Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 000-23877
Heritage Commerce Corp
(Exact name of Registrant as Specified in its Charter)
|
California
|
77-0469558
|
|
(State or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S. Employer Identification Number)
|
150 Almaden Boulevard
San Jose, California 95113
(Address of Principal Executive Offices including Zip Code)
(408) 947-6900
(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 reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The Registrant had 11,329,358 shares of Common Stock outstanding on November 5, 2003.
Heritage Commerce Corp and Subsidiaries
Quarterly Report on Form 10-Q
Table of Contents
|
PART I. FINANCIAL INFORMATION
|
Page No.
|
|
|
|
|
Item 1. Financial Statements
(unaudited):
|
|
|
|
|
|
Condensed Consolidated Balance Sheets
|
2
|
|
|
|
|
Condensed Consolidated Income Statements
|
3
|
|
|
|
|
Condensed Consolidated Statements of Cash Flows
|
4
|
|
|
|
|
Condensed Consolidated Notes to Financial Statements
|
5
|
|
|
|
|
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
8
|
|
|
|
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk
|
28
|
|
|
|
|
Item 4. Controls and Procedures
|
28
|
|
|
|
|
PART II. OTHER INFORMATION
|
|
|
|
|
|
Item 6. Exhibits and Reports on Form 8-K
|
28
|
|
|
|
|
Signatures
|
29
|
|
|
|
|
Exhibit Index
|
30
|
Part I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERITAGE COMMERCE CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
(Dollars in thousands) 2003 2002
- -------------------------------------------------------------- ------------ ------------
ASSETS
Cash and due from banks......................................... $ 42,442 $ 35,610
Interest bearing deposits in other financial institutions....... 2,464 7,022
Federal funds sold.............................................. 51,300 44,000
------------ ------------
Total cash and cash equivalents.................. 96,206 86,632
Securities available-for-sale, at fair value.................... 172,010 126,443
Loans held for sale, at lower of cost or market................. 30,675 28,084
Loans, net of deferred costs.................................... 642,180 673,907
Allowance for probable loan losses.............................. (13,039) (13,227)
------------ ------------
Loans, net....................................... 629,141 660,680
Premises and equipment, net..................................... 4,532 5,194
Accrued interest receivable and other assets.................... 25,083 24,549
Corporate owned life insurance.................................. 25,014 23,898
Other investments............................................... 2,059 3,272
------------ ------------
TOTAL............................................ $ 984,720 $ 958,752
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Demand, noninterest bearing............................... $ 252,133 $ 248,616
Demand, interest bearing.................................. 94,092 94,309
Savings and money market.................................. 334,613 290,417
Time deposits, under $100................................. 41,020 46,341
Time deposits, $100 and over.............................. 99,137 114,613
Brokered deposits......................................... 14,952 47,640
------------ ------------
Total deposits............................................... 835,947 841,936
Accrued interest payable and other liabilities............... 38,289 11,599
Mandatorily redeemable cumulative trust preferred
securities of subsidiary grantor trust.................... 23,000 23,000
------------ ------------
Total liabilities................................ 897,236 876,535
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized;
none outstanding.......................................... -- --
Common stock, no par value; 30,000,000 shares authorized;
shares issued and outstanding: 11,326,163 at
September 30, 2003 and 11,214,414 at December 31, 2002.... 65,004 64,002
Unallocated ESOP shares...................................... (443) (693)
Accumulated other comprehensive income (loss), net of taxes.. (11) 1,714
Retained earnings............................................ 22,934 17,194
------------ ------------
Total shareholders' equity....................... 87,484 82,217
------------ ------------
TOTAL............................................ $ 984,720 $ 958,752
============ ============
See notes to condensed consolidated financial statements
HERITAGE COMMERCE CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(Dollars in thousands, except per share data) 2003 2002 2003 2002
- ------------------------------------------------------------ ----------- ----------- ----------- -----------
Interest income:
Loans, including fees..................................... $ 10,138 $ 11,493 $ 32,121 $ 34,802
Securities, taxable...................................... 1,154 1,142 3,036 3,415
Securities, non-taxable.................................. 112 121 292 385
Interest bearing deposits in other financial institutions. 5 22 40 70
Federal funds sold........................................ 147 273 388 740
----------- ----------- ----------- -----------
Total interest income 11,556 13,051 35,877 39,412
----------- ----------- ----------- -----------
Interest expense:
Deposits.................................................. 1,775 3,210 6,106 10,557
Mandatorily redeemable trust preferred securities......... 470 444 1,450 1,371
Other..................................................... 124 1 138 13
----------- ----------- ----------- -----------
Total interest expense....................................... 2,369 3,655 7,694 11,941
----------- ----------- ----------- -----------
Net interest income before provision for probable
loan losses................................................ 9,187 9,396 28,183 27,471
Provision for probable loan losses........................... 600 750 2,500 2,066
----------- ----------- ----------- -----------
Net interest income after provision for probable
loan losses................................................ 8,587 8,646 25,683 25,405
----------- ----------- ----------- -----------
Noninterest income:
Gain on sale of loans..................................... 561 596 1,705 1,574
Servicing income.......................................... 463 362 1,339 940
Service charges and other fees on deposit accounts........ 480 360 1,332 1,047
Equipment leasing ........................................ 310 -- 929 --
Appreciation of corporate owned life insurance ........... 254 279 891 830
Gain on sale of securities available-for-sale............. 74 361 532 786
Other..................................................... 321 402 1,215 1,060
----------- ----------- ----------- -----------
Total noninterest income..................................... 2,463 2,360 7,943 6,237
----------- ----------- ----------- -----------
Noninterest expenses:
Salaries and employee benefits............................ 4,423 4,568 13,664 13,725
Occupancy................................................. 857 814 2,511 2,322
Furniture and equipment................................... 385 379 1,143 1,062
Loan origination costs.................................... 369 343 1,046 941
Professional fees......................................... 338 347 1,028 919
Client services........................................... 239 238 714 678
Advertising and promotion................................. 209 185 608 515
Stationery & supplies..................................... 83 82 246 268
Telephone................................................. 85 83 235 241
Other..................................................... 1,322 1,307 4,101 3,693
----------- ----------- ----------- -----------
Total noninterest expenses................................... 8,310 8,346 25,296 24,364
----------- ----------- ----------- -----------
Income before provision for income taxes..................... 2,740 2,660 8,330 7,278
Provision for income taxes................................... 800 848 2,590 2,393
----------- ----------- ----------- -----------
Net income................................................... $ 1,940 $ 1,812 $ 5,740 $ 4,885
=========== =========== =========== ===========
Earnings per share:
Basic................................................... $ 0.17 $ 0.16 $ 0.51 $ 0.44
=========== =========== =========== ===========
Diluted................................................. $ 0.17 $ 0.16 $ 0.50 $ 0.43
=========== =========== =========== ===========
See notes to condensed consolidated financial statements
HERITAGE COMMERCE CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
--------------------------
(Dollars in thousands) 2003 2002
- --------------------------------------------------------------- ------------ ------------
Cash flows from operating activities:
Net income........................................................ $ 5,740 $ 4,885
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization..................................... 1,277 1,151
Provision for probable loan losses................................ 2,500 2,066
Loss on disposals of property and equipment....................... 10 --
Gain on sale of securities available-for-sale..................... (532) (786)
Net amortization of premiums / accretion of discounts............. 1,034 409
Gains on sales of loans held for sale............................. (1,705) (1,574)
Proceeds from sales of loans held for sale....................... 35,069 37,094
Originations of loans held for sale............................... (60,895) (55,817)
Maturities of loans held for sale................................. 24,940 13,287
Appreciation of corporate owned life insurance.................... (891) (830)
Effect of changes in:
Accrued interest receivable and other assets.................. (383) (8,568)
Accrued interest payable and other liabilities................ (757) 2,059
------------ ------------
Net cash provided by (used in) operating activities............... 5,407 (6,624)
------------ ------------
Cash flows from investing activities:
Net decrease in loans............................................. 29,040 1,429
Purchases of securities available-for-sale........................ (120,478) (33,194)
Maturities/paydowns/calls of securities available-for-sale........ 43,715 17,196
Proceeds from sales of securities available-for-sale............. 27,664 27,879
Maturities/paydowns/calls of securities held-to-maturity.......... -- 1,776
Purchases of corporate owned life insurance....................... (225) (750)
Redemption (Purchases) of other investments....................... 1,213 (182)
Purchases of premises and equipment............................... (625) (1,255)
------------ ------------
Net cash provided by (used in) investing activities............... (19,696) 12,899
------------ ------------
Cash flows from financing activities:
Net (decrease) increase in deposits............................... (5,989) 34,029
Proceeds from issuance of mandatorily redeemable cumulative
trust preferred securities of subsidiary grantor trust.......... -- 4,000
Net proceeds from issuance of common stock........................ 1,252 339
Net change in other borrowings.................................... 28,600 --
------------ ------------
Net cash provided by financing activities......................... 23,863 38,368
------------ ------------
Net increase in cash and cash equivalents......................... 9,574 44,643
Cash and cash equivalents, beginning of period.................... 86,632 106,319
------------ ------------
Cash and cash equivalents, end of period.......................... $ 96,206 $ 150,962
============ ============
Supplemental disclosures of cash paid during the period for:
Interest....................................................... $ 8,726 $ 13,988
Income taxes................................................... $ 2,735 $ 4,070
Supplemental schedule on non-cash investing and financing activity
Transfer loans to other real estate owned...................... $ 652 $ --
Transfer of investment securities from HTM to AFS.............. $ -- $ 13,619
See notes to condensed consolidated financial statements
HERITAGE COMMERCE CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(Unaudited)
1) Basis of Presentation
The unaudited condensed consolidated financial statements
of Heritage Commerce Corp (the "Company") and its wholly owned
subsidiary: Heritage Bank of Commerce (HBC) have been prepared pursuant to the
rules and regulations for reporting on Form 10-Q. Accordingly, certain
information and notes required by accounting principles generally accepted in
the United States of America ("GAAP") for complete financial statements are not
included herein. The interim statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 2002. The Company has also
established the following subsidiary trusts: Heritage Capital Trust I; Heritage
Statutory Trust I; Heritage Statutory Trust II; and Heritage Commerce Corp
Statutory Trust III which are Delaware statutory business trusts formed for the
exclusive purpose of issuing and selling trust preferred securities.
