U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

ý              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2003

 

OR

 

o              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: 000-31593

 

BUSINESS BANCORP

(Exact  name of registrant as specified in its charter)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No ý

 

Outstanding shares of Common Stock, no par value, as of May 13, 2003: 3,857,922

 

 

BUSINESS BANCORP

 

INDEX

 

PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002
	Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2003 and 2002
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
Signatures
Certifications
Exhibit Index

 

2

 

PART I - FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

BUSINESS BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 

		March 31, 2003			December 31, 2002
		(Unaudited)
		(Dollars in thousands)
ASSETS
Cash and cash equivalents		$	35,170		$	32,531
Investment securities:
Available for sale, at fair value		168,965			179,180
Other securities		3,216			2,641
Total investment securities		172,181			181,821
Loans, net of deferred fees		377,176			378,100
Allowance for loan losses		(5,562		)	(5,442		)
Total loans, net		371,614			372,658
Property, premises and equipment, net		12,455			12,361
Goodwill		20,121			20,121
Other intangible assets		1,704			1,790
Interest receivable and other assets		13,309			9,650
Total assets		$	626,554		$	630,932
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand, noninterest-bearing		$	183,094		$	184,728
MMDA, NOW and savings		253,677			244,364
Time certificates, $100,000 and over		60,999			64,510
Other time certificates		35,462			37,237
Total deposits		533,232			530,839
Borrowings		17,325			23,625
Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trusts holding soley junior subordinated debentures		13,454			13,462
Accrued interest payable and other liabilities		3,035			4,560
Total liabilities		567,046			572,486
Commitments and contingencies
SHAREHOLDERS’ EQUITY
Serial preferred stock, no par value: 20,000,000 shares authorized; none issued
Common stock, no par value: 20,000,000 shares authorized; 3,927,975 and 3,944,899 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively		36,407			36,529
Accumulated other comprehensive income		2,304			2,430
Retained earnings		20,797			19,487
Total shareholders’ equity		59,508			58,446
Total liabilities and shareholders’ equity		$	626,554		$	630,932

 

See notes to consolidated financial statements

 

3

 

BUSINESS BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended March 31,
Dollars in thousands, except per share amounts		2003			2002
		(Unaudited)
INTEREST INCOME
Interest and fees on loans		$	7,327		$	7,695
Interest on investment securities:
Taxable		1,148			1,588
Tax-exempt		331			271
Other interest income		2			10
Total interest income		8,808			9,564
INTEREST EXPENSE
Interest on deposits		1,039			1,625
Interest on other borrowings		138			241
Interest on trust preferred securities		338			338
Total interest expense		1,515			2,204
Net interest income		7,293			7,360
Provision for loan losses		100			100
Net interest income after provision for loan losses		7,193			7,260
NON-INTEREST INCOME
Service fees on deposit accounts		901			800
Gain on sale of SBA loans		124			—
Gain on sale of other real estate owned		1			—
Other income		222			288
Total		1,248			1,088
OPERATING EXPENSES
Salaries and employee benefits		3,301			3,359
Occupancy and equipment		1,010			1,005
Data processing		366			411
Legal and other professional fees		43			325
Telephone, postage and supplies		280			318
Marketing and promotion		75			137
Amortization of intangibles		85			87
FDIC insurance and regulatory assessments		8			36
Other expenses		750			694
Total operating expenses		5,918			6,372
Income before provision for income taxes		2,523			1,976
Provision for income taxes		945			745
Net income		$	1,578		$	1,231
Net income per share - basic		$	0.40		$	0.30
Net income per share - diluted		$	0.38		$	0.29
Cash dividends per share of common stock		$	0.01		$	0.01

 

4

 

BUSINESS BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

		Three Months Ended March 31,
Dollars in thousands		2003			2002
Net income		$	1,578		$	1,231
Other comprehensive income:
Unrealized net gains (losses) on securities:
Unrealized net holding gains (losses) arising during period (net of taxes of $(75) and $175 for the three months ended March 31, 2003 and 2002, respectively)		(126		)	289
Comprehensive income		$	1,452		$	1,520

 

See notes to consolidated financial statements.

 

5

 

BUSINESS BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Three Months Ended March 31,
		2003			2002
		(Dollars in thousands)
Cash flows - operating activities
Net income		$	1,578		$	1,231
Reconcilement of net income to net cash from operations:
Provision for loan losses		100			100
Depreciation and amortization		462			397
Net amortization/accretion of premiums/discounts on investment securities		1,254			918
Deferred income taxes		—			165
(Gain) loss on sale of other real estate owned		(1		)	—
Gain on sale of loans		(124		)	—
Changes in:
Accrued interest receivable and other assets		280			179
Accrued interest payable and other liabilities		(1,525		)	(958		)
Deferred loans fees and discounts, net		19			84
Operating cash flows, net		2,043			2,116
Cash flows - investing activities
Interest-bearing deposits with banks, net		—			(74		)
Available for sale securities:
Maturities		1,000			20,818
Principal reduction of mortgage-backed securities		23,281			13,416
Purchases		(15,535		)	(16,148		)
Sales		—			100
Other securities		(574		)	(34		)
Loans, net		(914		)	3,526
Proceeds from sale of other real estate owned		31			—
Proceeds from sale of loans		1,924			—
Purchase of bank owned life insurance policies		(3,881		)	—
Purchase of property, premises and equipment		(439		)	(716		)
Investing cash flows, net		4,893			20,888
Cash flows - financing activities
Net change in deposits		2,393			7,610
Net change in other borrowings		(6,300		)	(30,031		)
Proceeds from the exercise of stock options		151			446
Cash dividends		(39		)	(41		)
Repurchases of common stock		(502		)	(4,123		)
Financing cash flows, net		(4,297		)	(26,139		)
Net change in cash and cash equivalents		2,639			(3,135		)
Cash and cash equivalents at beginning of period		32,531			34,615
Cash and cash equivalents at end of period		$	35,170		$	31,480
Cash flows - supplemental disclosures
Interest on deposits and other borrowings		$	2,100		$	2,761
Income taxes		$	2,025		$	862
Non-cash transactions:
Additions to other real estate owned		—			812

 

See notes to consolidated financial statements.

