 2000, non-interest revenue totaled $953,807
compared to $837,793 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 six months ended June 30, 2000, increased to
$2,638,649 or 5.54%, from $2,500,124 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 $192,830 from $137,721 for the six
months ended June 30, 1999 to $330,551 for the same period in 2000. The increase
in legal is primarily due to litigation arising from credit resolution.
Income Taxes
For the six months ended June 30, 2000, the provision for income taxes was
$348,285 compared to $563,122 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 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
22
<PAGE>
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. At June 30, 2000 there were no material
mismatches of rate sensitive assets and rate sensitive liabilities within
these limited ranges.
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
with 12 months 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 48.9%of its loan portfolio reprices and matures over a 1year
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 the majority of its
investments in the available-for-sale category in order to be able to react to
changes in interest rates.
23
<PAGE>
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 June 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>
<CAPTION>
March 31, 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 $ 1,102 $ - $ - $ - $ 1,102
Taxable investment securities 2,170 2,113 22,464 8,400 35,147
Nontaxable investment securities - 100 981 1,270 2,351
Loans (1) 30,468 612 8,540 23,941 63,561
------- ------- ------- -------- --------
Total interest-earning assets 33,740 2,825 31,985 33,611 102,161
LIABILITIES:
Savings deposits (2) 33,585 - 33,585
Time deposits 17,292 13,558 839 - 31,689
Other borrowed funds 1,166 - 4,645 6,375 12,186
------- ------- -------- -------- --------
Total interest-bearing liabilities 52,043 13,558 5,484 6,375 77,460
------- ------- -------- -------- --------
Net (interest-bearing liabilities)
interest-earning assets $(18,303) $(10,733) $ 26,501 $ 27,236 $ 24,701
======== ======== ======== ======== ========
Cumulative net (interest-bearing
liabilities) interest-
earning assets (GAP) $(18,303) $(29,036) $ 15,768 $ 53,737 $ 51,937
======== ======== ======== ======== ========
Cumulative GAP as a
percentage of total
interest-earning assets -54.25% -1027.82% 49.30% 159.88% 50.84%
======= ========= ====== ======= ======
</TABLE>
(1) Gross loans net of nonaccrual.
(2) Savings deposits include interest-bearing transaction accounts.
24
<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
25
<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.
26
<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
27
<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 August 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 August 14, 2000
---------------------------
28
