Exhibit 99.4
`
FEDERAL DEPOSIT INSURANCE CORPORATION
550 17th Street NW, Washington, D.C. 20429
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
--------------
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
FDIC Certificate Number: 23266
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SAN JOAQUIN BANK
----------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3426405
---------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1301 - 17th Street, Bakersfield, California 93301
------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(661) 281-0300
--------------
(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 |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock: 3,474,212 shares outstanding at April 25, 2006
SAN JOAQUIN BANK
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006
INDEX
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets
March 31, 2006 and December 31, 2005....................... 1
Condensed Consolidated Statements of Income
Three month ended March 31, 2006 and 2005................. 2
Condensed Consolidated Statements of Cash Flows
Three month periods ended March 31, 2006 and 2005......... 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 22
ITEM 4. CONTROLS AND PROCEDURES..................................... 24
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 25
ITEM 1A. RISK FACTORS 25
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS . 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ............................ 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........ 25
ITEM 5. OTHER INFORMATION........................................... 25
ITEM 6. EXHIBITS ................................................... 26
This quarterly report on Form 10-Q contains forward-looking statements about San
Joaquin Bank for which it claims the protection of the safe harbor provisions
contained in the Private Securities Litigation Reform Act of 1995, including
statements with regard to descriptions of our plans or objectives for future
operations, products or services, and forecasts of our revenues, earnings or
other measures of economic performance. Forward-looking statements can be
identified by the fact that they do not relate strictly to historical or current
facts. They often include the words "believe," "expect," "anticipate," "intend,"
"plan," "estimate," or words of similar meaning, or future or conditional verbs
such as "will," "would," "should," "could," or "may."
Forward-looking statements, by their nature, are subject to risks and
uncertainties. A number of factors -- many of which are beyond our control --
could cause actual conditions, events or results to differ significantly from
those described in the forward-looking statements and reported results should
not be considered an indication of our future performance. Some of these risk
factors include, among others, certain credit, market, operational and liquidity
risks associated with our business and operations, changes in business and
economic conditions in California and nationally, rising interest rates,
potential acts of terrorism (which are beyond our control), volatility of rate
sensitive deposits and assets, value of real estate collateral securing many of
our loans, accounting estimates and judgments, compliance costs associated with
the company's internal control structure and procedures for financial reporting.
These risk factors are not exhaustive and additional factors that could have an
adverse effect on our business and financial performance are set forth under
"Risk Factors" and elsewhere in this quarterly report and in our annual report
on Form 10-K for the year ended December 31, 2005.
Forward-looking statements speak only as of the date they are made. We do not
undertake to update forward-looking statements to reflect circumstances or
events that occur after the date forward-looking statements are made. In
addition, past operating results are not necessarily indicative of the results
to be expected for future periods.
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAN JOAQUIN BANK AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2006 December 31, 2005
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(unaudited) (audited)
ASSETS
Cash and due from banks $ 56,914,000 $ 24,355,000
Interest-bearing deposits in banks 2,551,000 390,000
Federal funds sold - 1,700,000
---------------- ---------------
Total cash and cash equivalents 59,465,000 26,445,000
Investment securities:
Held to maturity 148,825,000 167,636,000
Available for sale 7,008,000 2,428,000
---------------- ---------------
Total Investment Securities 155,833,000 170,064,000
Loans, net of unearned income 439,814,000 407,400,000
Allowance for loan losses 7,319,000 7,003,000
---------------- ---------------
Net Loans 432,495,000 400,397,000
Premises and equipment 7,800,000 7,677,000
Investment in real estate 693,000 710,000
Interest receivable and other assets 21,704,000 21,721,000
---------------- ---------------
TOTAL ASSETS $ 677,990,000 $ 627,014,000
================ ===============
- --------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 183,037,000 $ 186,266,000
NOW 24,876,000 25,163,000
Money market 286,833,000 237,415,000
Savings 100,952,000 99,604,000
Time deposits and IRAs of $100,000 or more 21,125,000 20,209,000
Other time deposits and IRAs 6,793,000 6,876,000
---------------- ---------------
Total Deposits 623,616,000 575,533,000
Accrued interest payable and other
liabilities 6,663,000 5,394,000
Long-term debt and other borrowings 6,795,000 6,797,000
---------------- ---------------
Total Liabilities 637,074,000 587,724,000
---------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, no par value - 10,000,000
shares authorized; 3,474,212 and
3,435,896 issued and outstanding
at March 31, 2006 and December 31,
2005, respectively 10,221,000 9,970,000
Additional paid-in capital 26,000 -
Retained earnings 30,817,000 29,445,000
Accumulated other comprehensive income
(loss) (148,000) (125,000)
---------------- ---------------
Total Shareholders' Equity 40,916,000 39,290,000
---------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 677,990,000 $ 627,014,000
================ ===============
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See Notes to Unaudited Condensed Consolidated Financial Statements
1
SAN JOAQUIN BANK AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended March 31
-------------------------------
2006 2005
- --------------------------------------------------------------------------------
INTEREST INCOME
Loans (including fees) $ 8,537,000 $ 5,807,000
Investment securities 1,622,000 879,000
Fed funds sold and other interest-bearing
balances 277,000 156,000
------------ --------------
Total Interest Income 10,436,000 6,842,000
------------ --------------
INTEREST EXPENSE
Deposits 3,321,000 1,379,000
Long term debt and other borrowings 116,000 110,000
------------ --------------
Total Interest Expense 3,437,000 1,489,000
------------ --------------
Net Interest Income 6,999,000 5,353,000
Provision for loan losses 230,000 300,000
------------ --------------
Net Interest Income After Loan Loss Provision 6,769,000 5,053,000
------------ --------------
NONINTEREST INCOME
Service charges and fees on deposits 196,000 212,000
Other service charges and fees 292,000 315,000
Net gain on sale of fixed assets 4,000 -
Other 164,000 148,000
------------ --------------
Total Noninterest Income 656,000 675,000
------------ --------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,277,000 1,953,000
Occupancy 216,000 189,000
Furniture and equipment 246,000 375,000
Other 864,000 774,000
------------ --------------
Total Noninterest Expense 3,603,000 3,291,000
------------ --------------
Income Before Taxes 3,822,000 2,437,000
Income Taxes 1,616,000 1,036,000
------------ --------------
NET INCOME $ 2,206,000 $ 1,401,000
============ ==============
Basic Earnings per Share $ 0.64 $ 0.41
============ ==============
Diluted Earnings per Share $ 0.60 $ 0.38
============ ==============
See Notes to Unaudited Condensed Consolidated Financial Statements
2
SAN JOAQUIN BANK AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended March 31
-----------------------------
2006 2005
- -------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net Income $ 2,206,000 $ 1,401,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for possible loan losses 230,000 300,000
Depreciation and amortization 213,000 331,000
Share-based compensation expense 26,000 -
Gain on sale of assets (4,000) -
Deferred income taxes 121,000 115,000
Amortization of investment securities'
premiums and discounts 3,000 39,000
Increase in interest receivable and other
assets (95,000) (1,297,000)
Increase in accrued interest payable and
other liabilities 1,269,000 (405,000)
------------ ------------
Total adjustments 1,763,000 (917,000)
------------ ------------
Net Cash Provided by Operating
Activities 3,969,000 484,000
------------ ------------
Cash Flows From Investing Activities:
Proceeds from maturing and called
investment securities 25,096,000 15,305,000
Purchases of investment securities (10,900,000) (34,997,000)
Net increase in loans made to customers (32,328,000) 16,156,000
Net additions to premises and equipment (315,000) (158,000)
------------ ------------
Net Cash Applied to Investing
Activities (18,447,000) (3,694,000)
------------ ------------
Cash Flows From Financing Activities:
Net increase in demand deposits and
savings accounts 47,250,000 26,619,000
Net increase (decrease) in certificates
of deposit 833,000 1,925,000
Payments on long term debt and other
borrowings (2,000) (2,000)
Net increase (decrease) in fed funds
purchased and securities sold under
agreements to repurchase - (2,376,000)
Cash dividends paid (834,000) (755,000)
Proceeds from issuance of common stock 251,000 151,000
------------ ------------
Net Cash Provided by Financing
Activities 47,498,000 25,562,000
------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents 33,020,000 22,352,000
Cash and cash equivalents, at beginning of
period 26,445,000 24,409,000
------------ ------------
Cash and Cash Equivalents, at End of Period $ 59,465,000 $ 46,761,000
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits $ 3,306,000 $ 1,378,000
============ ============
Income taxes $ - $ 19,000
============ ============
See Notes to Unaudited Condensed Consolidated Financial Statements
3
SAN JOAQUIN BANK AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
as of March 31, 2006 (Unaudited)
NOTE 1. BASIS FOR PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and pursuant to the rules and regulations of the Federal
Deposit Insurance Corporation. In the opinion of Management, the unaudited
condensed consolidated financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly San Joaquin
Bank's (the "Company's") consolidated financial position at March 31, 2006 and
December 31, 2005, the results of operations for the three month periods ended
March 31, 2006 and 2005, and cash flows for the three month periods ended March
31, 2006 and 2005.
