UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2008 |
or | |
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________ |
Commission File Number: 333-141453
BELVEDERE SOCAL
(Exact name of registrant as specified in its charter)
California | 20-8356735 |
(State of incorporation) | (I.R.S. Employer Identification No.) |
One Maritime Plaza, Suite 825 San Francisco, CA | 94111 |
(Address of principal executive offices) | (Zip Code) |
(415) 434 - 1236
(Registrant’s telephone number, including area code)
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 o |
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (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 Rule 12b-2 of the Exchange Act).
Yes o | No x |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 14, 2008 there were 3,331,859 shares of common stock, no par value, outstanding.
BELVEDERE SoCAL
TABLE OF CONTENTS
Page | ||
PART I – FINANCIAL INFORMATION | ||
ITEM 1. | FINANCIAL STATEMENTS | F-1 |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 3 |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 15 |
ITEM 4. | CONTROLS AND PROCEDURES | 16 |
PART II – OTHER INFORMATION | ||
ITEM 1. | LEGAL PROCEEDINGS | 17 |
ITEM 1A. | RISK FACTORS | 17 |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 17 |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 17 |
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 17 |
ITEM 5. | OTHER INFORMATION | 17 |
ITEM 6. | EXHIBITS | 18 |
SIGNATURES | 19 | |
CERTIFICATIONS |
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
BELVEDERE SoCAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2008 | December 31, 2007 | |||||||
Cash and due from banks | $ | 9,871,092 | $ | 4,401,632 | ||||
Federal Funds sold | 5,955,000 | 9,130,000 | ||||||
Total cash and cash equivalents | 15,826,092 | 13,531,632 | ||||||
Interest-bearing deposits in other financial institutions | 524,000 | 100,000 | ||||||
Investment securities available for sale, amortized cost of $9,875,715 at September 30, 2008 and $8,769,293 at December 31, 2007 | 9,207,715 | 8,786,293 | ||||||
Investment securities held-to-maturity, fair market value of $21,530,122 at September 30, 2008 | 21,112,800 | - | ||||||
Loans, net of allowance for loan losses of $5,622,080 at September 30, 2008 and $4,077,213 at December 31, 2007 | 303,374,209 | 210,257,162 | ||||||
Premises and equipment, net | 5,282,896 | 461,760 | ||||||
Goodwill | 23,990,432 | 29,459,783 | ||||||
Other intangible assets, net | 2,717,842 | 2,368,172 | ||||||
Federal Home Loan Bank stock, at cost | 1,101,500 | 916,300 | ||||||
Other real estate owned | 1,217,905 | - | ||||||
Accrued interest and other assets | 10,613,718 | 4,198,740 | ||||||
Total assets | $ | 394,969,109 | $ | 270,079,842 | ||||
Deposits | ||||||||
Noninterest bearing demand | $ | 97,268,173 | $ | 73,358,729 | ||||
NOW, savings and money market accounts | 87,394,799 | 49,514,411 | ||||||
Time deposits under $100,000 | 86,742,434 | 45,460,646 | ||||||
Time deposits over $100,000 | 49,687,318 | 25,715,811 | ||||||
Total deposits | 321,092,724 | 194,049,597 | ||||||
Federal Home Loan Bank advances | 6,000,000 | 18,000,000 | ||||||
Note payable, net of fees | 7,959,123 | - | ||||||
Junior subordinated debentures, net of issuance costs | 15,425,867 | - | ||||||
Accrued interest and other liabilities | 2,677,679 | 3,044,416 | ||||||
Total liabilities | 353,155,393 | 215,094,013 | ||||||
Commitments and Contingencies (Note 3) | ||||||||
Shareholders’ equity: | ||||||||
Preferred Stock - non-cumulative, perpetual, no par value; authorized 20,000,000 shares; 900,860 and 806,666 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively | 22,121,500 | 19,766,650 | ||||||
Common Stock - no par value; authorized 20,000,000 shares; 3,331,776 and 2,011,343 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively | 57,990,030 | 35,749,587 | ||||||
Accumulated deficit | (37,903,814 | ) | (540,408 | ) | ||||
Accumulated other comprehensive (loss) income, net of taxes | (394,000 | ) | 10,000 | |||||
Total shareholders’ equity | 41,813,716 | 54,985,829 | ||||||
Total liabilities and shareholders' equity | $ | 394,969,109 | $ | 270,079,842 |
See notes to unaudited consolidated financial statements
F-1
BELVEDERE SoCAL AND SUBSIDIARIES
AND ITS PREDECESSOR BUSINESS PROFESSIONAL BUSINESS BANK
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three-month periods ended September 30, | Nine-month periods ended September 30, | |||||||||||||||
Belvedere SoCal and Subsidiaries | Professional Business Bank | Belvedere SoCal and Subsidiaries | Professional Business Bank | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Interest income: | ||||||||||||||||
Interest and fees on loans | $ | 5,395,535 | $ | 4,105,521 | $ | 16,211,804 | $ | 10,878,506 | ||||||||
Interest on investment securities | 316,502 | 161,060 | 1,002,164 | 636,232 | ||||||||||||
Other interest income | 55,790 | 42,199 | 329,437 | 346,548 | ||||||||||||
Total interest income | 5,767,827 | 4,308,780 | 17,543,405 | 11,861,286 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 1,456,625 | 1,055,753 | 4,500,370 | 3,389,416 | ||||||||||||
Junior subordinated debentures | 387,466 | - | 1,031,800 | - | ||||||||||||
Other borrowings | 129,787 | 194,704 | 570,937 | 270,379 | ||||||||||||
Total interest expense | 1,973,878 | 1,250,457 | 6,103,107 | 3,659,795 | ||||||||||||
Net interest income before provision for loan losses | 3,793,949 | 3,058,323 | 11,440,298 | 8,201,491 | ||||||||||||
Provision for loan losses | 255,765 | 983,000 | 2,316,295 | 1,520,000 | ||||||||||||
Net interest income after provision for loan losses | 3,538,184 | 2,075,323 | 9,124,003 | 6,681,491 | ||||||||||||
Non-interest income: | ||||||||||||||||
Service charges and fees | 226,964 | 100,436 | 773,781 | 291,810 | ||||||||||||
Loss on sales of available-for-sale investment securities | (116,431 | ) | - | (116,431 | ) | - | ||||||||||
Other income | 65,159 | (17,076 | ) | 208,440 | 27,997 | |||||||||||
Total non-interest income | 175,692 | 83,360 | 865,790 | 319,807 | ||||||||||||
Non-interest expense: | ||||||||||||||||
Salaries and employee benefits | 2,161,301 | 1,316,074 | 6,782,574 | 4,167,056 | ||||||||||||
Occupancy and equipment | 369,910 | 176,762 | 1,084,985 | 496,718 | ||||||||||||
Professional fees | 743,872 | 298,962 | 1,845,512 | 924,943 | ||||||||||||
Data processing | 342,686 | 124,316 | 1,000,316 | 421,296 | ||||||||||||
Marketing and business promotion | 35,715 | 38,490 | 149,010 | 102,834 | ||||||||||||
Office and administrative expenses | 241,645 | 194,415 | 734,605 | 579,758 | ||||||||||||
Goodwill impairment | 33,301,000 | - | 33,301,000 | - | ||||||||||||
Other expenses | 623,598 | 175,128 | 1,452,607 | 506,798 | ||||||||||||
Total non-interest expense | 37,819,727 | 2,324,147 | 46,350,609 | 7,199,403 | ||||||||||||
Loss before income taxes | (34,105,852 | ) | (165,464 | ) | (36,360,816 | ) | (198,105 | ) | ||||||||
Provision for income tax (benefit) expense | (353,626 | ) | (15,375 | ) | (1,352,260 | ) | 105,362 | |||||||||
Net loss | $ | (33,752,226 | ) | $ | (150,089 | ) | $ | (35,008,556 | ) | $ | (303,467 | ) | ||||
Net loss per share: | ||||||||||||||||
Basic and diluted | $ | (10.38 | ) | $ | (0.08 | ) | $ | (11.75 | ) | $ | (0.15 | ) |
See notes to unaudited consolidated financial statements
F-2
BELVEDERE SoCAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE PERIOD FROM JANUARY 17, 2007 (INCEPTION) TO SEPTEMBER 30, 2008
Preferred Stock | Common Stock | Accumulated Other | ||||||||||||||||||||||||||
Number of Shares | Amount | Number of Shares | Amount | Comprehensive Loss | Accumulated Deficit | Comprehensive (Loss) Income | ||||||||||||||||||||||
Common stock issued | 1,125,539 | $ | 11,500,000 | |||||||||||||||||||||||||
Series A non-cumulative perpetual preferred stock issued, net of issuance costs | 800,000 | $ | 19,600,000 | |||||||||||||||||||||||||
Common stock issued for acquisition of Professional Business Bank, net of issuance costs | 885,804 | 24,249,587 | ||||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||
Net loss | $ | (373,758 | ) | $ | (373,758 | ) | ||||||||||||||||||||||
Unrealized gain on available-for-sale securities, net of tax | 10,000 | $ | 10,000 | |||||||||||||||||||||||||
Total comprehensive loss | $ | (363,758 | ) | |||||||||||||||||||||||||
Series A preferred stock dividend declared | 6,666 | 166,650 | (166,650 | ) | ||||||||||||||||||||||||
Balance December 31, 2007 | 806,666 | 19,766,650 | 2,011,343 | 35,749,587 | (540,408) | 10,000 | ||||||||||||||||||||||
Warrants exercised | 7,001 | 70 | ||||||||||||||||||||||||||
Stock-based compensation | 240,424 | |||||||||||||||||||||||||||
Common stock issued | 1,313,432 | 22,000,000 | ||||||||||||||||||||||||||
Cash payments for fractional shares | (51 | ) | ||||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||
Net loss | $ | (35,008,556 | ) | (35,008,556 | ) | |||||||||||||||||||||||
Change in unrealized gain (loss) on available-for-sale securities, net of tax | (404,000 | ) | (404,000 | ) | ||||||||||||||||||||||||
Total comprehensive loss | $ | (35,412,556 | ) | |||||||||||||||||||||||||
Series A preferred stock dividends declared | 94,194 | 2,354,850 | (2,354,850 | ) | ||||||||||||||||||||||||
Balance September 30, 2008 | 900,860 | $ | 22,121,500 | 3,331,776 | $ | 57,990,030 | $ | (37,903,814 | ) | $ | (394,000 | ) |
See notes to unaudited consolidated financial statements
F-3
BELVEDERE SoCAL AND SUBSIDIARIES
AND ITS PREDECESSOR BUSINESS PROFESSIONAL BUSINESS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND 2007
Belvedere SoCal and Subsidiaries | Professional Business Bank | |||||||
2008 | 2007 | |||||||
Operating activities: | ||||||||
Net loss | $ | (35,008,556 | ) | $ | (303,467) | |||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
Depreciation and amortization expense | 373,734 | 121,044 | ||||||
Net loss on sales of available-for-sale investment securities | 116,431 | - | ||||||
Provision for loan losses | 2,316,295 | 1,520,000 | ||||||
Stock-based compensation | 240,424 | 162,014 | ||||||
Loss on sale of other real estate owned | 69,716 | - | ||||||
Write down of other real estate owned to market value | 57,000 | - | ||||||
Goodwill impairment | 33,301,000 | - | ||||||
Net decrease (increase) in accrued interest and other assets | 2,900,905 | (855,716 | ) | |||||
Net (decrease) increase in accrued interest and other liabilities | (9,351,326 | ) | 227,573 | |||||
Net cash (used in) provided by operating activities | (4,984,377 | ) | 871,448 | |||||
Investing activities: | ||||||||
Proceeds from maturities and principal paydowns of available-for-sale investment securities | 22,493,982 | 2,797,848 | ||||||
PrProceeds from sales of available-for-sale investment securities | 18,343,387 | - | ||||||
Proceeds from issuance of junior subordinated debentures | 464,000 | - | ||||||
Purchases of held-to-maturity investment securities | (21,105,527 | ) | - | |||||
Net decrease in interest-bearing deposits in other financial institutions | 2,184,000 | 4,799,000 | ||||||
Increase in loans, net | (18,051,529 | ) | (50,403,304 | ) | ||||
Purchases of premises and equipment | (228,904 | ) | (217,935 | ) | ||||
Purchase of FHLB stock | (185,200 | ) | (710,800 | ) | ||||
Proceeds from sale of other real estate owned | 712,184 | - | ||||||
Cash received in connection with the acquisition of Spectrum Bank, net of cash paid | 127,811 | - | ||||||
Net cash provided by (used in) investing activities | 4,754,204 | (43,735,191 | ) | |||||
Financing activities: | ||||||||
Net (decrease) increase in deposits | (14,967,386 | ) | 38,254,290 | |||||
Net (decrease) increase in Federal Home Loan Bank advances | (12,000,000 | ) | 2,000,000 | |||||
Proceeds from note payable | 7,956,000 | - | ||||||
Investment in Belvedere Statutory Trust I | (464,000 | ) | - | |||||
Proceeds from exercise of stock options | - | 253,859 | ||||||
Proceeds from sale of stock | 22,000,000 | - | ||||||
Cash payments for fractional shares | (51 | ) | - | |||||
