Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
following discussion and analysis is intended to identify the major factors
that
affected our financial condition and results of operations as of and for the
three and nine months ended September 30, 2007.
Application
of Critical Accounting Policies and Accounting Estimates
The
accounting and reporting policies followed by us conform, in all material
respects, to accounting principles generally accepted in the United States
(“GAAP”) and to general practices within the financial services
industry. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. While
we
base our estimates on historical experience, current information and other
factors deemed to be relevant, actual results could differ from those
estimates.
We
consider accounting estimates to be critical to reported financial results
if
(i) the accounting estimate requires management to make assumptions about
matters that are highly uncertain and (ii) different estimates that management
reasonably could have used for the accounting estimate in the current period,
or
changes in the accounting estimate that are reasonably likely to occur from
period to period, could have a material impact on our financial
statements. Accounting polices related to the allowance for loan
losses are considered to be critical, as these policies involve considerable
subjective judgment and estimation by management. We also consider
our accounting polices related to other real estate and other assets owned
to be
critical due to the potential significance of these activities and the estimates
involved.
For
additional information regarding critical accounting policies, refer to
Note 1 – “Organization and Summary of Significant Accounting Policies” in
the Notes to Consolidated Financial Statements and the sections captioned
“Application of Critical Accounting Policies and Accounting Estimates” and
“Allowance for Loan Losses and Nonperforming Assets” in Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
Company’s Form 10-K for the year ended December 31, 2006. There have
been no significant changes in the Company's application of accounting policies
since December 31, 2006.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2007 Compared to Three Months Ended September 30,
2006
Executive
Summary
Consolidated
net income and diluted EPS were $1.7 million and $0.31, respectively, for the
three months ended September 30, 2007, compared to $6.8 million and $1.20 for
the same periods last year. The decline in net income during the
current period was primarily caused by a $3.6 million reduction in net interest
income before provision for loan losses and a $3.8 million increase in provision
for loan losses recorded.
Net
interest income before provision for loan losses decreased to $20.7 million
for
the quarter ended September 30, 2007 compared to $24.3 million for the same
period last year. This decrease was primarily due to the decline in
the yield earned on our loan portfolio, as higher yielding loans have continued
to pay-off and are being replaced by our current loan production, which are
originated at lower spreads over our cost of funds due to competitive pricing
pressures. Net interest income was further negatively impacted by the
increase in our cost of funds as deposits and other interest bearing liabilities
repriced to higher current market interest rates, as well as the addition of
new
borrowings at higher current market interest rates, partially offset by the
growth in the average balance of our loan portfolio.
The
provision for loan losses was $5.3 million and $1.5 million, respectively,
for
the quarters ended September 30, 2007 and 2006. The increase in
provision for loan losses during the quarter was primarily due to the increase
in our non-performing loans. Non-performing loans as of September 30,
2007 were $40.8 million, compared to $26.3 million at December 31,
2006. As a percentage of our total loan portfolio, the amount of
non-performing loans was 1.28% and 0.88% at September 30, 2007 and December
31,
2006, respectively. The increase in non-performing loans was
primarily related to the addition of two lending relationships that in aggregate
represented $19.5 million of the total of $26.6 million of loans transferred
to
non-performing status during the quarter.
The
return on average assets was 0.19% for the three months ended September 30,
2007, compared to 0.86% for the same period last year. The return on
average shareholders’ equity was 2.97% for the three months ended September 30,
2007, compared to 12.77% for the same period last year.
Loan
originations were $340.1 million for the quarter ended September 30, 2007,
compared to $265.2 million for the same period last year. During the current
quarter, the Bank originated $215.1 million of commercial real estate loans,
$90.2 million of small balance multi-family real estate loans, and $34.8 million
of entertainment finance loans. Loan originations for the same period
last year consisted of $201.2 million of commercial real estate loans, $54.3
million of small balance multi-family real estate loans, and $9.7 million of
entertainment finance loans. In addition, the Bank’s wholesale loan operations
acquired $120.9 million of multi-family real estate loans during the quarter
ended September 30, 2006. The Bank did not purchase any loans during
the current period.
Net
Interest Income and Margin
The
following table presents for the three months ended September 30, 2007 and
2006,
our condensed average balance sheet information, together with interest income
and yields earned on average interest earning assets and interest expense and
rates paid on average interest bearing liabilities. Average balances
are computed using daily average balances. Nonaccrual loans are
included in loans receivable.
