UNITED STATES
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 quarterly period ended June 30, 2002
FIRST PACTRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
- 0 -
-------------
(Commission File Number)
Maryland
(State of incorporation)
04-3639825
(IRS Employer Identification No.)
610 Bay Boulevard, Chula Vista, California
(Address of Principal Executive Offices)
91910
(ZIP Code)
(619) 691-1519
(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 6, 2002, the Registrant had no outstanding shares of common stock.
FIRST PACTRUST BANCORP, INC.
Form 10-Q Quarterly Report
Index
Page
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PART I - Financial Information
Item 1 Financial Statements 1
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 14
The financial statements of First PacTrust Bancorp, Inc. have been omitted
because First PacTrust Bancorp, Inc. has not yet issued any stock, has no assets
or liabilities, and has not conducted any business other than that of an
organizational nature.
PART II - Other Information
Item 1 Legal Proceedings 16
Item 2 Changes in Securities 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Securities Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 17
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of
Section 27a of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. First PacTrust Bancorp, Inc. (the
Company) and Pacific Trust Bank (the Bank) intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995, as amended,
and are including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies, and expectations of the Company and the Bank, are
generally identifiable by use of the words such as "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
ability of the Company and the Bank to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors that could have a
material adverse effect on the operations and future prospects of the Company,
the Bank, and the Bank's wholly owned subsidiaries include, but are not limited
to, changes in: interest rates; the economic health of the local real estate
market; general economic conditions; legislative/regulatory provisions; monetary
and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board; the quality or composition of the loan
and securities portfolios; demand for loan products; deposit flows; competition;
demand for financial services in the Bank's market area; and accounting
principles, policies, and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.
ITEM 1 - FINANCIAL STATEMENTS
Pacific Trust Bank
Consolidated Statements of Financial Condition
(In thousands of dollars)
(Unaudited)
June 30, December 31,
2002 2001
-------- ------------
ASSETS
Cash and due from banks .......................... $ 5,356 $ 5,228
Federal funds sold ............................... 121,985 10,150
Interest-bearing deposits ........................ 2,771 2,625
-------- --------
Total cash and cash equivalents .............. 130,112 18,003
Securities available-for-sale .................... 20,033 13,661
Federal Home Loan Bank stock ..................... 2,581 2,509
Loans receivable, net ............................ 302,907 257,216
Accrued interest receivable ...................... 1,661 1,460
Premises and equipment, net ...................... 5,162 3,863
Servicing agent receivable ....................... 8,686 11,687
Other assets ..................................... 943 1,677
-------- --------
Total assets ................................. $472,085 $310,076
======== ========
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Non-interest-bearing ........................... $ 5,119 $ 4,001
Interest-bearing ............................... 393,828 247,953
-------- --------
Total deposits ............................... 398,947 251,954
Advances from Federal Home Loan Bank ............. 41,000 28,000
Accrued expenses and other liabilities ........... 2,129 1,401
-------- --------
Total liabilities ............................ 442,076 281,355
EQUITY
Retained earnings ................................ 29,843 28,669
Accumulated other comprehensive income ........... 166 52
-------- --------
Total equity ................................. 30,009 28,721
-------- --------
Total liabilities and equity ................. $472,085 $310,076
======== ========
See accompanying notes to consolidated financial statements.
1.
Pacific Trust Bank
Consolidated Statements of Income
(In thousands of dollars)
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------- -------- ------- --------
Interest and dividend income
Loans, including fees .............. $ 9,642 $ 10,221 $4,978 $ 5,212
Securities ......................... 397 979 221 425
Other interest-earning assets ...... 217 156 133 79
------- -------- ------ -------
Total ............................ 10,256 11,356 5,332 5,716
Interest expense
Deposits ........................... 3,381 4,740 1,704 2,352
Federal Home Loan Bank advances .... 646 1,359 333 614
------- -------- ------ -------
Total ............................ 4,027 6,099 2,037 2,966
------- -------- ------ -------
Net interest income .................. 6,229 5,257 3,295 2,750
Provision for loan losses ............ 439 40 274 20
------- -------- ------ -------
Net interest income after provision
for loan losses .................... 5,790 5,217 3,021 2,730
Noninterest income
Customer service fees .............. 441 484 222 249
Loan servicing fees ................ -- 13 2 --
Net loss on sale of securities
available-for-sale ............... -- (55) -- (77)
Other .............................. 48 68 33 25
------- -------- ------ -------
Total noninterest income ......... 489 510 257 197
Noninterest expense
Salaries and employee benefits ..... 1,935 1,690 994 825
Occupancy and equipment expense .... 1,037 856 461 427
Advertising ........................ 177 132 67 51
Professional fees .................. 70 121 22 49
Stationary, supplies and postage ... 179 151 75 58
Data processing .................... 374 147 133 47
ATM costs .......................... 206 179 105 89
Other general and administrative ... 337 347 218 181
------- -------- ------ -------
Total noninterest expense ........ 4,315 3,623 2,075 1,727
------- -------- ------ -------
Income before income taxes ........... 1,964 2,104 1,203 1,200
Income tax expense ................... 790 866 493 487
------- -------- ------ -------
Net income ....................... $ 1,174 $ 1,238 $ 710 $ 713
======= ======== ====== =======
Comprehensive income ................. $ 1,288 $ 1,436 $ 926 $ 845
======= ======== ====== =======
See accompanying notes to consolidated financial statements.
