Attached files

file filename
EX-32 - PPBI 2008 10-K EXHIBIT 32 - PACIFIC PREMIER BANCORP INCppbi_2009-10kex32.htm
EX-23 - PPBI 2008 10-K EXHIBIT 23 - PACIFIC PREMIER BANCORP INCppbi_2009-10kex23.htm
EX-31.1 - PPBI 2008 10-K EXHIBIT 31.1 - PACIFIC PREMIER BANCORP INCppbi_2009-10kex311.htm
EX-31.2 - PPBI 2008 10-K EXHIBIT 31.2 - PACIFIC PREMIER BANCORP INCppbi_2009-10kex312.htm
 




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

 ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

or

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from  to  .

Commission File No.: 0-22193

Pacific Premier Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Delaware                                                                33-0743196
(State of Incorporation)                        (I.R.S. Employer Identification No)


1600 Sunflower Ave. 2nd Floor, Costa Mesa, California 92626
(Address of Principal Executive Offices and Zip Code)
Registrant’s telephone number, including area code: (714) 431-4000

----------------

Securities registered pursuant to Section 12(b) of the Act:

Title of class
Name of each exchange on which registered
Common Stock, par value $0.01 per share
NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:

None
----------------
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [__] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [__] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X] No [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [   ]  No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
 
Large accelerated filer
[   ]
 
Accelerated filer
[   ]
Non-accelerated filer
[   ]
(Do not check if a smaller reporting company)
Smaller reporting company
[X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [__] No [X]

The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant, was approximately $24,362,455 and was based upon the last sales price as quoted on The NASDAQ Stock Market as of June 30, 2009, the last business day of the most recently completed second fiscal quarter.
 
 
As of March 29, 2010, the Registrant had 10,033,836 shares outstanding.
 
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement filed under Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which definitive proxy statement is to be filed within 120 days after the registrant’s fiscal year ended December 31, 2009, are incorporated by reference in Part III hereof.
 


 
 INDEX
 
 
 
 
 
 
 
 
 

 


 
 

Forward-Looking Statements

All references to “we”, “us”, “our”, or the “Company” mean Pacific Premier Bancorp, Inc. and our consolidated subsidiaries, including Pacific Premier Bank, our primary operating subsidiary.  All references to ‘‘Bank’’ refer to Pacific Premier Bank.  All references to the “Corporation” refer to Pacific Premier Bancorp, Inc.

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based.  Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” or words or phases of similar meaning.  We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control.  Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.
 
The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:
 
 
·  
The strength of the United States economy in general and the strength of the local economies in which we conduct operations;
 
 
·  
The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
 
 
·  
Inflation, interest rate, market and monetary fluctuations;
 
 
·  
The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
 
 
·  
The willingness of users to substitute competitors' products and services for our products and services;
 
 
·  
The impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;
 
 
·  
Technological changes;
 
 
·  
The effect of acquisitions we may make, if any, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;
 
 
·  
Changes in the level of our nonperforming assets and charge-offs;
 
 
·  
Oversupply of inventory and continued deterioration in values of California real estate, both residential and commercial;
 
 
·  
The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters;
 
 
·  
Possible other-than-temporary impairments (“OTTI”) of securities held by us;
 
 
·  
The impact of current governmental efforts to restructure the U.S. financial regulatory system;
 
 
·  
Changes in consumer spending, borrowing and savings habits;
 
 
·  
The effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
 
 
·  
Ability to attract deposits and other sources of liquidity;
 
 
·  
Changes in the financial performance and/or condition of our borrowers;
 
 
·  
Changes in the competitive environment among financial and bank holding companies and other financial service providers;
 
 
·  
Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
 
 
·  
Unanticipated regulatory or judicial proceedings; and
 
 
·  
Our ability to manage the risks involved in the foregoing.
 
 
If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Annual Report on Form 10-K.  Therefore, we caution you not to place undue reliance on our forward-looking information and statements.  We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements.
 
 
Overview

We are a California-based bank holding company incorporated in 1997 in the State of Delaware and registered as a banking holding company under the Bank Holding Company Act of 1956, as amended ("BHCA”), for Pacific Premier Bank, a California state-chartered commercial bank.  The Bank is subject to examination and regulation by the California Department of Financial Institutions (the “DFI”), the Federal Reserve, and by the Federal Deposit Insurance Corporation (the “FDIC”).

We conduct business throughout Southern California from our six locations in the counties of Orange and San Bernardino.  We operate depository branches in the cities of Huntington Beach, Los Alamitos, Newport Beach, San Bernardino, Seal Beach, and Costa Mesa, California.  Our corporate headquarters are located in Costa Mesa, California.

We provide banking services within our targeted markets in Southern California to businesses, including the owners and employees of those businesses, professionals entrepreneurs and non-profit organizations, as well as, consumers in the communities we serve.  Through our branches and our Internet website at www.ppbi.com, we offer a broad array of deposit products and services for both business and consumer customers, including checking, money market and savings accounts, cash management services, electronic banking, and on-line bill payment.  We offer a wide array of loan products, such as commercial business loans, lines of credit, commercial real estate loans, and U.S. Small Business Administration (“SBA”) loans.  At December 31, 2009, we had consolidated total assets of $807.3 million, net loans of $566.6 million, total deposits of $618.7 million, and consolidated total stockholders’ equity of $73.5 million.  At December 31, 2009, the Bank was considered a “well-capitalized” financial institution for regulatory capital purposes.


Operating Strategy

The Bank was founded in 1983 as a state chartered savings and loan, became a federally chartered stock savings bank in 1991 and, in March 2007, converted to a California-chartered commercial bank. In the fourth quarter of 2000, our management implemented a new business plan to refocus Pacific Premier’s business model, emphasizing community banking. To achieve the Bank’s goals, we implemented a three-phase strategic plan which involved:

• Phase 1: lowering the risk profile of the Bank and re-capitalizing Pacific Premier;
• Phase 2: growing the balance sheet through the origination of adjustable rate multi-family residential loans; and
• Phase 3: transforming the institution to a commercial banking business model.

