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 MARCH 31,
2010.
|
|
¨
|
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:
000-32987
UNITED SECURITY
BANCSHARES
(Exact
name of registrant as specified in its charter)
CALIFORNIA
|
91-2112732
|
(State or other jurisdiction of
|
(I.R.S. Employer
|
incorporation or organization)
|
Identification No.)
|
2126 Inyo Street, Fresno, California
|
93721
|
(Address of principal executive offices)
|
(Zip Code)
|
Registrants
telephone number, including area code
(559)
248-4943
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes
o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing for the past 90
days.
Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
o
No
x
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).
Large
accelerated filer
o
Accelerated
filer
o
Non-accelerated
filer
x
Small reporting company
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
o
No
x
Aggregate
market value of the Common Stock held by non-affiliates as of the last business
day of the registrant's most recently completed second fiscal quarter - June 30,
2009:
$43,114,654
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common Stock, no par
value
(Title of
Class)
Shares
outstanding as of April 30, 2010:
12,621,452
TABLE OF
CONTENTS
Facing
Page
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Table
of Contents
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PART
I. Financial Information
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1
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Item 1.
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Financial
Statements
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1
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Consolidated
Balance Sheets
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1
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Consolidated
Statements of Operations and Comprehensive (Loss) Income
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2
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Consolidated
Statements of Changes in Shareholders' Equity
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3
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Consolidated
Statements of Cash Flows
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4
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Notes
to Consolidated Financial Statements
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5
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Item
2.
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Management's
Discussion and Analysis of
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Financial
Condition and Results of Operations
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20
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Overview
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20
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Results
of Operations
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23
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Financial
Condition
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27
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Asset/Liability
Management – Liquidity and Cash Flow
|
34
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Regulatory
Matters
|
35
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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37
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Interest
Rate Sensitivity and Market Risk
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37
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Item
4T.
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Controls
and Procedures
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38
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PART
II. Other Information
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39
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Item
1.
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Legal
Proceedings
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39
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Item 1A.
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Risk
Factors
|
39
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
39
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Item
3.
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Defaults
Upon Senior Securities
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39
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Item
4.
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Reserved
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39
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Item
5.
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Other
Information
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39
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Item
6.
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Exhibits
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39
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Signatures
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PART I. Financial
Information
United
Security Bancshares and Subsidiaries
Consolidated
Balance Sheets – (unaudited)
March
31, 2010 and December 31, 2009
|
|
March 31,
|
|
|
December 31,
|
|
(in
thousands
except
shares)
|
|
2010
|
|
|
2009
|
|
Assets
|
|
|
|
|
|
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Cash
and due from banks
|
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$
|
16,607
|
|
|
$
|
17,644
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Federal
funds sold
|
|
|
21,160
|
|
|
|
11,585
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Cash
and cash equivalents
|
|
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37,767
|
|
|
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29,229
|
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Interest-bearing
deposits in other banks
|
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3,970
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|
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3,313
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Investment
securities available for sale (at fair value)
|
|
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68,855
|
|
|
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71,411
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Loans
and leases
|
|
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521,087
|
|
|
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508,573
|
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Unearned
fees
|
|
|
(1,047
|
)
|
|
|
(865
|
)
|
Allowance
for credit losses
|
|
|
(16,204
|
)
|
|
|
(15,016
|
)
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Net
loans
|
|
|
503,836
|
|
|
|
492,692
|
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Accrued
interest receivable
|
|
|
2,430
|
|
|
|
2,497
|
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Premises
and equipment – net
|
|
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13,121
|
|
|
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13,296
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Other
real estate owned
|
|
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38,130
|
|
|
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36,217
|
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Intangible
assets
|
|
|
1,775
|
|
|
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2,034
|
|
Goodwill
|
|
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7,391
|
|
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7,391
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Cash
surrender value of life insurance
|
|
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15,099
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|
|
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14,972
|
|
Investment
in limited partnership
|
|
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2,168
|
|
|
|
2,274
|
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Deferred
income taxes - net
|
|
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7,665
|
|
|
|
7,534
|
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Other
assets
|
|
|
9,422
|
|
|
|
9,708
|
|
Total
assets
|
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$
|
711,629
|
|
|
$
|
692,568
|
|
|
|
|
|
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|
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Liabilities
& Shareholders' Equity
|
|
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Liabilities
|
|
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Deposits
|
|
|
|
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|
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Noninterest
bearing
|
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$
|
134,140
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$
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139,724
|
|
Interest
bearing
|
|
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448,342
|
|
|
|
421,936
|
|
Total
deposits
|
|
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582,482
|
|
|
|
561,660
|
|
|
|
|
|
|
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Other
borrowings
|
|
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37,000
|
|
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40,000
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Accrued
interest payable
|
|
|
280
|
|
|
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376
|
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Accounts
payable and other liabilities
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4,416
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3,995
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Junior
subordinated debentures (at fair value)
|
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10,616
|
|
|
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10,716
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|
Total
liabilities
|
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634,794
|
|
|
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616,747
|
|
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|
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Shareholders'
Equity
|
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Common
stock, no par value 20,000,000 shares authorized, 12,621,452 and
12,496,499 issued and outstanding, in 2010 and 2009,
respectively
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38,235
|
|
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37,575
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Retained
earnings
|
|
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40,286
|
|
|
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40,499
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Accumulated
other comprehensive loss
|
|
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(1,686
|
)
|
|
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(2,253
|
)
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Total
shareholders' equity
|
|
|
76,835
|
|
|
|
75,821
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Total
liabilities and shareholders' equity
|
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$
|
711,629
|
|
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$
|
692,568
|
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See notes
to consolidated financial statements
United
Security Bancshares and Subsidiaries
Consolidated
Statements of Operations and Comprehensive Income
|
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Quarters Ended March 31,
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(In thousands except shares and EPS)
|
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2010
|
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2009
|
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Interest
Income:
|
|
|
|
|
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Loans,
including fees
|
|
$
|
7,540
|
|
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$
|
8,067
|
|
Investment
securities – AFS – taxable
|
|
|
853
|
|
|
|
1,190
|
|
Investment
securities – AFS – nontaxable
|
|
|
15
|
|
|
|
15
|
|
Federal
funds sold
|
|
|
8
|
|
|
|
0
|
|
Interest
on deposits in other banks
|
|
|
10
|
|
|
|
40
|
|
Total
interest income
|
|
|
8,426
|
|
|
|
9,312
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
1,158
|
|
|
|
1,705
|
|
Interest
on other borrowings
|
|
|
107
|
|
|
|
459
|
|
Total
interest expense
|
|
|
1,265
|
|
|
|
2,164
|
|
Net
Interest Income Before
|
|
|
|
|
|
|
|
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Provision
for Credit Losses
|
|
|
7,161
|
|
|
|
7,148
|
|
Provision
for Credit Losses
|
|
|
1,631
|
|
|
|
1,351
|
|
Net
Interest Income
|
|
|
5,530
|
|
|
|
5,797
|
|
Noninterest
Income:
|
|
|
|
|
|
|
|
|
Customer
service fees
|
|
|
948
|
|
|
|
989
|
|
Loss
on sale of other real estate owned
|
|
|
(56
|
)
|
|
|
(77
|
)
|
Gain
(loss) on fair value of financial liability
|
|
|
157
|
|
|
|
(59
|
)
|
Shared
appreciation income
|
|
|
0
|
|
|
|
9
|
|
Other
|
|
|
264
|
|
|
|
279
|
|
Total
noninterest income
|
|
|
1,313
|
|
|
|
1,141
|
|
Noninterest
Expense:
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
2,281
|
|
|
|
2,223
|
|
Occupancy
expense
|
|
|
913
|
|
|
|
942
|
|
Data
processing
|
|
|
19
|
|
|
|
42
|
|
Professional
fees
|
|
|
387
|
|
|
|
400
|
|
FDIC/DFI
insurance assessments
|
|
|
391
|
|
|
|
146
|
|
Director
fees
|
|
|
57
|
|
|
|
66
|
|
Amortization
of intangibles
|
|
|
203
|
|
|
|
228
|
|
Correspondent
bank service charges
|
|
|
76
|
|
|
|
107
|
|
Impairment
loss on core deposit intangible
|
|
|
57
|
|
|
|
57
|
|
Impairment
loss on investment securities (cumulative total other-than-temporary loss
of $3.9 million, net of $3.5 million recognized in other comprehensive
loss, pre-tax)
|
|
|
244
|
|
|
|
163
|
|
Impairment
loss on OREO
|
|
|
821
|
|
|
|
166
|
|
Loss
on California tax credit partnership
|
|
|
106
|
|
|
|
107
|
|
OREO
expense
|
|
|
282
|
|
|
|
305
|
|
Other
|
|
|
488
|
|
|
|
717
|
|
Total
noninterest expense
|
|
|
6,325
|
|
|
|
5,669
|
|
Income
Before Taxes on Income
|
|
|
518
|
|
|
|
1,269
|
|
Provision
for Taxes on Income
|
|
|
76
|
|
|
|
348
|
|
Net
Income
|
|
$
|
442
|
|
|
$
|
921
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on available for sale securities, and past service costs of
employee benefit plans - net income tax expense (benefit) of $378 and
$(488)
|
|
|
567
|
|
|
|
(733
|
)
|
Comprehensive
Income
|
|
$
|
1,009
|
|
|
$
|
188
|
|
Net
Income per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
Shares
on which net income per common shares were based
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,621,452
|
|
|
|
12,622,238
|
|
Diluted
|
|
|
12,621,452
|
|
|
|
12,622,238
|
|
See notes
to consolidated financial statements
United
Security Bancshares and Subsidiaries
Consolidated
Statements of Changes in Shareholders' Equity
Periods
Ended March 31, 2010 (unaudited)
|
|
Common
|
|
|
Common
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
stock
|
|
|
stock
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
(In
thousands except shares)
|
|
of Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
Balance
January 1, 2009
|
|
|
12,010,372
|
|
|
$
|
34,811
|
|
|
$
|
47,722
|
|
|
$
|
(2,923
|
)
|
|
$
|
79,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
changes in unrealized loss on available for sale securities (net of income
tax benefit of $489)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(733
|
)
|
|
|
(733
|
)
|
Dividends
on common stock (cash-in-lieu)
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
Repurchase
and cancellation of common shares
|
|
|
(488
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Common
stock dividends
|
|
|
119,622
|
|
|
|
919
|
|
|
|
(919
|
)
|
|
|
|
|
|
|
0
|
|
Other
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
921
|
|
|
|
|
|
|
|
921
|
|
Balance
March 31, 2009
|
|
|
12,219,506
|
|
|
|
35,776
|
|
|
|
47,720
|
|
|
|
(3,656
|
)
|
|
|
79,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
changes in unrealized loss on available for sale securities (net of income
tax expense of $1,045)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,568
|
|
|
|
1,568
|
|
Net
changes in unrecognized past service Cost on employee benefit plans (net
of income tax benefit of $116)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
|
|
(165
|
)
|
Dividends
on common stock (cash-in-lieu)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
Common
stock dividends
|
|
|
366,993
|
|
|
|
1,761
|
|
|
|
(1,761
|
)
|
|
|
|
|
|
|
0
|
|
Other
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Stock-based
compensation expense
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
(5,458
|
)
|
|
|
|
|
|
|
(5,458
|
)
|
Balance
December 31, 2009
|
|
|
12,496,499
|
|
|
|
37,575
|
|
|
|
40,499
|
|
|
|
(2,253
|
)
|
|
|
75,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
changes in unrealized loss on available for sale securities (net of income
tax expense of $378)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
567
|
|
|
|
567
|
|
Common
stock dividends
|
|
|
124,953
|
|
|
|
655
|
|
|
|
(655
|
)
|
|
|
|
|
|
|
0
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
442
|
|
|
|
|
|
|
|
442
|
|
Balance
March 31, 2010
|
|
|
12,621,452
|
|
|
$
|
38,235
|
|
|
$
|
40,286
|
|
|
$
|
(1,686
|
)
|
|
$
|
76,835
|
|
See notes
to consolidated financial statements
United
Security Bancshares and Subsidiaries
Consolidated
Statements of Cash Flows (unaudited)
|
|
Three Months Ended March 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
442
|
|
|
$
|
921
|
|
Adjustments
to reconcile net income:
|
|
|
|
|
|
|
|
|
to
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision
for credit losses
|
|
|
1,631
|
|
|
|
1,351
|
|
Depreciation
and amortization
|
|
|
539
|
|
|
|
640
|
|
Accretion
of investment securities
|
|
|
(10
|
)
|
|
|
(20
|
)
|
Decrease
(increase) in accrued interest receivable
|
|
|
67
|
|
|
|
(363
|
)
|
Decrease
in accrued interest payable
|
|
|
(96
|
)
|
|
|
(168
|
)
|
Increase
(decrease) in unearned fees
|
|
|
182
|
|
|
|
(179
|
)
|
Increase
in income taxes payable
|
|
|
8
|
|
|
|
894
|
|
Stock-based
compensation expense
|
|
|
5
|
|
|
|
13
|
|
Decrease
in accounts payable and accrued liabilities
|
|
|
(58
|
)
|
|
|
(476
|
)
|
Loss
on sale of other real estate owned
|
|
|
56
|
|
|
|
77
|
|
Impairment
loss on other real estate owned
|
|
|
821
|
|
|
|
166
|
|
Impairment
loss on core deposit intangible
|
|
|
57
|
|
|
|
57
|
|
Impairment
loss on investment securities
|
|
|
244
|
|
|
|
163
|
|
Increase
in surrender value of life insurance
|
|
|
(126
|
)
|
|
|
(136
|
)
|
(Gain)
loss on fair value option of financial liabilities
|
|
|
(157
|
)
|
|
|
59
|
|
Loss
on tax credit limited partnership interest
|
|
|
106
|
|
|
|
107
|
|
Net
decrease in other assets
|
|
|
513
|
|
|
|
337
|
|
Net
cash provided by operating activities
|
|
|
4,224
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Net
(increase) decrease in interest-bearing deposits with
banks
|
|
|
(657
|
)
|
|
|
16,464
|
|
Purchases
of available-for-sale securities
|
|
|
(1,001
|
)
|
|
|
0
|
|
Maturities
and calls of available-for-sale securities
|
|
|
4,269
|
|
|
|
3,784
|
|
Proceeds
from sale of investment in title company
|
|
|
0
|
|
|
|
99
|
|
Net
increase in loans
|
|
|
(18,196
|
)
|
|
|
(1,883
|
)
|
Net
proceeds from settlement of other real estate owned
|
|
|
2,143
|
|
|
|
1,515
|
|
Capital
expenditures for premises and equipment
|
|
|
(141
|
)
|
|
|
(59
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(13,583
|
)
|
|
|
19,920
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Net
increase in demand deposit and savings accounts
|
|
|
4,781
|
|
|
|
1,561
|
|
Net
increase in certificates of deposit
|
|
|
16,041
|
|
|
|
12,092
|
|
Net
decrease in federal funds purchased
|
|
|
0
|
|
|
|
(17,360
|
)
|
Net
decrease in FHLB term borrowings
|
|
|
(3,000
|
)
|
|
|
(24,500
|
)
|
Proceeds
from note payable
|
|
|
75
|
|
|
|
0
|
|
Repurchase
and retirement of common stock
|
|
|
0
|
|
|
|
33
|
|
Payment
of dividends on common stock
|
|
|
0
|
|
|
|
(5
|
)
|
Net
cash provided (used in) by financing activities
|
|
|
17,897
|
|
|
|
(28,179
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
8,538
|
|
|
|
(4,816
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
29,229
|
|
|
|
19,426
|
|
Cash
and cash equivalents at end of period
|
|
$
|
37,767
|
|
|
$
|
14,610
|
|
See notes
to consolidated financial statements
United Security Bancshares
and Subsidiaries - Notes to Consolidated Financial Statements -
(Unaudited)
1.
|
Organization
and Summary of Significant Accounting and Reporting
Policies
|
The
consolidated financial statements include the accounts of United Security
Bancshares, and its wholly owned subsidiary United Security Bank (the “Bank”)
and two bank subsidiaries, USB Investment Trust (the “REIT”) and United Security
Emerging Capital Fund, (collectively the “Company” or “USB”). Intercompany
accounts and transactions have been eliminated in consolidation
These
unaudited financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information on a basis
consistent with the accounting policies reflected in the audited financial
statements of the Company included in its 2009 Annual Report on Form 10-K. These
interim financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of a
normal recurring, nature) considered necessary for a fair presentation have been
included. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for any other interim
period or for the year as a whole.
Certain
reclassifications have been made to the 2009 financial statements to conform to
the classifications used in 2010.
New
Accounting Standards
:
In June
2009, the FASB revised ACS Topic 860 “
Transfers and Servicing
” to
amend existing guidance by eliminating the concept of a qualifying
special-purpose entity (QSPE), creating more stringent conditions for reporting
a transfer of a portion of a financial asset as a sale, clarifying other
sale-accounting criteria and changing the initial measurement of a transferor’s
interest in transferred financial assets. The new guidance is effective as of
the beginning of a company’s first fiscal year that begins after November 15,
2009 and for subsequent interim and annual periods. The adoption of this
standard as of January 1, 2010 did not have a material impact on the Company’s
consolidated financial condition or results of operations.
In
January 2010, the FASB issued ASU No. 2010-06,
Fair Value Measurements and
Disclosures (Topic 820)—Improving Disclosures about Fair Value
Measurements
. FASB ASU No. 2010-06 requires (i) fair value
disclosures by each class of assets and liabilities (generally a subset within a
line item as presented in the statement of financial position) rather than major
category, (ii) for items measured at fair value on a recurring basis, the
amounts of significant transfers between Levels 1 and 2, and transfers into and
out of Level 3, and the reasons for those transfers, including separate
discussion related to the transfers into each level apart from transfers out of
each level, and (iii) gross presentation of the amounts of purchases,
sales, issuances, and settlements in the Level 3 recurring measurement
reconciliation. Additionally, the ASU clarifies that a description of the
valuation techniques(s) and inputs used to measure fair values is required for
both recurring and nonrecurring fair value measurements. Also, if a valuation
technique has changed, entities should disclose that change and the reason for
the change. Disclosures other than the gross presentation changes in the Level 3
reconciliation are effective for the first reporting period beginning after
December 15, 2009. The requirement to present the Level 3 activity of
purchases, sales, issuances, and settlements on a gross basis will be effective
for fiscal years beginning after December 15, 2010. This update became
effective for the Company in the quarter ended March 31, 2010, except that the
disclosure on the roll forward activities for Level 3 fair value measurements
will become effective with the reporting period beginning January 1, 2011. Other
than requiring additional disclosures, adoption of this new guidance did not
have a material impact on the Company’s financial statements.
