Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); (iii) changes attributable to changes in rate/volume (change in rate multiplied by change in volume); and (iv) the net change.
| Three Months Ended September 30, 2003 | | Six Months Ended September 30, 2003 |
| Compared to | | Compared to |
| Three Months Ended September 30, 2002 | | Six Months Ended September 30, 2002 |
| Increase (Decrease) | | Increase (Decrease) |
| Due to | | Due to |
|
Volume
| |
Rate
| Rate/
Volume | |
Net
| |
Volume
| |
Rate
| Rate/
Volume | |
Net
|
| (In thousands) |
| | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | |
Interest-earning deposits and
short-term investments | $ (17 | ) | (116) | 9 | | (124) | | $ (137 | ) | (256) | 72 | | (321) |
Investment securities, net | (518 | ) | (173) | 70 | | (621) | | (1,011 | ) | (263) | 101 | | (1,173) |
Mortgage-backed securities, net | 965 | | (752) | (341 | ) | (128) | | 1,549 | | (1,768) | (581 | ) | (800) |
Collateralized mortgage obligations, net | (456 | ) | (6,506) | 6,471 | | (491) | | (868 | ) | (4,879) | 4,472 | | (1,275) |
Loans receivable, net | 2,645 | | (3,964) | (246 | ) | (1,565) | | 6,091 | | (9,352) | (700 | ) | (3,961) |
FHLB stock | (53 | ) | (103) | 13 | | (143) | | (145 | ) | (258) | 42 | | (361) |
Total interest-earning assets | 2,566 | | (11,614) | 5,976 | | (3,072) | | 5,479 | | (16,776) | 3,406 | | (7,891) |
| | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | |
Savings accounts | 40 | | (164) | (26 | ) | (150) | | 75 | | (294) | (37 | ) | (256) |
Money market accounts | 391 | | (1,240) | (176 | ) | (1,025) | | 607 | | (2,375) | (261 | ) | (2,029) |
NOW and other demand deposit accounts | 602 | | (1,432) | (316 | ) | (1,146) | | 1,566 | | (2,441) | (745 | ) | (1,620) |
Certificate accounts | (856 | ) | (1,785) | 181 | | (2,460) | | (1,982 | ) | (3,808) | 454 | | (5,336) |
FHLB advances and other borrowings | (149 | ) | (2,298) | 67 | | (2,380) | | (644 | ) | (4,158) | 258 | | (4,544) |
Total interest-bearing liabilities | 28 | | (6,919) | (270 | ) | (7,161) | | (378 | ) | (13,076) | (331 | ) | (13,785) |
Change in net interest income | $ 2,538 | | (4,695) | 6,246 | | 4,089 | | $ 5,857 | | (3,700) | 3,737 | | 5,894 |
14
Forward-Looking Statements
Except for historical information contained herein, the matters discussed in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words "anticipate," "believe," "estimate," "may," "intend," "expect" and similar expressions identify certain of such forward-looking statements. Actual results could differ materially from such forward-looking statements contained herein. Factors that could cause future results to vary from current expectations include, but are not limited to, the following: changes in economic conditions (both generally and more specifically in the markets in which the Company operates); changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines and in government legislation and regulation (which change from time to time and over which the Company has no control); other factors affecting the Company's operations, markets, products and services; and other risks detailed in this Form 10-Q and in the Company's other Securities and Exchange Commission filings. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.
Critical Accounting Policies
The Company's management has established various accounting policies which govern the application of accounting principles generally accepted in the United Sates of America in the preparation of the consolidated financial statements. The significant accounting policies are described in the Company's Annual Report on Form 10-K for the year ended March 31, 2003. Certain accounting policies require significant estimates and assumptions which have a material impact on the carrying value of certain assets and liabilities, and these are considered to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors, which management of the Company believes are reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on the results of operations for the reporting periods.
The following represents critical accounting policies that require the most significant estimates and assumptions that are particularly susceptible to significant change in the preparation of the consolidated financial statements:
- Allowance for loan losses. For further information, see "Comparison of Financial Condition at September 30, 2003 and March 31, 2003" and "Item 1 - Lending Activities - Allowance for Loan Losses" as found in the Company's March 31, 2003 Annual Report on From 10-K.
- Mortgage Servicing Rights. For further information, see "Item 1 - Lending Activities - Loan Servicing" and "Note 10 to the Consolidated Financial Statements" as found in the Company's March 31, 2003 Annual Report on Form 10-K.
- Pension Accounting. For further information, see "Note 14 to the Consolidated Financial Statements" as found in the Company's March 31, 2003 Annual Report on Form 10-K.