2.
Pacific Trust Bank
Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited) Six Months Ended
June 30,
----------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................ $ 1,174 $ 1,238
Adjustments to reconcile net income to net cash
from operating activities
Net premium amortization on securities ............ 93 48
Loss on sale of securities available-for-sale ..... -- 55
Provision for loan losses ......................... 439 40
Depreciation ...................................... 315 236
FHLB stock dividends .............................. (72) (89)
Net change in:
Accrued interest receivable and other assets ...... 533 (7)
Accrued interest payable and other liabilities .... 647 79
--------- --------
Net cash from operating activities ................ 3,129 1,600
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of loans ..................................... (19,403) (6,332)
Net increase in loans ................................. (23,726) (17,615)
Purchase of FHLB stock ................................ -- (212)
Purchase of securities available-for-sale ............. (10,234) (223)
Principal repayments on mortgage-backed securities .... 3,964 10,085
Proceeds from sales of securities available-for-sale .. -- 12,239
Purchase of premises and equipment .................... (1,614) (204)
--------- --------
Net cash from investing activities ................ (51,013) (2,262)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits ................................ 146,993 26,590
Net change in Federal Home Loan Bank open line ........ -- (28,800)
Repayments of Federal Home Loan Bank advances ......... (46,000) (5,000)
Proceeds from Federal Home Loan Bank advances ......... 59,000 13,000
--------- --------
Net cash from financing activities ................ 159,993 5,790
--------- --------
Net change in cash and cash equivalents ............... 112,109 5,128
Cash and cash equivalents at beginning of period ...... 18,003 7,699
--------- --------
Cash and cash equivalents at end of period ............ $ 130,112 $ 12,827
========= ========
See accompanying notes to consolidated financial statements.
3.
PACIFIC TRUST BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(table amounts in thousands of dollars)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Pacific Trust Bank (the Bank) as of June 30, 2002 and December 31,
2001 and for the three-month and six-month periods ended June 30, 2002 and 2001.
Significant intercompany accounts and transactions have been eliminated in
consolidation. The financial statements of First PacTrust Bancorp, Inc. (the
Company) have been omitted because the Company has not yet issued any stock, has
no assets or liabilities, and has not conducted any business other than that of
an organizational nature.
The accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain disclosures required by accounting principles generally
accepted in the United States of America are not included herein. These interim
statements should be read in conjunction with the consolidated financial
statements and notes included in the Form S-1 Registration Statement filed by
the Company with the Securities and Exchange Commission. The December 31, 2001
balance sheet presented herein has been derived from the audited financial
statements included in the Form S-1 Registration Statement filed with the
Securities and Exchange Commission, but does not include all of the disclosures
required by accounting principles generally accepted in the United States of
America.
Interim statements are subject to possible adjustment in connection with the
annual audit of the Bank for the year ending December 31, 2002. In the opinion
of management of the Bank, the accompanying unaudited interim consolidated
financial statements reflect all of the adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the consolidated
financial position and consolidated results of operations for the periods
presented.
The results of operations for the six months ended June 30, 2002 and 2001 are
not necessarily indicative of the results to be expected for the full year.
Note 2 - Summary of Significant Accounting Policies
Nature of Operations: The Bank is a federally chartered mutual savings bank and
member of the Federal Home Loan Bank (FHLB) system, which maintains insurance on
deposit accounts with the Savings Association Insurance Fund (SAIF) of the
Federal Deposit Insurance Corporation. The Bank is engaged in the business of
retail banking, with operations conducted through its main office and seven
branches located in the San Diego and Riverside counties.
See accompanying notes to consolidated financial statements.