 

6

 

BUSINESS BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business Bancorp (“BB”, on a parent-only basis, and “we” or “our”, on a consolidated basis) is a bank holding company with one bank subsidiary: Business Bank of California (the “Bank”). Business Capital Trust I and MCB Statutory Trust I, which are statutory trusts formed for the exclusive purpose of issuing and selling trust preferred securities, are also subsidiaries of ours.  The unaudited consolidated financial information included herein was prepared on the same basis as the audited financial statements for the year ended December 31, 2002.  The interim condensed consolidated financial statements contained herein are not audited.  However, in our opinion, all adjustments, consisting only of normal recurring items necessary for a fair presentation of the operating results for the periods shown, have been made.  The results of operations for the three months ended March 31, 2003 should not be considered indicative of operating results to be expected for the year ending December 31, 2003.  Certain prior year and prior quarter amounts have been reclassified to conform to current classifications.  Cash and cash equivalents consists of cash, due from banks, and federal funds sold.

 

On December 31, 2001, we completed our merger with MCB Financial Corporation.  This merger was accounted for using the purchase accounting method and, accordingly, MCB Financial Corporation’s results of operations have been included in the consolidated financial statements since December 31, 2001.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Stock-Based Compensation

 

In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation” (“SFAS No. 123 and No. 148”).  Under the provisions of SFAS No. 123 and No. 148, we are encouraged, but not required, to measure compensation costs related to our employee stock compensation plans under the fair value method.  If we elect not to recognize compensation expense under this method, we are required to disclose the pro forma net income and net income per share effects based on the SFAS No. 123 and No. 148 fair value methodology.  We have elected to adopt the disclosure provisions of these statements.

 

7

 

We apply Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in our accounting for stock options.  Accordingly, no compensation cost has been recognized for our stock option plan.  Had compensation for our stock option plan been determined consistent with SFAS No. 123 and No. 148, our net income per share would have been reduced to the pro forma amounts indicated below:

 

		Three months ended March 31
		2003			2002
		Dollars in thousands, except per share amounts
Stock-based employee compensation cost, net of tax, that would have been included in the determination of net income if the fair value method had been applied to all awards		$	22		$	270
Net income:
As reported		$	1,578		$	1,231
Pro forma		$	1,556		$	961
Basic net income per share:
As reported		$	0.40		$	0.30
Pro forma		$	0.39		$	0.24
Diluted net income per share:
As reported		$	0.38		$	0.29
Pro forma		$	0.37		$	0.23

 

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants during the periods indicated:

 

		Three months ended March 31
		2003		2002
Dividend yield		n/a		0.28	%
Expected volatility		n/a		20.00	%
Risk free rates		n/a		3.39	%
Weighted average expected life		n/a		7.5	yrs

 

No options were granted during the three months ended March 31, 2003, therefore, the values indicated above are marked “n/a”.  No adjustments have been made for forfeitures.  The actual value, if any, that the option holder will realize from these options will depend solely on the increase in the common share stock price over the option price when the options are exercised.

 

8

 

Goodwill and Other Intangible Assets

 

Goodwill generated from purchase business combinations consummated prior to the issuance of Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets,” (“SFAS No. 142”) was amortized straight-line over 15 to 20 years.  SFAS No. 142 addresses the initial recognition and measurement of goodwill and other intangible assets acquired as a result of a business combination and the recognition of and measurement of those assets subsequent to acquisition.  Under the new standard, goodwill and other intangible assets deemed to have indefinite lives will no longer be amortized, but instead they will be tested at least annually for impairment.  Upon adoption of SFAS No. 142, we did not identify any existing intangible assets to be separated from goodwill.

 

SFAS No. 142 also requires an analysis of impairment of goodwill annually or more frequently upon the occurrence of certain events.   During the second quarter of 2002, we completed the required initial impairment tests of goodwill.  We have no indefinite-lived other intangible assets.  Based upon this initial evaluation, our goodwill was not impaired at June 30, 2002.

 

NOTE 2 - BUSINESS COMBINATIONS

 

On December 31, 2001, we completed our merger with MCB Financial Corporation for a purchase price of $28.5 million.  We issued 1.9 million shares of our common stock for 100 percent of the outstanding common shares of MCB Financial Corporation.  The merger was accounted for using the purchase method of accounting and, accordingly, MCB Financial Corporation’s results of operations have been included in the consolidated financial statements since the date of the merger.

 

The purchase price for MCB Financial Corporation has been allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of the merger.  The excess of purchase price over the estimated fair values of the net assets acquired, totaling $14.1 million, was recorded as goodwill.  Prospectively, goodwill will be evaluated for possible impairment under the provisions of SFAS No. 142.

 

NOTE 3 – BORROWINGS

 

The following table presents our borrowings in detail for the periods indicated:

 

 

(Dollars in thousands)		March 31, 2003			December 31, 2002
Short term borrowings:
FHLB advances		$	17,325		$	20,025
Long term borrowings:
FHLB advances		—			3,600
Total borrowings		$	17,325		$	23,625

 

9

 

Pursuant to collateral agreements with the Federal Home Loan Bank (the “FHLB”), advances are secured by all the capital stock in the FHLB and certain investment securities.  Four advances totaling $17,325,000 were outstanding from the FHLB at March 31, 2003.  One advance for $7,900,000 bears an interest rate of 1.25% and matured April 1, 2003; one advance for $3,200,000 bears an interest rate of 1.32% and matures July 7, 2003; one advance for $2,625,000 bears an interest rate of 5.76% and matures December 22, 2003; and one advance for $3,600,000 bears an interest rate of 5.37% and matures January 12, 2004.