Proceeds from exercise of warrants | 70 | - | ||||||
Net cash provided by financing activities | 2,524,633 | 40,508,149 | ||||||
Increase (decrease) in cash and cash equivalents | 2,294,460 | (2,355,594) | ||||||
Cash and cash equivalents, beginning of period | 13,531,632 | 9,683,852 | ||||||
Cash and cash equivalents, end of period | $ | 15,826,092 | $ | 7,328,258 | ||||
Noncash financing activities | ||||||||
Loans transferred to other real estate owned | $ | 2,056,905 | $ | - | ||||
Preferred stock dividends declared | $ | 2,354,850 | $ | - | ||||
Supplemental cash flow information | ||||||||
Interest paid | $ | 6,167,433 | $ | 1,153,388 | ||||
Taxes paid | $ | 2,400 | $ | 268,000 |
See notes to unaudited consolidated financial statements
F-4
BELVEDERE SoCAL AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. | Nature of Business and Basis of Presentation |
Belvedere SoCal ("SoCal"), a bank holding company incorporated in 2007 in the state of California, was formed by its majority shareholder, Belvedere Capital Fund II L.P. (the “Fund”), a Delaware limited partnership formed in 2002. SoCal was formed specifically to acquire Professional Business Bank (“PBB"), which occurred on November 23, 2007, and to be the platform for acquiring other banks in southern California. SoCal closed the acquisition of Spectrum Bank (“Spectrum”) on January 31, 2008, further expanding its market presence. Effective July 3, 2008, SoCal completed the merger of Spectrum Bank into Professional Business Bank. The merger was accounted for as a transfer of assets and liabilities between entities under common control and, accordingly, the assets and liabilities of Spectrum were transferred at their carrying amounts, similar to a pooling of interests. However, the existing Spectrum branches and certain customer-related activities will continue to be conducted using the Spectrum brand. SoCal issued an additional 1,313,432 shares of common stock to the Fund for proceeds of $22 million to fund the Spectrum acquisition. After sale of the shares, the Fund now owns approximately 73% of SoCal's common stock. Collectively, PBB and Spectrum are referred to as the "Subsidiary Bank."
Prior to November 23, 2007 SoCal had no significant operations. The consolidated balance sheet at September 30, 2008 and the results of operations for the three-month and nine-month periods ended September 30, 2008 include the operations of Spectrum subsequent to January 31, 2008. The results of operations for the three-month and nine-month periods ended September 30, 2007 are for Professional Business Bank only. Securities and Exchange Commission rules require the presentation of certain prior period comparative financial statements of the acquired business when the acquiring company succeeds to substantially all of the business and the registrant’s own operations prior to the acquisition appear insignificant relative to the business acquired.
The September 30, 2008 unaudited consolidated financial statements include the accounts of SoCal and its Subsidiary Bank. SoCal has one other wholly-owned subsidiary, Belvedere SoCal Statutory Trust I (the “Trust”), which was formed in 2008, to issue trust preferred securities. FIN 46R does not allow the consolidation of the Trust into SoCal's consolidated financial statements. As a result, the accompanying consolidated balance sheets include the investment in the Trust of $464 thousand in other assets.
The financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position and operating results for the interim periods. The results of operations for the nine-month period ended September 30, 2008 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2008. The balance sheet data at December 31, 2007 was derived from the audited financial statements.
This information should be read in conjunction with the audited financial statements and notes thereto included in SoCal's Form 10-KSB for the fiscal year ended December 31, 2007.
2. | Recent Accounting Pronouncements |
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R), among other things, establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SoCal is required to adopt SFAS No. 141(R) for all business combinations for which the acquisition date is on or after January 1, 2009. Earlier adoption is prohibited. This standard will change the accounting treatment for business combinations on a prospective basis.
Effective January 1, 2008, SoCal adopted SFAS No. 157, Fair Value Measurements, which among other things, requires enhanced disclosures about financial instruments carried at fair value. SFAS No. 157 establishes a hierarchical disclosure framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.
On October 10, 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies how companies should apply the fair value measurement methodologies of SFAS 157 to financial assets when markets they are traded in are illiquid or inactive. Under the provisions of this FSP, companies may use their own assumptions about future cash flows and appropriately risk-adjusted discount rates when relevant observable inputs are either not available or are based solely on transaction prices that reflect forced liquidations or distressed sales. This FSP is effective as of September 30, 2008. There was no impact to our financial position or results of operations from the adoption of this FSP.
F-5
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115, which permits entities to choose to measure financial instruments and certain warranty and insurance contracts at fair value. SFAS No. 159 applies to all reporting entities, including not-for-profit organizations, and contains financial statement presentation and disclosure requirements for assets and liabilities reported at fair value. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. SoCal adopted SFAS No. 159 on January 1, 2008. SoCal chose not to elect the option to measure eligible financial assets and liabilities at fair value.
3. | Commitments and Contingencies |
In the normal course of business there are outstanding various commitments to extend credit which are not reflected in the financial statements, including unfunded loan commitments of approximately $36.4 million at September 30, 2008 and $62.5 million at December 31, 2007. Such loans relate primarily to real estate construction loans and revolving lines of credit and other commercial loans. However, all such unfunded commitments will not necessarily culminate in actual extensions of credit by SoCal as some of these are expected to expire without being fully drawn upon.
Standby letters of credit are conditional commitments issued to guarantee the performance or financial obligation of a client to a third party. These guarantees are issued primarily relating to purchases of inventory or as security for real estate rents by commercial clients and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to clients and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The majority of all such commitments are collateralized. Standby letters of credit totaled $1.4 million and $769 thousand at September 30, 2008 and December 31, 2007, respectively. SoCal provides a reserve for undisbursed commitments which totaled $130 thousand and $141 thousand at September 30, 2008 and December 31, 2007, respectively.
In connection with the acquisition of Spectrum Bank, SoCal assumed the following: leases for two branches, which expire in 2008 and 2011, and an administrative office, which expires in 2010. These leases include provisions for periodic rent increases as well as payment by the lessee of certain operating expenses.
Total rent expense for the three- and nine-month periods ended September 30, 2008 was approximately $62 thousand and $168 thousand, respectively.
The approximate future minimum annual payments for these leases are as follows:
Year Ending | ||||
December 31, | ||||
2008 | $ | 62,000 | ||
2009 | 58,380 | |||
2010 | 53,940 | |||
2011 | 34,960 | |||
Total | $ | 209,280 |
4. | Comprehensive Loss |
Comprehensive income (loss) is reported in addition to net income (loss) for all periods presented. Comprehensive (loss) is comprised of net income (loss) plus other comprehensive income (loss). Other comprehensive income (loss), net of taxes, was comprised of the unrealized gain (losses) on available-for-sale investment securities of ($404) thousand and $28 thousand for the nine-month periods ended September 30, 2008 and 2007 and ($99) thousand and $71 thousand for the three-month periods ended September 30, 2008 and 2007. Comprehensive (loss) was ($33.9) million and ($35.4) million for the three- and nine-month periods ended September 30, 2008, respectively. Comprehensive (loss) was ($79) thousand and ($275) thousand for the three and nine-month periods ended September 30, 2007.
5. | Stock-Based Compensation |
SoCal has adopted SFAS No. 123(R), Shared-Based Payment. This Statement requires entities to recognize the cost of employee services received in exchange for awards of stock options, or other equity instruments, based on the grant-date fair value of those awards. This cost is recognized over the period which an employee is required to provide services in exchange for the award, generally the vesting period. Stock-based compensation expense totaled $76 thousand and $32 thousand for the quarters ended September 30, 2008 and 2007, respectively. A tax benefit of $30 thousand and $8 thousand was recognized in connection with the stock-based compensation for the quarters ended September 30, 2008 and 2007, respectively. Stock-based compensation expense totaled $240 thousand and $162 thousand for the nine-month periods ended September 30, 2008 and 2007, respectively. A tax benefit of $99 thousand and $25 thousand was recognized in connection with the stock-based compensation expense for the nine-month periods ended September 30, 2008 and 2007, respectively. The expense for 2007 was recognized under the Professional Business Bank 2001 Incentive and Nonqualified Stock Option Plan.
F-6
SoCal has one stock-based compensation plan, the Belvedere SoCal 2007 Equity Incentive Plan (the "Plan"), which, among other things, permits the grant of stock options and stock purchase rights. The Plan is designed primarily to attract and retain personnel and provide additional incentives to employees, directors and consultants to promote the success of SoCal's business. The maximum aggregate number of shares that may be issued under the Plan is 1,500,000. The amount, frequency and terms of share-based awards are subject to all applicable terms and conditions of the Plan and such other terms and conditions as prescribed by a Committee of the Board of Directors. New shares are issued upon the exercise of options.
The Plan requires that the option or share price may not be less than the fair market value of the stock on the grant date, except for options granted in substitution for options outstanding under the Professional Business Bank Stock Option Plan, and that the stock be paid in full at the time the option is exercised. All options vest on a date determined by the Committee, but not later than ten years from the date of grant.
Management estimates the fair value of each option award as of the date of grant using a Black-Scholes-Merton option pricing model. Expected volatility is based on historical volatility of similar entities over a preceding period commensurate with the expected term of the option because the Company's common stock has been publicly traded for a shorter period than the expected term of the options. The expected term represents the period that the stock-based awards are expected to be outstanding. The risk free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula because SoCal has not paid cash dividends historically. In addition to these assumptions, management makes estimates regarding pre-vesting forfeitures that will impact total compensation expense recognized under the Plan.