HBC is a commercial bank serving customers located in Santa
Clara, Alameda, and Contra Costa counties of California. No customer accounts
for more than 10 percent of revenue for HBC or the Company. Management
evaluates the Company's performance as a whole and does not allocate resources
based on the performance of different lending or transaction activities.
Accordingly, the Company and its subsidiary operate as one business segment.
In the Company's opinion, all adjustments necessary for a
fair presentation of these condensed consolidated financial statements have been
included and are of a normal and recurring nature. Certain reclassifications
have been made to prior year amounts to conform to current year
presentation.
The results for the three months and nine months ended
September 30, 2003 are not necessarily indicative of the results expected for
any subsequent period or for the entire year ending December 31, 2003.
2) Stock-Based Compensation
The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees. No compensation
expense has been recognized in the financial statements for employee stock
arrangements, as the Company's stock option plan provides for the issuance of
options at a price of no less than the fair market value at the date of the
grant.
SFAS No. 123, Accounting for Stock-Based Compensation,
requires the disclosure of pro forma net income and earnings per share had the
Company adopted the fair value method at the grant date of all stock options.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which differ significantly from the
Company's stock option awards. Those models also require subjective assumptions,
which greatly affect the calculated values. The Company's calculations were made
using the Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 84 months; risk-free interest rate, 0.94% and 1.61%
for the quarter and nine month periods ended September 30, 2003 and 2002; stock
volatility of 11% and
30% for the quarter and nine month periods ended September 30, 2003 and 2002;
and no dividends during the expected term. The Company's calculations are based
on a multiple option valuation approach, and forfeitures are recognized as they
occur.
Had compensation expense for the Company's stock option plan
been determined under the requirements of SFAS No. 123 the Company's pro forma
net income and earnings per common share would have been as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
(Amounts in thousands, except per share data) 2003 2002 2003 2002
- ------------------------------------------------------------------- --------- --------- ---------- ----------
Net income
As reported...................................................... $ 1,940 $ 1,812 $ 5,740 $ 4,885
Less: Compensation expense for amortization of fair value of
stock awards, net of taxes................................. (203) (190) (582) (544)
--------- --------- ---------- ----------
Pro forma........................................................ $ 1,737 $ 1,622 $ 5,158 $ 4,341
========= ========= ========== ==========
Net income per common share - basic
As reported...................................................... $ 0.17 $ 0.16 $ 0.51 $ 0.44
Pro forma........................................................ $ 0.15 $ 0.15 $ 0.46 $ 0.39
Net income per common share - diluted
As reported...................................................... $ 0.17 $ 0.16 $ 0.50 $ 0.43
Pro forma........................................................ $ 0.15 $ 0.14 $ 0.45 $ 0.38
3) Earnings Per Share
Basic earnings per share is computed by dividing net
income by the weighted average common shares outstanding. Diluted earnings per
share reflects potential dilution from outstanding stock options, using the
treasury stock method. For each of the periods presented, net income is the
same for basic and diluted earnings per share. Reconciliation of weighted
average shares used in computing basic and diluted earnings per share is as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Weighted average common shares outstanding - used
in computing basic earnings per share.................... 11,254,328 11,076,443 11,201,345 11,050,399
Dilutive effect of stock options outstanding,
using the treasury stock method.......................... 441,879 278,494 367,595 280,195
----------- ----------- ----------- -----------
Shares used in computing diluted earnings per share.......... 11,696,207 11,354,937 11,568,940 11,330,594
=========== =========== =========== ===========
4) Comprehensive Income
Comprehensive Income includes net income and other
comprehensive income, which represents the change in the Company's net assets
during the period from non-owner sources. The Company's sources of other
comprehensive income are unrealized gains and losses on securities available-
for-sale and I/O strips, which are treated like available-for-sale securities,
and are presented net of tax. Reclassification adjustments resulting from gains
or losses on investment securities that were realized and included in net income
of the current period that also had been included in other comprehensive income
as unrealized holding gains or losses in the period in which they arose are
excluded from comprehensive income of the current period. The Company's total
comprehensive income was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(Dollars in thousands) 2003 2002 2003 2002
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
Net income................................................... $ 1,940 1,812 5,740 4,885
----------- ----------- ----------- -----------
Other comprehensive income, net of tax:
Net unrealized holding gains (losses) on available-for-sale
securities and Interest-Only strips during the period... (1,464) 996 (1,358) 1,522
Less: reclassification adjustment for realized
gains (losses) on available-for-sale securities
included in net income during the period................. (52) (246) (367) (528)
----------- ----------- ----------- -----------
Other comprehensive income (loss)............................ (1,516) 750 (1,725) 994
----------- ----------- ----------- -----------
Comprehensive income......................................... $ 424 $ 2,562 $ 4,015 $ 5,879
=========== =========== =========== ===========
5) Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
HBC is a party to financial instruments with off-
balance sheet risk in the normal course of business to meet the financing needs
of its clients. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk, in excess of the amounts recognized
in the balance sheets.
HBC's exposure to credit loss in the event of non-performance
of the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. HBC uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments. Credit
risk is the possibility that a loss may occur because a party to a transaction
failed to perform according to the terms of the contract. HBC controls the
credit risk of these transactions through credit approvals, limits, and
monitoring procedures. Management does not anticipate any significant losses as
a result of these transactions.
Commitments to extend credit as of September 30, were as
follows:
(Dollars in thousands) 2003 2002
- ------------------------------ ------------ ------------
Commitments to extend credit.. $ 270,347 $ 306,704
Standby letters of credit..... 2,290 4,486
------------ ------------
$ 272,637 $ 311,190
============ ============
Commitments to extend credit are agreements to lend to a
client as long as there is no violation of conditions established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amount does not necessarily represent future
cash requirements. HBC evaluates each client's creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary by HBC upon
the extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies but may include cash, marketable securities,
accounts receivable, inventory, property, plant and equipment, income-producing
commercial properties, and/or residential properties. Fair value of these
instruments is not considered significant.
Standby letters of credit are written with conditional
commitments issued by HBC to guaranty the performance of a client to a third
party. The premiums of $19,000 on the outstanding standby letters of credit are
deferred until the guarantee expires. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to clients.
6) Recent Accounting Pronouncements
Consolidation of Variable Interest Entities - In January
2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. (FIN) 46, Consolidation of Variable Interest Entities. The purpose of this
interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and to determine when the assets, liabilities, noncontrolling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in
an entity will need to consolidate that entity if the company's interest in the
VIE's expected residual returns, if they occur. New disclosure requirements are
also prescribed by FIN 46. FIN 46 is effective for all VIE's created after
January 31, 2003 and becomes effective for VIE's that existed before February 1,
2003 for the first period ending after December 15, 2003. As of September 30,
2003, the Company does not believe it has any VIE's for which this
interpretation would require consolidation. However, under FIN 46, the
Company's subsidiaries, which issued mandatorily redeemable trust preferred
securities, will be deconsolidated. Deconsolidation of these entities in the
fourth quarter of 2003 is expected to cause total assets and total liabilities
to increase slightly but is not expected to have any impact on the Company's
results of operations.
7) Reclassifications
Certain amounts in the December 31, 2002 and September
30, 2002 financial statements have been reclassified to conform to the September
30, 2003 financial statement presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
Discussions of certain matters in this Report on
Form 10-Q may constitute 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 (the "Exchange Act"), and as such,
may involve risks and uncertainties. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies, and
expectations, are generally identifiable by the use of words such as "believe",
"expect", "intend", "anticipate", "estimate", "project", or similar expressions.
These forward-looking statements relate to, among other things, expectations of
the business environment in which the Company operates, projections of future
performance, potential future performance, potential future credit experience,
perceived opportunities in the market, and statements regarding the Company's
mission and vision. The Company's actual results, performance, and achievements
may differ materially from the results, performance, and achievements expressed
or implied in such forward-looking statements due to a wide range of factors.
The factors include, but are not limited to changes in interest rates, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the US Government, real estate valuations, competition in the
financial services industry, and other risks. All of the Company's operations
and most of its customers are located in California. During the past year, the
availability of a sufficient supply of electrical power in California has been
unreliable at times. In addition, other events, including those of September
11, 2001, have increased the uncertainty related to the national and California
economic outlook and could have an effect on the future operations of the
Company or its customers, including borrowers. The Company does not undertake,
and specifically disclaims any obligation, to update any forward-looking
statements to reflect occurrences or unanticipated events or circumstances after
the date of such statements.
Heritage operates as the bank
holding company for its subsidiary bank Heritage Bank of Commerce
("HBC"). HBC is California state chartered bank, which offers a full
range of commercial and personal banking services to residents and the
business/professional community in Santa Clara, Contra Costa and Alameda
Counties, California.