2.
|
Investment
Securities Available for Sale
|
Following
is a comparison of the amortized cost and fair value of securities
available-for-sale, as of March 31, 2010 and December 31, 2009:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair Value
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
(Carrying
|
|
(In thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Amount)
|
|
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
34,525
|
|
|
$
|
1,500
|
|
|
$
|
(12
|
)
|
|
$
|
36,013
|
|
U.S.
Government agency CMO’s
|
|
|
12,724
|
|
|
|
397
|
|
|
|
(12
|
)
|
|
|
13,109
|
|
Residential
mortgage obligations
|
|
|
13,567
|
|
|
|
0
|
|
|
|
(3,674
|
)
|
|
|
9,893
|
|
Obligations
of state and political subdivisions
|
|
|
1,252
|
|
|
|
37
|
|
|
|
0
|
|
|
|
1,289
|
|
Other
investment securities
|
|
|
9,033
|
|
|
|
0
|
|
|
|
(482
|
)
|
|
|
8,551
|
|
|
|
$
|
71,101
|
|
|
$
|
1,934
|
|
|
$
|
(4,180
|
)
|
|
$
|
68,855
|
|
December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
35,119
|
|
|
$
|
1,469
|
|
|
$
|
(2
|
)
|
|
$
|
36,586
|
|
U.S.
Government agency CMO’s
|
|
|
14,954
|
|
|
|
376
|
|
|
|
(10
|
)
|
|
|
15,320
|
|
Residential
mortgage obligations
|
|
|
14,273
|
|
|
|
0
|
|
|
|
(4,559
|
)
|
|
|
9,714
|
|
Obligations
of state and political subdivisions
|
|
|
1,252
|
|
|
|
33
|
|
|
|
0
|
|
|
|
1,285
|
|
Other
investment securities
|
|
|
9,004
|
|
|
|
0
|
|
|
|
(498
|
)
|
|
|
8,506
|
|
|
|
$
|
74,602
|
|
|
$
|
1,878
|
|
|
$
|
(5,069
|
)
|
|
$
|
71,411
|
|
Included
in other investment securities at March 31, 2010 are a short-term government
securities mutual fund totaling $7.5 million and a money-market mutual fund
totaling $1.0 million. Included in other investment securities at December 31,
2009, is a short-term government securities mutual fund totaling $7.5 million,
and an overnight money-market mutual fund totaling $1.0 million. The short-term
government securities mutual fund invests in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, with a
maximum duration equal to that of a 3-year U.S. Treasury Note.
The
amortized cost and fair value of securities available for sale at March 31,
2010, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because issuers have the right to call or prepay
obligations with or without call or prepayment penalties. Contractual maturities
on collateralized mortgage obligations cannot be anticipated due to allowed
paydowns.
|
|
March
31, 2010
|
|
|
|
Amortized
|
|
|
Fair Value
|
|
(In thousands)
|
|
Cost
|
|
|
(Carrying
Amount)
|
|
Due
in one year or less
|
|
$
|
11,042
|
|
|
$
|
10,611
|
|
Due
after one year through five years
|
|
|
3,641
|
|
|
|
3,677
|
|
Due
after five years through ten years
|
|
|
11,127
|
|
|
|
11,727
|
|
Due
after ten years
|
|
|
19,000
|
|
|
|
19,838
|
|
Collateralized
mortgage obligations
|
|
|
26,291
|
|
|
|
23,002
|
|
|
|
$
|
71,101
|
|
|
$
|
68,855
|
|
There
were no realized gains or losses on sales of available-for-sale securities
during the three months ended March 31, 2010 or 2009. There were
other-than-temporary impairment losses on certain of the Company’s residential
mortgage obligations (private label collateralized mortgage obligations)
totaling $244,000 and $163,000 for the three months ended March 31, 2010 and
2009, respectively.
Securities
that have been temporarily impaired less than 12 months at March 31, 2010 are
comprised of one U.S. government agency security with a weighted average life of
3.0 years and one collateralized mortgage obligation with a weighted average
life of 0.8 years. As of March 31, 2010, there were three residential mortgage
obligations and one other investment security with a total weighted average life
of 3.2 years that have been temporarily impaired for twelve months or
more.
The
following summarizes the total of temporarily impaired and
other-than-temporarily impaired investment securities at Match 31, 2010 (see
discussion below for other than temporarily impaired securities included
here):
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
(In thousands)
|
|
Fair Value
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
(Carrying
|
|
|
Unrealized
|
|
|
(Carrying
|
|
|
Unrealized
|
|
|
(Carrying
|
|
|
Unrealized
|
|
Securities available for sale:
|
|
Amount)
|
|
|
Losses
|
|
|
Amount)
|
|
|
Losses
|
|
|
Amount)
|
|
|
Losses
|
|
U.S.
Government agencies
|
|
$
|
990
|
|
|
$
|
(12
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
990
|
|
|
$
|
(12
|
)
|
U.S.
Government agency CMO’s
|
|
|
1,323
|
|
|
|
(12
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
1,323
|
|
|
|
(12
|
)
|
Residential
mortgage obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
9,893
|
|
|
|
(3,674
|
)
|
|
|
9,893
|
|
|
|
(3,674
|
)
|
Obligations
of state and political subdivisions
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other
investment securities
|
|
|
0
|
|
|
|
0
|
|
|
|
7,518
|
|
|
|
(482
|
)
|
|
|
7,518
|
|
|
|
(482
|
)
|
Total
impaired securities
|
|
$
|
2,313
|
|
|
$
|
(24
|
)
|
|
$
|
17,411
|
|
|
$
|
(4,156
|
)
|
|
$
|
19,724
|
|
|
$
|
(4,180
|
)
|
Securities
that have been temporarily impaired less than 12 months at March 31, 2009 are
comprised of two collateralized mortgage obligations and one U.S. government
agency security with a total weighted average life of 0.5 years. As of March 31,
2009, there were three residential mortgage obligations and two other investment
securities with a total weighted average life of 2.8 years that have been
temporarily impaired for twelve months or more.
The
following summarizes temporarily impaired investment securities at March 31,
2009:
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
(In thousands)
|
|
Fair Value
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
(Carrying
|
|
|
Unrealized
|
|
|
(Carrying
|
|
|
Unrealized
|
|
|
(Carrying
|
|
|
Unrealized
|
|
Securities available for sale:
|
|
Amount)
|
|
|
Losses
|
|
|
Amount)
|
|
|
Losses
|
|
|
Amount)
|
|
|
Losses
|
|
U.S.
Government agencies
|
|
$
|
143
|
|
|
$
|
(1
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
143
|
|
|
$
|
(1
|
)
|
U.S.
Government agency CMO’s
|
|
|
6,870
|
|
|
|
(68
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
6,870
|
|
|
|
(68
|
)
|
Residential
mortgage obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
9,350
|
|
|
|
(7,400
|
)
|
|
|
9,350
|
|
|
|
(7,400
|
)
|
Obligations
of state and political subdivisions
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other
investment securities
|
|
|
0
|
|
|
|
0
|
|
|
|
12,346
|
|
|
|
(654
|
)
|
|
|
12,346
|
|
|
|
(654
|
)
|
Total
impaired securities
|
|
$
|
7,013
|
|
|
$
|
(69
|
)
|
|
$
|
21,696
|
|
|
$
|
(8,054
|
)
|
|
$
|
28,709
|
|
|
$
|
(8,123
|
)
|
At March
31, 2010 and December 31, 2009, available-for-sale securities with an amortized
cost of approximately $63.5 million and $66.5 million (fair value of $62.9
million and $65.4 million) were pledged as collateral for public funds, and
treasury tax and loan balances.
The
Company evaluates investment securities for other-than-temporary impairment
(“OTTI”) at least quarterly, and more frequently when economic or market
conditions warrant such an evaluation. The investment securities portfolio is
evaluated for OTTI by segregating the portfolio into two general segments and
applying the appropriate OTTI model. Investment securities classified as
available for sale or held-to-maturity are generally evaluated for OTTI under
ASC Topic 320, “
Investments –
Debt and Equity Instruments
.” Certain purchased beneficial interests,
including non-agency mortgage-backed securities, asset-backed securities, and
collateralized debt obligations, are evaluated using the model outlined in ASC
Topic 320 (formerly EITF Issue No. 99-20, “
Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests that
Continue to be Held by a Transfer in Securitized Financial
Assets.”)
In the
first segment, the Company considers many factors in determining OTTI,
including: (1) the length of time and the extent to which the fair value
has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the entity has the intent to sell
the debt security or more likely than not will be required to sell the debt
security before its anticipated recovery. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to the Company at the time of
the evaluation.
The
second segment of the portfolio uses the OTTI guidance that is specific to
purchased beneficial interests including non-agency collateralized mortgage
obligations. Under this model, the Company compares the present value of the
remaining cash flows as estimated at the preceding evaluation date to the
current expected remaining cash flows. An OTTI is deemed to have occurred if
there has been an adverse change in the remaining expected future cash
flows.
Effective
the first quarter 2009, the Company adopted an amendment to
existing guidance on
other-than-temporary impairments for debt securities
, which establishes a
new model for measuring and disclosing OTTI for all debt securities.
Other-than-temporary-impairment occurs under the new guidance when the Company
intends to sell the security or more likely than not will be required to sell
the security before recovery of its amortized cost basis less any current-period
credit loss. If an entity intends to sell or more likely than not will be
required to sell the security before recovery of its amortized cost basis less
any current-period credit loss, the other-than-temporary-impairment shall be
recognized in earnings equal to the entire difference between the investment’s
amortized cost basis and its fair value at the balance sheet date. If an entity
does not intend to sell the security and it is not more likely than not that the
entity will be required to sell the security before recovery of its amortized
cost basis less any current-period loss, the other-than-temporary-impairment
shall be separated into the amount representing the credit loss and the amount
related to all other factors. The amount of the total
other-than-temporary-impairment related to the credit loss is recognized in
earnings, and is determined based on the difference between the present value of
cash flows expected to be collected and the current amortized cost of the
security. The amount of the total other-than-temporary-impairment related to
other factors shall be recognized in other comprehensive (loss) income, net of
applicable taxes. The previous amortized cost basis less the
other-than-temporary-impairment recognized in earnings shall become the new
amortized cost basis of the investment.
At
March 31, 2010, the decline in market value for all but three (see below)
of the impaired securities is attributable to changes in interest rates and
illiquidity, and not credit quality. Because the Company does not have the
intent to sell these impaired securities and it is likely that it will not be
required to sell the securities before their anticipated recovery, the Company
does not consider these securities to be other-than-temporarily impaired at
March 31, 2010.
At March
31, 2010, the Company had three non-agency collateralized mortgage obligations
which have been impaired more than twelve months. The three non-agency
collateralized mortgage obligations had a market value of $9.9 million and
unrealized losses of approximately $3.7 million at March 31, 2010. All
three non-agency mortgage-backed securities were rated less than high credit
quality at March 31, 2010. The Company evaluated these three
non-agency collateralized mortgage obligations for OTTI by comparing the present
value of expected cash flows to previous estimates to determine whether there
had been adverse changes in cash flows during the quarter. The OTTI evaluation
was conducted utilizing the services of a third party specialist and consultant
in MBS and CMO products. The cash flow assumptions used in the evaluation
included a number of factors including changes in delinquency rates, anticipated
prepayment speeds, loan-to-value ratios, changes in agency ratings, and market
prices. As a result of the impairment evaluation, the Company determined that
there had been adverse changes in cash flows in all three of the three
non-agency collateralized mortgage obligations reviewed, and concluded that
these three non-agency collateralized mortgage obligations were
other-than-temporarily impaired. The three CMO securities had
other-than-temporary-impairment losses of $3.9 million, of which $244,000
was recorded as expense and $3.7 million was recorded in other
comprehensive loss. These three non-agency collateralized mortgage obligations
remained classified as available for sale at March 31, 2010.
The
following table details the three non-agency collateralized mortgage obligations
with other-than-temporary-impairment, their credit rating at March 31, 2010, the
related credit losses recognized in earnings during the quarter, and impairment
losses in other comprehensive loss:
|
|
RALI 2006-QS1G
A10
|
|
|
RALI 2006 QS8
A1
|
|
|
CWALT 2007-
8CB A9
|
|
|
|
|
|
|
Rated CCC
|
|
|
Rated CCC
|
|
|
Rated CCC
|
|
|
Total
|
|
Amortized
cost – before OTTI
|
|
$
|
4,676,372
|
|
|
$
|
1,401,642
|
|
|
$
|
7,733,440
|
|
|
$
|
13,811,454
|
|
Credit
loss – Quarter ended March 31, 2010
|
|
|
(192,179
|
)
|
|
|
(24,148
|
)
|
|
|
(28,137
|
)
|
|
|
(244,464
|
)
|
Other
impairment (OCI)
|
|
|
(1,304,357
|
)
|
|
|
(356,215
|
)
|
|
|
(2,013,400
|
)
|
|
|
(3,673,972
|
)
|
Carrying
amount – March 31, 2010
|
|
$
|
3,179,836
|
|
|
$
|
1,021,279
|
|
|
$
|
5,691,903
|
|
|
$
|
9,893,018
|
|
Total
impairment - YTD March 31, 2010
|
|
$
|
(1,496,536
|
)
|
|
$
|
(380,363
|
)
|
|
$
|
(2,041,537
|
)
|
|
$
|
(3,918,436
|
)
|
The total
other comprehensive loss (OCI) balance of $3.7 million in the above table is
included in unrealized losses of 12 months or more at March 31,
2010.
Loans
include the following:
|
|
March 31,
|
|
|
% of
|
|
|
December 31,
|
|
|
% of
|
|
(In thousands)
|
|
2010
|
|
|
Loans
|
|
|
2009
|
|
|
Loans
|
|
Commercial
and industrial
|
|
$
|
178,617
|
|
|
|
34.4
|
%
|
|
$
|
167,930
|
|
|
|
33.0
|
%
|
Real
estate – mortgage
|
|
|
173,737
|
|
|
|
33.3
|
%
|
|
|
165,629
|
|
|
|
32.6
|
%
|
RE
construction and development
|
|
|
98,618
|
|
|
|
18.9
|
%
|
|
|
105,220
|
|
|
|
20.7
|
%
|
Agricultural
|
|
|
51,113
|
|
|
|
9.8
|
%
|
|
|
50,897
|
|
|
|
10.0
|
%
|
Installment/other
|
|
|
18,340
|
|
|
|
3.5
|
%
|
|
|
18,191
|
|
|
|
3.6
|
%
|
Lease
financing
|
|
|
662
|
|
|
|
0.1
|
%
|
|
|
706
|
|
|
|
0.1
|
%
|
Total
Gross Loans
|
|
$
|
521,087
|
|
|
|
100.0
|
%
|
|
$
|
508,573
|
|
|
|
100.0
|
%
|
The
Company had $1.3 million in loans over 90 days past due and still accruing at
March 31, 2010. Loans over 90 days past due and still accruing totaled $486,000
at December 31, 2009. Nonaccrual loans totaled $32.7 million and $34.8 million
at March 31, 2010 and December 31, 2009, respectively.
An
analysis of changes in the allowance for credit losses is as
follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
Balance,
beginning of year
|
|
$
|
15,016
|
|
|
$
|
11,529
|
|
|
$
|
11,529
|
|
Provision
charged to operations
|
|
|
1,631
|
|
|
|
13,375
|
|
|
|
1,351
|
|
Losses
charged to allowance
|
|
|
(449
|
)
|
|
|
(10,145
|
)
|
|
|
(2,598
|
)
|
Recoveries
on loans previously charged off
|
|
|
6
|
|
|
|
257
|
|
|
|
166
|
|
Balance
at end-of-period
|
|
$
|
16,204
|
|
|
$
|
15,016
|
|
|
$
|
10,448
|
|
The
allowance for credit losses represents management's estimate of the risk
inherent in the loan portfolio based on the current economic conditions,
collateral values and economic prospects of the borrowers. The formula allowance
for unfunded loan commitments totaling $195,000 and $234,000 at March 31, 2010
and December 31, 2009, respectively, is carried in other liabilities. The
Company’s market areas of the San Joaquin Valley, the greater Oakhurst area,
East Madera County, and Santa Clara County, have all been impacted by the
economic downturn related to depressed real estate markets and the tightening of
liquidity markets. The Company has taken these events into account when
reviewing estimates of factors that may impact the allowance for credit
losses.
The
Company grades “problem” or “classified” loans according to certain risk factors
associated with individual loans within the loan portfolio. Classified loans
consist of loans which have been graded substandard, doubtful, or loss based
upon inherent weaknesses in the individual loans or loan relationships.
Classified loans include not only impaired loans (as defined under SFAS No.
114), but also loans which based upon inherent weaknesses result in a risk
grading of substandard, doubtful, or loss. The following table summarizes the
Company’s classified loans at March 31, 2010 and December 31, 2009.
|
|
March 31,
|
|
|
December 31,
|
|
(in 000's)
|
|
2010
|
|
|
2009
|
|
Impaired
loans
|
|
$
|
51,932
|
|
|
$
|
53,794
|
|
Classified
loans not considered impaired
|
|
|
12,792
|
|
|
|
15,816
|
|
Total
classified loans
|
|
$
|
64,724
|
|
|
$
|
69,610
|
|
The
following table summarizes the Company’s investment in loans for which
impairment has been recognized for the periods presented:
(in thousands)
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
March 31,
2009
|
|
Total
impaired loans at period-end
|
|
$
|
51,932
|
|
|
$
|
53,794
|
|
|
$
|
58,030
|
|
Impaired
loans which have specific allowance
|
|
|
32,938
|
|
|
|
26,266
|
|
|
|
29,711
|
|
Total
specific allowance on impaired loans
|
|
|
9,339
|
|
|
|
7,974
|
|
|
|
4,393
|
|
Total
impaired loans which as a result of write-downs or the fair value of the
collateral, did not have a specific allowance
|
|
|
18,994
|
|
|
|
27,528
|
|
|
|
28,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
YTD
– 3/31/10
|
|
|
YTD
-
12/31/09
|
|
|
YTD
– 3/31/09
|
|
Average
recorded investment in impaired loans during period
|
|
$
|
52,863
|
|
|
$
|
59,595
|
|
|
$
|
56,201
|
|
Income
recognized on impaired loans during period
|
|
$
|
155
|
|
|
$
|
326
|
|
|
$
|
0
|
|
Deposits
include the following:
|
|
March 31, December 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
Noninterest-bearing
deposits
|
|
$
|
134,140
|
|
|
$
|
139,724
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
NOW
and money market accounts
|
|
|
167,547
|
|
|
|
158,795
|
|
Savings
accounts
|
|
|
35,759
|
|
|
|
34,146
|
|
Time
deposits:
|
|
|
|
|
|
|
|
|
Under
$100,000
|
|
|
66,064
|
|
|
|
64,481
|
|
$100,000
and over
|
|
|
178,972
|
|
|
|
164,514
|
|
Total
interest-bearing deposits
|
|
|
448,342
|
|
|
|
421,936
|
|
Total
deposits
|
|
$
|
582,482
|
|
|
$
|
561,660
|
|
|
|
|
|
|
|
|
|
|
Total
brokered deposits included in time deposits above
|
|
$
|
120,303
|
|
|
$
|
129,352
|
|
5.
|
Short-term
Borrowings/Other Borrowings
|
At March
31, 2010, the Company had collateralized and uncollateralized lines of credit
with the Federal Reserve Bank of San Francisco and other correspondent banks
aggregating $136.5 million, as well as Federal Home Loan Bank (“FHLB”) lines of
credit totaling $43.0 million. These lines of credit generally have interest
rates tied to the Federal Funds rate or are indexed to short-term U.S. Treasury
rates or LIBOR. FHLB advances are collateralized by all of the Company’s stock
in the FHLB and certain qualifying mortgage loans. At March 31, 2010, the
Company had total outstanding balances of $37.0 million drawn against its FHLB
line of credit. The weighted average cost of borrowings outstanding at March 31,
2010 was 0.19%. The $37.0 million in FHLB borrowings outstanding at March 31,
2010 are summarized in the table below.