- Other-Than-Temporary-Impairment. For further information, see "Item 1 - Investment Activities" as found in the Company's March 31, 2003 Annual Report on Form 10-K.
15
Comparison of Operating Results for the Three Months Ended September 30, 2003 and 2002
General
The following discussion compares the results of operations for the three months ended September 30, 2003, with the same period of 2002. This discussion should be read in conjunction with the consolidated financial statements and footnotes included therein.
The Company recorded net earnings of $9.6 million or $0.58 per diluted share for the three months ended September 30, 2003 compared to net earnings of $8.5 million or $0.47 per diluted share for the comparable period of 2002 (adjusted for the 40 percent stock split effected in the form of a stock dividend paid on September 5, 2003, to shareholders of record on August 15, 2003).
Net interest income increased $4.1 million from $27.3 million for the three months ended September 30, 2002 to $31.4 million for the comparable period of 2003. The increase in net interest income reflects a 50 basis point expansion in net interest spread from 3.47% for the three months ended September 30, 2002 to 3.97% for the comparable period of 2003. The 50 basis point expansion in net interest spread was primarily due to a 113 basis point decrease in the average cost of interest-bearing liabilities partially offset by a 63 basis point decrease in average yield on interest-earning assets for the three months ended September 30, 2003 as compared to the comparable period of the prior year. Average interest-earning assets increased $112.3 million from $2.94 billion for the three months ended September 30, 2002 to $3.06 billion for the comparable period of 2003, while average interest-bearing liabilities increased $112.5 million from $2.69 billion to $2.80 billion for the comparative current period of 2003.
Provision for loan losses increased from $1.5 million for the three months ended September 30, 2002 to $1.6 million for the comparable period of 2003.
Total non-interest income increased $1.1 million from $4.5 million for the three months ended September 30, 2002 to $5.6 million for the comparable period of 2003. Total non-interest expense increased $2.8 million from $16.0 million for the three months ended September 30, 2002 to $18.7 million for the comparable period of 2003.
Interest Income
Interest income decreased $3.1 million from $46.5 million for the three months ended September 30, 2002 to $43.4 million for the comparable period of 2003. The decrease in interest income was attributable to a 63 basis point decrease in average yield on interest-earning assets from 6.30% for the three months ended September 30, 2002 to 5.67% for the comparable period of 2003.
Reflecting the lower interest rate environment, the average yield on loans receivable, net decreased 63 basis points from 6.62% for the three months ended September 30, 2002 to 5.99% for the comparable period of 2003. A substantial increase in loan portfolio turnover coupled with the continued lower interest rate environment has contributed significantly to the decrease in loan portfolio yield. Approximately 89 percent or $2.43 billion of the Company's loans receivable, net are adjustable rate. This includes approximately 35 percent or $943.2 million of the loan portfolio comprised by hybrid adjustable rate mortgages that are still in their initial fixed rate periods. Loan originations and purchases were $638.7 million and $178.8 million for the three months ended September 30, 2003, compared to $495.0 million and $72.8 million for the comparable period of 2002. Loan principal repayments were $687.6 million and $477.6 million for the three months ended September 30, 2003 and 2002, respectively.
16
The average yield on the aggregate balance of mortgage-backed securities, collateralized mortgage obligations ("CMOs") and investment securities (collectively "securities") fell 106 basis points from 4.68% for the three months ended September 30, 2002 to 3.62% for the comparable period of 2003. The decrease in the average yield on securities also reflects the impact of the decrease in the overall general level of interest rates. During the three months ended September 30, 2003, $34,000 of premium amortization resulting from CMO repayments of $826,000 (100 percent of the June 30, 2003 principal balance) reduced the average yield on CMOs and interest-earning assets by 4,146 and 0 basis points, respectively. During the comparable period of 2002, $47,000 of premium amortization on CMO repayments of $2.0 million, (3 percent of the June 30, 2002 principal balance) reduced the average yield on CMOs and interest-earning assets by 31 and one basis points, respectively. The CMO portfolio was paid-off during the three months ended September 30, 2003.
The downward influence on average yield on interest-earning assets exerted by the decrease in the general level of interest rates was partially mitigated by the following two factors:
- The proportion of total average interest-earning assets comprised of loans receivable, net increased from 86 percent for the three months ended September 30, 2002 to 88 percent for the comparable period of 2003. The average balance of loans receivable, net increased $159.8 million from $2.53 billion for the three months ended September 30, 2002 to $2.69 billion for the comparable period of 2003. The average balance of securities decreased $39.6 million from $331.8 million for the three months ended September 30, 2002, to $292.2 million for the comparable period of 2003. The Company's current strategy is to maintain securities at between ten and twelve percent of total average interest-earning assets.
