UNITED
STATES SECURITIES AND EXCHANGE
COMMISSION
|
Washington,
DC 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2007
or
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from to .
Commission
File No.: 0-22193
Pacific
Premier Bancorp, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
33-0743196
(State of
Incorporation) (I.R.S.
Employer Identification No)
1600
Sunflower Ave. 2nd Floor,
Costa Mesa, California 92626
(714)
431-4000
----------------
Securities
registered pursuant to Section 12(b) of the Act:
Title of class
|
Name of each exchange on which
registered
|
Common
Stock, par value $0.01 per share
|
NASDAQ Global
Market
|
Securities
registered pursuant to Section 12(g) of the Act:
None
----------------
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [__] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [__] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,”“accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check
one).
Large
accelerated filer
|
[ ]
|
|
Accelerated
filer
|
[ ]
|
Non-accelerated
filer
|
[ ]
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
[X]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes
[__] No [X]
The
aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant, was approximately $53,118,140 and was based upon the last sales
price as quoted on The NASDAQ Stock Market as of June 29, 2007, the last
business day of the most recently completed 2nd fiscal
quarter.
As of
March 31, 2008, the Registrant had 4,903,784 shares outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2008 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
PART
I
PART
I
Overview
All
references to “we”, “us”, “our”, or the “Company” mean Pacific Premier Bancorp,
Inc. and our consolidated subsidiaries, including Pacific Premier Bank, our
primary operating subsidiary. All references to ‘‘Bank’’ refer to
Pacific Premier Bank.
The
statements contained herein that are not historical facts are forward looking
statements based on management's current expectations and beliefs concerning
future developments and their potential effects on the Company. There can be no
assurance that future developments affecting the Company will be the same as
those anticipated by management. Actual results may differ from those
projected in the forward-looking statements. These forward-looking
statements involve risks and uncertainties. These include, but are
not limited to, the following risks: (1) changes in the performance of the
financial markets, (2) changes in the demand for and market acceptance of the
Company's products and services, (3) changes in general economic conditions
including interest rates, presence of competitors with greater financial
resources, and the impact of competitive projects and pricing, (4) the effect of
the Company's policies, (5) the continued availability of adequate funding
sources, and (6) various legal, regulatory and litigation risks.
We are a
California-based bank holding company incorporated in the state of Delaware and
registered as a banking holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA”), for Pacific Premier Bank, a California
state chartered commercial bank. The Bank is subject to examination
and regulation by the California Department of Financial Institutions (“DFI”),
the Board of Governors of the Federal Reserve System (the “Federal Reserve”),
and by the Federal Deposit Insurance Corporation (“FDIC”).
We
conduct business throughout Southern California from our six locations in the
counties of Orange and San Bernardino. We operate six depository
branches in the cities of Huntington Beach, Los Alamitos, Newport Beach, San
Bernardino and Seal Beach, and Costa Mesa. Our corporate headquarters
are located in Costa Mesa, California.
We
provide banking services within our targeted markets in Southern California to
businesses, including the owners and employees of those businesses,
professionals, real estate investors and non-profit organizations, as well as,
consumers in the communities we serve. Through our branches and our
web site at www.PPBI.net on the Internet, we offer a broad array of deposit
products and services for both businesses, and consumer customers including
checking, money market and savings accounts, cash management services,
electronic banking, and on-line bill payment. We offer a wide array
of loan products, such as commercial business loans, lines of credit, commercial
real estate loans, U.S. Small Business Administration (“SBA”) loans,
residential home loans, and home equity loans. At December 31, 2007,
we had consolidated total assets of $763.4 million, net loans of $622.9 million,
total deposits of $386.7 million, consolidated total stockholders’ equity of
$60.8 million, and the Bank was considered a “well-capitalized” financial
institution for regulatory capital purposes.
History
The Bank
was founded in 1983 as a state chartered savings and loan, became a federally
chartered stock savings bank in 1991 and on March 30, 2007, we converted to a
state chartered bank licensed by the DFI. From 1983 to 1994, the
Bank engaged in traditional community banking activities, consisting primarily
of deposit taking and originating one-to-four family home loans. In
1994, the Bank shifted its operating strategy and implemented a nationwide
sub-prime focused mortgage banking platform. The Bank expanded its
operations to originate and to sell sub-prime residential home loans through
asset securitizations and whole loan sales. Lending activities
were funded primarily through non-core deposits, such as wholesale and brokered
certificates of deposit (“CDs”), as well as, high rate consumer
CDs. In 1998, the Company and Bank began to experience
losses. By the third quarter of 2000, the Bank was deemed
under-capitalized, was operating under regulatory enforcement agreements and
incurring losses primarily due to loan defaults.
The
current management team was retained and implemented a new business plan in the
fourth quarter of 2000 in order to refocus the Company’s business model toward a
community bank. We implemented a three phase strategic plan which
involved (1) lowering the risk profile of the Bank and re-capitalizing the
Company, (2) growing the balance sheet at an accelerated rate through the
origination of adjustable rate multi-family loans, thus, returning the Company
to profitability, and (3) transforming the institution to a commercial banking
business model. The first two phases of our plan were completed in
2002 and 2004, respectively. Phase three of our plan involves the
transition to a commercial banking platform and, thus, we are focusing on
changing the deposit base to a higher percentage of low cost core deposits and a
diversification of the Bank’s loan portfolio. We began implementing
this phase of our strategic plan in late 2004 and early 2005 through a shift in
our corporate focus towards relationship banking.
Operating
Strategy
Our goal
is to develop the Bank into one of Southern California’s top performing
commercial banks as an alternative to the large regional and national banks for
businesses, professionals, entrepreneurs and non-profit organizations for the
long term benefit of our shareholders, customers and employees. The
following are our operating strategies to achieve our goals:
·
|
Recruitment of Business
Bankers. We began our transition to a commercial banking
platform in 2005 by recruiting experienced business bankers who possess an
established following of customer relationships. These relationships
typically include businesses that have both deposit and loan needs, as
well as, the personal depository needs of the business owners
themselves. Our incentive plans compensate our business bankers
for the generation and retention of customer relationships as measured by
the level of low cost deposits maintained at the Bank. We will
continue to recruit experienced bankers to staff our branches and serve
our targeted markets.
|
·
|
Relationship
Banking. We recognize that customer relationships are
built through a series of consistently executed experiences in both
routine transactions and higher value interactions. Our
business bankers are focused on developing long term relationships with
business owners, professionals, entrepreneurs, real estate investors, and
non-profit organizations through consistent and frequent
contact. Our bankers are actively involved in community
organizations and events, thus building and capitalizing on the Bank’s
reputation within our local
communities.
|
·
|
Growing Core Deposits/Reducing
our Wholesale Funding. The second phase of our strategic
plan relied on wholesale borrowings, such as advances from Federal Home
Loan Bank (“FHLB”) System and brokered deposits to fund a large portion of
our accelerated loan growth during that phase. As we transition
towards a commercial banking platform, we intend to reduce our reliance on
these funding sources over time. We will manage our growth and
our concentration in commercial real estate, in part, by selling excess
loan production, generally multi-family loans. We also expect
to increase the growth of low cost core deposit accounts via our recent
branch expansion, in order to better serve our market area and to attract
additional business customers.
|
·
|
Expansion through electronic
banking, organic growth and acquisitions. We believe that the
consolidation and current turmoil in the banking industry has created an
opportunity at the community banking level in the areas that we
serve. Many bank customers feel displaced by large
out-of-market acquirers and are attracted to institutions that have local
decision making capability, more responsive customer service, and greater
familiarity with the needs in their markets. We
opened two new branches in the cities of Los Alamitos and Costa Mesa,
California in 2006 and our sixth branch in the city of Newport Beach.
California during 2007. Additionally, we relocated our
Huntington Beach branch to a new facility which will enable us to better
serve our existing business clients and to attract additional business in
the surrounding area. We intend to continue expanding our
franchise in the high growth areas of Orange and Los Angeles Counties,
primarily through electronic banking, such as, remote or merchant capture,
on-line banking and cash management service available through our web
site. As opportunities arise, we will consider expansion into markets
contiguous to our own through potential acquisitions and/or de novo
branching.
|
·
|
Diversifying our Loan
Portfolio. We believe it is important to diversify our
loan portfolio and to increase the amount of commercial real estate,
commercial and industrial (“C&I”) loans and SBA loans within our
portfolio. As a result, we believe it is essential to be able
to offer our customers a wide array of products and
services. We provide flexible and structured loan products to
meet our customer’s needs, which, in turn, provide us the opportunity to
become their full service banker. We continually reassess our
various product and service offerings to ensure they allow us to achieve
our objectives.
|
·
|
Maintain Excellent Asset
Quality. Our credit and risk management culture has
resulted in low levels of nonperforming loans and an overall high credit
quality within our loan portfolio. We monitor existing economic
trends and conditions that could positively or negatively impact our
business. We seek to exploit these trends by entering or
exiting certain lines of business or through offering or eliminating
various products. We will continue to adjust our risk
management practices to changes in the conditions that impact our
business.
|
·
|
Premier Customer Service
Provider. We believe it is imperative that the Bank
provide a consistent level of quality service which generates customer
retention and referrals. All of our employees, through
training, understand that each interaction with our customers is an
opportunity to exceed their expectations. Our employees’
incentive compensation is, in part, predicated on achieving a consistently
high level of customer
satisfaction.
|
Our
executive offices are located at 1600 Sunflower Avenue, 2nd Floor,
Costa Mesa, California 92626 and our telephone number is (714)
431-4000. Our Internet website address is
www.ppbi.net. Our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K, and all amendments
thereto, from 1998 to present, are available free of charge on our Internet
website. Also on our website are our Code of Ethics, Insider Trading
and Beneficial Ownership forms, and Corporate Governance
Guidelines. The information contained in our website, or in any
websites linked by our website, is not a part of this Annual Report on Form
10-K.
Lending
Activities
General. In 2007 we
maintained our commitment to a high level of credit quality in our lending
activities, even as we generated record loan originations for the
year. We expanded our efforts to diversify our loan portfolio and to
increase our C&I and SBA lending activities in addition to continuing our
strong multi-family and commercial real estate lending programs. The
Bank offers a full complement of flexible and structured loan products tailored
to meet the needs of our customers.
Loans
were made primarily to borrowers within our market area and secured by real
property and business assets located principally in Southern
California. We emphasized relationship lending, and focused on
generating retail production by dealing directly with customers. We
have and will continue to offer loans up to our legal lending limits, which were
$17.6 million for secured loans and $10.6 million for unsecured loans as of
December 31, 2007. These efforts assisted us in establishing
depository relationships with new and existing customers consistent with the
Bank’s strategic direction. During 2007, we originated $311.2 million
in multi-family, $23.0 million in commercial real estate and land loans, and
$69.1 million of business loans consisting of $17.2 million of
owner-occupied commercial real estate loans, $37.7 million of conventional
C&I loans, $14.2 million of SBA loans and $6.0 million of other
loans. At December 31, 2007, we had $626.6 million in total gross loans
outstanding.
C&I Lending. We
originate loans secured by business assets including inventory, receivables,
machinery and equipment to businesses located in our primary market
area. In many instances, real estate holdings of the borrower, its
principals or loan guarantors are also taken as collateral. Loan
types include revolving lines of credit, term loans, seasonal loans and loans
secured by liquid collateral such as cash deposits or marketable
securities. We also issue letters of credit on behalf of our
customers, backed by loans or deposits with the Bank. In addition to
lending against business assets, our business loan programs include loans for
owner-occupied commercial real estate such as retail, office and industrial
properties. Owner-occupied real estate is underwritten based on the
value of the building and the cash flow of the occupying business. As
of December 31, 2007, we had total commitments of $48.1 million in commercial
business lines of credit, of which, $30.4 million were disbursed, constituting
8.1% of our loan portfolio.
SBA Lending. The
Bank was approved to originate loans under the SBA’s Preferred Lenders Program
(“PLP”) in the third quarter of 2006. The PLP lending status affords
the Bank a higher level of delegated credit autonomy, translating to a
significantly shorter turnaround time from application to funding, which is
critical to our marketing efforts. We originate loans under the SBA’s
7(a), 504 and Express loan programs, in conformance with SBA underwriting and
documentation standards. The guaranteed portion of the 7(a) loans is
typically sold on the secondary market. As of December 31, 2007, we
had $13.9 million of SBA loans, constituting 2.2% of our loan
portfolio.
Multi-family Real Estate
Lending. We originate and purchase loans secured by
multi-family residential properties (five units and greater) located
predominantly in Southern California. The majority of loans we fund
on multi-family properties are sold in the secondary market. However,
due to recent changes in the market place, starting in the third quarter of
2007, for such loans, originations of multi-family loans has materially
decreased which will affect future loan sales and thus the amount of gain on
loan sales we have been able to achieve in previous years. Pursuant to our
underwriting policies, multi-family residential loans may be made in an amount
up to 75% of the lesser of the appraised value or the purchase price of the
collateral property. In addition, we generally require a stabilized
minimum debt service coverage ratio of 1.15:1, based on the qualifying loan
interest rate. Loans are made for terms up to 30 years with
amortization periods up to 30 years. As of December 31, 2007, we had
$341.3 million of multi-family real estate secured loans, constituting 54.5% of
our loan portfolio. Multi-family loans originated in 2007 had an
average outstanding balance of $1,208,000, loan-to-value of 64.3%, and debt
coverage ratio of 1.15:1 at origination. We expect to originate a
substantially smaller amount of multifamily loans going forward due to changes
in the market place for such loans.
Commercial Real Estate Lending –
Investor and Owner-Occupied. We originate and purchase loans
secured by commercial real estate, such as retail centers, small office and
light industrial buildings, and mixed-use commercial properties located
predominantly in Southern California. We will also, from time to
time, make a loan secured by a special purpose property, such as a gas station
or motel. Pursuant to our underwriting policies, commercial real
estate loans may be made in amounts up to 75% of the lesser of the appraised
value or the purchase price of the collateral property. We consider
the net operating income of the property and typically require a stabilized debt
service coverage ratio of at least 1.20:1, based on the qualifying interest
rate. Loans are generally made for terms up to fifteen years with
amortization periods up to 30 years. As of December 31, 2007, we had
$205.1 million of commercial real estate secured loans, constituting 32.7% of
our loan portfolio. Commercial real estate loans originated in 2007
had an average balance of $1,138,000, loan-to-value of 64.84% and debt coverage
ratio, on investor owned, of 1.24:1 at origination.
One-to-Four Family
Lending. The Bank is not an active participant in single
family lending on a transactional basis and does not engage in Alt-A or subprime
lending. Home loans are available to banking customers only, in
keeping with the Bank’s strategy of offering a full complement of loan products
to customers. In 2007, the Bank originated three loans secured by
first liens on single family residences for $3.2 million. The Bank’s
portfolio of one-to-four family home loans at December 31, 2007 totaled $13.1
million, constituting 2.1% of our loan portfolio, of which $10.9 million
consists of loans secured by first liens on real estate and $2.2 million
consists of loans secured by second or junior liens on real estate.
Sourcing of our
Loans. In keeping with our business strategy, our Business
Bankers successfully expanded our retail lending activities in
2007. Direct loan originations accounted for 25.9% of our loans,
which represented an increase of 134.9% over 2006. These loans were
sourced through referrals from our depository branches and by soliciting
business owners directly. Our bankers continue to focus on developing
and maintaining relationships with individual investors, accountants,
consultants, commercial real estate investment sales and leasing agents, and
other banks to further increase the percentage of direct referrals in future
periods.
C&I
and SBA loans are sourced by our Business Bankers, Regional Managers and the
Bank’s web site. Our bankers call on business owners, accountants,
attorneys, consultants, non-profit organizations, and various other referral
sources to generate new business banking relationships. Upon securing
the business banking relationships, they work with the business owner to offer
personal banking products and services to the business owner, their families,
and the businesses’ employees as well. Additionally, our Regional
Managers work closely with our business bankers to capture the full banking
needs of our multi-family and commercial real estate loan
customers. A small percentage of our business lending activity
results from broker referrals of business owners seeking to purchase or
refinance their business real estate.
We primarily obtain new multi-family
and commercial real estate loans, from established relationships with mortgage
brokers operating throughout Southern California. In 2007, we
maintained relationships with over 50 brokerage companies of which five could be
termed significant. In 2007, the top five brokerage companies
accounted for 62.0% of the multi-family and commercial real estate loans
originated by the Bank. Within these five brokerage companies, we
funded loans with a total of 26 different agents. Our Business
Bankers have relationships with these individuals and seek to maintain the
relationship regardless of where these agents are
employed. Additionally, our bankers seek to establish relationships
with other agents within these brokerage companies that have not done business
with us in the past.
Interest Rates on Our
Loans. We employ a risk-based pricing strategy on all loans we
fund. The interest rates, fees and loan structure of our loans
generally vary based on a number of factors, including the degree of credit
risk, size, maturity of the loan, borrower’s business or property management
expertise, and prevailing market rates for similar types of
loans. Adjustable rate C&I and SBA loans are typically priced
based on a margin over the Prime rate. Investor owned real estate
loans are typically 3, 5, 7, or 10 year fixed rate hybrid adjustable-rate loans
and are based on one of several interest rate indices. Many of the
C&I loans and substantially all of the investor owned real estate loans
originated by the Bank in 2007 had minimum interest rates (“floor rates”) below
which the rate charged may not be reduced regardless of further reductions in
the underlying interest rate index. Substantially all investor real
estate loans also include prepayment penalties.
Lending Risks on our
Loans. Lending risks vary by the type of loan
extended. In our C&I and SBA lending activities, collectability
of the loans may be adversely affected by risks generally related to small
businesses, such as:
·
|
Changes
or continued weakness in general or local economic
conditions;
|
·
|
Changes
or continued weakness in specific industry segments, including weakness
affecting the business’ customer
base;
|
·
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Changes
in a business’ personnel;
|
·
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Increases
in supplier costs that cannot be passed along to
customers;
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·
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Increases
in operating expenses (including energy
costs);
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·
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Changes
in governmental rules, regulations and fiscal
policies;
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·
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Increases
in interest rates, tax rates; and
|
·
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Other
factors beyond the control of the borrower or the
lender.
|
In our
investor real estate loans, payment performance and the liquidation values of
collateral properties may be adversely affected by risks generally incidental to
interests in real property, such as:
·
|
Changes
or continued weakness in general or local economic
conditions;
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·
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Changes
or continued weakness in specific industry
segments;
|
·
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Declines
in real estate values;
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·
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Declines
in rental rates;
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·
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Declines
in occupancy rates;
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·
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Increases
in other operating expenses (including energy
costs);
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·
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The
availability of property financing;
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·
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Changes
in governmental rules, regulations and fiscal policies, including rent
control ordinances, environmental legislation and
taxation;
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·
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Increases
in interest rates, real estate and personal property tax rates;
and
|
·
|
Other
factors beyond the control of the borrower or the
lender.
|
We
attempt to mitigate these risks through sound and prudent underwriting
practices, as well as a proactive loan review process and our risk management
practices. See “Lending Activities - Underwriting and Approval
Authority for Our Loans.” We will not extend credit to any one
borrower that is in excess of regulatory limits.
Underwriting and Approval Authority
for Our Loans. Our board of directors establishes our lending
policies. Each loan must meet minimum underwriting criteria
established in our lending policies and must fit within our overall strategies
for yield, interest rate risk, and portfolio concentrations. The
underwriting and quality control functions are managed through our corporate
office. Each loan application is evaluated from a number of
underwriting perspectives. For business and SBA loans, underwriting
considerations include historic business cash flows, debt service coverage,
loan-to-value ratios of underlying collateral, if any, debt to equity ratios,
credit history, business experience, history of business, forecasts of
operations, economic conditions, business viability, net worth, and
liquidity. For real estate secured loans, underwriting considerations
include property appraised value, loan-to-value, level of debt service coverage
utilizing both the actual net operating income and forecasted net operating
income, use and condition of the property, as well as, the borrower’s liquidity,
income, credit history, net worth, and operating experience.
Business
loans are generally originated as recourse or with full guarantees from key
borrowers or borrower principals. Loans secured by real estate are
originated on both a non-recourse and full recourse basis. On loans
made to entities, such as partnerships, limited liability companies,
corporations or trusts, we typically obtain personal guarantees from the
appropriate managing members, major shareholders, trustees or other appropriate
principals. In 2007, substantially all of our loans to entities were
originated with full recourse and/or personal guarantees from principals of the
borrowers.
Upon
receipt of a completed loan application from a prospective borrower, a credit
report and other required reports are ordered and, if necessary, additional
information is requested. Prior to processing and underwriting any
loan, we issue a letter of interest based on a preliminary analysis by our
bankers, which letter details the terms and conditions on which we will consider
the loan request. Upon receipt of the signed letter of interest and a
deposit, we process and underwrite each loan application and prepare all loan
documentation after the loan has been approved.
Our
credit memorandum, which are prepared by our underwriters, include a description
of the transaction and prospective borrower and guarantors, the collateral
securing the loan, if any, the proposed uses of loan proceeds and source(s) of
repayment, as well as an analysis of the borrower’s business and personal
financial statements and creditworthiness. The financial statements
and creditworthiness of any guarantors are also analyzed. For loans
secured by real property, the credit memorandum will include an analysis of the
property. Loans secured by real estate require an independent
appraisal conducted by a licensed appraiser. All appraisal reports
are appropriately reviewed by our appraisal department. Our board of
directors reviews and approves annually the independent list of acceptable
appraisers. When appropriate, environmental reports are obtained and
reviewed as well.
Following
loan approval and prior to funding, our underwriting and processing departments
ensure that all loan approval terms have been satisfied, that they conform with
lending policies (or are properly documented as exceptions with required
approvals), and that all required documentation is present and in proper
form.
Commercial
business loans are subject to Bank guidelines regarding appropriate covenants
and periodic monitoring requirements which include but are not limited
to:
·
|
Capital
and lease expenditures;
|
·
|
Salaries
and other withdrawals;
|
·
|
Working
capital levels;
|
·
|
Debt
to net worth ratios;
|
·
|
Cash
flow requirements;
|
·
|
Profitability
requirements;
|
·
|
Collateral
coverage ratio;
|
·
|
Current
and quick ratios.
|
Subject
to the above standards, our board of directors delegates authority and
responsibility for loan approvals to management up to $1.5 million for all loans
secured by real estate and up to $250,000 for loans not secured by real
estate. Loan approvals at the management level require the approval
of at least two members of our Management Loan Committee, consisting of our
President and Chief Executive Officer, Chief Credit Officer, and Chief Banking
Officer. All loans in excess of $1.5 million, including total
aggregate borrowings in excess of $1.5 million, and any loan in excess of
$250,000 not secured by real estate require a majority approval of our board’s
Credit Committee, which is comprised of three directors, including our President
and Chief Executive Officer.
Loan
Servicing. Loan servicing is centralized at our corporate
headquarters. Our loan servicing operations are intended to provide
prompt customer service and accurate and timely information for account
follow-up, financial reporting and loss mitigation. Following the
funding of an approved loan, the data is entered into our data processing
system, which provides monthly billing statements, tracks payment performance,
and effects agreed upon interest rate adjustments. The loan servicing
activities include (i) the collection and remittance of mortgage loan payments,
(ii) accounting for principal and interest and other collections and expenses,
(iii) holding and disbursing escrow or impounding funds for real estate taxes
and insurance premiums, (iv) inspecting properties when appropriate, (v)
contacting delinquent borrowers, and (vi) acting as fiduciary in foreclosing and
disposing of collateral properties.
When
payments are not received by their contractual due date, collection efforts are
initiated by our loss mitigation personnel. Accounts delinquent more
than 15 days are reviewed by our loss mitigation manager and are assigned to our
collector to begin the process of collections. Our collector begins
by contacting the borrower telephonically and progresses to sending a notice of
intention to foreclose within 30 days of delinquency, and we will initiate
foreclosure on one-to-four family loans 30 days thereafter and on multi-family
and commercial real estate 10 days thereafter if the delinquent payments are not
received in full. Our loss mitigation manager conducts an evaluation
of all loans 90 days or more past due by obtaining an estimate of value on the
underlying collateral. The evaluation may result in our charging off
either part of, or the entire loan, but still continuing with collection
efforts.
Loan Portfolio
Composition. At December 31, 2007, our net loans receivable
held for investment totaled $622.1 million and net loans receivable held for
sale totaled $750,000. The types of loans that the Bank may originate
are subject to federal law, state law, and regulations.