CRITICAL ACCOUNTING POLICIES
General
The Company's financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP). The financial information contained within our financial
statements is, to a significant extent, based on approximate measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a
liability. In certain instances, the Company uses the discount factor and
prepayment assumptions to determine the present value of assets and liabilities.
A change in the discount factor or prepayment spreads could increase or decrease
the values of those assets and liabilities which would result in either a
beneficial or adverse impact to the Company's financial results. The Company
used historical loss experience as one factor in determining the inherent loss
that may be present in the Company's loan portfolio. Actual losses could differ
significantly from the historical factors that we use. Other estimates that the
Company used are related to the expected useful lives of the Company's
depreciable assets. In addition GAAP itself may change from one previously
acceptable method to another method. Although the economics of the Company's
transactions would be the same, the timing of events that would impact the
Company's transactions could change.
Allowance for Probable Loan Losses
The allowance for probable loan losses is an estimate
of the losses that may be sustained in the Company's loan portfolio. The
allowance is based on two basic principles of accounting. (1) Statement of
Financial Accounting Standards (SFAS) No. 5 "Accounting for
Contingencies", which requires that losses be accrued when they are
probable of occurring and estimable and (2) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued
based on the differences between the value of collateral, present value of
future cash flows or values that are observable in the secondary market and the
loan balance.
The Company's allowance for probable loan losses has
three basic components: the formula allowance, the specific allowance and the
unallocated allowance. Each of these components is determined based upon
estimates that can and do change when the actual events occur. The formula
allowance uses an historical loss view as an indicator of future losses and as a
result could differ from the losses incurred in the future. The specific
allowance uses various techniques to arrive at an estimate of loss. Historical
loss information and fair market value of collateral are used to estimate those
losses. The use of these values is inherently subjective and our actual losses
could be greater or less than the estimates. The unallocated allowance captures
losses that are attributable to various economic events, industry or geographic
sectors whose impact on the portfolio have occurred but have yet to be
recognized in either the formula or specific allowances. For further
information regarding our allowance for credit losses, see Allowance for
Probable Loan Losses on page 22.
Loan Sales and Servicing
The amounts of gains recorded on sales of loans and the
initial recording of servicing assets and interest only strips is based on the
estimated fair values of the respective components. In recording the initial
value of the servicing assets and the fair value of the Interest-Only (I/O)
strips receivable, the Company uses estimates which are made based on
management's expectations of future prepayment and discount rates. For the
quarter ended September 30, 2003, management's estimate of constant prepayment
rate ("CPR") was 14% and the weighted average discount rate assumption
was 10%. These prepayment and discount rates were based on current market
conditions and historical performance of the various pools of loans. If actual
prepayments with respect to sold loans occur more quickly than projected the
carrying value of the servicing assets may have to be adjusted through a charge
to earnings. Variations in prevailing interest rates on borrowed funds, changes
in general economic conditions, among other factors, could cause changes in the
prepayment experience. A corresponding decrease in the value of the I/O strip
receivable would also be expected.
Stock Based Awards
The Company accounts for its stock based awards using the
intrinsic value method in accordance with Accounting Principles Board
("APB") Opinion No. 25 and related interpretations. Since the
Company's stock option plans provide for the issuance of options at a price of
no less than the fair market value at the date of the grant, no compensation
expense has been recognized in the financial statements at the date of grant.
RESULTS OF OPERATIONS
Overview
Net income for the three and nine months ended
September 30, 2003 was $1,940,000 and $5,740,000, up $128,000 and $855,000, or
7% and 18%, as compared to the three and nine months ended September 30, 2002.
Earnings per diluted share for the three and nine months ended September 30,
2003 were $0.17 and $0.50, up 6% and 16% from $0.16 and $0.43 per diluted share
for the three and nine months ended September 30, 2002. Annualized return on
average assets and return on average equity for the three months ended September
30, 2003 were 0.78% and 8.80%, compared to 0.77% and 9.05%, for the same period
in the prior year. Annualized return on average assets and return on average
equity for the nine months ended September 30, 2003 were 0.81% and 8.95%, up
from 0.71% and 8.45%, for the same period in the prior year.
For the three months ended September 30, 2003 compared to the
same period in the prior year, net interest income decreased to $9,187,000 from
$9,396,000. However, for the nine months ended September 30, 2003 compared to
the same period in the prior year, net interest income increased to $28,183,000
from $27,471,000. The Company's net interest margin was 4.01% and 4.33% for the
three and nine months ended September 30, 2003, compared with 4.36% and 4.33%
for the three and nine months ended September 30, 2002.
Total assets as of September 30, 2003 were $984,720,000, an
increase of $28,438,000, or 3%, from $956,282,000 as of September 30, 2002, and
an increase of $25,968,000, or 3%, from total assets of $958,752,000 as of
December 31, 2002. Total deposits as of September 30, 2003 were $835,947,000, a
decrease of $5,990,000, or 1%, from $841,937,000 as of September 30, 2002, and a
decrease of $5,989,000, or 1%, from total deposits of $841,936,000 as of
December 31, 2002.
The total loan portfolio as of September 30, 2003 was
$642,180,000, an increase of $11,496,000, or 2%, from $630,684,000 as of
September 30, 2002 and a decrease of $31,727,000, or 5%, from $673,907,000 as of
December 31, 2002. The Company's allowance for probable loan losses was
$13,039,000, or 2.03%, of total loans at September 30, 2003. This compares with
an allowance for probable loan losses of $12,416,000, or 1.97%, and $13,227,000,
or 1.96% of total loans at September 30, 2002 and December 31, 2002. The
increase in the percentage of the allowance to total loans at September 30, 2003
is primarily a result of the decrease in the overall level of loans since
December 31, 2002 and the activity within the allowance. The decrease in the
overall level of allowance for loan losses since December 31, 2002 is primarily
the result of the decrease in the overall level of loans and the write down of
one commercial loan in the third quarter of 2003 offset by the provisions made
during the nine months ended September 30, 2003.
The Company's shareholders' equity at September 30, 2003 was
$87,484,000, up from $80,143,000 at September 30, 2002 and $82,217,000 as of
December 31, 2002. The increase in shareholders' equity is a result of the
income generated over the period and the exercise of common stock options offset
by a decline in other comprehensive income from fair value changes. Book value
per share increased to $7.72 at September 30, 2003, from $7.17 at September 30,
2002 and $7.33 at December 31, 2002. The Company's leverage capital ratio was
10.99% at September 30, 2003 compared to 10.83% at September 30, 2002 and 10.73%
at December 31, 2002.
Net Interest Income and Net Interest Margin
The following table presents the Company's average balance sheet, net
interest income and the resultant yields and rates paid for the period
presented:
For the Three Months Ended For the Three Months Ended
September 30, 2003 September 30, 2002
--------------------------------- ---------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
Assets:
Loans, gross..................................................... $ 668,769 $ 10,138 6.01% $ 673,816 $ 11,493 6.77%
Investment securities............................................ 175,338 1,266 2.86% 111,123 1,263 4.51%
Interest bearing deposits in other financial institutions........ 2,977 5 0.67% 6,179 22 1.41%
Federal funds sold............................................... 61,059 147 0.96% 63,180 273 1.71%
---------- ---------- ---------- ----------
Total interest earning assets................................. 908,143 $ 11,556 5.05% 854,298 $ 13,051 6.06%
---------- ----------
Cash and due from banks.......................................... 41,990 37,722
Premises and equipment, net...................................... 4,803 5,663
Other assets..................................................... 34,494 30,747
---------- ----------
Total assets.................................................. $ 989,430 $ 928,430
========== ==========
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing......................................... $ 95,681 $ 106 0.44% $ 79,022 $ 195 0.98%
Savings and money market......................................... 325,198 884 1.08% 288,581 1,239 1.70%
Time deposits, under $100........................................ 41,957 179 1.69% 50,790 354 2.77%
Time deposits, $100 and over..................................... 98,010 402 1.63% 123,258 764 2.46%
Brokered deposits................................................ 19,833 204 4.08% 67,886 658 3.85%
Other borrowings................................................. 51,600 594 4.57% 19,222 445 9.18%
---------- ---------- ---------- ----------
Total interest bearing liabilities............................ 632,279 $ 2,369 1.49% 628,759 $ 3,655 2.31%
---------- ----------
Demand, noninterest bearing...................................... 259,000 209,951
Other liabilities................................................ 10,723 10,286
---------- ----------
Total liabilities............................................. 902,002 848,996
Shareholders' equity............................................. 87,428 79,434
---------- ----------
Total liabilities and
shareholders' equity....................................... $ 989,430 $ 928,430
========== ==========
Net interest income / margin................................................. $ 9,187 4.01% $ 9,396 4.36%
========== ==========
|
Note: |
|
Yields and amounts earned on loans include loan fees of $876,000
and $1,110,000 for the three month periods ended September 30, 2003 and 2002,
respectively. Interest income is reflected on an actual basis, not a fully
taxable equivalent basis, and does not include a fair value adjustment.