There were two types of options granted in 2008. The first were options granted with performance conditions that vest based on certain qualifying events, or cliff vest at the 7th anniversary of the grant date if no qualifying event occurs. SoCal granted 175,402 and 11,640 of performance based options during the first and third quarters of 2008, respectively. The second type of options were granted with a time-based condition that cliff vest at the 5th anniversary of the grant date. SoCal granted 175,409 and 11,641 of time-based options during the first and third quarters of 2008, respectively. There were no stock options granted in the second quarter of 2008 or the first nine months of 2007.
The following table summarizes the assumptions utilized in the calculation of the fair value of the options granted during the stated periods:
Three-month period ended March 31, 2008 | Three-month period ended September 30, 2008 | ||
Risk-free interest rate | 3.21% | 3.46% | |
Expected life | 6 years | 5 years | |
Expected volatility | 28% | 30% | |
Expected dividend yield | N/A | N/A | |
Weighted average grant date fair value | $5.10 | $4.92 |
A summary of stock option activity and related information for the nine-month period ended September 30, 2008 follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
Outstanding December 31, 2007 | 135,041 | $ | 15.21 | ||||||||||||
Options granted | 374,092 | 15.00 | |||||||||||||
Options forfeited | (36,584 | ) | 15.00 | ||||||||||||
Options exercised | - | ||||||||||||||
Outstanding at September 30, 2008 | 472,549 | 15.06 | 8.3 years | $ | - | ||||||||||
Options exercisable, September 30, 2008 | 135,041 | 15.21 | 5.3 years | $ | - | ||||||||||
Options expected to vest after September 30, 2008 | 336,854 | $ | 15.00 | 9.5 years | $ | - |
F-7
All options granted in 2008 allow for early exercise into shares of restricted common stock of SoCal under identical vesting terms as the original options. Such options are not shown as exercisable in the above table.
At September 30, 2008, there was $1.5 million in unrecognized compensation costs related to the outstanding options that is expected to be recognized over a weighted average period of 5.1 years.
6. | Loss Per Share |
Basic loss per share for each of the periods presented was computed by dividing net loss adjusted for stock dividends paid or declared on non-cumulative perpetual preferred stock by the weighted average number of shares outstanding during each such period.
Basic and diluted loss per share for the three-month periods ended September 30, 2008 and 2007 are computed as follows (dollars in thousands):
SoCal Three-month period ended September 30, 2008 | Net Loss | Weighted Average Number of Shares Outstanding | Per Share Amount | |||||||||
Basic loss per share: | ||||||||||||
Net loss | $ | (33,752 | ) | |||||||||
Preferred stock dividend | (814 | ) | ||||||||||
Net loss available to common shareholders | $ | (34,566 | ) | 3,331,413 | $ | (10.38 | ) |
Professional Business Bank Three-month period ended September 30, 2007 | Net Loss | Weighted Average Number of Shares Outstanding | Per Share Amount | |||||||||
Net loss available to common shareholders | $ | (150 | ) | 1,998,477 | $ | (0.08) |
Basic and diluted earnings per share for the nine-month periods ended September 30, 2008 and 2007 are computed as follows (dollars in thousands):
SoCal Nine-month period ended September 30, 2008 | Net Loss | Weighted Average Number of Shares Outstanding | Per Share Amount | |||||||||
Basic loss per share: | ||||||||||||
Net loss | $ | (35,009 | ) | |||||||||
Preferred stock dividend | (2,355 | ) | ||||||||||
Net loss available to common shareholders | $ | (37,364 | ) | 3,180,736 | $ | (11.75 | ) |
F-8
Professional Business Bank Nine-month period ended September 30, 2007 | Net Loss | Weighted Average Number of Shares Outstanding | Per Share Amount | |||||||||
Net loss available to common shareholders | $ | (303 | ) | 1,994,269 | $ | (0.15) |
7. | Allowance for Loan Losses |
The following table presents the changes in the allowance for loan losses as of the dates indicated (dollars in thousands):
Three-month period ended September 30, | Nine-month period ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Balance at beginning of period | $ | 5,385 | $ | 2,404 | $ | 4,077 | $ | 1,869 | ||||||||
Allowance acquired at acquisition of Spectrum | - | - | 1,436 | - | ||||||||||||
Additional provision | 256 | 983 | 2,316 | 1,520 | ||||||||||||
Charge-offs | (45 | ) | (6 | ) | (2,247 | ) | (8 | ) | ||||||||
Recoveries | 26 | - | 40 | - | ||||||||||||
Total | $ | 5,622 | $ | 3,381 | $ | 5,622 | $ | 3,381 |
8. | Acquisition of Spectrum Bank |
Assets acquired: | ||||
Cash and due from banks | $ | 4,283 | ||
Federal funds sold | 17,080 | |||
Interest-bearing deposits in other financial institutions | 2,608 | |||
Investment securities available for sale | 41,475 | |||
Loans, net | 79,452 | |||
Premises and equipment | 4,947 | |||
Goodwill | 27,832 | |||
Other intangible assets, net | 722 | |||
Accrued interest and other assets | 9,043 | |||
Total assets acquired | 187,442 | |||
Liabilities assumed: | ||||
Total deposits | 142,011 | |||
Accrued interest and other liabilities | 9,196 | |||
Total liabilities assumed | 151,207 | |||
Total consideration paid | $ | 36,235 |
F-9
9. | Junior Subordinated Debentures |
In January 2008, SoCal issued $15.5 million of junior subordinated debentures to Belvedere SoCal Statutory Trust I, a Delaware business trust that was formed for the exclusive purpose of issuing trust preferred securities. The Trust purchased debentures with: (1) the proceeds of the sale of its common trust securities to SoCal for $464 thousand, and (2) certain shares of common stock in Spectrum Bank valued at $15 million that the Trust received from certain shareholders of Spectrum Bank in exchange for the Trust’s trust preferred securities. The subordinated debentures and trust preferred securities have generally identical terms, including that they mature in 2038, are redeemable at SoCal’s option at par, and require monthly distributions/interest payments at a rate of 10%. The trust preferred securities and corresponding junior subordinated debentures contain provisions limiting Socal’s ability to declare and pay dividends on its common stock in certain events. SoCal has unconditionally guaranteed certain distributions on, and certain payments on liquidation and redemption of, the trust preferred securities.
Interest expense recognized by SoCal for the three- and nine-month periods ended September 30, 2008 related to the subordinated debentures was $387 thousand and $1.0 million, respectively.
10. | Note Payable |
In March 2008, SoCal borrowed $8 million through a loan secured by the stock of the Subsidiary Bank. The loan bears interest at three-month LIBOR plus 3.1% (7.15% at September 30, 2008) with quarterly interest payments through September 2009, followed by principal and interest payments through the maturity date of March 2018. The promissory note and related loan agreements contain certain customary restrictions including a potential limitation on the ability of the Subsidiary Bank to pay dividends to SoCal for purposes other than to allow SoCal to service the loan. The holder notified SoCal that it was in violation of the loan's debt service and minimum total capital covenants for the third quarter 2008. The holder has waived their right to declare the loan in default pursuant to the above covenant violations.
11. | Investment Securities |
SoCal classifies as held-to-maturity those debt securities that the Company has the positive intent and ability to hold to maturity. All other debt and equity securities are classified as available-for-sale. Securities held-to-maturity are accounted for at cost and adjusted for amortization of premiums and accretion of discounts. Available-for-sale securities are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of shareholders’ equity. At each reporting date, held-to-maturity and available-for-sale securities are assessed to determine whether there is an other-than-temporary impairment. Such impairment, if any, is required to be recognized in current earnings rather than as a separate component of shareholders’ equity. Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the effective-yield method over the terms of the securities. For mortgage-backed securities (“MBS”), the amortization or accretion is based on estimated average lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received or losses realized on the underlying collateral of the securities.
Investment securities have been classified in the statement of condition according to management's intent. The carrying amounts and fair values of available-for-sale and held-to-maturity investment securities were as follows at the dates indicated (dollars in thousands):
September 30, 2008 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Market | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Available-for-Sale Securities | ||||||||||||||||
U.S. Government Agencies | $ | 1,638 | $ | ( 19 | ) | $ | 1,619 | |||||||||
States and Political Subdivisions | 6,250 | (646 | ) | 5,604 | ||||||||||||
Mortgage-Backed Securities | 1,987 | $ | 1 | (3 | ) | 1,985 | ||||||||||
Total available-for-sale securities | 9,875 | 1 | (668 | ) | 9,208 | |||||||||||
Held-to-Maturity Securities | ||||||||||||||||
Collateralized Mortgage Obligations | 21,113 | 735 | (318 | ) | 21,530 | |||||||||||
Total held-to-maturity securities | 21,113 | 735 | (318 | ) | 21,530 | |||||||||||
Total investment securities | $ | 30,988 | $ | 736 | $ | (986 | ) | $ | 30,738 | |||||||
F-10
December 31, 2007 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Market | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Available-for-Sale Securities | ||||||||||||||||
U.S. Government Agencies | $ | 4,028 | $ | - | $ | ( 2 | ) | $ | 4,026 | |||||||
Mortgage-Backed Securities | 4,741 | 19 | - | 4,760 | ||||||||||||
Total investment securities | $ | 8,769 | $ | 19 | $ | (2 | ) | $ | 8,786 |
As of September 30, 2008 and December 31, 2007, all investment securities were pledged to secure borrowings and for other purposes.
12. | Goodwill and Other Intangible Assets |
Goodwill resulted from the purchase of PBB and Spectrum Bank. Goodwill and other intangible assets deemed to have indefinite lives generated from purchase business combinations are not subject to amortization and are instead tested for impairment no less than annually under SFAS No. 142. The current year impairment test of goodwill was performed as of August 31, 2008 and resulted in a $33.3 million write-down of goodwill which is included in the loss for the period. See Note 15, Fair Value Measurements, for further discussion of the write-down.
13. | Other Real Estate Owned |
Other Real Estate Owned ("OREO") is real estate acquired through, or in lieu of, loan foreclosures that is expected to be sold and is recorded at its fair value less estimated costs to sell (fair value). The amount, if any, by which the recorded amount of the loan exceeds the fair value less estimated costs to sell are charged to the allowance for loan or lease losses at the time of foreclosure, if necessary. After foreclosure, valuations are periodically performed by management with any subsequent write-downs recorded as a valuation allowance and recognized in other operating expenses. Operating expenses of such properties, net of related income, are included in other expenses and gains and losses on their disposition are included in other income and other expenses, as applicable.
SoCal’s investment in OREO totaled $1.2 million at September 30, 2008. SoCal had no OREO at December 31, 2007.
14. | Pro forma financial information |
The September 30, 2008 consolidated financial statements include the accounts of Spectrum since February 1, 2008. The following supplemental proforma information discloses selected financial information for the three- and nine-month periods ended September 30, 2008 and 2007 as though the Spectrum merger had been completed as of the beginning of the period. The proforma information for the three- and nine-month periods ended September 30, 2007 combines Professional Business Bank, as the predecessor business to SoCal, and Spectrum. The unaudited proforma income for the three- and nine-month periods ended September 30, 2008 includes nonrecurring merger expenses incurred by Spectrum for cancellation of all outstanding options of Spectrum per the terms of the merger agreement, severance payments to Spectrum executives under change of control agreements and cash settlements of deferred compensation programs totaling $4.0 million, net of tax. Dollars are in thousands except per share data.