The
following table sets forth the composition of our loan portfolio in dollar
amounts and as a percentage of the portfolio at the dates
indicated:
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
|
(dollars
in thousands)
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
$ |
341,263 |
|
|
|
54.45 |
% |
|
$ |
357,275 |
|
|
|
58.80 |
% |
|
$ |
459,714 |
|
|
|
75.99 |
% |
|
$ |
394,582 |
|
|
|
83.67 |
% |
|
$ |
188,939 |
|
|
|
75.85 |
% |
Commercial
|
|
|
147,523 |
|
|
|
23.54 |
% |
|
|
173,452 |
|
|
|
28.55 |
% |
|
|
123,364 |
|
|
|
20.39 |
% |
|
|
53,937 |
|
|
|
11.44 |
% |
|
|
20,075 |
|
|
|
8.06 |
% |
One-to-four
family (1)
|
|
|
13,080 |
|
|
|
2.09 |
% |
|
|
12,825 |
|
|
|
2.11 |
% |
|
|
16,561 |
|
|
|
2.74 |
% |
|
|
22,347 |
|
|
|
4.74 |
% |
|
|
36,632 |
|
|
|
14.71 |
% |
Business
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
owner occupied (2)
|
|
|
57,614 |
|
|
|
9.19 |
% |
|
|
35,929 |
|
|
|
5.91 |
% |
|
|
2,062 |
|
|
|
0.34 |
% |
|
|
565 |
|
|
|
0.12 |
% |
|
|
592 |
|
|
|
0.24 |
% |
Commercial
and industrial
|
|
|
50,993 |
|
|
|
8.14 |
% |
|
|
22,762 |
|
|
|
3.75 |
% |
|
|
3,248 |
|
|
|
0.54 |
% |
|
|
103 |
|
|
|
0.02 |
% |
|
|
- |
|
|
|
0.00 |
% |
SBA
|
|
|
13,995 |
|
|
|
2.23 |
% |
|
|
5,312 |
|
|
|
0.87 |
% |
|
|
- |
|
|
|
0.00 |
% |
|
|
- |
|
|
|
0.00 |
% |
|
|
- |
|
|
|
0.00 |
% |
Other
loans
|
|
|
2,224 |
|
|
|
0.35 |
% |
|
|
63 |
|
|
|
0.01 |
% |
|
|
27 |
|
|
|
0.00 |
% |
|
|
75 |
|
|
|
0.01 |
% |
|
|
2,863 |
|
|
|
1.14 |
% |
Total
gross loans
|
|
|
626,692 |
|
|
|
100.00 |
% |
|
|
607,618 |
|
|
|
100.00 |
% |
|
|
604,976 |
|
|
|
100.00 |
% |
|
|
471,609 |
|
|
|
100.00 |
% |
|
|
249,101 |
|
|
|
100.00 |
% |
Less
(plus):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan origination (costs), fees, (premiums), and discounts
|
|
|
(769 |
) |
|
|
|
|
|
|
(1,024 |
) |
|
|
|
|
|
|
(1,467 |
) |
|
|
|
|
|
|
(1,371 |
) |
|
|
|
|
|
|
(483 |
) |
|
|
|
|
Allowance
for loan losses
|
|
|
4,598 |
|
|
|
|
|
|
|
3,543 |
|
|
|
|
|
|
|
3,050 |
|
|
|
|
|
|
|
2,626 |
|
|
|
|
|
|
|
1,984 |
|
|
|
|
|
Loans
receivable, net
|
|
$ |
622,863 |
|
|
|
|
|
|
$ |
605,099 |
|
|
|
|
|
|
$ |
603,393 |
|
|
|
|
|
|
$ |
470,354 |
|
|
|
|
|
|
$ |
247,600 |
|
|
|
|
|
(1) Includes second trust deeds.
(2) Secured by real estate.
Loan Maturity. The following
table shows the contractual maturity of the Bank's gross loans for the period
indicated. The table does not reflect prepayment assumptions.
|
|
At
December 31, 2007
|
|
|
|
Multi-
Family
|
|
|
Commercial
Investor
|
|
|
Commercial
Owner
Occupied
|
|
|
Commercial
Business
|
|
|
SBA
|
|
|
One-to-Four
Family
|
|
|
Other
Loans
|
|
|
Total
Loan
Receivable
|
|
|
|
(in
thousands)
|
|
Amounts
due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year or less
|
|
$ |
2,770 |
|
|
$ |
3,485 |
|
|
$ |
591 |
|
|
$ |
45,212 |
|
|
$ |
1,048 |
|
|
$ |
- |
|
|
$ |
142 |
|
|
$ |
53,248 |
|
More
than one year to three years
|
|
|
- |
|
|
|
2,952 |
|
|
|
65 |
|
|
|
1,198 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,215 |
|
More
than three years to five years
|
|
|
618 |
|
|
|
5,262 |
|
|
|
- |
|
|
|
1,268 |
|
|
|
230 |
|
|
|
81 |
|
|
|
2,062 |
|
|
|
9,521 |
|
More
than five years to 10 years
|
|
|
11,141 |
|
|
|
121,434 |
|
|
|
46,285 |
|
|
|
2,438 |
|
|
|
12,602 |
|
|
|
1,653 |
|
|
|
20 |
|
|
|
195,573 |
|
More
than 10 years to 20 years
|
|
|
2,651 |
|
|
|
7,618 |
|
|
|
6,364 |
|
|
|
877 |
|
|
|
115 |
|
|
|
2,055 |
|
|
|
- |
|
|
|
19,680 |
|
More
than 20 years
|
|
|
324,083 |
|
|
|
6,772 |
|
|
|
4,309 |
|
|
|
- |
|
|
|
- |
|
|
|
9,291 |
|
|
|
- |
|
|
|
344,455 |
|
Total
amount due
|
|
|
341,263 |
|
|
|
147,523 |
|
|
|
57,614 |
|
|
|
50,993 |
|
|
|
13,995 |
|
|
|
13,080 |
|
|
|
2,224 |
|
|
|
626,692 |
|
Less
(plus):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan origination fees (costs)
|
|
|
(881 |
) |
|
|
43 |
|
|
|
(55 |
) |
|
|
49 |
|
|
|
38 |
|
|
|
(41 |
) |
|
|
- |
|
|
|
(847 |
) |
Lower
of cost or market
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
78 |
|
|
|
- |
|
|
|
78 |
|
Allowance
for loan losses
|
|
|
1,438 |
|
|
|
1,129 |
|
|
|
248 |
|
|
|
640 |
|
|
|
207 |
|
|
|
165 |
|
|
|
21 |
|
|
|
3,848 |
|
Allowance
for loan losses (unallocated)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
750 |
|
Total
loans, net
|
|
|
340,706 |
|
|
|
146,351 |
|
|
|
57,421 |
|
|
|
50,304 |
|
|
|
13,750 |
|
|
|
12,878 |
|
|
|
2,203 |
|
|
|
622,863 |
|
Loans
held for sale, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
749 |
|
|
|
- |
|
|
|
- |
|
|
|
749 |
|
Loans
held for investment, net
|
|
$ |
340,706 |
|
|
$ |
146,351 |
|
|
$ |
57,421 |
|
|
$ |
50,304 |
|
|
$ |
13,001 |
|
|
$ |
12,878 |
|
|
$ |
2,203 |
|
|
$ |
622,114 |
|
The
following table sets forth at December 31, 2007, the dollar amount of gross
loans receivable contractually due after December 31, 2008, and whether such
loans have fixed interest rates or adjustable interest rates.
|
|
Loans
Due After December 31, 2008
|
|
|
|
At
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Residential
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$ |
5,509 |
|
|
$ |
7,571 |
|
|
$ |
13,080 |
|
Multi-family
|
|
|
1,555 |
|
|
|
336,938 |
|
|
|
338,493 |
|
Commercial
real estate
|
|
|
15,551 |
|
|
|
128,487 |
|
|
|
144,038 |
|
Commercial
owner occupied
|
|
|
8,367 |
|
|
|
48,656 |
|
|
|
57,023 |
|
Commercial
and industrial
|
|
|
1,310 |
|
|
|
4,470 |
|
|
|
5,780 |
|
SBA
|
|
|
6,084 |
|
|
|
6,862 |
|
|
|
12,946 |
|
Other
loans
|
|
|
34 |
|
|
|
2,048 |
|
|
|
2,082 |
|
Total
gross loans receivable
|
|
$ |
38,410 |
|
|
$ |
535,032 |
|
|
$ |
573,442 |
|
The
following table sets forth the Bank's loan originations, purchases, sales, and
principal repayments for the periods indicated:
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance of gross loans
|
|
$ |
607,618 |
|
|
$ |
604,976 |
|
|
$ |
471,609 |
|
Loans
originated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
311,236 |
|
|
|
182,378 |
|
|
|
184,757 |
|
Commercial
real estate
|
|
|
23,040 |
|
|
|
90,840 |
|
|
|
74,548 |
|
Commercial
owner occupied
|
|
|
17,208 |
|
|
|
28,396 |
|
|
|
12,335 |
|
Commecial
and industrial
|
|
|
37,705 |
|
|
|
34,420 |
|
|
|
3,741 |
|
SBA
|
|
|
14,209 |
|
|
|
9,230 |
|
|
|
- |
|
Other
loans
|
|
|
3,333 |
|
|
|
1,537 |
|
|
|
1,945 |
|
Total
loans originated
|
|
|
406,731 |
|
|
|
346,801 |
|
|
|
277,326 |
|
Loans
purchased
|
|
|
2,750 |
|
|
|
- |
|
|
|
- |
|
Sub
total—production
|
|
|
409,481 |
|
|
|
346,801 |
|
|
|
277,326 |
|
Total
|
|
|
1,017,099 |
|
|
|
951,777 |
|
|
|
748,935 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
repayments
|
|
|
149,550 |
|
|
|
138,116 |
|
|
|
83,754 |
|
Sales
of loans
|
|
|
239,396 |
|
|
|
205,268 |
|
|
|
59,752 |
|
Charge-offs
|
|
|
701 |
|
|
|
266 |
|
|
|
216 |
|
Transfer
to other real estate owned
|
|
|
760 |
|
|
|
509 |
|
|
|
237 |
|
Total
gross loans
|
|
|
626,692 |
|
|
|
607,618 |
|
|
|
604,976 |
|
Ending
balance loans held for sale, gross
|
|
|
750 |
|
|
|
795 |
|
|
|
456 |
|
Ending
balance loans held for investment, gross
|
|
$ |
625,942 |
|
|
$ |
606,823 |
|
|
$ |
604,520 |
|
Delinquencies and Classified
Assets. Federal regulations require that the Bank utilize an internal
asset classification system to identify and report problem and potential problem
assets. The Bank’s Senior Portfolio Manager has responsibility
for identifying and reporting problem assets to the Bank’s Credit and Investment
Review Committee (“CIRC”), which operates pursuant to the board-approved CIRC
policy. The policy incorporates the regulatory requirements of
monitoring and classifying all assets of the Bank. The Bank currently designates
or classifies problem and potential problem assets as “Special Mention”,
“Substandard" or "Loss" assets. An asset is considered "Substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the Bank will sustain "some
loss" if the deficiencies are not corrected. All other real estate
owned (“OREO”) acquired from foreclosure is classified as “Substandard”. Assets
classified as "Loss" are those considered “uncollectible" and of such little
value that their continuance as assets. Assets which do not currently
expose the Bank to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are designated "Special
Mention."
The
Bank’s determination as to the classification of its assets and the amount of
its valuation allowances are subject to review by bank regulatory agencies,
which can order the establishment of additional general or a change in a
classification. The federal banking agencies adopted an interagency policy
statement on the allowance for loan and lease losses. The policy statement
provides guidance for financial institutions on both the responsibilities of
management for the assessment and establishment of adequate allowances and
guidance for banking agency examiners to use in determining the adequacy of
general valuation allowances. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management has analyzed all
significant factors that affect the collectability of the portfolio in a
reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the Bank believes that it has established an adequate allowance for
estimated loan losses, there can be no assurance that its regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to materially
increase its allowance for estimated loan losses, thereby negatively affecting
the Bank's financial condition and earnings at that time. Although management
believes that an adequate allowance for estimated loan losses has been
established, actual losses are dependent upon future events and, as such,
further additions to the level of allowances for estimated loan losses may
become necessary.
The
Bank's CIRC reviews the Senior Portfolio Manager’s recommendations for
classifying the Bank's assets quarterly and reports the results of its review to
the board of directors. The following table sets forth information concerning
substandard assets, OREO and total classified assets at December 31,
2007 for the Company:
|
|
At
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Substandard
|
|
|
|
Total
Substandard Assets
|
|
|
OREO
|
|
|
Assets
and OREO
|
|
|
|
Gross
Balance
|
|
|
#
of Loans
|
|
|
Gross
Balance
|
|
|
#
of Properties
|
|
|
Gross
Balance
|
|
|
#
of Assets
|
|
|
|
(dollars
in thousands)
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$ |
406 |
|
|
|
11 |
|
|
$ |
- |
|
|
|
2 |
|
|
$ |
406 |
|
|
|
13 |
|
Multi-family
|
|
|
- |
|
|
|
- |
|
|
|
711 |
|
|
|
1 |
|
|
|
711 |
|
|
|
1 |
|
Commercial
Real Estate
|
|
|
5,929 |
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
|
|
5,929 |
|
|
|
5 |
|
Commercial
Owner Occupied
|
|
|
320 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
320 |
|
|
|
1 |
|
Commercial
Business
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
SBA
|
|
|
741 |
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
741 |
|
|
|
3 |
|
Other
loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Specific
Allowance
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
Substandard Assets
|
|
$ |
7,396 |
|
|
|
20 |
|
|
$ |
711 |
|
|
|
3 |
|
|
$ |
8,107 |
|
|
|
23 |
|
At
December 31, 2007, the Company had $27.6 million of Special Mention assets and
$8.1 million of Substandard assets.
The
following table sets forth delinquencies in the Company's loan portfolio as of
the dates indicated:
|
|
60-89
Days
|
|
|
90
Days or More
|
|
|
|
|
|
|
Principal
Balance
|
|
|
|
|
|
Principal
Balance
|
|
|
|
#
of Loans
|
|
|
of
Loans
|
|
|
#
of Loans
|
|
|
of
Loans
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Commercial
real estate
|
|
|
1 |
|
|
|
641 |
|
|
|
1 |
|
|
|
3,125 |
|
Commercial
owner occupied
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
and industrial
|
|
|
3 |
|
|
|
458 |
|
|
|
- |
|
|
|
- |
|
SBA
|
|
|
5 |
|
|
|
804 |
|
|
|
- |
|
|
|
- |
|
One-to-four
family and other loans
|
|
|
15 |
|
|
|
719 |
|
|
|
7 |
|
|
|
284 |
|
Total
|
|
|
24 |
|
|
$ |
2,622 |
|
|
|
8 |
|
|
$ |
3,409 |
|
Delinquent
loans to total gross loans
|
|
|
|
0.42 |
% |
|
|
|
|
|
|
0.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Commercial
real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
owner occupied
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
and industrial
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
SBA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
One-to-four
family and other loans
|
|
|
4 |
|
|
|
182 |
|
|
|
13 |
|
|
|
634 |
|
Total
|
|
|
4 |
|
|
$ |
182 |
|
|
|
13 |
|
|
$ |
634 |
|
Delinquent
loans to total gross loans
|
|
|
|
0.03 |
% |
|
|
|
|
|
|
0.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Commercial
real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
owner occupied
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
and industrial
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
SBA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
One-to-four
family and other loans
|
|
|
2 |
|
|
|
157 |
|
|
|
33 |
|
|
|
1,687 |
|
Total
|
|
|
2 |
|
|
$ |
157 |
|
|
|
33 |
|
|
$ |
1,687 |
|
Delinquent
loans to total gross loans
|
|
|
|
0.03 |
% |
|
|
|
|
|
|
0.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Commercial
real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Construction
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
One-to-four
family and other loans
|
|
|
11 |
|
|
|
525 |
|
|
|
38 |
|
|
|
2,371 |
|
Total
|
|
|
11 |
|
|
$ |
525 |
|
|
|
38 |
|
|
$ |
2,371 |
|
Delinquent
loans to total gross loans
|
|
|
|
0.11 |
% |
|
|
|
|
|
|
0.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Commercial
real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Construction
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
One-to-four
family and other loans
|
|
|
2 |
|
|
|
46 |
|
|
|
45 |
|
|
|
2,730 |
|
Total
|
|
|
2 |
|
|
$ |
46 |
|
|
|
45 |
|
|
$ |
2,730 |
|
Delinquent
loans to total gross loans
|
|
|
|
0.02 |
% |
|
|
|
|
|
|
1.09 |
% |
Nonperforming
Assets. At December 31, 2007 and 2006, respectively, we
had $4.9 million and $712,000 of net nonperforming assets, respectively, which
included $4.2 million and $574,000 of net nonperforming loans, respectively. Our
current policy is not to accrue interest on loans 90 days or more past due. The
increase in nonperforming assets in 2007 is primarily due to a $3.1 million
commercial real estate loan and four SBA loans totaling $784,000, of which
$550,000 represents the guaranteed portion. The collateral securing
the $3.1 million commercial real estate loan is currently in litigation with a
former associate of the borrower, alleging fraudulent reconveyance of their
previously recorded lien. Management believes that it will not suffer
a loss on this loan, as the title company has accepted the tender of defense,
subject to its normal reservation of rights, and the collateral value securing
the loan is considered adequate.
OREO was
$711,000 (consisting of three properties) at December 31, 2007, compared to
$138,000 (consisting of eight properties) at December 31, 2006. Properties
acquired through or in lieu of foreclosure are initially recorded at the lower
of fair value less cost to sell, or the balance of the loan at the date of
foreclosure through a charge to the allowance for loan losses. The Bank
generally obtains an appraisal and/or a market evaluation on all OREO at the
time of possession. After foreclosure, valuations are periodically performed by
management as needed due to changing market conditions or factors specifically
attributable to the properties’ condition. If the carrying value of the property
exceeds its fair value less estimated cost to sell, a charge to operations is
recorded. The decline in OREO over the periods represented reflects
the improvements in asset quality and sales of OREO properties.
The
following tables set forth information concerning nonperforming loans and OREO
at the periods indicated:
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(dollars
in thousands)
|
|
Nonperforming
assets (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$ |
284 |
|
|
$ |
634 |
|
|
$ |
1,687 |
|
|
$ |
2,371 |
|
|
$ |
2,729 |
|
Multi-family
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
real estate
|
|
|
3,125 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Business
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
owner occupied
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
and industrial
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
SBA
|
|
|
784 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
Total
nonaccrual loans
|
|
|
4,193 |
|
|
|
634 |
|
|
|
1,687 |
|
|
|
2,371 |
|
|
|
2,730 |
|
Foreclosures
in process
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
43 |
|
Specific
allowance
|
|
|
- |
|
|
|
(60 |
) |
|
|
(185 |
) |
|
|
(244 |
) |
|
|
(299 |
) |
Total
nonperforming loans, net
|
|
|
4,193 |
|
|
|
574 |
|
|
|
1,502 |
|
|
|
2,127 |
|
|
|
2,474 |
|
Foreclosed
other real estate owned (2)
|
|
|
711 |
|
|
|
138 |
|
|
|
211 |
|
|
|
351 |
|
|
|
979 |
|
Total
nonperforming assets, net (3)
|
|
$ |
4,904 |
|
|
$ |
712 |
|
|
$ |
1,713 |
|
|
$ |
2,478 |
|
|
$ |
3,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans (4)
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Allowance
for loan losses as a percent of gross loans receivable (5)
|
|
|
0.73 |
% |
|
|
0.58 |
% |
|
|
0.50 |
% |
|
|
0.56 |
% |
|
|
0.79 |
% |
Allowance
for loan losses as a percent of total nonperforming loans,
gross
|
|
|
109.66 |
% |
|
|
558.83 |
% |
|
|
180.79 |
% |
|
|
110.75 |
% |
|
|
72.67 |
% |
Nonperforming
loans, net of specific allowances, as a percent of gross loans
receivable
|
|
|
0.67 |
% |
|
|
0.09 |
% |
|
|
0.25 |
% |
|
|
0.45 |
% |
|
|
0.99 |
% |
Nonperforming
assets, net of specific allowances, as a percent of total
assets
|
|
|
0.64 |
% |
|
|
0.10 |
% |
|
|
0.24 |
% |
|
|
0.46 |
% |
|
|
1.12 |
% |
(1)
|
During
the years ended December 31, 2007, 2006, 2005, 2004, and 2003,
approximately $347,000, $41,000, $75,000, $131,000, and $299,000,
respectively, of interest income related to these loans was included in
net income. Additional interest income of approximately
$315,000, $106,000, $310,000, $317,000, and $406,000 million,
respectively, would have been recorded for the years ended December 31,
2007, 2006, 2005, 2004, and 2003 if these loans had been paid in
accordance with their original terms and had been outstanding throughout
the applicable period then ended or, if not outstanding throughout the
applicable period then ended, since
origination.
|
(2)
|
Foreclosed
OREO balances are shown net of related loss
allowances.
|
(3)
|
Nonperforming
assets consist of nonperforming loans and OREO. Nonperforming
loans consisted of all loans 90 days or more past due and foreclosures in
process less than 90 days and still accruing
interest.
|
(4)
|
A
“restructured loan” is one wherein the terms of the loan were renegotiated
to provide a reduction or deferral of interest or principal because of
deterioration in the financial position of the borrower. We did
not include in interest income any interest on restructured loans during
the periods presented.
|
(5)
|
Gross
loans include loans receivable held for investment and held for
sale.
|
(6)
|
The
SBA totals includes the guaranteed amount which was $550,000 as of
December 31, 2007.
|
Allowance for Loan Losses.
We maintain an allowance for loan losses to absorb losses inherent in the
loans held for investment portfolio. Loans held for sale are carried at
the lower of cost or estimated market value. Net unrealized losses, if
any, are recognized in a lower of cost or market valuation allowance by charges
to operations. The allowance is based on ongoing, quarterly assessments of
probable estimated losses inherent in our loan portfolio. The allowance is
increased by a provision for loan losses which is charged to expense and reduced
by charge-offs, net of recoveries.
As of
December 31, 2007, the allowance for loan losses totaled $4.6 million, compared
to $3.5 million at December 31, 2006 and $3.1 million at December 31,
2005. The December 31, 2007 allowance for loan losses, as a percent of
nonperforming loans and gross loans, was 109.7% and 0.73%, respectively,
compared with 558.8% and 0.58% at December 31, 2006, and 180.8% and 0.50% at
December 31, 2005. The specific allowance amount included in the allowance
for loan losses totaled zero, $166,000 and $291,000, as of December 31, 2007,
2006 and 2005, respectively.
The
Bank’s methodology for assessing the appropriateness of the allowance consists
of several key elements, including the formula allowance. The formula
allowance is calculated by applying loss factors to all loans held for
investment.
The loss
factors for each segment of the loan portfolio, except for loan secured by
single family residences originated prior to 2002, are derived by using the
average of the last 10 years and 15 years historical charge-off rates by loan
types for commercial banks and savings institutions headquartered in the state
of California as collected by the FDIC as the base rate. Then the
following internal and external risk factors are added to the
average:
Internal
Factors
-
|
Changes
in lending policies and procedures, including underwriting standards and
collection, charge-off, and recovery
practices;
|
-
|
Changes
in the nature and volume of the loan portfolio and in the terms of loans,
as well as new types of lending;
|
-
|
Changes
in the experience, ability, and depth of lending management and other
relevant staff that may have an impact on the Bank’s loan
portfolio;
|
-
|
Changes
in volume and severity of past due and classified loans, and in volumes of
non-accruals, troubled debt restructurings, and other loan
modifications;
|
-
|
Changes
in the quality of the Bank’s loan review system and the degree of
oversight by the Board; and
|
-
|
The
existence and effect of any concentrations of credit, and changes in the
level of such concentrations.
|
External
Factors
-
|
Changes
in national, state and local economic and business conditions and
developments that affect the collectability of the portfolio, including
the condition of various market segments (includes trends in real estate
values and the interest rate
environment);
|
-
|
Changes
in the value of the underlying collateral for collateral-dependent loans;
and
|
-
|
The effect of external factors,
such as competition, legal, regulatory requirements on the level of
estimated credit losses in the Bank’s current loan
portfolio.
|
The
factor amount for each of the nine above described risked factors are determined
by the Senior Portfolio Manager and Chief Credit Officer and approved by the
CIRC on a quarterly basis.
For the
homogeneous single-family residential loan portfolio, the ALLL loss factors for
pre-2002 originations of first and second deeds of trust loans are based upon
the Bank's historical loss experience from charge-offs and real estate owned,
and the migration history analysis. The Bank has tracked its
historical losses for the last 40 quarters. For loans secured with
single family residences made after 2001, the factor is calculated using the
average of the FDIC charge-off for 10 and 15 years plus the nine credit loss
factors mentioned above.