- Between the three months ended September 30, 2002 and 2003, the average disbursed balance of construction, commercial business, commercial real estate and consumer loans (the "Four-Cs") increased from 44 percent to 48 percent of average loans receivable, net. This represents a $194.6 million increase in the average balance of the Four-Cs from $1.11 billion for the three months ended September 30, 2002 to $1.30 billion for the comparable period of 2003. Originations of the Four-Cs represented 86% and 82%, respectively, of total loan originations for the three months ended September 30, 2002 and 2003. The slight decrease in the percentage of total originations comprised by the Four-Cs reflects a significant increase in turnover of the 1-4 family residential mortgage portfolio rather than any reduction in the Company's emphasis on the Four-Cs.
Interest Expense
Interest expense decreased $7.2 million from $19.2 million for the three months ended September 30, 2002 to $12.0 million for the comparable period of 2003. The decrease in interest expense was attributable principally to a 113 basis point decrease in the average cost of interest-bearing liabilities from 2.83% for the three months ended September 30, 2002 to 1.70% for the comparable period of 2003.
The 113 basis point decrease in the average cost of interest-bearing liabilities reflects a 94 basis point decrease in the average cost of deposits, and a 196 basis point decrease in the average cost of FHLB advances and other borrowings. Strong growth in deposits resulted in an increase in the proportion of total average interest-bearing liabilities comprised by deposits from 83 percent for the three months ended September 30, 2002 to 84 percent for the comparable period of 2003. The average balance of total deposits increased $125.9 million from $2.22 billion for the three months ended September 30, 2002 to $2.35 billion for the comparable period of 2003. The average balance of FHLB advances and other borrowings decreased $13.4 million from $464.5 million for the three months ended September 30, 2002 to $451.1 million for the comparable period of 2003.
17
The average cost of deposits decreased from 2.49% for the three months ended September 30, 2002 to 1.55% for the comparable period of 2003, reflecting strong growth in the lower cost categories of deposits coupled with the decrease in the general level of market interest rates. The average balance of money market, savings and NOW accounts (collectively, "core deposits") increased $228.2 million from $1.24 billion or 56 percent of average total deposits for the three months ended September 30, 2002 to $1.47 billion or 63 percent of average total deposits for the comparable period of 2003. The average cost of core deposits decreased from 1.84% for the three months ended September 30, 2002 to 0.93% for the comparable period of 2003.
The Bank's growth in the average balance of core deposits between the three months ended September 30, 2002 and 2003 is related to a number of factors: (1) the opening of two new branches in Chino and Fontana, California, during the second quarter of last year; (2) the continued overall reduction in the general level of interest rates which has reduced or eliminated the differential between rates offered on certificates of deposit ("CDs") and rates paid on certain core deposit accounts; and (3) the Bank's increased marketing of core deposit products.
In the opinion of management, a portion of the increase in deposits has been attributable to the volatility in the equity securities markets and the overall flight to safety into more conservative instruments. An increase in investor interest in equity investments may eventually reduce the rate of increase or reduce the balance of core deposits. An increase in the general level of interest rates could also cause CD rates to rise to a level sufficiently above core deposit rates to draw money from core accounts back into CDs. See "Liquidity and Capital Resources" in this Form 10-Q and "Asset/Liability Management" under "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2003 for a discussion of the possible impact of changes in deposit composition and pricing.
Provision for Loan Losses
Provision for loan losses increased from $1.5 million for the three months ended September 30, 2002 to $1.6 million for the comparable period of 2003.
The provision for loan losses and the adequacy of the allowance for loan losses are the result of management's periodic analysis of losses inherent in the loan portfolio. For additional discussion on the allowance for loan losses, see "Comparison of Financial Condition at September 30, 2003 and March 31, 2003."
Non-Interest Income
Non-interest income increased $1.1 million from $4.5 million for the three months ended September 30, 2002 to $5.6 million for the comparable period of 2003.
Reflecting the growth in core deposits, deposit and related fees increased $197,000 from $2.7 million for the three months ended September 30, 2002 to $2.9 million for the comparable period of 2003. The greatest growth in core deposits has been in the higher balance tiers of the interest-bearing checking and money market accounts on which there is less opportunity for the assessment of service charges. Accordingly, the 7% growth in deposit and related fees should not be expected to mirror the 18% growth in the average balance of core deposits between the three months ended September 30, 2002 and 2003.