Three-month periods ended September 30, | Nine-month periods ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenue (net interest income plus non-interest income) | $ | 3,970 | $ | 4,787 | $ | 12,837 | $ | 14,071 | ||||||||
Net (loss) income | $ | (33,752 | ) | $ | 78 | $ | (38,817 | ) | $ | 581 | ||||||
Basic (loss) earnings per share | $ | (10.38 | ) | $ | 0.02 | $ | (12.36 | ) | $ | 0.18 | ||||||
Diluted (loss) earnings per share | $ | (10.38 | ) | $ | 0.02 | $ | (12.36 | ) | $ | 0.17 |
15. | Fair Value Measurements |
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. SoCal adopted SFAS No. 157 as of January 1, 2008 and the adoption did not have a material impact on its consolidated financial statements or results of operations. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
● Level 1 | Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
● Level 2 | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
● Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
F-11
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Assets
Securities
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain collateralized mortgage and debt obligations and certain high-yield debt securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. SoCal’s current available-for-sale portfolio does not have securities that are valued using Level 3 inputs as of September 30, 2008. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. SoCal’s evaluations are based on market data and SoCal employs combinations of these approaches for its valuation methods depending on the asset class.
Impaired Loans
SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. Fair value of impaired loans that are not collateral dependent is calculated based on the present value of future cash flows. For impaired loans that are collateral dependent, either a Level 2 or Level 3 valuation methodology is used. The fair value of impared loans that are not collateral dependent is measured using a Level 3 methodology.
Other Real Estate Owned
OREO is measured at fair value less cost to sell which is a Level 2 valuation methodology based on quoted prices for similiar assets or a Level 3 valuation methodology when an income approach is used. SoCal believes that the fair value component in its valuation follows the provisions of SFAS No. 157. Fair value of OREO at September 30, 2008 was determined by independent appraised values less estimated costs to sell.
Goodwill
Initiation of the goodwill analysis during the third quarter was prompted by recent and significant deterioration in financial institution traded market values, including several acquisition transactions at heavily discounted prices, and significant weakening in local market conditions that diminish future customer business activity expectations. The reduced fair value conclusion was derived through a valuation analysis that utilized an equal weighting of valuations based on comparable transactions and discounted cash flow analysis. Given the wide range of potential values indicated by the comparable transactions analysis and limited applicability to SoCal, it was determined that the comparable transaction average value analysis should receive a 50% weight. The discounted cash flow valuation was also assigned a 50% weight. Given the discounted cash flow's reliance on subjective assumptions, the assigned fair value is deemed to be a Level 3 valuation.
F-12
Assets Measured on a Recurring Basis
Assets measured at fair value on a recurring basis are summarized below (dollars in thousands):
Fair Value Measurements at September 30, 2008 Using | ||||||||||||||||
September 30, 2008 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
(in 000’s) | ||||||||||||||||
Assets: | ||||||||||||||||
Available-for-sale investment securities | $ | 9,208 | $ | — | $ | 9,208 | $ | — |
Assets measured at fair value on a non-recurring basis are summarized below (dollars in thousands):
Fair Value Measurements at September 30, 2008 Using | ||||||||||||||||
September 30, 2008 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
(in 000's) | ||||||||||||||||
Assets: | ||||||||||||||||
Impaired loans | $ | 1,916 | $ | — | $ | 1,916 | $ | — | ||||||||
OREO | $ | 1,218 | $ | — | $ | 1,218 | $ | — | ||||||||
Goodwill | $ | 23,990 | $ | — | $ | — | $ | 23,990 |
Impaired loans consist of collateral-dependent nonaccrual loans. A valuation allowance of $195 thousand is included in the allowance for loan losses for the impaired loans.
OREO consists of four properties consisting of three residential properties and one participation interest in residential unimproved lots. The properties were valued by independent appraisals, net of estimated selling costs.
During the third quarter 2008, in accordance with the provisions of SFAS No. 142, following the completion of an analysis of goodwill value, goodwill with a carrying amount of $57.3 million was written down to its implied fair value of $24.0 million. This resulted in an impairment charge of $33.3 million, which was included in the loss for the period.
F-13
Background
SoCal acquired Professional Business Bank on November 23, 2007 and Spectrum on January 31, 2008. Prior to November 23, 2007, SoCal had no significant operations. Accordingly, the discussion and results of operations and financial condition for the three- and nine-month periods ended September 30, 2008 are for SoCal. The results of operations and financial condition for the three- and nine-month periods ended September 30, 2007 are for Professional Business Bank only. Securities and Exchange Commission rules require the presentation of certain prior period comparative financial statements of the acquired business when the acquiring company succeeds to substantially all of the business and the registrant’s own operations prior to the acquisition appear insignificant relative to the business acquired.
Effective July 3, 2008, SoCal completed the merger of the Subsidiary Banks. By combining the two banks, SoCal expects to improve operational efficiency, reduce regulatory compliance costs, and consolidate vendor relationships. The merger of Spectrum Bank into Professional Business Bank was accounted for as a transfer of assets and liabilities between entities under common control and, accordingly, the assets and liabilities of Spectrum were transferred at their carrying amounts, similar to a pooling of interests. However, the existing Spectrum branches and certain customer-related activities will continue to be conducted using the Spectrum brand.
Forward-Looking Information
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 SoCal. These forward looking statements involve risks and uncertainties, including the risks and uncertainties described in our annual report on Form 10-KSB in the discussion under the caption, “Business - Factors That May Affect Future Operating Results,” which was filed with the Securities and Exchange Commission on March 31, 2008. There can be no assurance that future developments affecting SoCal will be the same as those anticipated by management, and actual results may differ from those projected in the forward-looking statements. Statements regarding policies and procedures are not intended, and should not be interpreted to mean, that such policies and procedures will not be amended, modified or repealed at any time in the future.
Critical Accounting Policies
This discussion and analysis is based upon SoCal’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires SoCal’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingencies.
Our accounting policies are integral to understanding the results reported. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. SoCal has established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of the significant accounting policies involving significant management valuation judgments.
Allowance for Loan Losses. The allowance for loan losses represents management’s best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The provision for loan losses is determined based on management’s assessment of several factors: reviews and evaluation of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experiences, the level of classified and nonperforming loans and the results of regulatory examinations. Refer to “Provision for Loan Losses” on page 9 for a full discussion of Socal’s methodology of assessing the adequacy of the allowance for loan losses.
Loans are considered impaired if, based on current information and events, it is probable that SoCal will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. In measuring the fair value of the collateral, management uses assumptions and methodologies consistent with those that would be utilized by unrelated third parties.
3
Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses and the associated provision for loan losses.
The Bank has an analysis of its portfolio performed on a quarterly basis utilizing a model which calculates an estimated reserve based upon loan type, collateral type, and geographic location. The model estimates the odds of payment default, and the potential charge-off rate given default. The model is fine tuned for Joint Policy Statement factors and actual loan performance on a loan by loan basis. Underlying factors for geography, collateral type and overall payment history and losses given default are adjusted quarterly from call report data gathered from approximately 1,100 smaller community banks in the Western United States.
Goodwill and Other Intangibles. Net assets of entities acquired in purchase transactions are recorded at fair value at the date of acquisition. The historical cost basis of individual assets and liabilities are adjusted to reflect their fair value. Identified intangibles are amortized on a straight-line basis over the period benefited. Goodwill is not amortized for book purposes, although it is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment. The impairment test is performed in two phases. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed. That additional procedure compares the implied fair value of the reporting unit’s goodwill (as defined in SFAS No. 142, Goodwill and Other Intangible Assets) with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. During the third quarter of 2008, SoCal engaged a third party to provide an independent impairment analysis of goodwill in accordance with the requirements of SFAS 142. The fair value of SoCal was determined using valuation approaches typically applied in business combinations involving financial institutions: (1) comparable transactions approach, (2) discounted cash flow approach and (3) control permium approach. The process of evaluating goodwill for impairment requires assumptions and estimates including market trends and multiples of companies engaged in similar businesses. If any of those assumptions change over time, the estimated value assigned to goodwill could change significantly.
The independent analysis resulted in a non-cash charge of $33.3 million for the write-down of goodwill. The charge does not affect our tangible equity or our liquidity position. Regulatory capital ratios are unaffected by the write-down of goodwill, with all ratios remaining in excess of the “well-capitalized” designation for Professional Business Bank. As goodwill is not tax deductible at the time of acquisition, there is no corresponding tax impact for the write-down of this asset. This charge is not expected to impact ongoing operations.
Other intangible assets subject to amortization are also evaluated for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss will be recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible is considered “not recoverable” if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.
Fair Value. Effective January 1, 2008, SoCal adopted SFAS No. 157, Fair Value Measurements, which among other things, requires enhanced disclosures about financial instruments carried at fair value. SFAS No. 157 establishes a hierarchical disclosure framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.
Overview
The following discussion reviews and analyzes the operating results of SoCal for the for the three- and nine-month periods ended September 30, 2008 and PBB for the three- and nine-month periods ended September 30, 2007 and the financial condition of SoCal at September 30, 2008 and December 31, 2007. It should be read in conjunction with SoCal’s Annual Report to Shareholders on Form 10-K and the unaudited financial statements and the other financial data presented elsewhere in this quarterly report.
SoCal recorded a net loss of $35.0 million, ($11.75) basic and diluted loss per share, for the nine-month period ended September 30, 2008 as compared to PBB’s $303 thousand loss, ($0.15) basic and diluted loss per share, for the nine-month period ended September 30, 2007. The increased loss was primarily due to the $33.3 million non-cash write-down of goodwill discussed above along with a $5.9 million increase in other non-interest expenses and a $796 thousand increase in provision for loan losses, partially offset by a $3.2 million increase in net interest income, a $546 thousand increase in non-interest income and a $1.5 million decrease in income tax expense.
SoCal recorded a net loss of $33.8 million, ($10.38) basic and diluted loss per share, for the three-month period ended September 30, 2008 as compared to PBB’s $150 thousand loss, ($0.08) basic and diluted loss per share, for the three-month period ended September 30, 2007. The increased loss was primarily due to the $33.3 million non-cash write-down of goodwill along with a $2.2 million increase in other non-interest expenses, partially offset by a $735 thousand increase in net interest income, a $727 thousand decrease to the provision for loan losses, a $92 thousand increase in non-interest income, and an increase in income tax benefit of $338 thousand.
Total assets increased from $270.1 million at December 31, 2007 to $395.0 million at September 30, 2008, an increase of $124.9 million, or 46.2% Net loans grew from $210.3 million at December 31, 2007 to $303.4 million at September 30, 2008, an increase of $93.1 million, or 44.3%, which includes approximately 13% of organic loan growth. Deposits grew from $194.0 million at December 31, 2007 to $321.1 million at September 30, 2008, an increase of $127.0 million, or 65.5%. The primary reason for the increase in assets, loans and deposits relates to the acquisition of Spectrum, which contributed $187.4 million in assets, $80.9 million in loans and $142.0 million in deposits at the acquisition date.