Nonaccrual loans of $6,497,000 and $4,747,000 for the period ended September 30,
2003 and 2002, respectively, are included in the average balance calculation
above. |
For the Nine Months Ended For the Nine Months Ended
September 30, 2003 September 30, 2002
--------------------------------- ---------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
Assets:
Loans, gross..................................................... $ 678,446 $ 32,121 6.33% $ 672,292 $ 34,802 6.92%
Investment securities............................................ 137,107 3,328 3.25% 109,094 3,800 4.66%
Interest bearing deposits in other financial institutions........ 6,134 40 0.87% 6,779 70 1.38%
Federal funds sold............................................... 47,699 388 1.09% 59,110 740 1.67%
---------- ---------- ---------- ----------
Total interest earning assets................................. 869,386 $ 35,877 5.52% 847,275 $ 39,412 6.22%
---------- ----------
Cash and due from banks.......................................... 39,418 37,015
Premises and equipment, net...................................... 4,987 5,597
Other assets..................................................... 33,664 29,148
---------- ----------
Total assets.................................................. $ 947,455 $ 919,035
========== ==========
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing......................................... $ 94,967 $ 389 0.55% $ 80,590 $ 549 0.91%
Savings and money market......................................... 310,391 2,792 1.20% 266,408 3,667 1.84%
Time deposits, under $100........................................ 43,884 641 1.95% 58,968 1,465 3.32%
Time deposits, $100 and over..................................... 103,135 1,442 1.87% 133,242 2,887 2.90%
Brokered deposits................................................ 28,124 842 4.00% 68,337 1,989 3.89%
Other borrowings................................................. 33,721 1,588 6.30% 19,956 1,384 9.27%
---------- ---------- ---------- ----------
Total interest bearing liabilities............................ 614,222 $ 7,694 1.67% 627,501 $ 11,941 2.54%
---------- ----------
Demand, noninterest bearing ..................................... 237,396 204,045
Other liabilities................................................ 10,116 10,165
---------- ----------
Total liabilities............................................. 861,734 841,711
Shareholders' equity............................................. 85,721 77,324
---------- ----------
Total liabilities and
shareholders' equity....................................... $ 947,455 $ 919,035
========== ==========
Net interest income / margin................................................. $ 28,183 4.33% $ 27,471 4.33%
========== ==========
|
Note: |
|
Yields and amounts earned on loans include loan fees of
$2,932,000 and $3,363,000 for the nine month periods ended September 30, 2003
and 2002, respectively. Interest income is reflected on an actual basis, not a
fully taxable equivalent basis, and does not include a fair value adjustment.
Nonaccrual loans of $6,497,000 and $4,747,000 for the period ended September 30,
2003 and 2002, respectively, are included in the average balance calculation
above. |
The Company's net interest income for the three and nine
months ended September 30, 2003 was $9,187,000 and $28,183,000, a decrease of
$209,000 or 2% for the three month period, but an increase of $712,000 or 3% for
the nine month period, compared to the same periods in the prior year. For the
three and nine months ended September 30, 2003 compared to the same periods in
the prior year, average interest earning assets increased by $53,845,000, or 6%
and $22,111,000, or 3%. For the three months ended September 30, 2003, the
average yield on interest earning assets was 5.05%, down 101 basis points from
6.06% for the same period in 2002. Over the same period the rates paid on
interest bearing liabilities declined 82 basis points to 1.49% from 2.31%. For
the nine months ended September 30, 2003, the average yield on interest earning
assets was 5.52%, down 70 basis points from 6.22% for the same period in 2002.
Over the same period the rates paid on interest bearing liabilities declined 87
basis points to 1.67% from 2.54%. As a result, the net interest margin for the
three months ended September 30, 2003 compared to the same period in the prior
year decreased 35 basis points to 4.01% from 4.36%. The net interest margin
for the nine months ended September 30, 2003 and 2002 was unchanged at 4.33%.
The decrease in the third quarter was primarily attributable to the continuing
low interest rate environment and changes in the level and mix of earning assets
as average investment balances increased while average loans decreased. The
continued low interest rate environment for the three and nine months ended
September 30, 2003 compared to the same period in 2002 resulted in a reduction
in net interest income related to interest rates of $731,000 and $904,000. This
was mitigated by the overall growth in the level of earning assets and a
reduction in the level of interest bearing liabilities which added $522,000 and
$1,616,000 to the net interest income for the three and nine months ended
September 30, 2003 compared to the same periods in 2002.
The following table sets forth an
analysis of the changes in interest income resulting from changes in the average
volume of interest earning assets and liabilities and changes in the average
rates earned and paid. The total change is shown in the column designated
"Net Change" and is allocated in the columns to the left, to the
portions respectively attributable to volume changes and rate changes that
occurred during the period indicated. Changes due to both volume and rate have
been allocated to the change in volume.
Three Months Ended September 30,
2003 vs. 2002
----------------------------------
Increase (Decrease) Due to Change In:
Average Average Net
(Dollars in thousands) Volume Rate Change
- -------------------------------------------------------------- ---------- ---------- ----------
Interest earning assets
Loans, gross.............................................. $ (77) $ (1,278) $ (1,355)
Investments securities.................................... 464 (461) 3
Interest bearing deposits in other financial institutions. (5) (12) (17)
Federal funds sold........................................ (5) (121) (126)
---------- ---------- ----------
Total interest earning assets................................ $ 377 $ (1,872) $ (1,495)
---------- ---------- ----------
Interest bearing liabilities
Demand, interest bearing.................................. 18 (107) (89)
Savings and money market.................................. 100 (455) (355)
Time deposits, under $100................................. (38) (137) (175)
Time deposits, $100 and over.............................. (104) (258) (362)
Brokered deposits......................................... (494) 40 (454)
Other borrowings.......................................... 373 (224) 149
---------- ---------- ----------
Total interest bearing liabilities........................... $ (145) $ (1,141) $ (1,286)
---------- ---------- ----------
Net interest income.......................................... $ 522 $ (731) $ (209)
========== ========== ==========
Nine Months Ended September 30,
2003 vs. 2002
----------------------------------
Increase (Decrease) Due to Change In:
Average Average Net
(Dollars in thousands) Volume Rate Change
- -------------------------------------------------------------- ---------- ---------- ----------
Interest earning assets
Loans, gross.............................................. $ 291 $ (2,972) $ (2,681)
Investments securities.................................... 680 (1,152) (472)
Interest bearing deposits in other financial institutions. (4) (26) (30)
Federal funds sold........................................ (93) (259) (352)
---------- ---------- ----------
Total interest earning assets................................ $ 874 $ (4,409) $ (3,535)
---------- ---------- ----------
Interest bearing liabilities
Demand, interest bearing.................................. $ 59 $ (219) $ (160)
Savings and money market.................................. 396 (1,271) (875)
Time deposits, under $100................................. (220) (604) (824)
Time deposits, $100 and over.............................. (421) (1,024) (1,445)
Brokered deposits......................................... (1,204) 57 (1,147)
Other borrowings.......................................... 648 (444) 204
---------- ---------- ----------
Total interest bearing liabilities........................... $ (742) $ (3,505) $ (4,247)
---------- ---------- ----------
Net interest income.......................................... $ 1,616 $ (904) $ 712
========== ========== ==========
Provision for Probable Loan Losses
The provision for probable loan losses represents the current
period expense associated with maintaining an appropriate allowance for credit
losses. The loan loss provision and level of allowance for each period is
dependent upon many factors, including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment of
the quality of the loan portfolio, the valuation of problem loans and the
general economic conditions in the Company's market area. Periodic fluctuations
in the provision for loan losses result from management's assessment of the
adequacy of the allowance for probable loan losses; however, actual loan losses
may vary from current estimates. For the three and nine months ended September
30, 2003, the provision for probable loan losses was $600,000 and $2,500,000,
down $150,000 and up $434,000, respectively, from $750,000 and $2,066,000 for
the same periods in the prior year. See additional discussion at Allowance for
Probable Loan Losses.
Noninterest Income
The following table sets forth the various components of the Company's
noninterest income for the periods indicated:
Three Months Ended Increase (decrease)
September 30, 2003 versus 2002
-------------------- --------------------
(Dollars in thousands) 2003 2002 Amount Percent
- ---------------------------------------------------- --------- --------- --------- ---------
Gain on sale of loans............................... $ 561 $ 596 $ (35) (6)%
Servicing income.................................... 463 362 101 28 %
Service charges and other fees on deposits accounts. 480 360 120 33 %
Equipment leasing................................... 310 -- 310 N/A
Appreciation of corporate owned life insurance...... 254 279 (25) (9)%
Gain on sale of securities available-for-sale....... 74 361 (287) (80)%
Other............................................... 321 402 (81) (20)%
--------- --------- ---------
Total............................................... $ 2,463 $ 2,360 $ 103 4 %
========= ========= =========
Nine Months Ended Increase (decrease)
September 30, 2003 versus 2002
-------------------- --------------------
(Dollars in thousands) 2003 2002 Amount Percent
- ---------------------------------------------------- --------- --------- --------- ---------
Gain on sale of loans............................... $ 1,705 $ 1,574 $ 131 8 %
Servicing income.................................... 1,339 940 399 42 %
Service charges and other fees on deposits accounts. 1,332 1,047 285 27 %
Equipment leasing................................... 929 -- 929 N/A
Appreciation of corporate owned life insurance...... 891 830 61 7 %
Gain on sale of securities available-for-sale....... 532 786 (254) (32)%
Other............................................... 1,215 1,060 155 15 %
--------- --------- ---------
Total............................................... $ 7,943 $ 6,237 $ 1,706 27 %
========= ========= =========
Noninterest income for the three and nine months ended
September 30, 2003 was $2,463,000 and $7,943,000, up $103,000 or 4% and
$1,706,000 or 27% from $2,360,000 and $6,237,000 for the same periods in the
prior year. For the three and nine month periods in 2003 compared to the same
periods in the prior year, the increases were primarily due to increases of
$310,000 and $929,000 from the leasing of medical and test equipment which the
Company purchased in the fourth quarter of 2002. The purchase price of the
leased equipment was $5,000,000. Increases also included service charges and
fees of $120,000 and $285,000 from an increase in demand deposit accounts
resulting in customers paying additional fees for services and in servicing
income of $101,000 and $399,000. This overall increase in servicing income and
in gains on sales of loans was primarily the result of expansion of the SBA
lending operation and the overall increase in the level of loans serviced. The
overall increases were offset by a decrease in the gain on sale of securities
available-for-sale of $287,000 and $254,000 for the comparative three and nine
month periods ended September 30, 2003 and a decrease in the gain on sale of
loans of $35,000 for the comparative three month period ended September 30,
2003.