The
following table sets forth activity in the Bank’s allowance for loan losses for
the periods indicated:
|
|
As
of and For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(dollars in
thousands) |
|
Balances:
|
|
|
|
Average
net loans outstanding during the period
|
|
$ |
617,528 |
|
|
$ |
607,439 |
|
|
$ |
546,426 |
|
|
$ |
351,968 |
|
|
$ |
184,460 |
|
Total
loans outstanding at end of the period
|
|
|
626,580 |
|
|
|
607,618 |
|
|
|
604,976 |
|
|
|
471,609 |
|
|
|
250,117 |
|
Allowance
for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
3,543 |
|
|
|
3,050 |
|
|
|
2,626 |
|
|
|
1,984 |
|
|
|
2,835 |
|
Provision
for loan losses
|
|
|
1,651 |
|
|
|
531 |
|
|
|
349 |
|
|
|
705 |
|
|
|
655 |
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
|
101 |
|
|
|
266 |
|
|
|
211 |
|
|
|
252 |
|
|
|
1,612 |
|
Multi-family
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Construction
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Business
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
owner occupied
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
and industrial
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
SBA
|
|
|
600 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
loans
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
148 |
|
|
|
388 |
|
Total
charge-offs
|
|
|
701 |
|
|
|
266 |
|
|
|
216 |
|
|
|
400 |
|
|
|
2,000 |
|
Recoveries
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
|
103 |
|
|
|
225 |
|
|
|
191 |
|
|
|
122 |
|
|
|
197 |
|
Multi-family
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Construction
|
|
|
- |
|
|
|
- |
|
|
|
74 |
|
|
|
- |
|
|
|
- |
|
Business
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
owner occupied
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
and industrial
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
SBA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
loans
|
|
|
2 |
|
|
|
3 |
|
|
|
26 |
|
|
|
215 |
|
|
|
297 |
|
Total
recoveries
|
|
|
105 |
|
|
|
228 |
|
|
|
291 |
|
|
|
337 |
|
|
|
494 |
|
Net
loan charge-offs
|
|
|
596 |
|
|
|
38 |
|
|
|
(75 |
) |
|
|
63 |
|
|
|
1,506 |
|
Balance
at end of period
|
|
$ |
4,598 |
|
|
$ |
3,543 |
|
|
$ |
3,050 |
|
|
$ |
2,626 |
|
|
$ |
1,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs to average net loans
|
|
|
0.10 |
% |
|
|
0.01 |
% |
|
|
(0.01 |
)% |
|
|
0.02 |
% |
|
|
0.82 |
% |
Allowance
for loan losses to gross loans at end of period
|
|
|
0.73 |
% |
|
|
0.58 |
% |
|
|
0.50 |
% |
|
|
0.56 |
% |
|
|
0.79 |
% |
Allowance
for loan losses to total nonperforming loans
|
|
|
109.66 |
% |
|
|
558.83 |
% |
|
|
180.79 |
% |
|
|
110.77 |
% |
|
|
72.67 |
% |
The
following table sets forth the Bank’s allowance for loan losses and the percent
of gross loans to total gross loans in each of the categories listed at the
dates indicated:
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
%
of Loans
|
|
|
|
|
|
%
of Loans
|
|
|
|
|
|
%
of Loans
|
|
Balance
at End of
|
|
|
|
|
in
Category to
|
|
|
|
|
|
in
Category to
|
|
|
|
|
|
in
Category to
|
|
Period
Applicable to
|
|
Amount
|
|
|
Total
Loans
|
|
|
Amount
|
|
|
Total
Loans
|
|
|
Amount
|
|
|
Total
Loans
|
|
|
|
(dollars
in thousands)
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$ |
165 |
|
|
|
2.09 |
% |
|
$ |
331 |
|
|
|
2.11 |
% |
|
$ |
554 |
|
|
|
2.74 |
% |
Multi-family
|
|
|
1,438 |
|
|
|
54.45 |
% |
|
|
1,405 |
|
|
|
58.80 |
% |
|
|
1,746 |
|
|
|
75.99 |
% |
Commercial
real estate
|
|
|
1,129 |
|
|
|
23.54 |
% |
|
|
881 |
|
|
|
28.55 |
% |
|
|
627 |
|
|
|
20.39 |
% |
Construction
|
|
|
20 |
|
|
|
0.00 |
% |
|
|
- |
|
|
|
0.00 |
% |
|
|
- |
|
|
|
0.00 |
% |
Commercial
owner occupied
|
|
|
248 |
|
|
|
9.19 |
% |
|
|
179 |
|
|
|
5.91 |
% |
|
|
10 |
|
|
|
0.34 |
% |
Commercial
and industrial
|
|
|
640 |
|
|
|
8.14 |
% |
|
|
478 |
|
|
|
3.75 |
% |
|
|
110 |
|
|
|
0.54 |
% |
SBA
|
|
|
207 |
|
|
|
2.23 |
% |
|
|
68 |
|
|
|
0.87 |
% |
|
|
- |
|
|
|
0.00 |
% |
Other
Loans
|
|
|
1 |
|
|
|
0.35 |
% |
|
|
4 |
|
|
|
0.01 |
% |
|
|
3 |
|
|
|
0.00 |
% |
Unallocated
|
|
|
750 |
|
|
|
-- |
|
|
|
197 |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
Total
|
|
$ |
4,598 |
|
|
|
100.00 |
% |
|
$ |
3,543 |
|
|
|
100.00 |
% |
|
$ |
3,050 |
|
|
|
100.00 |
% |
|
|
As
of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
%
of Loans
|
|
|
|
|
|
%
of Loans
|
|
Balance
at End of
|
|
|
|
|
in
Category to
|
|
|
|
|
|
in
Category to
|
|
Period
Applicable to
|
|
Amount
|
|
|
Total
Loans
|
|
|
Amount
|
|
|
Total
Loans
|
|
|
|
(dollars
in thousands)
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$ |
661 |
|
|
|
4.74 |
% |
|
$ |
843 |
|
|
|
14.71 |
% |
Multi-family
|
|
|
1,643 |
|
|
|
83.67 |
% |
|
|
812 |
|
|
|
75.85 |
% |
Commercial
real estate
|
|
|
271 |
|
|
|
11.44 |
% |
|
|
105 |
|
|
|
8.06 |
% |
Construction
|
|
|
- |
|
|
|
0.00 |
% |
|
|
41 |
|
|
|
0.00 |
% |
Commercial
owner occupied
|
|
|
1 |
|
|
|
0.12 |
% |
|
|
- |
|
|
|
0.24 |
% |
Commercial
and industrial
|
|
|
3 |
|
|
|
0.02 |
% |
|
|
- |
|
|
|
0.00 |
% |
SBA
|
|
|
- |
|
|
|
0.00 |
% |
|
|
- |
|
|
|
0.00 |
% |
Other
Loans
|
|
|
11 |
|
|
|
0.01 |
% |
|
|
15 |
|
|
|
1.14 |
% |
Unallocated
|
|
|
36 |
|
|
|
-- |
|
|
|
168 |
|
|
|
-- |
|
Total
|
|
$ |
2,626 |
|
|
|
100.00 |
% |
|
$ |
1,984 |
|
|
|
100.00 |
% |
The
following table sets forth the allowance for loan losses amounts calculated by
the categories listed for the periods set forth in the table:
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
Allowance
|
|
|
|
|
|
Allowance
|
|
|
|
|
|
Allowance
|
|
Balance
at End of Period Applicable to
|
|
Amount
|
|
|
to
Total
|
|
|
Amount
|
|
|
to
Total
|
|
|
Amount
|
|
|
to
Total
|
|
|
|
(dollars
in thousands)
|
|
Formula
allowance
|
|
$ |
3,848 |
|
|
|
83.7 |
% |
|
$ |
3,180 |
|
|
|
89.7 |
% |
|
$ |
2,759 |
|
|
|
90.5 |
% |
Specific
allowance
|
|
|
- |
|
|
|
0.0 |
% |
|
|
166 |
|
|
|
4.7 |
% |
|
|
291 |
|
|
|
9.5 |
% |
Unallocated
allowance
|
|
|
750 |
|
|
|
16.3 |
% |
|
|
197 |
|
|
|
5.6 |
% |
|
|
- |
|
|
|
0.0 |
% |
Total
|
|
$ |
4,598 |
|
|
|
100.0 |
% |
|
$ |
3,543 |
|
|
|
100.0 |
% |
|
$ |
3,050 |
|
|
|
100.0 |
% |
|
|
As
of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
Allowance
|
|
|
|
|
|
Allowance
|
|
Balance
at End of Period Applicable to
|
|
Amount
|
|
|
to
Total
|
|
|
Amount
|
|
|
to
Total
|
|
|
|
(dollars
in thousands)
|
|
Formula
allowance
|
|
$ |
2,245 |
|
|
|
85.5 |
% |
|
$ |
1,386 |
|
|
|
69.8 |
% |
Specific
allowance
|
|
|
345 |
|
|
|
13.1 |
% |
|
|
430 |
|
|
|
21.7 |
% |
Unallocated
allowance
|
|
|
36 |
|
|
|
1.4 |
% |
|
|
168 |
|
|
|
8.5 |
% |
Total
|
|
$ |
2,626 |
|
|
|
100.0 |
% |
|
$ |
1,984 |
|
|
|
100.0 |
% |
Investment
Activities
Our
investment policy as established by our board of directors attempts to provide
and maintain liquidity, generate a favorable return on investments without
incurring undue interest rate and credit risk, and complement our lending
activities. Specifically, our policies limit investments to U.S.
government securities, federal agency-backed securities, non-government
guaranteed securities, municipal bonds, corporate bonds and mutual funds
comprised of the above.
Our
investment securities portfolio amounted to $73.0 million at December 31, 2007,
as compared to $77.1 million at December 31, 2006. As of December 31,
2007, the portfolio consisted of $29.7 million of mortgage-backed securities,
$26.5 million of mutual funds, $15.2 million of FHLB stock and $1.6 million of
Federal Reserve Bank stock.
The Federal Reserve Bank stock was
purchased in March 2007 as part of the requirements for the Bank to become a
member of the Federal Reserve System.
At
December 31, 2007, our securities portfolio includes $27.9 million of
mortgage-backed securities which are guaranteed by Freddie Mac and a $1.8million
private-issue mortgage-backed security that are accounted for as available for
sale. The mutual fund investments are comprised of two separate funds
under the Shay Asset Management Funds, the Adjustable Rate Mortgage (‘‘ARM’’)
Fund with $16.8 million invested and the Intermediate Fund with $9.7 million
invested. The ARM Fund invests in U.S. government agency
adjustable-rate mortgage-backed securities, fixed and floating-rate
collateralized mortgage obligations and investment grade corporate debt
instruments. The Intermediate Fund invests in mortgage-backed
securities, U.S. government notes and U.S. government agency
debentures. We may increase or decrease our investment in
mortgage-backed securities and mutual funds in the future depending on our
liquidity needs and market opportunities.
The
following table sets forth certain information regarding the amortized costs and
carrying values of the Company's securities at the dates indicated:
|
|
2007
|
|
|
2006
|
|
|
|
Amortized
|
|
|
Carrying
|
|
|
Amortized
|
|
|
Carrying
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(in
thousands)
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$ |
29,719 |
|
|
$ |
29,753 |
|
|
$ |
35,271 |
|
|
$ |
35,081 |
|
Mutual
funds
|
|
|
27,719 |
|
|
|
26,485 |
|
|
|
27,719 |
|
|
|
26,735 |
|
Total
securities available for sale
|
|
|
57,438 |
|
|
|
56,238 |
|
|
|
62,990 |
|
|
|
61,816 |
|
FHLB
Stock
|
|
|
15,204 |
|
|
|
15,204 |
|
|
|
15,328 |
|
|
|
15,328 |
|
Federal
Reserve Bank Stock
|
|
|
1,600 |
|
|
|
1,600 |
|
|
|
- |
|
|
|
- |
|
Total
securities
|
|
$ |
74,242 |
|
|
$ |
73,042 |
|
|
$ |
78,318 |
|
|
$ |
77,144 |
|
The table
below sets forth certain information regarding the carrying value, weighted
average yields and contractual maturities of the Company's securities as of
December 31, 2007.
|
|
At
December 31, 2007
|
|
|
|
One
Year
|
|
|
More
than One
|
|
|
More
than Five Years
|
|
|
More
than
|
|
|
|
|
|
|
or
Less
|
|
|
to
Five Years
|
|
|
to
Ten Years
|
|
|
Ten
Years
|
|
|
Total
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
|
(dollars
in thousands)
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
29,753 |
|
|
|
5.22 |
% |
|
$ |
29,753 |
|
|
|
5.22 |
% |
Mutual
Funds
|
|
|
26,485 |
|
|
|
5.16 |
% |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,485 |
|
|
|
5.16 |
% |
Total
available for sale
|
|
$ |
26,485 |
|
|
|
5.16 |
% |
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
29,753 |
|
|
|
5.22 |
% |
|
$ |
56,238 |
|
|
|
5.19 |
% |
FHLB
Stock
|
|
$ |
15,204 |
|
|
|
5.90 |
% |
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
15,204 |
|
|
|
5.90 |
% |
Federal
Reserve Bank Stock
|
|
$ |
1,600 |
|
|
|
6.00 |
% |
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
1,600 |
|
|
|
6.00 |
% |
Total
securities
|
|
$ |
43,289 |
|
|
|
5.45 |
% |
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
29,753 |
|
|
|
5.22 |
% |
|
$ |
73,042 |
|
|
|
5.36 |
% |
Sources
of Funds
General. Deposits, lines of
credit, loan repayments and prepayments, and cash flows generated from
operations and borrowings are the primary sources of the Bank’s funds for use in
lending, investing and for other general purposes.
Deposits. Deposits
represent our primary source of funds for our lending and investing
activities. The Bank offers a variety of deposit accounts with a
range of interest rates and terms. The deposit accounts are offered
through our six branch network in Southern California. The Bank’s
deposits consist of passbook savings, checking accounts, money market accounts
and certificates of deposit. Total deposits at December 31,
2007 were $386.7 million, as compared to $339.4 million at December 31,
2006. For the year ended December 31, 2007, certificates of deposit
constituted 74.3% of total average deposits. The terms of the
fixed-rate certificates of deposit offered by the Bank vary from 3 months to 5
years. Specific terms of an individual account vary according to the
type of account, the minimum balance required, the time period funds must remain
on deposit and the interest rate, among other factors. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market rates, prevailing interest rates and competition. At
December 31, 2007, the Bank had $288.7 million of certificate of deposit
accounts maturing in one year or less.
The Bank
relies primarily on customer service, business development efforts,
cross-selling of deposit products to loan customers, and long-standing
relationships with customers to attract and retain local
deposits. However, market interest rates and rates offered by
competing financial institutions significantly affect the Bank’s ability to
attract and retain deposits. Additionally, the Bank will utilize both
wholesale and brokered deposits to supplement its generation of deposits from
businesses and consumers. During 2007, the Bank increased the amount
of broker deposits by $9.4 million to $33.7 million at December 31,
2007.
The
following table presents the deposit activity of the Bank for the years ended
December 31:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in
thousands)
|
|
Net
(withdrawals) deposits
|
|
$ |
32,755 |
|
|
$ |
(613 |
) |
|
$ |
30,914 |
|
Interest
credited on deposit accounts
|
|
|
14,531 |
|
|
|
12,126 |
|
|
|
8,135 |
|
Total
increase in deposit accounts
|
|
$ |
47,286 |
|
|
$ |
11,513 |
|
|
$ |
39,049 |
|
At
December 31, 2007, the Bank had $160.2 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
|
|
|
|
|
Weighted
|
|
Maturity
Period
|
|
Amount
|
|
|
Average
Rate
|
|
|
|
(dollars
in thousands)
|
|
Three
months or less
|
|
$ |
63,269 |
|
|
|
5.13 |
% |
Over
three months through 6 months
|
|
|
54,904 |
|
|
|
5.04 |
% |
Over
6 months through 12 months
|
|
|
27,904 |
|
|
|
4.79 |
% |
Over
12 months
|
|
|
3,146 |
|
|
|
4.44 |
% |
Total
|
|
$ |
149,224 |
|
|
|
5.02 |
% |
The
following table sets forth the distribution of the Bank's average deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented:
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
%
of Total
|
|
|
Weighted
|
|
|
|
|
|
%
of Total
|
|
|
Weighted
|
|
|
|
|
|
%
of Total
|
|
|
Weighted
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Deposits
|
|
|
Rate
|
|
|
Balance
|
|
|
Deposits
|
|
|
Rate
|
|
|
Balance
|
|
|
Deposits
|
|
|
Rate
|
|
|
|
(dollars
in thousands)
|
|
Passbook
accounts
|
|
$ |
3,336 |
|
|
|
0.91 |
% |
|
|
2.51 |
% |
|
$ |
2,600 |
|
|
|
0.81 |
% |
|
|
0.55 |
% |
|
$ |
3,613 |
|
|
|
1.19 |
% |
|
|
0.24 |
% |
Money
market accounts
|
|
|
39,782 |
|
|
|
10.83 |
% |
|
|
3.51 |
% |
|
|
39,128 |
|
|
|
12.13 |
% |
|
|
3.44 |
% |
|
|
33,905 |
|
|
|
11.12 |
% |
|
|
2.57 |
% |
Checking
accounts
|
|
|
52,066 |
|
|
|
14.17 |
% |
|
|
0.60 |
% |
|
|
49,441 |
|
|
|
15.32 |
% |
|
|
0.63 |
% |
|
|
42,755 |
|
|
|
14.02 |
% |
|
|
1.19 |
% |
Sub-total
|
|
|
95,184 |
|
|
|
25.91 |
% |
|
|
1.88 |
% |
|
|
91,169 |
|
|
|
28.26 |
% |
|
|
1.83 |
% |
|
|
80,273 |
|
|
|
26.33 |
% |
|
|
1.48 |
% |
Certificate
of deposit accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months or less
|
|
|
17,038 |
|
|
|
4.64 |
% |
|
|
5.15 |
% |
|
|
9,072 |
|
|
|
2.81 |
% |
|
|
4.89 |
% |
|
|
12,580 |
|
|
|
4.13 |
% |
|
|
3.30 |
% |
Four
through 12 months
|
|
|
226,834 |
|
|
|
61.75 |
% |
|
|
5.18 |
% |
|
|
163,802 |
|
|
|
50.79 |
% |
|
|
4.55 |
% |
|
|
109,580 |
|
|
|
35.96 |
% |
|
|
3.14 |
% |
13
through 36 months
|
|
|
16,693 |
|
|
|
4.54 |
% |
|
|
4.35 |
% |
|
|
43,093 |
|
|
|
13.36 |
% |
|
|
3.75 |
% |
|
|
85,210 |
|
|
|
27.95 |
% |
|
|
2.97 |
% |
37
months or greater
|
|
|
11,611 |
|
|
|
3.16 |
% |
|
|
4.28 |
% |
|
|
15,453 |
|
|
|
4.79 |
% |
|
|
4.39 |
% |
|
|
17,176 |
|
|
|
5.63 |
% |
|
|
4.44 |
% |
Total
certificate of deposit accounts
|
|
|
272,176 |
|
|
|
74.09 |
% |
|
|
5.09 |
% |
|
|
231,420 |
|
|
|
71.74 |
% |
|
|
4.40 |
% |
|
|
224,546 |
|
|
|
73.67 |
% |
|
|
3.18 |
% |
Total
average deposits
|
|
$ |
367,360 |
|
|
|
100.00 |
% |
|
|
4.26 |
% |
|
$ |
322,589 |
|
|
|
100.00 |
% |
|
|
3.67 |
% |
|
$ |
304,819 |
|
|
|
100.00 |
% |
|
|
2.73 |
% |
The
following table presents, by various rate categories, the amount of certificate
of deposit accounts outstanding at the date indicated and the periods to
maturity of the certificate of deposit accounts outstanding at December 31,
2007:
|
|
Period
to Maturity from December 31, 2007
|
|
|
|
Less
than
|
|
|
One
to
|
|
|
Two
to
|
|
|
Three
to
|
|
|
Four
to
|
|
|
More
than
|
|
|
|
|
|
|
One
Year
|
|
|
Two
Years
|
|
|
Three
Years
|
|
|
Four
Years
|
|
|
Five
Years
|
|
|
Five
Years
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Certificate
of deposit accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.50
to 2.00%
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
13 |
|
|
$ |
16 |
|
2.01
to 3.00%
|
|
|
15 |
|
|
|
15 |
|
|
|
8 |
|
|
|
29 |
|
|
|
6 |
|
|
|
139 |
|
|
|
212 |
|
3.01
to 4.00%
|
|
|
4,714 |
|
|
|
1,022 |
|
|
|
53 |
|
|
|
60 |
|
|
|
2 |
|
|
|
25 |
|
|
|
5,876 |
|
4.01
to 5.00%
|
|
|
81,953 |
|
|
|
4,701 |
|
|
|
908 |
|
|
|
68 |
|
|
|
412 |
|
|
|
2 |
|
|
|
88,044 |
|
5.01
to 6.00%
|
|
|
201,671 |
|
|
|
271 |
|
|
|
145 |
|
|
|
173 |
|
|
|
47 |
|
|
|
530 |
|
|
|
202,837 |
|
6.01
to 7.00%
|
|
|
82 |
|
|
|
39 |
|
|
|
16 |
|
|
|
36 |
|
|
|
19 |
|
|
|
4 |
|
|
|
196 |
|
7.01
to 8.00%
|
|
|
239 |
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
243 |
|
Total
|
|
$ |
288,674 |
|
|
$ |
6,052 |
|
|
$ |
1,130 |
|
|
$ |
368 |
|
|
$ |
487 |
|
|
$ |
713 |
|
|
$ |
297,424 |
|
FHLB Advances. The
FHLB system functions as a source of credit to financial institutions that are
members. Advances are secured by certain real estate loans,
investment securities and the capital stock of the FHLB owned by the
Bank. Subject to the FHLB’s advance policies and requirements, these
advances can be requested for any business purpose in which the Bank is
authorized to engage. In granting advances, the FHLB considers a
member’s creditworthiness and other relevant factors. The Bank is
allowed to have advances totaling 45% of its assets, equating to a credit line
of $348.4 million as of December 31, 2007. At December 31, 2007,
the Bank had FHLB advances outstanding totaling $297.3 million with a weighted
average interest rate of 4.69%, of which $255.0 million were term advances
with a weighted average remaining maturity of 1.3 years and a weighted average
interest rate of 4.80%.
Borrowings. The
Bank has established a credit facility, secured by mutual funds pledged to
Pershing LLC. The Bank is able to borrow up to 70% of the valuation
of the pledged mutual funds at a cost of the current federal funds rate plus 75
basis points. At December 31, 2007, the Bank had borrowing of
$500,000 against the line. The Bank maintains lines of credit totaling $35.0
million with five correspondent banks to purchase federal funds as business
needs dictate. Federal funds purchased are short-term in nature and
utilized to meet short term funding needs. As of December 31, 2007, we had
no outstanding balance with any of our correspondent banks. Additionally, the
Bank has a $50.0 million credit facility with Salomon Brothers. At December 31,
2007, there were no borrowings against this line.
Debentures. On
March 25, 2004 the Company issued $10,310,000 of Floating Rate Junior
Subordinated Deferrable Interest Debentures (the “Debt Securities”) to PPBI
Trust I, a statutory trust created under the laws of the State of
Delaware. The Debt Securities are subordinated to effectively all
borrowings of the Company and are due and payable on April 7,
2034. Interest is payable quarterly on the Debt Securities at
three-month LIBOR plus 2.75% for an effective rate of 7.99% as of December 31,
2007.
The
following table sets forth certain information regarding the Company's borrowed
funds at or for the years ended on the dates indicated:
|
|
At
or For Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(dollars
in thousands)
|
|
FHLB
advances
|
|
|
|
|
|
|
|
|
|
Average
balance outstanding
|
|
$ |
285,577 |
|
|
$ |
297,441 |
|
|
$ |
234,243 |
|
Maximum
amount outstanding at any month-end during the year
|
|
|
310,700 |
|
|
|
319,200 |
|
|
|
296,835 |
|
Balance
outstanding at end of year
|
|
|
297,300 |
|
|
|
300,300 |
|
|
|
296,835 |
|
Weighted
average interest rate during the year
|
|
|
5.06 |
% |
|
|
4.79 |
% |
|
|
3.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
balance outstanding
|
|
$ |
10,310 |
|
|
$ |
10,310 |
|
|
$ |
10,310 |
|
Maximum
amount outstanding at any month-end during the year
|
|
|
10,310 |
|
|
|
10,310 |
|
|
|
10,310 |
|
Balance
outstanding at end of year
|
|
|
10,310 |
|
|
|
10,310 |
|
|
|
10,310 |
|
Weighted
average interest rate during the year
|
|
|
7.97 |
% |
|
|
7.77 |
% |
|
|
6.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
borrowings and lines of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
balance outstanding
|
|
$ |
5,172 |
|
|
$ |
1,833 |
|
|
$ |
9,870 |
|
Maximum
amount outstanding at any month-end during the year
|
|
|
31,500 |
|
|
|
16,191 |
|
|
|
35,500 |
|
Balance
outstanding at end of year
|
|
|
665 |
|
|
|
16,191 |
|
|
|
11,000 |
|
Weighted
average interest rate during the year
|
|
|
5.48 |
% |
|
|
5.86 |
% |
|
|
3.16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
balance outstanding
|
|
$ |
301,059 |
|
|
$ |
309,584 |
|
|
$ |
254,423 |
|
Maximum
amount outstanding at any month-end during the year
|
|
|
352,510 |
|
|
|
345,701 |
|
|
|
342,645 |
|
Balance
outstanding at end of year
|
|
|
308,275 |
|
|
|
326,801 |
|
|
|
318,145 |
|
Weighted
average interest rate during the year
|
|
|
5.16 |
% |
|
|
4.89 |
% |
|
|
3.24 |
% |
Subsidiaries
As of
December 31, 2007, we had two subsidiaries, the Bank, which did not have any
subsidiaries at December 31, 2007, and PPBI Trust I, which is not consolidated
for reporting purposes.
Personnel
As of
December 31, 2007, we had 103 full-time employees and 3 part-time
employees. The employees are not represented by a collective
bargaining unit and we consider our relationship with our employees to be
satisfactory.
Competition
The
banking business in California, in general, and specifically in our market
areas, is highly competitive with respect to virtually all products and
services. The industry continues to consolidate, and unregulated
competitors have entered banking markets with focused products targeted at
highly profitable customer segments. Many largely unregulated
competitors are able to compete across geographic boundaries, and provide
customers increasing access to meaningful alternatives to nearly all significant
banking services and products. These competitive trends are likely to
continue.
The
banking business is largely dominated by a relatively small number of major
banks with many offices operating over a wide geographical
area. These banks have, among other advantages, the ability to
finance wide-ranging and effective advertising campaigns and to allocate their
resources to regions of highest yield and demand. Many of the major
banks operating in the area offer certain services that we do not offer directly
but may offer indirectly through correspondent institutions. By
virtue of their greater total capitalization, such banks also have substantially
higher lending limits than the Bank’s.