Total assets decreased from $458.9 million at June 30, 2008 to $395.0 million at September 30, 2008, a decrease of $63.9 million, or 13.9%. The primary reasons for the decrease in total assets are the $33.3 million write-down of goodwill during the third quarter of 2008 along with a reduction in Fed Funds Sold of $28.1 million. Total deposits decreased from $342.7 million at June 30, 2008 to $321.1 million at September 30, 2008, a decrease of $21.6 million, or 6.3%. Customer deposit decreases of $45.6 million, primarily time deposits, were partially offset by a $24.0 million increase in brokered deposits.
4
Set forth below are certain key financial performance ratios for the periods indicated:
For the nine-month period ended September 30, | ||||||
2008 | 2007 | |||||
Return on Average Assets (1) | (10.93%) | (0.21%) | ||||
Return on Average Equity (1) | (62.39%) | (2.01%) | ||||
(1) Annualized |
Net Interest Income
SoCal’s interest income was $5.8 million and $17.5 million for the three- and nine-month periods ended September 30, 2008 as compared to PBB’s $4.3 million and $11.9 million for the three- and nine-month periods ended September 30, 2007. SoCal’s interest expense was $2.0 million and $6.1 million for the three- and nine-month periods ended September 30, 2008 as compared to PBB’s $1.3 million and $3.7 million for the three- and nine-month periods ended September 30, 2007. SoCal’s net interest income was $3.8 million and $11.4 million for the three- and nine-month periods ended September 30, 2008 as compared to PBB’s $3.1 million and $8.2 million for the three- and nine-month periods ended September 30, 2007. The increase in interest income was primarily due to the $146.9 million and $165.2 million increase in SoCal’s average interest-earning assets for the three- and nine-month periods ended September 30, 2008 as compared to PBB’s interest-earning assets for the same periods in 2007. The increase in interest expense was due to a $148.3 million and $133.6 million increase in SoCal’s average interest-bearing liabilities. The decrease in net interest margin from 5.84% for the nine-month period ended September 30, 2007 to 4.39% for the nine-month period ended September 30, 2008 is primarily due to declines in market interest rates, additional interest costs incurred on holding company debt and Spectrum’s lower net interest margin as compared to that of PBB, which decreased the overall net interest margin on the combined banks.
The increase in SoCal’s average interest-earning assets and average interest-bearing liabilities as compared to PBB’s average interest-earning assets and average interest-bearing liabilities for the same period in the prior year is primarily the result of the acquisition of Spectrum. Average loans increased $136.8 million, or 84.5%, to $298.8 million at September 30, 2008 compared to $161.9 million at September 30, 2007. Average interest-bearing deposits increased $104.3 million, or 94.1%, to $215.3 million at September 30, 2008 compared to $111.0 million at September 30, 2007.
The weighted average yield on interest-earning assets decreased as a result of a decline in market interest rates. The prime rate decreased seven times, totaling a reduction of 325 basis points, from September 2007 through September 2008. Variable rate loans, with rates primarily indexed to the prime rate, comprise approximately 73% of the loan portfolio. The decline in the prime rate impacted the loan portfolio immediately and to a greater extent than its impact on the interest-bearing liabilities generally due to a lag in deposit repricing as compared to loans.
The following table presents the weighted average yield on each specified category of interest-earning assets, the weighted average rate paid on each specified category of interest-bearing liabilities, and the resulting interest rate spread and net interest margin for the periods indicated. Loan fees, which are not material, are included in interest earned on loans (dollars in thousands).
5
Three-month period ended September 30, | ||||||||||||||||||||||||
Belvedere SoCal | Professional Business Bank | |||||||||||||||||||||||
2008 | 2007 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Interest | Yield or | Interest | Yield or | |||||||||||||||||||||
Average | Earned | Rate | Average | Earned | Rate | |||||||||||||||||||
Balance | or Paid | Paid | Balance | or Paid | Paid | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-Earning Assets: | ||||||||||||||||||||||||
Investment Securities-Taxable | $ | 17,771 | $ | 233 | 5.22% | $ | 13,454 | $ | 172 | 5.07% | ||||||||||||||
Investment Securities-Nontaxable | 7,970 | 84 | 6.35% | - | - | - | ||||||||||||||||||
Interest-Bearing Deposits in Other | ||||||||||||||||||||||||
Financial Institutions | 554 | 6 | 4.31% | 100 | 1 | 3.97% | ||||||||||||||||||
Federal Funds Sold | 10,139 | 49 | 1.92% | 2,296 | 30 | 5.18% | ||||||||||||||||||
Loans | 307,827 | 5,396 | 6.97% | 181,542 | 4,106 | 8.97% | ||||||||||||||||||
Total Interest-Earning Assets | 344,261 | 5,768 | 6.67% | 197,392 | 4,309 | 8.66% | ||||||||||||||||||
Noninterest-Earning Assets: | ||||||||||||||||||||||||
Cash and Due from Banks | 8,501 | 4,158 | ||||||||||||||||||||||
Premises and Equipment | 5,158 | 488 | ||||||||||||||||||||||
Goodwill | 56,686 | - | ||||||||||||||||||||||
Other Intangible Assets, Net | 2,763 | - | ||||||||||||||||||||||
Accrued Interest and Other Assets | 13,325 | 4,070 | ||||||||||||||||||||||
Allowance for Loan Losses | (5,793 | ) | (2,614 | ) | ||||||||||||||||||||
Total Assets | $ | 424,901 | $ | 203,494 | ||||||||||||||||||||
Liabilities and Shareholders' Equity | ||||||||||||||||||||||||
Interest-Bearing Liabilities: | ||||||||||||||||||||||||
Money Market, Savings and NOW | $ | 88,770 | 310 | 1.39% | $ | 74,449 | 608 | 3.24% | ||||||||||||||||
Time Deposits under $100,000 | 71,336 | 545 | 3.04% | 18,378 | 250 | 5.40% | ||||||||||||||||||
Time Deposits of $100,000 or More | 59,381 | 602 | 4.03% | 15,166 | 198 | 5.18% | ||||||||||||||||||
Short-Term Borrowings | 2,147 | 4 | 0.74% | 15,088 | 195 | 5.13% | ||||||||||||||||||
Note Payable | 7,979 | 387 | 6.28% | - | - | - | ||||||||||||||||||
Subordinated Debentures | 15,445 | 126 | 9.97% | - | - | - | ||||||||||||||||||
Total Interest-Bearing Liabilities | 245,058 | 1,974 | 3.20% | 123,081 | 1,251 | 4.08% | ||||||||||||||||||
Noninterest-Bearing Liabilities: | ||||||||||||||||||||||||
Demand Deposits | 100,306 | 58,803 | ||||||||||||||||||||||
Other Liabilities | 3,982 | 1,415 | ||||||||||||||||||||||
Shareholders' Equity | 75,555 | 20,195 | ||||||||||||||||||||||
Total Liabilities and Shareholders' Equity | $ | 424,901 | $ | 203,494 | ||||||||||||||||||||
Net Interest Income | $ | 3,794 | $ | 3,058 | ||||||||||||||||||||
Net Yield on Interest-Earning | ||||||||||||||||||||||||
Assets (Net Interest Margin) | 4.38% | 6.15% |
Yields are computed on a tax equivalent basis resulting in an adjustment of $43 thousand to interest earned on municipal bonds for the three-month period ended September 30, 2008. There were no municipal bonds held during the three-month period ended September 30, 2007.
6
Nine-month period ended September 30, | ||||||||||||||||||||||||
Belvedere SoCal 2008 | Professional Business Bank 2007 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Interest | Yield or | Interest | Yield or | |||||||||||||||||||||
Average | Earned | Rate | Average | Earned | Rate | |||||||||||||||||||
Balance | or Paid | Paid | Balance | or Paid | Paid | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-Earning Assets: | ||||||||||||||||||||||||
Investment Securities-Taxable | $ | 23,210 | $ | 767 | 4.41% | $ | 14,146 | $ | 528 | 4.99% | ||||||||||||||
Investment Securities-Nontaxable | 7,663 | 235 | 6.21% | - | - | - | ||||||||||||||||||
Interest-Bearing Deposits in Other Financial Institutions | 1,067 | 38 | 4.76% | 2,668 | 107 | 5.36% | ||||||||||||||||||
Federal Funds Sold | 17,141 | 291 | 2.27% | 8,874 | 347 | 5.23% | ||||||||||||||||||
Loans | 298,777 | 16,212 | 7.25% | 161,941 | 10,879 | 8.98% | ||||||||||||||||||
Total Interest-Earning Assets | 347,858 | 17,543 | 6.74% | 187,629 | 11,861 | 8.45% | ||||||||||||||||||
Noninterest-Earning Assets: | ||||||||||||||||||||||||
Cash and Due from Banks | 8,490 | 5,128 | ||||||||||||||||||||||
Premises and Equipment | 4,690 | 453 | ||||||||||||||||||||||
Goodwill | 53,874 | - | ||||||||||||||||||||||
Other Intangibles Assets, Net | 2,818 | - | ||||||||||||||||||||||
Accrued Interest and Other Assets | 15,923 | 3,488 | ||||||||||||||||||||||
Allowance for Loan Losses | (5,874 | ) | (2,269 | ) | ||||||||||||||||||||
Total Assets | $ | 427,779 | $ | 194,429 |
Liabilities and Shareholders' Equity | ||||||||||||||||||||||||
Interest-Bearing Liabilities: | ||||||||||||||||||||||||
Money Market, Savings and NOW | $ | 82,145 | 856 | 1.39% | $ | 78,596 | 2,106 | 3.58% | ||||||||||||||||
Time Deposits under $100,000 | 71,928 | 2,003 | 3.72% | 20,262 | 823 | 5.43% | ||||||||||||||||||
Time Deposits of $100,000 or More | 61,250 | 1,641 | 3.58% | 12,101 | 461 | 5.09% | ||||||||||||||||||
Short-Term Borrowings | 14,686 | 308 | 2.80% | 7,218 | 270 | 5.00% | ||||||||||||||||||
Note Payable | 7,124 | 263 | 4.93% | - | - | - | ||||||||||||||||||
Subordinated Debentures | 13,771 | 1,032 | 10.01% | - | - | - | ||||||||||||||||||
Total Interest-Bearing Liabilities | 250,904 | 6,103 | 3.25% | 118,177 | 3,660 | 4.14% | ||||||||||||||||||
Noninterest-Bearing Liabilities: | ||||||||||||||||||||||||
Demand Deposits | 97,487 | 54,939 | ||||||||||||||||||||||
Other Liabilities | 4,437 | 1,154 | ||||||||||||||||||||||
Shareholders' Equity | 74,951 | 20,159 | ||||||||||||||||||||||
Total Liabilities and Shareholders' Equity | $ | 427,779 | $ | 194,429 | ||||||||||||||||||||
Net Interest Income | $ | 11,440 | $ | 8,201 | ||||||||||||||||||||
Net Yield on Interest-Earning | ||||||||||||||||||||||||
Assets (Net Interest Margin) | 4.39% | 5.84% |
Yields are computed on a tax equivalent basis resulting in an adjustment of $121 thousand to interest earned on municipal bonds for the nine-month period ended September 30, 2008. There were no municipal bonds held during the nine-month period ended September 30, 2007.