Certain disclosures normally presented in the notes to the annual consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. These interim
consolidated condensed financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto as well as other
information included in the Company's annual report on Form 10-K for the year
ended December 31, 2005. The results of operations for the three month periods
ended March 31, 2006 and 2005 may not necessarily be indicative of the operating
results for the full year.
In preparing such financial statements in connection with certain accounting
policies, Management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and revenues and expenses and
disclosure of contingent assets and liabilities. Material estimates that are
particularly susceptible to significant changes in the near term relate to the
allowance for loan losses.
Cash dividend - The Board of Directors declared a cash dividend of $0.24 per
share, which was payable to shareholders of record as of February 27, 2006.
There are 10,000,000 shares of common stock, no par value, authorized. There
were 3,474,212 and 3,435,896 shares issued and outstanding at March 31, 2006 and
December 31, 2005, respectively. The Company also has 5,000,000 authorized
shares of preferred stock, with 0 shares outstanding.
Certain prior period amounts have been reclassified to conform to the current
year presentation.
NOTE 2. STOCK COMPENSATION
Prior to January 1, 2006, the Company accounted for its stock-based awards using
the intrinsic value method in accordance with Accounting Principles Bulletin No.
25, Accounting for Stock Issued to Employees, and its related interpretations.
No compensation expense was recognized in the financial statements for employee
stock arrangements, as the Company's stock option plans provide for the issuance
of options at a price of no less than the fair market value at the date of the
grant. Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, requires the disclosure of pro forma net income
and earnings per share, had the Company adopted the fair value method of
accounting for stock-based compensation. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differs from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following assumptions: approximate expected volatility of 29.02%, risk
free interest rate of 4.34%, and expected life of 7.78 years for options granted
in the period ended March 31, 2005.
4
A summary of the pro forma effects to reported net income and earnings per
share, as if the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS No. 123,
for the three months ended March 31, 2005:
Three Months
Ended
March 31, 2005
--------------
Net Income, as reported $1,401,000
Add: Stock-based employee compensation
expense included in reported net income
net of related tax effects -
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net
of related tax effects (43,000)
--------------
Pro Forma Net Income $ 1,358,000
==============
Earnings per Share:
Basic -- as reported $ 0.41
Basic -- pro forma $ 0.40
Diluted -- as reported $ 0.38
Diluted -- pro forma $ 0.37
SFAS No. 123 was revised in December 2004 (SFAS 123R) to require that, effective
for periods beginning after June 15, 2005, the Company begin using the fair
market value method for valuing and accounting for stock options. On April 14,
2005, the Securities and Exchange Commission announced the adoption of a new
rule which delayed the implementation date for the new requirements until 2006.
Effective December 31, 2005, the Board of Directors of the Bank voted to
accelerate the vesting of all unvested options to acquire the Company's common
stock that were outstanding at that date (the "Acceleration"), except that no
options to non-employee directors were affected by the Acceleration. A total of
158,870 shares subject to option were impacted by the Acceleration. As a result
of the acceleration, and based upon estimated Black-Scholes value calculations,
the Company will not be required to recognize pretax compensation expense
related to the accelerated options of approximately $833,000. Had the
Acceleration not occurred, the Company would have had to recognize this expense
over the next five years when the Company became subject to the requirements of
SFAS No. 123R, "Share-Based Payment," on January 1, 2006. Under applicable
accounting guidance, the company did not record a charge related to the
Acceleration. As a result of the acceleration, certain options granted to the
Company's Chairman of the Board, Bruce Maclin, Chief Executive Officer, Bart
Hill, and two other highest paid executive officers (together the "Named
Executive Officers") exceeded the $100,000 limit established by IRS regulation
ss.1.422-4. As such, the excess options granted to the Named Executive Officers
must be treated as non-statutory options. All other terms and conditions of the
accelerated options remained unchanged as a result of the Acceleration.
Effective January 1, 2006, the Company adopted the new requirements of SFAS 123R
on a prospective basis. As a result of the implementation, net income before
taxes was approximately $26,000 lower than if it had continued to be accounted
for as share-based compensation under Opinion 25.
NOTE 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
5
loan commitments of approximately $202,055,000 and standby letters of credit of
approximately $6,838,000, at March 31, 2006. However, all such commitments will
not necessarily culminate in actual extensions of credit by the Company.
Approximately $102,374,000 of loan commitments outstanding at March 31, 2006
related to real estate construction loans that are expected to fund within the
next twelve months. The remaining commitments primarily relate to revolving
lines of credit or other real estate or commercial loans, and many of these
commitments are expected to expire without being drawn upon. Therefore, the
total commitments do not necessarily represent future cash requirements. Each
potential borrower and the necessary collateral are evaluated on an individual
basis. Collateral varies, but may include real property, bank deposits, debt or
equity securities or business assets.
Stand-by letters of credit are commitments written to guarantee the performance
of a customer to another party. These guarantees are issued primarily relating
to purchases of inventory by commercial customers and are typically short-term
in nature. Credit risk is similar to that involved in extending loan commitments
to customers and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such commitments are
collateralized.
NOTE 4. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if options or other contracts
to issue common stock were exercised and converted into common stock.
There was no difference in the numerator used in the calculation of basic
earnings per share and diluted earnings per share. The denominator used in the
calculation of basic earnings per share and diluted earnings per share for each
of the three month periods ended March 31 is reconciled as follows:
---------------------------------------------------------------------
Three Months Ended March 31
2006 2005
---------------------------------------------------------------------
Basic Earnings per Share:
Net Income $2,206,000 $1,401,000
Weighted average common shares
outstanding 3,464,000 3,422,000
---------------------------------------------------------------------
Basic Earnings per Share $0.64 $0.41
---------------------------------------------------------------------
Diluted Earnings per Share:
Net Income $2,206,000 $1,401,000
Weighted average common shares
outstanding 3,464,000 3,422,000
Dilutive effect of outstanding
options 239,000 222,000
---------------------------------------------------------------------
Weighted average common shares
outstanding - Diluted 3,703,000 3,644,000
---------------------------------------------------------------------
Diluted Earnings per Share $0.60 $0.38
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NOTE 5. COMPREHENSIVE INCOME
Three Months Ended March 31
2006 2005
- ----------------------------------------------------------------------
Net Income $2,206,000 $1,401,000
Other comprehensive income-net
unrealized holding (loss),
net of taxes (23,000) (15,000)
- ----------------------------------------------------------------------
Total comprehensive income $2,183,000 $1,386,000
- ----------------------------------------------------------------------
6
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income is equal to net income plus the change in "other
comprehensive income," as defined by SFAS No. 130. This statement requires the
Company to report income and (loss) from non-owner sources. The only components
of other comprehensive income currently applicable to the Company is the net
unrealized gain or loss on interest rate cap contracts and the net unrealized
gain or loss on available for sale investment securities. FASB Statement No. 130
requires that an entity: (a) classify items of other comprehensive income by
their nature in a financial statement, and (b) report the accumulated balance of
other comprehensive income separately from common stock and retained earnings in
the equity section of the balance sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our Unaudited
Condensed Consolidated Financial Statements and notes thereto appearing
elsewhere in this quarterly report on Form 10-Q.
This quarterly report on Form 10-Q contains forward-looking statements about San
Joaquin Bank for which it claims the protection of the safe harbor provisions
contained in the Private Securities Litigation Reform Act of 1995, including
statements with regard to descriptions of our plans or objectives for future
operations, products or services, and forecasts of our revenues, earnings or
other measures of economic performance. Forward-looking statements can be
identified by the fact that they do not relate strictly to historical or current
facts. They often include the words "believe," "expect," "anticipate," "intend,"
"plan," "estimate," or words of similar meaning, or future or conditional verbs
such as "will," "would," "should," "could," or "may."
Forward-looking statements, by their nature, are subject to risks and
uncertainties. A number of factors -- many of which are beyond our control --
could cause actual conditions, events or results to differ significantly from
those described in the forward-looking statements and reported results should
not be considered an indication of our future performance. Some of these risk
factors include, among others, certain credit, market, operational and liquidity
risks associated with our business and operations, changes in business and
economic conditions in California and nationally, rising interest rates,
potential acts of terrorism (which are beyond our control), volatility of rate
sensitive deposits and assets, value of real estate collateral securing many of
our loans, accounting estimates and judgments, compliance costs associated with
the company's internal control structure and procedures for financial reporting.
These risk factors are not exhaustive and additional factors that could have an
adverse effect on our business and financial performance are set forth under
"Risk Factors" and elsewhere in this quarterly report and in our annual report
on Form 10-K for the year ended December 31, 2005.
Forward-looking statements speak only as of the date they are made. We do not
undertake to update forward-looking statements to reflect circumstances or
events that occur after the date forward-looking statements are made. In
addition, past operating results are not necessarily indicative of the results
to be expected for future periods.
RECENT EVENTS
On April 25, 2006, the Board authorized Chairman of the Board, the Chief
Executive Officer and President or any Executive Vice President of the Company
to take any and all actions necessary to form a Bank Holding Company (the "BHC")
and enter into an Agreement and Plan of Reorganization (the "Reorganization
Agreement") and an Agreement of Merger (the "Merger Agreement") where the
Company would become a wholly owned subsidiary of the BHC (the
"Reorganization"). San Joaquin Bancorp, a California corporation, was
incorporated on May 4, 2006.