The first two phases of our strategic plan were completed in 2002 and 2004, respectively. Our transition to a commercial banking platform began in 2005 as we recruited experienced business bankers from other regional and national commercial banks. These business bankers helped us to introduce new credit and deposit products as well as on-line banking and cash management services. This in turn allowed us to begin to capture small business customers in our market. Our transition to a commercial banking platform is being achieved by retaining and growing the number of business banking relationships within the Southern California market.

Our primary goal is to develop the Bank into one of Southern California’s top performing commercial banks as an alternative to the large regional and national banks for businesses, professionals, entrepreneurs and non-profit organizations for the long term benefit of our stockholders, customers and employees. The following are our operating strategies which we have adopted in order to achieve this goal:

Expansion through Acquisitions. The consolidation and current turmoil in the banking industry has created an opportunity in our markets and we expect to expand the Bank’s franchise through acquisitions. Many banks have been negatively impacted by the economic environment, which we expect will lead to the continued consolidation and elimination of certain of our competitors. We intend to take advantage of this opportunity over the next couple of years by pursuing acquisitions of all or part of failing banks located in Southern California through FDIC-assisted transactions.

Expansion through Relationship Banking. The industry wide consolidation and turmoil is also creating opportunities to acquire new business banking customers. Profitable businesses are not having their needs met either from a service level or credit availability basis and we intend to convert these businesses to customers of the Bank. We believe customer relationships are built through a series of consistently executed experiences in both routine transactions and higher value interactions. Our business bankers are focused on developing long term relationships with business owners, professionals, entrepreneurs, and non-profit organizations through consistent and frequent contact. Additionally, our bankers are actively involved in community organizations and events, thus building and capitalizing on the Bank’s reputation within our local communities.

Reduction in Wholesale Funding and Brokered Deposits. As we transitioned towards a commercial banking platform, we began reducing our reliance on wholesale borrowings, such as advances from the Federal Home Loan Bank (“FHLB”) and brokered deposits.

Diversifying our Loan Portfolio. We believe it is important to diversify our loan portfolio in order to better manage credit risks. As part of our transition to a commercial banking platform, we have increased the amount of owner-occupied commercial real estate (“CRE”) loans, commercial and industrial (“C&I”) loans and Small Business Administration (“SBA”) loans within the portfolio.

Maintain Excellent Asset Quality. Our conservative credit and risk management culture has resulted in relatively low levels of nonperforming loans and an overall high credit quality within the loan portfolio as compared to our peer banks. Our portfolio management strategies involve the early identification of loan weakness, aggressive collection techniques, loss mitigation through loan sales and/or working with third parties to refinance the credit. We will continue to monitor economic trends and conditions that could positively or negatively impact our business. We seek to take advantage of these trends by entering or exiting certain lines of business or offering or eliminating various loan product types, as evidenced by our decision to curtail our multi-family and commercial real estate lending. We will continue to adjust our risk management practices to the on-going changes in our local economy that impact our business.

Premier Customer Service Provider. We believe it is imperative that the Bank provide a consistent level of quality service which generates customer retention and referrals. All of our employees, through training and compensation, understand that each interaction with our customers is an opportunity to exceed their expectations.  We measure and test our employee’s service levels through third party evaluations and by listening to customer interactions recorded over the phone.  We use these tools to train and improve our employees on a consistent basis.

Expansion through Electronic Banking. Many businesses feel displaced by large out-of-market institutions and are attracted to banks that have local decision making capability, more responsive customer service, and greater familiarity with their needs. We intend to continue expanding our franchise through electronic banking, such as remote or merchant capture, on-line banking and cash management services available through our web site.

Our executive offices are located at 1600 Sunflower Avenue, 2nd Floor, Costa Mesa, California  92626 and our telephone number is (714) 431-4000.  Our Internet website address is www.ppbi.com.  Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments thereto, from 1998 to present that have been filed with the SEC, are available free of charge on our Internet website.  Also on our website are our Code of Ethics, Insider Trading and Beneficial Ownership forms, and Corporate Governance Guidelines.  The information contained in our website, or in any websites linked by our website, is not a part of this Annual Report on Form 10-K.
 
 
Lending Activities

General.  In 2009, we maintained our commitment to a high level of credit quality in our lending activities.  We expanded our efforts to diversify our loan portfolio and focused our efforts on meeting the financial needs of qualified individuals and local businesses.  The Company offers a full complement of flexible and structured loan products tailored to meet the needs of our customers.

Loans were made primarily to borrowers within our market area and secured by real property and business assets located principally in Southern California.  We emphasize relationship lending and focus on generating retail production with customers who also maintain full depository relationships with us.  These efforts assist us in establishing and expanding depository relationships consistent with the Company’s strategic direction.  The Company has generally ceased making loans secured by investor owner commercial real estate, although such loans continue to make up a substantial portion of our loan portfolio.  We maintain a house lending limit below our $18.1 million legal lending limit for secured loans and $10.9 million for unsecured loans as of December 31, 2009.  During 2009, we originated or purchased 4.5 million in multi-family loans, $4.2 million of C&I loans, $1.2 million of SBA loans, $1.2 million of other loan and $365,000 in owner-occupied commercial real estate loans.  At December 31, 2009, we had $576.3 million in total gross loans outstanding.

Owner-Occupied Commercial Real Estate Lending.  We originate and purchase loans secured by owner-occupied commercial real estate, such as retail buildings, small office and light industrial buildings, and mixed-use commercial properties located predominantly in Southern California.  We will also, from time to time, make a loan secured by a special purpose property, such as a gas station.  Pursuant to our underwriting policies, owner-occupied commercial real estate loans may be made in amounts of up to 75% of the lesser of the appraised value or the purchase price of the collateral property. Loans are generally made for terms up to 15 years with amortization periods up to 30 years.  Owner-occupied commercial real estate loans originated or purchased in 2009 had an average balance of $365,000 and an average loan-to-value ratio of 31.1% at origination.  At December 31, 2009, we had $103.0 million of owner-occupied commercial real estate secured loans, constituting 17.9% of our loan portfolio.

Commercial and Industrial Lending.  We originate C&I loans secured by business assets including inventory, receivables, machinery and equipment to businesses located in our primary market area.  In many instances, real estate holdings of the borrower, its principals or loan guarantors are also taken as collateral.  Loan types include revolving lines of credit, term loans, seasonal loans and loans secured by liquid collateral such as cash deposits or marketable securities.  We also issue letters of credit on behalf of our customers, backed by loans or deposits with the Company.  At December 31, 2009, we had total commitments of $42.0 million in commercial business lines of credit, of which, $31.1 million were disbursed, constituting 5.4% of our loan portfolio.