Noninterest Expense
The following table sets forth the various components of the Company's
noninterest expenses for the periods indicated:
Three Months Ended Increase (decrease)
September 30, 2003 versus 2002
-------------------- --------------------
(Dollars in thousands) 2003 2002 Amount Percent
- ---------------------------------------------------- --------- --------- --------- ---------
Salaries and employee benefits...................... $ 4,423 $ 4,568 $ (145) (3)%
Occupancy........................................... 857 814 43 5 %
Furniture and equipment............................. 385 379 6 2 %
Loan origination costs.............................. 369 343 26 8 %
Professional fees................................... 338 347 (9) (3)%
Client services..................................... 239 238 1 0 %
Advertising and promotion........................... 209 185 24 13 %
Stationery & supplies............................... 83 82 1 1 %
Telephone........................................... 85 83 2 2 %
Other............................................... 1,322 1,307 15 1 %
--------- --------- ---------
Total............................................... $ 8,310 $ 8,346 $ (36) 0 %
========= ========= =========
Nine Months Ended Increase (decrease)
September 30, 2003 versus 2002
-------------------- --------------------
(Dollars in thousands) 2003 2002 Amount Percent
- ---------------------------------------------------- --------- --------- --------- ---------
Salaries and employee benefits...................... $ 13,664 $ 13,725 $ (61) 0 %
Occupancy........................................... 2,511 2,322 189 8 %
Furniture and equipment............................. 1,143 1,062 81 8 %
Loan origination costs.............................. 1,046 941 105 11 %
Professional fees................................... 1,028 919 109 12 %
Client services..................................... 714 678 36 5 %
Advertising and promotion........................... 608 515 93 18 %
Stationery & supplies............................... 246 268 (22) (8)%
Telephone........................................... 235 241 (6) (2)%
Other............................................... 4,101 3,693 408 11 %
--------- --------- ---------
Total............................................... $ 25,296 $ 24,364 $ 932 4 %
========= ========= =========
The following table indicates the percentage of
noninterest expense in each category:
For The Three Months Ended September 30,
-------------------------------------------
Percent Percent
(Dollars in thousands) 2003 of Total 2002 of Total
- ---------------------------------------------------- --------- --------- --------- ---------
Salaries and employee benefits...................... $ 4,423 53 % $ 4,568 55 %
Occupancy........................................... 857 10 % 814 10 %
Furniture and equipment............................. 385 5 % 379 4 %
Professional fees................................... 338 4 % 347 4 %
Loan origination costs.............................. 369 4 % 343 4 %
Client services..................................... 239 3 % 238 3 %
Advertising and promotion........................... 209 3 % 185 2 %
Stationery & supplies............................... 83 1 % 82 1 %
Telephone........................................... 85 1 % 83 1 %
Other............................................... 1,322 16 % 1,307 16 %
--------- --------- --------- ---------
Total............................................... $ 8,310 100 % $ 8,346 100 %
========= ========= ========= =========
For The Nine Months Ended September 30,
-------------------------------------------
Percent Percent
(Dollars in thousands) 2003 of Total 2002 of Total
- ---------------------------------------------------- --------- --------- --------- ---------
Salaries and employee benefits...................... $ 13,664 54 % $ 13,725 56 %
Occupancy........................................... 2,511 10 % 2,322 10 %
Furniture and equipment............................. 1,143 5 % 1,062 4 %
Professional fees................................... 1,028 4 % 919 4 %
Loan origination costs.............................. 1,046 4 % 941 4 %
Client services..................................... 714 3 % 678 3 %
Advertising and promotion........................... 608 2 % 515 2 %
Stationery & supplies............................... 246 1 % 268 1 %
Telephone........................................... 235 1 % 241 1 %
Other............................................... 4,101 16 % 3,693 15 %
--------- --------- --------- ---------
Total............................................... $ 25,296 100 % $ 24,364 100 %
========= ========= ========= =========
Noninterest expenses for the three and nine months ended
September 30, 2003 were $8,310,000 and $25,296,000, down $36,000 or less than
1% and up $932,000, or 4%, from $8,346,000 and $24,364,000 for the same period
in the prior year.
For the three and nine months ended September 30, 2003,
salaries and benefits decreased $145,000, or 3%, and $61,000, or less than 1%,
to $4,423,000 and $13,664,000, as compared to the same periods in the prior
year. The decreases were primarily due to the decreased number of employees to
210 as of September 30, 2003 compared to 223 as of September 30, 2002
attributable to the consolidation of the Company's subsidiaries in 2003.
Salaries and employee benefits, as a percentage of total noninterest expense,
decreased slightly over the comparative three and nine month periods.
For the comparative three month periods, occupancy increased
by $43,000, or 5%, to $857,000, and for the nine month periods the increase was
$189,000, or 8%, to $2,511,000 primarily as a result of increased rental costs.
Occupancy costs, as a percentage of total noninterest expense remained fairly
constant over the comparative three and nine month periods.
For the comparative three month periods, furniture and
equipment increased by $6,000, or 2%, to $385,000, and for the nine month
periods the increase was $81,000, or 8%, to $1,143,000 primarily due to costs
for the addition of new facilities. Furniture and equipment, as a percentage of
total noninterest expense increased slighty over the comparative three and nine
month periods.
For the comparative three month periods, loan origination
costs increased by $26,000, or 8%, to $369,000, and for the nine month periods
the increase was $105,000, or 11%, to $1,046,000 primarily due to continued
growth in the loan portfolio. Loan origination costs, as a percentage of total
noninterest expense remained fairly constant over the comparative three and
nine month periods.
For the comparative three month periods, professional fees
decreased $9,000, or 3%, to $338,000, but for the nine month periods increased
$109,000, or 12%, to $1,028,000 primarily due to increased costs from
professional service providers. Professional fees, as a percentage of total
noninterest expense remained fairly constant over the comparative three and
nine month periods.
For the comparative three month periods, client services
increased $1,000, or less than 1%, to $239,000, and for the nine month periods
increased $36,000, or 5%, to $714,000 primarily due to the increase in services
fees charged to the Company from third party vendors in 2003 compared to the
same period in 2002. Client services, as a percentage of total noninterest
expense remained fairly constant over the comparative three and nine month
periods.
For the comparative three month periods, advertising and
promotion increased $24,000, or 13%, to $209,000, and for the nine month periods
the increase was $93,000, or 18%, to $608,000 primarily due to several new
sponsorships in 2003. Advertising and promotion, as a percentage of total
noninterest expense increased from 2% to 3% over the comparative three month
periods but remained fairly constant over the comparative nine month
periods.
For the comparative three month periods, stationery and
supplies increased by $1,000, or 1%, to $83,000, but for the nine month periods
decreased by $22,000, or 8%, to $246,000, primarily due to the decrease in
the number of employees in 2003. Stationery and supplies, as a percentage of
total noninterest expense remained fairly constant over the comparative three
and nine month periods.
For the comparative three month periods, telephone expense
increased by $2,000, or 2%, to $85,000, but for the nine month periods decreased
$6,000, or 2%, to $235,000, primarily due to the decrease in the number of
employees in 2003. Telephone, as a percentage of total noninterest expense
remained fairly constant over the comparative three and nine month periods.
For the comparative three month period, other noninterest
expenses increased $15,000, or 1%, to $1,322,000, and for the nine month period
the increase was $408,000, or 11%, to $4,101,000, primarily in support of the
overall growth of the Company and expense related to the Company's investment
in a low income housing project and amortization of leased equipment.
Income Taxes
The provision for income taxes for the three and nine months
ended September 30, 2003 was $800,000 and $2,590,000, as compared to $848,000
and $2,393,000 for the same periods in the prior year. The following table shows
the income tax rate for each period indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Income tax rate..................................... 29.20 % 31.88 % 31.09 % 32.88 %
The difference in the effective tax rate compared to the
statutory tax rate of 42% is primarily the result of the Company's receipt of
tax free distributions from certain life insurance contracts, tax credits, and
the level of the Company's investments in municipal securities.
FINANCIAL CONDITION
Total assets increased $25,968,000, or 3%, to $984,720,000 at
September 30, 2003 from $958,752,000 at December 31, 2002, and increased
$28,438,000, or 3%, from $956,282,000 at September 30, 2002. The total loan
portfolio decreased $31,727,000, or 5%, to $642,180,000 at September 30, 2003
from $673,907,000 at December 31, 2002, but increased $11,496,000, or 2%,
from $630,684,000 at September 30, 2002. Total deposits decreased $5,989,000,
or 1% to $835,947,000 at September 30, 2003 from $841,936,000 at
December 31, 2002, and decreased $5,990,000, or 1%, from $841,937,000 at
September 30, 2002.
The Company had $28,600,000 in other borrowings at September
30, 2003, which was primarily used to fund the increases in the investment
portfolio. The Company did not have any other borrowings at December 31, 2002
or September 30, 2002.