The increase in loan and servicing fees from $1.4 million for the three months ended September 30, 2002 to $1.8 million for the comparable period of 2003 reflects the increase in fees associated with the loan repayments noted earlier. The increase in gain on sale of loans, net from $56,000 for the three months ended September 30, 2002 to $267,000 for the three months ended September 30, 2003, reflects the Company's current policy of managing long-term interest rate risk exposure by selling virtually all of its 15 and 30 year fixed rate mortgage originations. Loan sales were $11.9 million and $1.2 million for the three months ended September 30, 2003 and 2002, respectively. Loan and servicing fees income is shown net of originated mortgage servicing rights (MSR) asset amortization of $30,000 and $28,000 for the three months ended September 30, 2003 and 2002, respectively.
18
During the three months ended September 30, 2002, the Company incurred a net loss of $233,000 on trading securities activity. To meet current investment objectives, the Company completed the liquidation of its entire portfolio of trading securities during the quarter ended March 31, 2003.
Non-Interest Expense
Non-interest expense increased from $16.0 million for the three months ended September 30, 2002 to $18.7 million for the comparable period of 2003.
General and administrative ("G&A") expense increased from $16.0 million or 2.12%, on an annualized basis, of average assets for the three months ended September 30, 2002 to $18.7 million or 2.37%, on an annualized basis, of average assets for the comparable period of 2003. The increase in G&A expense was primarily attributable to compensation and benefits, which increased from $9.0 million for the three months ended September 30, 2002 to $10.7 million for the comparable period of 2003. The $1.8 million increase in compensation and benefits was primarily due to an increase in employees from 604 Full-Time Equivalents ("FTEs") at September 30, 2002, to 622 FTEs at September 30, 2003, an increase in annual incentive compensation based on the Company's strong performance and an increase in Employee Stock Ownership Plan ("ESOP") expense resulting from the increase in the Company's stock price.
Income Taxes
Income taxes were $7.0 million for the three months ended September 30, 2003 compared to $5.9 million for the comparable period of 2002. The effective tax rates were 42.3% and 41.0% for the three months ended September 30, 2003 and 2002, respectively.
Comparison of Operating Results for the Six Months Ended September 30, 2003 and 2002
General
The following discussion compares the results of operations for the six months ended September 30, 2003, with the same period of 2002. This discussion should be read in conjunction with the consolidated financial statements and footnotes included therein.
The Company recorded net earnings of $18.9 million or $1.14 per diluted share for the six months ended September 30, 2003 compared to net earnings of $17.3 million or $0.95 per diluted share for the comparable period of 2002 (adjusted for the 40 percent stock split effected in the form of a stock dividend paid on September 5, 2003, to shareholders of record on August 15, 2003).
Net interest income increased $5.9 million from $55.6 million for the six months ended September 30, 2002 to $61.5 million for the comparable period of 2003. The increase in net interest income reflects a 35 basis point expansion in net interest spread from 3.52% for the six months ended September 30, 2002 to 3.87% for the comparable period of 2003. The 35 basis point expansion in net interest spread was primarily due to a 110 basis point decrease in the average cost of interest-bearing liabilities partially offset by a 75 basis point decrease in the average yield on interest-earning assets for the six months ended September 30, 2003 as compared to the comparable period of the prior year. Average interest-earning assets increased $107.4 million from $2.95 billion for the six months ended September 30, 2002 to $3.06 billion for the comparable period of 2003, while average interest-bearing liabilities increased $113.0 million from $2.69 billion for the six months ended September 30, 2002 to $2.80 billion for the comparative current period of 2003.
19
Provision for loan losses decreased from $2.5 million for the six months ended September 30, 2002 to $2.3 million for the comparable period of 2003.
Total non-interest income increased $2.4 million from $8.8 million for the six months ended September 30, 2002 to $11.2 million for the comparable period of 2003. Total non-interest expense increased $5.2 million from $32.3 million for the six months ended September 30, 2002 to $37.6 million for the comparable period of 2003.
Interest Income
Interest income decreased $7.9 million from $95.1 million for the six months ended September 30, 2002 to $87.2 million for the comparable period of 2003. The decrease in interest income was attributable to a 75 basis point decrease in average yield on interest-earning assets from 6.45% for the six months ended September 30, 2002 to 5.70% for the comparable period of 2003.