FHLB term borrowings at March 31, 2010 (in
000’s):
|
|
Term
|
|
Balance
at 3/31/10
|
|
|
Fixed
Rate
|
|
Maturity
|
6-month
|
|
$
|
28,000
|
|
|
|
0.18
|
%
|
7/29/10
|
6-month
|
|
|
9,000
|
|
|
|
0.21
|
%
|
7/29/10
|
|
|
$
|
37,000
|
|
|
|
0.19
|
%
|
|
At
December 31, 2009, the Company had collateralized and uncollateralized lines of
credit with the Federal Reserve Bank of San Francisco and other correspondent
banks aggregating $124.2 million, as well as Federal Home Loan Bank (“FHLB”)
lines of credit totaling $40.8 million. At December 31, 2009, the Company had
total outstanding balances of $40.0 million in borrowings drawn against its
FHLB lines of credit at an average rate of 0.86%. Of the $40.0 million in FHLB
borrowings outstanding at December 31, 2009, all will mature in three months or
less. The weighted average cost of borrowings for the year ended December 31,
2009 was 0.80%. As of December 31, 2009, $14.2 million in real estate-secured
loans, and $42.6 million in investment securities at FHLB, were pledged as
collateral for FHLB advances. Additionally, $256.7 million in real
estate-secured loans were pledged at December 31, 2009 as collateral for used
and unused borrowing lines with the Federal Reserve Bank totaling $120.7
million. All lines of credit are on an “as available” basis and can be revoked
by the grantor at any time.
6.
|
Supplemental
Cash Flow Disclosures
|
|
|
Three Months Ended March 31,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$
|
1,360
|
|
|
$
|
2,232
|
|
Income
Taxes
|
|
$
|
68
|
|
|
|
59
|
|
Noncash
investing activities:
|
|
|
|
|
|
|
|
|
Dividends
declared not paid
|
|
$
|
0
|
|
|
$
|
4
|
|
Loans
transferred to foreclosed assets
|
|
$
|
5,180
|
|
|
$
|
721
|
|
On March
23, 2010, the Company’s Board of Directors declared a one-percent (1%) stock
dividend on the Company’s outstanding common stock. Based upon the number of
outstanding common shares on the record date of April 9, 2010, an additional
124,965 shares were issued to shareholders on April 21, 2010. Because the stock
dividend was considered a “small stock dividend”, approximately $655,000 was
transferred from retained earnings to common stock based upon the $5.24 closing
price of the Company’s common stock on the declaration date of March 23, 2010.
There were no fractional shares paid. Other than for earnings-per-share
calculations, shares issued for the stock dividend have been treated
prospectively for financial reporting purposes. For purposes of earnings per
share calculations, the Company’s weighted average shares outstanding and
potentially dilutive shares used in the computation of earnings per share have
been restated after giving retroactive effect to a 1% stock dividend to
shareholders for all periods presented.
8.
|
Net
(Loss) Income per Common Share
|
The
following table provides a reconciliation of the numerator and the denominator
of the basic EPS computation with the numerator and the denominator of the
diluted EPS computation:
|
|
Three Months Ended March 31,
|
|
(In thousands except earnings per share data)
|
|
2010
|
|
|
2009
|
|
Net
income available to common shareholders
|
|
$
|
442
|
|
|
$
|
921
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares issued
|
|
|
12,621
|
|
|
|
12,622
|
|
Add:
dilutive effect of stock options
|
|
|
0
|
|
|
|
0
|
|
Weighted
average shares outstanding adjusted for potential dilution
|
|
|
12,621
|
|
|
|
12,622
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
Diluted
earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
Anti-dilutive
shares excluded from earnings per share calculation
|
|
|
194
|
|
|
|
185
|
|
The
Company’s average weighted shares outstanding and potentially dilutive shares
used in the computation of earnings per share have been restated after giving
retroactive effect to a 1% stock dividend to shareholders of record on April 9,
2010.
9.
|
Stock
Based Compensation
|
All
share-based payments to employees, including grants of employee stock options,
are recognized in the financial statements based on the grant-date fair value of
the award. The fair value is amortized over the requisite service period
(generally the vesting period).
Included
in salaries and employee benefits for the three months ended March 31, 2010 and
2009 is $5,000 and $13,000 of share-based compensation, respectively. The
related tax benefit on share-based compensation recorded in the provision for
income taxes was not material to either quarter.
A summary
of the Company’s options as of January 1, 2010 and changes during the three
months ended March 31, 2010 is presented below.
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
2005
|
|
|
Exercise
|
|
|
1995
|
|
|
Exercise
|
|
|
|
Plan
|
|
|
Price
|
|
|
Plan
|
|
|
Price
|
|
Options
outstanding January 1, 2010
|
|
|
160,820
|
|
|
$
|
15.38
|
|
|
|
16,984
|
|
|
$
|
11.50
|
|
Options
granted during period
|
|
|
25,000
|
|
|
|
4.75
|
|
|
|
0
|
|
|
|
—
|
|
1%
common stock dividends – 2010
|
|
|
1,858
|
|
|
|
(0.14
|
)
|
|
|
170
|
|
|
|
(0.11
|
)
|
Options
outstanding March 31, 2010
|
|
|
187,678
|
|
|
$
|
13.81
|
|
|
|
17,154
|
|
|
$
|
11.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at March 31, 2010
|
|
|
127,744
|
|
|
$
|
15.17
|
|
|
|
16,942
|
|
|
$
|
11.39
|
|
As of
March 31, 2010 and 2009, there was $70,000 and $68,000, respectively, of total
unrecognized compensation expense related to nonvested stock options. This cost
is expected to be recognized over a weighted average period of approximately 0.9
years and 0.5 years, respectively. No options were exercised during the three
months ended March 31, 2010 or 2009.
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Weighted
average grant-date fair value of stock options granted
|
|
$
|
2.22
|
|
|
|
n/a
|
|
Total
fair value of stock options vested
|
|
$
|
61,543
|
|
|
$
|
68,690
|
|
Total
intrinsic value of stock options exercised
|
|
|
n/a
|
|
|
|
n/a
|
|
The Bank
determines fair value at grant date using the Black-Scholes-Merton pricing model
that takes into account the stock price at the grant date, the exercise price,
the expected life of the option, the volatility of the underlying stock and the
expected dividend yield and the risk-free interest rate over the expected life
of the option.
The
weighted average assumptions used in the pricing model are noted in the table
below. The expected term of options granted is derived using the simplified
method, which is based upon the average period between vesting term and
expiration term of the options. The risk free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of the grant. Expected volatility is based on the historical
volatility of the Bank's stock over a period commensurate with the expected term
of the options. The Company believes that historical volatility is indicative of
expectations about its future volatility over the expected term of the
options.
The Bank
expenses the fair value of options on a straight-line basis over the
vesting period for each separately vesting portion of the award. The Bank
estimates forfeitures and only recognizes expense for those shares expected to
vest. Based upon historical evidence, the Company has determined that because
options are granted to a limited number of key employees rather than a broad
segment of the employee base, expected forfeitures, if any, are not
material.
|
|
Three Months Ended
|
|
|
|
March 31, 2010
|
|
Risk
Free Interest Rate
|
|
|
2.71
|
%
|
Expected
Dividend Yield
|
|
|
0.00
|
%
|
Expected
Life in Years
|
|
6.50
Years
|
|
Expected
Price Volatility
|
|
|
43.07
|
%
|
The
Black-Scholes-Merton option valuation model requires the input of highly
subjective assumptions, including the expected life of the stock based award and
stock price volatility. The assumptions listed above represent management's best
estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if other assumptions had been
used, the Bank's recorded stock-based compensation expense could have been
materially different from that previously reported in proforma disclosures. In
addition, the Bank is required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If the Bank's actual
forfeiture rate is materially different from the estimate, the share-based
compensation expense could be materially different.
The
Company periodically reviews its tax positions under the guidance of ASC Topic
740, “
Income Taxes
”,
based upon the criteria that an individual tax position would have to meet for
some or all of the income tax benefit to be recognized in a taxable entity’s
financial statements. Under the guidelines, an entity should recognize the
financial statement benefit of a tax position if it determines that it is
more likely than not
that the
position will be sustained on examination. The term, “more likely than not”,
means a likelihood of more than 50 percent. In assessing whether the
more-likely-than-not criterion is met, the entity should assume that the tax
position will be reviewed by the applicable taxing authority and all available
information is known to the taxing authority.
The
Company and a subsidiary file income tax returns in the U.S federal
jurisdiction, and several states within the U.S. There are no filings in foreign
jurisdictions. The Company is not currently aware of any tax jurisdictions where
the Company or any subsidiary is subject examination by federal, state, or local
taxing authorities before 2001. The Internal Revenue Service (IRS) has not
examined the Company’s or any subsidiaries federal tax returns since before
2001, and the Company currently is not aware of any examination planned or
contemplated by the IRS.
The
Company again reviewed its REIT tax position as of March 31, 2010. There have
been no changes to the Company’s tax position with regard to the REIT during the
quarter ended March 31, 2010. The Company had approximately $684,000 and
$653,000 accrued for the payment of interest and penalties at March 31, 2010 and
December 31, 2009, respectively. It is the Company’s policy to recognize
interest expense related to unrecognized tax benefits, and penalties, as a
component tax expense. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in 000’s):
Balance at
January 1, 2010
|
|
$
|
1,560
|
|
Additions
for tax provisions of prior years
|
|
|
21
|
|
Balance
at March 31, 2010
|
|
$
|
1,581
|
|
11.
|
Junior
Subordinated Debt/Trust Preferred
Securities
|
Effective
September 30, 2009 and beginning with the quarterly interest payment due October
1, 2009, the Company elected to defer interest payments on the Company's $15.0
million of junior subordinated debentures relating to its trust preferred
securities. The terms of the debentures and trust indentures allow for the
Company to defer interest payments for up to 20 consecutive quarters without
default or penalty. During the period that the interest deferrals are elected,
the Company will continue to record interest expense associated with the
debentures. Upon the expiration of the deferral period, all accrued and unpaid
interest will be due and payable. During the deferral period, the Company is
precluded from paying cash dividends to shareholders or repurchasing its
stock.
The fair
value guidance generally permits the measurement of selected eligible financial
instruments at fair value at specified election dates. Effective January 1,
2008, the Company elected the fair value option for its junior subordinated debt
issued under USB Capital Trust II. The rate paid on the junior subordinated debt
issued under USB Capital Trust II is 3-month LIBOR plus 129 basis points, and is
adjusted quarterly.
At March
31, 2010 the Company performed a fair value measurement analysis on its junior
subordinated debt using a cash flow valuation model approach to determine the
present value of those cash flows. The cash flow model utilizes the forward
3-month Libor curve to estimate future quarterly interest payments due over the
thirty-year life of the debt instrument, adjusted for deferrals of interest
payments per the Company’s election at March 31, 2010. These cash flows were
discounted at a rate which incorporates a current market rate for similar-term
debt instruments, adjusted for additional credit and liquidity risks associated
with the junior subordinated debt. Although there is little market data in the
current relatively illiquid credit markets, we believe the 8.7% discount rate
used represents what a market participant would consider under the
circumstances.
The fair
value calculation performed at March 31, 2010 resulted in a pretax gain
adjustment of $157,000 ($92,000, net of tax) for the quarter ended March 31,
2010. The previous year’s fair value calculation performed at March 31, 2009
resulted in a pretax loss adjustment of $59,000 ($34,000 net of tax) for the
quarter ended March 31, 2009.
12.
|
Fair
Value Measurements and Disclosure
|
The
following summary disclosures are made in accordance with the guidance provided
by ASC Topic 825 “
Fair Value
Measurements and Disclosures
” (formerly Statement of Financial
Accounting Standards No. 107, “Disclosures about Fair Value of Financial
Instruments,”) which requires the disclosure of fair value information about
both on- and off- balance sheet financial instruments where it is practicable to
estimate that value.
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(In thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
On-Balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
16,607
|
|
|
$
|
16,607
|
|
|
$
|
17,644
|
|
|
$
|
17,644
|
|
Interest-bearing
deposits
|
|
|
3,970
|
|
|
|
4,133
|
|
|
|
3,313
|
|
|
|
3,449
|
|
Investment
securities
|
|
|
68,855
|
|
|
|
68,855
|
|
|
|
71,411
|
|
|
|
71,411
|
|
Loans,
net
|
|
|
520,040
|
|
|
|
507,784
|
|
|
|
507,708
|
|
|
|
496,543
|
|
Cash
surrender value of life insurance
|
|
|
15,099
|
|
|
|
15,099
|
|
|
|
14,972
|
|
|
|
14,972
|
|
Investment
in bank stock
|
|
|
143
|
|
|
|
143
|
|
|
|
143
|
|
|
|
143
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
582,482
|
|
|
|
581,926
|
|
|
|
561,660
|
|
|
|
561,150
|
|
Borrowings
|
|
|
37,000
|
|
|
|
36,972
|
|
|
|
40,000
|
|
|
|
39,970
|
|
Junior
Subordinated Debt
|
|
|
10,616
|
|
|
|
10,616
|
|
|
|
10,716
|
|
|
|
10,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to extend credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Standby
letters of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
ASC Topic
820 (formerly SFAS 157, “Fair Value Measurements”) clarifies the definition of
fair value, describes methods used to appropriately measure fair value in
accordance with generally accepted accounting principles and expands fair value
disclosure requirements. This statement applies whenever other accounting
pronouncements require or permit fair value measurements.
The fair
value hierarchy prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels (Level 1, Level 2, and Level 3). Level 1
inputs are unadjusted quoted prices in active markets (as defined) for identical
assets or liabilities that the reporting entity has the ability to access at the
measurement date. Level 2 inputs are inputs other than quoted prices included
within Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 3 inputs are unobservable inputs for the asset or
liability, and reflect the reporting entity’s own assumptions about the
assumptions that market participants would use in pricing the asset or liability
(including assumptions about risk).
The
Company performs fair value measurements on certain assets and liabilities as
the result of the application of current accounting guidelines. Some fair value
measurements, such as for available-for-sale securities (AFS) and junior
subordinated debt are performed on a recurring basis, while others, such as
impairment of loans, goodwill and other intangibles, are performed on a
nonrecurring basis.
The
Company’s Level 1 financial assets consist of money market funds and highly
liquid mutual funds for which fair values are based on quoted market prices. The
Company’s Level 2 financial assets include highly liquid debt instruments of
U.S. government agencies, collateralized mortgage obligations, and debt
obligations of states and political subdivisions, whose fair values are obtained
from readily-available pricing sources for the identical underlying security
that may, or may not, be actively traded. Level 2 financial assets also include
certain impaired loans which are evaluated based on the observable inputs,
specifically current appraisals. From time to time, the Company recognizes
transfers between Level 1, 2, and 3 when a change in circumstances warrants a
transfer. There were no significant transfers in or out of Level 1 and Level 2
fair value measurements during the three months ended March 31,
2010.
The
following tables summarize the Company’s assets and liabilities that were
measured at fair value on a recurring and non-recurring basis as of March 31,
2010 (in 000’s):
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Description of Assets
|
|
March 31, 2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
AFS
Securities (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investment securities
|
|
$
|
8,694
|
|
|
$
|
8,694
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
|
36,013
|
|
|
|
|
|
|
$
|
36,013
|
|
|
|
|
U.S.
government agency CMO’s
|
|
|
13,109
|
|
|
|
|
|
|
|
13,109
|
|
|
|
|
Obligations
of states &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political
subdivisions
|
|
|
1,289
|
|
|
|
|
|
|
|
1,289
|
|
|
|
|
Residential
mortgage obligations
|
|
|
9,893
|
|
|
|
|
|
|
|
|
|
|
$
|
9,893
|
|
Total
AFS securities
|
|
|
68,998
|
|
|
|
8,694
|
|
|
|
50,411
|
|
|
|
9,893
|
|
Impaired
loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and industrial
|
|
|
2,878
|
|
|
|
|
|
|
|
29
|
|
|
|
2,849
|
|
Real
estate mortgage
|
|
|
6,240
|
|
|
|
|
|
|
|
451
|
|
|
|
5,789
|
|
RE
construction & development
|
|
|
13,722
|
|
|
|
|
|
|
|
2,734
|
|
|
|
10,988
|
|
Agricultural
|
|
|
760
|
|
|
|
|
|
|
|
0
|
|
|
|
760
|
|
Total
impaired loans
|
|
|
23,600
|
|
|
|
|
|
|
|
3,214
|
|
|
|
20,386
|
|
Core
deposit intangibles (1)
|
|
|
619
|
|
|
|
|
|
|
|
|
|
|
|
619
|
|
Total
|
|
$
|
93,217
|
|
|
$
|
8,694
|
|
|
$
|
53,625
|
|
|
$
|
30,898
|
|
|
(2)
|
Includes
$143 in equity securities reported in other assets on the balance
sheet
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Description of Liabilities
|
|
March 31, 2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Junior
subordinated debt
|
|
$
|
10,616
|
|
|
|
|
|
|
|
|
$
|
10,616
|
|
Total
|
|
$
|
10,616
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
10,616
|
|
The
following tables summarize the Company’s assets and liabilities that were
measured at fair value on a recurring and nonrecurring basis during the year
ended December 31, 2009 (in 000’s):
|
|
December
31,
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Description of Assets
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
AFS
securities (1)
|
|
$
|
71,554
|
|
|
$
|
8,648
|
|
|
$
|
53,192
|
|
|
$
|
9,714
|
|
Impaired
loans
|
|
|
18,347
|
|
|
|
|
|
|
|
1,976
|
|
|
|
16,371
|
|
Goodwill
|
|
|
5,764
|
|
|
|
|
|
|
|
|
|
|
|
5,764
|
|
Core
deposit intangible (2)
|
|
|
777
|
|
|
|
|
|
|
|
|
|
|
|
777
|
|
Total
|
|
$
|
96,442
|
|
|
$
|
8,648
|
|
|
$
|
55,168
|
|
|
$
|
32,626
|
|
|
(1)
|
Includes
$143 in equity securities reported in other
assets
|
|
|
December
31,
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Description of Liabilities
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Junior
subordinated debt
|
|
$
|
10,716
|
|
|
|
|
|
|
|
|
$
|
10,716
|
|
Total
|
|
$
|
10,716
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
10,716
|
|
The
nonrecurring fair value measurements performed during the three months ended
March 31, 2010 resulted in pretax fair value impairment adjustments of $57,000
($33,000 net of tax) to the core deposit intangible asset. The impairment
adjustments are reflected as a component of noninterest expense for the nine
months ended March 31, 2010.