4.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates. The collectibility of
loans, fair value of financial instruments, and status of contingencies are
particularly subject to change.
Servicing Agent Receivable: The Bank has contracted with a servicing agent to
process payments and service a portion of the Bank's real estate loan portfolio.
The servicing agent remits cash receipts within 15 days of the end of each month
for loan payments received. These cash amounts are reflected as due from
servicing agent on the consolidated statements of financial condition.
Note 3 - Adoption of Plan of Conversion
On March 1, 2002, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federal mutual savings bank to a federal stock
savings bank with the concurrent formation of a holding company. The conversion
is expected to be accomplished through the amendment of the Bank's charter and
the sale of the proposed holding company's common stock in an amount equal to
the consolidated pro forma market value of the holding company and the Bank
after giving effect to the conversion. A subscription offering of the shares of
common stock was offered initially to the Bank's eligible deposit account
holders, then to other members of the Bank. Any shares of the holding company's
common stock not sold in the subscription offering were to be offered for sale
to the general public, giving preference to the Bank's market area.
The initial offering period closed on June 19, 2002 and resulted in a
significant over-subscription of shares of common stock. The Office of Thrift
Supervision required an increase in the appraisal of the Bank resulting in a
re-solicitation of the offering. The Securities and Exchange Commission required
the return of all funds received for initial stock subscriptions with the
re-solicitation document. The re-solicitation document was mailed on July 25,
2002 and the re-solicitation offering period is expected to close on August 14,
2002.
At the time of conversion, the Bank will establish a liquidation account in an
amount equal to its total net worth as of the latest statement of financial
condition appearing in the final prospectus. The liquidation account will be
maintained for the benefit of eligible depositors who continue to maintain their
accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that eligible depositors have reduced their
qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The liquidation account balance is not available for
payment of dividends.
(Continued)
5.
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs will be
charged to expense. At June 30, 2002, $450,000 has been deferred.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion compares the financial condition of Pacific Trust Bank
(the Bank), at June 30, 2002 to its financial condition at December 31, 2001 and
the results of operations for the three-month and six-month periods ended June
30, 2002 to the same periods in 2001. This discussion should be read in
conjunction with the interim financial statements and footnotes included herein.
Discussion of the financial condition and results of operations of First
PacTrust Bancorp, Inc. has been omitted because First PacTrust Bancorp has not
yet issued any stock, has no assets or liabilities, and has not conducted any
business other than that of an organizational nature.
Comparison of Financial Condition at June 30, 2002 and December 31, 2001
Our total assets increased by $162.0 million, or 52.2%, to $472.1 million
at June 30, 2002 from $310.1 million at December 31, 2001. The increase
reflected growth in cash and cash equivalents, loans receivable, and securities
available-for-sale, funded by an increase in deposits and additional advances
from the Federal Home Loan Bank. Cash and cash equivalents increased $112.1
million, or 622.7%, to $130.1 million at June 30, 2002 from $18.0 million at
December 31, 2001 due to federal funds sold funded by an increase in deposits
resulting from stock subscription proceeds. The initial offering resulted in a
significant over-subscription of shares of common stock. The Office of Thrift
Supervision required a re-solicitation and the Securities and Exchange
Commission required the return of all funds received for the initial stock
subscriptions. The funds ultimately to be received as part of the
re-solicitation cannot be determined until after its close on August 14, 2002.
Net loans increased by $45.7 million, or 17.8%, to $302.9 million at June 30,
2002 from $257.2 million at December 31, 2001. Our increase in loans resulted
from a purchase of a $19.4 million pool of one to four-family residential loans
and increased volume of one-to-four-family mortgage loan originations.
Securities classified as available-for-sale increased during this period due to
purchases of $10.2 million of securities, partially offset by principal
repayments of $4.0 million. Premises and equipment also increased by $1.3
million, primarily related to the purchase of the Temecula branch location,
which opened in February 2002.
Total deposits increased by $146.9 million, or 58.3%, to $398.9 million at
June 30, 2002 from $252.0 million at December 31, 2001. The increase primarily
reflected $110.6 million in funds received by the Bank through stock
subscriptions related to the stock offering currently in process. The increase
also reflected growth in savings, NOW, and money market accounts and
certificates of deposit. Certificates of deposit increased $11.8 million, or
9.6%, to $134.8 million. Money market accounts, NOW accounts, and savings
accounts increased by $8.2
(Continued)
6.
million, $3.8 million, and $12.5 million, respectively. The additional funding
was used to support loan growth.
