UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended September 30, 2008 |
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o | TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT |
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| For transition period to |
Commission File Number: 000-51901
Santa Lucia Bancorp
(Exact name of registrant as specified in its charter)
California |
| 35-2267934 |
(State or other jurisdiction of incorporation) |
| (IRS Employer Identification No.) |
7480 El Camino Real, Atascadero, CA 93422
(Address of principal executive offices)
805-466-7087
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
| Accelerated filer o |
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Non- accelerated filer o |
| Smaller reporting Company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Title of Class: Common Stock, no par value; shares outstanding as of November 10, 2008: 1,923,053.
2
PART I - FINANCIAL INFORMATION
Santa Lucia Bancorp
(in thousands)
|
| 30-Sep-08 |
| 31-Dec-07 |
| ||
|
| (unaudited) |
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|
| ||
Assets |
|
|
|
|
| ||
Cash and due from banks |
| $ | 10,033 |
| $ | 7,399 |
|
Federal funds sold |
| — |
| — |
| ||
Total cash and cash equivalents |
| 10,033 |
| 7,399 |
| ||
|
|
|
|
|
| ||
Securities available for sale |
| 40,841 |
| 56,107 |
| ||
Loans, net |
| 184,787 |
| 166,619 |
| ||
Premises and equipment, net |
| 8,636 |
| 8,869 |
| ||
Cash surrender value of life insurance |
| 5,147 |
| 5,006 |
| ||
Federal Reserve Bank and Federal Home Loan Bank stock, at cost |
| 1,506 |
| 1,454 |
| ||
Accrued interest and other assets |
| 2,961 |
| 3,186 |
| ||
Total Assets |
| $ | 253,911 |
| $ | 248,640 |
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|
| ||
Liabilities and Shareholders’ Equity |
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|
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Deposits: |
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|
|
|
| ||
Noninterest-bearing demand |
| $ | 74,082 |
| $ | 77,101 |
|
Interest-bearing demand - NOW |
| 12,918 |
| 11,996 |
| ||
Money Market |
| 28,003 |
| 25,440 |
| ||
Savings |
| 26,749 |
| 26,337 |
| ||
Time certificates of deposit of $100,000 or more |
| 38,029 |
| 38,830 |
| ||
Other time certificates |
| 33,611 |
| 33,014 |
| ||
Total Deposits |
| 213,392 |
| 212,718 |
| ||
Short-term borrowings |
| 9,500 |
| 5,900 |
| ||
Long-term debt |
| 6,988 |
| 7,155 |
| ||
Accrued interest and other liabilities |
| 2,626 |
| 1,678 |
| ||
Total Liabilities |
| 232,506 |
| 227,451 |
| ||
Commitments and contingencies |
| — |
| — |
| ||
Shareholders’ Equity |
|
|
|
|
| ||
Common stock - no par value; authorized 20,000,000 shares; Issued and outstanding, 1,923,053 shares at September 30, 2008 and 1,924,873 shares at December 31, 2007 |
| 9,894 |
| 9,851 |
| ||
Additional Paid-in Capital. |
| 468 |
| 358 |
| ||
Retained earnings |
| 10,795 |
| 10,783 |
| ||
Accumulated other comprehensive income-net unrealized gains on available-for-sale securities, net of taxes |
| 248 |
| 197 |
| ||
Total Shareholders’ Equity |
| 21,405 |
| 21,189 |
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 253,911 |
| $ | 248,640 |
|
(see accompanying notes)
3
Santa Lucia Bancorp
Consolidated Statements of Income
(in thousands except per share data)
|
| For the three month period ending |
| For the nine month period ending |
| ||||||||
|
| 30-Sep-08 |
| 30-Sep-07 |
| 30-Sep-08 |
| 30-Sep-07 |
| ||||
|
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
| ||||
Interest Income |
|
|
|
|
|
|
|
|
| ||||
Interest and fees on loans |
| $ | 3,242 |
| $ | 3,791 |
| $ | 9,773 |
| $ | 11,412 |
|
Federal funds sold |
| 8 |
| 94 |
| 24 |
| 240 |
| ||||
Investment securities |
| 543 |
| 620 |
| 1,785 |
| 1,627 |
| ||||
|
| 3,793 |
| 4,505 |
| 11,582 |
| 13,279 |
| ||||
Interest expense |
|
|
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|
|
| ||||
Interest-bearing demand deposits |
| 9 |
| 21 |
| 27 |
| 45 |
| ||||
Money Market |
| 131 |
| 150 |
| 410 |
| 423 |
| ||||
Savings |
| 17 |
| 71 |
| 71 |
| 218 |
| ||||
Time certificates of deposit |
| 612 |
| 826 |
| 2,053 |
| 2,374 |
| ||||
Short-term borrowings |
| 52 |
| — |
| 152 |
| 8 |
| ||||
Long-term debt |
| 89 |
| 140 |
| 300 |
| 414 |
| ||||
|
| 910 |
| 1,208 |
| 3,013 |
| 3,482 |
| ||||
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|
|
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| ||||
Net interest income |
