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MANAGEMENT'S DISCUSSION & ANALYSIS OF 2008
As most of you are aware, we lost our great leader, Carl Gregory, who passed away March 30, 2009 after a long and valiant fight against cancer. His accomplishments include leading FCB through the severe early '90s recession, and leading our transformation from a conservative savings and loan to a full service community bank. He made Fullerton Community Bank a great place to work!
At last's year's meeting, we noted the worsening economic environment. We had been concerned about it since 2004, when signs of the real estate bubble become apparent. We noted the rapidly deteriorating fundamental of the large banks as well as California thrifts. We noted that this was clearly the worst liquidity crisis, and credit crunch since 1974. We noted that many of our competitors were nearly insolvent. We also noted (warned?), that we would be facing deteriorating conditions in our land and construction portfolios during 2008.
We were concerned about, but did not predict the rapid deterioration across all asset categories during 2008 nor did we predict that the subprime woes would so dramatically spread to all sectors of the economy. We did predict the retrenchment of consumer spending in response to the decline in household wealth. This consumer retrenchment and deleveraging could subtract $1 trillion per annum in economic activity, as consumers return to traditional savings rates. Long-term, this is not unhealthy for the economy.
EARNINGS
For 2008, RMG Capital Corporation reported a loss of $354 thousand, or $0.26 per share compared with a profit of $4,587 thousand or $1.47 per share during 2007. Our wholly owned subsidiary, Fullerton Community Bank, managed to generate a small profit of $1.9 million for 2008, despite substantially increased reserves and REO expenses.
Fullerton Community Bank increased our allowance for loan losses by $9.2 million during 2008, which is a dramatic increase compared to previous years. This reserve allowance plus a deferred compensation charge more than offset a nearly $4 million increase in operating income during 2008. Additionally, RMG Corporation incurred a write off of $1.83 million (nearly 50% of the total real estate investments) for its real estate development activities for those ventures where we believed that we would be unable to recoup our original investment.
LOANS
We encountered severe weakness in our construction and land portfolio during 2008, especially loans we extended for the entitlement of raw land; and to a lesser extent our SBA portfolio. Construction and land loans comprised 9.3% of FCB's total loan portfolio as of December 31, 2008.
One year ago at this meeting, I mentioned that our delinquent loans were 1% of total loans. At the end of 2008, the delinquent loan ratio increased to 4.7%.
At year end nearly one half of our $51.5 million land and construction loan portfolio was impaired. We are currently valuing our Inland Empire land at less than 40% of original value. Another $14 million of SBA loans were also impaired at year end. We made a few bets, which in hindsight have not worked out favorably, on growth "stories" in the SBA. By definition, many SBA customers do not have the experience or financial depth to weather the downturn in sales. Fortunately, this segment of the portfolio, approximating $6.0 million, carries a 75% U.S. guarantee.
The diversity and quality of the remainder of the loan portfolio remained solid at year end. Delinquencies in Single Family Residence loans, Income Property loans, Consumer loans & Business Banking loans all remain under 1% of each segment.
During 2008, the bank suspended extending new land and construction loans. Our immediate objective is to cut this segment of our portfolio in half by year end. So far, we have achieved 1/3 of our objective ($8.8 million), with another $7.8 million scheduled to be sold or refinanced by the end of May.
RETAIL BANK
Despite major issues that surfaced in our loan portfolio during 2008, and continue to be our primary focus this year, the retail bank enjoyed success during 2008.
1) FCB's cost of funds declined to 2.10% during the year. We resisted the
temptation to match high cost CDs in the marketplace, and instead
increased our business checking accounts, introduced the Option and
Access CD, and used low cost FHLB borrowings, to relentlessly reduce the
cost of funds. The net interest margin increased from 3.58% to 3.96%
during 2008 which is exceptional for this competitive environment.
2) The retail bank continued to progress in electronic banking services
offerings. We made significant progress including lowering our postage
charges and increasing interchange fees by increased customer
utilization of e-statements, e-banking, business debit cards, and
increased business cash management services.
3) Continued investment in our retail branches.
a) Garden Grove remodeling
b) Pending Placentia move to Yorba Linda
Our customers notice and appreciate the investments being made, and the increased Garden Grove office visibility has been noted. When completed these investments will provide boosts for us in the local marketplace.
2009 OUTLOOK
Obviously we are hopeful that the local economy hits bottom soon. And we are seeing signs that the "pace of deterioration is decelerating."
-- Home sales (especially at the lower end) are stabilizing. Inventory
levels are less than 4 months for homes priced below $500,000.
-- Retail sales, while still down, seem to be flattering out
-- Stock market up nearly 30% past two months
-- Debt markets are showing signs of life
While we hope for the best, management is still preparing for the worst. Our most important initiatives this year are 1) to increase capital reserves, 2) increase liquidity and funding sources, and 3) reduce exposures in construction and land loans and control costs. Additionally, our Chief Credit Officer has been "stress testing" the loan portfolio to better anticipate future credit concerns, if any.
ACTIONS
1) Unfortunately, due to the pressures of the credit cycle, we will need to suspend dividends for the remainder of 2009. 2) Our risk weighted assets have decreased the past 4 months, thereby increasing our regulatory capital cushion. 3) We are working hard to reduce operating costs, which will become more evident later this year.