On May 9, 2006, the Company, San Joaquin Bancorp, and San Joaquin Reorganization
Corp. (the "Reorganization Corp."), a wholly owned subsidiary of San Joaquin
Bancorp, entered into the Reorganization Agreement where the Company would
become a wholly owned subsidiary of San Joaquin Bancorp.
Under the terms of the Reorganization Agreement and Merger Agreement (together
the "Agreements"), at the Effective Time, the Reorganization Corp. shall be
merged with and into the Bank, the separate existence of the Reorganization
7
Corp. will cease, and the Bank will continue as the surviving corporation (the
"Merger"). The Bank shall thereafter be a subsidiary of the San Joaquin Bancorp,
and operations shall continue under the name "San Joaquin Bank."
In accordance with the terms of the Agreements, upon consummation of the Merger,
each share of common stock of the Bank issued and outstanding immediately prior
to the Effective Time shall, by virtue of the Merger, be deemed to be exchanged
for and converted into one share of fully paid and nonassessable common stock of
the Holding Company. In addition, San Joaquin Bancorp will assume all
outstanding stock options of the Bank exercisable into common stock of the Bank
upon consummation of the Merger. Each such stock option will be exercisable into
one share of San Joaquin Bancorp upon closing of the Merger. The Reorganization
and Merger will result in a change in control of the Bank.
Consummation of the transactions contemplated by the Agreements is subject to
approval by the Bank's shareholders at its annual meeting on June 20, 2006 and
applicable regulatory authorities. Management anticipates that, subject to
receipt of all required consents and approvals, the Merger and Reorganization
will be effected during the second or third quarter of 2006.
CRITICAL ACCOUNTING POLICIES
GENERAL
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). The financial
information contained within our statements is, to a significant extent,
financial information that is based on measures of the financial effects of
transactions and events that have already occurred. We use historical loss
factors as one factor, among other factors, in determining the inherent loss
that may be present in our loan portfolio. Actual losses could differ
significantly from the historical and other factors that we use. Other estimates
that we use are related to the expected useful lives of our depreciable assets.
In addition, GAAP itself may change from one previously acceptable method to
another method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is an estimate of the losses that may be sustained
in our loan portfolio. The allowance is based on two basic principles of
accounting: (1) SFAS No. 5, "Accounting for Contingencies," which requires that
losses be accrued when they are probable of occurring and estimable, and (2)
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which requires
that losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan losses has three basic components: the formula allowance,
the specific allowance and the unallocated allowance. Each of these components
is determined based upon estimates that can and do change when the actual events
occur. The formula allowance uses historical losses as an indicator of future
losses and, as a result, could differ from the loss incurred in the future.
However, since this history is updated with the most recent loss information,
Management believes the errors that might otherwise occur are mitigated. The
specific allowance uses various techniques to arrive at an estimate of the
expected loss. Historical loss information and fair market value of collateral
are used to estimate those losses. The use of these values is inherently
subjective and our actual losses could be greater or less than the estimates.
The unallocated allowance addresses losses that are attributable to various
factors including economic events, industry or geographic sectors whose impact
on the portfolio are believed to be probable, but have yet to be recognized in
either the formula or specific allowances. For further information regarding our
allowance for loan losses, see "Allowance for Loan Losses" discussion later in
this item.
STOCK BASED AWARDS
Prior to January 1, 2006, we accounted for our stock based awards using the
intrinsic value method in accordance with Accounting Principles Board ("APB")
Opinion No. 25 and related interpretations. All option grants under our stock
option plans to date provide for the issuance of options at a price of no less
than the fair market value at the date of the grant, therefore, no compensation
expense was recognized in the financial statements. Effective January 1, 2006,
the Company adopted the new requirements of SFAS 123R on a prospective basis.
See Note 2, "Stock Compensation," in Notes to Condensed Consolidated Financial
Statements.
8
OVERVIEW
We commenced operations as a California state-chartered bank in December 1980
and are the oldest independent community bank headquartered in Bakersfield, Kern
County, California. San Joaquin Bank has four banking offices in Kern County,
California. The Rosedale Branch located at 3800 Riverlakes Drive is owned by the
Company, as are the Stockdale Branch located at 4600 California Avenue and the
Administrative Center located at 1000 Truxtun Avenue, all in Bakersfield,
California. The Main Office at addressStreet1301 17th Street, CityBakersfield,
and the Delano Branch at CityStreet1613 Inyo Street, CityDelano, are both leased
facilities.
At March 31, 2006, we had total consolidated assets of $677,990,000 (an increase
of 8.13% compared to year-end 2005), total consolidated deposits of $623,616,000
(an increase of 8.35% over year-end 2005), total consolidated net loans of
$432,495,000 (an increase of 8.02% compared to year-end 2005), and consolidated
shareholders' equity of $40,916,000 (an increase of 4.14% compared to year-end
2005).
We reported quarterly net income of $2,206,000 for the first quarter of 2006.
Net income increased $805,000, or 57.46%, over the $1,401,000 reported in the
first quarter of 2005. Diluted earnings per share were $0.60 for the first
quarter of 2006 and $0.38 for the first quarter of 2005. For the first quarter
of 2006, the annualized return on average equity (ROAE) and return on average
assets (ROAA) were 21.90% and 1.36%, respectively, as compared to 16.44% and
1.08%, respectively, for the same period in 2005. During the first quarter of
2006, we have experienced steady growth in loans and deposits while, at the same
time, we have continued to maintain control over our overhead and other fixed
expenses, which has resulted in our continued earnings growth. Our growth in
deposits stems from continued local advertising and business promotion
activities. There have been no special promotions or other deposit campaigns
utilized during the first three months of 2006 to attract new deposits, nor have
we relied upon brokered deposits of any kind.
We ended the first quarter of 2006 with a Tier 1 leverage ratio of 6.30%, a Tier
1 risk-based capital ratio of 7.78%, and a total risk-based capital ratio of
10.18%. At the end of the first quarter of 2005, these ratios were 6.59%, 8.70%
and 11.48%, respectively. We met all the criteria under current regulatory
guidelines for a "well capitalized" bank as of March 31, 2006.
9
The following table provides a summary of the major elements of income and
expense for the periods indicated:
Three Months Ended March 31
-----------------------------
2006 2005 % Change
------------ ------------ ---------
Interest Income $ 10,436,000 $ 6,842,000 52.53%
Interest Expense 3,437,000 1,489,000 130.83%
------------ ------------ ---------
Net Interest Income 6,999,000 5,353,000 30.75%
Provision for Loan Losses 230,000 300,000 -23.33%
------------ ------------ ---------
Net interest income after
provision for loan losses 6,769,000 5,053,000 33.96%
Noninterest Income 656,000 675,000 -2.81%
Noninterest Expense 3,603,000 3,291,000 9.48%
------------ ------------ ---------
Income Before Taxes 3,822,000 2,437,000 56.83%
Provision For Income Taxes 1,616,000 1,036,000 55.98%
------------ ------------ ---------
Net Income $ 2,206,000 $ 1,401,000 57.46%
============ ============ =========
10
NET INTEREST INCOME
Net interest income, the difference between interest earned on loans and
investments and interest paid on deposits and other borrowings, is the principal
component of our earnings. The following two tables provide a summary of the
components of net interest income and the changes within the components for the
periods indicated. The first table sets forth a summary of the changes in
interest income and interest expense from changes in average asset and liability
balances (volume) and changes in average interest rates (rate) for the periods
indicated.
Three Months Ended March 31
(DOLLARS IN THOUSANDS) 2006 2005
----------------------------- ----------------------------
Avg Avg Avg Avg
Balance Interest Yield Balance Interest Yield
--------- -------- -------- ----------------------------
ASSETS
Earning assets:
Loans (1)(2)(3) $ 415,077 $ 8,537 8.34% $ 312,523 $ 5,807 7.54%
Taxable investments 155,570 1,599 4.17% 123,467 869 2.85%
Tax-exempt investments 2,550 23 3.66% 997 10 4.07%
Fed funds sold and other
interest-bearing balances 25,286 277 4.44% 25,989 156 2.43%
----------------------------- ----------------------------
Total earning assets 598,483 10,436 7.07% 462,976 6,842 5.99%
----------------------------- ----------------------------
Cash & due from banks 28,904 26,152
Other assets 28,946 34,219
--------- ----------
Total Assets $ 656,333 $ 523,347
========= ==========
LIABILITIES
Interest-bearing liabilities:
NOW & money market $ 282,661 $ 2,374 3.41% $ 188,543 802 1.73%
Savings 100,599 739 2.98% 94,941 475 2.03%
Time deposits 27,594 208 3.06% 22,284 102 1.86%
Other borrowings 6,974 116 6.75% 12,272 110 3.64%
----------------------------- ----------------------------
Total interest-bearing
liabilities 417,828 3,437 3.34% 318,040 1,489 1.90%
----------------------------- ----------------------------
Noninterest-bearing deposits 186,628 156,286
Other liabilities 4,430 9,349
--------- ----------
Total Liabilities 608,886 483,675
SHAREHOLDERS' EQUITY
Shareholders' equity 40,301 33,921
--------- ----------
Total Liabilities and
Shareholders' Equity $ 649,187 $ 517,596
========= ==========
Net Interest Income and Net
Interest Margin (4) $ 6,999 4.74% $ 5,353 4.69%
================== ==================
1) Loan interest income includes fee income of $511,000 and $431,000 for the three months
ended March 31, 2006 and 2005, respectively.