SBA Lending.  The Company was approved to originate loans under the SBA’s Preferred Lenders Program (“PLP”) in the third quarter of 2006.  The PLP lending status affords the Company a higher level of delegated credit autonomy, translating to a significantly shorter turnaround time from application to funding, which is critical to our marketing efforts.  We originate loans under the SBA’s 7(a), 504, and Express loan programs, in conformity with SBA underwriting and documentation standards.  The guaranteed portion of the 7(a) loans is typically sold on the secondary market.  At December 31, 2009, we had $3.3 million of SBA loans, constituting 0.6% of our loan portfolio.

One-to-Four Family Lending.  The Company is not an active participant in single family lending on a transactional basis and does not engage in Alt-A or subprime lending.  In keeping with the Company’s strategy of offering a full complement of loan products to customers, home loans are available to banking customers only.  The Company’s portfolio of one-to-four family loans at December 31, 2009 totaled $8.5 million, constituting 1.5% of our loan portfolio, of which $6.7 million consists of loans secured by first liens on real estate and $1.8 million consists of loans secured by second or junior liens on real estate.

Multi-family Real Estate Lending.  Although we were not an active multi-family lender in 2009, on occasion, we originate and purchase loans secured by multi-family residential properties (five units and greater) located predominantly in Southern California.  Pursuant to our underwriting policies, multi-family residential loans may be made in an amount up to 75% of the lesser of the appraised value or the purchase price of the collateral property.  In addition, we generally require a stabilized minimum debt service coverage ratio of 1.15:1, based on the qualifying loan interest rate.  Loans are made for terms of up to 30 years with amortization periods up to 30 years.  As part of our desired strategy to diversify the loan portfolio, we have substantially reduced the origination of multi-family real estate loans beginning in late 2007.  Historically, we have managed our concentration in multi-family real estate loans by selling excess loan production. However, in recent periods, the level of loan sales has decreased significantly due to dislocations in the credit markets. Multi-family loan sales remain a strategic option for us as the Bank continues its transition to a traditional commercial bank.  At December 31, 2009, we had $278.7 million of multi-family real estate secured loans, constituting 48.4% of our loan portfolio.

Commercial Investor Real Estate Lending.  Although we were not an active commercial real estate lender in 2009, on occasion, we originate and purchase loans secured by commercial real estate, such as retail centers, small office and light industrial buildings, and mixed-use commercial properties located predominantly in Southern California.  Pursuant to our underwriting policies, commercial real estate loans may be made in amounts up to 75% of the lesser of the appraised value or the purchase price of the collateral property.  We consider the net operating income of the property and typically require a stabilized debt service coverage ratio of at least 1.20:1, based on the qualifying interest rate.  Loans are generally made for terms up to 15 years with amortization periods up to 30 years.  At December 31, 2009, we had $149.6 million of commercial real estate secured loans, constituting 26.0% of our loan portfolio.

Other Loans.  We originate other consumer loan products, generally for banking customers only, which consist primarily of saving account and auto loans.  Before we make a consumer loan, we assess the applicant’s ability to repay the loan and, if applicable, the value of the collateral securing the loan.  At December 31, 2009, we had $2.0 million in other loans that represented 0.33% of our gross loans.

Interest Rates on Our Loans.  We employ a risk-based pricing strategy on all loans that we fund.  The interest rates, fees and loan structure of our loans generally vary based on a number of factors, including the degree of credit risk, size, maturity of the loan, a borrower’s business or property management expertise, and prevailing market rates for similar types of loans.  Adjustable rate C&I and SBA loans are typically priced based on a margin over the Prime rate.  Commercial real estate loans are typically 3, 5, 7, or 10-year fixed rate hybrid adjustable-rate loans and are based on one of several interest rate indices.  Many of the C&I loans and substantially all of the investor owned real estate loans originated by the Company in 2009 had minimum interest rates, or floor rates, below which the rate charged may not be reduced regardless of further reductions in the underlying interest rate index.  Substantially all commercial real estate loans also include prepayment penalties.

Lending Risks on Our Loans.  Lending risks vary by the type of loan extended.  In our C&I and SBA lending activities, collectability of the loans may be adversely affected by risks generally related to small businesses, such as:

·  
Changes or continued weakness in general or local economic conditions;
·  
Changes or continued weakness in specific industry segments, including weakness affecting the business’ customer base;
·  
Changes in consumer behavior;
·  
Changes in a business’ personnel;
·  
Increases in supplier costs that cannot be passed along to customers;
·  
Increases in operating expenses (including energy costs);
·  
Changes in governmental rules, regulations and fiscal policies;
·  
Increases in interest rates, tax rates; and
·  
Other factors beyond the control of the borrower or the lender.

In our investor real estate loans, payment performance and the liquidation values of collateral properties may be adversely affected by risks generally incidental to interests in real property, such as:

·  
Changes or continued weakness in general or local economic conditions;
·  
Changes or continued weakness in specific industry segments;
·  
Declines in real estate values;
·  
Declines in rental rates;
·  
Declines in occupancy rates;
·  
Increases in other operating expenses (including energy costs);
·  
The availability of property financing;
·  
Changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation and taxation;
·  
Increases in interest rates, real estate and personal property tax rates; and
·  
Other factors beyond the control of the borrower or the lender.

We attempt to mitigate these risks through sound and prudent underwriting practices, as well as a proactive loan review process and our risk management practices.  See “Lending Activities - Underwriting and Approval Authority for Our Loans” immediately below.  We will not extend credit to any one borrower that is in excess of regulatory limits.