|
|
For
the Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
|
(dollars
in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and investment securities
|
|
$
|
349,765
|
|
|
$
|
4,249
|
|
|
|
4.82
|
%
|
|
$
|
471,381
|
|
|
$
|
5,525
|
|
|
|
4.65
|
%
|
Loans
receivable
|
|
|
3,114,776
|
|
|
|
58,450
|
|
|
|
7.44
|
%
|
|
|
2,667,130
|
|
|
|
53,605
|
|
|
|
7.97
|
%
|
Total
interest earning assets
|
|
|
3,464,541
|
|
|
$
|
62,699
|
|
|
|
7.18
|
%
|
|
|
3,138,511
|
|
|
$
|
59,130
|
|
|
|
7.47
|
%
|
Non-interest
earning assets
|
|
|
75,030
|
|
|
|
|
|
|
|
|
|
|
|
72,131
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(43,302
|
)
|
|
|
|
|
|
|
|
|
|
|
(47,200
|
)
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
3,496,269
|
|
|
|
|
|
|
|
|
|
|
$
|
3,163,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposit accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
$
|
25,627
|
|
|
$
|
251
|
|
|
|
3.89
|
%
|
|
$
|
25,329
|
|
|
$
|
188
|
|
|
|
2.94
|
%
|
Money
market and passbook
|
|
|
248,955
|
|
|
|
3,152
|
|
|
|
5.02
|
%
|
|
|
212,501
|
|
|
|
2,593
|
|
|
|
4.84
|
%
|
Time
certificates
|
|
|
1,879,726
|
|
|
|
25,076
|
|
|
|
5.29
|
%
|
|
|
1,670,231
|
|
|
|
20,307
|
|
|
|
4.82
|
%
|
Total
interest bearing deposit
accounts
|
|
|
2,154,308
|
|
|
|
28,479
|
|
|
|
5.24
|
%
|
|
|
1,908,061
|
|
|
|
23,088
|
|
|
|
4.80
|
%
|
FHLB
advances and other borrowings
|
|
|
980,776
|
|
|
|
11,440
|
|
|
|
4.63
|
%
|
|
|
908,897
|
|
|
|
9,648
|
|
|
|
4.21
|
%
|
Junior
subordinated debentures
|
|
|
86,600
|
|
|
|
2,102
|
|
|
|
9.63
|
%
|
|
|
86,600
|
|
|
|
2,104
|
|
|
|
9.64
|
%
|
Total
interest bearing liabilities
|
|
|
3,221,684
|
|
|
$
|
42,021
|
|
|
|
5.17
|
%
|
|
|
2,903,558
|
|
|
$
|
34,840
|
|
|
|
4.76
|
%
|
Non-interest
bearing demand accounts
|
|
|
10,022
|
|
|
|
|
|
|
|
|
|
|
|
11,351
|
|
|
|
|
|
|
|
|
|
Other
non-interest bearing liabilities
|
|
|
35,392
|
|
|
|
|
|
|
|
|
|
|
|
35,715
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
229,171
|
|
|
|
|
|
|
|
|
|
|
|
212,818
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
shareholders’
equity
|
|
$
|
3,496,269
|
|
|
|
|
|
|
|
|
|
|
$
|
3,163,442
|
|
|
|
|
|
|
|
|
|
Net
interest spread
(1)
|
|
|
|
|
|
|
|
|
|
|
2.01
|
%
|
|
|
|
|
|
|
|
|
|
|
2.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision
for
loan losses
|
|
|
|
|
|
$
|
20,678
|
|
|
|
|
|
|
|
|
|
|
$
|
24,290
|
|
|
|
|
|
Net
interest margin
(2)
|
|
|
|
|
|
|
|
|
|
|
2.37
|
%
|
|
|
|
|
|
|
|
|
|
|
3.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________
(1)
|
Average
yield on interest earning assets minus average rate paid on interest
bearing liabilities.
|
(2)
|
Net
interest income divided by total average interest earning
assets.
|
The
following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in average interest earning asset and
interest bearing liability balances and changes in average interest
rates. The change in interest due to both volume and rate has been
allocated to change due to volume and rate in proportion to the relationship
of
absolute dollar amounts of each.
|
|
For
the Three Months Ended
September
30, 2007 and 2006
|
|
|
|
Increase
(Decrease) Due to:
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Interest
and fees earned from:
|
|
|
|
|
|
|
|
|
|
Cash
and investment securities
|
|
$
|
195
|
|
|
$
|
(1,471
|
)
|
|
$
|
(1,276
|
)
|
Loans
|
|
|
(3,729
|
)
|
|
|
8,574
|
|
|
|
4,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(decrease) increase in interest income
|
|
|
(3,534
|
)
|
|
|
7,103
|
|
|
|
3,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
accounts
|
|
|
2,239
|
|
|
|
3,152
|
|
|
|
5,391
|
|
FHLB
advances and other borrowings
|
|
|
999
|
|
|
|
793
|
|
|
|
1,792
|
|
Junior
subordinated debentures
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
increase in interest expense
|
|
|
3,236
|
|
|
|
3,945
|
|
|
|
7,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in net interest income
|
|
$
|
(6,770
|
)
|
|
$
|
3,158
|
|
|
$
|
(3,612
|
)
|
Total
interest income increased $3.6 million to $62.7 million for the
current quarter as compared to $59.1 million for the same period last year.
The increase in interest income was primarily attributable to a
$447.6 million increase in the average balance of total loans receivable,
partially offset by a 53 basis point decrease in the average yield earned on
total loans receivable.
The
average balance of cash and investment securities decreased to $349.8 million
during the quarter compared to $471.4 million during the same period last
year. The decrease in average cash and investment securities was
primarily due to a decline in cash and cash equivalents, as well as a decrease
in the average balance of investment securities held-to-maturity, partially
offset by an increase in investment securities
available-for-sale. The average yield earned on cash and investments
increased to 4.82% during the current quarter as compared to 4.65% for the
same
period last year. The increase primarily related to an increase in market
interest rates earned on current investments.