Reflecting the lower interest rate environment, the average yield on loans receivable, net decreased 75 basis points from 6.80% for the six months ended September 30, 2002 to 6.05% for the comparable period of 2003. A substantial increase in loan portfolio turnover coupled with the lower interest rate environment has contributed significantly to the decrease in loan portfolio yield. Loan originations and purchases were $1.15 billion and $272.1 million for the six months ended September 30, 2003, compared to $888.6 million and $135.3 million for the comparable period of 2002. Loan principal repayments were $1.26 billion and $866.3 million for the six months ended September 30, 2003 and 2002, respectively.
The average yield on securities fell 139 basis points from 4.77% for the six months ended September 30, 2002 to 3.39% for the comparable period of 2003. The decrease in the average yield on securities also reflects the impact of the decrease in the general level of interest rates and the increase in premium amortization associated with CMO prepayments. During the six months ended September 30, 2003, $367,000 of premium amortization resulting from CMO repayments of $15.2 million, (100 percent of the March 31, 2003 principal balance) reduced the average yield on CMOs and interest-earning assets by 1,449 and 3 basis points, respectively. During the comparable period of 2002, $77,000 of premium amortization on CMO repayments of $3.1 million, (5 percent of the March 31, 2002 principal balance) reduced the average yield on CMOs and interest-earning assets by 26 and zero basis points, respectively.
The continued downward influence on average yield on interest-earning assets exerted by the decrease in the general level of interest rates was partially mitigated by the following two factors:
- The proportion of total average interest-earning assets comprised of loans receivable, net increased from 85 percent for the six months ended September 30, 2002 to 88 percent for the comparable period of 2003. The average balance of loans receivable, net increased $179.2 million from $2.51 billion for the six months ended September 30, 2002 to $2.69 billion for the comparable period of 2003. The average balance of securities decreased $49.7 million from $346.7 million for the six months ended September 30, 2002, to $297.0 million for the comparable period of 2003; and
- Between the six months ended September 30, 2002 and 2003, the average disbursed balance of the Four-Cs increased from 43 percent to 47 percent of average loans receivable, net. This represents a $181.3 million increase in the average balance of the Four-Cs from $1.08 billion for the six months ended September 30, 2002 to $1.26 billion for the comparable period of 2003. Originations of the Four-Cs represented 84% and 82% of total loan originations for the six months September 30, 2002 and 2003, respectively.
20
Interest Expense
Interest expense decreased $13.8 million from $39.5 million for the six months ended September 30, 2002 to $25.7 million for the comparable period of 2003. The decrease in interest expense was attributable principally to a 110 basis point decrease in the average cost of interest-bearing liabilities from 2.93% for the six months ended September 30, 2002 to 1.83% for the comparable period of 2003.
The 110 basis point decrease in the average cost of interest-bearing liabilities reflects a 94 basis point decrease in the average cost of deposits, and a 170 basis point decrease in the average cost of FHLB advances and other borrowings. Strong growth in deposits resulted in an increase in the proportion of total interest-bearing liabilities comprised by deposits from 82 percent for the six months ended September 30, 2002 to 84 percent for the comparable period of 2003. The average balance of total deposits increased $142.1 million from $2.20 billion for the six months ended September 30, 2002 to $2.35 billion for the comparable period of 2003. The average balance of FHLB advances and other borrowings decreased $29.1 million from $488.0 million for the six months ended September 30, 2002 to $458.9 million for the comparable period of 2003.
The average cost of deposits decreased from 2.60% for the six months ended September 30, 2002, to 1.66% for the comparable period of 2003, reflecting strong growth in the lower cost categories of deposits coupled with the decrease in the general level of market interest rates. The average balance of core deposits increased $255.7 million from $1.20 billion or 54 percent of average total deposits for the six months ended September 30, 2002 to $1.45 billion or 62% of average total deposits for the comparable period of 2003. The average cost of core deposits was 1.86% for the six months ended September 30, 2002, compared to 1.00% for the comparable period of 2003.
Provision for Loan Losses
Provision for loan losses was $2.3 million for the six months ended September 30, 2003, compared to $2.5 million for the comparable period of 2002.
The provision for loan losses and the adequacy of the allowance for loan losses are the result of management's periodic analysis of losses inherent in the loan portfolio. For additional discussion on the allowance for loan losses, see "Comparison of Financial Condition at September 30, 2003 and March 31, 2003."
Non-Interest Income
Non-interest income increased from $8.8 million for the six months ended September 30, 2002, to $11.2 million for the comparable period of 2003.
Reflecting the growth in core deposits, deposit and related fees increased $302,000 from $5.4 million for the six months ended September 30, 2002 to $5.7 million for the comparable period of 2003.