 

NOTE 4 – EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing net income by the number of weighted average common shares outstanding.  Diluted earnings per share reflects potential dilution from outstanding stock options, using the treasury stock method.  The number of weighted average shares used in computing basic and diluted earnings per share are as follows:

 

 

		Three months ended March 31,
		2003								2002
Dollars in thousands except		Income			Shares		Per Share			Income			Shares		Per Share
share and per share amounts		(numerator)			(denominator)		Amount			(numerator)			(denominator)		Amount
Net Income as Reported		$	1,578							$	1,231
Used in Basic EPS		1,578			3,942,835		$	0.40		1,231			4,036,445		$	0.30
Dilutive Effect of Outstanding
Stock Options					236,862								176,218
Used in Dilutive EPS		$	1,578		4,179,697		$	0.38		$	1,231		4,212,663		$	0.29

 

NOTE 5 – GUARANTEES

 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness to Others” (“FIN 45”), which requires us to disclose information about obligations under certain guarantee arrangements.  FIN 45 defines a guarantee as a contract that contingently requires us to pay a guaranteed party based on:

 

1.		changes in underlying asset, liability or equity security of the guaranteed party or
2.		a third party’s failure to perform under an obligating guarantee (performance guarantee).

 

We provide guarantees related to financial and performance standby letters of credit issued to our customers to enhance their credit standing and enable them to complete a wide variety of business transactions.  Financial standby letters of credit are conditional commitments issued by us to guarantee the payment by a client to a third party (beneficiary). Financial standby letters of credit are primarily used to support many types of domestic and international payments. Performance standby letters of credit are issued to guarantee the performance of a customer to a third party when certain specified future events have occurred. Performance standby letters of credit are primarily used to support performance instruments such as bid bonds, performance bonds, lease obligations, repayment of loans and past due notices.  These standby letters of credit have fixed expiration dates and generally require a fee paid by a customer at the time we issue the commitment.

 

The credit risk involved in issuing letters of credit is essentially the same as that involved with extending loan commitments to customers, and accordingly, we use a credit evaluation process and collateral requirements similar to those for loan commitments. The actual liquidity needs or the credit risk that we have experienced historically has been lower that the contractual amount of letters of credit issued because a significant portion of these conditional commitments expire without being drawn upon.

 

The table below summarizes at March 31, 2003 our standby letter or credits at the inception of the contract. The maximum potential amount of future payments represents the amount that could be lost under the standby letter of credits if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from the collateral held or pledged.

 

		Expires within one year			Expires after one year			Total amount outstanding			Maximum amount of future payments
		(dollars in thousands)
Financial standby		—			—			—			—
Performance standby		$	2,971		$	50		$	3,021		$	3,021
Total		$	2,971		$	50		$	3,021		$	3,021

 

NOTE 6 – VARIABLE INTEREST ENTITIES

 

FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) defines variable interest entities as a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company.  FIN 46 requires that a variable interest entity be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both.  FIN 46 also requires disclosures about variable interest entities that we are not required to consolidate but in which we have a significant variable interest. As of March 31, 2003, we did not have an interest in any variable interest entities.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis is intended to provide greater details of our results of operations and financial condition.  The following discussion should be read in conjunction with our consolidated financial data included elsewhere in this document.  Certain statements under this caption constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties.  Our actual results may differ significantly from the results discussed in such forward-looking statements.  Factors that might cause such a difference include but are not limited to economic conditions, competition in the geographic and business areas in which we conduct our operations, fluctuation in interest rates, credit quality and government regulation and other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2002.

 

Overview

 

Business Bancorp (“BB”, on a parent-only basis, and “we” or “our”, on a consolidated basis) is a bank holding company with one bank subsidiary: Business Bank of California (the “Bank”). Business Capital Trust I and MCB Statutory Trust I, which are statutory trusts formed for the exclusive purpose of issuing and selling trust preferred securities, are also subsidiaries of ours.

 

We provide a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals.  We operate throughout the San Francisco Bay Area and Southern California’s Inland Empire with fifteen branch offices located in Corona, Hayward, Hemet, Hesperia, Ontario, Petaluma, Phelan, Redlands, Riverside, San Bernardino, San Francisco, San Rafael, South San Francisco and Upland.

 

At March 31, 2003, we had total assets of $626.6 million, total loans, net, of $371.6 million and total deposits of $533.2 million.

 

10

 

RESULTS OF OPERATIONS

 

The following table summarizes our income, income per share and key financial ratios for the periods indicated:

 

		Net Income
Dollars in thousands,		Three months ended March 31,
except per share amounts		2003			2002
Income		$	1,578		$	1,231
Income per share:
Basic		$	0.40		$	0.30
Diluted		$	0.38		$	0.29
Return on average assets		1.02		%	0.80		%
Return on average shareholders’ equity		10.78		%	9.12		%
Dividend payout ratio		2.63		%	3.23		%

 

Net Income

 

Our net income for the first quarter of 2003 increased 28.2% to $1,578,000, or $0.38 per diluted share, compared to net income of $1,231,000, or $0.29 per diluted share, for the first quarter of 2002.  Based on our net income for the first quarter of 2003, our return on average shareholders’ equity was 10.78% and our return on average assets was 1.02%.  During the first quarter of 2002, our net income resulted in a return on average shareholders’ equity of 9.12% and a return on average assets of 0.80%.

 

The 28.2% increase in net income during the first quarter of 2003 as compared to the first quarter of 2002 was primarily due to increases in noninterest income and decreases in noninterest expense.

 

11

 

Net Interest Income

 

Net interest income decreased 0.91% to $7.3 million for the first quarter of 2003 from $7.4 million for the first quarter of 2002.  The slight increase in our total interest-earning assets was offset by a 6 basis point drop in our net yield on interest-earning assets.

 

Net interest income decreased 2.4% to $7.3 million for the first quarter of 2003 from $7.5 million for the fourth quarter of 2002.  This was primarily due to the 1 basis point drop in our net yield on interest-earning assets.

 

The following table presents, for the periods indicated, 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 average daily balances.

