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| SJQU.OB > SEC Filings for SJQU.OB > Form 10-K on 17-Mar-2008 | All Recent SEC Filings |
17-Mar-2008
Annual Report
The following discussion addresses information pertaining to the financial condition and results of operations of the Company that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes. It should be read in conjunction with those statements and notes thereto appearing elsewhere in this report. The results of operations for the periods presented may not necessarily be indicative of future results.
Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The financial information and disclosures contained within those statements are significantly impacted by Management's estimates, assumptions, and judgments. These estimates, assumptions, and judgments are based upon historical experience and various other factors available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. In addition, GAAP itself may change from one previously acceptable method to another method.
Reorganization
On May 9, 2006, San Joaquin Bancorp, San Joaquin Bank, and San Joaquin Reorganization Corp. (the "Reorganization Corp."), a California corporation and wholly- owned subsidiary of the Bancorp, entered into an Agreement and Plan of Reorganization and Agreement of Merger (together, the "Agreements") pursuant to which the Reorganization Corp. would be merged with and into the Bank, with the Bank being the surviving corporation (the "Reorganization"). Upon consummation of the Reorganization, the Bank would become a wholly-owned subsidiary of the Bancorp and the shareholders of the Bank would receive one share of Bancorp common stock in exchange for each share of Bank common stock held by such shareholder.
The Reorganization was approved by the affirmative vote of a majority of the outstanding shares of the Bank's common stock on June 20, 2006. Following receipt of all required approvals from applicable regulatory authorities, the Reorganization became effective as of the close of business on July 31, 2006. As a result of the Reorganization, the Bank became a wholly-owned subsidiary of the San Joaquin Bancorp and the one-for-one share exchange described above was completed. In addition, upon consummation of the Reorganization, San Joaquin Bancorp assumed all outstanding stock options of the Bank exercisable into shares of Bank common stock. Such stock options continue be subject to substantially the same terms and conditions of such stock options immediately prior to the consummation of the Reorganization, except that such options are now exercisable for Bancorp's common stock.
Prior to the Reorganization, the Bank's common stock was registered under
Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act"). The
Bank was subject to the information requirements of the Exchange Act and filed
annual and quarterly reports, proxy statements and other information with the
FDIC. As a result of the Reorganization, San Joaquin Bancorp became the
successor to the Bank for securities reporting purposes and San Joaquin
Bancorp's common stock became registered under Section 12(g) of the Exchange
Act.
The Bank continues doing business under the name San Joaquin Bank.
Overview
At December 31, 2007, the Company had total consolidated assets of $868,728,000, an increase of 16.0% compared to the $748,930,000 in assets at the end of 2006. Strong loan growth was the primary contributor to asset growth for the year. Total consolidated net loans were $689,190,000, an increase of 30.5%, compared to the $527,999,000 in net loans at year end 2006. The majority of the increase came from loans secured by real estate as the commercial market continued to grow at a steady pace in 2007. Total consolidated deposits were $716,073,000, an increase of 11.4% over the 2006 level of $642,654,000. Savings deposits made up the majority of the increase in deposits through direct efforts to raise additional deposits. Time deposits also increased because of increased use of funding under the State of California time deposit program. Consolidated shareholders' equity was $55,428,000, an increase of 20.8% compared to $45,866,000 at the end of 2006. The increase was mostly due to earnings in 2007.
Overall, the Company believes it executed its plan of loan and deposit growth successfully in an environment that was both competitive and challenging.
We reported record annual net income of $9,418,000 for the year ended December 31, 2007. Net income increased $944,000, or 11.1%, over the $8,474,000 reported in 2006, which was an increase of $1,850,000, or 27.9%, from the $6,624,000 reported in 2005. The majority of the increase in 2007 came from increased net interest income and a reduction in the provision for loan losses. Diluted earnings per share for the year ended December 31, 2007 increased 10.9% to $2.54 compared to the $2.29 for 2006, which was an increase of 26.5% from $1.81 in 2005.
For the years ended December 31, 2007, 2006, and 2005, annualized return on average assets was 1.21%, 1.26%, and 1.18%, respectively. The annualized return on average equity (ROAE) was 18.76%, 19.48%, and 18.43% for the years ended December 31, 2007, 2006, and 2005, respectively. ROAE has averaged over 18% for the past five years. Based on its consistent ROAE, the Company was ranked one of the top 10 community banks in the United States with assets of less than $1 billion by US Banker Magazine in 2007 and 2008.