In
addition to other local community banks, our competitors include commercial
banks, savings banks, credit unions, and numerous non-banking institutions, such
as finance companies, leasing companies, insurance companies, brokerage firms,
and investment banking firms. In recent years, increased competition
has also developed from specialized finance and non-finance companies that offer
wholesale finance, credit card, and other consumer finance services, including
on-line banking services and personal financial software. Strong
competition for deposit and loan products affects the rates of those products,
as well as, the terms on which they are offered to customers. Mergers
between financial institutions have placed additional pressure on banks within
the industry to streamline their operations, reduce expenses, and increase
revenues to remain competitive.
Technological
innovations have also resulted in increased competition in financial services
markets. Such innovation has, for example, made it possible for
non-depository institutions to offer customers automated transfer payment
services that previously were considered traditional banking
products. In addition, many customers now expect a choice of delivery
systems and channels, including telephone, mail, home computer, ATMs,
self-service branches, and/or in-store branches. The sources of
competition in such products include commercial banks, as well as, credit
unions, brokerage firms, money market and other mutual funds, asset management
groups, finance and insurance companies, internet-only financial intermediaries,
and mortgage banking firms.
In order
to compete with these other institutions, the Company primarily relies on local
promotional activities, personal relationships established by officers,
directors and employees of the Company and specialized services tailored to meet
the individual needs of the Company’s customers.
SUPERVISION
AND REGULATION
General
Bank
holding companies and banks are extensively regulated under state and federal
law. Various requirements and restrictions under state and federal
law affect the operations and activities of the Company and the Bank. Statutes
and regulations regulate many aspects of the Bank's operations, including
reserves against deposits, ownership of deposit accounts, interest rates payable
on deposits, loans, investments, mergers and acquisitions, borrowings,
dividends, locations of branch offices and capital
requirements. Further, the Company and the Bank are required to
maintain certain levels of capital. See "Capital Requirements" in this Section
below. The following is a brief summary of certain statutes and rules
that affect or will affect the Company and the Bank. This summary is qualified
in its entirety by reference to the particular statute and regulatory provisions
referred to below and is not intended to be an exhaustive description of all
applicable statutes and regulations.
As a bank
holding company, the Company is subject to regulation and supervision by the
Federal Reserve. We are required to file with the Federal Reserve quarterly and
annual reports and such additional information the Federal Reserve may require
pursuant to the BHCA. The Federal Reserve may conduct examinations of bank
holding companies and their subsidiaries. The Company is also a bank
holding company within the meaning of the California Financial Code (the
“Financial Code”). As such, the Company and its subsidiaries are subject to
examination by, and may be required to file reports with, the DFI.
Under a
policy of the Federal Reserve, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such a policy. The Federal Reserve, under the BHCA, has the
authority to require a bank holding company to terminate any activity or to
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the Federal Reserve's determination that such activity or control
constitutes a serious risk to the financial soundness and stability of any bank
subsidiary of the bank holding company.
As a
California state-chartered bank, the Bank is subject to supervision,
periodic examination and regulation by the DFI and the Federal Reserve. The
Bank's deposits are insured (presently $100,000 per account; $250,000 in the
case of certain retirement accounts) by the Deposit Insurance Fund ("DIF")
which is operated by the FDIC. As a result of this deposit insurance function,
the FDIC also has certain supervisory authority and powers over our bank as well
as all other FDIC insured institutions. If, as a result of an examination of the
Bank, the regulators should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity or other
aspects of the Bank's operations are unsatisfactory or that the Bank or our
management is violating or has violated any law or regulation, various remedies
are available to the regulators. Such remedies include the power to enjoin
unsafe or unsound practices, to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an administrative
order that can be judicially enforced, to direct an increase in capital, to
restrict growth, to assess civil monetary penalties, to remove officers and
directors and ultimately to request the FDIC to terminate the Bank's deposit
insurance. As a California-chartered commercial bank, the Bank is also subject
to certain provisions of California law.
Activities of Bank Holding
Companies. The activities of bank holding companies are
generally limited to the business of banking, managing or controlling banks, and
other activities that the Federal Reserve has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Bank holding companies that qualify and register as “financial holding
companies” are also able to engage in certain additional financial activities,
such as merchant banking and securities and insurance underwriting, subject to
limitations set forth in federal law. We are not at this date a “financial
holding company.”
The BHCA
requires a bank holding company to obtain prior approval of the Federal Reserve
before: (1) taking any action that causes a bank to become a controlled
subsidiary of the bank holding company; (2) acquiring direct or indirect
ownership or control of voting shares of any bank or bank holding company, if
the acquisition results in the acquiring bank holding company having control of
more than 5% of the outstanding shares of any class of voting securities of such
bank or bank holding company, unless such bank or bank holding company is
majority-owned by the acquiring bank holding company before the acquisition; (3)
acquiring all or substantially all the assets of a bank; or (4) merging or
consolidating with another bank holding company.
Permissible Activities of the
Bank. Because California permits commercial banks
chartered by the state to engage in any activity permissible for national banks,
the Bank can form subsidiaries to engage in activates “closely related to
banking” or “nonbanking” activities and expanded financial activities. However,
to form a financial subsidiary, the Bank must be well capitalized and would be
subject to the same capital deduction, risk management and affiliate transaction
rules as applicable to national banks. Generally, a financial subsidiary is
permitted to engage in activities that are “financial in nature” or incidental
thereto, even though they are not permissible for the national bank to conduct
directly within the bank. The definition of “financial in nature” includes,
among other items, underwriting, dealing in or making a market in securities,
including, for example, distributing shares of mutual funds. The subsidiary may
not, however, engage as principal in underwriting insurance (other than credit
life insurance), issue annuities or engage in real estate development or
investment or merchant banking. Presently, the Bank does not have any
subsidiaries.
Capital
Requirements. The federal banking agencies have adopted
regulations establishing minimum capital adequacy requirements for banking
organizations. These agencies may establish higher minimum requirements if, for
example, a banking organization previously has received special attention or has
a high susceptibility to interest rate risk. Under Federal Reserve regulations,
the minimum ratio of total capital to risk-adjusted assets is 8%. At least half
of the total capital is required to be "Tier I capital," principally consisting
of common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items. The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the allowance for loan
loss.
In
addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier I capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier I capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 4%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios. Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Company to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
The
regulatory capital requirements, as well as the actual capital ratios for the
Bank and the Company as of December 31, 2007, are presented in detail in Note 2,
Regulatory Capital Requirements and Other Regulatory Matters. See also “Capital
Resources” within Management’s Discussion and Analysis in Item 7 hereof. As of
December 31, 2007, both the Bank and the Company exceeded the minimum capital
requirements to be well capitalized.
Under
applicable regulatory guidelines, the Company’s trust preferred securities
issued by our subsidiary capital trust qualify as Tier I capital up to a maximum
limit of 25% of total Tier I capital. Any additional portion of the trust
preferred securities would qualify as Tier II capital. As of December 31, 2007,
the subsidiary trust had $10.3 million in trust preferred securities
outstanding, of which $10.0 million qualify as Tier I capital.
In
addition, the DFI has authority to take possession of the business and
properties of a bank in the event that the tangible shareholders' equity of a
bank is less than the greater of (i) 4% of the bank’s total assets or (ii)
$1,000,000.
Prompt Corrective Action
Regulations. The federal banking regulators are required to take "prompt
corrective action" with respect to capital-deficient institutions. Agency
regulations define, for each capital category, the levels at which institutions
are "well capitalized," "adequately capitalized," "under capitalized,"
"significantly under capitalized" and "critically under capitalized." A "well
capitalized" bank has a total risk-based capital ratio of 10.0% or higher; a
Tier I risk-based capital ratio of 6.0% or higher; a leverage ratio of 5.0% or
higher; and is not subject to any written agreement, order or directive
requiring it to maintain a specific capital level for any capital measure. An
"adequately capitalized" bank has a total risk-based capital ratio of 8.0% or
higher; a Tier I risk-based capital ratio of 4.0% or higher; a leverage
ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in
its most recent examination report and is not experiencing significant growth);
and does not meet the criteria for a well capitalized bank. A bank is "under
capitalized" if it fails to meet any one of the ratios required to be adequately
capitalized.
In the
event an institution becomes “undercapitalized,” it must submit a capital
restoration plan. The capital restoration plan will not be accepted
by the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary’s compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution’s holding company is entitled to a priority of payment in
bankruptcy. The aggregate liability of the holding company of an
undercapitalized bank is limited to the lesser of 5% of the institution’s assets
at the time it became undercapitalized or the amount necessary to cause the
institution to be “adequately capitalized.” The bank regulators have greater
power in situations where an institution becomes “significantly” or “critically”
undercapitalized or fails to submit a capital restoration plan. In
addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
As an
institution's capital decreases, the federal agency's enforcement powers become
more severe. A significantly undercapitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management, and other restrictions. A federal agency
has limited discretion in dealing with a critically undercapitalized institution
and is virtually required to appoint a receiver or conservator.
Banks
with risk-based capital and leverage ratios below the required minimums may also
be subject to certain administrative actions, including the termination of
deposit insurance upon notice and hearing, or a temporary suspension of
insurance without a hearing in the event the institution has no tangible
capital.
As of
December 31, 2007, the Bank was “well capitalized” according to the guidelines
discussed above,.
Dividends. Dividends
from the Bank, starting in 2008, will constitute the principal source of income
to the Company. The Bank is subject to various statutory and regulatory
restrictions on its ability to pay dividends. In addition, the
banking agencies have the authority to prohibit the Bank from paying dividends,
depending upon the Bank's financial condition, if such payment is deemed to
constitute an unsafe or unsound practice.
Insurance of Accounts and Regulation
by the FDIC. The Bank’s deposits are currently insured to a maximum of
$100,000 per depositor by the FDIC except for certain retirement accounts which
are insured up to $250,000. The Bank is required to pay deposit insurance
premiums. The premium amount is based upon a risk classification system
established by the FDIC. Banks with higher levels of capital and a low degree of
supervisory concern are assessed lower premiums than banks with lower levels of
capital or a higher degree of supervisory concern. Effective January 1, 2007 the
FDIC adopted a new rule for the insurance assessment on deposits. Under the new
rule the charge for annual insurance deposit assessments will range from a
minimum of 5 basis points to a maximum of 43 basis points per $100 of insured
deposits depending upon the risk assessment category into which the institution
falls. Insured institutions are not all allowed to disclose their risk
assessment classification and no assurance can be given as to what the future
level of premiums will be.
Under the
Federal Deposit Insurance Reform Act of 2005, the Bank received a one-time
initial assessment credit to recognize its past contributions to the insurance
fund. The Bank’s one-time assessment credit was approximately $122,000. This
credit can be used to offset assessments until exhausted. During 2007, the Bank
used the entire amount of the credit as an offset to its regular quarterly
assessment. . The FDIC has authority to increase insurance
assessments. A significant increase in insurance premiums could have an adverse
effect on the operating expenses and results of operations of the Company.
Management cannot predict what insurance assessment rates will be in the
future.
In
addition to the assessment for deposit insurance, the Bank, as a former member
of the SAIF, also pays assessments towards the retirement of the Financing
Corporation Bonds issued in the 1980s to assist in the recovery of the savings
and loan industry. These assessments will continue until the FICO
Bonds mature in 2017. This payment is established quarterly and
during the year ending December 31, 2007 averaged 1.14 basis points of
assessable deposits.
The FDIC
is authorized to terminate a depository institution's deposit insurance upon a
finding by the FDIC that the institution's financial condition is unsafe or
unsound or that the institution has engaged in unsafe or unsound practices or
has violated any applicable rule, regulation, order or condition enacted or
imposed by the institution's regulatory agency.
Loans-to-One
Borrower. Under state law, our ability to make aggregate
secured and unsecured loans-to-one-borrower is limited to 25% and 15%,
respectively, of unimpaired capital and surplus. At December 31, 2007, the
Bank's limit on aggregate secured and unsecured loans-to-one-borrower was $17.6
million and $10.6 million, respectively. At December 31, 2007, the Bank's
largest aggregate outstanding balance of loans-to-one borrower, in secured
loans, was $16.7 million.
Transactions with Related
Parties. Depository institutions are subject to the
restrictions contained in Section 22(h) of the Federal Reserve Act (“FRA”) with
respect to loans to directors, executive officers and principal stockholders.
Under Section 22(h), loans to directors, executive officers and stockholders who
own more than 10% of a depository institution and certain affiliated entities of
any of the foregoing, may not exceed, together with all other outstanding loans
to such person and affiliated entities, the institution's loans-to-one-borrower
limit (as discussed above). Section 22(h) also prohibits loans above amounts
prescribed by the appropriate federal banking agency to directors, executive
officers, and stockholders who own more than 10% of an institution, and their
respective affiliates, unless such loans are approved in advance by a majority
of the board of directors of the institution. Any "interested" director may not
participate in the voting. The prescribed loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus (up
to $500,000). Further, pursuant to Section 22(h), the Federal Reserve requires
that loans to directors, executive officers, and principal stockholders be made
on terms substantially the same as offered in comparable transactions with
non-executive employees of the bank and must not involve more than the normal
risk of repayment. There are additional limits on the amount a bank
can loan to an executive officer.
Transactions
between a bank and its "affiliates" are quantitatively and qualitatively
restricted under Sections 23A and 23B of the Federal Reserve Act (“FRA”).
Section 23A restricts the aggregate amount of covered transactions with any
individual affiliate to 10% of the capital and surplus of the financial
institution. The aggregate amount of covered transactions with all affiliates is
limited to 20% of the institution’s capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates are generally prohibited. Section 23B generally provides
that certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. The Federal Reserve Board has promulgated Regulation W,
which codifies prior interpretations under Sections 23A and 23B of the FRA and
provides interpretive guidance with respect to affiliate
transactions. Affiliates of a bank include, among other entities, a
bank’s holding company and companies that are under common control with the
bank. We are considered to be an affiliate of the Bank.
Standards for Safety and
Soundness. The Federal Deposit Insurance Corporation Improvement Act
(“FDICIA”) imposes certain specific restrictions on transactions and requires
federal banking regulators to adopt overall safety and soundness standards for
depository institutions related to internal control, loan underwriting and
documentation and asset growth. Among other things, FDICIA limits the interest
rates paid on deposits by undercapitalized institutions, restricts the use of
brokered deposits, limits the aggregate extensions of credit by a depository
institution to an executive officer, director, principal shareholder or related
interest, and reduces deposit insurance coverage for deposits offered by
undercapitalized institutions for deposits by certain employee benefits
accounts. The federal banking agencies may require an institution to submit to
an acceptable compliance plan as well as have the flexibility to pursue other
more appropriate or effective courses of action given the specific circumstances
and severity of an institution's noncompliance with one or more
standards.
Federal Reserve
System. Federal Reserve regulations require banks to maintain
noninterest earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). At December 31, 2007, the Bank
maintained compliance with the foregoing requirements.
Cross-Guarantee
Provisions. Insured depository institutions under common
control are required to reimburse the FDIC for any loss suffered by its deposit
insurance funds as a result of the default of a commonly controlled depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the deposit insurance funds. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
Community Reinvestment Act and the
Fair Lending Laws. The Bank is subject to certain fair lending
requirements and reporting obligations involving home mortgage lending
operations and Community Reinvestment Act ("CRA") activities. The CRA generally
requires the federal banking agencies to evaluate the record of a financial
institution in meeting the credit needs of their local communities, including
low and moderate income neighborhoods. In addition to substantial penalties and
corrective measures that may be required for a violation of certain fair lending
laws, the federal banking agencies may take compliance with such laws and CRA
into account when regulating and supervising other activities.. A bank's
compliance with its CRA obligations is based on a performance-based evaluation
system which bases CRA ratings on an institution's lending service and
investment performance, resulting in a rating by the appropriate bank regulatory
agency of "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance.” Based on its last CRA examination, the Bank received an
“outstanding” rating.
Bank Secrecy Act and Money Laundering
Control Act. In 1970,
Congress passed the Currency and Foreign Transactions Reporting Act, otherwise
known as the Bank Secrecy Act (the “BSA”), which established requirements for
recordkeeping and reporting by banks and other financial institutions. The BSA
was designed to help identify the source, volume and movement of currency and
other monetary instruments into and out of the United States in order to help
detect and prevent money laundering connected with drug trafficking, terrorism
and other criminal activities. The primary tool used to implement BSA
requirements is the filing of Suspicious Activity Reports. Today, the BSA
requires that all banking institutions develop and provide for the continued
administration of a program reasonably designed to assure and monitor compliance
with certain recordkeeping and reporting requirements regarding both domestic
and international currency transactions. These programs must, at a minimum,
provide for a system of internal controls to assure ongoing compliance, provide
for independent testing of such systems and compliance, designate individuals
responsible for such compliance and provide appropriate personnel
training.
USA Patriot Act of 2001. On October 26,
2001, President Bush signed the USA Patriot Act of 2001 (the “Patriot
Act”). Enacted in response to the terrorist attacks in New York,
Pennsylvania and Washington, D.C. on September 11, 2001, the Patriot Act is
intended to strengthen U.S. law enforcement's and the intelligence communities'
ability to work cohesively to combat terrorism on a variety of
fronts. The potential impact of the Act on financial institutions of
all kinds is significant and wide ranging. The Act contains sweeping
anti-money laundering and financial transparency laws and requires various
regulations, including:
·
|
due
diligence requirements for financial institutions that administer,
maintain, or manage private bank accounts or correspondent accounts for
non-U.S. persons;
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·
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standards
for verifying customer identification at account opening;
and
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·
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rules
to promote cooperation among financial institutions, regulators, and law
enforcement entities in identifying parties that may be involved in
terrorism or money laundering.
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Sarbanes-Oxley Act of
2002. The Sarbanes-Oxley Act of 2002 (“SOA”) was enacted to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The SOA generally
applies to all companies, both U.S. and non-U.S., that file or are required to
file periodic reports with the Securities Exchange Commission (“SEC”) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”),
including us.
The SOA
includes additional disclosure requirements and new corporate governance rules,
requires the SEC and securities exchanges to adopt extensive additional
disclosure, corporate governance and other related rules and mandates further
studies of specified issues by the SEC and the Comptroller
General. The SEC has promulgated regulations to implement various
provisions of the SOA, including additional disclosure requirements and
certifications in periodic filings under the Exchange Act. We have
revised our internal policies and Exchange Act disclosures to comply with these
new requirements.
Check Clearing for the 21st Century
Act. The Check Clearing for the 21st Century Act, or “Check 21”,
facilitates check truncation and electronic check exchange by authorizing a new
negotiable instrument called a “substitute check,” which is the legal equivalent
of an original check. Check 21 does not require banks to create substitute
checks or accept checks electronically; however, it does require banks to accept
a legally equivalent substitute check in place of an original. In addition to
its issuance of regulations governing substitute checks, the Federal Reserve has
issued final rules governing the treatment of remotely created checks (sometimes
referred to as “demand drafts”) and electronic check conversion transactions
(involving checks that are converted to electronic transactions by merchants and
other payees).
Federal
and State Taxation
The
Company and the Bank report their income on a consolidated basis using the
accrual method of accounting, and are subject to federal income taxation in the
same manner as other corporations with some exceptions. The Bank has not been
audited by the IRS. For its 2007 taxable year, the Bank is subject to a maximum
federal and state income tax rate of 34% and 10.84%, respectively.
Risk
Factors
You
should carefully consider the following risk factors and all other information
contained in this Annual Report on Form 10-K. The risks and
uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us or
that we currently believe are immaterial also may impair our
business. If any of the events described in the following risk
factors occur, our business, results of operations and financial condition could
be materially adversely affected.
Our
multi-family residential, commercial real estate and business loans are
relatively unseasoned, and defaults on such loans would adversely affect our
financial condition and results of operations.
At
December 31, 2007, our multi-family residential loans amounted to $341.3
million, or 54.5% of our total loans. At December 31, 2007, our
commercial real estate loans amounted to $147.5 million, or 23.5% of our total
loans. At December 31, 2007, our business loans amounted to $122.6 million, or
19.6% of our total loans. Our multi-family residential and commercial real
estate loan portfolios consist primarily of loans originated after June 30, 2002
while our business loans were originated even more recently and are,
consequently, relatively unseasoned. Further, the payments on
multi-family, commercial real estate and business loans are typically dependent
on the successful operation of the project. If there is a downturn in
the market in which a multi-family property, commercial property or a business
is located, a borrower may suffer a loss on his/her project and be unable to
repay the loan. Defaults on these loans would negatively affect our
financial condition, results of operations and financial prospects.
We
may be unable to successfully compete in our industry.
We face
direct competition from a significant number of financial institutions, many
with a state-wide or regional presence, and in some cases a national presence,
in both originating loans and attracting deposits. Competition in
originating loans comes primarily from other banks and mortgage companies that
make loans in our primary market areas. We also face substantial
competition in attracting deposits from other banking institutions, money market
and mutual funds, credit unions and other investment vehicles. In
addition banks with larger capitalizations and non-bank financial institutions
that are not governed by bank regulatory restrictions have large lending limits
and are better able to serve the needs of larger customers. Many of
these financial institutions are also significantly larger and have greater
financial resources than we have, and have established customer bases and name
recognition. We compete for loans principally on the basis of
interest rates and loan fees, the types of loans that we originate and the
quality of service that we provide to our borrowers. Our ability to
attract and retain deposits requires that we provide customers with competitive
investment opportunities with respect to rate of return, liquidity, risk and
other factors. To effectively compete, we may have to pay higher
rates of interest to attract deposits, resulting in reduced
profitability. In addition, we rely upon local promotional
activities, personal relationships established by our officers, directors and
employees and specialized services tailored to meet the individual needs of our
customers in order to compete. If we are not able to effectively
compete in our market area, our profitability may be negatively
affected.
Our
origination of multi-family and commercial real estate loans is dependent on the
mortgage brokers who refer these loans to us.
Our
primary method of originating multi-family and commercial real estate loans is
through referrals by mortgage brokers. During 2007, five mortgage
brokers have referred to us approximately 57.8% of all the multi-family and
commercial real estate loans we originated. Although we have in-house
account managers who have the responsibility of developing relationships with
additional mortgage brokers which may refer us the types of loans we target,
should we not be successful in developing relationships with additional mortgage
brokers and should we lose referrals from one or more mortgage brokers on whom
we depend for a large percentage of our multi-family and commercial real estate
loans, our loan originations could be substantially less than we anticipate,
thus reducing our anticipated income from these loans.
Interest
rate fluctuations, which are out of our control, could harm
profitability.
Our
profitability depends to a large extent upon net interest income, which is the
difference between interest income on interest-earning assets, such as loans and
investments, and interest expense on interest-bearing liabilities, such as
deposits and borrowings. Any change in general market interest rates,
whether as a result of changes in the monetary policy of the Federal Reserve
Board or otherwise, may have a significant effect on net interest
income. The assets and liabilities may react differently to changes
in overall market rates or conditions. Moreover, in periods of rising
interest rates, financial institutions typically originate fewer mortgage loans
adversely affecting our interest income on loans. Further, if
interest rates decline, our loans may be refinanced at lower rates or paid off
and our investments may be prepaid earlier than expected. If that
occurs, we may have to redeploy the loan or investment proceeds into lower
yielding assets, which might also decrease our income.
We
may experience loan losses in excess of our allowance for loan
losses.
We try to
limit the risk that borrowers will fail to repay loans by carefully underwriting
the loans, nevertheless losses can and do occur. We create an
allowance for estimated loan losses in our accounting records, based on
estimates of the following:
• industry historical
losses as reported by the FDIC;
• historical
experience with our loans;
• evaluation
of economic conditions;
• regular
reviews of the quality mix and size of the overall loan portfolio;
• regular
reviews of delinquencies; and
• the
quality of the collateral underlying our loans.
We
maintain an allowance for loan losses at a level that we believe is adequate to
absorb any specifically identified losses, as well as, any other losses inherent
in our loan portfolio. However, changes in economic, operating and
other conditions, including changes in interest rates, which are beyond our
control, may cause our actual loan losses to exceed our current allowance
estimates. If the actual loan losses exceed the amount reserved, it
will adversely affect our financial condition and results of
operations. In addition, the Federal Reserve and DFI, as part of
their supervisory function, periodically review our allowance for loan
losses. Either agency may require us to increase our provision for
loan losses or to recognize further loan losses, based on their judgments, which
may be different from those of our management. Any increase in the
allowance required by them could also adversely affect our financial condition
and results of operations.
Upon
exercise of the Warrant, shareholders will experience significant dilution in
their shares of common stock.
In 2002,
a warrant (“the Warrant”) was issued in conjunction with a private
placement. The holder of the Warrant has the right to purchase
1,166,400 shares of our common stock at an exercise price of $0.75 per share,
which shares, once exercised, would represent approximately 18.4% of our issued
and outstanding shares as of December 31, 2007. The Warrant is
currently exercisable for an aggregate of 1,166,400 shares of our common
stock. The trading price of our common stock has been significantly
higher than $0.75 per share for the last three fiscal years and at December 31,
2007, the closing price of our common stock was $6.91 per share. Upon
exercise of the Warrant, existing shareholders will experience significant
dilution of the shares of our common stock that they hold.
Adverse
outcomes of litigation against us could harm our business and results of
operations.