7
Rate and Volume Analysis
The following tables show the increase or decrease in interest income, interest expense and net interest income resulting from the changes in rates and volumes for the periods indicated (dollars in thousands):
Three Months Ended September 30, 2008 | ||||||||||||
versus | ||||||||||||
Three Months Ended September30, 2007 | ||||||||||||
Increase (Decrease) Due | ||||||||||||
To Change in | ||||||||||||
Volume | Rate | Total | ||||||||||
Interest-Earning Assets: | ||||||||||||
Investment Securities-Taxable | $ | 56 | $ | 5 | $ | 61 | ||||||
Investment Securities-Nontaxable | 84 | - | 84 | |||||||||
Certificates of Deposit | 4 | 1 | 5 | |||||||||
Federal Funds Sold | 23 | (4 | ) | 19 | ||||||||
Loans | 1,898 | (608 | ) | 1,290 | ||||||||
Total Interest Income | 2,065 | (606 | ) | 1,459 | ||||||||
Interest-Bearing Liabilities: | ||||||||||||
Money Market, Savings and NOW | 615 | (913 | ) | (298 | ) | |||||||
Time Deposits under $100,000 | 319 | (24 | ) | 295 | ||||||||
Time Deposits of $100,000 or More | 437 | (33 | ) | 404 | ||||||||
Short-Term Borrowings | (96 | ) | ( 95 | ) | (191 | ) | ||||||
Subordinated Debentures | 387 | - | 387 | |||||||||
Note Payable | 126 | - | 126 | |||||||||
Total Interest Expense | 1,788 | (1,065 | ) | 723 | ||||||||
Net Interest Income | $ | 277 | $ | 459 | $ | 736 | ||||||
Nine Months Ended September 30, 2008 | ||||||||||||
versus | ||||||||||||
Nine Months Ended September 30, 2007 | ||||||||||||
Increase (Decrease) Due | ||||||||||||
To Change in | ||||||||||||
Volume | Rate | Total | ||||||||||
Interest-Earning Assets: | ||||||||||||
Investment Securities-Taxable | $ | 305 | $ | (66 | ) | $ | 239 | |||||
Investment Securities-Nontaxable | 235 | - | 235 | |||||||||
Certificates of Deposit | (58 | ) | (11 | ) | (69 | ) | ||||||
Federal Funds Sold | 209 | (265 | ) | (56 | ) | |||||||
Loans | 7,753 | (2,420 | ) | 5,333 | ||||||||
Total Interest Income | 8,444 | (2,762 | ) | 5,682 | ||||||||
Interest-Bearing Liabilities: | ||||||||||||
Money Market, Savings and NOW | 91 | (1,341 | ) | (1,250 | ) | |||||||
Time Deposits under $100,000 | 1,511 | (331 | ) | 1,180 | ||||||||
Time Deposits of $100,000 or More | 1,355 | (175 | ) | 1,180 | ||||||||
Short-Term Borrowings | 194 | (156 | ) | 38 | ||||||||
Subordinated Debentures | 1,032 | - | 1,032 | |||||||||
Note Payable | 263 | - | 263 | |||||||||
Total Interest Expense | 4,446 | (2,003 | ) | 2,443 | ||||||||
Net Interest Income | $ | 3,998 | $ | (759 | ) | $ | 3,239 |
8
Provision for Loan Losses
SoCal made provisions for loan losses of $256 thousand and $2.3 million for the three- and nine-month periods ended September 30, 2008 and Professional Business Bank made provisions of $983 thousand and $1.5 million for the three- and nine-month periods ended September 30, 2007, respectively. The increase year over year reflects SoCal’s assessment of the overall adequacy of the allowance for loan losses considering the $1.8 million charge-off of one real estate construction loan along with an increase in nonperforming loans.
During the second quarter, additional provision was recorded to replenish the allowance for loan losses after a $1.8 million charge-off on one real estate construction participation loan. The loan was classified as impaired at March 31, 2008 with a $510 thousand specific reserve pending an updated appraisal from the lead bank. The appraisal received during the second quarter indicated additional reserves were required. Management recorded a charge-off of the $1.8 million impairment based on the appraised value, reducing the loan balance to $520 thousand. The loan remained on nonaccrual status until being transferred to OREO during the third quarter.
Management believes that the allowance for loan losses is adequate. Quarterly detailed reviews are performed by management to identify the risks inherent in the loan portfolio, assess the overall quality of the loan portfolio and to determine the adequacy of the allowance for loan losses and the related provision for loan losses to be charged to expense. These systematic reviews follow the methodology set forth by the FDIC in its 2006 policy statement on the allowance for loan losses.
Management has adopted a methodology designed by a third-party to prepare the quarterly provision for loan loss calculations. The methodology estimates the expected loss rates based on a two-factor approach. The first factor is based on the actual payment default rate in the loan portfolio. For loan types that have not generated an actual payment default rate, a rate is applied based on industry experience for such loans by type and geographic location. The second factor is based on the rate of loss as determined by dividing the expected net charge-off of defaulted loans, with defaulted loans being defined as loans that have 30 days or greater payment delinquency plus nonaccrual and gross loans charged-off, by total loans in each group. This rate reflects industry experience as determined by state and loan type. Taken together, the two factors produce the expected loss rate.
The calculation is applied to outstanding loan balances, including participation loans, and expected contingent funding of commitments to fund as of the measurement date. Expected losses on loans identified as specifically impaired are excluded from the above measurements, as the provision for such loans is based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or based on the fair value of collateral for collateral-dependent loans and is included as a separate component in calculating the required provision for loan losses.
SoCal has also elected to take external, subjective (so-called qualitative) factors into consideration when assessing the adequacy of the allowance for loan losses. These qualitative factors take into account and weight by risk, among other things, the growth and nature of the loan portfolio, concentration of credits, lending policies, economic trends, competition and legal and regulatory requirements. The total qualitative reserve requirement is determined by applying the risk weights of the qualitative factors to the total amount of loans outstanding and is included as the third component in the calculation.
The credit quality of our loans will be influenced by underlying trends in the economic cycle, particularly in Southern California, and other factors, which are beyond management’s control. Accordingly, no assurance can be given that we will not sustain loan losses that in any particular period will be sizable in relation to the allowance. Additionally, subsequent evaluation of the loan portfolio by us and by our regulators, in light of factors then prevailing, may require increases in the allowance through charges to the provision for loan losses.
Non-Interest Income
Non-interest income consists primarily of service charges on deposit accounts. Non-interest income for SoCal was $176 thousand and $866 thousand for the three- and nine-month periods ended September 30, 2008. Non-interest income for Professional Business Bank was $83 thousand and $320 thousand for the three- and nine-month periods ended September 30, 2007. Virtually all of the increase is attributable to the acquisition of Spectrum’s deposit base. During the three-month period ended September 30, 2008, losses on sales of available-for-sale investment securities totaling $116 thousand were included in non-interest income. There were no sales of investment securities during the first nine months of 2007.
9
Non-Interest Expense
Three-month period ended September 30, | Nine-month period ended September 30, | |||||||||||||||||||||||
Belvedere SoCal 2008 | Professional Business Bank 2007 | Percent Change | Belvedere SoCal 2008 | Professional Business Bank 2007 | Percent Change | |||||||||||||||||||
Salaries and employee benefits | $ | 2,161,301 | $ | 1,316,074 | 64.2% | $ | 6,782,574 | $ | 4,167,056 | 62.8% | ||||||||||||||
Occupancy and equipment | 369,910 | 176,762 | 109.3% | 1,084,985 | 496,718 | 118.4% | ||||||||||||||||||
Professional fees | 743,872 | 298,962 | 148.8% | 1,845,512 | 924,943 | 99.5% | ||||||||||||||||||
Data processing | 342,686 | 124,316 | 175.7% | 1,000,316 | 421,296 | 137.4% | ||||||||||||||||||
Marketing and business promotion | 35,715 | 38,490 | (7.2% | ) | 149,010 | 102,834 | 44.9% | |||||||||||||||||
Office and administrative expenses | 241,645 | 194,415 | 24.3% | 734,605 | 579,758 | 26.7% | ||||||||||||||||||
Write-down of goodwill | 33,301,000 | - | 100.0% | 33,301,000 | - | 100.0% | ||||||||||||||||||
Other expenses | 623,598 | 175,128 | 256.1% | 1,452,607 | 506,798 | 186.6% | ||||||||||||||||||
Total | $ | 37,819,727 | $ | 2,324,147 | 1527.8% | $ | 46,350,609 | $ | 7,199,403 | 543.8% |
Salary and employee benefits increased $845 thousand, or 64.2%, and $2.6 million, or 62.8%, for the three-and nine-month periods ended September 30, 2008 compared to the same periods in 2007. Virtually all of the increase related to the addition of 33 full-time and two part-time Spectrum employees. The remainder of the increase was the result of increased stock-based compensation costs, salary adjustments and other employee benefits.
Occupancy and equipment expenses increased $193 thousand, or 109.3%, and $588 thousand, or 118.4%, for the three- and nine-month periods ended September 30, 2008. The increase was primarily due to the acquisition of Spectrum, which added two branch offices and one administrative office to the existing branches of Professional Business Bank.
Professional fees increased $445 thousand, or 148.8%, and $921 thousand, or 99.5%, for the three- and nine-month periods ended September 30, 2008 due to professional fees incurred by Spectrum, Sarbanes-Oxley Act of 2002 implementation costs and legal, accounting and audit fees incurred by the holding company.
Data processing expenses increased $218 thousand, or 175.7%, and $579 thousand, or 137.4%, for the three- and nine-month periods ended September 30, 2008 due to system conversion costs and the increased transaction volume subsequent to the acquisition of Spectrum.
Marketing and business promotion expenses decreased $3 thousand, or 7.2% as a result of consolidating advertising for Professional Business Bank and Spectrum. Marketing and business promotion costs increased $14 thousand, or 14.2%, for the nine-month periods ended September 30, 2008 compared to the same period in 2007 due to costs incurred by the holding company related to the processing and publication of public filings and marketing costs incurred by Spectrum.
Office and administrative expenses increased $47 thousand, or 24.3%, and $155 thousand, or 26.7%, for the three- and nine-month periods ended September 30, 2008 due to administrative costs incurred by the combined banks.
As discussed previously, an independent analysis performed during the third quarter of 2008 resulted in a $33.3 million write-down of goodwill. See Notes to Consolidated Financial Statements, Notes 12 and 15, for a more detailed discussion.
Other expenses increased $448 thousand, or 256.1%, and $946 thousand, or 186.6%, for the three- and nine-month periods ended September 30, 2008 due to amortization of core deposit intangibles and expenses incurred by the holding company and Spectrum.
Income Tax (Benefit) Expense
The income tax benefit for the three- and nine-month periods ended September 30, 2008, respectively, totaled $354 thousand, an effective rate of 43.9%, and $1.4 million, an effective tax rate of 44.2%. The income tax benefit for the three-month period ended September 30, 2007 totaled $15 thousand, an effective rate of 9.3%. The income tax provision for the nine-month period ended September 30, 2007 totaled $105 thousand, an effective rate of 53.2%. The fluctuating effective rates (compared to a statutory rate of 41.2%) for the three- and nine-month periods ended September 30, 2007 were due to nondeductible merger-related costs and stock compensation costs incurred by PBB during these periods partially offset by interest income exclusions for certain loans in designated enterprise zones of California. No valuation allowance for deferred taxes is considered necessary based on the earnings history of the combined banks.