The year ending December 31, 2007 marked the 24th consecutive year of record profits for the Company. The Bank continued to be a leader in market share gains for Kern County, with a deposit share of 12.3% at mid-year 2007, up from 10.5% for the same period in 2006. Measured by assets at December 31, 2007, San Joaquin Bank is the fourth largest of twenty-two FDIC-insured financial institutions in Kern County, based upon total deposits.
During 2007 and 2006, the need for noncore funding, such as Federal Home Loan Bank ("FHLB") advances, brokered deposits, and time certificates of deposit in the form of public funds, increased as loan growth outpaced deposit growth. This increased need for funding alternatives at higher interest rates resulted in a greater increase in interest expense year-over-year than would have resulted otherwise from core funding such as demand, NOW, money market, savings, and time certificates of deposit under $100,000.
Year to date December 31
--------- ---------- ------------------------------- -------- ---------
Year-Over-Year Year-Over-Year
(dollars in thousands, except per share data) 2007 Change 2006 Change 2005
--------- -------------------- --------- -------------------- ---------
INTEREST INCOME
Loans (including fees) $ 49,910 $ 10,295 26.0% $ 39,615 $ 13,403 51.1% $ 26,212
Investment securities 5,584 (872) -13.5% 6,456 1,119 21.0% 5,337
Fed funds & other interest-bearing balances 163 (294) -64.3% 457 (263) -36.5% 720
--------- ---------- ------- --------- --------- -------- ---------
Total Interest Income 55,657 9,129 19.6% 46,528 14,259 44.2% 32,269
--------- ---------- ------- --------- --------- -------- ---------
INTEREST EXPENSE
Deposits 23,281 7,091 43.8% 16,190 7,559 87.6% 8,631
Short-term borrowings 805 (100) -11.0% 905 868 2345.9% 37
Long-term borrowings 1,226 493 67.3% 733 355 93.9% 378
--------- ---------- ------- --------- --------- -------- ---------
Total Interest Expense 25,312 7,484 42.0% 17,828 8,782 97.1% 9,046
--------- ---------- ------- --------- --------- -------- ---------
Net Interest Income 30,345 1,645 5.7% 28,700 5,477 23.6% 23,223
Provision for loan losses 900 (830) -48.0% 1,730 530 44.2% 1,200
--------- ---------- ------- --------- --------- -------- ---------
Net Interest Income After Loan Loss Provision 29,445 2,475 9.2% 26,970 4,947 22.5% 22,023
--------- ---------- ------- --------- --------- -------- ---------
NONINTEREST INCOME
Service charges & fees on deposits 907 120 15.2% 787 (100) -11.3% 887
Other customer service fees 1,168 (154) -11.6% 1,322 171 14.9% 1,151
Other 1,053 87 9.0% 966 293 43.5% 673
--------- ---------- ------- --------- --------- -------- ---------
Total Noninterest Income 3,128 53 1.7% 3,075 364 13.4% 2,711
--------- ---------- ------- --------- --------- -------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 10,023 529 5.6% 9,494 1,587 20.1% 7,907
Occupancy 1,026 84 8.9% 942 47 5.3% 895
Furniture & equipment 1,062 33 3.2% 1,029 4 0.4% 1,025
Promotional 605 37 6.5% 568 (99) -14.8% 667
Professional 1,361 134 10.9% 1,227 293 31.4% 934
Other 2,145 200 10.3% 1,945 5 0.3% 1,940
--------- ---------- ------- --------- --------- -------- ---------
Total Noninterest Expense 16,222 1,017 6.7% 15,205 1,837 13.7% 13,368
--------- ---------- ------- --------- --------- -------- ---------
Income Before Taxes 16,351 1,511 10.2% 14,840 3,474 30.6% 11,366
Income Taxes 6,933 567 8.9% 6,366 1,624 34.2% 4,742
--------- ---------- ------- --------- --------- -------- ---------
NET INCOME $ 9,418 944 11.1% $ 8,474 1,850 27.9% $ 6,624
--------- ---------- ------- --------- --------- -------- ---------
Basic Earnings per Share $ 2.67 0.23 9.4% $ 2.44 0.50 25.8% $ 1.94
--------- ---------- ------- --------- --------- -------- ---------
Diluted Earnings per Share $ 2.54 0.25 10.9% $ 2.29 0.48 26.5% $ 1.81
--------- ---------- ------- --------- --------- -------- ---------
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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 tables provide a summary of earning assets and interest-bearing liabilities with their corresponding components of net interest income and the changes within the components for the periods indicated. The second and third tables set forth changes in interest income and interest expense segregated for major categories of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume (volume) and changes in rates (rate). Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components.