Federal Home Loan Bank advances increased $13.0 million, or 46.4 %, to
$41.0 million at June 30, 2002 from $28.0 million at December 31, 2001. The
additional advances were used to support loan growth.
Equity increased $1.3 million, or 4.5%, to $30.0 million at June 30, 2002
from $28.7 million at December 31, 2001 as a result of $1.2 million net earnings
for the six months ended June 30, 2002, supplemented by a $114,000 increase in
unrealized gain on securities available-for-sale, net of tax.
Comparison of Operating Results for the Six Months Ended June 30, 2002 and 2001
General. Net income for the six months ended June 30, 2002 was $1.2
million, a decrease of $64,000, or 5.2%, from the six months ended June 30,
2001. The decrease in net income resulted from a decrease in noninterest income,
an increase in the provision for loan losses, and an increase in noninterest
expense, partially offset by an increase in net interest income.
Interest income. Interest income decreased by $1.1 million, or 9.6%, to
$10.3 million for the six months ended June 30, 2002 from $11.4 million for the
six months ended June 30, 2001. The primary factor for the decrease in interest
income was a 146 basis point decrease in the average yield on loans receivable,
from 8.03% for the six months ended June 30, 2001 to 6.57% for the same period
in 2002. The majority of the Bank's loans have an adjustable rate feature, and
this decrease reflects the downward repricing of adjustable rate mortgage loans
due to a decline in market rates of interest. The average balance of loans
receivable increased $39.1 million, or 15.4%, from $254.5 million for the six
months ended June 30, 2001 to $293.6 million for the quarter ended June 30,
2002. The increase was primarily the result of the purchase of a $19.4 million
pool of residential mortgage loans and originations exceeding repayments due to
strong demand, reflecting generally lower interest rates in 2002
Interest income on securities decreased by $582,000, or 59.4%, to $397,000
for the six months ended June 30, 2002. The decrease resulted from a $10.2
million, or 36.6%, decrease in the average balance of securities, attributable
to the increased rate of repayment on collateralized mortgage obligations in a
declining interest rate environment. The average yield on the securities
portfolio was 4.49% for the six months ended June 30, 2002 compared to 7.02% for
the same period in 2001, due to generally lower levels of market of rates of
interest in 2002.
Interest income from other interest-earning assets increased $61,000, or
39.1%, to $217,000 for the six months ended June 30, 2002 from $156,000 for the
six months ended June 30, 2001. The increase resulted from an increase in the
average balance from $2.1 million to $27.0 million, which was due to funds
received from principal repayments on loans and collateralized mortgage
obligations and an increase in federal funds sold due to the short-term
investment of stock subscription proceeds.
(Continued)
7.
Interest Expense. Interest expense decreased $2.1 million, or 34.4%, to
$4.0 million for the six months ended June 30, 2002 from $6.1 million for the
six months ended June 30, 2001. The decrease in interest expense resulted
primarily from a decrease in the average cost of our interest-bearing
liabilities to 2.6% from 4.52%, reflecting the decrease in market rates of
interest during the period. This was partially offset by an increase in the
average balance of deposits from $226.2 million for the six months ended June
30, 2001 to $266.7 million for the same period in 2002. Interest expense on
deposits decreased $1.3 million, or 27.7%, to $3.4 million for the six months
ended June 30, 2002 from $4.7 million for the same period in 2001. Interest
expense on Federal Home Loan Bank advances decreased $713,000, or 52.5%, to
$646,000 for the six months ended June 30, 2002 from $1.4 million for the six
months ended June 30, 2001. The decrease resulted from a 317 basis point
decrease in the cost of Federal Home Loan Bank advances from 6.25% for the six
months ended June 30, 2001 to 3.08% for the six months ended June 30, 2002. The
decrease resulted from a $19.0 million variable rate advance with a rate of
1.83% that was drawn in February 2002. Despite the increase in advances as of
June 30, 2002, the average balance of Federal Home Loan Bank advances decreased
$1.5 million from the prior quarter due to repayments of overnight borrowings
and fixed term advances.
Net Interest Income. Net interest income before provision for loan losses
increased $970,000, or 18.5%, to $6.2 million for the six months ended June 30,
2002 from $5.3 million for the six months ended June 30, 2001. The net interest
spread remained steady at 3.46% for both periods while the net interest margin
decreased slightly during the period to 3.68% from 3.70%. The increase in net
interest income primarily reflects an increase in volume of interest-earning
assets as compared to the prior period.