 

 

		For the three months ended								For the three months ended								For the three months ended
		March 31, 2003								December 31, 2002								March 31, 2002
Dollars in thousands		Average Balance (1)			Interest			Yield/Rate		Average Balance (1)			Interest			Yield/Rate		Average Balance (1)			Interest			Yield/Rate
ASSETS
Federal funds sold		$	—		—			—		$	2,174		$	6		1.09	%	$	2,356		$	9		1.55	%
Interest earning deposits		945			$	2		0.86	%	180			2			4.41	%	737			1			0.55	%
Investment securities:
Taxable		147,351			1,148			3.16	%	146,896			1,367			3.69	%	140,075			1,588			4.60	%
Tax-exempt (2)		27,493			331			4.88	%	24,304			298			4.86	%	21,471			271			5.12	%
Loans, net (3)		379,898			7,327			7.82	%	382,874			7,483			7.75	%	390,082			7,695			8.00	%
Total Interest-earning Assets		555,687			8,808			6.43	%	556,428			9,156			6.53	%	554,721			9,564			6.99	%
Total Non-earning Assets		70,121								69,616								66,231
Total Assets		$	625,808							$	626,044							$	620,952
LIABILITIES & SHAREHOLDERS’ EQUITY
MMDA, NOW and savings		$	247,233		$	603		0.99	%	$	249,939		$	720		1.14	%	$	246,099		$	867		1.43	%
Time certificates, $100,000 or more		62,456			189			1.23	%	63,077			257			1.62	%	72,499			434			2.43	%
Other time certificates		36,295			247			2.76	%	37,851			213			2.23	%	42,477			324			3.09	%
Total Interest-bearing Deposits		345,984			1,039			1.22	%	350,867			1,190			1.35	%	361,075			1,625			1.83	%
Other borrowings		21,484			138			2.61	%	14,497			151			4.13	%	27,857			241			3.51	%
Trust preferred securities		13,425			338			10.21	%	13,458			346			10.20	%	13,491			338			10.16	%
Total Interest-bearing Liabilities		380,893			1,515			1.61	%	378,822			1,687			1.77	%	402,423			2,204			2.22	%
Non-interest bearing demand deposits		181,386								184,771								159,455
Other non-interest bearing liabilities		4,162								5,241								4,362
Shareholders’ equity		59,367								57,210								54,712
Total liabilities and shareholders’ Equity		$	625,808							$	626,044							$	620,952
Net interest income					$	7,293							$	7,469							$	7,360
Interest rate spread								4.82	%							4.76	%							4.77	%
Contribution of interest free funds								0.51	%							0.56	%							0.61	%
Net yield on interest-earning assets (4)								5.32	%							5.33	%							5.38	%

 

(1)          Nonaccrual loans are excluded from the average balance and only collected interest on nonaccrual loans is included in the interest column.

 

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(2)          Tax equivalent yields earned on the tax exempt securities were 6.55%, 6.63% and 6.98% for the three months ended March 31, 2003, December 31, 2002 and March 31, 2002, respectively, using the federal statutory rate of 34%.

(3)          Loan fees totaling $813,000, $636,000 and $581,000 are included in loan interest income for the three months ended March 31, 2003, December 31, 2002 and March 31, 2002, respectively.

(4)          Net yield on interest-earning assets during the period equals (a) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (b) average interest-earning assets for the period.

 

The most significant impact on our net interest income between periods is derived from the interaction of changes in the volume of, and rate earned or paid on, interest-earning assets and interest-bearing liabilities. The volume of interest-earning asset dollars in loans and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined with the spread, produces the changes in the net interest income between periods. The table below sets forth, for the periods indicated, a summary of the changes in average asset and liability balances (volume) and changes in average interest rates (rate).

 

		Three Months Ended March 31, 2003 Compared to Three Months Ended December 31, 2002 Favorable / (Unfavorable)									Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 Favorable / (Unfavorable)
Dollars in thousands		Volume			Rate(1)			Total			Volume			Rate(1)			Total
Interest Income:
Federal funds sold		$	(6	)	$	—		$	(6	)	$	(9	)	$	—		$	(9	)
Interest earning deposits		8			(8		)	0			0			1			1
Investment securities:																	0
Taxable		4			(223		)	(219		)	82			(522		)	(440		)
Tax-exempt		38			(5		)	33			76			(16		)	60
Loans, net		(57		)	(99		)	(156		)	(201		)	(167		)	(368		)
Total Interest Income		(13		)	(335		)	(348		)	(52		)	(704		)	(756		)
Interest Expense:
MMDA, NOW and savings		8			109			117			(4		)	268			264
Time certificates, $100,000 or more		2			66			68			60			185			245
Other time certificates		9			(43		)	(34		)	47			30			77
Other borrowings		(71		)	84			13			55			48			103
Trust preferred securities		1			7			8			2			(2		)	0
Total Interest Expense		(51		)	223			172			160			529			689
Change in Net Interest Income		$	(64	)	$	(112	)	$	(176	)	$	108		$	(175	)	$	(67	)

 

(1)             The rate/volume variance has been included in the rate variance.

 

The Quarter Ended March 31, 2003 Compared to the Quarter Ended December 31, 2002

 

Interest income in the first quarter ended March 31, 2003 was $8.8 million compared to $9.2 million in the fourth quarter ended December 31, 2002.  The decline was primarily due to a decline in the yield on interest-earning assets.  Average interest-earning assets decreased slightly to $555.7 million in the three months ended March 31, 2003 compared to $556.4 in the three

 

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months ended December 31, 2002.  The yield earned on average interest-earning assets declined to 6.43% in the three months ended March 31, 2003 compared to 6.53% in the three months ended December 31, 2002.  Loans represented approximately 68.4% of total interest-earning assets in the first quarter of 2003 compared to 68.8% for the fourth quarter of 2002.

 

Interest expense in the first quarter of 2003 decreased to $1.5 million from $1.7 million for the fourth quarter of 2002.  Lower interest rates paid on interest-bearing liabilities contributed to the decrease in interest expense.  The interest rates paid on interest-bearing liabilities fell by 16 basis points from 1.77% during the fourth quarter of 2002 to 1.61% during the first quarter of 2003.  Average interest-bearing liabilities increased 0.55% to $380.9 million in the first quarter of 2003 from $378.8 million in the fourth quarter of 2002.