Underwriting and Approval Authority for Our Loans.  Our board of directors establishes our lending policies.  Each loan must meet minimum underwriting criteria established in our lending policies and must fit within our overall strategies for yield, interest rate risk, and portfolio concentrations.  The underwriting and quality control functions are managed through our corporate office.  Each loan application is evaluated from a number of underwriting perspectives.  For C&I and SBA loans, underwriting considerations include historic business cash flows, debt service coverage, loan-to-value ratios of underlying collateral, if any, debt to equity ratios, credit history, business experience, history of business, forecasts of operations, economic conditions, business viability, net worth, and liquidity.  For loans secured by real estate, underwriting considerations include property appraised value, loan-to-value ratios, level of debt service coverage utilizing both the actual net operating income and forecasted net operating income and use and condition of the property, as well as the borrower’s liquidity, income, credit history, net worth, and operating experience.  We do not offer loans on a limited- or no-documentation basis unless fully secured by cash collateral.

Business loans are generally originated as recourse or with full guarantees from key borrowers or borrower principals.  Loans secured by real estate are likewise originated on a full recourse basis.  On loans made to entities, such as partnerships, limited liability companies, corporations or trusts, we typically obtain personal guarantees from the appropriate managing members, major stockholders, trustees or other appropriate principals.  In 2009, substantially all of our loans to entities were originated with full recourse and/or personal guarantees from the principals of the borrowers.

Prior to processing and underwriting any loan request, we issue a letter of interest based on a preliminary analysis by our bankers, which letter details the terms and conditions on which we will consider the loan request.  Upon receipt of the signed letter of interest, a completed loan application and a deposit, a credit report and other required reports are ordered and, if necessary, additional information is requested.  Upon receipt of all requested information, we process and underwrite each loan application and prepare all the loan documentation after the loan has been approved.

Our credit memorandums, which are prepared by our underwriters, include a description of the transaction and prospective borrower and guarantors, the collateral securing the loan, if any, the proposed uses of loan proceeds and source(s) of repayment, as well as an analysis of the borrower’s business and personal financial statements and creditworthiness.  The financial statements and creditworthiness of any guarantors are also analyzed.  For loans secured by real property, the credit memorandum will include an analysis of the property.  Loans for which real estate is the primary collateral require an independent appraisal conducted by a licensed appraiser.  All appraisal reports are appropriately reviewed by our appraisal department.  Our board of directors reviews and approves annually the independent list of acceptable appraisers.  When appropriate, environmental reports are obtained and reviewed as well.

Following loan approval and prior to funding, our underwriting and processing departments ensure that all loan approval terms have been satisfied, that those terms conform with lending policies (or are properly documented as exceptions with required approvals), and that all the required documentation is present and in proper form.

Business loans are subject to the Company’s guidelines regarding appropriate covenants and periodic monitoring requirements which may include, but are not limited to:

·  
Capital and lease expenditures;
·  
Capital levels;
·  
Salaries and other withdrawals;
·  
Working capital levels;
·  
Debt to net worth ratios;
·  
Sale of assets;
·  
Change of management;
·  
Change of ownership;
·  
Cash flow requirements;
·  
Profitability requirements;
·  
Debt service ratio;
·  
Collateral coverage ratio; and
·  
Current and quick ratios.
 
    Subject to the above standards, our board of directors delegates authority and responsibility to management for loan approvals of up to $1.5 million for all loans secured by real estate and up to $250,000 for loans not secured by real estate.  Loan approvals at the management level require the approval of at least two members of our Management Loan Committee, consisting of our President and Chief Executive Officer, Chief Credit Officer, and Chief Banking Officer.  All loans in excess of $1.5 million, including total aggregate borrowings by one borrower in excess of $1.5 million, and any loan in excess of $250,000 not secured by real estate, require a majority approval of our board’s Credit Committee, which is comprised of three directors, including our President and Chief Executive Officer.
 
        Portfolio Management and Loan Servicing.  Portfolio management and loan servicing activities are centralized at our corporate headquarters.  Our loan servicing operations are designed to provide prompt customer service and accurate and timely information for account follow-up, financial reporting and loss mitigation.  Following the funding of an approved loan, the data is entered into our data processing system, which provides monthly billing statements, tracks payment performance, and effects agreed upon interest rate adjustments.  Loan servicing activities include (i) the collection and remittance of loan payments, (ii) accounting for principal and interest and other collections and expenses, and (iii) holding and disbursing escrow or impounding funds for real estate taxes and insurance premiums.
 
        Our portfolio management operations are designed to ensure that management and the board of directors has timely and comprehensive information regarding the performance of our loan portfolio.  This information provides an essential leading indicator of potential performance issues prior to loan payment delinquency.  For each of the Company’s non-homogeneous loans, our Portfolio Managers collect financial information from borrowers and guarantors in order to conduct a detailed loan review in accordance with our policies, generally annually or more often as appropriate.  The Portfolio Managers also visit properties and businesses on a periodic basis to perform inspections of our collateral and associated revenue-generating activities of borrowers.  In conjunction with the loan review process, all loans in the portfolio are assigned a risk grade that, among other purposes, factors into the Company’s allowance for loan and lease loss calculations.
 
        When payments are not received by their contractual due date, collection efforts are initiated by our loss mitigation personnel.  Accounts past-due by more than 10 days are assigned to our collector for comprehensive payment collection efforts.  Our Portfolio Managers conduct an evaluation of all loans 90 days or more past due by obtaining an estimate of value on the underlying collateral.  The evaluation may result in our partial or complete charge off of the loan, but collection efforts still continue.  Portfolio Managers also conduct discussions with borrowers in order to identify whether alternatives to foreclosure exist.  When foreclosure will maximize the Company’s recovery for a non-performing loan, the Portfolio Managers will carry out the foreclosure process, including any associated judicial legal actions.
 
        Loan Portfolio Composition.  At December 31, 2009, our net loans receivable held for investment totaled $566.6 million and we had no loans receivable held for sale.  The types of loans that the Company may originate are subject to federal and state law.
 