The
following tables provide a reconciliation of assets and liabilities at fair
value using significant unobservable inputs (Level 3) on a recurring and
non-recurring basis during the three months ended March 31, 2010 and 2009 (in
000’s):
|
|
3/31/10
|
|
|
3/31/10
|
|
|
3/31/10
|
|
|
3/31/09
|
|
|
3/31/09
|
|
|
3/31/09
|
|
Reconciliation
of
Assets:
|
|
Impaired
loans
|
|
|
CMO’s
|
|
|
Intang
i
ble
assets
|
|
|
Impaired
loans
|
|
|
CMO’s
|
|
|
Intang
i
ble
assets
|
|
Beginning
balance
|
|
$
|
16,371
|
|
|
$
|
9,714
|
|
|
$
|
77
|
|
|
$
|
15,967
|
|
|
$
|
12,800
|
|
|
$
|
1,489
|
|
Total
gains or (losses) included in earnings (or other comprehensive
loss)
|
|
|
(731
|
)
|
|
|
179
|
|
|
|
(158
|
)
|
|
|
(3,685
|
)
|
|
|
(3,286
|
)
|
|
|
(176
|
)
|
Transfers
in and/or out of Level 3
|
|
|
4,746
|
|
|
|
0
|
|
|
|
0
|
|
|
|
10,930
|
|
|
|
0
|
|
|
|
(206
|
)
|
Ending
balance
|
|
$
|
20,386
|
|
|
$
|
9,893
|
|
|
$
|
619
|
|
|
$
|
23,212
|
|
|
$
|
9,514
|
|
|
$
|
1,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amount of total gains or (losses) for the period included in earnings (or
other comprehensive loss) attributable to the change in unrealized gains
or losses relating to assets still held at the reporting
date
|
|
$
|
(568
|
)
|
|
$
|
179
|
|
|
$
|
(158
|
)
|
|
$
|
(1,256
|
)
|
|
$
|
(3,286
|
)
|
|
$
|
(176
|
)
|
|
|
3/31/2010
|
|
|
3/31/2009
|
|
Reconciliation of
Liabilities:
|
|
Junior Sub
Debt
|
|
|
Junior Sub
Debt
|
|
Beginning
balance
|
|
$
|
10,716
|
|
|
$
|
11,926
|
|
|
|
|
|
|
|
|
|
|
Total
gains included in earnings (or changes in net assets)
|
|
|
(100
|
)
|
|
|
(39
|
)
|
Transfers
in and/or out of Level 3
|
|
|
0
|
|
|
|
0
|
|
Ending
balance
|
|
$
|
10,616
|
|
|
$
|
11,887
|
|
|
|
|
|
|
|
|
|
|
The
amount of total gains for the period included in earnings attributable to
the change in unrealized gains or losses relating to liabilities still
held at the reporting date
|
|
$
|
(100
|
)
|
|
$
|
(39
|
)
|
The
following methods and assumptions were used in estimating the fair values of
financial instruments:
Cash and Cash
Equivalents
- The carrying amounts reported in the balance sheets for
cash and cash equivalents approximate their estimated fair values.
Interest-bearing
Deposits –
Interest bearing deposits in other banks consist of fixed-rate
certificates of deposits. Accordingly, fair value has been estimated based upon
interest rates currently being offered on deposits with similar characteristics
and maturities.
Investments
– Available for sale securities are valued based upon open-market price
quotes obtained from reputable third-party brokers that actively make a market
in those securities. Market pricing is based upon specific CUSIP identification
for each individual security. To the extent there are observable prices in the
market, the mid-point of the bid/ask price is used to determine fair value of
individual securities. If that data are not available for the last 30 days, a
Level 2-type matrix pricing approach based on comparable securities in the
market is utilized. Level-2 pricing may include using a spread forward from the
last observable trade or may use a proxy bond like a TBA mortgage to come up
with a price for the security being valued. Changes in fair market value are
recorded in other comprehensive loss as the securities are available for sale.
At March 31, 2010 and December 31, 2009, the Company held three non-agency
(private-label) collateralized mortgage obligations (CMO’s). Fair value of these
securities (as well as review for other-than-temporary impairment) was performed
by a third-party securities broker specializing in CMO’s. Fair value was based
upon estimated cash flows which included assumptions about future prepayments,
default rates, and the impact of credit risk on this type of investment
security. Although the pricing of the CMO’s has certain aspects of Level 2
pricing, many of the pricing inputs are based upon unobservable assumptions of
future economic trends and as a result the Company considers this to be Level 3
pricing.
Loans
-
Fair values of variable rate loans, which reprice frequently and with no
significant change in credit risk, are based on carrying values. Fair
values for all other loans, except impaired loans, are estimated using
discounted cash flows over their remaining maturities, using interest rates at
which similar loans would currently be offered to borrowers with similar credit
ratings and for the same remaining maturities.
Impaired
Loans -
Fair value measurements for impaired loans are performed pursuant
to the criteria defined in the Receivables Topic of the FASB ASC, which was
originally issued under FAS No. 114, and are based upon either collateral values
supported by appraisals, or observed market prices. Changes are not recorded
directly as an adjustment to current earnings or comprehensive income, but
rather as an adjustment component in determining the overall adequacy of the
loan loss reserve. Such adjustments to the estimated fair value of impaired
loans may result in increases or decreases to the provision for credit losses
recorded in current earnings.
Bank-owned Life
Insurance
– Fair values of life insurance policies owned by the Company
approximate the insurance contract’s cash surrender value.
Investment in
limited partnerships
– Investment in limited partnerships which invest in
qualified low-income housing projects generate tax credits to the Company. The
investment is amortized using the effective yield method based upon the
estimated remaining utilization of low-income housing tax credits. The Company’s
carrying value approximates fair value.
Investments
in Bank Stock
–
Investment in
Bank equity securities is classified as available for sale and is valued based
upon open-market price quotes obtained from an active stock exchange. Changes in
fair market value are recorded in other comprehensive income
.
Deposits
–
In accordance with ASC Topic 820 (formerly SFAS No. 107), fair values for
transaction and savings accounts are equal to the respective amounts payable on
demand at March 31, 2010 and December 31, 2009 (i.e., carrying amounts). The
Company believes that the fair value of these deposits is clearly greater than
that prescribed by ASC Topic 820. Fair values of fixed-maturity certificates of
deposit were estimated using the rates currently offered for deposits with
similar remaining maturities.
Borrowings
- Borrowings consist of federal funds sold, securities sold under agreements to
repurchase, and other short-term borrowings. Fair values of borrowings were
estimated using the rates currently offered for borrowings with similar
remaining maturities.
Junior
Subordinated Debt
– The fair value of the junior subordinated debt was
determined based upon a valuation discounted cash flows model utilizing
observable market rates and credit characteristics for similar instruments. In
its analysis, the Company used characteristics that distinguish market
participants generally use, and considered factors specific to (a) the
liability, (b) the principal (or most advantageous) market for the liability,
and (c) market participants with whom the reporting entity would transact in
that market. For the three month period ended March 31, 2010,
cash flows were discounted
at a rate which incorporates a current market rate for similar-term debt
instruments, adjusted for additional credit and liquidity risks associated with
the junior subordinated debt.
The Company believes the inputs to the
model are subjective enough to the fair value determination of the junior
subordinated debt to make them Level 3 inputs.
Off-balance sheet
Instruments
- Off-balance sheet instruments consist of commitments to
extend credit, standby letters of credit and derivative contracts. Fair values
of commitments to extend credit are estimated using the interest rate currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present counterparties’ credit standing. There
was no material difference between the contractual amount and the estimated
value of commitments to extend credit at March 31, 2010 and December 31,
2009.
Fair
values of standby letters of credit are based on fees currently charged for
similar agreements. The fair value of commitments generally approximates the
fees received from the customer for issuing such commitments. These fees are not
material to the Company’s consolidated balance sheet and results of
operations.
13.
|
Goodwill
and Intangible Assets
|
At March
31, 2010 and December 31, 2009 the Company had goodwill, core deposit
intangibles, and other identified intangible assets which were recorded in
connection with various business combinations and purchases. The following table
summarizes the carrying value of those assets at March 31, 2010 and December 31,
2009.
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Goodwill
|
|
$
|
7,391
|
|
|
$
|
7,391
|
|
Core
deposit intangible assets
|
|
|
1,381
|
|
|
|
1,585
|
|
Other
identified intangible assets
|
|
|
394
|
|
|
|
449
|
|
Total
goodwill and intangible assets
|
|
$
|
9,166
|
|
|
$
|
9,425
|
|
Core
deposit intangibles and other identified intangible assets are amortized over
their useful lives, while goodwill is not amortized. The Company conducts
periodic impairment analysis on goodwill and intangible assets and goodwill at
least annually or more often as conditions require.
Goodwill:
The largest component of goodwill is related to the Legacy merger (Campbell
reporting unit) completed during February 2007 and totaled approximately $8.8
million at March 31, 2009. The Company conducted its annual impairment testing
of the goodwill related to the Campbell reporting unit effective March 31, 2010.
Impairment testing for goodwill is a two-step process.
The first
step in impairment testing is to identify potential impairment, which involves
determining and comparing the fair value of the operating unit with its carrying
value. If the fair value of the operating unit exceeds its carrying value,
goodwill is not impaired. If the carrying value exceeds fair value, there is an
indication of possible impairment and the second step is performed to determine
the amount of the impairment, if any. The fair value determined in the step one
testing was determined based on a discounted cash flow methodology using
estimated market discount rates and projections of future cash flows for the
Campbell operating unit. In addition to projected cash flows, the
Company also utilized other market metrics including industry multiples of
earnings and price-to-book ratios to estimate what a market participant would
pay for the operating unit in the current business environment. Determining the
fair value involves a significant amount of judgment, including estimates of
changes in revenue growth, changes is discount rates, competitive forces within
the industry, and other specific industry and market valuation conditions. The
2009 impairment analysis was impacted by to a large degree by the current
economic environment, including significant declines in interest rates, and
depressed valuations within the financial industry. Based on the results of step
one of the impairment analysis, the Company concluded that the potential for
goodwill impairment exists and, therefore, step-two testing will be required to
determine if there is goodwill impairment and the amount of goodwill that might
be impaired, if any.
Core
Deposit Intangibles
: During the first quarter of 2010, the Company
performed an annual impairment analysis of the core deposit intangible assets
associated with the Legacy Bank merger completed during February 2007 (Campbell
operating unit). The core deposit intangible asset, which totaled $3.0 million
at the time of merger, is being amortized over an estimated life of
approximately seven years. The Company recognized $101,000 and $119,000 in
amortization expense related to the Legacy operating unit during the three
months ended March 31, 2010 and 2009, respectively. At March 31, 2010, the
carrying value of the core deposit intangible related to the Legacy Bank merger
was $619,000.
During
the impairment analysis performed as of March 31, 2010, it was determined that
the original deposits purchased from Legacy Bank during February 2007 continue
to decline faster than originally anticipated. As a result of increased deposit
runoff, particularly in noninterest-bearing checking accounts and savings
accounts, the estimated value of the Campbell core deposit intangible was
determined to be $619,000 at March 31, 2010 rather than the pre-adjustment
carrying value of $675,000. As a result of the impairment analysis, the Company
recorded a pre-tax impairment loss of $57,000 ($33,000, net of tax) reflected as
a component of noninterest expense for the quarter ended March 31,
2010.
As a
result of impairment testing of core deposit intangible assets related to the
Campbell operating unit conducted during the first quarter of 2009, the Company
recorded a pre-tax impairment loss of $57,000 ($33,000, net of tax) reflected as
a component of noninterest expense for the quarter ended March 31,
2009.
Subsequent
events
are events
or transactions that occur after the balance sheet date but before financial
statements are issued. Recognized subsequent events are events or transactions
that provide additional evidence about conditions that existed at the date of
the balance sheet, including the estimates inherent in the process of preparing
financial statements. Nonrecognized subsequent events are events that
provide evidence about conditions that did not exist at the date of the balance
sheet but arose after that date. Management has reviewed events occurring
through the date the financial statements were issued and no subsequent events
occurred requiring accrual or disclosure.
Item
2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Certain
matters discussed or incorporated by reference in this Quarterly Report of Form
10-Q are forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties include, but are not
limited to, those described in Management’s Discussion and Analysis of Financial
Condition and Results of Operations. Such risks and uncertainties include, but
are not limited to, the following factors: i) competitive pressures in the
banking industry and changes in the regulatory environment; ii) exposure to
changes in the interest rate environment and the resulting impact on the
Company’s interest rate sensitive assets and liabilities; iii) decline in the
health of the economy nationally or regionally which could reduce the demand for
loans or reduce the value of real estate collateral securing most of the
Company’s loans; iv) credit quality deterioration that could cause an increase
in the provision for loan losses; v) Asset/Liability matching risks and
liquidity risks; volatility and devaluation in the securities markets, vi)
expected cost savings from recent acquisitions are not realized, and, vii)
potential impairment of goodwill and other intangible assets. Therefore, the
information set forth therein should be carefully considered when evaluating the
business prospects of the Company. For additional information concerning risks
and uncertainties related to the Company and its operations, please refer to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2009.
United
Security Bancshares (the “Company” or “Holding Company") is a California
corporation incorporated during March of 2001 and is registered with the Board
of Governors of the Federal Reserve System as a bank holding company under the
Bank Holding Company Act of 1956, as amended.. United Security Bank (the “Bank”)
is a wholly-owned bank subsidiary of the Company and was formed in 1987.
References to the Company are references to United Security Bancshares
(including the Bank). References to the Bank are to United Security Bank, while
references to the Holding Company are to the parent-only, United Security
Bancshares. The Company currently has eleven banking branches, which provide
financial services in Fresno, Madera, Kern, and Santa Clara counties in the
state of California.
Trends
Affecting Results of Operations and Financial Position
The
following table summarizes the nine-month and year-to-date averages of the
components of interest-bearing assets as a percentage of total interest-bearing
assets and the components of interest-bearing liabilities as a percentage of
total interest-bearing liabilities:
|
|
YTD
Average
|
|
|
YTD
Average
|
|
|
YTD
Average
|
|
|
|
3/31/10
|
|
|
12/31/09
|
|
|
3/31/09
|
|
Loans
and Leases
|
|
|
83.78
|
%
|
|
|
85.09
|
%
|
|
|
83.89
|
%
|
Investment
securities available for sale
|
|
|
11.60
|
%
|
|
|
13.38
|
%
|
|
|
14.06
|
%
|
Interest-bearing
deposits in other banks
|
|
|
0.42
|
%
|
|
|
0.94
|
%
|
|
|
2.05
|
%
|
Federal
funds sold
|
|
|
4.20
|
%
|
|
|
0.59
|
%
|
|
|
0.00
|
%
|
Total
earning assets
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
accounts
|
|
|
9.90
|
%
|
|
|
8.80
|
%
|
|
|
8.21
|
%
|
Money
market accounts
|
|
|
22.96
|
%
|
|
|
22.68
|
%
|
|
|
19.85
|
%
|
Savings
accounts
|
|
|
7.06
|
%
|
|
|
6.86
|
%
|
|
|
7.05
|
%
|
Time
deposits
|
|
|
50.16
|
%
|
|
|
39.94
|
%
|
|
|
33.00
|
%
|
Other
borrowings
|
|
|
7.77
|
%
|
|
|
19.44
|
%
|
|
|
29.64
|
%
|
Subordinated
debentures
|
|
|
2.15
|
%
|
|
|
2.28
|
%
|
|
|
2.25
|
%
|
Total
interest-bearing liabilities
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
The
Company’s overall operations are impacted by a number of factors, including not
only interest rates and margin spreads, which impact results of operations, but
also the composition of the Company’s balance sheet. One of the primary
strategic goals of the Company is to maintain a mix of assets that will generate
a reasonable rate of return without undue risk, and to finance those assets with
a low-cost and stable source of funds. Liquidity and capital resources must also
be considered in the planning process to mitigate risk and allow for
growth.
Continued
weakness in the real estate markets and the general economy have impacted the
Company’s operations during the past year with increased levels of nonperforming
assets, increased expenses related to foreclosed properties, and decreased
profit margins. Although the Company continues its business development and
expansion efforts throughout its market area, increased attention has been
placed on reducing nonperforming assets and providing customers more options to
help work through this difficult economic period.
With
market rates of interest remaining at historically low levels for more than a
year, the Company continues to experience compressed net interest margins,
although margins have increased to some degree during the first quarter of 2010.
The Company’s net interest margin was 4.78% for the three months ended March 31,
2010, as compared to 4.51% for the year ended December 31, 2009, and 4.48% for
the three months ended March 31, 2009. With approximately 58% of the loan
portfolio in floating rate instruments at March 31, 2010, the effects of low
market rates continue to impact loan yields. The Company has sought to mitigate
the low-interest rate environment with loan floors applied to new and renewed
loans over the past year. Loans yielded 6.01% during the three months ended
March 31, 2010, as compared to 5.83% for the year ended December 31, 2009, and
6.03% for the three months ended March 31, 2009. The Company’s cost of funds has
continued to decline over the past year and is largely responsible for the
increase in net interest margin experienced during the quarter ended March 31,
2010. The cost of interest-bearing liabilities was 1.04% for the three months
ended March 31, 2010, as compared to 1.43% for the year ended December 31, 2009,
and 1.68% for the three months ended March 31, 2009. Wholesale borrowing and
brokered deposit rates have remained low since late 2008, resulting in
overnight and short-term borrowing rates of less than 0.50% during much of the
past year. The Company has benefited from these rate declines, as it has
continued to utilize overnight and short-term borrowing lines through the
Federal Reserve and Federal Home Loan Bank. The company will continue to utilize
these funding sources as required to maintain prudent liquidity levels, while
seeking to increase core deposits when possible.