Distribution of Assets, Liabilities & Shareholders' Equity, Rates & Interest Margin
Year to date December 31
------------ --------- ------ ------------------------------- ---------- --------- ---------------
(dollars in thousands) 2007 2006 2005
------------ --------- ------ ---------- --------- ------ ---------- --------- ---------------
Avg Avg Avg Avg
Avg Balance Interest Yield Balance Interest Yield Balance Interest Avg Yield
------------ --------- ------ ---------- --------- ------ ---------- --------- ---------------
ASSETS
Earning assets:
Loans, net of unearned (1) $ 591,710 $ 49,910 8.43% $ 461,346 $ 39,615 8.59% $ 334,158 $ 26,212 7.84%
Taxable investments 123,060 5,393 4.38% 148,570 6,301 4.24% 156,451 5,268 3.37%
Tax-exempt investments(2) 4,556 191 4.19% 4,091 155 3.79% 1,183 69 5.83%
Fed funds sold and other
interest-bearing balances 3,269 163 4.99% 9,796 457 4.67% 23,258 720 3.10%
------------ --------- ------ ---------- --------- ------ ---------- --------- ---------------
Total Earning Assets 722,595 55,657 7.70% 623,803 46,528 7.46% 515,050 32,269 6.27%
------------ --------- ------ ---------- --------- ------ ---------- --------- ---------------
Cash & due from Banks 25,836 26,457 26,347
Other assets 30,227 23,761 19,545
------------ ---------- ----------
Total Assets $ 778,658 $ 674,021 $ 560,942
------------ ---------- ----------
LIABILITIES
Interest-bearing liabilities:
NOW & money market $ 291,438 $ 12,663 4.35% $ 289,385 $ 11,428 3.95% $ 213,249 5,471 2.57%
Savings 165,085 7,660 4.64% 98,432 3,525 3.58% 106,552 2,602 2.44%
Time deposits 62,578 2,958 4.73% 31,972 1,237 3.87% 24,171 558 2.31%
Other borrowings 32,732 2,031 6.20% 27,531 1,638 5.95% 8,893 415 4.67%
------------ --------- ------ ---------- --------- ------ ---------- --------- ---------------
Total interest-bearing liabilities 551,833 25,312 4.59% 447,320 17,828 3.99% 352,865 9,046 2.56%
------------ --------- ------ ---------- --------- ------ ---------- --------- ---------------
Noninterest-Bearing Deposits 164,221 176,879 166,573
Other Liabilities 12,396 6,319 5,570
------------ ---------- ----------
Total Liabilities 728,450 $ 630,518 525,008
SHAREHOLDERS' EQUITY
Shareholders' Equity 50,208 43,503 35,934
------------ ---------- ----------
Total Liabilities and
Shareholders' Equity $ 778,658 $ 674,021 $ 560,942
------------ ---------- ----------
Net Interest Income and
Net Interest Margin (3) $ 30,345 4.20% $ 28,700 4.60% $ 23,223 4.51%
--------- ------ --------- ------ --------- ---------------
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1) Loan interest income includes fee income of $1,859,000, $1,967,000, and $1,907,000 for the years ended December 31, 2007, 2006, and 2005, respectively. Includes nonperforming and restructured loans of $5,068,000, $153,000, and $727,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
2) Applicable nontaxable securities yields are not material to the Company's results of operations, therefore there have been no adjustments made to reflect interest earned on these securities on a tax-equivalent basis.
3) Net interest margin is computed by dividing net interest income by the total average earning assets.