    The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated:

 
   
At December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
Amount
   
% of Total
   
Amount
   
% of Total
   
Amount
   
% of Total
   
Amount
   
% of Total
   
Amount
   
% of Total
 
   
(dollars in thousands)
 
Real estate loans:
                                                           
Multi-family
  $ 278,744       48.4 %   $ 287,592       45.7 %   $ 341,263       54.5 %   $ 357,275       58.8 %   $ 459,714       76.0 %
Commercial investor
    149,577       26.0 %     163,428       26.0 %     142,134       22.7 %     170,175       28.0 %     111,566       18.4 %
One-to-four family (1)
    8,491       1.5 %     9,925       1.6 %     13,080       2.1 %     12,825       2.1 %     16,500       2.7 %
Construction
    -       0.0 %     2,733       0.4 %     2,048       0.3 %     -       0.0 %     -       0.0 %
Land
    -       0.0 %     2,550       0.4 %     5,389       0.9 %     3,277       0.5 %     2,524       0.4 %
Business loans:
                                                                               
Commercial owner occupied (2)
    103,019       17.9 %     112,406       17.9 %     57,614       9.2 %     35,929       5.9 %     11,335       1.9 %
Commercial and industrial
    31,109       5.4 %     43,235       6.9 %     50,992       8.1 %     22,762       3.8 %     3,248       0.6 %
SBA
    3,337       0.5 %     4,942       0.8 %     13,995       2.2 %     5,312       0.9 %     -       0.0 %
Other loans
    1,991       0.3 %     1,956       0.3 %     177       0.0 %     63       0.0 %     89       0.0 %
Total gross loans
    576,268       100.0 %     628,767       100.0 %     626,692       100.0 %     607,618       100.0 %     604,976       100.0 %
Less (plus):
                                                                               
Deferred loan origination (fees) costs and (discounts) premiums
    (779 )             252               769               1,024               1,467          
Allowance for loan losses
    (8,905 )             (5,881 )             (4,598 )             (3,543 )             (3,050 )        
Loans held for investment, net
  $ 566,584             $ 623,138             $ 622,863             $ 605,099             $ 603,393          
                                                                                 
(1) Includes second trust deeds.
                                                                               
(2) Secured by real estate
                                                                               

        Loan Portfolio Characteristics.  In general, the Company does not require regular updates of collateral valuations for non-homogeneous loans that are not classified as potential problem or problem loans.  However, updated valuations are obtained for collateral securing non-homogeneous loans that are identified as potential problem or problem loans at least every twenty-four months.  Updated collateral valuations may be required more frequently at the discretion of the Company’s management or for loans identified as impaired in accordance with the Company’s allowance for loan loss policy.  Market values may be substantiated by obtaining an appraisal or an appropriate evaluation by the Company’s Chief Appraiser. At December 31, 2009, 29.8% of multi-family, 35.0% of commercial investor and 62.3% of commercial owned loans had current updated collateral valuations within the last twenty-four months.
 
        The following table sets forth by loan category our average loan size, months of seasoning, average loan-to-value ratio (the proportion of the principal amount of the loan to the most current market value of the collateral property) and debt coverage ratio (the proportion of the property's annual net operating income to its annual debt service, which includes principal and interest payments) for the period indicated.

 
   
At December 31, 2009
 
   
Average
 Loan Size
   
Seasoning (months)
   
Loan-to-
Value Ratio
   
Debt
Coverage Ratio
 
   
(dollars in thousands)
 
Real estate loans:
                       
Multi-family
  $ 1,053       52       67 %     1.20  
Commercial investor
    1,216       45       59 %     1.42  
One-to-four family
    64       135       71 %     N/A  
Business loans:
                               
Commercial owner occupied
    972       47       57 %     N/A  
Commercial and industrial
    399       26       N/A       N/A  
SBA
    111       30       N/A       N/A  
Other loans
    80       248       N/A       N/A  

 
        Loan Maturity. For our commercial real estate and business loans, repayment typically depends on the successful operation of the businesses or the properties securing the loans.  Several months before a loan matures, our portfolio managers contact our borrowers to obtain personal and/or business financial and operations data and property information for review.  When deemed appropriate, business and property visits are made to assess the borrower’s revenue-generating activities and to perform inspections of our collateral.  This information is reviewed and evaluated for indications of potential payoff issues prior to maturity.  If potential issues are discovered, our portfolio managers work on a strategy with the borrower well in advance of the loan maturing in order to maximize the benefit to the Company.  At December 31, 2009, we had $29.9 million or 5.2% of the loans held for investment that were due to mature in one year or less, primarily in our loan categories of total C&I loans of $20.4 million and commercial real estate loans of $7.8 million.

The following table does not reflect prepayment assumptions, but rather shows the contractual maturity of the Company's gross loans for the period indicated.

 
   
At December 31, 2009
 
   
Multi-family
   
Commercial
Investor
   
Commercial
Owner Occupied
   
Commercial
and
 Industrial
   
SBA
   
One-to-Four
Family
   
Other
Loans
   
Total
 
   
(in thousands)
 
Amounts due:
                                               
One year or less
  $ -     $ 7,764     $ -     $ 20,372     $ -     $ -     $ 1,808     $ 29,944  
More than one year to three years
    2,202       4,330       177       703       152       41       48       7,653  
More than three years to five years
    178       5,115       -       4,449       1,923       627       12       12,304  
More than five years to 10 years
    7,688       113,156       45,236       5,585       1,262       554       120       173,601  
More than 10 years to 20 years
    2,051       10,828       16,242       -       -       2,877       -       31,998  
More than 20 years
    266,625       8,384       41,364       -       -       4,392       3       320,768  
Total gross loans
    278,744       149,577       103,019       31,109       3,337       8,491       1,991       576,268  
Less (plus):
                                                               
Deferred loan origination (fees) costs
    (718 )     (56 )     (165 )     95       31       36       (2 )     (779 )
Allowance for loan losses (allocated)
    (3,350 )     (1,585 )     (897 )     (2,384 )     (323 )     (269 )     (2 )     (8,810 )
Allowance for loan losses (unallocated)
    -       -       -       -       -       -       -       (95 )
Total loans, net
    274,676       147,936       101,957       28,820       3,045       8,258       1,987       566,584  
Loans held for sale, net
    -       -       -       -       -       -       -       -  
Loans held for investment, net
  $ 274,676     $ 147,936     $ 101,957     $ 28,820     $ 3,045     $ 8,258     $ 1,987     $ 566,584  



The following table sets forth at December 31, 2009, the dollar amount of gross loans receivable contractually due after December 31, 2010, and whether such loans have fixed interest rates or adjustable interest rates.