2) Includes average deferred loan fees of $1,440,000 and $1,057,000 for the three months
ended March 31, 2006 and 2005, respectively.
3) The average balance of nonaccrual loans is not significant as a percentage of total
loans and, as such, has been included in net loans
4) Net interest margin is computed by dividing net interest income by the total average
earning assets.
11
VOLUME RATE ANALYSIS (UNAUDITED)
----------------------------------------------------------------------------
Three Months Ended March 31
(dollars in thousands) 2006 over 2005
----------------------------------------------------------------------------
Volume Rate Net Change
----------------------------------------------------------------------------
Interest-earning assets:
Net Loans (1)(2) 1,906 824 2,730
Taxable Investment Securities 226 504 730
Tax-exempt Investment Securities (3) 16 (3) 13
Federal Funds Sold (4) 125 121
----------------------------------------------------------------------------
Total 2,144 1,450 3,594
----------------------------------------------------------------------------
Interest-Bearing Liabilities
NOW and Money Market Accounts 400 1,172 1,572
Savings Deposits 28 236 264
Time Deposits 24 82 106
Other Borrowings (47) 53 6
----------------------------------------------------------------------------
Total 405 1,543 1,948
----------------------------------------------------------------------------
Interest Differential 1,739 (93) 1,646
============================================================================
1) Loan interest income includes fee income of $511,000 and $431,000 for the
three months ended March 31, 2006 and 2005, respectively.
2) The average balance of nonaccrual loans is not significant as a percentage
of total loans and, as such, has been included in net loans.
3) The amount of tax-exempt securities that we hold is minimal and the amount
derived from these securities is not significant, therefore there have
been no adjustments made to reflect interest earned on these securities on
a tax-equivalent basis. The effective statutory tax rate was 42.28% and
42.51% for the three month period ended March 31, 2006 and 2005,
respectively.
Net interest income, before provision for loan loss, was $6,999,000 for the
quarter ended March 31, 2006 compared to $5,353,000 for the quarter ended March
31, 2005, an increase of $1,646,000, or 30.75%.
INTEREST INCOME - FIRST QUARTER 2006 COMPARED TO 2005
Total interest income for the quarter ended March 31, 2006 was $10,436,000
compared to $6,842,000 for the quarter ended March 31, 2005, an increase of
$3,594,000 or 52.53%. Changes in interest income are the result of changes in
the average balances and changes in average yields on earning assets. Major
components of earning assets include loans, taxable investment securities, and
federal funds sold and other interest-bearing balances. Year-over-year, we
experienced changes in average balances and average yields on these balances as
follows:
During the first quarter of 2006, average net loans were $415,077,000 compared
to $312,523,000 during the first quarter of 2005, an increase of $102,554,000,
or 32.81%. This increased volume of loans resulted in an increase in interest
earned on average loans of $1,906,000 during the three months ended March 31,
2006, compared to the three months ended March 31, 2005. During this same time
period, the average yield earned on average loans increased from 7.54% to 8.34%.
This 80 basis point increase in average yield resulted in an increase of
$824,000 in interest earned on average net loans during the first quarter of
2006 compared to the first quarter of 2005. The net result was an increase of
$2,730,000 in interest earned on average net loans during the first quarter of
2006 compared with the same period of 2005.
Average taxable investment securities during the first quarter of 2006 were
$155,570,000 compared to $123,467,000 during the same period of 2005, an
increase of $32,103,000, or 26.00%. This increased volume resulted in an
increase in interest earned on average taxable securities of $226,000 during the
12
first quarter of 2006 compared to the first quarter of 2005. During the same
period, average yield earned on average taxable securities increased by 132
basis points, resulting in an increase of $504,000 in interest earned on average
taxable securities during the first quarter of 2006, compared to the same period
of 2005. The net result was an increase of $730,000 in interest earned on
average taxable securities during the first quarter of 2006, compared to the
first quarter of 2005.
The average balance of federal funds sold and other interest-bearing balances
during the first quarter of 2006 was $25,286,000, compared to $25,989,000 during
the same period of 2005, a decrease of $703,000, or 2.70%. The decreased volume
of federal funds sold and other interest-bearing balances during the first
quarter of 2006 resulted in a decrease of $4,000 in interest earned on these
balances as compared to the first quarter of 2005. The average yield on federal
funds sold and other interest-bearing balances increased 201 basis points
between the first quarter of 2005 and the first quarter of 2006, which resulted
in an increase in interest earned on these balances of $125,000 during this same
time period. These two factors resulted in a net increase of $121,000 in
interest earned on average federal funds sold and other interest-bearing
balances during the first quarter of 2006 compared to the same period of 2005.
INTEREST EXPENSE - FIRST QUARTER 2006 COMPARED TO 2005
Total Interest expense for the first quarter of 2006 was $3,437,000 compared to
$1,489,000 for the first quarter of 2005, an increase of $1,948,000, or 130.83%.
Changes in interest expense are the result of changes in the average balances
and changes in average rates paid on interest-bearing liabilities. Major
components of interest-bearing liabilities include NOW and money market
accounts, savings deposits, time deposits, and other borrowings. Year-over-year,
we experienced changes in average balances and average yields on these balances
as follows:
The average balance of NOW and money market accounts increased from $188,543,000
during the first quarter of 2005 to $282,661,000 during the first quarter of
2006, an increase of $94,118,000, or 49.92%. This increased volume of deposits
resulted in an increase in interest expense of $400,000 during the first quarter
of 2006 compared to the first quarter of 2005, while the 168 basis point
increase in interest rates during the same period caused interest expense to
increase by $1,172,000. The net result was an increase in interest expense on
average NOW and money market accounts of $1,572,000 during the first quarter of
2006, compared to the first quarter of 2005.
Average savings deposits increased during the first quarter of 2006 to
$100,599,000, compared to $94,941,000 during the first quarter of 2005, an
increase of $5,658,000, or 5.96%. Because of this increase in average savings
deposits, interest expense increased $28,000 during the first quarter of 2006,
compared to the first quarter of 2005. Interest rates during this same period
increased by 95 basis points, resulting in an increase in interest expense of
$236,000 in the first quarter of 2006, compared to the first quarter of 2005.
The net result was an increase of $264,000 in interest expense on average
savings deposits during the first quarter of 2006 versus the first quarter of
2005.
Average time deposits during the first quarter of 2006 increased to $27,594,000,
compared to $22,284,000 during the first quarter of 2005, an increase of
$5,310,000, or 23.83%. This increase in average time deposits caused interest
expense to increase by $24,000 in the first quarter of 2006 compared to the
first quarter of 2005, and the 120 basis point increase in interest rates on
average time deposits caused interest expense to increase by $82,000 during this
same time period. These two factors resulted in the net increase in interest
expense on average time deposits of $106,000 in the first quarter of 2006
compared to the first quarter of 2005.
Average other borrowings, consisting primarily of a $6,000,000 subordinated
note, decreased during the first quarter of 2006 to $6,974,000 compared to
$12,272,000 during the first quarter of 2005, a decrease of $5,298,000, or
43.17%. This decrease in volume was the result of a decrease in securities sold
under agreements to repurchase and caused interest expense to decrease by
$47,000 during the first quarter of 2006, compared to the first quarter of 2005,
while a 311 basis point increase in interest rates paid on average other
borrowings caused interest expense to increase by $53,000 during this same
year-over-year time period. The net result was an increase of $6,000 in interest
expense on other borrowings during the first quarter of 2006 compared to the
first quarter of 2005.
NET INTEREST MARGIN
The net interest margin for the first quarter of 2006 was 4.74% compared to
4.69% for the first quarter of 2005. In the current rising rate environment,
Management believes the net interest margin should remain stable due to the
rising rate environment in which our variable rate assets are expected to
13
reprice more quickly than the interest-bearing liabilities. Although, the
current competitive rate environment could exert pressure on net interest margin
resulting in a flat to slightly declining margin for the remainder of 2006.
Conversely, in a declining rate environment the net interest margin would be
expected to decline.
PROVISION FOR LOAN LOSSES
We made a $230,000 addition to the allowance for loan losses in the first
quarter of 2006 compared to an addition of $300,000 in the first quarter of
2005. The provision for loan losses is based upon in-depth analysis, in which
Management considers many factors, including the rate of loan growth, changes in
the level of past due, nonperforming and classified assets, changing portfolio
mix, overall credit loss experience, recommendations of regulatory authorities,
and prevailing local and national economic conditions to establish the required
level of the allowance for loan losses. Based upon information known to
Management at the date of this report, Management believes that these additions
to the total allowance for loan losses allow the Company to maintain an adequate
reserve to absorb losses inherent in the loan portfolio. The total allowance for
loan losses was $7,319,000 at March 31, 2006, compared to $7,003,000 at December
31, 2005, an increase of $316,000, or 4.51%. The ratios of the allowance for
loan losses to nonperforming and restructured loans were 1,527.97% at March 31,
2006 and 963.27% at December 31, 2005. The ratio of the allowance for loan
losses to total loans was 1.66% at March 31, 2006 and 1.72% at December 31,
2005. For further information regarding our allowance for loan losses, see
"Allowance for Loan Losses" discussion later in this item.