 

As a result of the foregoing analyses, our net yield on interest-earning assets decreased in the first quarter of 2003 to 5.32% from 5.33% in the fourth quarter of 2002.

 

The Quarter Ended March 31, 2003 Compared to the Quarter Ended March 31, 2002

 

Interest income in the first quarter ended March 31, 2003 decreased to $8.8 million from $9.6 million in the quarter ended March 31, 2002.  This was primarily due to the decrease in the yield earned on average earning assets. The yield on average earning assets decreased from 6.99% during the first quarter ended March 31, 2002 to 6.43% during the first quarter ended March 31, 2003.  This decline was due to the overall decline in market interest rates.  Loans represented approximately 68.4% of total interest-earning assets in the first quarter of 2003 compared to 70.3% for the first quarter of 2002.

 

Interest expense in the first quarter of 2003 decreased to $1.5 million from $2.2 million for the first quarter of 2002.  The decrease in interest-bearing liabilities and the decrease in the interest rates paid on those liabilities contributed to the decrease in interest expense.  Average interest-bearing liabilities decreased 5.4% to $380.9 million in the first quarter of 2003 from $402.4 million in the first quarter of 2002.  Interest rates paid on average interest-bearing liabilities decreased to 1.61% during the first quarter of 2003 from 2.22% during the same period of 2002.  This decrease was due to the overall decline in market interest rates.

 

As a result of the foregoing analyses, our net yield on interest-earning assets decreased in the first quarter of 2003 to 5.32% from 5.38% in the the first quarter of 2002.

 

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Noninterest Income

 

The following table summarizes our noninterest income for the periods indicated and expresses the amounts as a percentage of average assets:

 

		Three Months Ended March 31
Dollars in thousands		2003			2002
Components of Noninterest Income
Service fees on deposit accounts		$	901		$	800
Gain on sale of investments, net		—			—
Gain on sale of SBA loans		124			—
Gain on sale of other real estate owned		1			—
Other income		222			288
Total		$	1,248		$	1,088
As a Percentage of Average Assets (Annualized)
Service fees on deposit accounts		0.58		%	0.52		%
Gain on sale of investments, net		0.00		%	0.00		%
Gain on sale of SBA loans		0.08		%	0.00		%
Gain on sale of other real estate owned		0.00		%	0.00		%
Other income		0.14		%	0.19		%
Total		0.81		%	0.71		%

 

Our noninterest income increased to $1.2 million in the first quarter of 2003 from $1.1 million in the same period of 2002.  Increases in service fees on deposit accounts and gains on sales of SBA loans were partially offset by the decrease in other income.

 

Operating Expenses

 

The following table summarizes our operating expenses and the associated ratios to average assets for the periods indicated:

 

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		Three Months Ended March 31
Dollars in thousands		2003			2002
Components of Operating Expense
Salaries and employee benefits		$	3,301		$	3,359
Occupancy and equipment		1,010			1,005
Data processing		366			411
Legal and other professional fees		43			325
Telephone, postage and supplies		280			318
Marketing and promotion		75			137
Amortization of intangibles		85			87
FDIC insurance and regulatory assessments		8			36
Other expenses		750			694
Total Noninterest Expense		$	5,918		$	6,372
Average full-time equivalent staff		215			228
As a Percentage of Average Assets (Annualized)
Salaries and employee benefits		2.14		%	2.19		%
Occupancy and equipment		0.65		%	0.66		%
Data processing		0.24		%	0.27		%
Legal and other professional fees		0.03		%	0.21		%
Telephone, postage and supplies		0.18		%	0.21		%
Marketing and promotion		0.05		%	0.09		%
Amortization of intangibles		0.06		%	0.06		%
FDIC insurance and regulatory assessments		0.01		%	0.02		%
Other expenses		0.49		%	0.45		%
Total		3.84		%	4.16		%

 

Our operating expenses decreased by $454,000, or 7.1%, in the first quarter of 2003 compared to the same period of 2002.  Legal and other professional fees decreased $282,000, or 86.8%.  During the first quarter of 2002, we recorded $225,000 in costs associated with the merger with MCB Financial Corporation and the on-going integration effort.

 

Income Taxes.

 

Our effective tax rate was 37.5% for the first quarter ended March 31, 2003 compared to 37.7% for the same period of the prior year.

 

FINANCIAL CONDITION

 

Our total assets decreased by $4.4 million, or 0.7%, from $630.9 million at the end of 2002 to $626.6 million at March 31, 2003.  The decrease in total assets was due primarily to the decrease in borrowings.  Borrowings decreased to $17.3 million at March 31, 2003 from $23.6 million at December 31, 2002.

 

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Investments

 

The following tables set forth the amortized cost and approximate market value of our investment securities as of the dates indicated:

 

Dollars in thousands March 31, 2003:		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value			Carrying Value
Available for sale:
U.S. Treasury securities		$	2,018		$	14		$			$	2,032		$	2,032
Mortgage backed securities		135,273			2,543			(592		)	137,224			137,224
Municipal securities		25,727			1,708			(42		)	27,393			27,393
Corporates		2,031			285						2,316			2,316
Total Available for Sale		$	165,049		$	4,550		$	(634	)	$	168,965		$	168,965
Dollars in thousands December 31, 2002		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value			Carrying Value
Available for sale:
U.S. Treasury securities		$	3,033		$	20		$			$	3,053		$	3,053
Mortgage backed securities		144,257			$	2,495		$	(340	)	146,412			146,412
Municipal securities		25,729			1,705			(64		)	27,370			27,370
Corporates		2,031			314						2,345			2,345
Total Available for Sale		$	175,050		$	4,534		$	(404	)	$	179,180		$	179,180
Dollars in thousands March 31, 2002		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value			Carrying Value
Available for sale:
U.S. Treasury securities		$	5,107		$	1		$	(14	)	$	5,094		$	5,094
U.S. government agencies		1,058						(8		)	1,050			1,050
Mortgage backed securities		118,727			$	1,757		$	(206	)	120,278			120,278
Municipal securities		20,433			678			(53		)	21,058			21,058
Other securities		2,031			80						2,111			2,111
Total Available for Sale		$	147,356		$	2,516		$	(281	)	$	149,591		$	149,591
Held to Maturity:
U.S. Treasury securities		$	1,017		$	2		$			$	1,019		$	1,017
Total Held to Maturity		$	1,017		$	2		$			$	1,019		$	1,017

 

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Loans Held for Investment

 

Our loans, net of deferred fees, decreased by $924,000, or 0.2%, during the first three months of 2003.  Certain reclassfications of loans were made during the second quarter of 2002 in conjunction with our systems conversion.  As a result, the loans shown below at March 31, 2002 are classified differently than the loans shown at December 31, 2002 and March 31, 2003.