 
   
At December 31, 2009
 
   
Loans Due After December 31, 2010
 
   
Fixed
   
Adjustable
   
Total
 
   
(in thousands)
 
Real estate loans:
                 
Multi-family
  $ 1,516     $ 277,228     $ 278,744  
Commercial investor
    18,049       123,764       141,813  
One-to-four family
    4,063       4,428       8,491  
Business loans:
                       
Commercial owner occupied
    37,303       65,716       103,019  
Commercial and industrial
    1,462       9,275       10,737  
SBA
    -       3,337       3,337  
Other loans
    150       32       182  
Total gross loans
  $ 62,543     $ 483,780     $ 546,323  

 
 
The following table sets forth the Company’s loan originations, purchases, sales, and principal repayments for the periods indicated:

 
   
For the Year Ended December 31,
 
   
2009
   
2008
   
2007
 
   
(in thousands)
 
                   
Beginning balance of gross loans
  $ 628,767     $ 626,692     $ 607,618  
Loans originated:
                       
Real estate loans:
                       
Multi-family
    494       34,166       311,236  
Commercial investor
    -       33,058       23,040  
One-to-four family
    200       250       341  
Business loans:
                       
Commercial owner occupied
    365       5,375       17,208  
Commecial and industrial
    4,249       17,512       37,705  
SBA
    1,150       907       14,209  
Other loans
    958       1,215       2,992  
Total loans originated
    7,416       92,483       406,731  
Loans purchased:
                       
Multi-family
    4,051       4,577       -  
Commercial investor
    -       9,305       -  
Commercial owner occupied
    -       53,710       -  
Construction loans
    -       -       2,750  
Total loans purchased
    4,051       67,592       2,750  
Total loan production
    11,467       160,075       409,481  
Total
    640,234       786,767       1,017,099  
Less:
                       
Principal repayments
    52,107       150,498       149,550  
Sales of loans
    2,515       6,235       239,396  
Charge-offs
    4,811       1,174       701  
Transfer to other real estate owned
    4,533       93       760  
Total gross loans
    576,268       628,767       626,692  
Ending balance loans held for sale, gross
    -       668       749  
Ending balance loans held for investment, gross
  $ 576,268     $ 628,099     $ 625,943  

 
 
Delinquent Loans. When a borrower fails to make required payments on a loan and does not cure the delinquency within 30 days, we normally record a notice of default and, after providing the required notices to the borrower, commence foreclosure proceedings.  If the loan is not reinstated within the time permitted by law, we may sell the property at a foreclosure sale.  At these foreclosure sales, we generally acquire title to the property.  At December 31, 2009, loans delinquent 60 or more days as a percentage of total gross loans was 0.95%, up from 0.68% at year-end 2008.

The following table sets forth delinquencies in the Company's loan portfolio as of the dates indicated: 
   
60-89 Days
   
90 Days or More
 
         
Principal Balance
         
Principal Balance
 
   
# of Loans
   
of Loans
   
# of Loans
   
of Loans
 
   
(dollars in thousands)
 
                         
At December 31, 2009
                       
Real estate loans:
                       
Multi-family
    -     $ -       3     $ 2,073  
Commercial investor
    -       -       1       1,851  
One-to-four family
    -       -       4       97  
Business loans:
                               
Commercial owner occupied
    -       -       2       996  
SBA
    1       52       3       463  
Total
    1     $ 52       13     $ 5,480  
Delinquent loans to total gross loans
            0.01 %             0.95 %
                                 
At December 31, 2008
                               
Real estate loans:
                               
Multi-family
    -     $ -       1     $ 350  
Commercial investor
    1       317       1       638  
One-to-four family
    2       32       8       637  
Land
    -       -       1       2,550  
Business loans:
                               
SBA
    -       -       2       127  
Total
    3     $ 349       13     $ 4,302  
Delinquent loans to total gross loans
            0.06 %             0.68 %

Nonperforming Assets.  Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), loans restructured at an interest rate below market and other real estate owned (“OREO”).  Nonaccrual loans consisted of all loans 90 days or more past due and on loans where, in the opinion of management, there is reasonable doubt as to the collection of interest.  A “restructured loan” is one where the terms of the loan were renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower.  We did not include in interest income any interest on restructured loans during the periods presented.  At December 31, 2009, we had $13.4 million of nonperforming assets, which consisted of $10.0 million of net nonperforming loans and $3.4 million of OREO.  At December 31, 2008, we had $5.2 million of nonperforming assets, essentially all of which consisted of $5.2 million of nonperforming loans.
 
OREO consisted of three properties at December 31, 2009, compared to two properties at December 31, 2008.  Properties acquired through or in lieu of foreclosure are recorded at fair value less cost to sell. The Company generally obtains an appraisal and/or a market evaluation on all OREO prior to obtaining possession. After foreclosure, valuations are periodically performed by management as needed due to changing market conditions or factors specifically attributable to the properties’ condition. If the carrying value of the property exceeds its fair value less estimated cost to sell, a charge to operations is recorded.
 
We recognized loan interest income on nonperforming loans of $95,000 in 2009, $212,000 in 2008 and $347,000 in 2007.  If these loans had paid in accordance with their original loan terms, we would have recorded additional loan interest income of $781,000 in 2009, $491,000 in 2008 and $315,000 in 2007.

The following table sets forth information concerning nonperforming loans and OREO at the periods indicated:

 
   
At December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(dollars in thousands)
 
Nonperforming assets
                             
Real estate loans:
                             
Multi-family
  $ 5,223     $ 350     $ -     $ -     $ -  
Commercial investor
    1,851       3,188       3,125       -       -  
One-to-four family
    107       637       284       634       1,687  
Business loans:
                                       
Commercial owner occupied
    996       -       -       -       -  
Commercial and industrial
    955       -       -       -       -  
SBA (1)
    880       1,025       784       -       -  
Other loans
    -       -       -       -       -  
Total nonaccrual loans
    10,012       5,200       4,193       634       1,687  
Specific allowance
    -       -       -       (60 )     (185 )
Total nonperforming loans, net
    10,012       5,200       4,193       574       1,502  
Other real estate owned
    3,380       37       711       138       211  
Total nonperforming assets, net
  $ 13,392     $ 5,237     $ 4,904     $ 712     $ 1,713  
                                         
Allowance for loan losses
  $ 8,905     $ 5,881     $ 4,598     $ 3,543     $ 3,050  
Allowance for loan losses as a percent of total nonperforming loans, gross
    88.94 %     113.10 %     109.48 %     558.83 %     180.79 %
Nonperforming loans, net of specific allowances, as a percent of gross loans receivable (2)
    1.74 %     0.83 %     0.67 %     0.09 %     0.25 %
Nonperforming assets, net of specific allowances, as a percent of total assets
    1.66 %     0.71 %     0.64 %     0.10 %     0.24 %
(1)  
The SBA totals include the guaranteed amount, which was $624,000 as of December 31, 2009.
(2)  
Gross loans include loans receivable held for investment and held for sale.
 