Securities Portfolio
The following table sets forth the carrying value of investment securities at
the dates indicated:
September 30,
---------------------- December 31
(Dollars in thousands) 2003 2002 2002
- ----------------------------------------------- ---------- ---------- ----------
Securities available-for-sale (at fair value)
U.S. Treasury.................................. $ 8,564 $ 1,106 $ 4,740
U.S. Government Agencies....................... 46,797 50,203 48,029
Mortgage-backed securities..................... 74,741 13,261 44,774
Municipals..................................... 16,748 13,186 12,134
Mutual funds................................... 10,036 -- --
Corporate bonds................................ -- 2,629 2,632
CMOs........................................... 15,124 14,579 14,134
---------- ---------- ----------
Total securities available-for-sale............ $ 172,010 $ 94,964 $ 126,443
========== ========== ==========
The following table summarizes the composition of the Company's
investment securities and the weighted average yields at September 30:
September 30, 2003
Maturity
----------------------------------------------------------------------------------------
After One and After Five and
Within One Year Within Five Years Within Ten Years After Ten Years Total
--------------- --------------- --------------- --------------- ----------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------ -------- ------ -------- ------ -------- ------ -------- ------ --------- ------
Securities available-for-sale:
U.S. treasury.................. $ 1,302 1.54 % $ 7,262 2.05 % $ -- -- % $ -- -- % $ 8,564 1.98 %
U.S. government agencies....... 8,233 3.73 % 35,705 2.37 % 2,859 3.13 % -- -- % 46,797 2.66 %
Mortgage-backed securities..... -- -- % -- -- % 8,756 3.64 % 65,985 3.22 % 74,741 3.27 %
Municipals - taxable.......... -- -- % 547 6.45 % -- -- % -- -- % 547 6.45 %
Municipals - nontaxable....... 471 4.88 % 11,261 3.12 % 4,469 3.16 % -- -- % 16,201 3.18 %
CMOs........................... -- -- % -- -- % -- -- % 15,124 2.11 % 15,124 2.11 %
-------- -------- -------- -------- ---------
Total available-for-sale....... $ 10,006 3.50 % $ 54,775 2.53 % $ 16,084 3.41 % $ 81,109 3.01 % $ 161,974 2.92 %
======== ======== ======== ======== =========
|
Note: |
|
Yield on non-taxable municipal securities are not presented on a
fully tax equivalent basis. Mutual funds with a carrying value of $10,036,000
have been excluded, as they have no stated maturity date. |
Loans
Total loans (exclusive of loans held for sale) decreased
$31,727,000, or 5%, to $642,180,000 as of September 30, 2003 from $673,907,000
as of December 31, 2002, but increased $11,496,000, or 2%, from $630,684,000 as
of September 30, 2002.
For the three and nine months ended September 30, 2003,
$24,174,000 and $60,895,000 in loans guaranteed by the U.S. Small Business
Administration (SBA) were generated and held for sale, and $10,757,000 and
$33,364,000 of SBA loans held for sale were sold into the secondary market.
At September 30, 2003 and December 31, 2002, the Company
serviced SBA loans, which it had sold into the secondary market of approximately
$108,545,000 and $83,008,000. At September 30, 2003 and December 31, 2002, the
carrying amount of the servicing assets was $1,731,000 and $1,538,000,
respectively. There was no valuation allowance as of September 30, 2003 or
December 31, 2002. The carrying amount of Interest-Only (I/O) strip receivable
at September 30, 2003 and December 31, 2002 was $2,700,000 and $2,839,000,
respectively. These assets represent the servicing spread generated from the
sold guaranteed portions of SBA loans. Servicing income from these loans was
$463,000 and $1,339,000 for the quarter and nine months ended September 30,
2003, compared to $362,000 and $940,000 for the same periods in 2002.
Amortization of the related assets was $332,000 and $978,000 for the quarter and
nine months ended September 30, 2003, compared to $258,000 and $536,000 for the
same periods in 2002. HBC is a preferred lender with the SBA, which allows the
Company to grant certain SBA loans without the prior approval of the SBA.
The following table summarizes the composition of the Company's loan
portfolio at the dates indicated:
September 30, % of December 31, % of
(Dollars in thousands) 2003 Total 2002 Total
- ----------------------------------- ------------ ----------- ----------- -----------
Commercial......................... $ 268,607 42 % $ 263,144 39 %
Real estate - mortgage............. 252,664 39 % 259,974 38 %
Real estate - land and construction 117,441 18 % 147,822 22 %
Consumer........................... 2,487 1 % 2,850 1 %
------------ ----------- ----------- -----------
Total loans................... 641,199 100 % 673,790 100 %
=========== ===========
Deferred loan costs................ 981 117
Allowance for loan losses.......... (13,039) (13,227)
------------ -----------
Loans, net......................... $ 629,141 $ 660,680
============ ===========
The Company's loan portfolio is based on commercial
(primarily to companies engaged in manufacturing, wholesale, and service
businesses) and real estate lending, with the balance in consumer loans. While
no specific industry concentration is considered significant, the Company's
lending operations are dependent on the technology and real estate industries
and their supporting companies located within the Company's market area. Thus,
the Company's borrowers could be adversely impacted by a downturn in these
sectors of the economy, which could reduce the demand for loans and adversely
impact the borrowers' abilities to repay their loans.
The following table sets forth the maturity distribution of the Company's
loans at September 30, 2003:
Over One
Due in Year But
One Year Less Than Over
(Dollars in thousands) or Less Five Years Five Years Total
- ----------------------------------- ------------ ----------- ----------- -----------
Commercial......................... $ 254,040 $ 10,547 $ 4,020 $ 268,607
Real estate - mortgage............. 195,568 48,028 9,068 252,664
Real estate - land and construction 117,441 -- -- 117,441
Consumer........................... 2,281 206 -- 2,487
------------ ----------- ----------- -----------
Total loans................... $ 569,330 $ 58,781 $ 13,088 $ 641,199
============ =========== =========== ===========
Loans with variable interest rates. $ 554,894 $ 31,268 $ 42 $ 586,204
Loans with fixed interest rates.... 14,436 27,513 13,046 54,995
------------ ----------- ----------- -----------
Total loans................... $ 569,330 $ 58,781 $ 13,088 $ 641,199
============ =========== =========== ===========
The table above also shows the distribution of such loans between those loans
with predetermined (fixed) interest rates and those with variable (floating)
interest rates. Floating rates generally fluctuate with changes in the prime
rate as reflected in the western edition of The Wall Street Journal. At
September 30, 2003, approximately 91% of the Company's loan portfolio consisted
of floating interest rate loans.
Nonperforming assets
Nonperforming assets consist of nonaccrual loans, loans past
due 90 days and still accruing, troubled debt restructurings and other real
estate owned. Management generally places loans on nonaccrual status when they
become 90 days past due, unless they are well secured and in the process of
collection. When a loan is placed on nonaccrual status, any interest previously
accrued but not collected is generally reversed from income. Loans are charged
off when management determines that collection has become unlikely. Restructured
loans are those where HBC has granted a concession on the interest paid or
original repayment terms due to financial difficulties of the borrower. Other
real estate owned ("OREO") consists of real property acquired through
foreclosure on the related underlying defaulted loans. The following table shows
nonperforming assets at the dates indicated:
September 30,
---------------------- December 31,
(Dollars in thousands) 2003 2002 2002
- ------------------------------------------------ ---------- ---------- -----------
Nonaccrual loans................................ $ 6,497 $ 4,747 $ 4,571
Loans 90 days past due and still accruing 395 -- --
Restructured loans.............................. -- -- --
---------- ---------- -----------
Total nonperforming loans................... 6,892 4,747 4,571
Other real estate owned......................... 652 -- --
---------- ---------- -----------
Total nonperforming assets.................. $ 7,544 $ 4,747 $ 4,571
========== ========== ===========
Nonperforming assets as a percentage of
period end loans plus other real estate owned. 1.17 % 0.75 % 0.68 %
As of September 30, 2003, the Company had $6,497,000
loans on nonaccrual status, compared to $4,747,000 in the same period of the
prior year, which were considered impaired loans. The increase in nonaccrual
loans at September 30, 2003 is primarily the result of one commercial loan which
was placed on nonaccrual status and written down by $2,000,000 to its current
principal balance of $4,300,000. The Company believes that the loan is now
adequately secured and does not expect any significant impact on future
earnings. The impaired loans had a related valuation allowance of $1,139,000 at
September 30, 2003 and $876,000 at September 30, 2002. The Company had $395,000
loans past due 90 days or more and still accruing interest, no restructured
loans and $652,000 other real estate owned assets as of September 30, 2003,
compared to no loans past due 90 days or more and still accruing interest, no
restructured loans and no other real estate owned assets as of September 30,
2002. The Company had $4,571,000 loans on nonaccrual status as of December 31,
2002, which were considered impaired loans. The impaired loans had a related
valuation allowance of $356,000 at December 31, 2002. The Company had no loans
past due 90 days or more and still accruing interest, no restructured loans and
no other real estate owned assets as of December 31, 2002. For the three and
nine months ended September 30, 2003, the Company had $185,000 and $392,000
foregone interest income on nonaccrual loans. The Company had no foregone
interest income on nonaccrual loans as of December 31, 2002. For the three and
nine months ended September 30, 2003, the Company recognized $3,000 and $44,000
in interest income for cash payments received on nonaccrual loans. The Company
did not recognize any interest income for cash payments received on nonaccrual
loans for the three and nine months ended September 30, 2002.
The Company assigns a risk grade consistent with
the system recommended by regulatory agencies to all of its loans. Grades range
from "Pass" to "Loss" depending on credit quality, with "Pass" representing
loans that involve an acceptable degree of risk. Management conducts a critical
evaluation of the loan portfolio monthly. This evaluation includes periodic loan
by loan review for certain loans to evaluate the level of impairment as well as
detailed reviews of other loans (either individually or in pools) based on an
assessment of the following factors: past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, collateral value, loan volumes and concentrations,
size and complexity of the loans, recent loss experience in particular segments
of the portfolio, bank regulatory examination results, and current economic
conditions in the Company's marketplace, in particular the state of the
technology industry and the real estate market.