We are
currently involved in litigation involving the prior management’s origination
and sale of subprime mortgages, as well as, other actions arising in the
ordinary course of our business. A significant judgment against us in
connection with any pending or future litigation could harm our business and
results of operations. See Item 3 hereof.
Poor
economic conditions in California may cause us to suffer higher default rates on
our loans and decreased value of the assets we hold as collateral.
A
substantial majority of our assets and deposits are generated in Southern
California. As a result, poor economic conditions in Southern
California may cause us to incur losses associated with higher default rates and
decreased collateral values in our loan portfolio. In addition,
demand for our products and services may decline. Further, a downturn in the
Southern California real estate market could hurt our business. Our
business activities and credit exposure are concentrated in Southern
California. A downturn in the Southern California real estate market
could hurt our business because the vast majority of our loans are secured by
real estate located within Southern California. As of December 31,
2007, approximately 86.1% of our loan portfolio consisted of loans secured by
real estate located in Southern California. If there is a significant
decline in real estate values, especially in Southern California, the collateral
for our loans will provide less security. As a result, our ability to
recover on defaulted loans by selling the underlying real estate would be
diminished, and we would be more likely to suffer losses on defaulted
loans. Real estate values in Southern California could be affected
by, among other things, earthquakes and other natural disasters particular to
Southern California.
We
do not expect to pay cash dividends in the foreseeable future.
We do not
intend to pay cash dividends on our common stock in the foreseeable
future. Instead, we intend to reinvest our earnings in our
business. In addition, in order to pay cash dividends to our
shareholders, we would most likely need to obtain funds from the
Bank. The Bank’s ability, in turn, to pay dividends to us is subject
to restrictions set forth in the Financial Code. The Financial Code provides
that a bank may not make a cash distribution to its shareholders in excess of
the lesser of (a) bank’s retained earnings; or (b) bank’s net income for its
last three fiscal years, less the amount of any distributions made by the bank
or by any majority-owned subsidiary of the bank to the shareholders of the bank
during such period. However, a bank may, with the approval of the DFI, make a
distribution to its shareholders in an amount not exceeding the greatest of (x)
its retained earnings; (y) its net income for its last fiscal year; or (z) its
net income for its current fiscal year. In the event that the DFI determines
that the shareholders' equity of a bank is inadequate or that the making of a
distribution by the bank would be unsafe or unsound, the DFI may order the bank
to refrain from making a proposed distribution. Additionally, while the Federal
Reserve has no general restriction with respect to the payment of cash dividends
by an adequately capitalized bank to its parent holding company, the Federal
Reserve might, under certain circumstances, place restrictions on the ability of
a particular bank to pay dividends based upon peer group averages and the
performance and maturity of the particular bank, or object to management fees to
be paid by a subsidiary bank to its holding company on the basis that such fees
cannot be supported by the value of the services rendered or are not the result
of an arm's length transaction. Under these provisions, the amount available for
distribution from the Bank to the Company was approximately $8.7million at
December 31, 2007.
Our
business may be adversely affected by the highly regulated environment in which
we operate.
We are
subject to extensive federal and state legislation, regulation and
supervision. Recently enacted, proposed and future legislation and
regulations have had and are expected to continue to have a significant impact
on the financial services industry. Some of the legislative and
regulatory changes may benefit us. However, other changes could increase our
costs of doing business or reduce our ability to compete in certain
markets.
Anti-takeover
defenses may delay or prevent future transactions
Our
Certificate of Incorporation and Bylaws, among other things:
·
|
divide
the board of directors into three classes with directors of each class
serving for a staggered three year
period;
|
·
|
provides
that our directors must fill vacancies on the
board;
|
·
|
permit
the issuance, without shareholder approval, of shares of preferred stock
having rights and preferences determined by the board of
directors;
|
·
|
provide
that stockholders holding 80% of our issued and outstanding shares must
vote to approve certain business combinations and other transactions
involving holders of more than 10% of our common stock or our
affiliates;
|
·
|
provide
that stockholders holding 80% of our issued and outstanding shares must
vote to remove directors for cause;
and
|
·
|
provide
that record holders of our common stock who beneficially own in excess of
10% of our common stock are not entitled to vote shares held by them in
excess of 10% of our common stock.
|
In
addition, Steven R. Gardner, our President and Chief Executive Officer, John
Shindler, our Chief Financial Officer, and Edward Wilcox, the Bank’s Chief
Banking Officer, have employment agreements which provides that, in the event of
a change of control in which their employment is terminated, Mr. Gardner will be
entitled to a severance payment equal to three times his annual base salary plus
an amount equal to three times his incentive bonus for the previous year, while
Messrs. Shindler and Wilcox will each be entitled to a severance payment equal
to their annual base plus the their previous year incentive bonus. Also, the
Bank has Salary Continuation Agreements with Messrs. Gardner and Shindler that
provides that if their employment is terminated within 12 months of a change in
control they would receive the present value of their benefits which is
approximately $1.5 million and $740,000, respectively.
These
provisions in our certificate of incorporation, by-laws and the employment
agreements could make the removal of incumbent directors more difficult and
time-consuming and may have the effect of discouraging a tender offer or other
takeover attempts not previously approved by our board of
directors.
We
are dependent on our key personnel
Our
future operating results depend in large part on the continued services of our
key personnel, including Steven R. Gardner, our President and Chief Executive
Officer, who developed and implemented our new business strategy. The
loss of Mr. Gardner could have a negative impact on the success of our new
business strategy. In addition, we rely upon the services of John
Shindler, our Executive Vice President and Chief Financial Officer, Eddie
Wilcox, our Executive Vice President and Chief Banking Officer, and our ability
to attract and retain highly skilled personnel. On December 19, 2007, the
Company and the Bank entered into a three year employment agreement with
Mr. Gardner and the Bank entered into three year employment agreements with
each of Messrs. Shindler and Wilcox and the Company with Mr.
Gardner. We do not maintain key-man life insurance on any employee
other than Messrs Gardner and Shindler. . We cannot assure you that
we will be able to continue to attract and retain the qualified personnel
necessary for the development of our business.
Potential
acquisitions may disrupt our business and dilute stockholder value.
We have
evaluated merger and acquisition opportunities and conduct due diligence
activities related to possible transactions with other financial institutions.
As a result, merger or acquisition discussions and, in some cases, negotiations
may take place and future mergers or acquisitions involving cash, debt or equity
securities may occur at any time. Acquisitions typically involve the payment of
a premium over book and market values, and, therefore, some dilution of our
stock’s tangible book value and net income per common share may occur in
connection with any future transaction. Furthermore, failure to realize the
expected revenue increases, cost savings, increases in geographic or product
presence, and/or other projected benefits from an acquisition could have a
material adverse effect on our financial condition and results of
operations.
We may
seek merger or acquisition partners that are culturally similar and have
experienced management and possess either significant market presence or have
potential for improved profitability through financial management, economies of
scale or expanded services. We do not currently have any specific plans,
arrangements or understandings regarding such expansion. We cannot say with any
certainty that we will be able to consummate, or if consummated, successfully
integrate future acquisitions or that we will not incur disruptions or
unexpected expenses in integrating such acquisitions. In attempting to make such
acquisitions, we anticipate competing with other financial institutions, many of
which have greater financial and operational resources. Acquiring other banks,
businesses, or branches involves various risks commonly associated with
acquisitions, including, among other things:
·
|
Potential
exposure to unknown or contingent liabilities of the target
company;
|
·
|
Exposure
to potential asset quality issues of the target
company;
|
·
|
Difficulty
and expense of integrating the operations and personnel of the target
company;
|
·
|
Potential
disruption to our business;
|
·
|
Potential
diversion of management’s time and
attention;
|
·
|
The
possible loss of key employees and customers of the target
company;
|
·
|
Difficulty
in estimating the value of the target
company;
|
·
|
Potential
changes in banking or tax laws or regulations that may affect the target
company.
|
None.
Location
|
Leased
or
Owned
|
Original
Year
Leased
or
Acquired
|
Date
of
Lease
Expiration
|
|
Net
Book Value of
Property or Leasehold
Improvements at
December
31, 2007
|
|
|
|
|
|
|
|
|
Corporate
Headquarters:
1600
Sunflower Ave. (1)
Costa
Mesa, CA 92626
|
Owned
|
2002
|
N.A.
|
|
$ |
4,902,000 |
|
|
|
|
|
|
|
|
|
Branch
Office:
1598 E. Highland Ave.
San
Bernardino, CA 92404
|
Leased
|
1986
|
2015
|
|
$ |
106,000 |
|
|
|
|
|
|
|
|
|
Branch
Office:
19011 Magnolia Avenue
Huntington
Beach CA 92646
|
Owned
(2)
|
2005
|
2023
|
|
$ |
1,520,000 |
|
|
|
|
|
|
|
|
|
Branch
Office:
13928 Seal Beach Blvd.
Seal
Beach, CA 90740
|
Leased
|
1999
|
2012
|
|
$ |
4,000 |
|
|
|
|
|
|
|
|
|
Branch
Office:
4957 Katella Ave. Suite B
Los
Alamitos, CA 90720
|
Leased
|
2005
|
2015
|
|
$ |
343,000 |
|
|
|
|
|
|
|
|
|
Branch
Office:
4667
MacArthur Blvd.
Newport
Beach, CA 92660
|
Leased
|
2005
|
2016
|
|
$ |
851,000 |
|
(1) We lease to two tenants approximately 9,735 square feet of the
36,159 square feet of our corporate headquarters for $12,442 per month.
(2) The building is owned, but the land is leased on a long-term
basis.
All of
our existing facilities are considered to be adequate for our present and
anticipated future use. In the opinion of management, all properties are
adequately covered by insurance.
In
February 2004, the Bank was named in a class action lawsuit titled, “James Baker
v. Century Financial, et al”, alleging various violations of Missouri's Second
Mortgage Loans Act by charging and receiving fees and costs that were either
wholly prohibited by or in excess of that allowed by the Act relating to
origination fees, interest rates, and other charges. The class action lawsuit
was filed in the Circuit Court of Clay County, Missouri. The
complaint seeks restitution of all improperly collected charges, interest plus
the right to rescind the mortgage loans or a right to offset any illegal
collected charges, interest against the principal amounts due on the loans and
punitive damages. In March of 2005, the Bank’s motion for dismissal
due to limitations was denied by the trial court without comment. The
Bank’s “preemption” motion was denied in August 2006. The Bank has answered the
plaintiffs’ complaint and the parties have exchanged and answered initial
discovery requests. When the record is more fully developed, the Bank
intends to raise the limitations issue again in the form of a motion for summary
judgment.
The
Company is not involved in any other pending legal proceedings other than legal
proceedings occurring in the ordinary course of business. Management
believes that none of these legal proceedings, individually or in the aggregate,
will have a material adverse impact on the results of operations or financial
condition of the Company.
None.
PART
II
PRICE
RANGE BY QUARTERS
The
common stock of the Company has been publicly traded since 1997 and is currently
traded on the NASDAQ Global Market under the symbol PPBI. However,
until recently, trading in the common stock has not been extensive and such
trades cannot be characterized as constituting an active trading
market.
As of
March 31, 2008, there were approximately 1,100 holders of record of the common
stock. The following table summarizes the range of the high and low
closing sale prices per share of our common stock as quoted by the Nasdaq Global
Market for the periods indicated.
|
|
Sale
Price of Common Stock
|
|
|
|
High
|
|
|
Low
|
|
2006
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
12.45 |
|
|
$ |
11.63 |
|
Second
Quarter
|
|
$ |
12.03 |
|
|
$ |
11.12 |
|
Third
Quarter
|
|
$ |
12.33 |
|
|
$ |
10.79 |
|
Fourth
Quarter
|
|
$ |
12.69 |
|
|
$ |
11.46 |
|
2007
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
12.35 |
|
|
$ |
10.80 |
|
Second
Quarter
|
|
$ |
10.88 |
|
|
$ |
9.80 |
|
Third
Quarter
|
|
$ |
10.99 |
|
|
$ |
10.02 |
|
Fourth
Quarter
|
|
$ |
11.73 |
|
|
$ |
6.91 |
|
Stock Performance
Graph. The graph below compares the performance of the common
stock with that of the Nasdaq Composite Index (U.S. Companies) and the Nasdaq
Bank Stocks Index from December 31, 2002 through December 31,
2007. The graph is based on the investment of $100 in the common
stock at its closing price on December 31, 2002. The Company has not
paid any dividends on its common stock.
Total
Return Analysis
|
12/31/2002
|
12/31/2003
|
12/31/2004
|
12/31/2005
|
12/30/2006
|
12/29/2007
|
Pacific
Premier Bancorp, Inc.
|
$ 100.00
|
$ 208.85
|
$ 249.72
|
$ 222.22
|
$ 229.38
|
$ 130.13
|
Nasdaq
Bank Stocks Index
|
$ 100.00
|
$ 128.64
|
$ 147.22
|
$ 143.82
|
$ 161.41
|
$ 127.92
|
Nasdaq
Composite Index
|
$ 100.00
|
$ 149.52
|
$ 162.72
|
$ 166.18
|
$ 182.57
|
$ 197.98
|
DIVIDENDS
It is our
policy to retain earnings, if any, to provide funds for use in our
business. We have never declared or paid dividends on our common
stock and do not anticipate declaring or paying any cash dividends in the
foreseeable future.
Our
ability to pay a dividend on the common stock is dependent on the Bank’s ability
to pay dividends to the Company. Various statutory provisions restricted the
amount of dividends that the Bank can pay without regulatory
approval.
ISSUER
PURCHASES OF EQUITY SECURITIES
In 2005,
the Company's Board of Directors authorized the Management of the Company to
repurchase up to 61,500 shares, or 1.17% of the Company's issued and outstanding
common stock, to be done in accordance with Rule 10b-18 of the Exchange
Act. During 2007 the remaining 27,200 shares available under
that authorization were purchased. In February of 2007, the Company's
Board of Directors authorized the Management of the Company to repurchase up to
600,000 shares of the Company's issued and outstanding common stock on a
negotiated, non-open market basis by dealing directly with investment bankers
representing shareholders of larger blocks of the stock. At December
31, 2007, the Company had purchased 72,800 shares pursuant to that
authorization. The following table summarizes purchase activity for
the year of 2007:
Month
of
Purchase
|
|
Total
Number
of
shares purchased/returned
|
|
|
Average
price
paid
per share
|
|
|
Total
Number of shares repurchased as
part
of the publicly
announced
program
|
|
|
Maximum
number
of
shares that
may
yet be purchased
under
the program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan-07
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
27,200 |
|
Feb-07
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
627,200 |
|
Mar-07
|
|
|
50,000 |
|
|
|
11.39 |
|
|
|
50,000 |
|
|
|
577,200 |
|
Apr-07
|
|
|
50,000 |
|
|
|
10.48 |
|
|
|
50,000 |
|
|
|
527,200 |
|
May-07
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
527,200 |
|
Jun-07
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
527,200 |
|
Jul-07
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
527,200 |
|
Aug-07
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
527,200 |
|
Sep-07
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
527,200 |
|
Oct-07
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
527,200 |
|
Nov-07
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
527,200 |
|
Dec-07
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
527,200 |
|
Total/Average
|
|
|
100,000 |
|
|
$ |
10.94 |
|
|
|
100,000 |
|
|
|
527,200 |
|
The
selected financial data presented below is derived from the audited consolidated
financial statements of the Company and should be read in conjunction with the
Consolidated Financial Statements presented elsewhere herein (dollars in
thousands, except ratios and per share data):
|
|
As
of and For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
49,432 |
|
|
$ |
44,128 |
|
|
$ |
33,707 |
|
|
$ |
23,223 |
|
|
$ |
17,248 |
|
Interest
expense
|
|
|
31,166 |
|
|
|
27,003 |
|
|
|
16,571 |
|
|
|
7,817 |
|
|
|
7,657 |
|
Net
interest income
|
|
|
18,266 |
|
|
|
17,125 |
|
|
|
17,136 |
|
|
|
15,406 |
|
|
|
9,591 |
|
Provision
for loan losses
|
|
|
1,651 |
|
|
|
531 |
|
|
|
349 |
|
|
|
705 |
|
|
|
655 |
|
Net
interest income after provision for loans losses
|
|
|
16,615 |
|
|
|
16,594 |
|
|
|
16,787 |
|
|
|
14,701 |
|
|
|
8,936 |
|
Net
gains from loan sales
|
|
|
3,720 |
|
|
|
3,697 |
|
|
|
590 |
|
|
|
105 |
|
|
|
328 |
|
Other
noninterest income
|
|
|
2,639 |
|
|
|
2,818 |
|
|
|
3,540 |
|
|
|
4,141 |
|
|
|
1,987 |
|
Noninterest
expense
|
|
|
17,248 |
|
|
|
15,231 |
|
|
|
12,260 |
|
|
|
11,234 |
|
|
|
9,783 |
|
Income
before income tax provision
|
|
|
5,726 |
|
|
|
7,878 |
|
|
|
8,657 |
|
|
|
7,713 |
|
|
|
1,468 |
|
Income
tax provision (benefit) (1)
|
|
|
2,107 |
|
|
|
450 |
|
|
|
1,436 |
|
|
|
972 |
|
|
|
(597 |
) |
Net
income
|
|
$ |
3,619 |
|
|
$ |
7,428 |
|
|
$ |
7,221 |
|
|
$ |
6,741 |
|
|
$ |
2,065 |
|
Share
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.70 |
|
|
$ |
1.41 |
|
|
$ |
1.37 |
|
|
$ |
1.28 |
|
|
$ |
0.96 |
|
Diluted
|
|
$ |
0.55 |
|
|
$ |
1.11 |
|
|
$ |
1.08 |
|
|
$ |
1.02 |
|
|
$ |
0.61 |
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,189,104 |
|
|
|
5,261,897 |
|
|
|
5,256,906 |
|
|
|
5,256,334 |
|
|
|
2,161,314 |
|
Diluted
|
|
|
6,524,753 |
|
|
|
6,684,915 |
|
|
|
6,658,240 |
|
|
|
6,622,735 |
|
|
|
3,399,376 |
|
Book
value per share (basic)
|
|
$ |
11.77 |
|
|
$ |
11.03 |
|
|
$ |
9.67 |
|
|
$ |
8.37 |
|
|
$ |
7.10 |
|
Book
value per share (diluted)
|
|
$ |
9.69 |
|
|
$ |
9.16 |
|
|
$ |
8.09 |
|
|
$ |
7.08 |
|
|
$ |
5.98 |
|
Selected Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
763,420 |
|
|
$ |
730,874 |
|
|
$ |
702,696 |
|
|
$ |
543,124 |
|
|
$ |
309,368 |
|
Participation
Contract
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,977 |
|
Securities
and FHLB stock
|
|
|
73,042 |
|
|
|
77,144 |
|
|
|
49,795 |
|
|
|
44,844 |
|
|
|
42,275 |
|
Loans
held for sale, net (2)
|
|
|
749 |
|
|
|
795 |
|
|
|
456 |
|
|
|
532 |
|
|
|
804 |
|
Loans
held for investment, net (2)
|
|
|
622,114 |
|
|
|
604,304 |
|
|
|
602,937 |
|
|
|
469,822 |
|
|
|
246,796 |
|
Allowance
for loan losses
|
|
|
4,598 |
|
|
|
3,543 |
|
|
|
3,050 |
|
|
|
2,626 |
|
|
|
1,984 |
|
Mortgage
servicing rights
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12 |
|
|
|
29 |
|
Total
deposits
|
|
|
386,735 |
|
|
|
339,449 |
|
|
|
327,936 |
|
|
|
288,887 |
|
|
|
221,447 |
|
Borrowings
|
|
|
297,965 |
|
|
|
316,491 |
|
|
|
318,145 |
|
|
|
206,710 |
|
|
|
48,600 |
|
Total
stockholders' equity
|
|
|
60,750 |
|
|
|
58,038 |
|
|
|
50,542 |
|
|
|
44,028 |
|
|
|
37,332 |
|
Performance
Ratios: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets (4)
|
|
|
0.50 |
% |
|
|
1.07 |
% |
|
|
1.18 |
% |
|
|
1.61 |
% |
|
|
0.82 |
% |
Return
on average equity (5)
|
|
|
6.03 |
% |
|
|
13.47 |
% |
|
|
15.17 |
% |
|
|
16.37 |
% |
|
|
12.43 |
% |
Average
equity to average assets
|
|
|
8.16 |
% |
|
|
7.94 |
% |
|
|
7.78 |
% |
|
|
9.86 |
% |
|
|
6.59 |
% |
Equity
to total assets at end of period
|
|
|
7.96 |
% |
|
|
7.94 |
% |
|
|
7.19 |
% |
|
|
8.11 |
% |
|
|
12.07 |
% |
Average
interest rate spread (6)
|
|
|
2.44 |
% |
|
|
2.39 |
% |
|
|
2.70 |
% |
|
|
3.66 |
% |
|
|
4.02 |
% |
Net
interest margin (7)
|
|
|
2.63 |
% |
|
|
2.58 |
% |
|
|
2.88 |
% |
|
|
3.82 |
% |
|
|
4.06 |
% |
Efficiency
ratio (8)
|
|
|
69.87 |
% |
|
|
64.26 |
% |
|
|
57.72 |
% |
|
|
57.21 |
% |
|
|
81.20 |
% |
Average
interest-earning assets to average interest-bearing
liabilities
|
|
|
104.20 |
% |
|
|
104.83 |
% |
|
|
106.41 |
% |
|
|
108.02 |
% |
|
|
101.16 |
% |
Capital
Ratios (9):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to adjusted total assets
|
|
|
8.81 |
% |
|
|
8.38 |
% |
|
|
7.79 |
% |
|
|
9.09 |
% |
|
|
8.93 |
% |
Tier
1 capital to total risk-weighted assets
|
|
|
10.68 |
% |
|
|
10.94 |
% |
|
|
11.21 |
% |
|
|
13.00 |
% |
|
|
12.49 |
% |
Total
capital to total risk-weighted assets
|
|
|
11.44 |
% |
|
|
11.55 |
% |
|
|
11.78 |
% |
|
|
13.59 |
% |
|
|
13.21 |
% |
Capital
Ratios (10):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to adjusted total assets
|
|
|
9.51 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Tier
1 capital to total risk-weighted assets
|
|
|
11.54 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Total
capital to total risk-weighted assets
|
|
|
12.29 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans, net, to total loans (11)
|
|
|
0.67 |
% |
|
|
0.09 |
% |
|
|
0.25 |
% |
|
|
0.45 |
% |
|
|
0.99 |
% |
Nonperforming
assets, net as a percent of total assets (12)
|
|
|
0.64 |
% |
|
|
0.10 |
% |
|
|
0.24 |
% |
|
|
0.46 |
% |
|
|
1.12 |
% |
Net
charge-offs to average total loans
|
|
|
0.37 |
% |
|
|
0.01 |
% |
|
|
(0.01 |
)% |
|
|
0.02 |
% |
|
|
0.82 |
% |
Allowance
for loan losses to total loans at period end
|
|
|
0.73 |
% |
|
|
0.58 |
% |
|
|
0.50 |
% |
|
|
0.56 |
% |
|
|
0.79 |
% |
Allowance
for loan losses as a percent of nonperforming loans at period end
(11)
|
|
|
109.48 |
% |
|
|
558.83 |
% |
|
|
180.79 |
% |
|
|
110.77 |
% |
|
|
71.55 |
% |
----------
(1)
|
In
the years ended December 31, 2006 and December 31, 2005, we reversed $2.4
million and $1.6 million, respectively, of our deferred tax valuation
allowance due to our improved financial
outlook.
|
(2)
|
Loans
are net of the allowance for loan losses and deferred
fees.
|
(3)
|
All
average balances consist of average daily
balances.
|
(4)
|
Net
income divided by total average
assets.
|
(5)
|
Net
income divided by average stockholders'
equity.
|
(6)
|
Represents
the weighted average yield on interest-earning assets less the weighted
average cost of interest-bearing
liabilities.
|
(7)
|
Represents
net interest income as a percent of average interest-earning
assets.
|
(8)
|
Represents
the ratio of noninterest expense less (gain) loss on foreclosed real
estate to the sum of net interest income before provision for loan losses
and total noninterest income.
|
(9)
|
Calculated
with respect to the Bank.
|
(10)
|
Calculated
with respect to the Company. Years prior to 2007 are not
applicable due to change in the Bank’s charter to that of a commercial
bank in 2007.
|
(11)
|
Nonperforming
loans consist of loans past due 90 days or more and foreclosures in
process less than 90 days and still accruing
interest.
|
(12)
|
Nonperforming
assets consist of nonperforming loans (see footnote 10 above) and
foreclosed other real estate owned.
|
Summary
Our
principal business is attracting deposits from small businesses and consumers
and investing those deposits together with funds generated from operations and
borrowings, primarily in commercial business loans and various types of
commercial real estate loans. In 2008, the Bank expects to fund
substantially all of the loans that it originates or purchases through deposits,
FHLB advances and internally generated funds. Deposit flows and cost
of funds are influenced by prevailing market rates of interest primarily on
competing investments, account maturities and the levels of savings in the
Bank’s market area. The Bank’s ability to originate and purchase
loans is influenced by the general level of product available. The
Bank’s results of operations are also affected by the Bank’s provision for loan
losses and the level of operating expenses. The Bank’s operating expenses
primarily consist of employee compensation and benefits, premises and occupancy
expenses, and other general expenses. The Company's results
of operations are also affected by prevailing economic conditions, competition,
government policies and other actions of regulatory agencies.