         It is our policy to take appropriate, timely and aggressive action when necessary to resolve nonperforming assets.  When resolving problem loans, it is our policy to determine collectability under various circumstances which are intended to result in our maximum financial benefit.  We accomplish this by working with the borrower to bring the loan current, selling the loan to a third party or by foreclosing and selling the asset.
 
        Allowance for Loan Losses.  We maintain an allowance for loan losses to absorb losses inherent in the loans held for investment portfolio at the balance sheet date.  Management evaluates the adequacy of the allowance quarterly to maintain the allowance at levels sufficient to provide for these inherent losses.  The allowance for loan losses is reported as a reduction of loans held for investment.  The allowance is increased by a provision for loan losses which is charged to expense and reduced by charge-offs, net of recoveries.  Loans held for sale are carried at the lower of cost or estimated market value.  Net unrealized losses, if any, are recognized in a lower of cost or market valuation allowance by charges to operations. 
 
The federal banking agencies adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation allowances.  Generally, the policy statement recommends that institutions establish and maintain effective systems and controls to identify, monitor and address asset quality problems; that management analyzes all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establishes acceptable allowance evaluation processes that meet the objectives set forth in the policy statement.  Federal regulations require that the Bank utilize an internal asset classification system to identify and report problem and potential problem assets.   The Bank’s Chief Credit Officer has responsibility for identifying and reporting problem assets to the Bank’s Credit and Investment Review Committee (“CIRC”), which operates pursuant to the board-approved CIRC policy.  The policy incorporates the regulatory requirements of monitoring and classifying all of our assets.

We separate our assets, largely loans, by type, and we use various asset classifications to segregate the assets into various risk categories.  We use the various asset classifications as a means of measuring risk for determining the valuation allowance for groups and individual assets at a point in time.  Currently, we designate our assets into a category of “Pass,”, “Special Mention”, “Substandard” or “Loss.”  A brief description of these classifications follows:

·  
Pass classifications represent assets with a level of credit quality which contain no well-defined deficiency or weakness.
·  
Special Mention assets do not currently expose the Bank to sufficient risk to warrant classification in one of the adverse categories, but possess correctable deficiency or potential weaknesses deserving management’s close attention.
·  
Substandard assets are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  These assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.  OREO acquired from foreclosure is classified as substandard.
·  
Loss assets are those that are considered uncollectible and of such little value that their continuance as assets is not warranted.  Amounts classified as loss are promptly charged off.

Our determination as to the classification of assets and the amount of valuation allowances necessary are subject to review by bank regulatory agencies, which can order a change in a classification or an increase to the allowance. While we believe that an adequate allowance for estimated loan losses has been established, there can be no assurance that our regulators, in reviewing assets including the loan portfolio, will not request us to materially increase our allowance for estimated loan losses, thereby negatively affecting our financial condition and earnings at that time. In addition, actual losses are dependent upon future events and, as such, further increases to the level of allowances for estimated loan losses may become necessary.

The Company’s CIRC reviews the Chief Credit Officer’s recommendations for classifying our assets quarterly and reports the results of our review to the board of directors. At December 31, 2009, we had $36.9 million of assets classified as substandard.  The following tables set forth information concerning substandard assets and OREO at December 31, 2009 and 2008:

 
   
At December 31, 2009
 
   
Loans
   
OREO
   
Securities
   
Total Substandard Assets
 
   
Gross
Balance
   
# of Loans
   
Gross
Balance
   
# of Properties
   
Gross
Balance
   
# of Securities
   
Gross
Balance
   
# of Assets
 
   
(dollars in thousands)
 
Real estate loans:
                                               
Multi-family
  $ 12,268       10     $ -       -       --       --     $ 12,268       10  
Commercial investor
    10,712       12       515       1       --       --       11,227       13  
One-to-four family
    724       16       -       -       --       --       724       16  
Land
    -       -       2,138       1       --       --       2,138       1  
Business loans:
                                    --       --                  
Commercial owner occupied
    3,576       7       727       1       --       --       4,303       8  
Commercial and industrial
    2,102       6       -       -       --       --       2,102       6  
SBA
    1,146       11       -       -       --       --       1,146       11  
Securities
    --       --       --       --       2,988       27       2,988       27  
Total substandard assets
  $ 30,528       62     $ 3,380       3     $ 2,988       27     $ 36,896       92  



 
   
At December 31, 2008
 
   
Loans
   
OREO
   
Securities
   
Total Substandard Assets
 
   
Gross
 Balance
   
# of Loans
   
Gross
 Balance
   
# of Properties
   
Gross
Balance
   
# of Securities
   
Gross
Balance
   
# of Assets
 
   
(dollars in thousands)
 
Real estate loans:
                                               
Multi-family
  $ 350       1     $ -       -       --       --     $ 350       1  
One-to-four family
    307       7       11       3       --       --       318       10  
Commercial investor
    6,362       6       -       -       --       --       6,362       6  
Business loans:
                                    --       --       -       -  
Commercial owner occupied
    912       2       -       -       --       --       912       2  
SBA
    1,261       10       26       1       --       --       1,287       11  
Securities
    --       --       --       --       1,974       35       1,974       35  
Total substandard assets
  $ 9,192       26     $ 37       4     $ 1,974       35     $ 11,203       65  

 
In determining the allowance for loan losses, we evaluate loan credit losses on an individual basis in accordance with FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan, and on a collective basis based on FASB Statement No. 5, Accounting for Contingencies.  For loans evaluated on an individual basis, we analyze the borrower’s creditworthiness, cash flows and financial status, and the condition and estimated value of the collateral.  Loans evaluated individually that are deemed to be impaired are separated from our collective credit loss analysis.
 