NONINTEREST INCOME
Noninterest income consists primarily of service charges on deposit accounts and
fees for miscellaneous services. Noninterest income totaled $656,000 in the
first quarter of 2006, which was a decrease of $19,000, or 2.81%, over $675,000
in the first quarter of 2005. Service charges and fees on deposits decreased
$16,000 during the three months ended March 31, 2006 compared to the same period
of 2005. The decrease in service charges and fees on deposits was the result of
customers maintaining higher balances in their accounts thereby offsetting
service charges and fees that would be charged against those accounts. Other
service charges and fees were down $23,000 in the first quarter of 2006 as
compared to the first quarter of 2005. Other noninterest income increased
$16,000 during the first quarter of 2006 compared to the first quarter of 2005.
NONINTEREST EXPENSE
As compared to the first quarter of 2005, noninterest expense increased
$312,000, or 9.48%, to a total of $3,603,000 in the first quarter of 2006.
Salary and employee benefits increased $324,000, or 16.59%, during the first
quarter of 2006 as compared to the first quarter of 2005. The increase in salary
and employee benefits was due primarily to normal salary increases, and
increases in group medical insurance premiums as compared to the prior year.
Salary and employee benefits expense also includes additional compensation
expense from granting of stock options of $26,000 under SFAS 123R. Occupancy and
fixed asset expense decreased by $102,000, or 18.09%, to $462,000 during the
first quarter of 2006 compared to the first quarter of 2005. This change was due
primarily to in depreciation expense on equipment. Other expenses for the first
quarter of 2006 totaled $864,000, which was an increase of $90,000, or 9.48%
compared to the first quarter of 2005. The increases in other noninterest
expense were primarily due to increases in advertising and marketing expense,
increases in legal expense, and increases in audits and examinations expense
associated with increased regulatory requirements. The efficiency ratio for the
three month periods ended March 31, 2006 was 47.07% compared to 54.60% for the
same period in the prior year demonstrating improvement in overall operating
efficiency.
PROVISION FOR INCOME TAXES
We recorded income tax expense of $1,616,000 in the first quarter of 2006
compared to $1,036,000 in the first quarter of 2005. The provision for income
taxes increased primarily due to increased profitability in the first quarter of
2006 as compared to the same period in the prior year. The effective tax rate
for the three month periods ended March 31, 2006 and 2005 was 42.28% and 42.51%.
SECURITIES
At March 31, 2006, held-to-maturity securities had a fair value of $145,466,000
with an amortized cost basis of $148,825,000. At March 31, 2006,
14
available-for-sale securities had a market value of $7,008,000. On an amortized
cost basis, the held-to-maturity investment portfolio decreased $18,811,000 from
the December 31, 2005 balance of $167,636,000, a decrease of 11.22%. The
decrease in the portfolio was primarily due to the maturity of U.S. Treasury
securities which decreased $14,041,000. During the first quarter of 2006, the
bank reclassified all of its investments in municipal securities from
held-to-maturity to available for sale. At March 31, 2006, these securities had
an amortized cost basis of $4,660,000 and a fair value of $4,618,000. The
unrealized pretax loss on held-to-maturity securities at March 31, 2006 was
$3,359,000, as compared to a loss of $2,677,000 at December 31, 2005. The
decreases in the market value of the investment portfolio was caused by the
general increase in short-term interest rates. As a general rule, the market
price of fixed rate investment securities will decline as interest rates rise,
which is precisely what happened. Inasmuch as these investment securities are
classified as held-to-maturity, we expect to hold all such securities until they
reach their respective maturity dates and, therefore, we do not anticipate
recognizing any losses on these securities. The unrealized pretax loss on
available-for-sale securities at March 31, 2006 was $152,000.
LOANS
The ending balance for net loans at March 31, 2006 was $432,495,000, which was
an increase of $32,098,000, or 8.02%, from the year-end 2005 balance and an
increase of $128,842,000, or 42.43%, from the March 31, 2005 balance.
Year-over-year, significant changes in our loan portfolio were as follows: real
estate loans have increased from $235,530,000 at March 31, 2005 to $379,718,000
at March 31, 2006 (61.22%); commercial loans have decreased from $57,834,000 at
March 31, 2005 to $48,209,000 at March 31, 2006 (16.64%); and, loans to finance
agricultural production have decreased from $14,613,000 at March 31, 2005 to
$11,756,000 at March 31, 2006 (19.55%). Since year-end 2005, the significant
changes in the bank's loan portfolio are as follows: real estate loans have
increased from $333,121,000 at December 31, 2005 to $379,718,000 at March 31,
2006 (13.99%); commercial loans have decreased from $55,895,000 at December 31,
2005 to $48,209,000 at March 31, 2006 (13.75%); and, loans to finance
agricultural production have decreased from $18,211,000 at December 31, 2005 to
$11,756,000 at March 31, 2006 (35.45%). Management believes and current economic
projections considered indicate that loan demand for Kern County and the greater
Bakersfield area will remain fairly constant through 2006.
CREDIT RISK
We assess and manage credit risk on an ongoing basis through a formal credit
review program, internal monitoring and formal lending policies. We believe our
ability to identify and assess risk and return characteristics of our loan
portfolio are critical for profitability and growth. We emphasize credit quality
in the loan approval process, active credit administration and regular
monitoring. With this in mind, we have designed and implemented a comprehensive
loan review and grading system that functions to monitor and assess the credit
risk inherent in the loan portfolio.
Ultimately, the credit quality of our loans may be influenced by underlying
trends in the national and local economic and business cycles. Our business is
mostly concentrated in Kern County, California. Our economy is diversified
between agriculture, oil, light industry, and warehousing and distribution. As a
result, we lend money to individuals and companies dependent upon these
industries.
We have significant extensions of credit and commitments to extend credit which
are secured by real estate, totaling approximately $482,092,000 at March 31,
2006. Although we believe this real estate concentration has no more than the
normal risk of collectibility, a substantial decline in the economy in general,
a decline in real estate values in our primary market area in particular, or a
substantial increase in interest rates could have an adverse impact on the
collectibility of these loans. The ultimate recovery of these loans is generally
dependent upon the successful operation, sale or refinancing of the real estate.
We monitor the effects of current and expected market conditions and other
factors on the collectibility of real estate loans. When, in our judgment, these
loans are impaired, an appropriate provision for losses is recorded. The more
significant assumptions we consider involve estimates of the following: lease,
absorption and sale rates; real estate values and rates of return; operating
expenses; inflation; and sufficiency of collateral independent of the real
estate including, in most instances, personal guarantees. Notwithstanding the
foregoing, abnormally high rates of impairment due to general or local economic
conditions could adversely affect our future prospects and results of
operations.
In extending credit and commitments to borrowers, we generally require
collateral and/or guarantees as security. The repayment of such loans is
expected to come from cash flow and from proceeds from the sale of selected
15
assets of the borrowers. Our requirement for collateral and/or guarantees is
determined on a case-by-case basis in connection with our evaluation of the
creditworthiness of the borrower. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, income-producing
properties, residences and other real property. We secure our collateral by
perfecting our interest in business assets, obtaining deeds of trust, or
outright possession among other means. Loan losses from lending transactions
related to real estate and agriculture compare favorably with our loan losses on
our loan portfolio as a whole.
We believe that our lending policies and underwriting standards will tend to
mitigate losses in an economic downturn; however, there is no assurance that
losses will not occur under such circumstances. Our loan policies and
underwriting standards include, but are not limited to, the following: 1)
maintaining a thorough understanding of our service area and limiting
investments outside of this area, 2) maintaining an understanding of borrowers'
knowledge and capacity in their fields of expertise, 3) basing real estate
construction loan approval not only on salability of the project, but also on
the borrowers' capacity to support the project financially in the event it does
not sell within the originally projected time period, and 4) maintaining
conforming and prudent loan to value and loan to cost ratios based on
independent outside appraisals and ongoing inspection and analysis of our
construction lending activities. In addition, we strive to diversify the risk
inherent in the construction portfolio by avoiding concentrations to individual
borrowers and on any one project.