Total
noninterest income of $1.3 million reported for the three months ended March 31,
2010 increased $172,000 or 15.1% as compared to the three months ended March 31,
2009. The increase in noninterest income between the two quarterly periods is
primarily the result of the fair value gain adjustments on the Company’s junior
subordinated debt which included fair value gains of $157,000 recognized during
the three months ended March 31, 2010, as compared to fair value losses of
59,000 recognized during the three months ended March 31, 2009, an increase of
$216,000 between the two periods. Noninterest income continues to be driven by
customer service fees, which totaled $948,000 for the three months ended March
31, 2010, representing a decrease of $41,000 or 4.2% over the $989,000 in
customer service fees reported for the three months ended March 31, 2009.
Customer service fees represented 72.2% and 86.7% of total noninterest income
for the three-month periods ended March 31, 2010 and 2009,
respectively.
Noninterest
expense increased approximately 656,000 or 11.6% between the three-month periods
ended March 31, 2009 and March 31, 2010. The primary reason for the increase in
noninterest expense experienced during the first three months of 2010 was the
result of increases in impairment losses on other real estate owned through
foreclosure and investment securities, as well as increases in FDIC insurance
assessments during the period.
Effective
September 30, 2009 and beginning with the quarterly interest payment due October
1, 2009, the Company elected to defer interest payments on the Company's $15.0
million of junior subordinated debentures relating to its trust preferred
securities. This is the result of regulatory restraints which have precluded the
Bank from paying dividends to the Holding Company. The terms of the debentures
and trust indentures allow for the Company to defer interest payments for up to
20 consecutive quarters without default or penalty. During the period that the
interest deferrals are elected, the Company will continue to record interest
expense associated with the debentures. Upon the expiration of the deferral
period, all accrued and unpaid interest will be due and payable. Under the terms
of the debenture, the Company is precluded from paying cash dividends to
shareholders or repurchasing its stock during the deferral period.
The
Company has not paid any cash dividends on its common stock since the second
quarter of 2008 and does not expect to resume cash dividends on its common stock
for the foreseeable future. Because the Company has elected to defer the
quarterly payments of interest on its junior subordinated debentures issued in
connection with the trust preferred securities as discussed above, the Company
is prohibited from paying cash dividends on its common stock during the deferral
period. In addition, pursuant to a formal agreement entered into with the
Federal Reserve Bank during the first quarter of 2010, the Company and the Bank
are precluded from paying cash dividends without prior consent of the Federal
Reserve. On March 23, 2010 the Company’s Board of Directors
again declared a one-percent (1%) stock dividend on the Company’s outstanding
common stock. The Company believes, given the current uncertainties in the
economy and unprecedented declines in real estate valuations in our markets, it
is prudent to retain capital in this environment, and better position the
Company for future growth opportunities. Based upon the number of outstanding
common shares on the record date of April 9, 2010, an additional 124,965
shares were issued to shareholders on April 21, 2010. For purposes of earnings
per share calculations, the Company’s weighted average shares outstanding and
potentially dilutive shares used in the computation of earnings per share have
been restated after giving retroactive effect to the 1% stock dividend to
shareholders for all periods presented.
The
Company has sought to maintain a strong, yet conservative balance sheet while
continuing to reduce the level of nonperforming assets during the three months
ended March 31, 2010. Total assets increased approximately $19.1 million during
the three months ended March 31, 2010, with an increase of $12.5
million in loans. Decreases of $3.0 million in FHLB term borrowings were
partially offset by increases in brokered and other deposits. Net increases of
$17.8 million in deposits and borrowings experienced during the three months
ended March 31, 2010, were utilized to fund increases in loans during the period
as well as increases in federal funds sold to enhance liquidity. Average loans
comprised approximately 84% of overall average earning assets during the three
months ended March 31, 2010, a percentage that has remained stable over the past
three years.
Nonperforming
assets, which are primarily related to the real estate loan and property
portfolio, have declined slightly during the first quarter of 2010 but remain
high as real estate markets continue to suffer from the mortgage crisis which
began during mid-2007. Nonaccrual loans totaling $32.7 million at March 31,
2010, decreased $2.0 million from the balance reported at December 31, 2009. In
determining the adequacy of the underlying collateral related to these loans,
management monitors trends within specific geographical areas, loan-to-value
ratios, appraisals, and other credit issues related to the specific
loans. Impaired loans decreased $1.9 million during the three months
ended March 31, 2010 to a balance of $51.9 million at March 31, 2010. Other real
estate owned through foreclosure increased $1.9 million between December 31,
2009 and March 31, 2010, as transfers of $5.2 million in loans to other real
estate owned during the quarter more than offset write-downs and sales of those
assets during the period. As a result of these events, nonperforming assets as a
percentage of total assets decreased from 12.56% at December 31, 2009 to 12.22%
at March 31, 2010.
Management
continues to monitor economic conditions in the real estate market for signs of
further deterioration or improvement which may impact the level of the allowance
for loan losses required to cover identified losses in the loan portfolio.
Greater focus has been placed on identifying and reducing the level of problem
assets, while working with borrowers to find more options, including loan
restructures, to work through these difficult economic times. Provisions made to
the allowance for credit losses, totaled $1.6 million during the three months
ended March 31, 2010, as compared to $13.4 million for the year ended December
31, 2009 and $1.4 million for the three months ended March 31, 2009. Net loan
and lease charge-offs during the three months ended March 31, 2010 totaled
$443,000, as compared to $9.9 million and $2.4 million for the year ended
December 31, 2009 and three months ended March 31, 2009,
respectively.
Deposits
increased by $20.8 million during the three months ended March 31, 2010, with
increases experienced in all interest-bearing deposit accounts. Increases in
time deposits experienced during the quarter ended March 31, 2010 were primarily
the result of increases in brokered deposits, allowing the Company to continue
to reduce its reliance on borrowed funds, while enhancing
liquidity.
Although
balances have declined during the most recent quarter, the Company continues to
utilize overnight borrowings and other term credit lines, with borrowings
totaling $37.0 million at March 31, 2010 as compared to $40.0 million at
December 31, 2009. The average rate of those term borrowings was 0.19% at March
31, 2010, as compared to 0.86% at December 31, 2009. Although the Company
continues to realize significant interest expense reductions by utilizing these
overnight and term borrowings lines, the use of such lines are monitored closely
to ensure sound balance sheet management in light of the current economic and
credit environment.
The cost
of the Company’s subordinated debentures issued by USB Capital Trust II has
remained low as market rates declined during most of 2009. With pricing at
3-month-LIBOR plus 129 basis points, the effective cost of the subordinated debt
was 1.58% and 1.54% at March 31, 2010 and December 31, 2009, respectively.
Pursuant to fair value accounting guidance, the Company has recorded $157,000 in
pretax fair value gains on its junior subordinated debt during the three months
ended March 31, 2010, bringing the total cumulative gain recorded on the debt to
$5.0 million at March 31, 2010.
The
Company continues to emphasize relationship banking and core deposit growth, and
has focused greater attention on its market area of Fresno, Madera, and Kern
Counties, as well as Campbell, in Santa Clara County. The San Joaquin Valley and
other California markets continue to exhibit weak demand for construction
lending and commercial lending from small and medium size businesses, as
commercial and residential real estate markets declined during much of 2008, and
2009, a condition which still persists at this time. Although we have seen some
improvement during the first quarter of 2010, the past year has presented
significant challenges for the banking industry with tightening credit markets,
weakening real estate markets, and increased loan losses adversely affecting the
industry.
The
Company continually evaluates its strategic business plan as economic and market
factors change in its market area. Balance sheet management, enhancing revenue
sources, and maintaining market share will be of primary importance during 2010
and beyond. The banking industry is currently experiencing continued pressure on
net margins as well as asset quality resulting from conditions in the real
estate market, and weak credit markets. During March 2010, the Company and the
Bank entered into a regulatory agreement with the Federal Reserve Bank which,
among other things, requires improvements in the overall condition of the
Company and the Bank. As a result, market rates of interest, asset quality, as
well as regulatory oversight will continue be an important factor in the
Company’s ongoing strategic planning process.
Results
of Operations
For the
three months ended March 31, 2010, the Company reported net income of $442,000
or $0.04 per share ($0.04 diluted) as compared to net income of $921,000 or
$0.07 per share ($0.07 diluted) for the three months ended March 31, 2009. The
decline in earnings between the two three month periods ended March 31, 2009 and
2010 is primarily the result of increases in provisions for loan losses and
impairment losses taken during 2010, combined with declines in market rates of
interest.
The
Company’s return on average assets was 0.25% for the three months ended March
31, 2010 as compared to 0.50% for the three months ended March 31, 2009. The
Bank’s return on average equity was 2.33% for the three months ended March 31,
2010 as compared to 4.46% for the same three-month period of 2009.
Net
Interest Income
Net
interest income before provision for credit losses totaled $7.2 million for the
three months ended March 31, 2010, representing an increase of $13,000, or 0.2%
when compared to the $7.1 million reported for the same three months of the
previous year.
The
Company’s net interest margin, as shown in Table 1, increased to 4.78% at March
31, 2010 from 4.48% at March 31, 2009, an increase of 30 basis points (100 basis
points = 1%) between the two periods. While average market rates of interest
have remained level between the three-month periods ended March 31, 2009 and
2010 (the Prime rate averaged 3.2% during both periods), significant declines in
the Company’s cost of funds enhanced the net margin between the two
quarters.
Table 1. Distribution of
Average Assets, Liabilities and Shareholders’ Equity:
Interest
rates and Interest Differentials
Three
Months Ended March 31, 2010 and 2009
|
|
2010
|
|
|
2009
|
|
(dollars
in thousands)
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases (1)
|
|
$
|
509,099
|
|
|
$
|
7,540
|
|
|
|
6.01
|
%
|
|
$
|
542,512
|
|
|
$
|
8,067
|
|
|
|
6.03
|
%
|
Investment
Securities – taxable
|
|
|
69,271
|
|
|
|
853
|
|
|
|
4.99
|
%
|
|
|
89,676
|
|
|
|
1,190
|
|
|
|
5.38
|
%
|
Investment
Securities – nontaxable (2)
|
|
|
1,252
|
|
|
|
15
|
|
|
|
4.86
|
%
|
|
|
1,252
|
|
|
|
15
|
|
|
|
4.86
|
%
|
Interest-bearing deposits
in other banks
|
|
|
2,555
|
|
|
|
10
|
|
|
|
1.59
|
%
|
|
|
13,287
|
|
|
|
40
|
|
|
|
1.22
|
%
|
Federal
funds sold and reverse repos
|
|
|
25,553
|
|
|
|
8
|
|
|
|
0.13
|
%
|
|
|
10
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Total
interest-earning assets
|
|
|
607,730
|
|
|
$
|
8,426
|
|
|
|
5.62
|
%
|
|
|
646,737
|
|
|
$
|
9,312
|
|
|
|
5.84
|
%
|
Allowance
for credit losses
|
|
|
(15,259
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,416
|
)
|
|
|
|
|
|
|
|
|
Noninterest-bearing
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
18,960
|
|
|
|
|
|
|
|
|
|
|
|
18,120
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
13,233
|
|
|
|
|
|
|
|
|
|
|
|
14,146
|
|
|
|
|
|
|
|
|
|
Accrued
interest receivable
|
|
|
2,228
|
|
|
|
|
|
|
|
|
|
|
|
2,277
|
|
|
|
|
|
|
|
|
|
Other
real estate owned
|
|
|
39,664
|
|
|
|
|
|
|
|
|
|
|
|
29,754
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
44,257
|
|
|
|
|
|
|
|
|
|
|
|
48,883
|
|
|
|
|
|
|
|
|
|
Total
average assets
|
|
$
|
710,813
|
|
|
|
|
|
|
|
|
|
|
$
|
748,501
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
accounts
|
|
$
|
48,781
|
|
|
$
|
26
|
|
|
|
0.22
|
%
|
|
$
|
42,848
|
|
|
$
|
57
|
|
|
|
0.54
|
%
|
Money
market accounts
|
|
|
113,094
|
|
|
|
366
|
|
|
|
1.31
|
%
|
|
|
103,624
|
|
|
|
519
|
|
|
|
2.03
|
%
|
Savings
accounts
|
|
|
34,775
|
|
|
|
36
|
|
|
|
0.42
|
%
|
|
|
36,783
|
|
|
|
70
|
|
|
|
0.77
|
%
|
Time
deposits
|
|
|
247,067
|
|
|
|
730
|
|
|
|
1.20
|
%
|
|
|
172,288
|
|
|
|
1,059
|
|
|
|
2.49
|
%
|
Other
borrowings
|
|
|
38,266
|
|
|
|
50
|
|
|
|
0.53
|
%
|
|
|
154,754
|
|
|
|
356
|
|
|
|
0.93
|
%
|
Junior
subordinated debentures
|
|
|
10,581
|
|
|
|
57
|
|
|
|
2.18
|
%
|
|
|
11,727
|
|
|
|
103
|
|
|
|
3.56
|
%
|
Total
interest-bearing liabilities
|
|
|
492,564
|
|
|
$
|
1,265
|
|
|
|
1.04
|
%
|
|
|
522,024
|
|
|
$
|
2,164
|
|
|
|
1.68
|
%
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
checking
|
|
|
136,578
|
|
|
|
|
|
|
|
|
|
|
|
139,669
|
|
|
|
|
|
|
|
|
|
Accrued
interest payable
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
667
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
4,244
|
|
|
|
|
|
|
|
|
|
|
|
5,656
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
633,787
|
|
|
|
|
|
|
|
|
|
|
|
668,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
77,026
|
|
|
|
|
|
|
|
|
|
|
|
80,485
|
|
|
|
|
|
|
|
|
|
Total
average liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders'
equity
|
|
$
|
710,813
|
|
|
|
|
|
|
|
|
|
|
$
|
748,501
|
|
|
|
|
|
|
|
|
|
Interest
income as a percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
average earning assets
|
|
|
|
|
|
|
|
|
|
|
5.62
|
%
|
|
|
|
|
|
|
|
|
|
|
5.84
|
%
|
Interest
expense as a percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
average earning assets
|
|
|
|
|
|
|
|
|
|
|
0.84
|
%
|
|
|
|
|
|
|
|
|
|
|
1.36
|
%
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.78
|
%
|
|
|
|
|
|
|
|
|
|
|
4.48
|
%
|
(1)
|
Loan
amounts include nonaccrual loans, but the related interest income has been
included only if collected for the period prior to the loan being placed
on a nonaccrual basis. Loan interest income includes loan fees of
approximately $330,000 and $386,000 for the three months ended March 31,
2010 and 2009, respectively.
|
(2)
|
Applicable
nontaxable securities yields have not been calculated on a tax-equivalent
basis because they are not material to the Company’s results of
operations.
|
Both the
Company's net interest income and net interest margin are affected by changes in
the amount and mix of interest-earning assets and interest-bearing liabilities,
referred to as "volume change." Both are also affected by changes in yields on
interest-earning assets and rates paid on interest-bearing liabilities, referred
to as "rate change." The following table sets forth the changes in interest
income and interest expense for each major category of interest-earning asset
and interest-bearing liability, and the amount of change attributable to volume
and rate changes for the periods indicated.
Table 2. Rate and
Volume Analysis
|
|
Increase
(decrease) in the three months ended
|
|
|
|
March 31, 2010 compared to March 31,
2009
|
|
(In thousands)
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
Increase
(decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
Loans
and leases
|
|
$
|
(527
|
)
|
|
$
|
(32
|
)
|
|
|
(495
|
)
|
Investment
securities available for sale
|
|
|
(337
|
)
|
|
|
(81
|
)
|
|
|
(256
|
)
|
Interest-bearing
deposits in other banks
|
|
|
(30
|
)
|
|
|
19
|
|
|
|
(49
|
)
|
Federal
funds sold
|
|
|
8
|
|
|
|
8
|
|
|
|
0
|
|
Total
interest income
|
|
|
(886
|
)
|
|
|
(86
|
)
|
|
|
(800
|
)
|
Increase
(decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand accounts
|
|
|
(184
|
)
|
|
|
(240
|
)
|
|
|
56
|
|
Savings
accounts
|
|
|
(34
|
)
|
|
|
(30
|
)
|
|
|
(4
|
)
|
Time
deposits
|
|
|
(329
|
)
|
|
|
(680
|
)
|
|
|
351
|
|
Other
borrowings
|
|
|
(306
|
)
|
|
|
(112
|
)
|
|
|
(194
|
)
|
Subordinated
debentures
|
|
|
(46
|
)
|
|
|
(37
|
)
|
|
|
(9
|
)
|
Total
interest expense
|
|
|
(899
|
)
|
|
|
(1,099
|
)
|
|
|
200
|
|
Increase
(decrease) in net interest income
|
|
$
|
13
|
|
|
$
|
1,013
|
|
|
$
|
(1,000
|
)
|
For the
three months ended March 31, 2010, total interest income decreased approximately
$886,000, or 9.5% as compared to the three-month period ended March 31, 2009.
Earning asset volumes decreased in all earning-asset categories between the
three month periods, with the largest decrease experienced in
loans.
For the
three months ended March 31, 2010, total interest expense decreased
approximately $899,000, or 41.5% as compared to the three-month period ended
March 31, 2009. Between those two periods, average interest-bearing liabilities
decreased by $29.5 million, and the average rates paid on these liabilities
decreased by 64 basis points.
Provisions
for credit losses are determined on the basis of management's periodic credit
review of the loan portfolio, consideration of past loan loss experience,
current and future economic conditions, and other pertinent factors. Such
factors consider the allowance for credit losses to be adequate when it covers
estimated losses inherent in the loan portfolio. Based on the condition of the
loan portfolio, management believes the allowance is sufficient to cover risk
elements in the loan portfolio. For the three months ended March 31, 2010, the
provision to the allowance for credit losses amounted to $1.6 million as
compared to $1.4 million for the three months ended March 31, 2009. The amount
provided to the allowance for credit losses during the first three months of
2010 brought the allowance to 3.12% of net outstanding loan balances at March
31, 2010, as compared to 2.96% of net outstanding loan balances at December 31,
2009, and 1.93% at March 31, 2009.