RMG Capital Corporation is the holding company for Fullerton Community Bank. The Bank is a community focused full-service bank which is headquartered in Fullerton, California and has been serving southern California since 1927. The Bank currently has eight retail branches, two regional business banking offices, and an SBA division operating in southern California.
The statements contained in this news release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates and projections about RMG Capital Corporation and its subsidiary Fullerton Community Bank's business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, the Company's actual results or performance may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including but not limited to the general business environment, the California real estate market, competitive conditions in the business and geographic areas in which the Company conducts its business and regulatory actions or changes. The Company disclaims any obligation to subsequently revise or update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
RMG Capital Corporation and Subsidiaries
Consolidated Statements of Financial Condition (Unaudited)
Assets 12/31/08 12/31/07
------------- --------------
Cash and Due from Banks $ 15,630,000 $ 10,595,000
Federal Funds Sold $ 0 $ 0
------------- --------------
Total Cash and Cash Equivalents $ 15,630,000 $ 10,595,000
Loans, net $ 691,380,000 $ 633,826,000
Investment Securities HTM $ - $ 996,000
Mortgage-backed Securities AFS, at fair value $ 2,755,000 $ 4,269,000
Mortgage-backed Securities HTM $ 19,228,000 $ 24,179,000
Accrued Interest Receivable $ 3,282,000 $ 3,688,000
Investments in Real Estate, net $ 2,026,000 $ 3,222,000
Real Estate Acquired through Foreclosure $ 3,065,000 $ -
Federal Home Loan Bank Stock, at cost $ 9,800,000 $ 7,741,000
Cash Surrender Value of Life Insurance $ 7,877,000 $ 7,602,000
Premises and Equipment, net $ 5,887,000 $ 5,973,000
Other Assets $ 7,459,000 $ 6,284,000
Land and Other Development Costs $ 2,293,000 $ -
------------- --------------
Total Assets $ 770,682,000 $ 708,375,000
============= ==============
Liabilities and Stockholders' Equity
Liabilities
Deposit Accounts $ 507,239,000 $ 474,191,000
FHLB Borrowings $ 186,100,000 $ 152,300,000
Other Borrowings $ 1,234,000 $ 1,945,000
Junior Subordinated Debentures $ 18,558,000 $ 18,558,000
Accounts Payable and Other Liabilities $ 9,811,000 $ 11,901,000
------------- --------------
Total Liabilities $ 722,942,000 $ 658,895,000
------------- --------------
Minority Interest and Noncontrolling Interest
in Consolidated Subsidiary $ 0 $ 577,000
StockHolders' Equity
Preferred stock, no par value: 1,000,000
shares authorized: 5,000
issued and outstanding $ 4,823,000 $ 4,823,000
Common Stock, no par value; 10,000,000
shares authorized: 2,808,633
shares issued and outstanding $ 3,327,000 $ 3,164,000
Accumulated other comprehensive Income (Loss) $ (4,000) $ 28,000
Retained earnings $ 39,594,000 $ 40,888,000
------------- --------------
Total Stockholders' Equity $ 47,740,000 $ 48,903,000
------------- --------------
$ 770,682,000 $ 708,375,000
============= ==============
RMG Capital Corporation and Subsidiaries
Consolidated Statement of Income (Unaudited)
2008 2007
------------- --------------
Interest Income:
Interest on loans $ 44,321,000 $ 45,016,000
Interest and dividends on investments $ 1,521,000 $ 2,208,000
------------- --------------
Total Interest Income $ 45,842,000 $ 47,224,000
------------- --------------
Interest Expense:
Interest on deposit accounts $ 9,019,000 $ 16,500,000
Other interest expense $ 8,348,000 $ 6,991,000
------------- --------------
Total Interest Expense $ 17,367,000 $ 23,491,000
------------- --------------
Net Interest Income before provision for
loan losses $ 28,475,000 $ 23,733,000
------------- --------------
Provision for loan losses $ 9,256,000 $ 725,000
------------- --------------
Net Interest Income $ 19,219,000 $ 23,008,000
------------- --------------
Noninterest Income:
Loan servicing and other fees $ 2,882,000 $ 2,660,000
Real estate operations, net $ (1,401,000) $ 119,000
Gain on sale of loans, net $ 124,000 $ 423,000
Other $ (176,000) $ 358,000
------------- --------------
Total Noninterest Income $ 1,429,000 $ 3,560,000
------------- --------------
Noninterest Expense:
Compensation and other employee benefits $ 15,733,000 $ 13,135,000
Occupancy $ 1,485,000 $ 1,398,000
Equipment rental and data processing $ 1,041,000 $ 1,009,000
Other expense and supplies $ 568,000 $ 564,000
Other $ 3,642,000 $ 3,385,000
------------- --------------
Total Noninterest Expense $ 22,469,000 $ 19,491,000
------------- --------------
Income before income tax provision $ (1,821,000) $ 7,077,000
Income tax provision $ (1,002,000) $ 2,490,000
------------- --------------
Income (loss) before minority interest
and noncontrolling interests in
net (loss) income of consolidated
subsidiaries $ (819,000) $ 4,587,000
Minority and noncontrolling interests in net
(income) loss of consolidated subsidiaries $ 465,000 $ 0
------------- --------------
Net Income $ (354,000) $ 4,587,000
============= ==============
Contact: Tom Meyer Chairman & Chief Executive Officer RMG Capital Corp. Fullerton Community Bank (714) 578-7500
SOURCE: RMG Capital Corporation
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