NONACCRUAL, PAST DUE, RESTRUCTURED LOANS AND OTHER REAL ESTATE OWNED (OREO)
We generally place loans on nonaccrual status when they become 90 days past due
as to principal or interest, unless the loan is well secured and in the process
of collection. When a loan is placed on nonaccrual status, the accrued and
unpaid interest receivable is reversed and the loan is accounted for on the cash
or cost recovery method thereafter, until qualifying for return to accrual
status. Generally, a loan may be returned to accrual status when all delinquent
interest and principal become current in accordance with the terms of the loan
agreement and remaining principal is considered collectible or when the loan is
both well secured and in the process of collection. Loans or portions thereof
are charged off when, in our opinion, collection appears unlikely. The following
table sets forth nonaccrual loans, loans past due 90 days or more and still
accruing, restructured loans performing in compliance with modified terms and
OREO at March 31, 2006 and December 31, 2005:
16
NONACCRUAL, PAST DUE, RESTRUCTURED LOANS, AND OTHER REAL ESTATE OWNED (OREO)
(DATA IN THOUSANDS, EXCEPT PERCENTAGES) March 31, December 31,
2006 2005
--------- -----------
Past due 90 days or more and still accruing:
Commercial $ 4 $ -
Real estate - -
Consumer and other 11 -
Nonaccrual:
Commercial 32 -
Real estate 395 727
Consumer and other 37 -
Restructured (in compliance with
modified terms) - -
-------- --------
Total nonperforming and restructured loans 479 727
Other real estate owned 693 710
-------- --------
Total nonperforming and restructured assets $ 1,172 $ 1,437
======== ========
Allowance for loan losses as a percentage of
nonperforming and restructured loans 1527.97% 963.27%
Nonperforming and restructured loans to total
loans 0.11% 0.18%
Allowance for loan losses to nonperforming and
restructured assets 624.49% 487.33%
Nonperforming and restructured assets to total
assets 0.17% 0.23%
At March 31, 2006, there were nonperforming and restructured loans which totaled
$479,000, compared to $727,000 at December 31, 2005, a decrease of $248,000. The
decrease was due to an decrease in nonaccrual loans. During the first quarter of
2006, we continued to closely monitor and actively pursue the collection of all
loans classified as nonperforming. At March 31, 2006, nonperforming and
restructured loans were .11% of total loans, compared to .18% at December 31,
2005. The ratio of nonperforming and restructured assets to total assets was
..17% at March 31, 2006 compared to .23% at December 31, 2005.
Under generally accepted accounting principles, a loan is considered impaired
when, based on current information and events, it is probable that we may be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Impaired loans are measured based on the present value of expected
future cash flows, discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral-dependent. Under some circumstances, a
loan which is deemed impaired may still perform in accordance with its
contractual terms. Loans that are considered impaired are generally not placed
on nonaccrual status unless the loan becomes 90 days or more past due.
At March 31, 2006 and December 31, 2005, there was no recorded investment in
loans that were considered impaired under SFAS No. 114. Other than impaired
loans and classified loans (discussed below), we are not aware of any other
potential problem loans which were accruing and current at March 31, 2006, where
serious doubt exists as to the ability of the borrower to comply with the
present repayment terms. In this report, the terms "impaired" and "classified"
will not necessarily be used to describe the same loans. "Impaired" loans are
those loans that meet the definition outlined in SFAS No. 114. "Classified"
loans generally refer to those loans that have a credit risk rating of 6 through
8, as further discussed in the following section.
Generally it is the Bank's policy that when a loan is nonaccrual, payments are
applied against the principal balance of the loan until such time as full
collection of the principal balance is expected. The amount of gross interest
income that would have been recorded for nonaccrual loans, if all such loans had
been current in accordance with their original terms, was $38,000, including
those related to interest owed from prior years.
17
Total cash payments received during the three months ended March 31, 2006, which
were applied against the book balance of nonaccrual loans outstanding at March
31, 2006, totaled approximately $340,000.
CLASSIFIED LOANS
We have established a system of evaluation of all loans in our loan portfolio.
Based upon the evaluation performed, each loan is assigned a risk rating. This
risk rating system quantifies the risk we believe we have assumed when entering
into a credit transaction. The system rates the strength of the borrower and the
facility or transaction, which provides a tool for risk management and early
problem loan recognition.
For each new credit approval, credit review, credit extension or renewal or
modification of existing facilities, the approving officers assign risk ratings
utilizing an eight point rating scale. The risk ratings are a measure of credit
risk based on the historical, current and anticipated financial characteristics
of the borrower in the current risk environment. We assign risk ratings on a
scale of 1 to 8, with 1 being the highest quality rating and 8 being the lowest
quality rating. Loans rated an 8 are charged off.
The primary accountability for risk rating management resides with the account
officer. The Credit Review Department is responsible for confirming the risk
rating after reviewing all the credit factors independently of the account
officer. The rating assigned to a credit is the one determined to be appropriate
by the Credit Review Department.
The loans we consider "classified" are those that have a credit risk rating of 6
through 8. These are the loans and other credit facilities that we consider to
be of the greatest risk to us and, therefore, they receive the highest level of
attention by our account officers and senior credit management officers.
A loan that is classified may be either a "performing" or "nonperforming" loan.
A performing loan is one wherein the borrower is making all payments as required
by the loan agreements. A nonperforming loan is one wherein the borrower is not
paying as agreed and/or is not meeting specific other performance requirements
that were agreed to in the loan documentation.
The following table summarizes the Bank's classified loans for the periods
indicated:
March 31, 2006 December 31, 2005
-------------- -----------------
(dollars in thousands)
Classified Loans $ 4,082 $ 4,676
OREO 693 710
------------- --------------
Total $ 4,775 $ 5,386
============= ==============
At March 31, 2006, there were $4,082,000 in classified loans compared to
$4,676,000 in classified loans at December 31, 2005, a decrease of $594,000, or
12.70%. The amount of classified loans includes the portion of certain loans
that are guaranteed by the Small Business Administration. These amounts were $0
and $196,000 at March 31, 2006 and December 31, 2005, respectively. Management
does not expect to incur a loss on these amounts that are guaranteed by the
Small Business Administration.
The loans and other credit facilities considered classified are also allocated a
specific amount in the allowance for loan losses, as further explained in the
"Allowance for Loan Losses" section herein.
ALLOWANCE FOR LOAN LOSSES
We maintain an allowance for loan losses to absorb losses inherent in the loan
portfolio. The allowance is based on our regular assessments of the probable
losses inherent in the loan portfolio and to a lesser extent, unused commitments
to provide financing. Determining the adequacy of the allowance is a matter of
judgment, which reflects consideration of all significant factors that affect
the collectibility of the portfolio as of the evaluation date. Our methodology
18
for measuring the appropriate level of the allowance relies on several key
elements, which include the formula allowance, specific allowances for
identified problem loans and the unallocated reserve. The unallocated allowance
contains amounts that are based on our evaluation of existing conditions that
are not directly measured in the determination of the formula and specific
allowances.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments, in each case based on the internal risk
grade of such loans and commitments. Changes in risk grades of both performing
and nonperforming loans affect the amount of the formula allowance. Loss factors
are based on our historical loss experience and may be adjusted for other
factors that, in our judgment, affect the collectibility of the portfolio as of
the evaluation date. At March 31, 2006, the formula allowance was $4,296,000
compared to $3,866,000 at December 31, 2005. The increase in the formula
allowance was primarily a result of increases in the balances of loans
outstanding.
In addition to the formula allowance calculated by the application of the loss
factors to the standard loan categories, specific allowances may also be
calculated. Quarterly, all significant classified loans are analyzed
individually based on the source and adequacy of repayment and specific type of
collateral, and an assessment is made of the adequacy of the formula reserve
relative to the individual loan. A specific allocation either higher or lower
than the formula reserve will be calculated based on the
higher/lower-than-normal probability of loss and the adequacy of the collateral.
At March 31, 2006, the specific allowance was $1,281,000 on a classified loan
base of $4,082,000 compared to a specific allowance of $1,412,000 on a
classified loan base of $4,676,000 at December 31, 2005.
At March 31, 2006 and December 31, 2005 there was $1,742,000 and $1,724,000,
respectively, in the allowance for loan losses that was unallocated. In the
opinion of Management, and based upon an evaluation of potential losses inherent
in the loan portfolio, it is necessary to establish unallocated allowance
amounts above the amounts allocated using the formula and specific allowance
methods, based upon our evaluation of the following factors:
o The current national and local economic and business conditions, trends
and developments, including the condition of various market segments
within our lending area;
o Changes in lending policies and procedures, including underwriting
standards and collection, charge-off, and recovery practices;
o Changes in the nature, mix, concentrations and volume of the loan
portfolio;
o The effect of other external factors such as legal and regulatory
requirements on the level of estimated credit losses in our current
portfolio.
There can be no assurance that the adverse impact of any of these conditions on
us will not be in excess of the combined allowance for loan losses as determined
by us at March 31, 2006 and set forth in the preceding paragraph.
The allowance for loan losses totaled $7,319,000 or 1.66% of total loans at
March 31, 2006, compared to $7,003,000 or 1.71% of total loans at December 31,
2005. At these dates, the allowance represented 1,527.97%, 963.27% and 153.76%
of nonperforming and restructured loans, respectively.
It is our policy to maintain the allowance for loan losses at a level considered
adequate for risks inherent in the loan portfolio. Based on information
currently available to Management, including economic factors, overall credit
quality, historical delinquency and history of actual charge-offs, as of March
31, 2006, we believe that the allowance for loan losses is adequate. However, no
prediction of the ultimate level of additional provisions to our allowance or
loans charged off in future years can be made with any certainty.