--------------------------------------------------------------------------------
Summary of Changes in Interest Income and Expense
------------------------------------------------------ -------- --------------- -----------
Twelve Months Ended December 31
2007 over 2006
------------------------------------------------------ -------- --------------- -----------
(unaudited)(dollars in thousands) Volume Rate Net Change
------------------------------------------------------ -------- --------------- -----------
Interest-Earning Assets:
Loans, net of unearned income (1) 11,008 (713) 10,295
Taxable investment securities (1,112) 204 (908)
Tax-exempt investment securities (2) 19 17 36
Fed funds sold and other interest-bearing balances (323) 29 (294)
------------------------------------------------------ -------- --------------- -----------
Total 9,592 (463) 9,129
------------------------------------------------------ -------- --------------- -----------
Interest-Bearing Liabilities:
NOW and money market accounts 82 1,153 1,235
Savings deposits 2,878 1,257 4,135
Time deposits 1,397 324 1,721
Other borrowings 320 73 393
------------------------------------------------------ -------- --------------- -----------
Total 4,677 2,807 7,484
------------------------------------------------------ -------- --------------- -----------
Interest Differential 4,915 (3,270) 1,645
------------------------------------------------------ -------- --------------- -----------
Twelve Months Ended December 31
2006 over 2005
------------------------------------------------------ -------- --------------- -----------
(dollars in thousands) Volume Rate Net Change
------------------------------------------------------ -------- --------------- -----------
Interest-Earning Assets:
Loans, net of unearned income (1) 10,733 2,670 13,403
Taxable investment securities (277) 1,310 1,033
Tax-exempt investment securities (2) 118 (32) 86
Fed funds sold and other interest-bearing balances (529) 266 (263)
------------------------------------------------------ -------- --------------- -----------
Total 10,045 4,214 14,259
------------------------------------------------------ -------- --------------- -----------
Interest-Bearing Liabilities:
NOW and money market accounts 2,373 3,584 5,957
Savings deposits (211) 1,134 923
Time deposits 219 460 679
Other borrowings 1,081 142 1,223
------------------------------------------------------ -------- --------------- -----------
Total 3,462 5,320 8,782
------------------------------------------------------ -------- --------------- -----------
Interest Differential 6,583 (1,106) 5,477
------------------------------------------------------ -------- --------------- -----------
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1) Loan interest income includes fee income of $1,859,000, $1,967,000, and $1,907,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
2) Applicable nontaxable securities yields are not material to the Company's results of operations, therefore there have been no adjustments made to reflect interest earned on these securities on a tax-equivalent basis.
Net interest income, before provision for loan losses, for the year ended December 31, 2007 was $30,345,000, an increase of $1,645,000 (5.7%) compared to $28,700,000 for the year ended December 31, 2006, which increased $5,477,000 (23.6%) over $23,223,000 for the year ended December 31, 2005.
2007 Compared to 2006
Total interest income for the year ended December 31, 2007 was $55,657,000 compared to $46,528,000 for the same period of 2006, an increase of $9,129,000, or 19.6% . Changes in interest income are the result of changes in the average balances and changes in average yields on earning assets. During 2007, total average earning assets were $722,595,000 compared to
Average loans increased $130,364,000, or 28.3%, from $461,346,000 at December 31, 2006 to $591,710,000 at December 31, 2007, increasing interest income by $11,008,000 for the year ended December 31, 2007. During that same year-over-year period, the average yield on loans decreased by 16 basis points, resulting in a decrease in interest income on loans of $713,000. The combined effect was an increase of $10,295,000 in interest income earned on average loans during 2007 compared to 2006.
Average taxable investment securities decreased from $148,570,000 at December 31, 2006 to $123,060,000 at December 31, 2007, a decrease of $25,510,000, or 17.2% . This decrease in taxable investment securities caused interest income to decrease by $1,112,000 during 2007 compared to 2006. The yield on taxable investment securities increased by 14 basis points during this year-over-year period, increasing interest income on taxable investment securities by $204,000 during the year ended December 31, 2007 compared to the year ended December 31, 2006. These two factors resulted in a net decrease in interest earned on taxable investment securities of $908,000 in 2007 versus the same period of 2006.
Average federal funds sold and other interest-bearing balances decreased by . . .
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