This process attempts to assess the risk of loss inherent in
the portfolio by segregating loans into four components for purposes of
determining an appropriate level of the allowance: "watch," "special mention,"
"substandard" and "doubtful." Additionally, the Company maintains a program for
regularly scheduled reviews of certain new and renewed loans by an outside loan
review consultant. Any loans identified during an external review process that
expose the Company to increased risk are appropriately downgraded and an
increase in the allowance for loan losses is established for such loans.
Further, the Company is examined periodically by the FDIC, FRB, and the
California Department of Financial Institutions at which time a further review
of loan quality is conducted.
Loans that demonstrate a weakness, for which there is a
possibility of loss if the weakness is not corrected, are categorized as
"classified." Classified loans include all loans graded substandard, doubtful
and loss and may result from problems specific to a borrower's business or from
economic downturns that affect the borrower's ability to repay or that cause a
decline in the value of the underlying collateral (particularly real
estate).
Allowance for Probable Loan Losses
It is the policy of management to maintain the allowance for
probable loan losses at a level adequate for risks inherent in the loan
portfolio. Based on information currently available to analyze loan loss
delinquency and a history of actual charge-offs, management believes that the
loan loss allowance is adequate. However, the loan portfolio can be adversely
affected if California economic conditions and the real estate market in the
Company's market area were to continue to weaken. Additionally, any weakness of
a prolonged nature in the technology industry would have a negative impact on
the local market. The effect of such events although uncertain at this time,
could result in an increase in the level of nonperforming loans and increased
loan losses, which could adversely affect the Company's future growth and
profitability. No assurance of the ultimate level of credit losses can be given
with any certainty. Loans are charged against the allowance when management
believes that the collectibility of the principal is unlikely.
The following table summarizes the Company's loan loss experience as well as
provisions, charge-offs and recoveries to the allowance for loan losses and
certain pertinent ratios for the periods indicated:
Nine Months Ended
September 30, For the Year Ended
-------------------- December 31,
(Dollars in thousands) 2003 2002 2002
- -------------------------------------- --------- --------- -----------
Balance, beginning of period / year... $ 13,227 $ 11,154 $ 11,154
Net charge-offs....................... (2,688) (804) (590)
Provision for probable loan losses.... 2,500 2,066 2,663
--------- --------- -----------
Balance, end of period / year......... $ 13,039 $ 12,416 $ 13,227
========= ========= ===========
Ratios:
Net charge-offs to
average loans outstanding.......... 0.55 % 0.17 % 0.09 %
Allowance for loan losses to average
loans.............................. 2.01 % 1.95 % 2.07 %
Allowance for loan losses to total
loans.............................. 2.03 % 1.97 % 1.96 %
Allowance for loan losses to
nonperforming assets............... 173 % 262 % 289 %
Charge-offs reflects the realization of losses in the
portfolio that were recognized previously though provisions for probable loan
losses. The net charge-offs for the nine months ended September 30, 2003 were
$2,688,000, compared to $804,000 for the nine months ended September 30, 2002.
The increase in charge-offs was primarily the result of the $2,000,000 write
down taken on the commercial loan discussed as part of the nonaccrual loans
above. Historical net charge-offs are not necessarily indicative of the amount
of net charge-offs that the Company will realize in the future.
The following table summarizes the allocation of the allowance for loan
losses (ALL) by loan type and the allocated allowance as a percent of loans
outstanding in each loan category at the dates indicated:
September 30, 2003 September 30, 2002 December 31, 2002
-------------------- ---------------------- --------------------
Percent Percent Percent
of ALL by of ALL by of ALL by
category category category
to total to total to total
loans by loans by loans by
(Dollars in thousands) Amount category Amount category Amount category
- -------------------------------------- --------- --------- ----------- --------- --------- ---------
Commercial............................ $ 8,814 3.27 % $ 5,636 2.46 % $ 6,349 2.41 %
Real estate - mortgage................ 1,908 0.76 % 2,317 0.89 % 2,411 0.93 %
Real estate - land and construction... 2,259 1.92 % 2,973 2.18 % 3,574 2.42 %
Consumer.............................. 58 2.33 % 104 2.40 % 47 1.63 %
Unallocated........................... -- -- % 1,386 -- % 846 -- %
--------- ----------- ---------
Total ........................... $ 13,039 2.03 % $ 12,416 1.97 % $ 13,227 1.96 %
========= =========== =========
While the overall level of loans and allowance has decreased
since December 31, 2002, the percentage of the allowance to total loans has
increased at September 30, 2003. The increase is primarily a result of the
change in the mix in loans as commercial loans have increased as a percentage of
total loans while land and construction loans have decreased, the activity
within the allowance and the Company's concern for the continued weaknesses in
the economy, particularly in the Company's primary market area. The decrease in
the overall level of allowance for loan losses since December 31, 2002 is
primarily the result of the decrease in the overall level of loans and the write
down of one commercial loan in the third quarter of 2003 offset by the
provisions made during the nine months ended September 30, 2003. Other than the
loans previously classified, the Company did not identify any additional
potential problem loans at September 30, 2003.
Loans are charged against the allowance when management
believes that the collectibility of the principal is doubtful. The Company's
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include specific allowances, the formula allowance
and the unallocated allowance.
Specific allowances are established in cases where management
has identified significant conditions or circumstances related to a credit that
management believes indicate the probability that a loss may be incurred in
excess of the amount determined by the application of the formula allowance. As
of September 30, 2003, nonperforming loans had a related specific valuation
allowance of $1,139,000.
The formula allowance is calculated by applying loss factors
to outstanding loans and certain unused commitments. Loss factors are based on
management's experience and may be adjusted for significant factors that, in
management's judgment, may affect the collectibility of the portfolio as of the
evaluation date. Due to the Company's limited historical loss experience,
management utilizes their prior industry experience to determine the loss factor
for each category of loan. The formula allowance on September 30, 2003 was
$11,900,000, compared to $12,381,000 on December 31, 2002. The increase was
attributable to several factors, most notably the change in the mix of loans and
an increase in certain factors used to estimate the reserve allocations.
The unallocated allowance is based upon management's
evaluation of various conditions that are not directly measured in the
determination of the formula and specific allowances. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific problem credits or
portfolio segments. As of September 30, 2003, the Company's unallocated
allowance was zero, compared to $846,000 on December 31, 2002. In evaluating the
appropriateness of the unallocated allowance, management considered the changes
in the trend of the volume and severity of past due and classified loans; and
trends in the volume of nonaccrual loans, troubled debt restructurings and other
loan modifications, changes in national and local economic and business
conditions, trends, and developments, including the condition of various market
segments, changes in underwriting standards and collection, charge-off, and
recovery practices, and changes in the volume and mix of the loan portfolio and
in credit concentrations particularly in commercial and real estate land and
construction lending. There can be no assurance that the adverse impact of any
of these conditions on the Bank will not be in excess of the range set forth
above.
In addition, the current business, economic, and real estate
markets along with the seasoning of the portfolio and the nature and duration of
the current business cycle will affect the amount of unallocated reserve.
In an effort to improve its analysis of risk factors
associated with its loan portfolio, the Company continues to monitor and to make
appropriate changes to its internal loan policies. These efforts better enable
the Company to assess risk factors prior to granting new loans and to assess the
sufficiency of the allowance for loan losses.
Management believes that it has adequately provided an
allowance for estimated probable losses in the credit portfolio. Significant
deterioration in Northern California real property values or economic downturns
could impact future operating results, liquidity or capital resources and
require additional provisions to the allowance or cause losses in excess of the
allowance.
Deposits
Deposits totaled $835,947,000 at September 30, 2003, down
less than 1%,
compared
to deposits of $841,936,000 at December 31, 2002 and $841,937,000 at September
30, 2002. Compared to December 31, 2002, noninterest bearing demand deposits
increased $3,517,000 or 1%, interest bearing demand deposits decreased $217,000,
or less than 1%, savings and money market deposits increased $44,196,000, or
15%, time deposits decreased $20,797,000, or 13%, and brokered deposits
decreased $32,688,000, or 69%.
The following table summarizes the distribution of average deposits and the
average rates paid for the periods indicated:
Nine Months Ended Year Ended
September 30, 2003 December 31, 2002
-------------------- --------------------
Average Average
Average Rate Average Rate
(Dollars in thousands) Balance Paid Balance Paid
- ------------------------------------- ---------- -------- ---------- --------
Demand, noninterest bearing.......... $ 237,396 -- % $ 211,195 -- %
Demand, interest bearing............. 94,967 0.55 % 81,011 0.89 %
Saving and money market.............. 310,391 1.20 % 275,217 1.74 %
Time deposits, under $100............ 43,884 1.95 % 56,097 3.14 %
Time deposits, $100 and over......... 103,135 1.87 % 129,702 2.75 %
Brokered deposits.................... 28,124 4.00 % 65,183 3.87 %
---------- ----------
Total average deposits.......... $ 817,897 1.00 % $ 818,405 1.63 %
========== ==========
Deposit Concentration and Deposit Volatility
The following table indicates the maturity schedule of the Company's time
deposits of $100,000 or more as of September 30, 2003.