The following table summarizes activity in the allowance for loan losses for the
periods indicated:
19
Three Months Ended March 31
2006 2005
----------------------------------
Beginning Balance $ 7,003,000 $ 5,487,000
Provision charged to expense 230,000 300,000
Loans charged off (4,000) -
Recoveries 90,000 70,000
----------------------------------
Ending Balance $ 7,319,000 $ 5,857,000
==================================
Ending Loan Portfolio 441,379,000 310,672,000
Allowance for loss as a percentage of
ending loan portfolio 1.66% 1.89%
LIQUIDITY
Liquidity management refers to our ability to maintain cash flows that are
adequate to fund our operations on an ongoing basis and to meet our debt
obligations and other commitments on a timely and cost effective basis. Both
assets and liabilities contribute to our liquidity position. Federal funds
lines, short-term investments and securities, and loan repayments contribute to
liquidity, along with deposit increases, while loan funding and deposit
withdrawals decrease liquidity. We assess the likelihood of projected funding
requirements by reviewing historical funding patterns, current and forecasted
economic conditions and individual customer funding needs. Commitments to fund
loans and outstanding standby letters of credit at March 31, 2006, were
approximately $202,055,000 and $6,838,000, respectively. Such loans relate
primarily to revolving lines of credit and other commercial loans, and to real
estate construction loans.
Our sources of liquidity consist of overnight funds sold to correspondent banks,
unpledged marketable loans and investments, and salable SBA loans. At March 31,
2006, consolidated liquid assets totaled $174,568,000 or 25.75% of total assets
as compared to $150,422,000 or 23.99% of total consolidated assets at December
31, 2005. In addition to liquid assets, we maintain short-term lines of credit
with correspondent banks. At March 31, 2006, we had $15,000,000 available under
these credit lines. Additionally, we have borrowing capacity with the Federal
Home Loan Bank of San Francisco in the amount of $17,735,000. At March 31, 2006,
$0 was outstanding under these credit lines. We serve primarily a business and
professional customer base and, as such, our deposit base is susceptible to
economic fluctuations. Accordingly, we strive to maintain a balanced position of
liquid assets to volatile and cyclical deposits.
CAPITAL RESOURCES
Our total shareholders' equity was $40,916,000 at March 31, 2006, compared to
$39,290,000 at December 31, 2005, an increase of $1,626,000, or 4.14%. The
change is the result of the first quarters' earnings, issuance of capital stock
due to the exercise of stock options, the increase in other comprehensive income
or loss, and the payout of a cash dividend to shareholders in February, 2006.
We are subject to regulations issued by the Federal Deposit Insurance
Corporation ("FDIC"), which require maintenance of certain levels of capital.
Under the regulations, capital requirements are based upon the composition of an
institution's asset base and the risk factors assigned to those assets. The
guidelines characterize an institution's capital as being "Tier 1" capital
(defined to be principally shareholders' equity less intangible assets) and
"Tier 2" capital (defined to be principally the allowance for loan losses,
limited to one and one-fourth percent of gross risk weighted assets, and term
subordinated debt, subject to certain limits). The guidelines require us to
maintain specific levels of risk-based capital in order to be considered "well
capitalized" under the prompt corrective action provisions of the applicable
banking regulations.
The following table shows our actual capital amounts and ratios at March 31,
2006 and December 31, 2005, as well as the minimum capital ratios for capital
adequacy and well capitalized classifications under the regulatory framework:
20
To Be Categorized
Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------
As of March 31, 2006
- -----------------------------------------------------------------------------------------------------------------
Total risk-based capital ratio $ 53,447,000 10.18% $ 42,002,000 8.00% $ 52,502,000 10.00%
Tier 1 risk-based capital ratio 40,873,000 7.78% 21,014,000 4.00% 31,522,000 6.00%
Tier 1 leverage ratio 40,873,000 6.30% 25,951,000 4.00% 32,439,000 5.00%
As of December 31, 2005
- -----------------------------------------------------------------------------------------------------------------
Total risk-based capital ratio $ 51,510,000 10.51% $ 39,208,000 8.00% $ 49,010,000 10.00%
Tier 1 risk-based capital ratio 39,372,000 8.03% 19,612,000 4.00% 29,419,000 6.00%
Tier 1 leverage ratio 39,372,000 6.44% 24,455,000 4.00% 30,568,000 5.00%
We meet the "well capitalized" ratio measures at both March 31, 2006 and
December 31, 2005.
On April 5, 2004, the Bank issued a Six Million Dollar ($6,000,000) Floating
Rate Subordinated Note (the "Subordinated Note") in a private placement. The
Subordinated Note, which was issued pursuant to a Purchase Agreement dated April
5, 2004 by and between the Company and NBC Capital Markets Group, Inc., matures
in 2019. The Company may redeem the Subordinated Note, at par, on or after April
23, 2009, subject to compliance with California and federal banking regulations.
The Subordinated Note resets quarterly and bears interest at a rate equal to the
three-month LIBOR index plus a margin of 2.70%. The Subordinated Note is a
capital security that qualifies as Tier 2 capital pursuant to capital adequacy
guidelines promulgated by the Federal Deposit Insurance Corporation.
OFF-BALANCE SHEET ITEMS
We have certain ongoing commitments under operating leases. These commitments do
not significantly impact operating results. As of March 31, 2006 and December
31, 2005, commitments to extend credit and letters of credit were the only
financial instruments with off-balance sheet risk, except for the interest rate
cap contracts and interest rate swap agreements described herein.
DERIVATIVES
The use of derivatives allows the bank to meet the needs of its customers while
reducing the interest rate risk associated with certain transactions. Currently
the bank uses interest rate cap contracts, which are cash flow hedges, and
interest rate swap agreements, which are fair value hedges, to limit exposure to
changes in interest rates. The Board has approved a hedging policy, and the
Asset Liability Committee is responsible for ensuring that the Board is
knowledgeable about general hedging theory, usage and accounting; and that based
upon this understanding, approves all hedging transactions. The derivatives are
carried at fair value and are included in other assets or other liabilities in
the consolidated balance sheet if they have a positive or negative fair value,
respectively.
CASH FLOW HEDGES
We entered into two interest rate cap contracts with a third party, to manage
the risk that changes in interest rates will affect the amount of interest
expense of our deposits. The interest rate cap contracts qualify as derivative
financial instruments. Under an interest rate cap contract, we agree to pay an
initial fixed amount at the beginning of the contract in exchange for quarterly
payments from the third party when the three-month LIBOR rate exceeds a certain
fixed level.
At March 31, 2006, we had interest rate cap contracts on $14,000,000 notional
amount of indebtedness. Interest rate cap contracts with notional amounts of
$7,000,000 and $7,000,000 have cap rates of 6.50%, and 6.00%, respectively.
Notional amount of $14,000,000 outstanding contracts will mature on June 2,
2008. The net gain or loss on the ineffective portion of these interest rate cap
contracts was not material for the year ended December 31, 2005, or for the
three months ended March 31, 2006.
21
The interest rate cap contracts are considered to be a hedge against changes in
the amount of future cash flows associated with our interest expense for our
deposits. Accordingly, the interest rate cap contracts are recorded at fair
value in our consolidated balance sheet and the related unrealized gains or
losses on these contracts are recorded in shareholders' equity as a component of
other comprehensive income. These deferred gains and losses are amortized as an
adjustment to interest expense over the same period in which the related
interest payments being hedged are recognized in income. Over the next 12
months, the bank expects to amortize $61,000 of the unrealized loss as an
adjustment to interest expense. However, to the extent that any of these
contracts are not considered to be perfectly effective in offsetting the change
in the value of the interest payments being hedged, any changes in fair value
relating to the ineffective portion of these contracts are immediately
recognized in income.
FAIR VALUE HEDGES
The bank entered into five interest rate swap agreements with a third party, to
hedge against changes in fair value of certain fixed rate loans. The bank uses
this a means to offer fixed rate loans to customers, while maintaining a
variable rate income that that better suits the bank's needs. Under an interest
rate swap agreement, the bank agrees to pay a fixed rate to the counter party
while receiving a floating rate based on the 1-month LIBOR.
As of March 31, 2006, we had interest rate swap agreements on $6,617,000
notional amount of indebtedness. At March 31, 2006, the fair value of the swaps
was an unrealized loss of $56,000. The corresponding fair value adjustment is
included on the balance sheet with the hedged items. The net gain or loss on the
ineffective portion of these interest rate swap agreements was not material for
the three months ended March 31, 2006.
The interest rate swap agreements are considered to be a hedge against changes
in the fair value of certain fixed rate loans. The interest rate swap agreements
are fair value hedges that qualify as derivative financial instruments under
SFAS No. 133 and are accounted for under the short-cut method. Accordingly, the
hedges are recorded at fair value the balance sheet and any changes in fair
value of the swap is recognized currently in earnings and the offsetting gain or
loss on the hedged assets attributable to the hedged risk is recognized
currently in earnings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The goal for managing our assets and liabilities is to maximize shareholder
value and earnings while maintaining a high quality balance sheet without
exposing ourselves to undue interest rate risk. Our Board of Directors has
overall responsibility for our interest rate risk management policies. We have
an Asset/Liability Management Committee (ALCO), which establishes and monitors
guidelines to control the sensitivity of earnings to changes in interest rates.
The company does not engage in trading activities to manage interest rate risk,
however, the Board of Directors has approved, and the Company currently uses,
derivatives to manage interest rate risk. These derivatives are discussed in
Item 7 under the caption "Off-Balance Sheet Items" and in note 11 to the
consolidated financial statements. Interest rate risk is the most significant
market risks affecting the Bank. Management does not believe the Company faces
other significant market risks such as foreign currency exchange risks,
commodity risks, or equity price risks.