The
average aggregate balance of our loan portfolio was $3.1 billion and $2.7
billion for the three months ended September 30, 2007 and 2006,
respectively. Commercial real estate and construction loans had an
average aggregate balance of $993.5 million during the quarter ended September
30, 2007 compared to $857.0 million during the same period last
year. Multi-family real estate loans had an average aggregate balance
of $2.0 billion during the quarter ended September 30, 2007 compared to $1.7
billion during the same period last year. Single-family residential
loans had an average aggregate balance of $18.5 million during the quarter
ended
September 30, 2007 compared to $60.1 million during the same period last
year. The average aggregate balance of entertainment finance loans
was $68.4 million and $58.9 million during the quarters ended September 30,
2007
and 2006, respectively.
The
average yield earned on total loans decreased to 7.44% during the quarter ended
September 30, 2007 as compared to 7.97% during the same period last
year. The decrease in yield was primarily due to higher yielding
loans continuing to pay-off and being replaced by our current loan production,
which are originated at lower spreads over our cost of funds due to competitive
pricing pressures. A significant portion of our loan portfolio is
comprised of adjustable rate loans indexed to either six month LIBOR or the
Prime Rate, most with interest rate floors and caps below and above which the
loan’s contractual interest rate may not adjust. Approximately 40.0%
of our loan portfolio was adjustable at September 30, 2007, and approximately
56.1% of the loan portfolio was comprised of hybrid loans, which after an
initial fixed rate period of three or five years, will convert to an adjustable
interest rate for the remaining term of the loan. As of September 30,
2007, our hybrid loans had a weighted average of 2.5 years remaining until
conversion to an adjustable rate loan. Our adjustable rate loans
generally reprice on a quarterly or semi-annual basis with increases generally
limited to maximum adjustments of 2% per year up to 5% for the life of the
loan. At September 30, 2007, approximately $2.7 billion, or 85.5%, of
our adjustable and hybrid loan portfolio contained interest rate floors, below
which the loans’ contractual interest rate may not adjust. The
inability of our loans to adjust downward can contribute to increased income
in
periods of declining interest rates, and also assists us in our efforts to
limit
the risks to earnings resulting from changes in interest rates, subject to
the
risk that borrowers may refinance these loans during periods of declining
interest rates. At September 30, 2007, the weighted average floor
interest rate of these loans was 6.95%. At that date, approximately
$152.4 million, or 4.9%, of these loans were at their floors at the end of
the
quarter. At September 30, 2007, 47.1% of the adjustable rate loans
outstanding had a lifetime interest rate cap. The weighted-average lifetime
interest rate cap on our adjustable rate loan portfolio was 11.53% at that
date.
Total
interest expense increased by $7.2 million to $42.0 million during the current
quarter, compared to $34.8 million for the same period last year. The
increase in interest expense was primarily attributable to an increase of $318.1
million in the average balance of interest bearing liabilities, which was caused
by the increase in deposits and FHLB advances and other borrowings, and a 41
basis point increase in the rate paid on interest bearing liabilities, which
was
primarily caused by deposits and other interest bearing liabilities repricing
to
higher current market interest rates, as well as the addition of new borrowings
and deposits at higher current market interest rates.
Our
average cost of funds increased to 5.17% during the three months ended September
30, 2007, compared to 4.76% for the same period last year. As
discussed above, the increase in the average funding costs was primarily due
to
deposits and other interest bearing liabilities repricing to higher current
market interest rates, and the addition of new borrowings and deposits at higher
current market interest rates. The average rate paid on deposit
accounts was 5.24% during the three months ended September 30, 2007 as compared
to 4.80% for the same period last year. The average balance of
deposit accounts increased $246.2 million to $2.2 billion for the three months
ended September 30, 2007 as compared to $1.9 billion for the same period last
year. The average rate paid on FHLB advances and other borrowings was
4.63% during the three months ended September 30, 2007 compared to 4.21% for
the
same period last year. FHLB advances and other borrowings averaged
$980.8 billion during the current quarter, compared to $908.9 million for the
same period last year.
Net
interest margin decreased to 2.37% for the three months ended September 30,
2007
as compared to 3.07% for the same period last year. This decrease was
caused by a 70 basis point decline in our net interest spread and a $326.0
million increase in our average interest earning assets.
Provision
for Loan Losses
Management
periodically assesses the adequacy of the allowance for loan losses by reference
to certain quantitative and qualitative factors that may be weighted differently
at various times depending on prevailing conditions. These factors
include, among other elements:
·
|
the
risk characteristics of various classifications of
loans;
|
·
|
general
portfolio trends relative to asset and portfolio
size;
|
·
|
potential
credit and geographic
concentrations;
|
·
|
delinquency
trends and nonaccrual loan levels;
|
·
|
historical
loss experience and risks associated with changes in economic, social
and
business conditions; and
|
·
|
the
underwriting standards in effect when the loan was
made.
|
Accordingly,
the evaluation of the adequacy of the allowance for loan losses is not based
solely on the level of nonperforming assets. The quantitative
factors, included above, are utilized by our management to identify two
different risk groups (1) individual loans (loans with specifically identifiable
risks); and (2) homogeneous loans (groups of loans with similar
characteristics). We base the allocation for individual loans primarily on
risk
rating grades assigned to each of these loans as a result of our loan management
and review processes. We then assign each risk-rating grade a loss ratio, which
is determined based on the experience of management and our independent loan
review process. We estimate losses on impaired loans based on estimated cash
flows discounted at the loan’s original effective interest rate or based on the
underlying collateral value. Based on management’s experience, we also assign
loss ratios to groups of loans. These loss ratios are assigned to the
various homogenous categories of the portfolio.