The increase in loan and servicing fees from $2.6 million for the six months ended September 30, 2002 to $3.4 million for the comparable period of 2003 reflects the increase in fees associated with the loan repayments noted earlier. The increase in gain on sale of loans, net from $123,000 for the six months ended September 30, 2002 to $642,000 for the six months ended September 30, 2003, reflects loan sales of $25.9 million and $2.2 million for the six months ended September 30, 2003 and 2002, respectively. Loan and servicing fees income is shown net of MSR asset amortization of $61,000 and $137,000 for the six months ended September 30, 2003 and 2002, respectively.
During the six months ended September 30, 2002, the Company incurred a net loss of $442,000 on trading securities activity. To meet current investment objectives, the Company completed the liquidation of its entire portfolio of trading securities during the quarter ended March 31, 2003.
21
Non-Interest Expense
Non-interest expense increased from $32.3 million for the six months ended September 30, 2002, to $37.6 million for the comparable period of 2003.
G&A expense increased from $32.5 million or 2.16%, on an annualized basis, of average assets for the six months ended September 30, 2002, to $37.6 million or 2.39%, on an annualized basis, of average assets for the comparable period of 2003. Compensation and benefits increased $2.8 million from $18.6 million for the six months ended September 30, 2002, to $21.4 million for the comparable period of 2003. The $2.8 million increase in compensation and benefits was primarily due to the increase in FTEs, an increase in annual incentive compensation based on the Company's strong performance and an increase in ESOP expense resulting from the increase in the Company's stock price.
Income Taxes
Income taxes were $13.9 million for the six months ended September 30, 2003, compared to $12.2 million for the comparable period of 2002. The effective tax rates were 42.3% and 41.3% for the six months ended September 30, 2003 and 2002, respectively.
Comparison of Financial Condition at September 30, 2003 and March 31, 2003
Total assets decreased $51.4 million from $3.15 billion at March 31, 2003, to $3.20 billion at September 30, 2003. Loans receivable, net increased $43.2 million from $2.69 billion at March 31, 2003 to $2.73 billion at September 30, 2003. The aggregate balance of securities decreased $15.1 million from $330.3 million at March 31, 2003 to $315.2 million at September 30, 2003.
Non-accrual loans increased to $22.5 million or 0.69 percent of gross loans at September 30, 2003, from $18.6 million or 0.59 percent of gross loans at March 31, 2003. Non-accrual loans at September 30, 2003, include a $4.5 million commercial business loan to an investment company. The Company has determined this credit is impaired, has placed it on non-accrual status and taken this status into account in determining the adequacy of the allowance for loan losses at September 30, 2003. During the current quarter, $3.4 million of the $5.5 million of tract construction loans on the residential subdivision located in La Quinta, California were paid-off. The remaining $2.1 million remains on non-accrual status. However, the Company presently expects to collect all principal amounts due upon sale of the property by the borrower.
At September 30, 2003, the allowance for loan losses was $30.4 million or 0.93 percent of gross loans and 135 percent of non-accrual loans compared to $31.1 million or 0.99 percent of gross loans and 168 percent of non-accrual loans at March 31, 2003.
22
The allowance for loan losses is maintained at an amount management considers adequate to cover probable losses on loans receivable. The determination of the adequacy of the allowance for loan losses is influenced to a significant degree by the evaluation of the loan portfolio by the Company's Internal Asset Review (IAR) function. The IAR system is designed to identify problem loans and probable losses prior to loans becoming ninety days past due. As the Company's loan portfolio has become comprised to a greater degree by the Four-Cs, the IAR function has become increasingly important not only for the timely and accurate identification of probable losses, but also to minimize the Company's exposure to such losses through early intervention. Among the factors taken into account by the IAR function in identifying probable losses and determining the adequacy of the allowance for loan losses are the nature, level and severity of classified assets; historical loss experience adjusted for current economic conditions and composition of the loan portfolio by type. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to make additional provisions for loan losses based upon information available at the time of the review. The Company will continue to monitor and modify its allowance for loan losses as economic conditions, loss experience, changes in asset quality, portfolio composition and other factors dictate.