Provision for Loan Losses. We establish provisions for loan losses, which
are charged to operations, at a level required to reflect probable incurred
credit losses in the loan portfolio. In evaluating the level of the allowance
for loan losses, management considers historical loss experience, the types of
loans and the amount of loans in the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any underlying
collateral, peer group information, and prevailing economic conditions. Large
groups of smaller balance homogenous loans, such as residential real estate,
small commercial real estate, and home equity and consumer loans, are evaluated
in the aggregate using historical loss factors and peer group data adjusted for
current economic conditions. More complex loans, such as multi-family and
commercial real estate loans, are evaluated for impairment.
Based on our evaluation of these factors, we made provisions of $439,000
and $40,000 for the six months ended June 30, 2002 and 2001, respectively. The
provision increased by $399,000 reflecting a $50.3 million, or 19.7%, increase
in gross loans, primarily consisting of residential real estate loans. This
growth continues to be achieved primarily through the use of independent loan
originators and through whole loan purchases. Since we did not have a seasoned
portfolio in this type of lending and did not have our own related loss history
to apply to these types of loans, we continued to utilize peer group data
adjusted for local economic conditions to establish our loan loss allowance,
resulting in the $439,000 provision.
This evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes available or
as future events change. We used the same methodology and generally similar
assumptions in assessing the allowance for
(Continued)
8.
both periods. The allowance for loan losses as a percentage of loans outstanding
increased to .78% at June 30, 2002 from .71% at June 30, 2001. This increase was
primarily the result of a continued growth in the unsecured portion of Bank's
loan portfolio combined with current economic conditions. The level of the
allowance is based on estimates and the ultimate losses may vary from the
estimates.
Management assesses the allowance for loan losses on at least quarterly
basis and makes provisions for loan losses as necessary in order to maintain the
allowance. While management uses available information to recognize losses on
loans, future loan loss provisions may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses and
may require us to recognize additional provisions based on their judgment of
information available to them at the time of their examination. The allowance
for loan losses as of June 30, 2002 was maintained at a level that represented
management's best estimate of inherent losses in the loan portfolio to the
extent they were both probable and reasonably estimable.
Noninterest Income. Noninterest income decreased $21,000, or 4.1%, to
$489,000 for the six months ended June 30, 2002 from $510,000 for the six months
ended June 30, 2001, primarily as a result of a decrease in loan servicing fees
of $13,000 and a decrease of $43,000 in customer service fees on deposit
accounts. Customer service fees decreased as a result of decreased return item
fees and decreased month-end checking fees. Other noninterest income decreased
as a result of various declines in miscellaneous smaller balance accounts. These
decreases were partially offset by a $55,000 loss in the prior year on sales of
securities.
Noninterest Expense. Noninterest expense increased $692,000, or 19.1%, to
$4.3 million for the six months ended June 30, 2002 from $3.6 million for the
six months ended June 30, 2001. This increase was primarily the result of a
$181,000 increase in occupancy and equipment expense, a $227,000 increase in
data processing, a $245,000 increase in salaries and employee benefits, and a
$45,000 increase in advertising, partially offset by a $51,000 reduction in
professional fees.
Salaries and employee benefits represented 44.8% and 46.6% of total
noninterest expense for the six months ended June 30, 2002 and June 30, 2001,
respectively. Total salaries and employee benefits increased $245,000, or 14.5%,
to $1.9 million for the six months ended June 30, 2002 from $1.7 million for the
same period in 2001. The increase was primarily due to normal staffing increases
and additional staffing at the new branch facility. The increase in occupancy
and equipment was also the result of opening the new branch facility.
Data processing expense increased as a result of increased volume in both
loans and deposits and the write-off of approximately $163,000 of software
related to the cancellation of a proposed system conversion. We had anticipated
that the software related to the system conversion could be utilized with
another data processor under a modified conversion plan. We determined, however,
that the value of the software was impaired and should be expensed. The $45,000
increase in advertising was related to the promotion of the new branch which
opened in March 2002, and the move of an existing branch in April 2002.
(Continued)
9.
Income Tax Expense. Income tax expense decreased to $790,000 for the six
months ended June 30, 2002, from $866,000 for the six months ended June 30,
2001. This decrease was primarily a result of a decrease in pre-tax income. The
effective tax rate was 40.2% and 41.2% for the six months ended June 30, 2002
and 2001, respectively.
Comparison of Operating Results for the Three Months Ended June 30, 2002
and 2001
General. Net income for the three months ended June 30, 2002 was $710,000,
a decrease of $3,000 from $713,000 for the three months ended June 30, 2001. The
decrease in net income resulted from an increase in the provision for loan
losses and an increase in noninterest expense, partially offset by an increase
in net interest income and noninterest income.