 

 

		March 31 2003					December 31 2002					March 31 2002
Dollars in thousands		Amount			%		Amount			%		Amount			%
Real estate - construction		$	64,003		17.0	%	$	59,854		15.8	%	$	68,238		17.8	%
Commercial real estate		256,871			68.1		253,105			66.9		214,380			55.8
Real estate - other		16,774			4.4		25,951			6.9		18,733			4.9
Commercial		34,858			9.2		33,441			8.8		73,371			19.1
Consumer and other		5,731			1.5		6,791			1.8		10,472			2.7
Total loans, gross		378,237			100.3		379,142			100.3		385,194			100.3
Less: unearned income		(1,061		)	(0.3	)	(1,042		)	(0.3	)	(1,193		)	(0.3	)
Total loans, net of deferred fees		$	377,176		100.0		$	378,100		100.0		$	384,001		100.0

 

In the normal practice of extending credit, we accept real estate collateral for loans which have primary sources of repayment from commercial operations.  The total amount of loans secured by real estate equaled $337.6 million, or 89.3% of the total portfolio as of March 31, 2003.  Due to our limited marketing areas, our real estate collateral is primarily concentrated in the San Francisco Bay Area and Southern California.  We believe that our underwriting standards for real estate secured loans are prudent and provide an adequate safeguard against declining real estate prices which may effect a borrower’s ability to liquidate the property and repay the loan.  However, no assurance can be given that real estate values will not decline and impair the value of the security for loans held by us.

 

We focus our portfolio lending on commercial, commercial real estate, and construction loans.  These loans generally carry a higher level of risk than conventional real estate loans; accordingly, yields on these loans are typically higher than those of other loans.  The performance of commercial and construction loans is generally dependent upon future cash flows from business operations (including the sale of products, merchandise and services) and the successful completion or operation of large real estate projects.  Risks attributable to such loans can be significantly increased, often to a greater extent than other loans, by regional economic factors, real estate prices, the demand for commercial and retail office space, and the demand for products and services of industries which are concentrated within our loan portfolio.  Because credit concentrations increase portfolio risk, we place significant emphasis on the purpose of each loan and the related sources of repayment.  We generally limit unsecured commercial loans to maturities of three years and secured commercial loans to maturities of five years.

 

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Maturities of Loans at March 31, 2003:

 

 

Dollars in thousands

Time remaining to maturity		Fixed rate			Adjustable rate			Total
One year or less		$	19,571		$	102,072		$	121,643
After one year to five years		91,430			34,932			126,362
After five years		38,286			91,946			130,232
Total		$	149,287		$	228,950		$	378,237

 

As of March 31, 2003, the percentage of loans held for investment with fixed and floating interest rates was 39.5% and 60.5%, respectively.

 

Nonperforming Assets

 

We carefully monitor the quality of our loan portfolio and the factors that affect it, including regional economic conditions, employment stability, and real estate values.  The accrual of interest on loans is discontinued when the payment of principal or interest is considered to be in doubt, or when a loan becomes contractually past due by 90 days or more with respect to principal or interest, except for loans that are well secured and in the process of collection.

 

As of March 31, 2003, we had $1.3 million in nonperforming assets.  The following table sets forth the balance of nonperforming assets as of the dates indicated:

 

Dollars in thousands		March 31 2003			December 31 2002			September 30 2002			June 30 2002			March 31 2002
Nonaccrual loans		$	222		$	797		$	4,194		$	1,775		$	878
Loans 90 days or more past due and still accruing		122			249			29			54			33
Total nonperforming loans		344			1,046			4,223			1,829			911
Other real estate owned		965			995			1,005			885			885
Total nonperforming assets		$	1,309		$	2,041		$	5,228		$	2,714		$	1,796
Nonperforming loans as a percentage of total gross loans		0.09		%	0.28		%	1.08		%	0.46		%	0.24		%
Nonperforming assets as a percentage of total assets		0.21		%	0.32		%	0.85		%	0.43		%	0.30		%
Nonperforming assets as a percentage of total gross loans and other real estate owned		0.35		%	0.54		%	1.33		%	0.68		%	0.47		%

 

Allowance for Loan Losses

 

We maintain an allowance for loan losses (“ALL”) which is reduced by credit losses and increased by credit recoveries and by the provision to the ALL which is charged against operations.  Provisions to the ALL and the total of the ALL are based, among other factors, upon

 

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our credit loss experience, current economic conditions, the performance of loans within the portfolio, evaluation of loan collateral value, and the prospects or worth of respective borrowers and guarantors.

 

In determining the adequacy of our ALL and after carefully analyzing each loan individually, we segment the loan portfolio into pools of homogeneous loans that share similar risk factors.  Each pool is given a risk assessment factor which largely reflects the expected future losses from each category.  These risk assessment factors change as economic conditions shift and actual loan losses are recorded.  As of March 31, 2003, the ALL of $5,562,000, or 1.47% of total loans, was determined by us to be adequate against foreseeable future losses.  No assurance can be given that nonperforming loans will not increase or that future losses will not exceed the amount of the ALL.