The following table sets forth activity in the Company's allowance for loan losses.
| Three months ended | | Six months ended | |
| September 30, | | September 30, | |
| 2003 | | 2002 | | 2003 | | 2002 | |
| (Dollars in thousands) | |
Beginning balance | $29,223 | | $31,982 | | $31,121 | | $31,359 | |
Provision for loan losses | 1,645 | | 1,500 | | 2,305 | | 2,500 | |
Charge-offs | (469 | ) | (4,780 | ) | (3,103 | ) | (5,159 | ) |
Recoveries | 22 | | 464 | | 98 | | 466 | |
Ending balance | $30,421 | | $29,166 | | $30,421 | | $29,166 | |
| | | | | | | | |
Charge-offs of $3.1 million for the six months ended September 30, 2003 included $2.1 million relating to a commercial business loan to a jewelry store chain that was foreclosed upon and $319,000 relating to participating interests in two commercial aircraft leases that were repurchased by the lead lender. The Company has no additional credit exposure to the jewelry or commercial aircraft sectors. These charge-offs were fully anticipated in determining the adequacy of the allowance for loan losses at March 31, 2003, and resulted in total charge-offs for the six months ended September 30, 2003 exceeding the provision for loan losses as a result, the allowance for loan losses decreased $700,000 between March 31, and September 30, 2003. Excluding the reductions in non-accrual loans and the allowance for loan losses arising from the final disposition of the aircraft leases and jewelry store loan, the changes in non-accrual loans and the allowance for loan losses would have been "directionally consistent", increasing $9.8 million and $1.7 million, respectively, between March 31 and September 30, 2003. Charge-offs of $5.2 million for the six months ended September 30, 2002 included $4.5 million applicable to a $4.9 million participating interest in a $17.4 million commercial loan to a Southern California garment manufacturer.
Total liabilities increased $28.5 million from $2.88 billion at March 31, 2003 to $2.91 billion at September 30, 2003. Deposits increased $31.0 million from $2.33 billion at March 31, 2003 to $2.36 billion at September 30, 2003. Core deposits increased $92.3 million from $1.40 billion or 60 percent of total deposits at March 31, 2003 to $1.50 billion or 63 percent of total deposits at September 30, 2003. FHLB advances and other borrowings increased $21.6 million from $485.4 million at March 31, 2003 to $507.0 million at September 30, 2003.
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Total stockholders' equity was $296.0 million at September 30, 2003 compared to $273.1 million at March 31, 2003. The $22.9 million increase in total stockholders' equity was comprised principally of a $14.8 million increase in retained earnings, substantially restricted, a $4.5 million increase in additional paid-in-capital, a $2.7 million decrease in accumulated other comprehensive losses and a $930,000 decrease in unearned stock-based compensation. The $14.8 million increase in retained earnings, substantially restricted, reflects the $18.9 million of net earnings for the six months ended September 30, 2003, partially offset by: 1) $1.1 million applicable to a quarterly cash dividend of $0.07 (adjusted for the 40 percent stock split effected as a stock dividend, paid on September 5, 2003) per common share paid on June 27, 2003, to shareholders of record as of June 13, 2003; 2) $2.6 million applicable to a quarterly cash dividend of $0.16 per common share paid on September 26, 2003 to shareholders of record as of September 12, 2003; 3) $395,000 representing the amount paid by the Company in excess of the original issuance price for 23,100 shares of common stock repurchased during the period; and 4) $47,000 representing the par of value of the shares issued pursuant to the 40 percent stock split effected in the form of a stock dividend paid on September 5, 2003, to shareholders of record on August 15, 2003.
The $4.5 million increase in additional paid-in-capital reflects the exercise of 118,806 stock options issued to employees, along with the associated tax benefit to the Company and the amortization of shares under the Company's stock based compensation plans, partially offset by $165,000 representing the original issuance price of the 23,100 shares of repurchased common stock. The $2.7 million decrease in accumulated other comprehensive losses reflects a reduction in the unrealized loss, net of tax on available-for-sale securities from $5.0 million at March 31, 2003 to $2.4 million at September 30, 2003. The $930,000 decrease in unearned stock-based compensation reflects the amortization of unearned compensation under the Company's ESOP.
During the six months ended September 30, 2003, the Company repurchased 23,100 shares of its common stock at a weighted average price of $24.26 per share. The Company did not repurchase any of its common stock during the three months ended September 30, 2003. During the three months ended September 30, 2003, the Company retired 12,856,574 shares of common stock that had been repurchased in prior periods and held as treasury stock.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest payments on loans and securities, FHLB advances and other borrowings, proceeds from the maturation of securities and, to a lesser extent, proceeds from the sale of loans and securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage and security prepayments are greatly influenced by the general level of interest rates, economic conditions and competition. OTS regulations require that sufficient liquidity be maintained at a level which ensures safe and sound banking practices. Management's strategy is to invest excess liquidity in higher yielding interest-earning assets, such as loans or other investments, depending on market conditions. The Company has invested in investment grade corporate securities when the yields thereon have been more attractive than U.S. government and federal agency securities of similar maturity.