10
The income tax rates used in determining the income tax provision or benefit were 34.000% for federal income tax purposes and 7.115% for state income taxes, net of federal income tax benefit. Generally, the current tax expense is the result of applying the current tax rate to taxable income. The deferred portion is intended to account for the fact that (losses) income on which taxes are recognized differs from financial statement pre-tax (loss) income because some items of income and expense are recognized in different years for income tax purposes than in the financial statements. These recognition anomalies cause “temporary differences”; eventually, all taxes are paid and benefits realized.
Regulatory Capital
At September 30, 2008, Tier 1 capital of PBB, which is comprised of shareholders’ equity as modified by certain regulatory adjustments, was $34.8 million.
Under regulatory capital guidelines, capital adequacy is measured as a percentage of risk-adjusted assets in which risk percentages are applied to assets and certain off-balance-sheet items, such as unused loan commitments and standby letters of credit. The guidelines require that a portion of total capital be core, or Tier 1, capital consisting of common shareholders’ equity and non-cumulative perpetual preferred stock, less goodwill and certain deductions. Tier 2 capital consists of other elements, primarily some types of non-perpetual preferred stock, subordinated debt and mandatory convertible debt, plus the allowance for loan losses, subject to certain limitations. Under current regulatory guidelines, SoCal’s $15 million in trust preferred securities outstanding currently qualify as Tier 1 capital up to 25% of core capital. The guidelines also evaluate the leverage ratio, which is Tier 1 capital divided by average tangible assets. Beginning with the quarter ended March 31, 2009, amendments to the risk-based capital guidelines will become effective and the amount of trust preferred securities that may be included in Tier 1 capital may not exceed 25% of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability.
The following table sets forth the minimum regulatory requirements to qualify as being well-capitalized or adequately capitalized and the capital ratios for SoCal and PBB as of the date indicated (dollars in thousands):
September 30, 2008: | Actual | For Capital Adequacy Purposes | To Be Well Capitalized | ||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||
SoCal | |||||||||||||||||||
Total Capital (to risk-weighted assets) | $ | 33,446 | 9.65% | $ | 27,727 | 8% | N/A | N/A | |||||||||||
Tier 1 Capital (to risk-weighted assets) | 29,084 | 8.39% | 13,864 | 4% | N/A | N/A | |||||||||||||
Tier 1 Capital (to average assets) | 29,084 | 7.46% | 15,593 | 4% | N/A | N/A | |||||||||||||
Professional Business Bank | |||||||||||||||||||
Total Capital (to risk-weighted assets) | 39,171 | 11.27% | 27,808 | 8% | $ | 34,760 | 10% | ||||||||||||
Tier 1 Capital (to risk-weighted assets) | 34,809 | 10.01% | 13,904 | 4% | 20,856 | 6% | |||||||||||||
Tier 1 Capital (to average assets) | 34,809 | 8.91% | 15,633 | 4% | 19,542 | 5% |
The United States Treasury Department recently announced a Capital Purchase Program under the Troubled Asset Relief Program, the $700 billion relief program for financial institutions passed by Congress. Under the Capital Purchase Program, the Treasury department is offering to purchase senior preferred stock in qualifying financial institutions with an initial cumulative dividend rate of 5%, increasing to 9% after five years. Financial institutions participating in the program are required to issue warrants to purchase their common stock equal to 30% of the value of the preferred stock purchased by the Treasury Department.
SoCal has applied for $10.4 million of TARP Capital Purchase Program funding. Management reserves the right to modify or withdraw the application following release of program rules applicable to SoCal. Application approval is at the discretion of the Treasury Department, with consideration given to a concurrent recommendation from SoCal's primary federal regulator. Given that program rules for nonexchange traded applicants have not yet been issued, it is uncertain when SoCal's application will be processed and if approved, when funding may occur.
Deposits
Deposits grew from $194.0 million at December 31, 2007 to $321.1 million at September 30, 2008, an increase of $127.1 million, or 65.5%. The increase primarily related to the acquisition of Spectrum, which contributed $142.0 million in deposits.
Total demand deposits represented 30.3% of total deposits at September 30, 2008 compared to 37.8% at December 31, 2007. Total interest-bearing checking, money market and savings accounts as a group totaled 27.0% of total deposits at September 30, 2008 compared to 25.5% at December 31, 2007. Total certificates of deposit represented 42.5% of total deposits at September 30, 2008 compared to 36.7% at December 31, 2007.
At September 30, 2008 and December 31, 2007, the deposit portfolio consisted of $60.1 million and $20.0 million in brokered deposits, respectively, which are defined to include not only deposits received through deposit brokers, but also deposits bearing interest in excess of 75 basis points over market rates. Movement in brokered deposit balances reflect loan portfolio growth and shifts in other funding sources.
11
The following table sets forth the scheduled maturities of time deposits in denominations of $100,000 or greater at September 30, 2008 (dollars in thousands):
Three Months or less | $ | 15,502 | ||
Over Three Months to One Year | 24,790 | |||
Over One Year to Three Years | 5,199 | |||
Over Three Years | 4,196 | |||
Total | $ | 49,687 |
Liquidity and Borrowings
Liquidity management for banks requires that funds always be available to pay anticipated deposit withdrawals and maturing financial obligations promptly and fully in accordance with their terms. The balance of the funds required is generally provided by payments on loans, the acquisition of additional deposit liabilities and liquidation of assets.
Liquidity may be enhanced, if necessary, through short-term borrowings. As of September 30, 2008, SoCal had short-term borrowing facilities available totaling approximately $127.0 million. This consisted of $22.5 million in unsecured federal funds lines of credit with correspondent banks and approximately $104.5 million in a secured line of credit with the Federal Home Loan Bank.
SoCal has from time to time borrowed funds on a short-term basis from the Federal Home Loan Bank and other financial institutions. Outstanding borrowings totaled $6.0 million and $18.0 million at September 30, 2008 and December 31, 2007, respectively. The interest rate was 1.33% and 3.80% on these outstanding borrowings at September 30, 2008 and December 31, 2007, respectively. The average amounts outstanding totaled $17.5 million and $7.8 million and the weighted average interest rates were 2.10% and 4.90% for the nine-month period ended September 30, 2008 and the year ended December 31, 2007, respectively. The maximum outstanding at any month-end during the nine-month period ended September 30, 2008 and the year ended December 31, 2007 was $39.0 million and $18.0 million, respectively.
In March 2008, SoCal borrowed $8.0 million through a loan secured by the stock of the Subsidiary Bank. The loan bears interest at three-month LIBOR plus 3.1% (7.15% at September 30, 2008) with quarterly interest payments through September 2009, followed by principal and interest payments through the maturity date of March 2018. The promissory note and related loan agreements contain certain customary restrictions, including a potential limitation on the ability of the Subsidiary Bank to pay dividends to SoCal for purposes other than to allow SoCal to service the loan.
The holder notified SoCal that it was in violation of the loan's debt service and minimum total capital covenants for the third quarter 2008. The holder waived their right to declare the loan in default pursuant to the above covenant violations.
In January 2008, SoCal issued $15.5 in junior subordinated debentures to Belvedere SoCal Statutory Trust I, a Delaware business trust that was formed for the exclusive purpose of issuing trust preferred securities. The Trust purchased debentures with: (1) the proceeds of the sale of its common trust securities to SoCal for $464 thousand, and (2) certain shares of common stock in Spectrum Bank valued at $15 million that the Trust received from certain shareholders of Spectrum Bank in exchange for the Trust’s trust preferred securities. The junior subordinated debentures and trust preferred securities have generally identical terms, including that they mature in January 2038 are redeemable at SoCal’s option at par and require monthly interest payments at a rate of 10%. SoCal has unconditionally guaranteed certain distributions on, and certain payments on liquidation and redemption of, the trust preferred securities. The trust preferred securities and corresponding junior subordinated deferrable interest debentures contain provisions limiting our ability to declare and pay dividends on SoCal’s common stock in certain events.
Loan Portfolio
SoCal’s lending strategy is to attract small to mid-sized business borrowers by offering a variety of commercial and real estate loan products and a full range of other banking services coupled with highly personalized service. We offer commercial loans, lines of credit, certain consumer and installment loans, commercial and residential construction loans, as well as specialized products such as SBA and CalCAP loans.
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The following table sets forth the components of total net loans outstanding in each category at the date indicated (dollars in thousands):
September 30, 2008 | December 31, 2007 | |||||||||||||||
Amount | Percent of | Amount | Percent of | |||||||||||||
Outstanding | Total | Outstanding | Total | |||||||||||||
Loans | ||||||||||||||||
Commercial | $ | 80,252 | 25.9% | $ | 56,791 | 26.5% | ||||||||||
Real Estate - Construction | 41,930 | 13.6% | 37,566 | 17.5% | ||||||||||||
Real Estate - Other | 179,607 | 58.1% | 113,123 | 52.7% | ||||||||||||
Consumer | 7,563 | 2.4% | 7,127 | 3.3% | ||||||||||||
Total Loans | 309,352 | 100.0% | 214,607 | 100.0% | ||||||||||||
Net Deferred Loan Fees | (356 | ) | (273 | ) | ||||||||||||
Allowance for Loan Losses | (5,622 | ) | (4,077 | ) | ||||||||||||
Net Loans | $ | 303,374 | $ | 210,257 | ||||||||||||
Commitments | ||||||||||||||||
Letters of Credit | $ | 1,398 | $ | 769 | ||||||||||||
Undisbursed Loans and | ||||||||||||||||
Commitments to Grant Loans | 36,390 | 62,459 | ||||||||||||||
Total Commitments | $ | 37,788 | $ | 63,228 |
The following table sets forth participation loans purchased by loan type at the dates indicated:
September 30, 2008 | December 31, 2007 | |||||||||||||||
Amount in Thousands | Percent of Total | Amount in Thousands | Percent of Total | |||||||||||||
Commercial | $ | 1,125 | 3.8 | % | $ | 339 | 1.1 | % | ||||||||
Real Estate - Other | 17,634 | 59.1 | % | 21,717 | 72.6 | % | ||||||||||
Real Estate - Construction | 11,078 | 37.1 | % | 7,857 | 26.3 | % | ||||||||||
Total | $ | 29,837 | 100.0 | % | $ | 29,913 | 100.0 | % |
At September 30, 2008 one borrowing relationship totaling $3.5 million, of which $3.4 million is outstanding, was graded Substandard. Of the total outstanding balance, approximately $1.0 million was past due at September 30, 2008, of which $0.5 million is collateralized by deposits at PBB. The borrowers have filed suit against PBB and an advisory director alleging conspiracy to disparage the borrower. PBB denies the allegations and believes that the suit is unwarranted. PBB has currently declared the loans in default. While the loans are supported by various guarantors, PBB is currently unsure of what action, if any, will be required to collect from the guarantors. While management believes that the amount included in the allowance for loan losses at September 30, 2008 is adequate to cover any potential losses related to this relationship, there is no assurance that an additional provision will not be required in the future.
Nonperforming Assets
Nonaccrual loans are those loans for which SoCal has discontinued accrual of interest because reasonable doubt exists as to the full and timely collection of either principal or interest. Loans past due 90 days generally will continue to accrue interest when the loan is both well secured and in the process of collection. Other real estate owned consists of real properties that secured loans on which we have taken title in partial or complete satisfaction of the loan.