Interest income. Interest income decreased by $384,000, or 6.7%, to $5.3
million for the three months ended June 30, 2002 from $5.7 million for the three
months ended June 30, 2001. The primary factor for the decrease in interest
income was a decrease in the average yield on loans receivable reflecting the
downward repricing of adjustable rate mortgage loans due to a decline in market
interest rates. This was partially offset by an increase in the average balance
of loans receivable for the comparative periods reflecting the purchase of a
$19.4 million pool of residential mortgage loans and higher levels of
originations due to strong demand, reflecting generally lower interest rates in
2002.
Interest income on securities decreased by $204,000, or 48.0%, to $221,000
for the three months ended June 30, 2002. The decrease resulted from a decrease
in the average balance of securities, attributable to the increased rate of
repayment on collateralized mortgage obligations due to a declining interest
rate environment combined with a decrease in the average yield due to generally
lower levels of market interest rates in 2002.
Interest income from other interest earning assets increased $54,000, or
68.4%, to $133,000 for the three months ended June 30, 2002 from $79,000 for the
three months ended June 30, 2001. The increase resulted from an increase in the
average balance of these assets, which was due to funds received from principal
repayments on loans and collateralized mortgage obligations and stock
subscriptions received in anticipation of the stock offering.
Interest Expense. Interest expense decreased $983,000, or 33.1%, to $2.0
million for the three months ended June 30, 2002 from $3.0 million for the three
months ended June 30, 2001. The decrease in interest expense resulted primarily
from a decrease in the average cost of our interest-bearing liabilities
reflecting the decrease in market rates of interest during the period. Interest
expense on deposits decreased $648,000, or 27.6%, to $1.7 million for the three
months ended June 30, 2002 from $2.4 million for the same period in 2001.
Interest expense on Federal Home Loan Bank advances decreased $281,000, or
45.8%, to $333,000 for the three months ended June 30, 2002 from $614,000 for
the three months ended June 30, 2001. The decrease primarily resulted from a
decrease in the cost of Federal Home Loan Bank advances due to a $19.0 million
variable rate advance with a rate of 1.83% that was drawn in February 2002.
Despite the increase in advances as of June 30, 2002, the average balance of
Federal Home Loan Bank advances decreased from the prior quarter due to
repayments of overnight borrowings and fixed term advances.
(Continued)
10.
Net Interest Income. Net interest income before provision for loan losses
increased $545,000, or 19.8%, to $3.3 million for the three months ended June
30, 2002 from $2.8 million for the three months ended June 30, 2001. The
increase primarily represented an increase in the volume of earning assets.
Provision for Loan Losses. We establish provisions for loan losses, which
are charged to operations, at a level required to reflect probable incurred
credit losses in the loan portfolio. In evaluating the level of the allowance
for loan losses, management considers historical loss experience, the types of
loans and the amount of loans in the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any underlying
collateral, peer group information, and prevailing economic conditions. Large
groups of smaller balance homogenous loans, such as residential real estate,
small commercial real estate, home equity and consumer loans, are evaluated in
the aggregate using historical loss factors and peer group data adjusted for
current economic conditions. More complex loans, such as multi-family and
commercial real estate loans, are evaluated for impairment.
Based on our evaluation of these factors, we made provisions of $274,000
and $20,000 for the three months ended June 30, 2002 and 2001, respectively. The
provision increased by $254,000 reflecting a $50.8 million, or 19.8%, increase
in gross loans, primarily consisting of residential real estate loans. This
growth continues to be achieved primarily through the use of independent loan
originators and through whole loan purchases. Since we did not have a seasoned
portfolio in this type of lending and did not have our own related loss history
to apply to these types of loans, we continued to utilize peer group data
adjusted for local economic conditions to establish our loan loss allowance,
resulting in the $274,000 provision.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available or as
future events change. We used the same methodology and generally similar
assumptions in assessing the allowance for both periods. The allowance for loan
losses as a percentage of loans outstanding increased to .78% at June 30, 2002
from .71% at June 30, 2001. This increase was primarily the result of a
continued growth in the Bank's loan portfolio. The level of the allowance is
based on estimates and the ultimate losses may vary from the estimates.