 

The following table summarizes, for the periods indicated, loan balances at the end of each period and average balances during the period, changes in the ALL arising from credit losses, recoveries of credit losses previously incurred, additions to the ALL charged to operating expense, and certain ratios relating to the ALL:

 

		At and For the Three Months Ended March 31,			At and For the Year Ended December 31,
Dollars in thousands		2003			2002
Allowance for Loan Losses:
Beginning balance		$	5,442		$	4,557
Adjustments
Charge-offs:
Real estate - mortgage		—			60
Commercial		2			65
Consumer and other		8			83
Total Charge-offs		10			208
Recoveries:
Real estate - mortgage		—			55
Commercial		3			25
Consumer and other		27			13
Total Recoveries		30			93
Net Charge-offs  (Recoveries)		(20		)	115
Provision charged to operating expense		100			1,000
Ending balance		$	5,562		$	5,442
Loans at end of period		$	378,237		$	379,142
Average loans during period		$	379,898		$	389,430
Ratios:
Allowance to loans at end of period		1.47		%	1.44		%
Net charge-offs (recoveries) to average loans during period		-0.01		%	0.03		%
Net charge-offs (recoveries) to allowance at beginning of period		-0.37		%	2.52		%

 

We made a provision of $100,000 to the allowance for loan losses during the first quarter of 2003 and 2002.  The provisions in both periods were recorded due to growth in certain components of the loan portfolio and deteriorating economic conditions in our market areas.

 

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Deposits

 

Our deposits reached $533.2 million at March 31, 2003, an increase of $2.4 million, or 0.5% compared to December 31, 2002.

 

Our noninterest-bearing demand deposit accounts decreased 0.9% to $183.1 million at March 31, 2003 compared to $184.7 at December 31, 2002.  The ratio of noninterest-bearing deposits to total deposits decreased to 34.3% at March 31, 2003 compared to 34.8% at December 31, 2002.

 

Our MMDA, NOW and savings accounts were 47.6% of total deposits at March 31, 2003 as compared to 46.0% at December 31 2002.  Time certificates of deposit totaled $96.5 million, or 18.1% of total deposits at March 31, 2003 compared to $101.7 million or 19.2% of total deposits at December 31, 2002.

 

Liquidity and Cash Flow

 

The objective of our liquidity management is to maintain our ability to meet the day-to day cash flow requirements of our clients who either wish to withdraw funds or require funds to meet their credit needs. We must manage our liquidity position to allow us to meet the needs of our clients while maintaining an appropriate balance between assets and liabilities to meet the return on investment expectations of our shareholders. We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and repayments and maturities of loans and investments, we have the ability to obtain FHLB advances and purchase overnight Federal Funds.

 

BB is a company separate and apart from the Bank and therefore it must provide for its own liquidity. In addition to its own operating expenses, BB is responsible for the payment of the interest on the outstanding issues of trust preferred securities and the dividends paid on our common stock. Substantially all of BB’s revenues are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to BB.  At March 31, 2003, the Bank had approximately $2.1 million in the aggregate available to be paid as dividends to BB. Management of BB believes that such restrictions will not have an impact on the ability of BB to meet its ongoing cash obligations. As of March 31, 2003, BB did not have any material commitments for capital expenditures.

 

Net cash provided by operating activities totaled $2.0 million for the three months ended March 31, 2003 and $2.1 million for the same period in 2002.  Cash provided by investing activities totaled $4.9 million in the three months ended March 31, 2003.  Cash provided by investing activities totaled $20.9 million in the three months ended March 31, 2002.  For the three months ended March 31, 2003, net cash used for financing activities was $4.3 million compared to $26.1 million in the same period of 2002.

 

21

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Our financial performance is impacted by, among other factors, interest rate risk and credit risk. We do not utilize derivatives to mitigate our credit risk, relying instead on an extensive loan review process and our allowance for loan losses.

 

Interest rate risk is the degree of change in net interest income and economic value of equity due to changes in interest rates. This risk is addressed by our Investment Committee which includes senior management representatives.  We manage the balance sheet, in part, to maintain the forecasted changes in net interest income and economic value of equity within acceptable ranges despite changes in overall interest rates.

 

Our exposure to interest rate risk is reviewed on at least a quarterly basis by the Investment Committee. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income and economic value of equity resulting from changes in overall interest rates.  If potential changes to net interest income and economic value of equity resulting from hypothetical changes in overall interest rates are outside of board-approved limits, then the board may advise management to adjust its asset and liability mix to bring the interest rate risk to within Board-approved limits.

 

Net Interest Income Simulation

 

The impact of interest rate changes on net interest income are measured using net interest income simulation.  The various products in our balance sheet are modeled to simulate their income (and cash flow) behavior in relation to changes in interest rates.  Net interest income for the next 12 months is calculated for current interest rates and for immediate and sustained rate shocks.

 

The income simulation model includes various assumptions regarding the repricing relationships for each product. Many of our assets are floating rate loans, which are assumed to reprice immediately, and to the same extent as the change in market rates according to their contracted index. Our non-term deposit products reprice more slowly, usually changing less than the change in market rates and at our discretion.  As of March 31, 2003, our net interest income simulation analysis indicated that our net interest income for the next 12 months would increase by 3.5% if rates increased 100 basis points, and decrease by 1.6% if rates decreased 100 basis points.

 

This analysis calculates changes in net interest income for a given set of market rate changes and assumptions.  It assumes the balance sheet grows modestly, but that its composition remains similar to the composition at year-end.  It does not account for all the factors that impact this analysis including changes that management may make in the balance sheet composition to mitigate the impact of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change. Furthermore, loan prepayment rate estimates and spread relationships change regularly.  Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in the analysis. In addition, the proportion of adjustable-rate loans in our portfolio could decrease in future periods if market interest rates remain at or decrease below current levels. Changes that vary significantly from the assumptions may have significant effects on our net interest income.

 

The results of this sensitivity analysis should not be relied upon as indicative of actual future results.

 

Economic Value of Equity

 

The economic value of equity is computed by estimating the changes in economic, or market, value of equity over a range of potential changes in overall interest rates.  The economic value of equity is the market value of our assets minus the market value of our liabilities.  The market value of each asset and liability is the net present value of the expected future cash flows discounted at market rates after adjustment for rate changes. We measure the impact on market value for an immediate and sustained 100 basis point increase and decrease (“shock”) in interest rates.  As of March 31, 2003, our economic value of equity analysis indicated that our economic value of equity would decrease by 4.4% if rates increased 100 basis points, and increase by 6.0% if rates decreased 100 basis points.