Critical
Accounting Policies
We have
established various accounting policies that govern the application of
accounting principles generally accepted in the United States of America in the
preparation of the Company’s financial statements. The Company’s significant
accounting policies are described in the Notes to the Consolidated Financial
Statements. Certain accounting policies require management to make estimates and
assumptions that have a material impact on the carrying value of certain assets
and liabilities; management considers these to be critical accounting policies.
The estimates and assumptions management uses are based on historical experience
and other factors, which management believes to be reasonable under the
circumstances. Actual results could differ significantly from these estimates
and assumptions, which could have a material impact on the carrying value of
assets and liabilities at balance sheet dates and the Company’s results of
operations for future reporting periods.
We
believe that the allowance for loan losses is the critical accounting policy
that require estimates and assumptions in the preparation of the Company’s
financial statements that are most susceptible to significant change. For
further information, see “Business—Allowances for Loan Losses” and Note 1
to the Consolidated Financial Statements.
Average Balance
Sheet. The following tables set forth certain information
relating to the Company for the years ended December 31, 2007, 2006, and
2005. The yields and costs are derived by dividing income or expense
by the average balance of assets or liabilities, respectively, for the periods
shown. Average balances are measured on a daily basis. The yields and
costs include fees, which are considered adjustments to yields.
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
|
|
|
|
(dollars
in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents (1)
|
|
$ |
432 |
|
|
$ |
78 |
|
|
|
18.06 |
% |
|
$ |
602 |
|
|
$ |
126 |
|
|
|
20.93 |
% |
|
$ |
509 |
|
|
$ |
53 |
|
|
|
10.41 |
% |
Federal
funds sold
|
|
|
1,448 |
|
|
|
72 |
|
|
|
4.97 |
% |
|
|
1,123 |
|
|
|
54 |
|
|
|
4.81 |
% |
|
|
575 |
|
|
|
20 |
|
|
|
3.48 |
% |
Investment
securities (2)
|
|
|
76,080 |
|
|
|
4,010 |
|
|
|
5.27 |
% |
|
|
53,519 |
|
|
|
2,654 |
|
|
|
4.96 |
% |
|
|
47,564 |
|
|
|
1,924 |
|
|
|
4.05 |
% |
Loans
receivable, net (3)
|
|
|
617,528 |
|
|
|
45,272 |
|
|
|
7.33 |
% |
|
|
607,439 |
|
|
|
41,294 |
|
|
|
6.80 |
% |
|
|
546,426 |
|
|
|
31,710 |
|
|
|
5.80 |
% |
Total
interest-earning assets
|
|
|
695,488 |
|
|
|
49,432 |
|
|
|
7.11 |
% |
|
|
662,683 |
|
|
|
44,128 |
|
|
|
6.66 |
% |
|
|
595,074 |
|
|
|
33,707 |
|
|
|
5.66 |
% |
Noninterest-earning
assets
|
|
|
39,326 |
|
|
|
|
|
|
|
|
|
|
|
31,893 |
|
|
|
|
|
|
|
|
|
|
|
16,967 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
734,814 |
|
|
|
|
|
|
|
|
|
|
$ |
694,576 |
|
|
|
|
|
|
|
|
|
|
$ |
612,041 |
|
|
|
|
|
|
|
|
|
Liabilities
and Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
accounts
|
|
$ |
94,220 |
|
|
|
1,773 |
|
|
|
1.88 |
% |
|
$ |
91,169 |
|
|
|
1,669 |
|
|
|
1.83 |
% |
|
$ |
80,273 |
|
|
|
1,185 |
|
|
|
1.48 |
% |
Certificate
accounts
|
|
|
272,176 |
|
|
|
13,848 |
|
|
|
5.09 |
% |
|
|
231,420 |
|
|
|
10,185 |
|
|
|
4.40 |
% |
|
|
224,546 |
|
|
|
7,148 |
|
|
|
3.18 |
% |
Total
interest-bearing deposits
|
|
|
366,396 |
|
|
|
15,621 |
|
|
|
4.26 |
% |
|
|
322,589 |
|
|
|
11,854 |
|
|
|
3.67 |
% |
|
|
304,819 |
|
|
|
8,333 |
|
|
|
2.73 |
% |
FHLB
advances and other borrowings
|
|
|
290,749 |
|
|
|
14,723 |
|
|
|
5.06 |
% |
|
|
299,274 |
|
|
|
14,348 |
|
|
|
4.79 |
% |
|
|
244,113 |
|
|
|
7,616 |
|
|
|
3.12 |
% |
Subordinated
debentures
|
|
|
10,310 |
|
|
|
822 |
|
|
|
7.97 |
% |
|
|
10,310 |
|
|
|
801 |
|
|
|
7.77 |
% |
|
|
10,310 |
|
|
|
622 |
|
|
|
6.03 |
% |
Total
interest-bearing liabilities
|
|
|
667,455 |
|
|
|
31,166 |
|
|
|
4.67 |
% |
|
|
632,173 |
|
|
|
27,003 |
|
|
|
4.27 |
% |
|
|
559,242 |
|
|
|
16,571 |
|
|
|
2.96 |
% |
Noninterest-bearing
liabilities
|
|
|
7,363 |
|
|
|
|
|
|
|
|
|
|
|
7,253 |
|
|
|
|
|
|
|
|
|
|
|
5,187 |
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
674,818 |
|
|
|
|
|
|
|
|
|
|
|
639,426 |
|
|
|
|
|
|
|
|
|
|
|
564,429 |
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
59,996 |
|
|
|
|
|
|
|
|
|
|
|
55,150 |
|
|
|
|
|
|
|
|
|
|
|
47,612 |
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$ |
734,814 |
|
|
|
|
|
|
|
|
|
|
$ |
694,576 |
|
|
|
|
|
|
|
|
|
|
$ |
612,041 |
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
18,266 |
|
|
|
|
|
|
|
|
|
|
$ |
17,125 |
|
|
|
|
|
|
|
|
|
|
$ |
17,136 |
|
|
|
|
|
Net
interest rate spread (4)
|
|
|
|
|
|
|
|
|
|
|
2.44 |
% |
|
|
|
|
|
|
|
|
|
|
2.39 |
% |
|
|
|
|
|
|
|
|
|
|
2.70 |
% |
Net
interest margin (5)
|
|
|
|
|
|
|
|
|
|
|
2.63 |
% |
|
|
|
|
|
|
|
|
|
|
2.58 |
% |
|
|
|
|
|
|
|
|
|
|
2.88 |
% |
Ratio
of interest-earning assets to
interest-bearing
liabilities
|
|
|
|
|
|
|
|
104.20 |
% |
|
|
|
|
|
|
|
|
|
|
104.83 |
% |
|
|
|
|
|
|
|
|
|
|
106.41 |
% |
----------
(1)
|
Includes
interest on float from cash
disbursements.
|
(2)
|
Includes
unamortized discounts and premiums.
|
(3)
|
Amount
is net of deferred loan origination fees, unamortized discounts, premiums
and allowance for estimated loan losses and includes loans held for sale
and nonperforming loans. Loan fees were approximately $847,000,
$1.1 million, and $1.6 million for the years ended December 31, 2007,
2006, and 2005, respectively.
|
(4)
|
Net
interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing
liabilities.
|
(5)
|
Net
interest margin represents net interest income divided by average
interest-earning assets.
|
Rate Volume
Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to: (i) changes attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and
rate have been allocated proportionately to the changes due to volume and the
changes due to rate.
|
|
Year
Ended December 31, 2007
|
|
|
Year
Ended December 31, 2006
|
|
|
|
Compared
to
|
|
|
Compared
to
|
|
|
|
Year
Ended December 31, 2006
|
|
|
Year
Ended December 31, 2005
|
|
|
|
Increase
(decrease) due to
|
|
|
Increase
(decrease) due to
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
(in
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
(32 |
) |
|
$ |
(16 |
) |
|
$ |
(48 |
) |
|
$ |
11 |
|
|
$ |
62 |
|
|
$ |
73 |
|
Federal
funds sold
|
|
|
17 |
|
|
|
1 |
|
|
|
18 |
|
|
|
25 |
|
|
|
9 |
|
|
|
34 |
|
Investment
securities
|
|
|
1,180 |
|
|
|
176 |
|
|
|
1,356 |
|
|
|
260 |
|
|
|
470 |
|
|
|
730 |
|
Participation
Contract
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loans
receivable, net
|
|
|
695 |
|
|
|
3,283 |
|
|
|
3,978 |
|
|
|
3,780 |
|
|
|
5,804 |
|
|
|
9,584 |
|
Total
interest-earning assets
|
|
|
1,860 |
|
|
|
3,444 |
|
|
|
5,304 |
|
|
|
4,076 |
|
|
|
6,345 |
|
|
|
10,421 |
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
accounts
|
|
|
57 |
|
|
|
47 |
|
|
|
104 |
|
|
|
175 |
|
|
|
309 |
|
|
|
484 |
|
Certificate
accounts
|
|
|
1,942 |
|
|
|
1,721 |
|
|
|
3,663 |
|
|
|
208 |
|
|
|
2,829 |
|
|
|
3,037 |
|
FHLB
advances and other borrowings
|
|
|
(416 |
) |
|
|
791 |
|
|
|
375 |
|
|
|
1,996 |
|
|
|
4,736 |
|
|
|
6,732 |
|
Subordinated
debentures
|
|
|
- |
|
|
|
21 |
|
|
|
21 |
|
|
|
- |
|
|
|
179 |
|
|
|
179 |
|
Total
interest-bearing liabilities
|
|
|
1,583 |
|
|
|
2,580 |
|
|
|
4,163 |
|
|
|
2,379 |
|
|
|
8,053 |
|
|
|
10,432 |
|
Changes
in net interest income
|
|
$ |
277 |
|
|
$ |
864 |
|
|
$ |
1,141 |
|
|
$ |
1,697 |
|
|
$ |
(1,708 |
) |
|
$ |
(11 |
) |
Comparison
of Operating Results for the Year Ended December 31, 2007 and December 31,
2006
General: For the year ended
December 31, 2007, the Company reported net income of $3.6 million or $0.55 per
diluted share, compared with net income of $7.4 million or $1.11 per diluted
share for the same period in 2006. The $3.8 million, or 51.3%,
decrease in net income in 2007 compared to 2006 was primarily the result of
increases in the provision for loan losses and compensation and benefit expense
of $1.1 million and $1.2 million, respectively, as well as the reversal of the
valuation allowance for deferred taxes in 2006 of $2.4 million.
For both
the years ended December 31, 2007 and 2006 the Bank’s gain on loan sales was
$3.7 million. During 2007 and 2006, the Bank sold loans secured by multi-family
properties totaling $232.2 million and $196.6 million, respectively, for a gain
on sale of $3.6 million and $3.4 million, respectively. During the
third quarter there were changes in the secondary market for multi-family loans
which have required the Bank to adjust its pricing on these product types.
Additionally, the Southern California apartment market is seeing a significant
slow down in sales activity as a gap between buyer and seller expectations has
created a “wait and see” market. Due to the above changes
in the multi-family loan market, we expect that future gains on loan sales to be
substantially reduced or eliminated.
Interest Income: Interest
income for the year ended December 31, 2007 was $49.4 million, compared to $44.1
million for the year ended December 31, 2006. The increase of $5.3 million, or
12.0%, is primarily due to interest income on loans receivable increasing $4.0
million to $45.3 million for the year ended December 31, 2007 from $41.3 million
for the year ended December 31, 2006. The increase in interest income on loans
was primarily the result of an increase in the average loan balance of $10.1
million from $607.4 million in 2006 to $617.5 million in 2007 combined with a 53
basis points increase in the average yield on said loans from 6.80% for 2006 to
7.33% for 2007. The increase in loan yield is primarily due to the re-pricing of
our short-term adjustable-rate income property loans and the origination of
higher yielding loans during 2007.
Interest Expense: Interest
expense for the year ended December 31, 2007 was $31.2 million, compared to
$27.0 million for the year ended December 31, 2006. The $4.2 million, or 15.4%,
increase primarily reflects an increase in the average balance of deposits of
$43.8 million, during the year, combined with a 40 basis points increase in the
average cost of interest-bearing liabilities that was due to a higher interest
rate environment.
Net Interest
Income: Our primary source of revenue is net interest income,
which is the difference between interest income on earning assets and interest
expense on interest-bearing liabilities. Net interest income and net
interest margin are affected by several factors including (1) the level of,
and the relationship between, the dollar amount of interest-earning assets and
interest-bearing liabilities, (2) the relationship between repricing or maturity
of our variable-rate and fixed-rate loans and securities, and our deposits and
borrowings, and (3) the magnitude of our non-interest earning assets,
including non-accrual loans and foreclosed real estate.
Net
interest income before provision for loan losses was $18.3 million and $17.1
million for the years ended December 31, 2007 and 2006,
respectively.
Provision for Loan
Losses: The provision for loan losses increased to $1.7
million for the year ended December 31, 2007 from $531,000 for the year ended
December 31, 2006. The increase in the current year provision of $1.1
million, or 210.9%, for loan losses was primarily due to an increase in the
Bank’s net charge-off of $558,000, as well as an increase in the unallocated
allowance of $553,000. Net charge-offs in 2007 were $596,000 compared
to $38,000 for 2006. In the fourth quarter of 2007, the Bank charged-off the
unsecured portion of six SBA loans totaling $600,000 due to the deterioration of
the clients’ businesses. The increase in the unallocated allowance is
due to the Bank’s management belief that the overall national economy is
weakening and may affect our borrowers’ ability to repay their
loans.
Noninterest
Income: Noninterest income was $6.4 million for the year ended
December 31, 2007, compared to $6.5 million for the year ended December 31,
2006. The decrease of $156,000, or 2.3%, was primarily due to a
decrease in loan servicing income of $459,000 due to fewer prepayment penalties
collected in 2007 compared to 2006. Partially offsetting the decrease
from loan servicing income was an increase in other income and bank fee income
of $175,000 and $105,000, respectively.
Noninterest Expense:
Noninterest expense for the year ended December 31, 2007 was $17.2 million
compared to $15.2 million for the year ended December 31, 2006. The
$2.0 million, or 13.2%, increase in noninterest expense was principally due to
increases in compensation and benefits of $1.2 million, legal and audit expenses
of $184,000, and other expenses of $343,000 in 2007 compared to
2006. The increase in compensation and benefits for the year is
attributable primarily to the Bank’s branch expansion and the hiring of
additional business bankers during the latter part of 2006 and the early part of
2007. During the fourth quarter of 2007, the Bank laid-off 10 employees due to
the reduction in our loan volume. The number of employees at the Bank at
December 31, 2007 was 105 compared to 106 at December 31, 2006.
Income Taxes: The provision for income
taxes increased to $2.1 million for the year ended December 31, 2007 compared to
$450,000 for the year ended December 31, 2006. The Company had income
before income taxes of $5.7 million for the year ended December 31, 2007
compared to income before income taxes of $7.9 million for the year ended
December 31, 2006. In 2006, the Company eliminated its remaining
valuation allowance for deferred taxes which reduced its provision by $2.4
million. The elimination of the deferred tax valuation allowance is due to
management’s forecast of taxable earnings, based on assumptions regarding the
Company’s growth in the near future.
Comparison
of Operating Results for the Year Ended December 31, 2006 and December 31,
2005
General: For the year ended
December 31, 2006, the Company reported net income of $7.4 million or $1.11 per
diluted share, compared with net income of $7.2 million or $1.08 per diluted
share for the same period in 2005. The $207,000, or 2.9%, increase in
net income in 2006 compared to 2005 was primarily the result of increases in
total interest income of $10.4 million, total noninterest income of $2.4 million
and the reversal of its valuation allowance for deferred taxes of $2.4 million,
which was partially offset by increases in total interest expense of $10.4
million and noninterest expense of $3.0 million.
Interest Income: Interest
income for the year ended December 31, 2006 was $44.1 million, compared to $33.7
million for the year ended December 31, 2005. The increase of $10.4 million, or
30.9%, was primarily due to interest income on loans receivable increasing $9.6
million to $41.3 million for the year ended December 31, 2006 from $31.7 million
for the year ended December 31, 2005. The increase in interest income on loans
was primarily the result of an increase in the average loan balance of $61.0
million from $546.5 million in 2005 to $607.4 million in 2006 combined with a
100 basis points increase in the average yield on said loans from 5.80% for 2005
to 6.80% for 2006. The increase in loan yield was primarily due to the
re-pricing of our short-term adjustable-rate income property loans and the
origination of higher yielding loans during 2006.
Interest Expense: Interest
expense for the year ended December 31, 2006 was $27.0 million, compared to
$16.6 million for the year ended December 31, 2005. The $10.4 million, or 63.0%,
increase primarily reflects an increase in the average balance of deposits
and FHLB advances and other borrowings of $17.8 million and $55.2 million,
respectively, during the year, combined with a 131 basis points increase in the
average cost of interest-bearing liabilities that was due to a higher interest
rate environment.
Net
interest income before provision for loan losses was $17.1 million for each of
the years ended December 31, 2006 and 2005.
Provision for Loan
Losses: The provision for loan losses increased to $531,000
for the year ended December 31, 2006 from $349,000 for the year ended December
31, 2005. The increase of $182,000, or 52.1%, in the current year
provision for loan losses was primarily due to the overall shift in our loan
portfolio mix toward more commercial real estate, business and SBA loans, which
was partially offset by a decrease in our nonperforming loans by 58.4% from $1.7
million in 2005 to $712,000 in 2006, Net charge-offs increased $113,000 in 2006
from a net recoveries of $75,000 in 2005 to $38,000 in net charge-off in
2006. Total net loans receivable in 2006 increased $1.7 million, or
2.8%, over 2005.
Noninterest
Income: Noninterest income was $6.5 million for the year ended
December 31, 2006, compared to $4.1 million for the year ended December 31,
2005. The $2.4 million, or 57.7%, increase was primarily due to
an increase in gains from loan sales of $3.1 million in 2006 compared to
2005. Partially offsetting the increase from the gains on loan sales
was a decrease in other income from the sale and collection of charged-off loans
related to the Participation Contract. During 2006 and 2005, the
Company collected $171,000 and $1.0 million, respectively, in recoveries on the
collection of charged-off loans associated with the Participation
Contract.
Noninterest
Expense: Noninterest expense for the year ended December 31,
2006 was $15.2 million compared to $12.3 million for the year ended December 31,
2005. The $2.9 million, or 24%, increase in noninterest expense was
principally due to increases in compensation and benefits of $1.6 million and
premises and occupancy of $805,000 for 2006 compared to 2005. These
increases reflect of the Bank’s investments in its strategic expansion through
de novo branching and the addition of experienced business bankers to staff its
new locations. The number of employees at the Bank grew from 89 at
December 31, 2005 to 106 at December 31, 2006. A large portion of the
increases in compensation and benefits, $996,000, and premises and occupancy
expense, $478,000, for the year ended December 31, 2006 compared to the prior
year, was associated with the Bank’s depository branches in the cities of Costa
Mesa and Los Alamitos that opened in 2006 and Newport Beach (which opened in the
first quarter of 2007), and the SBA loan production office in Pasadena, which
opened in January 2006.
Income Taxes: The provision for income
taxes decreased to $450,000 for the year ended December 31, 2006 compared to a
provision of $1.4 million for the year ended December 31, 2005. The
Company had income before income taxes of $7.9 million for the year ended
December 31, 2006 compared to income before income taxes of $8.7 million for the
year ended December 31, 2005. In 2006, the Company eliminated its
remaining valuation allowance for deferred taxes which reduced its provision by
$2.4 million. In 2005, the Company reduced its valuation allowance for deferred
taxes by $1.6 million. The elimination of the deferred tax valuation allowance
is due to management’s forecast of taxable earnings, based on assumptions
regarding the Company’s growth in the near future.
Comparison
of Financial Condition at December 31, 2007 and December 31,
2006
Total
assets of the Company were $763.4 million as of December 31, 2007, compared to
$730.9 million as of December 31, 2006. The $32.5 million, or 4.5%,
increase in total assets is primarily due to increases in federal funds sold and
net loans of $15.7 million and $17.8 million, respectively.
Total
liabilities of the Company were $702.7 million at December 31, 2007 compared to
$672.8 million at December 31, 2006. The $29.9 million, or 4.4%,
increase was primarily due to an increase of $47.3 million in deposits, which
was partially offset by a decrease in other borrowings of $18.5
million. Total deposits at December 31, 2007 were $386.7 million
compared to $339.4 million at December 31, 2006.
At
December 31, 2007 and 2006, our stockholders’ equity amounted to $60.8
million and $58.0 million, respectively. The increase of $2.7 million, or 4.7%
in stockholders’ equity was due primarily to $3.6 million of net income for the
year ended December 31, 2007, partially offset by Company stock repurchases
totaling 100,000 shares in 2007 at a cost of $1.1 million.
Liquidity
Our
primary sources of funds are principal and interest payments on loans, deposits
and FHLB advances. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and
competition. We seek to maintain a level of liquid assets to ensure a
safe and sound operation. Our liquid assets are comprised of cash and
unpledged investments. Our average liquidity ratios were
9.98%, 7.20% and 6.32% for the years ended December 31, 2007, 2006 and
2005, respectively. The liquidity ratio is calculated by dividing the
sum of cash balances plus unpledged securities by the sum of deposits that
mature in one year or less plus transaction accounts and FHLB
advances. Our liquidity is monitored daily.
We
believe the level of liquid assets is sufficient to meet current and anticipated
funding needs. Liquid assets of the Bank represented approximately
9.0% of total assets at December 31, 2007, 9.2% of total assets at December 31,
2006 and 9.9% of total assets at December 31, 2005. At December 31,
2007, the Bank had five unsecured lines of credit with other correspondent banks
totaling $35.0 million to purchase federal funds as business needs
dictate. Also, the Bank has established a $50.0 million credit
facility with Salomon Brothers secured by investments securities owned by the
Bank. We also have a line of credit with FHLB allowing us to borrow
up to 45% of the Bank’s total assets as of September 30,
2007 or $348.4 million, $297.3 million of which was outstanding as of
December 31, 2007. The FHLB advance line is collateralized by
eligible loan collateral and FHLB stock. At December 31, 2007, we had
approximately $460.8 million of loans pledged to secure FHLB
borrowings.
At
December 31, 2007, we had $0 in outstanding commitments to originate or purchase
loans compared to $685,000 and $2.2 million at December 31, 2006 and 2005,
respectively.
The
Bank’s loan to deposit and borrowing ratio was 90.9%, 91.9% and 96.5% as of
December 31, 2007, 2006 and 2005, respectively. Certificates of
deposit, which are scheduled to mature in one year or less from December 31,
2007, totaled $288.7 million. We expect to retain a substantial
portion of the maturing certificates of deposit at maturity.
Capital
Resources
The Bank
is subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can trigger
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on our financial
condition and results of operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank’s capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
At
December 31, 2007 and 2006, the Bank’s leverage capital amounted to $65.3
million and $60.7 million, respectively, and its risk-based capital amounted to
$69.9 million and $64.1 million, respectively. As a result, the Bank
exceeded the capital levels required to be considered ‘‘well capitalized’’ at
that date. Pursuant to regulatory guidelines under prompt corrective
action rules, a bank must have total risk-based capital of 10% or greater, Tier
1 risk-based capital of 6% or greater and a leverage ratio of 5% or greater to
be considered ‘‘well capitalized.’’ At December 31, 2007, the Bank’s
total risk-based capital, Tier 1 risk-based capital and leverage ratios were
11.44%, 10.68%, and 8.81%, respectively.
Contractual
Obligations and Commitments
The Company enters into contractual
obligations in the normal course of business as a source of funds for its asset
growth and to meet required capital needs. The following schedule
summarizes our contractual obligations as of December 31,
2007:
|
|
|
|
|
Payment
Due by Period
|
|
|
|
|
|
|
Less
than
|
|
|
1
- 3 |
|
|
|
3
- 5 |
|
More
than
|
|
|
|
Total
|
|
|
1
year
|
|
|
years
|
|
|
years
|
|
|
5
years
|
|
|
|
(in
thousands)
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
borrowings
|
|
$ |
297,300 |
|
|
$ |
159,300 |
|
|
$ |
138,000 |
|
|
$ |
- |
|
|
$ |
- |
|
Other
borrowings
|
|
|
665 |
|
|
|
665 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Subordinated
debentures
|
|
|
10,310 |
|
|
|
- |
|
|
|
10,310 |
|
|
|
- |
|
|
|
- |
|
Certificates
of deposit
|
|
|
297,424 |
|
|
|
288,676 |
|
|
|
7,180 |
|
|
|
855 |
|
|
|
713 |
|
Operating
leases
|
|
|
5,987 |
|
|
|
603 |
|
|
|
1,250 |
|
|
|
1,252 |
|
|
|
2,882 |
|
Total
contractual cash obligations
|
|
$ |
611,686 |
|
|
$ |
449,244 |
|
|
$ |
156,740 |
|
|
$ |
2,107 |
|
|
$ |
3,595 |
|
The
following table summarizes our contractual commitments with off-balance sheet
risk as of December 31, 2007:
|
|
2007
|
|
|
|
(in
thousands)
|
|
Other
unused commitments:
|
|
|
|
Home
equity lines of credit
|
|
$ |
502 |
|
Commercial
lines of credit
|
|
|
18,525 |
|
Other
lines of credit
|
|
|
33 |
|
Standby
letters of credit
|
|
|
1,798 |
|
Undisbursed
construction funds
|
|
|
702 |
|
Total
commitments
|
|
$ |
21,560 |
|
Impact
of Inflation and Changing Prices
Our
consolidated financial statements and related data presented in this annual
report on Form 10-K have been prepared in accordance with accounting principles
generally accepted in the United States which require the measurement of
financial position and operating results in terms of historical dollar amounts
(except with respect to securities classified as available for sale which are
carried at market value) without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of our operations. Unlike most industrial
companies, substantially all of our assets and liabilities are monetary in
nature. As a result, interest rates have a greater impact on our performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same magnitude as the price of
goods and services.