The
qualitative factors, included above, are generally utilized to identify other
risks inherent in the portfolio and to determine whether the estimated credit
losses associated with the current portfolio might differ from historical loss
trends. We estimate a range of exposure for each qualitative factor
and evaluate the current condition and trend of each factor. Based on
this evaluation, we assign a positive, negative or neutral grade to each factor
to determine whether the portion of the qualitative reserve is in the high,
middle or low end of the range for each factor. Because of the
subjective nature of these factors and the judgments required to determine
the
estimated ranges, the actual losses incurred can vary significantly from the
estimated amounts.
Management
believes that our allowance for loan losses as of September 30, 2007 was
adequate to absorb the known and inherent risks of loss in the loan portfolio
at
that date. While management believes the estimates and assumptions used in
its
determination of the adequacy of the allowance are reasonable, there can be
no
assurance that such estimates and assumptions will not be proven incorrect
in
the future, or that the actual amount of future provisions will not exceed
the
amount of past provisions or that any increased provisions that may be required
will not adversely impact our financial condition and results of operations.
In
addition, the determination of the amount of the Bank’s allowance for loan
losses is subject to review by bank regulators, as part of the routine
examination process, which may result in the establishment of additional
reserves based upon their judgment of information available to them at the
time
of their examination.
The
consolidated provision for loan losses was $5.3 million and $1.5 million for
the
quarters ended September 30, 2007 and 2006, respectively. The
provision for loan losses was recorded based on an analysis of the factors
referred to above. The increase in provision for loan losses during
the quarter was primarily due to the increase in our non-performing
loans. Non-performing loans as of September 30, 2007 were $40.8
million, compared to $26.3 million at December 31, 2006. As a
percentage of our total loan portfolio, the amount of non-performing loans
was
1.28% and 0.88% at September 30, 2007 and December 31, 2006,
respectively. The increase in non-performing loans was primarily
related to the addition of two lending relationships that in aggregate
represented $19.5 million of the total of $26.6 million of loans transferred
to
non-performing status during the quarter.
With
the
housing and secondary mortgage markets continuing to deteriorate and showing
no
signs of stabilizing in the near future, we continue to aggressively monitor
our
commercial real estate loan portfolio, including our commercial and residential
construction loan portfolio. This portfolio totaled $395.5 million as
of September 30, 2007, and included $267.6 million of residential and
multi-family construction loans. At September 30, 2007, our
construction loan portfolio primarily consisted of projects located in
California, New York, Arizona, Texas and Florida, which represented 55.8%,
13.1%, 8.4%, 6.0% and 5.1%, respectively, of our total construction loan
portfolio. We had one non-performing lending relationship within our
construction loan portfolio, which consisted of a $16.9 million residential
construction project secured by land located in the Palm Springs area of
California.
The
allowance for loan losses as a percentage of our total loans was 1.4% at
September 30, 2007 compared to 1.5% at December 31, 2006. We believe
that these reserves levels were adequate to support known and inherent losses
in
our loan portfolio and for specific reserves as of September 30, 2007 and
December 31, 2006, respectively. The allowance for loan losses to
loans, net, is impacted by inherent risk in the loan portfolio, specific
reserves and charge-off activity. The decrease in the percentage of
the allowance for loan losses to loans, net, primarily reflects reserves that
were allocated to specific credits at December 31, 2006, that were subsequently
charged-off, foreclosed upon or repaid during the current period and the
decrease in the level of other loans of concern, which declined by 52.4%, from
$67.0 million at December 31, 2006 to $31.9 million at September 30,
2007. Other loans of concern consist of loans with respect to which
known information concerning possible credit problems with the borrowers or
the
cash flows of the collateral securing the respective loans has caused management
to be concerned about the ability of the borrowers to comply with present loan
repayment terms, which may result in the future inclusion of such loans in
the
nonaccrual category. In addition, this ratio was further impacted by
the higher concentration of small balance multi-family loans in our portfolio,
which has improved our geographic diversity and lowered our average loan size
due to the national expansion of our lending platform, as well as the Bank’s
aggressive recognition of charge-offs and the identification of problem credits
in a timely manner.
During
the quarters ended September 30, 2007 and 2006, we had net loan charge-offs
of
$3.6 million and $1.0 million, respectively. The charge-offs taken
during the current period primarily relate to a single multi-family lending
relationship that was previously specifically reserved for under our allowance
for loan loss methodology discussed above. See also – “Financial
Condition – Credit Risk”.