 

The economic value of equity is based on the net present values of each product in the portfolio, which in turn is based on cash flows factoring in recent market prepayment estimates. The discount rates are based on recently observed spread relationships and adjusted for the assumed interest rate changes.

 

Capital Resources

 

Our total shareholders’ equity was $59.5 million as of March 31, 2003 compared to $58.4 million at December 31, 2002. On February 27, 2003, the Board of Directors approved a plan to expand our stock repurchase program providing for the repurchase of 10% of our common stock outstanding in open market and private transactions.  This program is in addition to the $5 million repurchase program announced in February of 2002.  During the three months ended March 31, 2003, we repurchased 29,500 shares of our common stock for $503,000.

 

We declared cash dividends of $0.01 per share during the three months ended March 31, 2003.

 

We declared a 5% stock dividend during the second quarter of 2002.  All per share amounts have been restated to reflect the 5% stock dividend.

 

22

 

The ratios of average equity to average assets for the periods indicated are set forth below.

 

 

Risk-Based Capital

 

Regulatory authorities have issued guidelines to implement risk-based capital requirements.  The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations.

 

Total capital is classified into two components:  Tier 1 (primarily shareholder’s equity) and Tier 2 (supplementary capital including allowance for possible credit losses, certain preferred stock, eligible subordinated debt, and other qualifying instruments).  The guidelines require that total capital be 8% of risk-based assets, of which at least 4% must be Tier 1 capital.  As of March 31, 2003, our total capital ratio was 12.0% and our Tier 1 capital ratio was 10.8%.  In addition, under the guidelines established for adequately capitalized institutions, we must also maintain a minimum leverage ratio (Tier 1 capital divided by average total assets) of 4%.  As of March 31, 2003, our leverage ratio was 8.0%.  It is our intention to maintain risk-based capital ratios at levels characterized as “well-capitalized” for banking organizations:  Tier 1 risk-based capital of 6 percent or above and total risk-based capital at 10 percent or above.

 

The following table shows our actual capital ratios at March 31, 2003 and December 31, 2002 as well as the minimum capital ratios for capital adequacy:

 

Capital to Risk-Adjusted Assets		At March 31, 2003		At December 31, 2002		Minimum Regulatory Capital Requirements
Tier 1 Risk-Based Capital		10.8	%	10.8	%	4.0	%
Total Risk-Based Capital		12.0	%	12.0	%	8.0	%
Leverage Ratio		8.0	%	7.8	%	4.0	%

 

Item 4. Controls and Procedures:

 

The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation within 90 days prior to the filing date of this report of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a—14(c)), have concluded that the Company’s disclosure controls and procedures are adequate and effective for purposes of Rule 13a-14 in timely alerting them to material information relating to the Company required to be included in the Company’s filings with the SEC under the Securities Exchange Act of 1934.

 

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

Accounting for Stock-Based Compensation—Transition and Disclosure

 

In January 2003, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation” (“SFAS No. 148”). SFAS No. 148 amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. If awards of stock-based employee compensation were outstanding and accounted for under the intrinsic value method of APB Opinion No. 25, “Accounting for Stock” (“APB No. 25”) issued to employees, certain disclosures have to be made for any period for which an income statement is presented.

 

 SFAS No. 148 shall be effective for financial statements for fiscal years ending after December 15, 2002. We continue to apply APB No. 25 in accounting for stock-based compensation and have adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148.

 

 

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Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34

 

In November 2002, the FASB issued FIN 45. FIN 45 addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee.

 

The initial recognition and initial measurement of a liability of a guarantor shall be applied only on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The guarantor’s previous accounting for guarantees issued prior to the date of this Interpretation’s initial application shall not be revised or restated to reflect the effect of the recognition and measurement provisions of the Interpretation.

 

The disclosure requirements in the Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The disclosure requirements of FIN 45 are discussed in Note 5 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The implementation of the initial recognition provisions of FIN 45 did not have a significant impact on our financial condition or operating results. We do not expect the full adoption of FIN 45 to have a material impact on our financial condition or operating results.

 

Consolidation of Variable Interest Entities

 

In January 2003, the FASB issued FIN 46. FIN 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed.

 

 FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.

 

 FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated.

 

We do not expect the adoption of FIN 46 to have a material impact on our financial condition or operating results.

 

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PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

None

 

Item 2.  Changes in Securities and Use of Proceeds

 

None

 

Item 3.  Defaults Upon Senior Securities

 

None

 

Item 4.  Submission of Matters to a Vote of Securities Holders

 

None

 

Item 5.  Other Information

 

None

 

Item 6.  Exhibits and Reports on Form 8-K.

 

(a)          Exhibits:  The Exhibit Index is incorporated by reference.

 

(b)         Reports on Form 8-K.

 

None

 

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SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

BUSINESS BANCORP (Registrant)
By:
/s/ Patrick E. Phelan
	Patrick E. Phelan Executive Vice President and Chief Financial Officer
Date: May 14, 2003

 

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CERTIFICATIONS UNDER
SECTION 302 OF
THE SARBANES OXLEY ACT OF 2002

 

I, Alan J. Lane, certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q of Business Bancorp;

 

2.             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date:	May 14, 2003
By:	/s/ ALAN J. LANE
	Alan J. Lane Chief Executive Officer

 

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CERTIFICATIONS UNDER
SECTION 302 OF
THE SARBANES OXLEY ACT OF 2002

 

I, Patrick E. Phelan, certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q of Business Bancorp;

 

2.             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date:	May 14, 2003
By:	/s/ PATRICK E. PHELAN
	Patrick E. Phelan Executive Vice President and Chief Financial Officer

 

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Exhibit Index

 

Exhibit		Description
99.1		Certification of Registrant’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
99.2		Certification of Registrant’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

 

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