Impact
of New Accounting Standards
See Note
1 to the Consolidated Financial Statements included in Item 8 hereof for a
listing of recently issued accounting pronouncements and the impact of them on
the Company.
Interest
Rate Risk
Interest Rate Risk
Management. The principal objective of the Company's interest
rate risk management function is to evaluate the interest rate risk included in
certain balance sheet accounts, determine the level of appropriate risk given
the Company's business focus, operating environment, capital and liquidity
requirements and performance objectives and manage the risk consistent with
Board-approved guidelines through the establishment of prudent asset and
liability concentration guidelines. Through such activities, management seeks to
reduce the vulnerability of the Company's operations to changes in interest
rates. Management monitors its interest rate risk as such risk
relates to its operational strategies. The Bank's board of directors reviews on
a quarterly basis the Bank's asset/liability position, including simulations of
the effect on the Bank's capital in various interest rate
scenarios. The extent of the movement of interest rates, higher or
lower, is an uncertainty that could have a negative impact on the earnings of
the Company.
Economic Value of
Equity. The Bank's interest rate sensitivity is monitored by
management through the use of a model that estimates the change in the Bank’s
economic value of equity ("EVE") under alternative interest rate scenarios. The
model computes the net present value of capital by discounting all expected cash
flows from assets, liabilities and off-balance sheet contracts under each rate
scenario. An EVE ratio, in any interest rate scenario, is defined as the EVE in
that scenario divided by the market value of assets in the same scenario. The
sensitivity measure is the decline in the EVE ratio, in basis points, caused by
an increase or decrease in rates; whichever produces a larger decline (the
"Sensitivity Measure"). The higher an institution's Sensitivity Measure is, the
greater its exposure to interest rate risk is considered to be.
The
following table shows the EVE and projected change in the EVE of the Bank at
December 31, 2007, assuming an instantaneous and sustained change in market
interest rates of 100, 200, and 300 basis points ("bp"):
As
of December 31, 2007
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EVE
as % of Portfolio
|
|
Economic
Value of Equity
|
|
|
|
|
|
Value
of Assets
|
|
Change
in Rates
|
|
$
Amount
|
|
|
$
Change
|
|
|
%
Change
|
|
|
EVE
Ratio
|
|
|
%
Change (BP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300
BP
|
|
$ |
49,540 |
|
|
$ |
(16,547 |
) |
|
|
(25.0 |
)% |
|
|
6.85 |
% |
|
-187
BP
|
|
+200
BP
|
|
|
56,601 |
|
|
|
(9,486 |
) |
|
|
(14.4 |
)% |
|
|
7.69 |
% |
|
-103
BP
|
|
+100
BP
|
|
|
61,622 |
|
|
|
(4,465 |
) |
|
|
(6.8 |
)% |
|
|
8.25 |
% |
|
-47
BP
|
|
Static
|
|
|
66,087 |
|
|
|
-- |
|
|
|
-- |
|
|
|
8.72 |
% |
|
|
--
|
|
-100
BP
|
|
|
75,021 |
|
|
|
8,933 |
|
|
|
13.5 |
% |
|
|
9.71 |
% |
|
100
BP
|
|
-200
BP
|
|
|
84,658 |
|
|
|
18,571 |
|
|
|
28.1 |
% |
|
|
10.75 |
% |
|
204
BP
|
|
-300
BP
|
|
|
95,069 |
|
|
|
28,982 |
|
|
|
43.9 |
% |
|
|
11.84 |
% |
|
312
BP
|
|
Certain
shortcomings are inherent in the methodology used in the above interest rate
risk measurements. Modeling changes in EVE requires the making of certain
assumptions that may tend to oversimplify the manner in which actual yields and
costs respond to changes in market interest rates. First, the models assume that
the composition of the Bank's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured.
Second, the models assume that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Third, the model does
not take into account the impact of the Bank's business or strategic plans on
the structure of interest-earning assets and interest- bearing liabilities.
Although the EVE measurement provides an indication of the Bank's interest rate
risk exposure at a particular point in time, such measurement is not intended
to, does not provide a precise forecast of the effect of changes in market
interest rates on the Bank’s net interest income, and will differ from actual
results.
Selected Assets and Liabilities which
are Interest Rate Sensitive. The following table provides information
regarding the Bank's primary categories of assets and liabilities that are
sensitive to changes in interest rates for the year ended December 31, 2007. The
information presented reflects the expected cash flows of the primary categories
by year including the related weighted average interest rate. The cash flows for
loans are based on maturity and re-pricing date. The loans and mortgage-backed
securities that have adjustable rate features are presented in accordance with
their next interest-repricing date. Cash flow information on interest-bearing
liabilities, such as passbooks, NOW accounts and money market accounts also is
adjusted for expected decay rates, which are based on historical information. In
addition, for purposes of cash flow presentation, premiums or discounts on
purchased assets, and mark-to-market adjustments are excluded from the amounts
presented. All certificates of deposit and borrowings are presented
by maturity date.
Maturities
and Repricing
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
|
At
December 31, 2007
|
|
Year
1
|
|
|
Year
2
|
|
|
Year
3
|
|
|
Year
4
|
|
|
Year
5
|
|
|
Thereafter
|
|
|
|
(dollars
in thousands)
|
|
Selected
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
and Federal Funds
|
|
$ |
52,199 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Average
Interest Rate
|
|
|
4.58 |
% |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
- Backed Securities Fixed Rate
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
20,434 |
|
Average
Interest Rate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
- Backed Securities Adjustable Rate
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
$ |
- |
|
|
$ |
9,319 |
|
Average
Interest Rate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
5.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
- Fixed Rate
|
|
$ |
1,308 |
|
|
$ |
51 |
|
|
$ |
20 |
|
|
$ |
712 |
|
|
$ |
2,688 |
|
|
$ |
34,939 |
|
Average
Interest Rate
|
|
|
1.93 |
% |
|
|
7.75 |
% |
|
|
8.00 |
% |
|
|
8.44 |
% |
|
|
7.23 |
% |
|
|
7.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
- Adjustable Rate
|
|
$ |
51,829 |
|
|
$ |
4,078 |
|
|
$ |
65 |
|
|
$ |
2,851 |
|
|
$ |
3,270 |
|
|
$ |
524,768 |
|
Average
Interest Rate
|
|
|
8.67 |
% |
|
|
5.34 |
% |
|
|
9.50 |
% |
|
|
8.24 |
% |
|
|
7.95 |
% |
|
|
7.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
transaction accounts
|
|
$ |
94,380 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Average
Interest Rate
|
|
|
1.86 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of Deposits
|
|
$ |
288,773 |
|
|
$ |
6,071 |
|
|
$ |
1,050 |
|
|
$ |
369 |
|
|
$ |
486 |
|
|
$ |
713 |
|
Average
Interest Rate
|
|
|
5.07 |
% |
|
|
4.36 |
% |
|
|
4.64 |
% |
|
|
4.80 |
% |
|
|
4.53 |
% |
|
|
4.69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
Advances
|
|
$ |
159,300 |
|
|
$ |
75,000 |
|
|
$ |
63,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Average
Interest Rate
|
|
|
4.50 |
% |
|
|
4.94 |
% |
|
|
4.90 |
% |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Borrowings and Subordinated Debentures
|
|
$ |
10,975 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Average
Interest Rate
|
|
|
7.72 |
% |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
The Bank
does not have any foreign exchange exposure or any commodity exposure and
therefore does not have any market risk exposure for these issues.
Report of
Independent Registered Public Accounting Firm
Board of
Directors and Stockholders
Pacific
Premier Bancorp, Inc. and Subsidiaries
Costa
Mesa, California
We have
audited the accompanying consolidated statements of financial condition of
Pacific Premier Bancorp, Inc. and Subsidiaries (the “Company”) as of December
31, 2007 and 2006, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2007. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as, evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of the Company as of December 31, 2007 and 2006, and the
results of its operations, changes in its stockholders' equity, and its cash
flows for each of the three years in the period ended December 31, 2007, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Vavrinek, Trine, Day
& Co.,
LLP
Vavrinek,
Trine, Day & Co., LLP
Certified
Public Accountants
Rancho
Cucamonga, California
April 15,
2008
PACIFIC
PREMIER BANCORP, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
|
(dollars
in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
At
December 31,
|
|
ASSETS
|
|
2007
|
|
|
2006
|
|
Cash
and due from banks
|
|
$ |
8,307 |
|
|
$ |
7,028 |
|
Federal
funds sold
|
|
|
25,714 |
|
|
|
10,012 |
|
Cash
and cash equivalents
|
|
|
34,021 |
|
|
|
17,040 |
|
Investment
securities available for sale
|
|
|
56,238 |
|
|
|
61,816 |
|
FHLB
Stock/Federal Reserve Stock, at cost
|
|
|
16,804 |
|
|
|
15,328 |
|
Loans
held for sale, net
|
|
|
749 |
|
|
|
795 |
|
Loans
held for investment, net of allowance for loan losses of $4,598 (2007) and
$3,543 (2006)
|
|
|
622,114 |
|
|
|
604,304 |
|
Accrued
interest receivable
|
|
|
3,995 |
|
|
|
3,764 |
|
Foreclosed
real estate
|
|
|
711 |
|
|
|
138 |
|
Premises
and equipment
|
|
|
9,470 |
|
|
|
8,622 |
|
Current
income taxes
|
|
|
524 |
|
|
|
130 |
|
Deferred
income taxes
|
|
|
6,754 |
|
|
|
6,992 |
|
Bank
owned life insurance
|
|
|
10,869 |
|
|
|
10,344 |
|
Other
assets
|
|
|
1,171 |
|
|
|
1,601 |
|
TOTAL
ASSETS
|
|
$ |
763,420 |
|
|
$ |
730,874 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Deposit
accounts
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$ |
25,322 |
|
|
$ |
33,607 |
|
Interest
bearing
|
|
|
361,413 |
|
|
|
305,842 |
|
Total
Deposits
|
|
|
386,735 |
|
|
|
339,449 |
|
Borrowings
|
|
|
297,965 |
|
|
|
316,491 |
|
Subordinated
debentures
|
|
|
10,310 |
|
|
|
10,310 |
|
Accrued
expenses and other liabilities
|
|
|
7,660 |
|
|
|
6,586 |
|
TOTAL
LIABILITIES
|
|
|
702,670 |
|
|
|
672,836 |
|
COMMITMENTS
AND CONTINGENCIES (Note 11)
|
|
|
- |
|
|
|
- |
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred
Stock, $.01 par value; 1,000,000 shares authorized; no shares
outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock, $.01 par value; 15,000,000 shares authorized; 5,163,488 (2007) and
5,263,488 (2006) shares issued and outstanding
|
|
|
53 |
|
|
|
54 |
|
Additional
paid-in capital
|
|
|
66,417 |
|
|
|
67,306 |
|
Accumulated
deficit
|
|
|
(5,012 |
) |
|
|
(8,631 |
) |
Accumulated
other comprehensive loss, net of tax of $494 (2007) and $483
(2006)
|
|
|
(708 |
) |
|
|
(691 |
) |
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
60,750 |
|
|
|
58,038 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
763,420 |
|
|
$ |
730,874 |
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
PACIFIC
PREMIER BANCORP, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
(dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
45,272 |
|
|
$ |
41,294 |
|
|
$ |
31,710 |
|
Investment
securities and other interest-earning assets
|
|
|
4,160 |
|
|
|
2,834 |
|
|
|
1,997 |
|
Total
interest income
|
|
|
49,432 |
|
|
|
44,128 |
|
|
|
33,707 |
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
|
15,621 |
|
|
|
11,854 |
|
|
|
8,333 |
|
Borrowings
|
|
|
14,723 |
|
|
|
14,348 |
|
|
|
7,616 |
|
Subordinated
debentures
|
|
|
822 |
|
|
|
801 |
|
|
|
622 |
|
Total
interest expense
|
|
|
31,166 |
|
|
|
27,003 |
|
|
|
16,571 |
|
NET
INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
|
|
|
18,266 |
|
|
|
17,125 |
|
|
|
17,136 |
|
PROVISION
FOR LOAN LOSSES
|
|
|
1,651 |
|
|
|
531 |
|
|
|
349 |
|
NET
INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
|
|
|
16,615 |
|
|
|
16,594 |
|
|
|
16,787 |
|
NONINTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
servicing fee income
|
|
|
1,056 |
|
|
|
1,515 |
|
|
|
1,541 |
|
Deposit
fee income
|
|
|
619 |
|
|
|
514 |
|
|
|
480 |
|
Net
gain from sale of loans
|
|
|
3,720 |
|
|
|
3,697 |
|
|
|
590 |
|
Other
income
|
|
|
964 |
|
|
|
789 |
|
|
|
1,519 |
|
Total
noninterest income
|
|
|
6,359 |
|
|
|
6,515 |
|
|
|
4,130 |
|
NONINTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
10,479 |
|
|
|
9,231 |
|
|
|
7,612 |
|
Premises
and occupancy
|
|
|
2,407 |
|
|
|
2,327 |
|
|
|
1,522 |
|
Data
processing and communications
|
|
|
512 |
|
|
|
385 |
|
|
|
335 |
|
Net
loss (gain) on foreclosed real estate
|
|
|
42 |
|
|
|
39 |
|
|
|
(14 |
) |
Legal
and audit
|
|
|
806 |
|
|
|
622 |
|
|
|
665 |
|
Marketing
expenses
|
|
|
713 |
|
|
|
693 |
|
|
|
382 |
|
Office
and postage expense
|
|
|
384 |
|
|
|
372 |
|
|
|
383 |
|
Other
expense
|
|
|
1,905 |
|
|
|
1,562 |
|
|
|
1,375 |
|
Total
noninterest expense
|
|
|
17,248 |
|
|
|
15,231 |
|
|
|
12,260 |
|
INCOME
BEFORE INCOME TAX PROVISION
|
|
|
5,726 |
|
|
|
7,878 |
|
|
|
8,657 |
|
INCOME
TAX PROVISION
|
|
|
2,107 |
|
|
|
450 |
|
|
|
1,436 |
|
NET
INCOME
|
|
$ |
3,619 |
|
|
$ |
7,428 |
|
|
$ |
7,221 |
|
EARNINGS
PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.70 |
|
|
$ |
1.41 |
|
|
$ |
1.37 |
|
Diluted
earnings per share
|
|
$ |
0.55 |
|
|
$ |
1.11 |
|
|
$ |
1.08 |
|
WEIGHTED
AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,189,104 |
|
|
|
5,261,897 |
|
|
|
5,256,906 |
|
Diluted
|
|
|
6,524,753 |
|
|
|
6,684,915 |
|
|
|
6,658,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
PACIFIC
PREMIER BANCORP, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE
INCOME
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
(loss)
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
5,258,738 |
|
|
$ |
53 |
|
|
$ |
67,564 |
|
|
$ |
(23,280 |
) |
|
$ |
(309 |
) |
|
|
|
|
$ |
44,028 |
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,221 |
|
|
|
|
|
|
$ |
7,221 |
|
|
|
7,221 |
|
Unrealized
loss on investments, net of tax
of
$211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(304 |
) |
|
|
(304 |
) |
|
|
(304 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,917 |
|
|
|
|
|
Exercise
of options
|
|
|
3,750 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
Repurchase
of common stock
|
|
|
(38,550 |
) |
|
|
|
|
|
|
(442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(442 |
) |
Issuance
of restricted stock
|
|
|
4,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Share-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Balance
at December 31, 2005
|
|
|
5,228,438 |
|
|
$ |
53 |
|
|
$ |
67,161 |
|
|
$ |
(16,059 |
) |
|
$ |
(613 |
) |
|
|
|
|
|
$ |
50,542 |
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,428 |
|
|
|
|
|
|
$ |
7,428 |
|
|
|
7,428 |
|
Unrealized
loss on investments, net of tax
of
$55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78 |
) |
|
|
(78 |
) |
|
|
(78 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,350 |
|
|
|
|
|
Exercise
of stock options
|
|
|
6,500 |
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57 |
|
Issuance
of restricted stock
|
|
|
35,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Share-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122 |
|
Restricted
stock vested
|
|
|
|
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Forfeit
of restricted stock
|
|
|
(750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Retirement
of common stock repurchased
|
|
|
(3,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Repurchase
of common stock
|
|
|
(2,750 |
) |
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33 |
) |
Balance
at December 31, 2006
|
|
|
5,263,488 |
|
|
$ |
54 |
|
|
$ |
67,306 |
|
|
$ |
(8,631 |
) |
|
$ |
(691 |
) |
|
|
|
|
|
$ |
58,038 |
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,619 |
|
|
|
|
|
|
$ |
3,619 |
|
|
|
3,619 |
|
Unrealized
loss on investments, net of tax
of
$9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
|
(17 |
) |
|
|
(17 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,602 |
|
|
|
|
|
Share-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202 |
|
Repurchase
of common stock
|
|
|
(100,000 |
) |
|
|
(1 |
) |
|
|
(1,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,092 |
) |
Balance
at December 31, 2007
|
|
|
5,163,488 |
|
|
$ |
53 |
|
|
$ |
66,417 |
|
|
$ |
(5,012 |
) |
|
$ |
(708 |
) |
|
|
|
|
|
$ |
60,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PACIFIC
PREMIER BANCORP, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,619 |
|
|
$ |
7,428 |
|
|
$ |
7,221 |
|
Adjustments
to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
812 |
|
|
|
532 |
|
|
|
344 |
|
Provision
for loan losses
|
|
|
1,651 |
|
|
|
531 |
|
|
|
349 |
|
Share-based
compensation expense
|
|
|
202 |
|
|
|
122 |
|
|
|
11 |
|
Loss
on sale, provision, and write-down of foreclosed real
estate
|
|
|
72 |
|
|
|
57 |
|
|
|
118 |
|
Loss
on sale and disposal on premises and equipment
|
|
|
(200 |
) |
|
|
8 |
|
|
|
4 |
|
Net
unrealized and realized (gain) loss and accretion on investment
securities, residual mortgage-backed securities, and related mortgage
servicing rights
|
|
|
(151 |
) |
|
|
126 |
|
|
|
301 |
|
Gain
on sale of loans held for sale
|
|
|
(40 |
) |
|
|
(77 |
) |
|
|
- |
|
Loss
on sale of investment securities available for sale
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Purchase
and origination of loans held for sale
|
|
|
(2,924 |
) |
|
|
(1,083 |
) |
|
|
- |
|
Proceeds
from the sales of and principal payments from loans held for
sale
|
|
|
3,010 |
|
|
|
1,749 |
|
|
|
37 |
|
Gain
on sale of loans held for investment
|
|
|
(3,680 |
) |
|
|
(3,620 |
) |
|
|
(590 |
) |
Change
in current and deferred income tax receivable
|
|
|
(156 |
) |
|
|
(1,801 |
) |
|
|
(1,660 |
) |
Increase
in accrued expenses and other liabilities
|
|
|
1,074 |
|
|
|
513 |
|
|
|
2,574 |
|
Federal
Home Loan Bank stock dividend
|
|
|
(813 |
) |
|
|
(734 |
) |
|
|
(423 |
) |
Income
from bank owned life insurance
|
|
|
(525 |
) |
|
|
(344 |
) |
|
|
- |
|
Decrease
(increase) in accrued interest receivable and other assets
|
|
|
199 |
|
|
|
(1,428 |
) |
|
|
(1,270 |
) |
Net
cash provided by operating activities
|
|
|
2,150 |
|
|
|
1,979 |
|
|
|
7,016 |
|
CASH
FLOW FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale and principal payments on loans held for
investment
|
|
|
390,034 |
|
|
|
345,015 |
|
|
|
144,254 |
|
Purchase
and origination of loans held for investment
|
|
|
(406,574 |
) |
|
|
(344,730 |
) |
|
|
(277,326 |
) |
Principal
payments on securities available for sale
|
|
|
5,711 |
|
|
|
638 |
|
|
|
- |
|
Proceeds
from sale of foreclosed real estate
|
|
|
115 |
|
|
|
525 |
|
|
|
259 |
|
Purchase
of securities available for sale
|
|
|
- |
|
|
|
(26,808 |
) |
|
|
- |
|
Purchase
of securities held to maturity
|
|
|
(39,980 |
) |
|
|
- |
|
|
|
- |
|
Proceeds
from sale or maturity of securities available for sale
|
|
|
39,980 |
|
|
|
- |
|
|
|
- |
|
Increase
in premises and equipment
|
|
|
(1,660 |
) |
|
|
(3,180 |
) |
|
|
(1,114 |
) |
Proceeds
from sale and disposal of premises and equipment
|
|
|
200 |
|
|
|
2 |
|
|
|
26 |
|
Purchase
of bank owned life insurance
|
|
|
- |
|
|
|
(10,000 |
) |
|
|
- |
|
Purchase
and redemption of FHLB and FRB stock
|
|
|
(663 |
) |
|
|
(649 |
) |
|
|
(5,133 |
) |
Net
cash used in investing activities
|
|
|
(12,837 |
) |
|
|
(39,187 |
) |
|
|
(139,034 |
) |
CASH
FLOW FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in deposit accounts
|
|
|
47,286 |
|
|
|
11,513 |
|
|
|
39,049 |
|
(Payment)
proceeds from other borrowings
|
|
|
(15,691 |
) |
|
|
15,191 |
|
|
|
(17,400 |
) |
(Payment)
proceeds from FHLB advances
|
|
|
(2,835 |
) |
|
|
(6,535 |
) |
|
|
128,835 |
|
Repurchase
of common stock
|
|
|
(1,092 |
) |
|
|
(33 |
) |
|
|
(442 |
) |
Proceeds
from exercise of stock options
|
|
|
- |
|
|
|
57 |
|
|
|
28 |
|
Payoff
of from Senior Secured note
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
cash provided by financing activities
|
|
|
27,668 |
|
|
|
20,193 |
|
|
|
150,070 |
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
16,981 |
|
|
|
(17,015 |
) |
|
|
18,052 |
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
|
|
17,040 |
|
|
|
34,055 |
|
|
|
16,003 |
|
CASH
AND CASH EQUIVALENTS, end of year
|
|
$ |
34,021 |
|
|
$ |
17,040 |
|
|
$ |
34,055 |
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
32,114 |
|
|
$ |
26,918 |
|
|
$ |
15,783 |
|
Income
taxes paid
|
|
$ |
2,379 |
|
|
$ |
2,076 |
|
|
$ |
2,349 |
|
NONCASH
OPERATING ACTIVITIES DURING THE PERIOD:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock vested
|
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
NONCASH
INVESTING ACTIVITIES DURING THE PERIOD:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
Transfers-Loans held for sale from held for investment
|
|
$ |
- |
|
|
$ |
1,223 |
|
|
$ |
- |
|
Loan
Transfers-Loans held for investment from held for sale
|
|
$ |
- |
|
|
$ |
279 |
|
|
$ |
- |
|
Transfers
from loans to foreclosed real estate
|
|
$ |
760 |
|
|
$ |
509 |
|
|
$ |
237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
PACIFIC
PREMIER BANCORP, INC., AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Business and Summary of Significant Accounting
Policies
Basis of Presentation and
Description of Business — The consolidated financial statements include
the accounts of Pacific Premier Bancorp, Inc., (the ‘‘Corporation’’) and its
wholly owned subsidiary, Pacific Premier Bank (the ‘‘Bank’’) (collectively, the
‘‘Company’’). All significant intercompany accounts and transactions have been
eliminated in consolidation.
The
Corporation, a Delaware corporation organized in 1997, is a California based
bank holding company that owns 100% of the capital stock of the Bank, the
Corporation’s principal operating subsidiary. The Bank was incorporated and
commenced operations in 1983.
The Company accounts for its
investments in its wholly owned special purpose entities, PPBI Statutory Trust
I, ( the “Trust”) using the equity method under which the subsidiaries’ net
earnings are recognized in the Company’s Statement of Income and the investment
in the Trust is included in Other Assets on the Company’s Balance
Sheet.
The principal business of the Bank is
attracting deposits from the general public and investing those deposits,
together with funds generated from operations and borrowings, primarily in
multi-family (apartment buildings of five units or more) and commercial real
estate property loans. At December 31, 2007, the Bank had six
depository branches located in the cities of Costa Mesa, Huntington
Beach, Los Alamitos, San Bernardino, Seal Beach and Newport
Beach.
Cash and cash
equivalents—Cash and cash equivalents include cash on hand and due from
banks. At December 31, 2007, $850,000 was allocated to cash reserves required by
the Federal Reserve Board for depository institutions based on the amount of
deposits held. The Bank maintains amounts due from banks that exceed federally
insured limits. The Bank has not experienced any losses in such
accounts.
Securities Available for
Sale—Investments in debt securities that management has no immediate plan
to sell, but which may be sold in the future, are valued at fair value. Realized
gains and losses, based on the amortized cost of the specific security, are
included in noninterest income as net gain (loss) on investment securities.
Unrealized holding gains and losses, net of tax, on available for sale
securities are reported as a net amount in a separate component of capital until
realized.