Non-Interest
Income
Non-interest
income increased to $949,000 during the quarter ended September 30, 2007 as
compared to $578,000 for the same period last year. Non-interest
income primarily consists of late fees and other miscellaneous fees earned
on
customer accounts.
Non-Interest
Expense
Non-interest
expense totaled $13.5 million for the current quarter, compared to $11.8 million
for the same period last year. Our efficiency ratio (defined as
general and administrative expenses as a percentage of net revenue) was 61.3%
for the quarter ended September 30, 2007, as compared to 46.1% for the same
period last year. The fluctuation in our efficiency ratio during the
quarter was primarily due to a decline in net interest income earned, which,
as
discussed above, was caused by a decrease in our net interest rate
spread.
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
Executive
Summary
Consolidated
net income and diluted EPS were $14.5 million and $2.58, respectively, for
the
nine months ended September 30, 2007, compared to $19.9 million and $3.49,
respectively, for the same period last year.
Net
interest income before provision for loan losses decreased to $66.5 million
for
the nine months ended September 30, 2007 compared to $71.2 million for the
same
period last year. This decrease was primarily due to the decline in
the yield earned on our loan portfolio, as higher yielding loans have continued
to pay-off and are being replaced by our current loan production, which are
originated at lower spreads over our cost of funds due to competitive pricing
pressures. Net interest income was further negatively impacted by the
increase in our cost of funds as deposits and other interest bearing liabilities
repriced to higher current market interest rates, as well as the addition of
new
borrowings at higher current market interest rates, partially offset by the
growth in the average balance of our loan portfolio.
The
return on average assets was 0.56% for the nine months ended September 30,
2007,
compared to 0.87% for the same period last year. The return on
average shareholders’ equity was 8.55% for the nine months ended September 30,
2007, compared to 12.79% for the same period last year.
Loan
originations were $1.0 billion for the nine months ended September 30, 2007,
compared to $701.2 million for the same period last year. During the current
nine month period, the Bank originated $644.0 million of commercial real estate
loans, $281.2 million of small balance multi-family real estate loans, and
$92.0
million of entertainment finance loans. Loan originations for the
same period last year consisted of $489.7 million of commercial real estate
loans, $170.8 million of small balance multi-family real estate loans, and
$40.7
million of entertainment finance loans. In addition, the Bank’s wholesale loan
operations acquired $47.3 million and $347.3 million of commercial and
multi-family real estate loans during the nine months ended September 30, 2007
and 2006, respectively.
Net
Interest Income and Margin
The
following table presents for the nine months ended September 30, 2007 and 2006,
our condensed average balance sheet information, together with interest income
and yields earned on average interest earning assets and interest expense and
rates paid on average interest bearing liabilities. Average balances
are computed using daily average balances. Nonaccrual loans are
included in loans receivable.
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
|
(dollars
in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and investment securities
|
|
$
|
362,806
|
|
|
$
|
13,337
|
|
|
|
4.91
|
%
|
|
$
|
436,242
|
|
|
$
|
14,494
|
|
|
|
4.44
|
%
|
Loans
receivable
|
|
|
3,075,913
|
|
|
|
175,677
|
|
|
|
7.64
|
%
|
|
|
2,616,905
|
|
|
|
151,824
|
|
|
|
7.76
|
%
|
Total
interest earning assets
|
|
|
3,438,719
|
|
|
$
|
189,014
|
|
|
|
7.35
|
%
|
|
|
3,053,147
|
|
|
$
|
166,318
|
|
|
|
7.28
|
%
|
Non-interest
earning assets
|
|
|
67,871
|
|
|
|
|
|
|
|
|
|
|
|
69,007
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(45,352
|
)
|
|
|
|
|
|
|
|
|
|
|
(45,955
|
)
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
3,461,238
|
|
|
|
|
|
|
|
|
|
|
$
|
3,076,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposit accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
$
|
25,096
|
|
|
$
|
685
|
|
|
|
3.65
|
%
|
|
$
|
30,635
|
|
|
$
|
646
|
|
|
|
2.82
|
%
|
Money
market and passbook
|
|
|
234,163
|
|
|
|
8,741
|
|
|
|
4.99
|
%
|
|
|
208,097
|
|
|
|
6,812
|
|
|
|
4.38
|
%
|
Time
certificates
|
|
|
1,848,410
|
|
|
|
73,126
|
|
|
|
5.29
|
%
|
|
|
1,559,929
|
|
|
|
52,601
|
|
|
|
4.51
|
%
|
Total
interest bearing deposit
accounts
|
|
|
2,107,669
|
|
|
|
82,552
|
|
|
|
5.24
|
%
|
|
|
1,798,661
|
|
|
|
60,059
|
|
|
|
4.46
|
%
|
FHLB
advances and other borrowings
|
|
|
993,903
|
|
|
|
33,710
|
|
|
|
4.53
|
%
|
|
|
936,223
|
|
|
|
28,987
|
|
|
|
4.14
|
%
|
Junior
subordinated debentures
|
|
|
86,600
|
|
|
|
6,268
|
|
|
|
9.68
|
%
|
|
|
86,600
|
|
|
|
6,088
|
|
|
|
9.40
|
%
|
Total
interest bearing liabilities
|
|
|
3,188,172
|
|
|
$
|
122,530
|
|
|
|
5.14
|
%
|
|
|
2,821,484
|
|
|
$
|
95,134
|
|
|
|
4.51
|
%
|
Non-interest
bearing demand accounts
|
|
|
10,674
|
|
|
|
|
|
|
|
|
|
|
|
13,081
|
|
|
|
|
|
|
|
|
|
Other
non-interest bearing liabilities
|
|
|
35,913
|
|
|
|
|
|
|
|
|
|
|
|
33,267
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
226,479
|
|
|
|
|
|
|
|
|
|
|
|
208,367
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
shareholders’
equity
|
|
$
|
3,461,238
|
|
|
|
|
|
|
|
|
|
|
$
|
3,076,199
|
|
|
|
|
|
|
|
|
|
Net
interest spread
(1)
|
|
|
|
|
|
|
|
|
|
|
2.21
|
%
|
|
|
|
|
|
|
|
|
|
|
2.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision
for
loan losses
|
|
|
|
|
|
$
|
66,484
|
|
|
|
|
|
|
|
|
|
|
$
|
71,184
|
|
|
|
|
|
Net
interest margin
(2)
|
|
|
|
|
|
|
|
|
|
|
2.58
|
%
|
|
|
|
|
|
|
|
|
|
|
3.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________
(1)
|
Average
yield on interest earning assets minus average rate paid on interest
bearing liabilities.