Noninterest
Income
Table 3. Changes in
Noninterest Income
The
following table sets forth the amount and percentage changes in the categories
presented for the three months ended March 31, 2010 as compared to the three
months ended March 31, 2009:
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
Amount of
Change
|
|
|
Percent
Change
|
|
Customer
service fees
|
|
$
|
948
|
|
|
$
|
989
|
|
|
$
|
(41
|
)
|
|
|
-4.15
|
%
|
(Loss)
gain on sale of OREO
|
|
|
(56
|
)
|
|
|
(77
|
)
|
|
|
21
|
|
|
|
-27.27
|
%
|
Gain(loss)
on fair value of financial liabilities
|
|
|
157
|
|
|
|
(59
|
)
|
|
|
216
|
|
|
|
366.10
|
%
|
Shared
appreciation income
|
|
|
0
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
-100.00
|
%
|
Other
|
|
|
264
|
|
|
|
279
|
|
|
|
(15
|
)
|
|
|
-5.38
|
%
|
Total
noninterest income
|
|
$
|
1,313
|
|
|
$
|
1,141
|
|
|
$
|
172
|
|
|
|
15.07
|
%
|
Noninterest
income for the three months ended March 31, 2010 increased $172,000 or 15.07%
when compared to the same period of 2009. The increase in noninterest income
between the two quarterly periods is primarily the result of the fair value gain
adjustments on the Company’s junior subordinated debt which included fair value
gains of $157,000 recognized during the three months ended March 31, 2010, as
compared to fair value losses of 59,000 recognized during the three months ended
March 31, 2009, an increase of $216,000 between the two periods. Customer
service fees, the primary component of noninterest income, decreased $41,000 or
4.6% between the two three-month periods presented, primarily resulting from
decreases in revenues from the Company’s financial services
department.
Noninterest
Expense
The
following table sets forth the amount and percentage changes in the categories
presented for the three months ended March 31, 2010 as compared to the three
months ended March 31, 2009:
Table 4. Changes in
Noninterest Expense
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
Amount of
Change
|
|
|
Percent
Change
|
|
Salaries
and employee benefits
|
|
$
|
2,281
|
|
|
$
|
2,223
|
|
|
$
|
58
|
|
|
|
2.61
|
%
|
Occupancy
expense
|
|
|
913
|
|
|
|
942
|
|
|
|
(29
|
)
|
|
|
-3.08
|
%
|
Data
processing
|
|
|
19
|
|
|
|
42
|
|
|
|
(23
|
)
|
|
|
-54.76
|
%
|
Professional
fees
|
|
|
387
|
|
|
|
400
|
|
|
|
(13
|
)
|
|
|
-3.25
|
%
|
Directors
fees
|
|
|
57
|
|
|
|
66
|
|
|
|
(9
|
)
|
|
|
-13.64
|
%
|
FDIC/DFI
insurance assessments
|
|
|
391
|
|
|
|
146
|
|
|
|
245
|
|
|
|
167.81
|
%
|
Amortization
of intangibles
|
|
|
203
|
|
|
|
228
|
|
|
|
(25
|
)
|
|
|
-10.96
|
%
|
Correspondent
bank service charges
|
|
|
76
|
|
|
|
107
|
|
|
|
(31
|
)
|
|
|
-28.97
|
%
|
Impairment
loss on core deposit intangible
|
|
|
57
|
|
|
|
57
|
|
|
|
0
|
|
|
|
—
|
|
Impairment
loss on investment securities
|
|
|
244
|
|
|
|
163
|
|
|
|
81
|
|
|
|
49.69
|
%
|
Impairment
loss on OREO
|
|
|
821
|
|
|
|
166
|
|
|
|
655
|
|
|
|
394.58
|
%
|
Loss
on California tax credit partnership
|
|
|
106
|
|
|
|
107
|
|
|
|
(1
|
)
|
|
|
-0.93
|
%
|
OREO
expense
|
|
|
282
|
|
|
|
305
|
|
|
|
(23
|
)
|
|
|
-7.54
|
%
|
Other
|
|
|
488
|
|
|
|
717
|
|
|
|
(229
|
)
|
|
|
-31.94
|
%
|
Total
expense
|
|
$
|
6,325
|
|
|
$
|
5,669
|
|
|
$
|
656
|
|
|
|
11.57
|
%
|
The net
increase in noninterest expense between the three months ended March 31, 2009
and 2010 is in large part the result of impairment charges on OREO and
investment securities, as well as increases in FDIC assessments. Salaries and
occupancy expenses have remained stable between the two periods presented as the
Company has streamlined certain departments to more effectively control salary
and employee benefit costs where the levels of business are lower than they have
been historically.
Impairment
losses totaling $821,000 were realized on OREO during the three months ended
March 31, 2010 as OREO properties were further written-down to fair value as new
valuations were received. In addition, during the three months ended March 31,
2010, the Company recognized $244,000 in other-than-temporary impairment losses
on three of its non-agency residential mortgage obligations. The amount expensed
as impairment losses on the three securities represents the identified
credit-related portion of the impairment. Although there are some indications of
improvement in current economic conditions, a prolonged recessionary period
could result in additional impairment losses in the future.
Income Taxes
The
Company’s income tax expense is impacted to some degree by permanent taxable
differences between income reported for book purposes and income reported for
tax purposes, as well as certain tax credits which are not reflected in the
Company’s pretax income or loss shown in the statements of operations and
comprehensive income. As pretax income or loss amounts become smaller, the
impact of these differences become more significant and are reflected as
variances in the Company’s effective tax rate for the periods presented. In
general, the permanent differences and tax credits affecting tax expense have a
positive impact and tend to reduce the effective tax rates shown in the
Company’s statements of operations and comprehensive income.
The
Company reviews its current tax positions at least quarterly based upon income
tax accounting guidance which includes the criteria that an individual tax
position would have to meet for some or all of the income tax benefit to be
recognized in a taxable entity’s financial statements. Under the income tax
guidelines, an entity should recognize the financial statement benefit of a tax
position if it determines that it is
more likely than not
that the
position will be sustained on examination. The term “more likely than not” means
a likelihood of more than 50 percent.” In assessing whether the
more-likely-than-not criterion is met, the entity should assume that the tax
position will be reviewed by the applicable taxing authority.
Pursuant
to the guidance, the Company reviewed its REIT tax position as of January 1,
2007 (adoption date of the new guidance), and then has again reviewed its
position each subsequent quarter since adoption. The Bank, with guidance from
advisors, believes that the case has merit with regard to points of law, and
that the tax law at the time allowed for the deduction of the consent dividend.
However, the Bank, with the concurrence of advisors, cannot conclude that it is
“more than likely” that the Bank will prevail in its case with the FTB. As a
result of this determination, effective January 1, 2007 the Company recorded an
adjustment of $1.3 million to beginning retained earnings upon adoption of the
new guidance (previously FIN48) to recognize the potential tax liability under
the guidelines of the interpretation. The adjustment includes amounts for
assessed taxes, penalties, and interest. As of December 31, 2009, the Company
had recorded a total unrecognized tax liability related to the REIT of $1.6
million. The Company has determined that there has been no material change to
its position on the REIT from that at December 31, 2009, and as a result
recorded additional interest liability of $21,000 during the three months ended
March 31, 2010. It is the Company’s policy to recognize interest and penalties
as a component of income tax expense.
The
Company has reviewed all of its tax positions as of March 31, 2010, and has
determined that, other than the REIT, there are no other material amounts that
should be recorded under the current income tax accounting
guidelines.
Financial
Condition
Total
assets increased $19.1 million, or 2.75% to a balance of $711.6 million at March
31, 2010, from the balance of $692.6 million at December 31, 2009, but decreased
$21.8 million or 2.97% from the balance of $733.4 million at March 31, 2009.
Total deposits of $582.5 million at March 31, 2010 increased $20.8 million, or
3.71% from the balance reported at December 31, 2009, and increased $60.3
million from the balance of $522.1 million reported at March 31, 2009. Between
December 31, 2009 and March 31, 2010, loans increased $12.5 million, or 2.46% to
a balance of $521.1 million, and federal funds sold increased by $9.6 million or
82.65%, while investment securities decreased by $2.3 million, or
3.58%.
Earning
assets averaged approximately $607.7 million during the three months ended March
31, 2010, as compared to $646.7 million for the same three-month period of 2009.
Average interest-bearing liabilities decreased to $492.6 million for the three
months ended March 31, 2010, from $522.0 million reported for the comparative
three-month period of 2009.
Loans
and Leases
The
Company's primary business is that of acquiring deposits and making loans, with
the loan portfolio representing the largest and most important component of its
earning assets. Loans totaled $521.1 million at March 31, 2010, an increase of
$12.5 million or 2.46% when compared to the balance of $508.6 million at
December 31, 2009, and a decrease of $71.7 million or 12.10% when compared to
the balance of $543.0 million reported at March 31, 2009. Loans on average
decreased $33.4 million or 6.16% between the three-month periods ended March 31,
2009 and March 31, 2010, with loans averaging $509.1 million for the three
months ended March 31, 2010, as compared to $542.5 million for the same
three-month period of 2009.
During
the first three months of 2010, increases were experienced primarily in
commercial and industrial loans, and to a lesser degree, in real estate mortgage
loans. The largest declines were experienced in construction loans as a result
of soft real estate markets and declines in new home sales within the Company’s
market area. The following table sets forth the amounts of loans outstanding by
category at March 31, 2010 and December 31, 2009, the category percentages as of
those dates, and the net change between the two periods presented.
Table 5.
Loans
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
%
of
|
|
|
Dollar
|
|
|
%
of
|
|
|
Net
|
|
|
%
|
|
(In
thousands)
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Change
|
|
|
Change
|
|
Commercial
and industrial
|
|
$
|
178,617
|
|
|
|
34.3
|
%
|
|
$
|
167,930
|
|
|
|
33.0
|
%
|
|
$
|
10,687
|
|
|
|
6.36
|
%
|
Real
estate – mortgage
|
|
|
173,737
|
|
|
|
33.4
|
%
|
|
|
165,629
|
|
|
|
32.6
|
%
|
|
|
8,108
|
|
|
|
4.90
|
%
|
RE
construction & development
|
|
|
98,618
|
|
|
|
18.9
|
%
|
|
|
105,220
|
|
|
|
20.7
|
%
|
|
|
(6,602
|
)
|
|
|
-6.27
|
%
|
Agricultural
|
|
|
51,113
|
|
|
|
9.8
|
%
|
|
|
50,897
|
|
|
|
10.0
|
%
|
|
|
216
|
|
|
|
0.43
|
%
|
Installment/other
|
|
|
18,340
|
|
|
|
3.5
|
%
|
|
|
18,191
|
|
|
|
3.6
|
%
|
|
|
149
|
|
|
|
0.82
|
%
|
Lease
financing
|
|
|
662
|
|
|
|
0.1
|
%
|
|
|
706
|
|
|
|
0.1
|
%
|
|
|
(44
|
)
|
|
|
-6.30
|
%
|
Total
Gross Loans
|
|
$
|
521,087
|
|
|
|
100.0
|
%
|
|
$
|
508,573
|
|
|
|
100.0
|
%
|
|
$
|
12,514
|
|
|
|
2.46
|
%
|
The
overall average yield on the loan portfolio was 6.01% for the three months ended
March 31, 2010, as compared to 6.03% for the three months ended March 31, 2009.
At March 31, 2010, 58.2% of the Company's loan portfolio consisted of floating
rate instruments, as compared to 60.7% of the portfolio at December 31, 2009,
with the majority of those tied to the prime rate.
Deposits
Total
deposits increased during the period to a balance of $582.2 million at March 31,
2010, representing an increase of $20.8 million, or 3.71% from the balance of
$561.7 million reported at December 31, 2009, and an increase of $60.3 million,
or 11.56% from the balance reported at March 31, 2009. During the first three
months of 2010, increases were experienced in all interest-bearing
deposits.
The
following table sets forth the amounts of deposits outstanding by category at
March 31, 2010 and December 31, 2009, and the net change between the two periods
presented.
Table 6.
Deposits
|
|
March
31,
|
|
|
December
31,
|
|
|
Net
|
|
|
Percentage
|
|
(In
thousands)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
Noninterest
bearing deposits
|
|
$
|
134,140
|
|
|
$
|
139,724
|
|
|
$
|
(5,584
|
)
|
|
|
-4.00
|
%
|
Interest
bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
and money market accounts
|
|
|
167,547
|
|
|
|
158,795
|
|
|
|
8,752
|
|
|
|
5.51
|
%
|
Savings
accounts
|
|
|
35,759
|
|
|
|
34,146
|
|
|
|
1,613
|
|
|
|
4.73
|
%
|
Time
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
$100,000
|
|
|
66,064
|
|
|
|
64,481
|
|
|
|
1,583
|
|
|
|
2.45
|
%
|
$100,000
and over
|
|
|
178,972
|
|
|
|
164,514
|
|
|
|
14,458
|
|
|
|
8.79
|
%
|
Total
interest bearing deposits
|
|
|
448,342
|
|
|
|
421,936
|
|
|
|
26,406
|
|
|
|
6.26
|
%
|
Total
deposits
|
|
$
|
582,482
|
|
|
$
|
561,660
|
|
|
$
|
20,822
|
|
|
|
3.71
|
%
|
The
Company's deposit base consists of two major components represented by
noninterest-bearing (demand) deposits and interest-bearing deposits.
Interest-bearing deposits consist of time certificates, NOW and money market
accounts and savings deposits. Total interest-bearing deposits increased $26.8
million, or 6.26% between December 31, 2009 and March 31, 2010, while
noninterest-bearing deposits decreased $5.6 million, or 4.00% between the same
two periods presented.
Core
deposits, consisting of all deposits other than time deposits of $100,000 or
more, and brokered deposits, continue to provide the foundation for the
Company's principal sources of funding and liquidity. These core deposits
amounted to 65.3% and 66.7% of the total deposit portfolio at March 31, 2010 and
December 31, 2009, respectively. Brokered deposits totaled $120.3 million at
March 31, 2010 as compared to $129.4 million at December 31, 2009 and $105.1
million at March 31, 2009. The Company continues to utilize more cost-effective
overnight borrowing lines through Federal Reserve Discount Window, but in an
effort to reduce its reliance on borrowed funds, the Company has recently
increased the level of brokered deposits as rates of those deposits have become
more attractive.
On a
year-to-date average (refer to Table 1), the Company experienced an increase of
$85.1 million or 17.18% in total deposits between the three-month periods ended
March 31, 2009 and March 31, 2010. Between these two periods, average
interest-bearing deposits increased $88.2 million or 24.80%, while total
noninterest-bearing checking decreased $3.1 million or 2.21% on a year-to-date
average basis.
Short-Term
Borrowings
The
Company had collateralized and uncollateralized lines of credit aggregating
$136.5 million, as well as FHLB lines of credit totaling $43.0 million at March
31, 2010. These lines of credit generally have interest rates tied to the
Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR.
All lines of credit are on an “as available” basis and can be revoked by the
grantor at any time. At March 31, 2010, the Company had $37.0 million borrowed
against its FHLB lines of credit, which is summarized below. The Company had
collateralized and uncollateralized lines of credit aggregating $124.2 million,
as well as FHLB lines of credit totaling $40.8 million at December 31,
2009.
FHLB term borrowings at March 31, 2010 (in
000’s):
|
|
Term
|
|
Balance
at 3/31/10
|
|
|
Rate
|
|
Maturity
|
6
months
|
|
$
|
28,000
|
|
|
|
0.18
|
%
|
7/29/10
|
6
months
|
|
|
9,000
|
|
|
|
0.21
|
%
|
7/29/10
|
|
|
$
|
37,000
|
|
|
|
0.19
|
%
|
|
Asset
Quality and Allowance for Credit Losses
Lending
money is the Company's principal business activity, and ensuring appropriate
evaluation, diversification, and control of credit risks is a primary management
responsibility. Implicit in lending activities is the fact that losses will be
experienced and that the amount of such losses will vary from time to time,
depending on the risk characteristics of the loan portfolio as affected by local
economic conditions and the financial experience of borrowers.
The
allowance for credit losses is maintained at a level deemed appropriate by
management to provide for known and inherent risks in existing loans and
commitments to extend credit. The adequacy of the allowance for credit losses is
based upon management's continuing assessment of various factors affecting the
collectibility of loans and commitments to extend credit; including current
economic conditions, past credit experience, collateral, and concentrations of
credit. There is no precise method of predicting specific losses or amounts
which may ultimately be charged off on particular segments of the loan
portfolio. The conclusion that a loan may become uncollectible, either in part
or in whole is judgmental and subject to economic, environmental, and other
conditions which cannot be predicted with certainty. When determining the
adequacy of the allowance for credit losses, the Company follows, in accordance
with GAAP, the guidelines set forth in the Revised Interagency Policy Statement
on the Allowance for Loan and Lease Losses (“Statement”) issued by banking
regulators during December 2006. The Statement is a revision of the previous
guidance released in July 2001, and outlines characteristics that should be used
in segmentation of the loan portfolio for purposes of the analysis including
risk classification, past due status, type of loan, industry or collateral. It
also outlines factors to consider when adjusting the loss factors for various
segments of the loan portfolio, and updates previous guidance that describes the
responsibilities of the board of directors, management, and bank examiners
regarding the allowance for credit losses. Securities and Exchange Commission
Staff Accounting Bulletin No. 102 was released during July 2001, and represents
the SEC staff’s view relating to methodologies and supporting documentation for
the Allowance for Loan and Lease Losses that should be observed by all public
companies in complying with the federal securities laws and the Commission’s
interpretations. It is also generally consistent with the guidance
published by the banking regulators.
The
allowance for loan losses includes an asset-specific component, as well as a
general or formula-based component. The Company segments the loan and lease
portfolio into eleven (11) segments, primarily by loan class and type, that have
homogeneity and commonality of purpose and terms for analysis under the
formula-based component of the allowance. Those loans which are determined to be
impaired under current accounting guidelines are not subject to the
formula-based reserve analysis, and evaluated individually for specific
impairment under the asset-specific component of the allowance.
The
Company’s methodology for assessing the adequacy of the allowance for credit
losses consists of several key elements, which include:
|
-
|
specific
allowances for problem graded loans identified as impaired, or for problem
graded loans which may require reserves in excess of the formula
allowance,
|
|
-
|
and
the unallocated allowance
|
In
addition, the allowance analysis also incorporates the results of measuring
impaired loans as provided current accounting standards for
contingencies.
The
formula allowance is calculated by applying loss factors to outstanding loans
and certain unfunded loan commitments. Loss factors are based on the Company’s
historical loss experience and on the internal risk grade of those loans and,
may be adjusted for significant factors, including economic factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Management determines the loss factors for problem graded loans
(substandard, doubtful, and loss), special mention loans, and pass graded loans,
based on a loss migration model. The migration analysis incorporates loan losses
over the past twelve quarters (three years) and loss factors are adjusted to
recognize and quantify the loss exposure from changes in market conditions and
trends in the Company’s loan portfolio. For purposes of this analysis, loans are
grouped by internal risk classifications, which are “pass”, “special mention”,
“substandard”, “doubtful”, and “loss”. Certain loans are homogenous in nature
and are therefore pooled by risk grade. These homogenous loans include consumer
installment and home equity loans. Special mention loans are currently
performing but are potentially weak, as the borrower has begun to exhibit
deteriorating trends, which if not corrected, could jeopardize repayment of the
loan and result in further downgrade. Substandard loans have well-defined
weaknesses which, if not corrected, could jeopardize the full satisfaction of
the debt. A loan classified as “doubtful” has critical weaknesses that make full
collection of the obligation improbable. Classified loans, as defined by the
Company, include loans categorized as substandard, doubtful, and loss. At March
31, 2010 problem graded or “classified” loans totaled $64.7 million or 12.4% of
gross loans as compared to $69.6 million or 13.7% of gross loans at December 31,
2009.