Management assesses the allowance for loan losses on a quarterly basis and
makes provisions for loan losses as necessary in order to maintain the
allowance. While management uses available information to recognize losses on
loans, future loan loss provisions may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses and
may require us to recognize additional provisions based on their judgment of
information available to them at the time of their examination. The allowance
for loan losses as of June 30, 2002 is maintained at a level that best
represents management's best estimate of inherent losses in the loan portfolio,
and such losses were both probable and reasonably estimable.
Noninterest Income. Noninterest income increased $60,000, or 30.5%, to
$257,000 for the three months ended June 30, 2002 from $197,000 for the three
months ended June 30, 2001, primarily as a result of a $55,000 decrease in the
loss on sale of securities.
(Continued)
11.
Noninterest Expense. Noninterest expense increased $348,000, or 20.2%, to
$2.1 million for the three months ended June 30, 2002 from $1.7 million for the
three months ended June 30, 2001. This increase was primarily the result of a
$169,000 increase in salaries and employee benefits, a $34,000 increase in
occupancy and equipment expense, an $86,000 increase in data processing, and a
$37,000 increase in other general and administrative costs.
Salaries and employee benefits represented 47.9% and 47.8% of total
noninterest expense for the three months ended June 30, 2002 and June 30, 2001,
respectively. Total salaries and employee benefits increased $169,000, or 20.5%,
to $994,000 for the three months ended June 30, 2002 from $825,000 for the same
period in 2001. The increase was primarily due to cost of living increases and
additional staffing at the new branch facility. The increase in occupancy and
equipment was also the result of opening the new branch facility.
Data processing expense increased as a result of increased volume in both
loans and deposits.
Other noninterest expense increased $37,000 as a result of increases in
several smaller individual items, none of which were significant.
Income Tax Expense. Income tax expense increased to $493,000 for the three
months ended June 30, 2002, from $487,000 for the three months ended June 30,
2001. The effective tax rate was 41.0% and 40.6% for the three months ended June
30, 2002 and 2001, respectively.
Liquidity and Commitments
We are required to have enough investments that qualify as liquid assets in
order to maintain sufficient liquidity to ensure a safe and sound operation.
Liquidity may increase or decrease depending upon availability of funds and
comparative yields on investments in relation to the return on loans.
Historically, we have maintained liquid assets above levels believed to be
adequate to meet the requirements of normal operations, including potential
deposit outflows. Cash flow projections are regularly reviewed and updated to
ensure that adequate liquidity is maintained.
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing, and financing activities. The Bank's
primary sources of funds are deposits, amortization, prepayments, and maturities
of outstanding loans and mortgage-backed securities; maturities of investment
securities; and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans and mortgage-backed
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions, and
competition. In addition, the Bank invests excess funds in short-term
interest-earning assets, which provide liquidity to meet lending requirements.
The Bank also generates cash through borrowings. The Bank utilizes Federal Home
Loan Bank advances to leverage its capital base and provide funds for its
lending activities and to enhance its interest rate risk management.
(Continued)
12.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. Agency securities. On a longer-term basis,
the Bank maintains a strategy of investing in various lending products as
described in greater detail under "Business of Pacific Trust Bank - Lending
Activities" in the prospectus. The Bank uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing certificates of deposit and
savings withdrawals, to fund loan commitments, and to maintain its portfolio of
mortgage-backed securities and investment securities. At June 30, 2002, the
total approved loan origination commitments outstanding amounted to $5.1
million. At the same date, unused lines of credit were $19.0 million and
outstanding letters of credit totaled $10,000. Investment and mortgage-backed
securities scheduled to mature in one year or less at June 30, 2002 totaled
$500,000. Certificates of deposit scheduled to mature in one year or less at
June 30, 2002, totaled $104.7 million. Although the average cost of deposits has
decreased throughout 2002, management's policy is to maintain deposit rates at
levels that are competitive with other local financial institutions. Based on
the competitive rates and on historical experience, management believes that a
significant portion of maturing deposits will remain with the Bank. In addition,
the Bank has the ability at June 30, 2002 to borrow an additional $136.0 million
from the Federal Home Loan Bank of San Francisco as a funding source to meet
commitments and for liquidity purposes.
Capital
Consistent with its goals to operate a sound and profitable financial
organization, the Bank actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. Total equity was $30.0
million at June 30, 2002, or 6.3% of total assets on that date. As of June 30,
2002, the Bank exceeded all capital requirements of the Office of Thrift
Supervision. The Bank's regulatory capital ratios at June 30, 2002 were as
follows: core capital 6.3%; Tier 1 risk-based capital, 12.4%; and total
risk-based capital, 13.3%. The regulatory capital requirements to be considered
well capitalized are 5.0%, 6.0%, and 10.0%, respectively. The decline in capital
ratios from March 31, 2002 is primarily a result of an increase in assets due to
the over-subscription of the stock offering.