|
(2)
|
Net
interest income divided by total average interest earning
assets.
|
The
following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in average interest earning asset and
interest bearing liability balances and changes in average interest
rates. The change in interest due to both volume and rate has been
allocated to change due to volume and rate in proportion to the relationship
of
absolute dollar amounts of each.
|
|
For
the Nine Months Ended
September
30, 2007 and 2006
|
|
|
|
Increase
(Decrease) Due to:
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Interest
and fees earned from:
|
|
|
|
|
|
|
|
|
|
Cash
and investment securities
|
|
$
|
1,437
|
|
|
$
|
(2,594
|
)
|
|
$
|
(1,157
|
)
|
Loans
|
|
|
(2,385
|
)
|
|
|
26,238
|
|
|
|
23,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(decrease) increase in interest income
|
|
|
(948
|
)
|
|
|
23,644
|
|
|
|
22,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
accounts
|
|
|
11,347
|
|
|
|
11,146
|
|
|
|
22,493
|
|
FHLB
advances and other borrowings
|
|
|
2,856
|
|
|
|
1,867
|
|
|
|
4,723
|
|
Junior
subordinated debentures
|
|
|
180
|
|
|
|
—
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
increase in interest expense
|
|
|
14,383
|
|
|
|
13,013
|
|
|
|
27,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in net interest income
|
|
$
|
(15,331
|
)
|
|
$
|
10,631
|
|
|
$
|
(4,700
|
)
|
Total
interest income increased $22.7 million to $189.0 million for the nine
months ended September 30, 2007 as compared to $166.3 million for the same
period last year. The increase in interest income was primarily attributable
to
a $459.0 million increase in the average balance of total loans receivable
partially offset by a 12 basis point decrease in the average yield earned on
total loans receivable.
The
average balance of cash and investment securities decreased to $362.8 million
for the nine months ended September 30, 2007 compared to $436.2 million during
the same period last year. The decrease in average cash and
investment securities was primarily due to a decline in cash and cash
equivalents, as well as a decrease in the average balance of investment
securities held-to-maturity, partially offset by an increase in investment
securities available-for-sale. The average yield earned on cash and
investments increased to 4.91% during the nine months ended September 30, 2007
as compared to 4.44% for the same period last year. The increase primarily
related to an increase in market interest rates earned on current
investments.
The
average aggregate balance of our loan portfolio was $3.1 billion and $2.6
billion for the nine months ended September 30, 2007 and 2006,
respectively. Commercial real estate and construction loans had an
average aggregate balance of $966.4 million during the nine months ended
September 30, 2007 compared to $839.0 million during the same period last
year. Multi-family real estate loans had an average aggregate balance
of $2.0 billion during the nine months ended September 30, 2007 compared to
$1.6
billion during the same period last year. Single-family residential
loans had an average aggregate balance of $28.0 million during the nine months
ended September 30, 2007 compared to $78.7 million during the same period last
year. The average aggregate balance of entertainment finance loans
was $72.7 million and $57.2 million during the nine months ended September
30,
2007 and 2006, respectively.
The
average yield earned on total loans decreased to 7.64% during the nine months
ended September 30, 2007 as compared to 7.76% during the same period last
year. The decrease in yield was primarily due to
higher yielding loans continuing
to
pay-off and being replaced by our current loan production, which are originated
at lower spreads over our cost of funds due to competitive pricing
pressures
.
Total
interest expense increased by $27.4 million to $122.5 million for the nine
months ended September 30, 2007, compared to $95.1 million for the same period
last year. The increase in interest expense was primarily
attributable to an increase of $366.7 million in the average balance of interest
bearing liabilities, which was caused by the increase in deposits and FHLB
advances and other borrowings, and a 63 basis point increase in the rate paid
on
interest bearing liabilities, which was primarily caused by deposits and other
interest bearing liabilities repricing to higher current market interest rates,
as well as the addition of new borrowings and deposits at higher current market
interest rates.