% of
(Dollars in thousands) Balance Total
- ----------------------------------------------------------- ---------- --------
Three months or less....................................... $ 51,634 45 %
Over three months through twelve months.................... 46,549 41 %
Over twelve months......................................... 15,906 14 %
---------- --------
Total............................................... $ 114,089 100 %
========== ========
The Company focuses primarily on servicing business accounts
that are frequently over $100,000 in average size. Certain types of accounts
that the Company makes available are typically in excess of $100,000 in average
balance per account, and certain types of business clients whom the Company
serves typically carry deposits in excess of $100,000 on average. The account
activity for some account types and client types necessitates appropriate
liquidity management practices by the Company to ensure its ability to fund
deposit withdrawals.
Return on Equity and Assets
The following table indicates the ratios on the annualized return on
average assets and average equity and average equity to average assets for each
indicated period.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Return on average assets............... 0.78 % 0.77 % 0.81 % 0.71 %
Return on average equity............... 8.80 % 9.05 % 8.95 % 8.45 %
Average equity to average assets ratio. 8.84 % 8.56 % 9.05 % 8.41 %
Annualized return on average assets and return on average
equity for the quarter ended September 30, 2003 were 0.78% and 8.80%,
respectively, compared with returns of 0.77% and 9.05%, respectively, for the
same period in 2002. The equity to asset ratio for the quarter ended September
30, 2003 was 8.84%, compared to 8.56% for the same period in 2002.
Annualized return on average assets and return on average
equity for the nine months ended September 30, 2003 were 0.81% and 8.95%,
respectively, compared with returns of 0.71% and 8.45%, respectively, for the
same period in 2002. The equity to asset ratio for the nine months ended
September 30, 2003 was 9.05%, compared to 8.41% for the same period in 2002.
Interest Rate Risk
The planning of asset and liability maturities is an integral
part of the management of an institution's net yield. To the extent maturities
of assets and liabilities do not match in a changing interest rate environment,
net yields may change over time. Even with perfectly matched repricing of
assets and liabilities, risks remain in the form of prepayment of loans or
investments or in the form of delays in the adjustment of rates of interest
applying to either earning assets with floating rates or to interest bearing
liabilities. The Company has generally been able to control its exposure to
changing interest rates by maintaining primarily floating interest rate loans
and a majority of its time certificates with relatively short maturities.
The following table sets forth the interest rate sensitivity
of the Company's interest-earning assets and interest-bearing liabilities at
September 30, 2003, using the rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or when it is scheduled to mature
within the specified time frame:
Due in Due After
Within Three to One to Due After Not
Three Twelve Five Five Rate-
(Dollars in thousands) Months Months Years Years Sensitive Total
- ------------------------------------------------------------ --------- --------- --------- --------- --------- ---------
Interest earning assets:
Federal funds sold........................................ $ 51,300 $ -- $ -- $ -- $ -- $ 51,300
Interest bearing deposits in other financial Institutions. 2,464 -- -- -- -- 2,464
Securities................................................ 11,338 8,704 54,775 97,193 -- 172,010
Total loans............................................... 506,971 94,015 58,781 13,088 -- 672,855
--------- --------- --------- --------- --------- ---------
Total interest earning assets........................... 572,073 102,719 113,556 110,281 -- 898,629
--------- --------- --------- --------- --------- ---------
Cash and due from banks..................................... -- -- -- -- 42,442 42,442
Other assets................................................ -- -- -- -- 43,649 43,649
--------- --------- --------- --------- --------- ---------
Total assets............................................ $ 572,073 $ 102,719 $ 113,556 $ 110,281 $ 86,091 $ 984,720
========= ========= ========= ========= ========= =========
Interest bearing liabilities:
Demand, interest bearing.................................. $ 94,092 $ -- $ -- $ -- $ -- $ 94,092
Savings and money market.................................. 334,613 -- -- -- -- 334,613
Time deposits............................................. 66,303 67,500 21,306 -- -- 155,109
Mandatorily Redeemable Cumulative
Trust Preferred Securities.............................. -- -- -- 23,000 -- 23,000
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities...................... 495,008 67,500 21,306 23,000 -- 606,814
--------- --------- --------- --------- --------- ---------
Noninterest demand deposits................................. 70,002 -- -- -- 182,131 252,133
Other liabilities........................................... -- -- 28,600 -- 9,689 38,289
Shareholders' equity........................................ -- -- -- -- 87,484 87,484
--------- --------- --------- --------- --------- ---------
Total liabilities and shareholders' equity.............. $ 565,010 $ 67,500 $ 49,906 $ 23,000 $ 279,304 $ 984,720
========= ========= ========= ========= ========= =========
Interest rate sensitivity GAP............................... $ 7,063 $ 35,219 $ 63,650 $ 87,281 $(193,213) $ --
========= ========= ========= ========= ========= =========
Cumulative interest rate sensitivity GAP.................... $ 7,063 $ 42,282 $ 105,932 $ 193,213 $ -- $ --
Cumulative interest rate sensitivity GAP ratio.............. 0.72 % 4.29 % 10.76 % 19.62 % -- % -- %
The foregoing table demonstrates that the Company had a
positive cumulative one year gap of $42,282,000, or 4.29% of total assets, at
September 30, 2003. In theory, this would indicate that $42,282,000 more in
assets than liabilities would reprice if there were a change in interest rates
over the next year. If interest rates were to increase, the positive gap would
tend to result in a higher net interest margin, conversely if interest rates
were to decline, the positive gap would tend to result in a lower interest
margin. However, changes in the mix of earning assets or supporting liabilities
can either increase or decrease the net margin without affecting interest rate
sensitivity. This characteristic is referred to as a basis risk and, generally,
relates to the repricing characteristics of certain short-term funding
sources.
Interest rate changes do not affect all categories of assets
and liabilities equally or at the same time. Varying interest rate environments
can create unexpected changes in prepayment levels of assets and liabilities,
which may have a significant effect on the net interest margin and are not
reflected in the interest sensitivity analysis table. Because of these factors,
an interest sensitivity gap report may not provide a complete assessment of the
exposure to changes in interest rates. To supplement traditional GAP analysis,
the Company performs simulation modeling to estimate the potential effects of
changing interest rate environments. The process allows the Company to explore
the complex relationships within the GAP over time and various interest rate
environments.
Liquidity risk represents the potential for loss as a result
of limitations on the Company's ability to adjust for future cash flows, to meet
the needs of depositors and borrowers, and to fund operations on a timely and
cost-effective basis. The liquidity policy approved by the board of directors
requires annual review of the Company's liquidity by the asset/liability
committee, which is composed of senior executives, and the finance and
investment committee of the board of directors.
The Company's internal asset/liability committee and the
finance and investment committee of the board of directors each meet monthly to
monitor the Company's investments, liquidity needs and to oversee its
asset/liability management. The Company evaluates the rates offered on its
deposit products on a weekly basis.
Liquidity and Liability Management
To meet liquidity needs, the Company maintains a portion
of its funds in cash deposits in other banks, in Federal funds sold, and in
investment securities. At September 30, 2003, the Company's primary liquidity
ratio was
18.63% as a
percentage of total unsecured deposits of $817,730,000, comprised of $76,877,000
in investment securities available-for-sale with maturities (or probable calls)
of up to five years, less $18,217,000 of securities that were pledged to secure public and
certain other deposits as required by law and contract; Federal funds sold of $51,300,000, and
$42,442,000 in cash and due from banks.
Capital Resources
The following table summarizes risk-based capital, risk-weighted assets, and
risk-based capital ratios of the Company:
September 30,
---------------------- December 31,
(Dollars in thousands) 2003 2002 2002
- --------------------------------- ---------- ---------- ------------
Capital components:
Tier 1 Capital................ $ 108,764 $ 100,398 $ 101,966
Tier 2 Capital................ 10,286 10,025 10,563
---------- ---------- ------------
Total risk-based capital.... $ 119,050 $ 110,423 $ 112,529
========== ========== ============
Risk-weighted assets............. $ 820,875 $ 803,475 $ 842,399
Average assets................... $ 989,285 $ 927,078 $ 950,091
Minimum
Regulatory
Requirements
-----------
Capital ratios:
Total risk-based capital....... 14.5 % 13.7 % 13.4 % 8.0 %
Tier 1 risk-based capital...... 13.3 % 12.5 % 12.1 % 4.0 %
Leverage ratio (1)............. 11.0 % 10.8 % 10.7 % 4.0 %
|
(1) |
|
Tier 1 capital divided by average assets (excluding
goodwill). |
At September 30, 2003 and 2002, and December 31, 2002, the
Company's capital met all minimum regulatory requirements. As of September 30,
2003, management believes that HBC was considered "Well Capitalized"
under the Prompt Corrective Action Provisions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
No material changes have occurred during the quarter to the Company's market
risk profile or information. For further information refer to the Company's
Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a)
We carried out an evaluation
under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures, as of the end of the period covered by this report, pursuant to Rule
13a-15(b) under the Securities Exchange Act of 1934. Based on their review of
our disclosure controls and procedures, the principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to us that is required to be included in our periodic SEC filings.
(b) There were no changes in our internal controls over
financial reporting that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, such
controls.
Part II - OTHER INFORMATION
ITEM 6. - Exhibits and Reports on Form 8-K
- Exhibits included with this filing:
The exhibit list required by this item is incorporated by reference to the
Exhibit Index filed as part of this report.
- Reports on Form 8-K
The Registrant furnished a Current Report on Form 8-K dated
October 21, 2003 under item 7 and item 12 to report its third quarter ended
September 30, 2003 financial results, and condensed consolidated financial
information.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Heritage Commerce Corp
(Registrant)
|
|
November 13, 2003
Date |
|
/s/ Brad L. Smith
Brad L. Smith, Chief Executive Officer
|
|
November 13, 2003
Date |
|
/s/ Lawrence D. McGovern
Lawrence D. McGovern, Chief Financial Officer |
Exhibit Index