Unless an individual borrower relationship warrants a separate analysis, the majority of our loans are evaluated for credit losses on a collective basis through a quantitative analysis to arrive at base loss factors that are adjusted through a qualitative analysis for internal and external identified risks.  The adjusted factor is applied against the loan risk category to determine the appropriate allowance.  Our base loss factors are calculated using our trailing twelve-month and annualized trailing six-month actual charge-off data for all loan types except (1) loans fully secured by cash deposits, the guaranteed portion of SBA loans and FHA/VA guaranteed 1st TD loans, for which there is no loss exposure, (2) certain loan segments for which we have no recent loss experience and for which we rely on charge-off data for all FDIC insured commercial banks and savings institutions based in California, and (3) negative deposit accounts.  Then adjustments for the following internal and external risk factors are added to the base factors:
 
Internal Factors

· Changes in lending policies and procedures, including underwriting standards and collection, charge-offs, and recovery practices;
· Changes in the nature and volume of the loan portfolio and the terms of loans, as well as new types of lending;
· Changes in the experience, ability, and depth of lending management and other relevant staff that may have an impact on our loan portfolio;
· Changes in the volume and severity of past due and classified loans, and in the volume of non-accruals, troubled debt restructurings, and other  loan modifications;
· Changes in the quality of our loan review system and the degree of oversight by our board of directors; and
· The existence and effect of any concentrations of credit and changes in the level of such concentrations.

External Factors

· Changes in national, state and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of
   various market segments (includes trends in real estate values and the interest rate environment);
· Changes in the value of the underlying collateral for collateral-dependent loans; and
· The effect of external factors, such as competition, legal developments and regulatory requirements on the level of estimated credit losses in our current loan portfolio.

 The factor adjustment for each of the nine above-described risk factors are determined by the Chief Credit Officer and approved by the CIRC on a quarterly basis.
 
The ALLL factors are reviewed for reasonableness against the 10-year average, 15-year average, and trailing twelve month total charge-off data for all FDIC insured commercial banks and savings institutions based in California.  Given the above evaluations, the amount of the allowance for loan losses is based upon the total loans evaluated individually and collectively.
 
As of December 31, 2009, the allowance for loan losses totaled $8.9 million, compared to $5.9 million at December 31, 2008 and $4.6 million at December 31, 2007.  The allowance for loan losses at December 31, 2009, as a percent of nonperforming loans and gross loans, was 88.9% and 1.55%, compared with 113.1% and 0.94% at December 31, 2008, and 109.5% and 0.73% at December 31, 2007, respectively.
 
The following table sets forth the Company’s allowance for loan losses and the percent of gross loans to total gross loans in each of the categories listed at the dates indicated:

The following table sets forth the Company’s allowance for loan losses and the percent of gross loans to total gross loans in each of the categories listed at the dates indicated:

 
   
As of and For the Year Ended December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
Balances:
 
(dollars in thousands)
 
Average net loans outstanding during the period
  $ 594,483     $ 617,569     $ 617,528     $ 607,439     $ 546,426  
Total gross loans outstanding at end of the period
    576,268       628,767       626,692       607,618       604,976  
Allowance for Loan Losses:
                                       
Balance at beginning of period
    5,881       4,598       3,543       3,050       2,626  
ALLL Transfer In *
    -       8       -       -       -  
Provision for loan losses
    7,735       2,241       1,651       531       349  
Charge-offs:
                                       
Real Estate:
                                       
One-to-four family
    125       226       101       266       211  
Multi-family
    1,527       -       -       -       -  
Commercial investor
    317       -       -       -       -  
Construction
    -       -       -       -       -  
Business loans:
                                       
Commercial owner occupied
    59       -       -       -       -  
Commercial and industrial
    1,409       -       -       -       -  
SBA
    906       948       600       -       -  
Other loans
    468       -       -       -       5  
Total charge-offs
    4,811       1,174       701       266       216  
Recoveries :
                                       
Real Estate:
                                       
One-to-four family
    26       88       103       225       191  
Multi-family
    -       -       -       -       -  
Commercial investor
    -       -       -       -       -  
Construction
    -       -       -       -       74  
Business loans:
                                       
Commercial owner occupied
    -       -       -       -       -  
Commercial and industrial
    4       -       -       -       -  
SBA
    31       -       -       -       -  
Other loans
    39       120       2       3       26  
Total recoveries
    100       208       105       228       291  
Net loan charge-offs
    4,711       966       596       38       (75 )
Balance at end of period
  $ 8,905     $ 5,881     $ 4,598     $ 3,543     $ 3,050  
Ratios:
                                       
Net charge-offs to average net loans
    0.79 %     0.16 %     0.10 %     0.01 %     (0.01 )%
Allowance for loan losses to gross loans at end of period
    1.55 %     0.94 %     0.73 %     0.58 %     0.50 %


The following table sets forth the allowance for loan losses amounts calculated by the categories listed for the periods set forth in the table:

 
   
As of December 31,
 
   
2009
   
2008
   
2007
 
         
% of Loans
         
% of Loans
         
% of Loans
 
Balance at End of
       
in Category to
         
in Category to
         
in Category to
 
Period Applicable to
 
Amount
   
Total Loans
   
Amount
   
Total Loans
   
Amount
   
Total Loans
 
   
(dollars in thousands)
 
Real estate loans:
                                   
Multi-family
  $ 3,350       48.4 %   $ 1,641       45.7 %   $ 1,438       54.5 %
Commercial investor
    1,585       26.0 %     1,151       26.0 %     1,129       22.7 %
One-to-four family
    269       1.5 %     194       1.6 %     165       2.1 %
Construction
    -       0.0 %     65       0.4 %     20       0.3 %
Land
    -       0.0 %     -       0.4 %     -       0.9 %
Business loans:
                                               
Commercial owner occupied
    897       17.9 %     784       17.9 %     248       9.2 %
Commercial and industrial
    2,384       5.4 %     941       6.9 %     640       8.1 %
SBA
    323       0.5 %     148       0.8 %     207       2.2 %
Other Loans
    2       0.3 %     6       0.3 %     1       0.0 %
Unallocated
    95       --       951       --       750       --  
Total
  $ 8,905