Our
average cost of funds increased to 5.14% during the nine months ended September
30, 2007, compared to 4.51% for the same period last year. As
discussed above, the increase in the average funding costs was primarily due
to
deposits and other interest bearing liabilities repricing to higher current
market interest rates, and the addition of new borrowings and deposits at higher
current market interest rates. The average rate paid on deposit
accounts was 5.24% during the nine months ended September 30, 2007 as compared
to 4.46% for the same period last year. The average balance of
deposit accounts increased $309.0 million to $2.1 billion for the nine months
ended September 30, 2007 as compared to $1.8 billion for the same period last
year. The average rate paid on FHLB advances and other borrowings was
4.53% during the nine months ended September 30, 2007 compared to 4.14% for
the
same period last year. FHLB advances and other borrowings averaged
$993.9 million during the nine months ended September 30, 2007, compared to
$936.2 million for the same period last year.
Net
interest margin decreased to 2.58% for the nine months ended September 30,
2007
as compared to 3.12% for the same period last year. This decrease was
caused by a 56 basis point decline in our net interest spread and a $385.6
million increase in our average interest earning assets.
Provision
for Loan Losses
The
consolidated provision for loan losses was $6.5 million and $3.8 million for
the
nine months ended September 30, 2007 and 2006, respectively. The
provision for loan losses was recorded based on an analysis of the factors
referred to above in the discussion regarding the three months ended September
30, 2007 and 2006. During the nine months ended September 30, 2007
and 2006, we had net loan charge-offs of $7.9 million and $426,000,
respectively. See management’s discussion of the provision for loan
losses for the three months ended September 30, 2007 and 2006 for additional
discussion regarding the charge-offs incurred during the current
period. See also – “Financial Condition – Credit Risk”.
Non-Interest
Income
Non-interest
income increased to $2.5 million during the nine months ended September 30,
2007
as compared to $1.9 million for the same period last
year. Non-interest income primarily consists of late fees and other
miscellaneous fees earned on customer accounts.
Non-Interest
Expense
Non-interest
expense totaled $38.1 million for the nine months ended September 30, 2007,
compared to $35.6 million for the same period last year. Our
efficiency ratio (defined as general and administrative expenses as a percentage
of net revenue) was 54.5% for the nine months ended September 30, 2007, as
compared to 48.4% for the same period last year.
FINANCIAL
CONDITION
Total
assets increased to $3.6 billion at September 30, 2007 as compared to $3.4
billion at December 31, 2006. The increase in total assets was
primarily due to a $159.6 million increase in our loan portfolio, a $16.7
million increase in investment securities available-for-sale and an $11.6
million increase in other real estate and other assets owned, partially offset
by a $28.5 million decline in investment securities held-to-maturity and an
$18.3 million decrease in cash and cash equivalents.
At September 30, 2007,
gross loans totaled $3.2 billion, including approximately $3.1 billion of real
estate loans, $75.3 million of entertainment finance loans, and $14.3 million
of
other loans. Total deposit accounts increased to $2.2 billion at
September 30, 2007 compared to $2.1 billion at December 31,
2006. Management believes that a significant portion of time deposits
will remain with us upon maturity based on our historical experience regarding
retention of deposits. FHLB advances and other borrowings remained relatively
unchanged at $1.0 billion as of September 30, 2007 and December 31,
2006.
CREDIT
RISK
Nonperforming
Assets, Other Loans of Concern and Allowance for Loan
Losses
The
following table sets forth our nonperforming assets by category and troubled
debt restructurings as of the dates indicated.
|
|
September
30,
2007
|
|
|
December
31,
2006
|
|
|
|
(dollars
in thousands)
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
Real
estate
|
|
$
|
40,797
|
|
|
$
|
14,091
|
|
Franchise
|
|
|
—
|
|
|
|
4,549
|
|
Entertainment
finance
|
|
|
13
|
|
|
|
7,614
|
|
Total
nonaccrual loans
|
|
|
40,810
|
|
|
|
26,254
|
|
Other
real estate and other assets owned, net
|
|
|
18,333
|
|
|
|
6,729
|
|
Total
nonperforming assets
|
|
|
59,143
|
|
|
|
32,983
|
|
Performing
troubled debt restructurings
|
|
|
7,853
|
|
|
|
7,994
|
|
Total
nonperforming assets and performing troubled debt
restructurings
|
|
$
|
66,996
|
|
|
$
|
40,977
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans to total loans
|
|
|
1.28
|
%
|
|
|
0.88
|
%
|
Allowance
for loan losses to nonaccrual loans
|
|
|
109.45
|
%
|
|
|
175.40
|
%
|
Nonperforming
assets to total assets
|
|
|
1.66
|
%
|
|
|
0.97
|
%
|
Non-performing
assets were $59.1 million and $33.0 million, representing 1.66% and 0.97% of
total assets as of September 30, 2007 and December 31, 2006,
respectively. At September 30, 2007, nonperforming real estate loans
consisted of a $16.9 million residential construction loan located in Palm
Desert, California, $13.1 million of commercial real estate loans, $10.4 million
of multi-family real estate loans, and $387,000 of residential real estate
loans. The increase in non-performing assets during the nine months
ended September 30, 2007 consisted of the addition of $62.7 million of
non-performing loans, partially offset by paydowns received of $24.9 million,
charge-offs of $8.5 million and loan upgrades of $714,000 from non-performing
to
performing status. During the nine month period ended September 30,
2007, the net increase in non-performing loans primarily consisted of the
increase of a $16.9 million residential construction loan and $9.7 million
of
commercial and multi-family loans, partially offset by decreases of $4.5 million
of franchise loans and $7.6 million of entertainment finance
loans. In addition, during the nine months ended September 30, 2007,
the Bank foreclosed on 11 properties representing $14.3 million, and sold two
properties representing $2.6 million. The allowance for loan loss
coverage ratio (defined as the allowance for loan losses divided by non-accrual
loans) was 109.5% at September 30, 2007 as compared to 175.4% at December 31,
2006.