Specific
allowances are established based on management’s periodic evaluation of loss
exposure inherent in classified loans, impaired loans, and other loans in which
management believes there is a probability that a loss has been incurred in
excess of the amount determined by the application of the formula
allowance.
The
unallocated portion of the 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 conditions may include, but are not limited
to, general economic and business conditions affecting the key lending areas of
the Company, credit quality trends, collateral values, loan volumes and
concentrations, and other business conditions.
The
following table summarizes the specific allowance, formula allowance, and
unallocated allowance at March 31, 2010 and December 31, 2009, as well as
classified loans at those period-ends.
|
|
March
31,
|
|
|
December
31,
|
|
(in
000's)
|
|
2010
|
|
|
2009
|
|
Specific
allowance – impaired loans
|
|
$
|
9,339
|
|
|
$
|
7,974
|
|
Formula
allowance – classified loans not impaired
|
|
|
1,694
|
|
|
|
1,979
|
|
Formula
allowance – special mention loans
|
|
|
698
|
|
|
|
587
|
|
Total
allowance for special mention and classified loans
|
|
|
11,731
|
|
|
|
10,540
|
|
|
|
|
|
|
|
|
|
|
Formula
allowance for pass loans
|
|
|
4,234
|
|
|
|
4,476
|
|
Unallocated
allowance
|
|
|
239
|
|
|
|
0
|
|
Total
allowance for loan losses
|
|
$
|
16,204
|
|
|
$
|
15,016
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
|
51,932
|
|
|
$
|
53,794
|
|
Classified
loans not considered impaired
|
|
|
12,792
|
|
|
|
15,816
|
|
Total
classified loans
|
|
$
|
64,724
|
|
|
$
|
69,610
|
|
Special
mention loans
|
|
$
|
32,345
|
|
|
$
|
27,939
|
|
Impaired
loans decreased approximately $1.9 million between December 31, 2009 and March
31, 2010. The specific allowance related to those impaired loans increased $1.4
million between December 31, 2009 and March 31, 2010. The formula allowance
related to loans that are not impaired (including special mention and
substandard) decreased approximately $174,000 between December 31, 2009 and
March 31, 2010. Although the level of “pass” loans has increased between
December 31, 2009 and March 31, 2010 the related formula allowance decreased
$242,000 during the period as the result of changes in the types of loans
comprising “pass” loans.
The
Company’s methodology includes features that are intended to reduce the
difference between estimated and actual losses. The specific allowance portion
of the analysis is designed to be self-correcting by taking into account the
current loan loss experience based on that portion of the portfolio. By
analyzing the probable estimated losses inherent in the loan portfolio on a
quarterly basis, management is able to adjust specific and inherent loss
estimates using the most recent information available. In performing the
periodic migration analysis, management believes that historical loss factors
used in the computation of the formula allowance need to be adjusted to reflect
current changes in market conditions and trends in the Company’s loan portfolio.
There are a number of other factors which are reviewed when determining
adjustments in the historical loss factors. They include 1) trends in delinquent
and nonaccrual loans, 2) trends in loan volume and terms, 3) effects of changes
in lending policies, 4) concentrations of credit, 5) competition, 6) national
and local economic trends and conditions, 7) experience of lending staff, 8)
loan review and Board of Directors oversight, 9) high balance loan
concentrations, and 10) other business conditions. There were no changes in
estimation methods or assumptions that affected the methodology for assessing
the adequacy of the allowance for credit losses during the three months ended
March 31, 2010.
Management
and the Company’s lending officers evaluate the loss exposure of classified and
impaired loans on a weekly/monthly basis and through discussions and officer
meetings as conditions change. The Company’s Loan Committee meets weekly and
serves as a forum to discuss specific problem assets that pose significant
concerns to the Company, and to keep the Board of Directors informed through
committee minutes. All special mention and classified loans are reported
quarterly on Problem Asset Reports and Impaired Loan Reports which are reviewed
by senior management. With this information, the migration analysis and the
impaired loan analysis are performed on a quarterly basis and adjustments are
made to the allowance as deemed necessary. The Board of Directors is kept
abreast of any changes or trends in problem assets on a monthly basis or more
often if required. In addition, pursuant to the regulatory agreement, quarterly
updates are provided to the Federal Reserve Bank of San Francisco and the
California Department of Financial Institutions with regard to problem assets
levels and trends, liquidity, and capital trends, among other things. (See
regulatory section for more details.)
The
specific allowance for impaired loans is measured based on the present value of
the expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent. The
amount of impaired loans is not directly comparable to the amount of
nonperforming loans disclosed later in this section. The primary differences
between impaired loans and nonperforming loans are: i) all loan categories are
considered in determining nonperforming loans while impaired loan recognition is
limited to commercial and industrial loans, commercial and residential real
estate loans, construction loans, and agricultural loans, and ii) impaired loan
recognition considers not only loans 90 days or more past due, restructured
loans and nonaccrual loans but also may include problem loans other than
delinquent loans.
The
Company considers a loan to be impaired when, based upon current information and
events, it believes it is probable the Company will be unable to collect all
amounts due according to the contractual terms of the loan
agreement. Impaired loans include nonaccrual loans, restructured
debt, and performing loans in which full payment of principal or interest is not
expected. Management bases the measurement of these impaired loans on the fair
value of the loan's collateral or the expected cash flows on the loans
discounted at the loan's stated interest rates. Cash receipts on impaired loans
not performing to contractual terms and that are on nonaccrual status are used
to reduce principal balances. Impairment losses are included in the allowance
for credit losses through a charge to the provision, if applicable.
At March
31, 2010 and 2009, the Company's recorded investment in loans for which
impairment has been identified totaled $51.9 million and $58.0 million,
respectively. Included in total impaired loans at March 31, 2010, are $32.9
million of impaired loans for which the related specific allowance is $9.3
million, as well as $19.0 million of impaired loans that as a result of
write-downs or the sufficiency of the fair value of the collateral, did not have
a specific allowance. Total impaired loans at March 31, 2009 included $29.7
million of impaired loans for which the related specific allowance is $4.4
million, as well as $28.3 million of impaired loans that, as a result of
write-downs or the sufficiency of the fair value of the collateral, did not have
a specific allowance. The average recorded investment in impaired loans was
$52.9 million during the first three months of 2010 and $56.2 million during the
first three months of 2009. In most cases, the Company uses the cash basis
method of income recognition for impaired loans. In the case of certain troubled
debt restructuring, for which the loan has been performing for a prescribed
period of time under the current contractual terms, income is recognized under
the accrual method. For the three months ended March 31, 2010, the Company
recognized $155,000 in income on such loans. For the three months ended March
31, 2009, the Company recognized no income on such loans At March 31, 2010,
included in impaired loans, are troubled debt restructures totaled $29.3
million. Of the $29.3 million in troubled debt restructures at March 31, 2010,
$13.2 million are on nonaccrual status.
As with
nonaccrual loans, the greatest volume in impaired loans during the three months
ended March 31, 2010 is in real estate construction loans, with that loan
category comprising almost 52% of total impaired loans at March 31, 2010. The
balance of impaired construction loans has increased approximately $1.2 million,
and the related specific reserve has increased $949,000 since December 31, 2009.
Impaired loans classified as commercial and industrial increased $1.23 million
during the three months ended March 31, 2010. Of the $10.2 million in commercial
and industrial impaired loans reported at March 31, 2010, approximately $1.3
million or 12.3% are secured by real estate. Specific collateral related to
impaired loans is reviewed for current appraisal information, economic trends
within geographic markets, loan-to-value ratios, and other factors that may
impact the value of the loan collateral. Adjustments are made to collateral
values as needed for these factors. Of total impaired loans, approximately $39.4
million or 75.9% are secured by real estate. The majority of impaired real
estate construction and development loans are for the purpose of residential
construction, residential and commercial acquisition and development, and land
development. Residential construction loans are made for the purpose of building
residential 1-4 single family homes. Residential and commercial acquisition and
development loans are made for the purpose of purchasing land, and developing
that land if required, and to develop real estate or commercial construction
projects on those properties. Land development loans are made for the purpose of
converting raw land into construction-ready building sites. The following table
summarizes the components of impaired loans and their related specific reserves
at March 31, 2010 and December 31, 2009.
|
|
Balance
|
|
|
Reserve
|
|
|
Balance
|
|
|
Reserve
|
|
(in 000’s)
|
|
3/31/2010
|
|
|
3/31/2010
|
|
|
12/31/2009
|
|
|
12/31/2009
|
|
Commercial
and industrial
|
|
$
|
10,228
|
|
|
$
|
2,459
|
|
|
$
|
9,064
|
|
|
$
|
2,383
|
|
Real
estate – mortgage
|
|
|
10,535
|
|
|
|
849
|
|
|
|
12,584
|
|
|
|
536
|
|
RE
construction & development
|
|
|
26,824
|
|
|
|
5,690
|
|
|
|
25,606
|
|
|
|
4,741
|
|
Agricultural
|
|
|
4,022
|
|
|
|
153
|
|
|
|
6,212
|
|
|
|
153
|
|
Installment/other
|
|
|
323
|
|
|
|
187
|
|
|
|
328
|
|
|
|
160
|
|
Lease
financing
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
51,932
|
|
|
$
|
9,338
|
|
|
$
|
53,794
|
|
|
$
|
7,973
|
|
The
Company focuses on competition and other economic conditions within its market
area and other geographical areas in which it does business, which may
ultimately affect the risk assessment of the portfolio. The Company continues to
experience increased competition from major banks, local independents and
non-bank institutions creating pressure on loan pricing. With interest rates
decreasing 100 basis points during the fourth quarter of 2007, another 400 basis
points during 2008, indications are that the economy will continue to suffer in
the near future as a result of sub-prime lending problems, a weakened real
estate market, and tight credit markets. As a result of these conditions, the
Company has placed increased emphasis on reducing both the level of
nonperforming assets and the level of losses taken, if any, on the disposition
of these assets if required It has been in the best interest of both the Company
and the borrowers to seek alternative options to foreclosure in an effort to
diminish the impact on an already depressed real estate market. As part of this
strategy, the Company has increased its level of troubled debt restructurings,
when it makes economic sense. Both business and consumer spending have
slowed during the past several quarters, and current GDP projections for the
next year have softened significantly. It is difficult to determine to what
degree the Federal Reserve will adjust short-term interest rates in its efforts
to influence the economy, or what magnitude government economic support programs
will reach. It is likely that the business environment in California will
continue to be influenced by these domestic as well as global events. The local
market has remained relatively more stable economically during the past several
years than other areas of the state and the nation, which have experienced more
volatile economic trends, including significant deterioration of residential
real estate markets. Although the local area residential housing markets have
been hit hard, they continue to perform better than other parts of the state,
which should bode well for sustained, but slower growth in the Company’s market
areas of Fresno and Madera, Kern, and Santa Clara Counties. Local unemployment
rates in the San Joaquin Valley remain high primarily as a result of the areas’
agricultural dynamics, however unemployment rates have increased recently as the
national economy has declined. It is difficult to predict what impact this will
have on the local economy. The Company believes that the Central San Joaquin
Valley will continue to grow and diversify as property and housing costs remain
reasonable relative to other areas of the state. Management recognizes increased
risk of loss due to the Company's exposure from local and worldwide economic
conditions, as well as potentially volatile real estate markets, and takes these
factors into consideration when analyzing the adequacy of the allowance for
credit losses.
The
following table provides a summary of the Company's allowance for possible
credit losses, provisions made to that allowance, and charge-off and recovery
activity affecting the allowance for the periods indicated.
Table 7. Allowance for
Credit Losses - Summary of Activity (unaudited)
|
|
March
31,
|
|
|
March
31,
|
|
(In
thousands)
|
|
2010
|
|
|
2009
|
|
Total
loans outstanding at end of period before
|
|
|
|
|
|
|
deducting
allowances for credit losses
|
|
$
|
520,041
|
|
|
$
|
541,915
|
|
Average
net loans outstanding during period
|
|
|
509,099
|
|
|
|
542,512
|
|
|
|
|
|
|
|
|
|
|
Balance
of allowance at beginning of period
|
|
|
15,016
|
|
|
|
11,530
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
Real
estate
|
|
|
(228
|
)
|
|
|
(105
|
)
|
Commercial
and industrial
|
|
|
(174
|
)
|
|
|
(2,404
|
)
|
Lease
financing
|
|
|
(0
|
)
|
|
|
(25
|
)
|
Installment
and other
|
|
|
(47
|
)
|
|
|
(65
|
)
|
Total
loans charged off
|
|
|
(449
|
)
|
|
|
(2,599
|
)
|
Recoveries
of loans previously charged off:
|
|
|
|
|
|
|
|
|
Real
estate
|
|
|
0
|
|
|
|
0
|
|
Commercial
and industrial
|
|
|
3
|
|
|
|
160
|
|
Lease
financing
|
|
|
0
|
|
|
|
0
|
|
Installment
and other
|
|
|
3
|
|
|
|
6
|
|
Total
loan recoveries
|
|
|
6
|
|
|
|
166
|
|
Net
loans charged off
|
|
|
(443
|
)
|
|
|
(2,433
|
)
|
|
|
|
|
|
|
|
|
|
Provision
charged to operating expense
|
|
|
1,631
|
|
|
|
1,351
|
|
Balance
of allowance for credit losses
|
|
|
|
|
|
|
|
|
at
end of period
|
|
$
|
16,204
|
|
|
$
|
10,448
|
|
|
|
|
|
|
|
|
|
|
Net
loan charge-offs to total average loans (annualized)
|
|
|
0.35
|
%
|
|
|
1.82
|
%
|
Net
loan charge-offs to loans at end of period (annualized)
|
|
|
0.35
|
%
|
|
|
1.82
|
%
|
Allowance
for credit losses to total loans at end of period
|
|
|
3.12
|
%
|
|
|
1.93
|
%
|
Net
loan charge-offs to allowance for credit losses
(annualized)
|
|
|
11.09
|
%
|
|
|
94.44
|
%
|
Net
loan charge-offs to provision for credit losses
(annualized)
|
|
|
27.16
|
%
|
|
|
180.09
|
%
|
At March
31, 2010 and 2009, $195,000 and $272,000, respectively, of the formula allowance
is allocated to unfunded loan commitments and is, therefore, carried separately
in other liabilities. Management believes that the 3.12% credit loss allowance
at March 31, 2010 is adequate to absorb known and inherent risks in the loan
portfolio. No assurance can be given, however, that the economic conditions
which may adversely affect the Company's service areas or other circumstances
will not be reflected in increased losses in the loan portfolio.
It is the
Company's policy to discontinue the accrual of interest income on loans for
which reasonable doubt exists with respect to the timely collectibility of
interest or principal due to the ability of the borrower to comply with the
terms of the loan agreement. Such loans are placed on nonaccrual status whenever
the payment of principal or interest is 90 days past due or earlier when the
conditions warrant, and interest collected is thereafter credited to principal
to the extent necessary to eliminate doubt as to the collectibility of the net
carrying amount of the loan. Management may grant exceptions to this policy if
the loans are well secured and in the process of collection.
Table 8. Nonperforming
Assets
|
|
March
31,
|
|
|
December
31,
|
|
(In
thousands)
|
|
2010
|
|
|
2009
|
|
Nonaccrual
Loans
|
|
$
|
32,746
|
|
|
$
|
34,757
|
|
Restructured
Loans (1)
|
|
|
16,112
|
|
|
|
16,026
|
|
Total
nonperforming loans
|
|
|
48,858
|
|
|
|
50,783
|
|
Other
real estate owned
|
|
|
38,130
|
|
|
|
36,217
|
|
Total
nonperforming assets
|
|
$
|
86,988
|
|
|
$
|
87,000
|
|
|
|
|
|
|
|
|
|
|
Loans
past due 90 days or more, still accruing
|
|
$
|
1,278
|
|
|
$
|
486
|
|
Nonperforming
loans to total gross loans
|
|
|
9.38
|
%
|
|
|
9.99
|
%
|
Nonperforming
assets to total gross loans
|
|
|
16.69
|
%
|
|
|
17.11
|
%
|
(1)
Included in nonaccrual loans at March 31, 2010 and December 31, 2009 are
restructured loans totaling $13.2 million and $10.0 million,
respectively.
Non-performing assets have
remained level
b
etween December
31, 200
9
and
March
3
1
, 20
10, declining $12,000 between
the two periods,
as
depressed
real estate
markets
and related sectors continue to impact credit markets and the general economy.
Nonaccrual loans decreased $2.0 million between December 31, 2009 and March 31,
2010, with construction loans comprising approximately 63% of total nonaccrual
loans at March 31, 2010. The following table summarizes the nonaccrual totals by
loan category for the periods shown.
|
|
Balance
|
|
|
Balance
|
|
|
Change
from
|
|
Nonaccrual Loans (in
000's):
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
|
December
31,
2009
|
|
Commercial
and industrial
|
|
$
|
6,446
|
|
|
$
|
5,355
|
|
|
$
|
1,091
|
|
Real
estate - mortgage
|
|
|
1,226
|
|
|
|
5,336
|
|
|
|
(4,110
|
)
|
RE
construction & development
|
|
|
20,789
|
|
|
|
17,590
|
|
|
|
3,199
|
|
Agricultural
|
|
|
4,022
|
|
|
|
6,212
|
|
|
|
(2,190
|
)
|
Installment/other
|
|
|
150
|
|
|
|
150
|
|
|
|
0
|
|
Lease
financing
|
|
|
113
|
|
|
|
114
|
|
|
|
(1
|
)
|
Total
Nonaccrual Loans
|
|
$
|
32,746
|
|
|
$
|
34,757
|
|
|
$
|
(2,011
|
)
|
High
levels of nonaccrual construction loans experienced since early 2009 are the
result of the prolonged slowdown in new housing starts and the resultant
depreciation in land, and both partially completed and completed construction
projects. The decrease of $4.1 million experienced in nonaccrual real estate
mortgage loans during the three months ended March 31, 2010 is the result of a
single nonperforming mortgage loan that was transferred to OREO during the first
quarter of 2010. As with impaired loans, a large percentage of nonaccrual loans
were made for the purpose of residential construction, residential and
commercial acquisition and development, and land development. Non-performing
loans totaled 9.38% of total loans at March 31, 2010 as compared to 9.99%
December 31, 2009.