Securities Held to
Maturity—Investments in debt securities that management has the positive
intent and ability to hold to maturity are reported at cost and adjusted for
premiums and discounts that are recognized in interest income using the interest
method over the period to maturity.
Impairment of
Investments—Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other-than-temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses. In estimating
other-than-temporary impairment losses, management considers i) the length of
time and the extent to which the market value has been less than cost; ii) the
financial condition and near-term prospects of the issuer; iii) the intent and
ability of the Company to retain its investment in a security for a period of
time sufficient to allow for any anticipated recovery in market value; and iv)
general market conditions which reflect prospects for the economy as a whole,
including interest rates and sector credit spreads.
Participation Contract— The
Participation Contract represented the right to receive 50% of any cash realized
from three residual mortgage-backed securities. The right to receive cash flows
under the Participation Contract began after the purchaser of the residual
mortgage-backed securities recaptured its initial cash investment and a 15%
internal rate of return. During 2004, the Company sold its share of the residual
interest in the 1998-1 component of the Participation Contract and the 1997-2
and 1997-3 components of the Participation Contract were terminated early and
the performing assets sold. Thus, the Participation Contract was no longer on
the Company’s books at or after December 31, 2004. However, the
Company is entitled to 50% of the charge-off recoveries associated with the
1997-2 and 1997-3 components of the Participation Contract. The
recoveries from the 1997-2 and 1997-3 components were $72,000 and $171,000 in
the years 2007 and 2006, respectively, and are shown under Other
Income.
Loans Held for Sale -- Loans
held for sale, consisted of the guarantee portion of our SBA loans at December
31, 2007 and 2006 and are carried at the lower of cost or
market. Premiums paid and discounts obtained on such loans held for
sale are deferred as an adjustment to the carrying value of the loans until the
loans are sold. Interest is recognized as revenue when earned
according to the terms of the loans and when, in the opinion of management, it
is collectible. Loans are evaluated for collectability, and if
appropriate, previously accrued interest is reversed.
Loans Held for Investment --
Loans held for investment are carried at amortized cost and net of deferred loan
origination fees and costs and allowance for loan losses. Net deferred loan
origination fees and costs on loans are amortized or accreted using the interest
method over the expected lives of the loans. Amortization of deferred loan fees
is discontinued for nonperforming loans. Loans held for investment are not
adjusted to the lower of cost or estimated market value because it is
management's intention, and the Bank has the ability, to hold these loans to
maturity.
Interest
on loans is credited to income as earned. Interest receivable is accrued only if
deemed collectible.
Loans on
which the accrual of interest has been discontinued are designated as
non-accrual loans. The accrual of interest on loans is discontinued when
principal or interest is past due 90 days based on contractual terms of the loan
or when, in the opinion of management, there is reasonable doubt as to
collectibility. When loans are placed on non-accrual status, all interest
previously accrued but not collected is reversed against current period interest
income. Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments received on
such loans are applied as a reduction to the loan principal balance. Interest
accruals are resumed on such loans only when they are brought current with
respect to interest and principal and when, in the judgment of management, the
loans are estimated to be fully collectible as to all principal and
interest.
The Bank
considers a loan to be impaired when it is probable that the Bank will be unable
to collect all amounts due (principal and interest) according to the contractual
terms of the loan agreement. Measurement of impairment is based on the expected
future cash flows of an impaired loan which are to be discounted at the loan’s
effective interest rate, or measured by reference to an observable market value,
if one exists, or the fair value of the collateral for a collateral-dependent
loan. The Bank selects the measurement method on a loan-by-loan basis except
that collateral-dependent loans for which foreclosure is probable are measured
at the fair value of the collateral. The Bank recognizes interest income on
impaired loans based on its existing methods of recognizing interest income on
non-accrual loans. All loans are generally charged off at such time the loan is
classified as a loss.
Allowance for Loan Losses --
It is the policy of the Bank to maintain an allowance for loan losses at a level
deemed appropriate by management to provide for known or inherent risks in the
portfolio. Management's determination of the adequacy of the loan
loss allowance is based on an evaluation of the composition of the portfolio,
actual loss experience, current economic conditions, industry charge-off
experience on income property loans and other relevant factors in the area in
which the Bank's lending and real estate activities are based. These
factors may affect the borrowers' ability to pay and the value of the underlying
collateral. The Bank's methodology for assessing the appropriateness
of the allowance consists of several key elements, which include the formula
allowance. The formula allowance is calculated by applying loss
factors to loans held for investment. The loss factors are applied according to
loan program type and loan classification. The loss factors for each
program type and loan classification are evaluated on a quarterly basis and are
established based primarily upon the Bank’s historical loss experience and the
industry charge-off experience. The unallocated allowance is based upon
management's evaluation of various conditions, the effect of which is not
directly measured in the determination of the formula. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific problem credits or
portfolio segments. The conditions evaluated in connection with the
unallocated allowance include the following conditions that existed as of the
balance sheet date: (1) general economic and business conditions
affecting the key lending areas of the Bank, (2) credit quality trends, (3) loan
volumes and concentrations, (4) recent loss experience in particular segments of
the portfolio, and (5) regulatory examination results. Various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance based on
judgments different from those of management.
Although
management uses the best information available to make these estimates, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's
control.
Foreclosed Real Estate --
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at the lesser of fair value less cost to sell or the balance
of the loan at the date of foreclosure through a charge to the allowance for
estimated loan losses. It is the policy of the Bank to obtain an appraisal
and/or market valuation on all other real estate owned at the time of
possession. After foreclosure, valuations are periodically performed
by management and additional write downs are charged to operations if the
carrying value of a property exceeds its fair value less estimated costs to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net loss on foreclosed real estate in the consolidated
statement of operations.
Premises and Equipment --
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, which range from 40 years
for buildings, the remaining term of the lease for leasehold improvements, seven
years for furniture, fixtures and equipment, and three years for computer and
telecommunication equipment.
The
Company periodically evaluates the recoverability of long-lived assets, such as
premises and equipment, to ensure the carrying value has not been
impaired.
Income Taxes--Deferred tax
assets and liabilities are recorded for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns using the asset liability method. In estimating future tax consequences,
all expected future events other than enactments of changes in the tax law or
rates are considered. In the years 2000 and 2001, management deemed it necessary
to establish a valuation allowance totaling $11.6 million on the deferred tax
assets. With the recapitalization in the year 2002 and the return to
profitability, management began to reduce the valuation allowance as it appeared
that it was more likely than not that the deferred tax assets would be realized.
During 2006, the Company reversed the remaining valuation allowance of $2.4
million, as the deferred tax assets were determined, more likely than not, to be
realized based on the Company’s quarterly analysis of its valuation allowance
for deferred taxes. As of December 31, 2007, the valuation allowance
was zero.
Bank owned life insurance --
Bank owned life insurance is accounted for using the cash surrender value method
and is recorded at its realizable value. The change in the net asset value is
included in other assets and other non-interest income.
Presentation of Cash Flows --
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks.
Advertising Costs -- The
Company expenses the costs of advertising in the period incurred.
Use of Estimates -- The
preparation of the consolidated 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, the 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. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of foreclosed real
estate and deferred tax assets.
Comprehensive Income -- In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130,
“Reporting Comprehensive Income,” the Company classifies items of other
comprehensive income by their nature in the financial statements and displays
the accumulated other comprehensive income separately from retained earnings in
the equity section of the Balance Sheet. Changes in unrealized gain
(loss) on available-for-sale securities net of income taxes is the only
component of accumulated other comprehensive income for the
Company.
Fair Value of Financial
Instruments -- SFAS No. 107, “Disclosures About Fair Value of Financial
Instruments” (“SFAS No. 107”) specifies the disclosure of the estimated fair
value of financial instruments. The Company’s estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies.
However, considerable judgment is
required to develop the estimates of fair value. Accordingly, the estimates are
not necessarily indicative of the amounts the Company could have realized in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since the balance sheet date and, therefore, current
estimates of fair value may differ significantly from the amounts presented in
the accompanying notes.
Share-Based Compensation
Effective January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payments,” a
revision to the previously issued guidance on accounting for stock options and
other forms of equity-based compensation. SFAS No. 123(R) requires
companies to recognize in the income statement the grant-date fair value of
stock options and other equity-based forms of compensation issued to employees
over the employees’ requisite service period (generally the vesting period).
Prior to January 1, 2006, we accounted for share-based compensation to
employees under the intrinsic value method prescribed in Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees.” Under the intrinsic value method, compensation expense is
recognized only to the extent an option’s exercise price is less than the market
value of the underlying stock on the date of grant. No share-based compensation
expense was reflected in net income as all options are required by the plan to
be granted with an exercise price equal to the estimated fair value of the
underlying common stock on the date of grant. We also followed the disclosure
requirements of SFAS No. 123, “Accounting for Stock-Based
Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement 123.”
We adopted SFAS No. 123(R) under the modified prospective method
which means that the unvested portion of previously granted awards and any
awards that are granted or modified after the date of adoption will be measured
and accounted for under the provisions of SFAS No. 123(R). Accordingly,
financial statement amounts for prior periods presented have not been restated
to reflect the fair value method of recognizing compensation cost relating to
stock options. The Company will continue to use straight-line recognition of
expenses for awards with graded vesting.
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(dollars
in thousands, except per share data)
|
|
Net
income to common stockholders:
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$ |
3,619 |
|
|
$ |
7,428 |
|
|
$ |
7,221 |
|
Stock-based
compensation that would have been reported using the fair value method of
SFAS 123
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Pro
forma
|
|
$ |
3,619 |
|
|
$ |
7,428 |
|
|
$ |
7,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$ |
0.70 |
|
|
$ |
1.41 |
|
|
$ |
1.37 |
|
Pro
forma
|
|
$ |
0.70 |
|
|
$ |
1.41 |
|
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$ |
0.55 |
|
|
$ |
1.11 |
|
|
$ |
1.08 |
|
Pro
forma
|
|
$ |
0.55 |
|
|
$ |
1.11 |
|
|
$ |
1.08 |
|
In March
2005, the Securities and Exchange Commission (“the SEC”) issued Staff Accounting
Bulletin No. 107 (“SAB No. 107”) regarding the SEC's interpretation of SFAS
No.123(R) and the valuation of share-based payments for public companies. The
Company has applied the provisions of SAB No. 107 in its adoption of SFAS No.
123(R).
Recent
Accounting Pronouncements
In September 2006, the Financial
Accounting Standards Board (“FASB”) ratified the consensus the Emerging Issues
Task Force (“EITF”) reached regarding EITF No. 06-5, “Accounting for Purchases of Life
Insurance - Determining the Amount That Could Be Realized in Accordance with
FASB Technical Bulletin No. 85-4 (“EITF 06-5”).” The EITF concluded that
a policy holder should consider any additional amounts included in the
contractual terms of the life insurance policy in determining the amount that
could be realized under the issuance contract. For group policies with multiple
certificates or multiple policies with a group rider, the EITF also tentatively
concluded that the amount that could be realized should be determined at the
individual policy or certificate level, i.e, amounts that would be realized only
upon surrendering all of the policies or certificates would not be included in
measuring the assets. This interpretation is effective for fiscal years
beginning after December 15, 2006. The adoption of EITF 06-5 has not had a
material impact on the Company’s financial position, results of operations, or
cash flows.
In
February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140."
SFAS No. 155 simplifies accounting for certain hybrid instruments currently
governed by SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," by allowing fair value
re-measurement of hybrid instruments that contain an embedded derivative that
otherwise would require bifurcation. SFAS No. 155 also eliminates the guidance
in SFAS No.133 Implementation Issue No. D1, "Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets," which provides
such beneficial interests are not subject to SFAS No.133. SFAS No. 155 amends
SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a Replacement of FASB Statement No. 125," by eliminating the restriction
on passive derivative instruments that a qualifying special-purpose entity may
hold. This statement is effective for financial instruments acquired or issued
after the beginning of the Company’s fiscal year 2007. The Company adopted SFAS
No. 155 effective January 1, 2007. The adoption of this statement did not have a
material impact on the Company’s financial position, results of operations or
cash flows.
In March
2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets- an amendment of FASB Statement No. 140." SFAS No.156
requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
servicing contract in specific situations. Additionally, the servicing asset or
servicing liability shall be initially measured at fair value; however, an
entity may elect the "amortization method" or "fair value method" for subsequent
balance sheet reporting periods. SFAS No.156 is effective as of an entity's
first fiscal year beginning after September 15, 2006. The Company adopted SFAS
No. 156 effective January 1, 2007. The adoption of this statement did not have a
material impact on the Company’s financial position, results of operations or
cash flows.
In July
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”) which
clarifies the accounting and disclosure for uncertainty in tax positions, as
defined. FIN 48 seeks to reduce the diversity in practice associated with
certain aspects of the recognition and measurement related to accounting for
income taxes and provides that the tax effects from an uncertain tax position be
recognized in the financial statements only if, based on its merits, the
position is more likely than not to be sustained in audit by the taxing
authorities. This interpretation is effective for fiscal years beginning after
December 15, 2006. Effective January 1, 2007, the Company adopted FIN 48.
Management believes that all tax positions taken as of December 31, 2007 are
highly certain and, accordingly, no accounting adjustments have been made to the
financial statements.
In
September 2006, FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 enhances existing guidance for measuring assets and liabilities using
fair value. Prior to the issuance of SFAS No. 157, guidance for applying fair
value was incorporated in several accounting pronouncements. SFAS No. 157
provides a single definition of fair value, together with a framework for
measuring it, and requires additional disclosure about the use of fair value to
measure assets and liabilities. SFAS No. 157 also emphasizes that fair value is
a market-based measurement, not an entity-specific measurement, and sets out a
fair value hierarchy with the highest priority being quoted prices in active
markets. Under SFAS No. 157, fair value measurements are disclosed by level
within that hierarchy. While SFAS No. 157 does not add any new fair value
measurements, it does change current practice. Changes to practice include:
(1) a requirement for an entity to include its own credit standing in the
measurement of its liabilities; (2) a modification of the transaction price
presumption; (3) a prohibition on the use of block discounts when valuing
large blocks of securities for broker-dealers and investment companies; and
(4) a requirement to adjust the value of restricted stock for the effect of
the restriction even if the restriction lapses within one year. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The
Company has not determined the impact of adopting SFAS No. 157 will have on its
financial position, results of operations or cash flows.
In
September 2006, FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB
Statements No. 87, 88, 106, and 132R).” SFAS No. 158, requires an employer
to: (1) Recognize in its statement of financial position an asset for a
plan’s over funded status or a liability for a plan’s under funded status;
(2) measure a plan’s assets and its obligations that determine its funded
status as of the end of the employer’s fiscal year (with limited exceptions);
and (3) recognize changes in the funded status of a defined benefit
postretirement plan in the year in which the changes occur. Those changes will
be reported in comprehensive income of a business entity and in changes in net
assets of a not-for-profit organization. The requirement by SFAS No. 158 to
recognize the funded status of a benefit plan and the disclosure requirements of
SFAS No. 158 are effective as of the end of the fiscal year ending after
December 15, 2006 for entities with publicly traded equity securities. The
requirement to measure plan assets and benefit obligations as of the date of the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The adoption of SFAS No. 158
did not have a material effect on the financial position of the
company.
In
September 2006, the SEC staff issued SAB No. 108, which expresses the SEC
staff’s views regarding the process of quantifying financial statement
misstatements. SAB No. 108 was issued primarily to address diversity in the
practice of quantifying financial statement misstatements and the potential
under current practice to build up improper amounts on the balance sheet. This
new guidance applies when uncorrected misstatements affect the current
year. To eliminate diversity in practice, SAB No. 108 requires
registrants to quantify misstatements using both the rollover and iron curtain
methods, and then determine if either method results in a material error, as
quantified in the existing guidance of Staff Accounting Bulletin No. 99 “Materiality”. SAB No. 108 is
effective for errors identified during the year ended December 31, 2006. The
adoption of SAB No. 108 did not have a material impact on our financial
condition or operating results.
In
February 2007, the FASB issued SFAS No. 159, “Establishing the Fair Value Option
for Financial Assets and Liabilities.” The FASB has issued SFAS No. 159
to permit all entities to choose to elect, at specified election dates, to
measure eligible financial instruments at fair value. An entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date, and recognize upfront
costs and fees related to those items in earnings as incurred and not deferred.
SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with
early adoption permitted for an entity that has also elected to apply the
provisions of SFAS No. 157, Fair Value Measurements. An entity is prohibited
from retrospectively applying SFAS No. 159, unless it chooses early adoption.
SFAS No. 159 also applies to eligible items existing at November 15, 2007 (or
early adoption date). The Company does not expect the adoption of SFAS No. 159
to have a material impact on its financial position, results of operations or
cash flows.
In
December 2007, the FASB issued SFAS No. 141 (revised), “Business Combinations.” SFAS
No. 141(R) changes the accounting for business combinations including the
measurement of acquirer shares issued in consideration for a business
combination, the recognition of contingent consideration, the accounting for
pre-acquisition gain and loss contingencies, the recognition of capitalized
in-process research and development, the accounting for acquisition-related
restructuring cost accruals, the treatment of acquisition related transaction
costs and the recognition of changes in the acquirer’s income tax valuation
allowance. The Company is required to adopt SFAS No. 141(R) no later than
January 1, 2009. The Company has not yet determined the impact SFAS No. 141(R)
may have on its financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS No. 160 changes the
accounting for non-controlling (minority) interests in consolidated financial
statements including the requirements to classify non-controlling interests as a
component of consolidated stockholders’ equity, and the elimination of “minority
interest” accounting in results of operations with earnings attributable to
non-controlling interests reported as part of consolidated earnings.
Additionally, SFAS No. 160 revises the accounting for both increases and
decreases in a parent’s controlling ownership interest. The Company must adopt
SFAS No. 160 no later than January 1, 2009. The Company has not yet determined
the impact SFAS No. 160 may have on its financial position, results of
operations or cash flows.
Reclassifications –Certain
amounts reflected in the 2006 and 2005 consolidated financial statements have
been reclassified where practicable, to conform to the presentation for
2007. These classifications are of a normal recurring
nature.
The
following tables reflect the reclassification on the Company’s consolidated
statement of stockholders’ equity of restricted shares issued from repurchase of
common stock to issuance of restricted stock.
Common
Stock Shares
|
|
With
reclassifications For Year Ended December 31, 2005
|
|
|
Originally
presented For Year Ended December 31, 2005
|
|
|
Net
Change
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of common stock
|
|
$ |
(38,550 |
) |
|
$ |
(34,050 |
) |
|
$ |
(4,500 |
) |
Issuance
of restricted stock
|
|
|
4,500 |
|
|
|
- |
|
|
|
4,500 |
|
Exercise
of stock options
|
|
|
3,750 |
|
|
|
3,750 |
|
|
|
- |
|
Total
activity
|
|
$ |
(30,300 |
) |
|
$ |
(30,300 |
) |
|
$ |
- |
|
Common
Stock Amount
|
|
With
reclassifications For Year Ended December 31, 2005
|
|
|
Originally
presented For Year Ended December 31, 2005
|
|
|
Net
Change
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of common stock
|
|
$ |
(442 |
) |
|
$ |
(394 |
) |
|
$ |
(48 |
) |
Share-based
compensation expense
|
|
|
11 |
|
|
|
- |
|
|
|
11 |
|
Exercise
of stock options
|
|
|
28 |
|
|
|
28 |
|
|
|
0 |
|
Total
activity
|
|
$ |
(403 |
) |
|
$ |
(366 |
) |
|
$ |
(37 |
) |
The following table reflects the
reclassification on the statement of Company’s cash flows of repurchase of
common stock from net cash used in investing activities to net cash provided by
operating activities and share-based compensation expense and increase in
accrued interest and other assets from repurchase of common stock.
|
|
With
reclassifications For Year Ended December 31, 2005
|
|
|
Originally
presented For Year Ended December 31, 2005
|
|
|
Net
Change
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation expense
|
|
$ |
11 |
|
|
$ |
- |
|
|
$ |
11 |
|
Increase
in accrued interest receivable and other assets
|
|
|
(1,270 |
) |
|
|
(1,307 |
) |
|
|
37 |
|
All
other operating activities
|
|
|
8,275 |
|
|
|
8,275 |
|
|
|
- |
|
Net
cash provided by operating activities
|
|
$ |
7,016 |
|
|
$ |
6,968 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of common stock
|
|
$ |
- |
|
|
$ |
(394 |
) |
|
$ |
394 |
|
All
other investing activities
|
|
|
(139,034 |
) |
|
|
(139,034 |
) |
|
|
- |
|
Net
cash used in investing activities
|
|
$ |
(139,034 |
) |
|
$ |
(139,428 |
) |
|
$ |
394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of common stock
|
|
$ |
(442 |
) |
|
$ |
- |
|
|
$ |
(442 |
) |
All
other financing activities
|
|
|
150,512 |
|
|
|
150,512 |
|
|
|
- |
|
Net
cash used in financing activities
|
|
$ |
150,070 |
|
|
$ |
150,512 |
|
|
$ |
(442 |
) |
The following table reflects the
reclassification on the statement of the Corporation’s cash flows of repurchase
of common stock from net cash used in financing activities to net cash provided
by operating activities and share-based compensation expense and increase
(decrease) in accrued expenses and other liabilities from repurchase of common
stock.
|
|
With
reclassifications For Year Ended December 31, 2005
|
|
|
Originally
presented For Year Ended December 31, 2005
|
|
|
Net
Change
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation expense
|
|
$ |
11 |
|
|
$ |
- |
|
|
$ |
11 |
|
Increase
(decrease) in accrued expenses and other liabilities
|
|
|
91 |
|
|
|
54 |
|
|
|
37 |
|
All
other operating activities
|
|
|
226 |
|
|
|
226 |
|
|
|
- |
|
Net
cash provided by operating activities
|
|
$ |
328 |
|
|
$ |
280 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of common stock
|
|
$ |
(442 |
) |
|
$ |
(394 |
) |
|
$ |
(48 |
) |
All
other financing activities
|
|
|
28 |
|
|
|
28 |
|
|
|
- |
|
Net
cash used in financing activities
|
|
$ |
(414 |
) |
|
$ |
(366 |
) |
|
$ |
(48 |
) |
2.
Regulatory Capital Requirements and Other Regulatory Matters
The Bank
is subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Corporation’s
and the Bank’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and the Bank
must meet specific capital guidelines that involve quantitative measures of the
Corporation’s and the Bank’s assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Corporation’s and
the Bank’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation and the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2007, that the
Corporation and the Bank meet all capital adequacy requirements to which it is
subject.
As of the
most recent formal notification from the Federal Reserve, the Bank was
categorized as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the Bank's category. The Corporation’s and
Bank's actual capital amounts and ratios are presented in the table
below:
|
|
|
|
|
|
|
|
To
be adequately
|
|
|
To
be well
|
|
|
|
Actual
|
|
|
capitalized
|
|
|
capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(dollars
in thousands)
|
|
At December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$ |
69,873 |
|
|
|
11.44 |
% |
|
$ |
48,874 |
|
|
|
8.00 |
% |
|
$ |
61,093 |
|
|
|
10.00 |
% |
Consolidated
|
|
$ |
70,595 |
|
|
|
11.56 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Tier
1 Capital (to adjusted tangible assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
|
65,275 |
|
|
|
8.81 |
% |
|
|
29,639 |
|
|
|
4.00 |
% |
|
|
37,049 |
|
|
|
5.00 |
% |
Consolidated
|
|
|
65,997 |
|
|
|
8.90 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Tier
1 Risk-Based Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
|
65,275 |
|
|
|
10.68 |
% |
|
|
24,437 |
|
|
|
4.00 |
% |
|
|
36,656 |
|
|
|
6.00 |
% |
Consolidated
|
|
|
65,997 |
|
|
|
10.81 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$ |
64,124 |
|
|
|
11.55 |
% |
|
$ |
44,407 |
|
|
|
8.00 |
% |
|
$ |
55,508 |
|
|
|
10.00 |
% |
Consolidated
|
|
$ |
66,734 |
|
|
|
12.01 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Tier
1 Capital (to adjusted tangible assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
|
60,747 |
|
|
|
8.38 |
% |
|
|
29,012 |
|
|
|
4.00 |
% |
|
|
36,265 |
|
|
|
5.00 |
% |
Consolidated
|
|
|
63,357 |
|
|
|
8.73 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Tier
1 Risk-Based Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
|
60,747 |
|
|
|
10.94 |
% |
|
|
22,203 |
|
|
|
4.00 |
% |
|
|
33,305 |
|
|
|
6.00 |
% |
Consolidated
|
|
|
63,357 |
|
|
|
11.40 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
3.
Investment Securities
The
amortized cost and estimated fair value of securities were as follows at
December 31:
|
|
December 31,
2007
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$ |
29,719 |
|
|
$ |
35 |
|
|
$ |
(1 |
) |
|
$ |
29,753 |
|
Mutual
Funds
|
|
|
27,719 |
|
|
|
- |
|
|
|
(1,234 |
) |
|
|
26,485 |
|
Total
securities available for sale
|
|
$ |
57,438 |
|
|
$ |
35 |
|
|
$ |
(1,235 |
) |
|
$ |
56,238 |
|
FHLB
Stock
|
|
$ |
15,204 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
15,204 |
|
Federal
Reserve Bank Stock
|
|
|
1,600 |
|
|
|
- |
|
|
|
- |
|
|
|
1,600 |
|
Total
securities
|
|
$ |
74,242 |
|
|
$ |
35 |
|
|
$ |
(1,235 |
) |
|
$ |
73,042 |
|