ASSET AND LIABILITY MANAGEMENT
Activities involved in asset/liability management include but are not limited to
lending, accepting and placing deposits, investing in securities and issuing
debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk, the structure of the balance sheet is managed with the goal that movements
of interest rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The asset/liability
management policy sets limits on the acceptable amount of variance in net
income, net interest income and market value of equity.
The market values of assets or liabilities on which the interest rate is fixed
will increase or decrease with changes in market interest rates. If San Joaquin
Bank invests funds in a fixed rate long-term security and then interest rates
rise, the security is worth less than a comparable security just issued because
of the lower yield on the original fixed rate security. If the lower yielding
22
security had to be sold, San Joaquin Bank would have to recognize a loss.
Correspondingly, if interest rates decline after a fixed rate security is
purchased, its value increases. Therefore, while the value of the fixed rate
investment changes regardless of which direction interest rates move, the
adverse exposure to "market risk" is primarily due to rising interest rates.
This exposure is lessened by managing the amount of fixed rate assets and by
keeping maturities relatively short. However, this strategy must be balanced
against the need for adequate interest income because variable rate and shorter
fixed rate securities generally earn less interest than longer term fixed rate
securities.
There is market risk relating to San Joaquin Bank's fixed rate or term
liabilities as well as its assets. For liabilities, the adverse exposure to
market risk is to lower rates because San Joaquin Bank must continue to pay the
higher rate until the end of the term.
Simulation of earnings is the primary tool used to measure the sensitivity of
earnings to interest rate changes. Using computer modeling techniques, we are
able to estimate the potential impact of changing interest rates on earnings. A
balance sheet forecast is prepared using inputs of actual loan, securities and
interest bearing liabilities (i.e., deposits and other borrowings) positions as
the beginning base. The forecast balance sheet is processed against multiple
interest rate scenarios. The scenarios include a 100, 200, and 300 basis point
rising rate forecast, a flat rate forecast and a 100, 200, and 300 basis point
falling rate forecast which take place within a one year time frame. The latest
simulation forecast using December 31, 2005 balances and measuring against a
flat rate environment, calculated that in a one-year horizon an increase in
interest rates of 100 basis points would result in an increase of $576,000
(1.79%) in net interest income. Conversely, a 100 basis point decrease would
result in a decrease of $376,000 (1.17%) in net interest income. The basic
structure of the balance sheet has not changed significantly from the last
simulation run.
The simulations of earnings do not incorporate any management actions which
might moderate the negative consequences of interest rate deviations. Therefore,
in Management's view, they do not reflect likely actual results, but serve as
conservative estimates of interest rate risk. Our risk profile has not changed
materially from that at year-end 2005.
San Joaquin Bank has adequate capital to absorb any potential losses as
described above as a result of a decrease in interest rates. Periods of more
than one year are not estimated because it is believed that steps can be taken
to mitigate the adverse effects of such interest rate changes.
REPRICING RISK
One component, among others, of interest rate risk arises from the fact that
when interest rates change, the changes do not occur equally for the rates of
interest earned and paid because of differences in contractual terms of the
assets and liabilities held. San Joaquin Bank has a large portion of its loan
portfolio tied to the prime interest rate. If the prime rate is lowered because
of general market conditions, e.g., other money-center banks are lowering their
lending rates, these loans will be repriced. If San Joaquin Bank were at the
same time to have a large portion of its deposits in long-term fixed rate
certificates, net interest income would decrease immediately. Interest earned on
loans would decline while interest expense would remain at higher levels for a
period of time because of the higher rate still being paid on deposits.
A decrease in net interest income could also occur with rising interest rates if
San Joaquin Bank had a large portfolio of fixed rate loans and securities funded
by deposit accounts on which the rate is steadily rising. This exposure to
"repricing risk" is managed by matching the maturities and repricing
opportunities of assets and liabilities. This is done by varying the terms and
conditions of the products that are offered to depositors and borrowers. For
example, if many depositors want longer-term certificates while most borrowers
are requesting loans with floating interest rates, San Joaquin Bank will adjust
the interest rates on the certificates and loans to try to match up demand. San
Joaquin Bank can then partially fill in mismatches by purchasing securities with
the appropriate maturity or repricing characteristics.
BASIS RISK
Another component of interest rate risk arises from the fact that interest rates
rarely change in a parallel or equal manner. The interest rates associated with
the various assets and liabilities differ in how often they change, the extent
to which they change, and whether they change sooner or later than other
23
interest rates. For example, while the repricing of a specific asset and a
specific liability may fall in the same period of a gap report, the interest
rate on the asset may rise 100 basis points, while market conditions dictate
that the liability increases only 50 basis points. While evenly matched in the
gap report, San Joaquin Bank would experience an increase in net interest
income. This exposure to "basis risk" is the type of interest risk least able to
be managed, but is also the least dramatic. Avoiding concentration in only a few
types of assets or liabilities is the best insurance that the average interest
received and paid will move in tandem, because the wider diversification means
that many different rates, each with their own volatility characteristics, will
come into play. San Joaquin Bank has made an effort to minimize concentrations
in certain types of assets and liabilities.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" refers to the controls and
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files under Rule 13a - 14 of
the Securities Exchange Act of 1934, as amended, (the "Exchange Act") is
recorded, processed, summarized and reported within required time periods. As of
March 31, 2006 (the "Evaluation Date"), we carried out an evaluation under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the Evaluation Date, such controls
and procedures were effective in ensuring that required information will be
disclosed on a timely basis.
CHANGES IN INTERNAL CONTROLS
The evaluation did not identify any change in our internal control over
financial reporting that occurred during the quarter ended March 31, 2006 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Bank or any
subsidiary is a party or of which any of their property is subject, other than
ordinary routine litigation incidental to the business of the Bank or any
subsidiary. None of the ordinary routine litigation in which the Bank or any
subsidiary is involved is expected to have a material adverse impact upon the
financial position or results of operations of the Bank or any subsidiary.
ITEM 1A. RISK FACTORS
The risk factors included in the Bank's Annual Report on Form 10-K for the year
ended December 31, 2005 have not materially changed other than as set forth
below. The information set forth below should be red in conjunction with the
risk factors disclosed in that Form 10-K.
OUR PROPOSAL TO CONSUMMATE A BANK HOLDING COMPANY REORGANIZATION, IF
CONSUMMATED, WOULD CAUSE US TO BECOME A WHOLLY-OWNED SUBSIDIARY OF SAN JOAQUIN
BANCORP
We have entered into an Agreement and Plan of Reorganization dated May 9, 2006
with San Joaquin Bancorp, which is a holding company that is currently inactive.
Consummation of the bank holding company reorganization is subject to approval
from shareholders at the 2006 Annual Meeting of Shareholders, regulatory
approvals from the Commissioner of the Department of Financial Institutions, the
FDIC, the Federal Reserve, and other provisions in the Agreement and Plan of
Reorganization. Assuming consummation of that reorganization, all holders of our
common stock will automatically have their shares converted into shares of
common stock of San Joaquin Bancorp, a California corporation, on a one for one
basis. It is expected the reorganization will be consummated during 2006, but
there can be no assurance that the reorganization will be consummated.
In addition to the other information set forth here and elsewhere in this
report, you should carefully consider the factors discussed in Part I, "ITEM 1A.
Risk Factors" in our Annual Report on Form 10-K for the year ended December 31,
2005, which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the only
risks facing our Company. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may arise or become
material in the future and materially adversely affect our business, financial
condition and/or operating results.
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
(a) None
25
(b) None
ITEM 6. EXHIBITS
3.2 Amended and Restated Bylaws of the Registrant Dated April 25, 2006.
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange
Act Rule 13a - 14(a)/ 15d-14(a).
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange
Act Rule 13a - 14(a)/ 15d-14(a).
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
May 12, 2006 SAN JOAQUIN BANK
(Registrant)
By:/s/ Stephen M. Annis
-----------------------------------
Stephen M. Annis
Executive Vice President &
Chief Financial Officer
(Principal Financial and Accounting
Officer)
27
EXHIBIT 31.1
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bart Hill, certify that:
1. I have reviewed this quarterly report for the period ending March 31, 2006 on
Form 10-Q of San Joaquin Bank;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 12, 2006
/s/ Bart Hill
- -----------------------
Bart Hill
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen M. Annis, certify that:
1. I have reviewed this quarterly report for the period ending March 31, 2006 on
Form 10-Q of San Joaquin Bank;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 12, 2006
/s/ Stephen M. Annis
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Stephen M. Annis
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of San Joaquin Bank (the "Company") on
Form 10-Q for the quarter ended March 31, 2006, as filed with the Federal
Deposit Insurance Corporation, each of the undersigned, in the capacities and on
the date indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934;
(2) The information contained in the report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Bart Hill
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Bart Hill
Chief Executive Officer
(Principal Executive Officer)
May 12, 2006
/s/ Stephen M. Annis
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Stephen M. Annis
Chief Financial Officer
(Principal Financial and Accounting Officer)
May 12, 2006