Loans
past due more than 30 days are receiving increased management attention and are
monitored for increased risk. The Company continues to move past due loans to
nonaccrual status in its ongoing effort to recognize loan problems at an earlier
point in time when they may be dealt with more effectively. As impaired loans,
nonaccrual and restructured loans are reviewed for specific reserve allocations
and the allowance for credit losses is adjusted accordingly.
Except
for the loans included in the above table, or those otherwise included in the
impaired loan totals, there were no loans at March 31, 2010 where the known
credit problems of a borrower caused the Company to have serious doubts as to
the ability of such borrower to comply with the present loan repayment terms and
which would result in such loan being included as a nonaccrual, past due, or
restructured loan at some future date.
Asset/Liability Management –
Liquidity and Cash Flow
The
primary function of asset/liability management is to provide adequate liquidity
and maintain an appropriate balance between interest-sensitive assets and
interest-sensitive liabilities.
Liquidity
Liquidity
management may be described as the ability to maintain sufficient cash flows to
fulfill financial obligations, including loan funding commitments and customer
deposit withdrawals, without straining the Company’s equity structure. To
maintain an adequate liquidity position, the Company relies on, in addition to
cash and cash equivalents, cash inflows from deposits and short-term borrowings,
repayments of principal on loans and investments, and interest income received.
The Company's principal cash outflows are for loan origination, purchases of
investment securities, depositor withdrawals and payment of operating
expenses.
The
Company continues to emphasize liability management as part of its overall
asset/liability strategy. Through the discretionary acquisition of short term
borrowings, the Company has been able to provide liquidity to fund asset growth
while, at the same time, better utilizing its capital resources, and better
controlling interest rate risk. The borrowings are generally
short-term and more closely match the repricing characteristics of floating rate
loans, which comprise approximately 58.2% of the Company’s loan portfolio at
March 31, 2010. This does not preclude the Company from selling assets such as
investment securities to fund liquidity needs but, with favorable borrowing
rates, the Company has maintained a positive yield spread between borrowed
liabilities and the assets which those liabilities fund. If, at some time, rate
spreads become unfavorable, the Company has the ability to utilize an asset
management approach and, either control asset growth or, fund further growth
with maturities or sales of investment securities.
The
Company's liquid asset base which generally consists of cash and due from banks,
federal funds sold, securities purchased under agreements to resell (“reverse
repos”) and investment securities, is maintained at a level deemed sufficient to
provide the cash outlay necessary to fund loan growth as well as any customer
deposit runoff that may occur. Additional liquidity requirements may be funded
with overnight or term borrowing arrangements with various correspondent banks,
FHLB and the Federal Reserve Bank. Within this framework is the objective of
maximizing the yield on earning assets. This is generally achieved by
maintaining a high percentage of earning assets in loans, which historically
have represented the Company's highest yielding asset. At March 31, 2010, the
Bank had 70.8% of total assets in the loan portfolio and a loan to deposit ratio
of 89.3%, as compared to 71.1% of total assets in the loan portfolio and a loan
to deposit ratio of 90.4% at December 31, 2009. Liquid assets at March 31, 2010
include cash and cash equivalents totaling $37.8 million as compared to $29.2
million at December 31, 2009. Other sources of liquidity include collateralized
and uncollateralized lines of credit from other banks, the Federal Home Loan
Bank, and from the Federal Reserve Bank totaling $179.5 million at March 31,
2010.
The
liquidity of the parent company, United Security Bancshares, is primarily
dependent on the payment of cash dividends by its subsidiary, United Security
Bank, subject to limitations imposed by the Financial Code of the State of
California. The Bank currently has limited ability to pay dividends or make
capital distributions (see Dividends section included in Regulatory Matters of
this Management’s Discussion.) The limited ability of the Bank to pay dividends
may impact the ability of the Company to fund its ongoing liquidity requirements
including ongoing operating expenses, as well as quarterly interest payments on
the Company’s junior subordinated debt (Trust Preferred Securities.) During the
quarter ended September 30, 2009, the Bank was precluded from paying a cash
dividend to the Company. To conserve cash and capital resources, the Company
elected at September 30, 2009 to defer the payment of interest on its junior
subordinated debt beginning with the quarterly payment due October 1, 2009. The
Company has not determined how long it will defer interest payments, but under
the terms of the debenture, interest payments may be deferred up to five years
(20 quarters). During such deferral periods, the Company is prohibited from
paying dividends on its common stock (subject to certain exceptions) and will
continue to accrue interest payable on the junior subordinated
debt. During the three months ended March 31, 2010, the Bank paid did
not pay any cash dividends to the parent company.
Cash
Flow
Cash and
cash equivalents have declined during the two three-month periods ended March
31, 2010 and 2009 with period-end balances as follows (
from Consolidated Statements of Cash
Flows – in 000’s):
|
|
Balance
|
|
December
31, 2008
|
|
$
|
19,426
|
|
March
31, 2009
|
|
$
|
14,610
|
|
December
31, 2009
|
|
$
|
29,229
|
|
March
31, 2010
|
|
$
|
37,767
|
|
Cash and
cash equivalents increased $8.5 million during the three months ended March 31,
2010, as compared to a decrease of $4.8 million during the three months ended
March 31, 2009.
The
Company has maintained positive cash flows from operations, which amounted to
$4.2 million, and $3.4 million for the three months ended March 31, 2010, and
March 31, 2009, respectively. The Company experienced net cash outflows from
investing activities totaling $13.6 million during the three months ended March
31, 2010, as increases in loans outweighed paydowns and maturities of investment
securities. The Company experienced net cash inflows from investing activities
totaling $19.9 million during the three months ended March 31, 2009, as
maturities of interest-bearing deposits in other banks, and principal paydowns
on investment securities, exceeded other investing requirements during the
period.
Net cash
flows from financing activities, including deposit growth and borrowings, have
traditionally provided funding sources for loan growth, and during the three
months ended March 31, 2010, the Company experienced net cash inflows totaling
$17.9 million as the result of increases in time deposits totaling more
than $16.0 million. During the three months ended March 31, 2009, the Company
experienced net cash outflows of $28.2 million from financing activities as
reductions in borrowings exceeded increases in deposits.
The
Company has the ability to decrease loan growth, increase deposits and
borrowings, or a combination of both to manage balance sheet
liquidity.
Regulatory
Matters
Regulatory
Agreement
Effective
March 23, 2010, United Security Bancshares (the "Company") and its wholly owned
subsidiary, United Security Bank (the "Bank"), entered into a written agreement
with the Federal Reserve Bank of San Francisco. Under the terms of the
agreement, the Company and the Bank agreed, among other things, to strengthen
board oversight of management and the Bank's operations; submit an enhanced
written plan to strengthen credit risk management practices and improve the
Bank’s position on the past due loans, classified loans, and other real estate
owned; maintain a sound process for determining, documenting, and recording an
adequate allowance for loan and lease losses; improve the management of the
Bank's liquidity position and funds management policies; maintain sufficient
capital at the Company and Bank level; and improve the Bank’s earnings and
overall condition. The Company and Bank have also agreed not to increase or
guarantee any debt, purchase or redeem any shares of stock, declare or pay any
cash dividends, or pay interest on the Company's junior subordinated debt or
trust preferred securities, without prior written approval from the Federal
Reserve Bank. The Holding Company generates no revenue of its own and as such,
relies on dividends from the Bank to pay its operating expenses and interest
payments on the Company’s junior subordinated debt. The inability of the Bank to
pay cash dividends to the Holding Company may hinder the Holding Company’s
ability to meet its ongoing operating obligations.
This
agreement was a result of a regulatory examination that was conducted by the
Federal Reserve and the California Department of Financial Institutions in
June 2009, and relates primarily to the Bank’s asset quality. Progress on
these items has been made since the completion of the examination and management
and the Board are committed to resolving all of the items addressed by the
Federal Reserve in the agreement. Both the Company and the Bank will submit
quarterly written progress reports to the Federal Reserve Bank.
The
Company and the Bank have also received notification from the California
Department of Financial Institutions of their intention to issue a regulatory
order as a result of the June 2009 regulatory examination. The Company and the
Bank have not yet entered into an agreement with the California Department of
Financial Institutions, but believe that any agreement entered into, will be
similar to the current agreement with the Federal Reserve Bank of San
Francisco.
C
apital Adequacy
The Board
of Governors of the Federal Reserve System (“Board of Governors”) has adopted
regulations requiring insured institutions to maintain a minimum leverage ratio
of Tier 1 capital (the sum of common stockholders' equity, noncumulative
perpetual preferred stock and minority interests in consolidated subsidiaries,
minus intangible assets, identified losses and investments in certain
subsidiaries, plus unrealized losses or minus unrealized gains on available for
sale securities) to total assets. Institutions which have received the highest
composite regulatory rating and which are not experiencing or anticipating
significant growth are required to maintain a minimum leverage capital ratio of
3% Tier 1 capital to total assets. All other institutions are required to
maintain a minimum leverage capital ratio of at least 100 to 200 basis points
above the 3% minimum requirement.
The Board
of Governors has also adopted a statement of policy, supplementing its leverage
capital ratio requirements, which provides definitions of qualifying total
capital (consisting of Tier 1 capital and Tier 2 supplementary capital,
including the allowance for loan losses up to a maximum of 1.25% of
risk-weighted assets) and sets forth minimum risk-based capital ratios of
capital to risk-weighted assets. Insured institutions are required to maintain a
ratio of qualifying total capital to risk weighted assets of 8%, at least
one-half (4%) of which must be in the form of Tier 1 capital.
The Bank
has agreed with the California Department of Financial Institutions, to maintain
Tier I capital and leverage ratios that are at or in excess of 9.00%. In
addition, the Bank has agreed to maintain total risk-based capital ratios at or
in excess of 10.00% (at or above “Well Capitalized” levels as defined.) The
Company is not subject to “Well Capitalized” guidelines under regulatory Prompt
Corrective Action Provisions.
The
following table sets forth the Company’s and the Bank's actual capital positions
at March 31, 2010, as well as the minimum capital requirements and requirements
to be well capitalized under prompt corrective action provisions (Bank only)
under the regulatory guidelines discussed above:
Table 9. Capital
Ratios
|
|
|
|
|
|
|
|
|
|
|
To
be Well
|
|
|
|
Company
|
|
|
Bank
|
|
|
|
|
|
Capitalized under
Prompt Corrective
|
|
|
|
Actual
|
|
|
Actual
|
|
|
Minimum
|
|
|
Action
|
|
|
|
Capital
Ratios
|
|
|
Capital
Ratios
|
|
|
Capital
Ratios
|
|
|
Provisions
|
|
Total
risk-based capital ratio
|
|
|
14.54
|
%
|
|
|
13.93
|
%
|
|
|
10.00
|
%
|
|
|
10.00
|
%
|
Tier
1 capital to risk-weighted assets
|
|
|
13.28
|
%
|
|
|
12.67
|
%
|
|
|
9.00
|
%
|
|
|
6.00
|
%
|
Leverage
ratio
|
|
|
11.72
|
%
|
|
|
11.19
|
%
|
|
|
9.00
|
%
|
|
|
5.00
|
%
|
As is
indicated by the above table, the Company and the Bank exceeded all applicable
regulatory capital guidelines at March 31, 2010. Management believes that, under
the current regulations, both will continue to meet their minimum capital
requirements in the foreseeable future.
Dividends
The
primary source of funds with which dividends will be paid to shareholders is
from cash dividends received by the Company from the Bank. During the first
three months of 2010, the Company has received no cash dividends from the Bank,
and the Company paid no cash dividends to shareholders.
Dividends
paid to shareholders by the Company are subject to restrictions set forth in the
California General Corporation Law. The California General Corporation Law
provides that a corporation may make a distribution to its shareholders if
retained earnings immediately prior to the dividend payout are at least equal
the amount of the proposed distribution. The primary source of funds
with which dividends will be paid to shareholders will come from cash dividends
received by the Company from the Bank. As noted earlier, the Company and the
Bank have entered into an agreement with the Federal Reserve Bank that, among
other things, require us to obtain the prior approval before paying a cash
dividend or otherwise making a distribution on our stock. In addition, the
Company has elected to defer regularly scheduled quarterly interest payments on
its junior subordinated debentures issued in connection with its trust preferred
securities. The Company is prohibited from paying any dividends or making any
other distribution on its common stock for so long as interest payments are
being deferred.
The Bank
as a state-chartered bank is subject to dividend restrictions set forth in
California state banking law, and administered by the California Commissioner of
Financial Institutions (“Commissioner”). Under such restrictions, the Bank may
not pay cash dividends in an amount which exceeds the lesser of the retained
earnings of the Bank or the Bank’s net income for the last three fiscal years
(less the amount of distributions to shareholders during that period of time).
If the above test is not met, cash dividends may only be paid with the prior
approval of the Commissioner, in an amount not exceeding the Bank’s net income
for its last fiscal year or the amount of its net income for the current fiscal
year. Such restrictions do not apply to stock dividends, which generally require
neither the satisfaction of any tests nor the approval of the Commissioner.
Notwithstanding the foregoing, if the Commissioner finds that the shareholders’
equity is not adequate or that the declarations of a dividend would be unsafe or
unsound, the Commissioner may order the state bank not to pay any dividend. The
FRB may also limit dividends paid by the Bank. As noted above, the terms of the
regulatory agreement with the Federal Reserve prohibit both the Company and the
Bank from paying dividends without prior approval of the Federal
Reserve.
Reserve
Balances
The Bank
is required to maintain average reserve balances with the Federal Reserve Bank.
At March 31, 2010 the Bank's qualifying balance with the Federal Reserve was
approximately $25,000 consisting of balances held with the Federal
Reserve.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
Interest
Rate Sensitivity and Market Risk
There
have been no material changes in the Company’s quantitative and qualitative
disclosures about market risk as of March 31, 2010 from those presented in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2009.
The Board
of Directors has adopted an interest rate risk policy which establishes maximum
decreases in net interest income of 12% and 15% in the event of a 100 BP and 200
BP increase or decrease in market interest rates over a twelve month period.
Based on the information and assumptions utilized in the simulation model at
March 31, 2010, the resultant projected impact on net interest income falls
within policy limits set by the Board of Directors for all rate scenarios
run.
The
Company's interest rate risk policy establishes maximum decreases in the
Company's market value of equity of 12% and 15% in the event of an immediate and
sustained 100 BP and 200 BP increase or decrease in market interest rates. As
shown in the table below, the percentage changes in the net market value of the
Company's equity are within policy limits for both rising and falling rate
scenarios.
The
following sets forth the analysis of the Company's market value risk inherent in
its interest-sensitive financial instruments as they relate to the entire
balance sheet at March 31, 2010 and December 31, 2009 ($ in thousands). Fair
value estimates are subjective in nature and involve uncertainties and
significant judgment and, therefore, cannot be determined with absolute
precision. Assumptions have been made as to the appropriate discount rates,
prepayment speeds, expected cash flows and other variables. Changes in these
assumptions significantly affect the estimates and as such, the obtained fair
value may not be indicative of the value negotiated in the actual sale or
liquidation of such financial instruments, nor comparable to that reported by
other financial institutions. In addition, fair value estimates are based on
existing financial instruments without attempting to estimate future
business.
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
Change in
|
|
Estimated
MV
|
|
|
Change in
MV
|
|
|
Change in
MV
|
|
|
Estimated
MV
|
|
|
Change in
MV
|
|
|
Change in
MV
|
|
Rates
|
|
of
Equity
|
|
|
of
Equity $
|
|
|
of
Equity $
|
|
|
Of
Equity
|
|
|
of
Equity $
|
|
|
of
Equity %
|
|
+
200 BP
|
|
$
|
71,005
|
|
|
$
|
5,996
|
|
|
|
9.22
|
%
|
|
$
|
70,265
|
|
|
$
|
5,918
|
|
|
|
9.18
|
%
|
+
100 BP
|
|
|
70,226
|
|
|
|
5,217
|
|
|
|
8.02
|
%
|
|
|
69,482
|
|
|
|
5,127
|
|
|
|
7.97
|
%
|
0
BP
|
|
|
65,009
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
64,355
|
|
|
|
0
|
|
|
|
0.00
|
%
|
-
100 BP
|
|
|
65,561
|
|
|
|
552
|
|
|
|
0.85
|
%
|
|
|
64,912
|
|
|
|
557
|
|
|
|
0.87
|
%
|
-
200 BP
|
|
|
66,639
|
|
|
|
1,630
|
|
|
|
2.51
|
%
|
|
|
66,195
|
|
|
|
1,840
|
|
|
|
2.86
|
%
|
Item
4T. Controls and Procedures
a) As of
the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company’s
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures, as defined in the Securities and Exchange
Act Rule 13(a)-15(e). Based on that evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that the Company’s disclosure controls and
procedures are effective on a timely manner to alert them to material
information relating to the Company which is required to be included in the
Company’s periodic Securities and Exchange Commission filings.
(b)
Changes in Internal Controls over Financial Reporting: During the quarter ended
March 31, 2010, the Company did not make any significant changes in, nor take
any corrective actions regarding, its internal controls over financial reporting
or other factors that could significantly affect these controls.
The
Company does not expect that its disclosure controls and procedures and internal
control over financial reporting will prevent all error and fraud. A
control procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control procedure
are met. Because of the inherent limitations in all control procedures, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns in controls or procedures can
occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any
control procedure is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control procedure, misstatements due to
error or fraud may occur and not be detected.
PART II. Other
Information
Item 1.
Not
applicable
Item 1A.
There have been no
material changes to the risk factors disclosed in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2009.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None
during the quarter ended March 31, 2010.
Item 3
.
Not applicable
Item 4.
Not
applicable
Item 5.
Not
applicable
Item 6.
Exhibits:
11
|
|
Computation
of Earnings per Share*
|
31.1
|
|
Certification
of the Chief Executive Officer of United Security Bancshares pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2
|
|
Certification
of the Chief Financial Officer of United Security Bancshares pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1
|
|
Certification
of the Chief Executive Officer of United Security Bancshares pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
|
Certification
of the Chief Financial Officer of United Security Bancshares pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
|
* Data
required by Statement of Financial Accounting Standards No. 128,
Earnings per Share
, is
provided in Note 7 to the consolidated financial statements in this
report.
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.
|
United
Security Bancshares
|
|
|
Date: May
7, 2010
|
/S/ Dennis R. Woods
|
|
Dennis
R. Woods
|
|
President
and
|
|
Chief
Executive Officer
|
|
|
|
/S/ Richard B. Shupe
|
|
Richard
B. Shupe
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
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