As
of
September 30, 2007 and December 31, 2006, other loans of concern totaled $31.9
million and $67.0 million, respectively. The decrease in other loans
of concern for the nine months ended September 30, 2007 was primarily due to
$59.5 million of loans being transferred to nonperforming assets, $23.2 million
of loan repayments and loan upgrades of $3.6 million from other loans of
concerns, partially offset by $51.1 million of new other loans of
concern.
The
following table provides certain information with respect to our allowance
for
loan losses, including charge-offs, recoveries and selected ratios for the
periods indicated.
|
|
For
the Nine
Months
Ended
September
30,
2007
|
|
|
For
the Year
Ended
December
31,
2006
|
|
|
For
the Nine Months Ended
September
30,
2006
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
46,049
|
|
|
$
|
43,817
|
|
|
$
|
43,817
|
|
Provision
for loan losses
|
|
|
6,516
|
|
|
|
5,000
|
|
|
|
3,750
|
|
Charge-offs
|
|
|
(8,453
|
)
|
|
|
(4,134
|
)
|
|
|
(1,634
|
)
|
Recoveries
|
|
|
553
|
|
|
|
1,366
|
|
|
|
1,208
|
|
Net
charge-offs
|
|
|
(7,900
|
)
|
|
|
(2,768
|
)
|
|
|
(426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
44,665
|
|
|
$
|
46,049
|
|
|
$
|
47,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percentage
of
loans, net
|
|
|
1.41
|
%
|
|
|
1.53
|
%
|
|
|
1.70
|
%
|
Liquidity
Liquidity
refers to our ability to maintain cash flows adequate to fund operations and
meet obligations and other commitments on a timely basis, including the payment
of maturing deposits and the origination or purchase of new loans. We
maintain a cash and investment securities portfolio designed to satisfy
operating liquidity requirements while preserving capital and maximizing
yield. As of September 30, 2007, we held $12.1 million of cash and
cash equivalents (consisting primarily of short-term investments with original
maturities of 90 days or less) and $116.2 million of investment securities
classified as available-for-sale.
Short-term
fixed income investments classified as cash equivalents consisted of interest
bearing deposits at financial institutions, overnight repurchase agreement
investments, government money market funds and short-term government agency
securities, while investment securities available-for-sale consisted primarily
of fixed income instruments, which were rated “AAA”, or equivalent by nationally
recognized rating agencies. In addition, our liquidity position is
supported by credit facilities with the Federal Home Loan Bank of San Francisco
and the Federal Reserve Bank of San Francisco. As of September 30,
2007, we had remaining available borrowing capacity under the Federal Home
Loan
Bank of San Francisco credit facility of $398.6 million, net of the $15.5
million of additional Federal Home Loan Bank stock that we would be required
to
purchase to support those additional borrowings. As of September 30,
2007, we had an available borrowing capacity under the Federal Reserve Bank
of
San Francisco credit facility of $179.3 million. We also had
available $130.0 million of uncommitted, unsecured lines of credit with four
unaffiliated financial institutions, and a $37.5 million revolving credit
facility with an unaffiliated financial institution.
Capital
Resources
The
Company, the Bank’s holding company, had Tier 1 leverage, Tier 1 risk based and
total risk-based capital ratios at September 30, 2007 of 8.54%, 9.72% and
11.28%, respectively, which represents $123.7 million, $114.2 million and $39.4
million, respectively, of capital in excess of the amount required to be “well
capitalized.” These ratios were 9.0%, 10.2% and 11.9% as of December
31, 2006, respectively.
The
Bank
had Tier 1 leverage, Tier 1 risk based and total risk-based capital ratios
at
September 30, 2007 of 8.43%, 9.60% and 10.85%, respectively, which represents
$119.1 million, $109.8 million and $26.0 million, respectively, of capital
in
excess of the amount required to be “well capitalized” for regulatory purposes.
These ratios were 9.1%, 10.3% and 11.5% as of December 31, 2006,
respectively.
At
September 30, 2007, shareholders' equity totaled $227.3 million, or 6.4% of
total assets. Our book value per share of common stock was $44.19 as
of September 30, 2007, as compared to $42.07 as of December 31, 2006, and $40.96
as of September 30, 2006.