When a loan is placed on nonaccrual status, all interest previously accrued but uncollected is reversed against current period operating results. Income on such loans is then recognized only to the extent that cash is received and, where the ultimate collection of the carrying amount of the loan is probable, after giving consideration to the borrower’s current financial condition, historical repayment performance and other factors. Accrual of interest is resumed only when (i) principal and interest are brought fully current, and (ii) such loan is either considered, in management’s judgment, to be fully collectible or otherwise well secured and in the process of collection.
The following table sets forth information about non-performing assets at the dates indicated (dollars in thousands):
September 30, 2008 | December 31, 2007 | |||||||
Loans 90 Days Past Due and Still Accruing Interest | $ | 291 | $ | - | ||||
Nonaccrual Loans | 1,916 | 920 | ||||||
Total Nonperforming Loans | 2,207 | 920 | ||||||
Other Real Estate Owned | 1,218 | - | ||||||
Total Nonperforming Assets | $ | 3,425 | $ | 920 | ||||
Nonperforming Loans as a Percentage of Total Loans | 0.71% | 0.43% | ||||||
Allowance for Loan Losses as a Percentage of Nonperforming Loans | 254.73% | 443.15% | ||||||
Nonperforming Assets as a Percentage of Total Assets | 0.87% | 0.34% |
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The increase in nonperforming assets resulted primarily from placing several SBA loans, one real estate construction participation loan and one commercial loan on nonaccrual, as well as taking three properties in settlement of SBA loan obligations. The current economic slowdown has negatively affected the ability of borrowers to meet their payment obligations under the terms of the loans. Management continues to actively evaluate the entire loan portfolio as part of their internal credit review process.
The increase in nonperforming assets resulted primarily from placing several SBA loans, one real estate construction participation loan and one commercial loan on nonaccrual, as well as taking three properties in settlement of SBA loan obligations. The current economic slowdown has negatively affected the ability of borrowers to meet their payment obligations under the terms of the loans. Management continues to actively evaluate the entire loan portfolio as part of their internal credit review process.
Provision and Changes in Allowance for Loan Losses
The following table summarizes the allocation of the allowance for loan losses by loan type as of the indicated date and the percent of loans in each category to total loans (dollars in thousands):
September 30, 2008 | December 31, 2007 | |||||||||||||||
Amount | Loan Percent | Amount | Loan Percent | |||||||||||||
Commercial | $ | 2,731 | 25.9% | $ | 1,286 | 26.5% | ||||||||||
Real Estate - Construction | 1,190 | 13.6% | 1,163 | 17.5% | ||||||||||||
Real Estate - Other | 1,480 | 58.1% | 1,468 | 52.7% | ||||||||||||
Consumer | 221 | 2.4% | 152 | 3.3% | ||||||||||||
Unallocated | - | n/a | 8 | n/a | ||||||||||||
Total | $ | 5,622 | 100.0% | $ | 4,077 | 100.0% |
The following table presents an analysis of changes in the allowance for loan losses during the periods indicated (dollars in thousands):
Three-month period ended September 30, | Nine-month period ended September 30, | ||||||||||||||||
Belvedere SoCal | Professional Business Bank | Belvedere SoCal | Professional Business Bank | ||||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||||||
Balance at beginning of period | $ | 5,385 | $ | 2,404 | $ | 4,077 | $ | 1,869 | |||||||||
Allowance acquired at acquisition of Spectrum | 1,436 | ||||||||||||||||
Charge-offs: | |||||||||||||||||
Commercial | (19 | ) | - | (127 | ) | - | |||||||||||
Real Estate - Construction | - | - | (1,934 | ) | - | ||||||||||||
Real Estate - Other | - | - | - | - | |||||||||||||
Consumer | (26 | ) | (6 | ) | (186 | ) | (8 | ) | |||||||||
Total charge-offs | (45 | ) | (6 | ) | (2,247 | ) | (8 | ) | |||||||||
Recoveries: | |||||||||||||||||
Commercial | 26 | - | 26 | - | |||||||||||||
Real Estate - Construction | - | - | - | - | |||||||||||||
Real Estate - Other | - | - | - | - | |||||||||||||
Consumer | - | - | 14 | - | |||||||||||||
Total recoveries | 26 | - | 40 | - | |||||||||||||
Additional provision | 256 | 983 | 2,316 | 1,520 | |||||||||||||
Balance at end of period | $ | 5,622 | $ | 3,381 | $ | 5,622 | $ | 3,381 |
At September 30, 2008 and December 31, 2007, the allowance for loan losses was 1.82% and 1.90%, respectively, of total loans.
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Investment Portfolio
The following table summarizes the types, amounts, yields and maturities of investment securities held as of the dates indicated (dollars in thousands):
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Amortized | Market | Average | Amortized | Market | Average | |||||||||||||||||||
Cost | Value | Yield | Cost | Value | Yield | |||||||||||||||||||
Available-for-Sale Securities | ||||||||||||||||||||||||
U.S. Government Agencies | ||||||||||||||||||||||||
Within One Year | $ | - | $ | - | $ | 2,004 | $ | 2,002 | 4.24 | % | ||||||||||||||
One to Five Years | 1,638 | 1,618 | 6.20 | % | 2,024 | 2,024 | 5.42 | % | ||||||||||||||||
1,638 | 1,618 | 6.20 | % | 4,028 | 4,026 | 4.40 | % | |||||||||||||||||
States and Political Subdivisions | ||||||||||||||||||||||||
Over Ten Years | 6,250 | 5,604 | 4.47 | % | - | - | ||||||||||||||||||
6,250 | 5,604 | 4.47 | % | - | - | |||||||||||||||||||
Mortgage-Backed Securities | ||||||||||||||||||||||||
Within One Year | 1,453 | 1,454 | 3.81 | % | - | - | ||||||||||||||||||
One to Five Years | - | - | 1,230 | 1,231 | 4.16 | % | ||||||||||||||||||
After Five Years to Ten Years | 185 | 185 | 5.00 | % | 558 | 559 | 4.98 | % | ||||||||||||||||
Over Ten Years | 349 | 346 | 5.71 | % | 2,953 | 2,970 | 4.78 | % | ||||||||||||||||
1,987 | 1,985 | 4.26 | % | 4,741 | 4,760 | 4.84 | % | |||||||||||||||||
Subtotal available-for-sale securities | 9,875 | 9,207 | 4.73 | % | 8,769 | 8,786 | 4.56 | % | ||||||||||||||||
Held-to-Maturity Securities | ||||||||||||||||||||||||
Collateralized Mortgage Obligations | ||||||||||||||||||||||||
Over Ten Years | 21,113 | 21,530 | 5.31 | % | - | - | ||||||||||||||||||
21,113 | 21,530 | - | - | |||||||||||||||||||||
Total investment securities | $ | 30,988 | $ | 30,737 | 5.09 | % | $ | 8,769 | $ | 8,786 | 4.56 | % |
During September 2008 SoCal purchased $21.1 million of seasoned private label collateralized mortgage obligation (CMO) securities secured by prime and Alt A residential mortgages originated from 2003 to 2007,94% of which were originated prior to 2006. CMO purchase prices ranged from 75.8% to 93.3% of their par value and credit loss protection provided by subordinated tranches ranged from 4.02% to 12.10% of par. All purchased CMOs carry current AAA credit ratings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices and equity prices. SoCal's market risk arises primarily from interest rate risk inherent in its lending, investment and deposit taking activities. Management uses various asset/liability strategies to manage the re-pricing characteristics of SoCal's earning assets and funding liabilities to ensure that exposure to interest rate fluctuations is within its guidelines of acceptable risk-taking. Economic hedging strategies, including the terms and pricing of loans, investments, deposits and borrowings, are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.
Interest rate risk is addressed by the Asset Liability Management Committee (“ALCO”) which is comprised of executive officers of SoCal. The ALCO monitors interest rate risk by analyzing the potential impact on the net value of equity and net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages SoCal's balance sheet in part to maintain, within acceptable ranges, the potential impact on net value of equity and net interest income despite fluctuations in market interest rates.
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Exposure to interest rate risk is reviewed on at least a quarterly basis by the ALCO and the Board of Directors. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the change in net portfolio value in the event of hypothetical changes in interest rates. If potential changes to the net value of equity and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, management may adjust the asset and liability mix to bring interest rate risk within approved limits.
At September 30, 2008, SoCal's interest rate risk position was within the Board's established risk limits and moderately asset-sensitive.
Item 4. Controls and Procedures
Evaluation of Controls and Procedures
With the participation of management, including our Chief Executive Officer and Principal Accounting Officer, the effectiveness of SoCal's disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were evaluated as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, SoCal's Chief Executive Officer and Principal Accounting Officer have concluded that:
(a) information required to be disclosed by SoCal in this Quarterly Report on Form 10-Q and the other reports which SoCal files or submits under the Exchange Act would be accumulated and communicated to SoCal's management, including its Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure;
(b) information required to be disclosed by SoCal in this Quarterly Report on Form 10-Q and the other reports which SoCal files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
(c) SoCal's disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to SoCal and its consolidated subsidiary is made known to them, particularly during the period for which periodic reports, including this Quarterly Report on Form 10-Q, are being prepared.
Changes in Internal Control over Financial Reporting
There were no changes during the period covered by this Quarterly Report on Form 10-Q in SoCal's internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in legal proceedings as described in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007.
Item 1A. Risk Factors
Economic conditions continue to be disruptive, particularly in the financial sector. The cost and availability of funds may be adversely affected by relatively illiquid credit markets, and the demand for our products and services may decline as our borrowers and customers realize the impact of an economic slowdown. The severity and duration of these adverse conditions is unknown and may exacerbate our exposure to credit risk and adversely affect the ability of borrowers to perform under the terms of their lending arrangements with us. Accordingly, continued turbulence in the U.S. and international markets and economy may adversely affect our liquidity, financial condition, results of operations and profitability.
There can be no assurance that the actions of the U.S. government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets, or market response to those actions, will achieve the intended effect. Our business may not benefit from these actions and further government or market developments could adversely impact us.
We may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On November 11, 2008, it was announced that Alan Lane, the executive chairman of SoCal and its subsidiary, Professional Business Bank, will resign his duties as executive chairman of both entities effective December 5, 2008. Mr. Lane will remain as chairman of Professional Business Bank in a non-executive capacity at least through the end of 2008.
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Item 6. Exhibits
10.1 | First Amendment to Management Agreement |
10.2 | Baribault Employment Agreement |
10.3 | Warrant Agreement |
31.1 | Rule 15d-14(a) Certification by Chief Executive Officer |
31.2 | Rule 15d-14(a) Certification by Principal Accounting Officer |
32.1 | Section 1350 Certifications |
______________________
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
BELVEDERE SOCAL | |||
By: | /s/ WILLIAM BARIBAULT | ||
William Baribault President and Chief Executive Officer (Principal Executive Officer) | |||
Dated: November 19, 2008 | |||
BELVEDERE SOCAL | |||
By: | /s/ DANELLE THOMSEN | ||
Danelle Thomsen Manager of Financial Reporting (Principal Accounting Officer) | |||
Dated: November 19, 2008 |
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