The Company's cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities. Net cash flows provided by operating activities were $6.3 million for the six months ended September 30, 2003, compared to net cash flows provided by operating activities of $26.6 million for the comparable period of the prior year. The decrease in net cash provided by operating activities for the six months ended September 30, 2003 compared to the same period last year is due primarily to an increase in the volume of loans originated for sale from $2.6 million for the six months ended September 30, 2002 to $23.2 million for the comparable period of 2003 and to a decrease in accrued expenses and other liabilities of $25.3 million during the six months ended September 30, 2003 as compared to an increase of $2.9 million during the six months ended September 30, 2002. The $25.3 million decrease in accrued expenses and other liabilities between March 31 and September 30, 2003 was attributable to the Company's application of trade date accounting to $35.8 million of securities purchased but not yet settled as of March 31, 2003.
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Investing activities consist primarily of disbursements for originations and purchases of loans held for investment and purchases of securities, offset by principal payments on loans, and proceeds from maturation, paydowns and sales of securities.
The following items summarize the major components of the Company's investing activities. For the six months ended September 30, 2003 disbursements for originations and purchases of loans held for investment were $1.12 billion and $272.1 million, respectively, compared to $886.1 million and $135.3 million, respectively, for the comparable period of 2002. For the six months ended September 30, 2003 and 2002, disbursements for purchases of securities were $85.7 million and $35.1 million, respectively. Proceeds from paydowns on loans held for investment and proceeds from maturation, paydowns and sales of securities were $1.26 billion and $101.4 million, respectively for the six months ended September 30, 2003, compared to $866.3 million and $66.0 million, respectively for the comparable period of 2002.
Net cash provided by (used in) financing activities consisted primarily of net activity in deposits and FHLB advances. The net increases (decreases) in deposits and FHLB advances and other borrowings were $31.0 million and $21.6 million and $84.1 million and $(115.0) million for the six months ended September 30, 2003 and 2002, respectively.
At September 30, 2003, the Bank exceeded all of its regulatory capital requirements with a tangible capital level of $257.8 million, or 8.12% of adjusted total assets, which is above the required level of $47.6 million, or 1.5%; core capital of $257.8 million, or 8.12% of adjusted total assets, which is above the required level of $127.0 million, or 4.0%; and total risk-based capital of $284.0 million, or 11.83% of risk-weighted assets, which is above the required level of $192.0 million, or 8.0%.
The Company's most liquid assets are cash and cash equivalents. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. At September 30, 2003, cash and cash equivalents totaled $77.1 million. The Company has other sources of liquidity if a need for additional funds arises, including the utilization of reverse repurchase agreements and FHLB advances. At September 30, 2003, the Company had $507.0 million of FHLB advances and other borrowings outstanding. Other sources of liquidity include investment securities maturing within one year. The Company currently has no material contractual obligations or commitments for capital expenditures. At September 30, 2003, the Company had outstanding commitments to originate and purchase loans of $135.7 million and $103.3 million, respectively. The Company anticipates that it will have sufficient funds available to meet these commitments. At September 30, 2003, the Company had no outstanding commitments to purchase securities. CDs that are scheduled to mature in less than one year from September 30, 2003 totaled $545.4 million. The Company expects that a substantial portion of the monies represented by maturing CDs will be retained at maturity. FHLB advances and other borrowings maturing in less than one year from September 30, 2003 totaled $292.0 million. The Company expects that the majority of these maturing advances will be rolled into new advances upon maturity.
Segment Reporting
The Company, through its subsidiaries, provides a broad range of financial services to individuals and companies located primarily in Southern California. These services include demand, time, and savings deposits; real estate, business and consumer lending; cash management; trust and investment advisory services; and diversified financial services for the building industry. While the Company's chief decision makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one reportable operating segment.
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Item 3. Qualitative and Quantitative Disclosures about Market Risk
The Company's management believes there have been no significant changes to the Company's qualitative and quantitative disclosures of market risk (consisting primarily of interest rate risk) during the six months ended September 30, 2003.
Item 4. Controls and Procedures
Management, including the Company's Chief Executive Officer and Chief Financial Officer, have carried out an examination of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed in the reports the Company files under the Exchange Act is recorded, processed , summarized and reported as and when required. There have been no significant changes in the Company's internal controls over financial reporting in connection with this evaluation that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.