Impact of Inflation
The consolidated financial statements presented herein have been prepared
in accordance with accounting principles generally accepted in the United States
of America. These principles require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities structures of our
assets and liabilities are critical to the maintenance of acceptable performance
levels.
(Continued)
13.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings in the area of noninterest expense. Such expense items as
employee compensation, employee benefits, and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 141 (FAS 141), Business Combinations, and Statement No. 142 (FAS
142), Goodwill and Other Intangible Assets. FAS 141 addresses the financial
accounting and reporting for business combinations and requires all business
combinations within the scope of the statement to be accounted for using the
purchase method. However, for combinations between two or more mutual
enterprises, FAS 141 is not effective until interpretative guidance related to
the application of the purchase method to those transactions is issued. FAS 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. Management does not believe that these recent accounting
pronouncements will have any impact on its operations at this time.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank's interest rate sensitivity is monitored by management through the use
of a model that estimates the change in net portfolio value (NPV) over a range
of interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities, and off-balance-sheet contracts. An NPV Ratio, in any
interest rate scenario, is defined as the NPV in that scenario divided by the
market value of assets in the same scenario. The Sensitivity Measure is the
decline in the NPV Ratio, in basis points, caused by a 2% increase or decrease
in rates, whichever produces a larger decline. The higher an institution's
Sensitivity Measure is, the greater its exposure to interest rate risk is
considered to be. The Office of Thrift Supervision (OTS) has incorporated an
interest rate risk component into its regulatory capital rule. Under the rule,
an institution whose Sensitivity Measure exceeds 2% would be required to deduct
an interest rate risk component in calculating its total capital for purposes of
the risk-based capital requirement. As of March 31, 2002, the latest date for
which information is available, the Bank's Sensitivity Measure, as measured by
the OTS, resulting from a 200 basis point increase in interest rates was (9)%
and would result in a $4.2 million reduction in the NPV of the Bank.
Accordingly, increases in interest rates would be expected to have a negative
impact on the Bank's operating results. The Sensitivity Measure is less than the
threshold at which the Bank could be required to hold additional risk-based
capital under OTS regulations.
The OTS uses certain assumptions in assessing the interest rate risk of savings
associations. These assumptions relate to interest rates, loan prepayment rates,
deposit decay rates, and the market values of certain assets under differing
interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis used in the forthcoming table. For example,
although certain assets and
(Continued)
14.
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as adjustable
rate mortgage loans, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, if interest rates
change, expected rates of prepayments on loans and early withdrawals from
certificates could deviate significantly from those assumed in calculating the
table.
The following table shows the NPV and projected change in the NPV of the Bank at
March 31, 2002, the latest date for which information is available, assuming an
instantaneous and sustained change in market rates of interest of 100, 200, and
300 basis points. On March 31, 2002, the yield on the three-month Treasury bill
was 1.83%. As a result, the net portfolio value analysis was unable to produce
results for the minus 200 and minus 300 basis point scenario for the quarter
ended March 31, 2002.
Interest Rate Sensitivity of Net Portfolio Value (NPV)
NPV as a % of
-------Net Portfolio Value-------- ----PV of Assets-----
------------------- ------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
- --------------- -------- -------- -------- --------- ------
+ 300 bp $ 39,988 $(7,155) (15)% 11.25% (159 bp)
+ 200 bp 42,987 (4,156) (9) 11.95 (89 bp)
+ 100 bp 45,373 (1,770) (4) 12.47 (37 bp)
0 bp 47,143 -- -- 12.84 --
- 100 bp 47,897 754 2 12.97 13 bp
- 200 bp N/A N/A N/A N/A
- 300 bp N/A N/A N/A N/A
The Bank does not maintain any securities for trading purposes. The Bank does
not currently engage in trading activities or use derivative instruments in a
material amount to control interest rate risk. In addition, interest rate risk
is the most significant market risk affecting the Bank. Other types of market
risk, such as foreign currency exchange risk and commodity price risk, do not
arise in the normal course of the Bank's business activities and operations.
15.
PART II - - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
to Section 906 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Executive Officer (attached as an exhibit and
incorporated herein by reference).
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
to Section 906 of the Sarbanes-Oxley Act of 2002 from the
Company's Executive Vice President (attached as an exhibit and
incorporated herein by reference).
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
registrant during the quarter ended March 31, 2002.
16.