| 2,883 |
| 3,297 |
| 8,569 |
| 9,797 |
| ||||
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|
|
| ||||
Provision for credit losses. |
| 160 |
| — |
| 200 |
| — |
| ||||
Net interest income after provision for loan losses |
| 2,723 |
| 3,297 |
| 8,369 |
| 9,797 |
| ||||
Noninterest income |
|
|
|
|
|
|
|
|
| ||||
Service charges and fees |
| 172 |
| 146 |
| 457 |
| 436 |
| ||||
Gain on sale of investment securities |
| — |
| — |
| 108 |
| — |
| ||||
Other income |
| 76 |
| 100 |
| 302 |
| 356 |
| ||||
|
| 248 |
| 246 |
| 867 |
| 792 |
| ||||
Noninterest expense |
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
| 1,409 |
| 1,306 |
| 4,222 |
| 3,905 |
| ||||
Occupancy |
| 171 |
| 158 |
| 485 |
| 468 |
| ||||
Equipment |
| 175 |
| 165 |
| 502 |
| 498 |
| ||||
Professional services |
| 144 |
| 110 |
| 425 |
| 322 |
| ||||
Data processing |
| 125 |
| 119 |
| 377 |
| 369 |
| ||||
Office related expenses |
| 101 |
| 97 |
| 281 |
| 264 |
| ||||
Marketing |
| 106 |
| 107 |
| 310 |
| 299 |
| ||||
Regulatory assessments |
| 44 |
| 17 |
| 123 |
| 48 |
| ||||
Directors’ fees and expenses |
| 81 |
| 86 |
| 247 |
| 250 |
| ||||
Other |
| 78 |
| 109 |
| 266 |
| 298 |
| ||||
|
| 2,434 |
| 2,274 |
| 7,238 |
| 6,721 |
| ||||
Earnings before income taxes |
| 537 |
| 1,269 |
| 1,998 |
| 3,868 |
| ||||
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|
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| ||||
Income taxes |
| 188 |
| 514 |
| 747 |
| 1,521 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Earnings |
| $ | 349 |
| $ | 755 |
| $ | 1,251 |
| $ | 2,347 |
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Per Share Data |
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Net earnings - basic. |
| $ | 0.18 |
| $ | 0.39 |
| $ | 0.65 |
| $ | 1.21 |
|
Net Earnings - diluted. |
| $ | 0.18 |
| $ | 0.37 |
| $ | 0.64 |
| $ | 1.16 |
|
(see accompanying notes)
4
Santa Lucia Bancorp
Consolidated Statements of Cash Flow
(in thousands)
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| (For the nine month period ended) |
| ||||
|
| 30-Sep-08 |
| 30-Sep-07 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net earnings |
| $ | 1,251 |
| $ | 2,347 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 482 |
| 489 |
| ||
Provision for loan losses |
| 200 |
| — |
| ||
Loss (gain) on sale of investment securities |
| (108 | ) | — |
| ||
Stock-based compensation expense |
| 110 |
| 97 |
| ||
Other items, net |
| 977 |
| (494 | ) | ||
Net cash provided by operating activities |
| 2,912 |
| 2,439 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Proceeds from maturities of investment securities |
| 9,814 |
| 10,787 |
| ||
Proceeds from sale of investment securities |
| 5,513 |
| — |
| ||
Purchases of investment securities |
| — |
| (22,659 | ) | ||
Net change in loans |
| (18,368 | ) | 10,578 |
| ||
Purchases of bank premises and equipment |
| (250 | ) | (157 | ) | ||
Net cash used in investing activities |
| (3,291 | ) | (1,451 | ) | ||
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|
|
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|
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Cash flows from financing activities: |
|
|
|
|
| ||
Net change in deposits |
| 674 |
| 8,905 |
| ||
Proceeds and tax benefit from exercise of stock options |
| 15 |
| 164 |
| ||
Net change in borrowings |
| 3,433 |
| — |
| ||
Stock Repurchase |
| (146 | ) | (562 | ) | ||
Cash dividends paid |
| (963 | ) | (871 | ) | ||
Net cash provided by financing activities |
| 3,013 |
| 7,636 |
| ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
| 2,634 |
| 8,624 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of year |
| 7,399 |
| 10,140 |
| ||
Cash and cash equivalents at end of year |
| $ | 10,033 |
| $ | 18,764 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
Interest paid |
| $ | 2,588 |
| $ | 2,990 |
|
Income taxes paid |
| $ | 815 |
| $ | 1,320 |
|
(see accompanying notes)
5
Santa Lucia Bancorp
Consolidated Statement of Shareholders’ Equity
(in thousands except shares outstanding)
|
| For year ending December 31, 2007 and the period ending September 30, 2008 |
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| Accumulated |
|
|
| ||||||
|
|
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|
| Additional |
|
|
|
|
| Other |
|
|
| ||||||
|
| Shares |
| Common |
| Paid-in |
| Comprehensive |
| Retained |
| Comprehensive |
| Total |
| ||||||
|
| Outstanding |
| Stock |
| Capital |
| Income |
| Earnings |
| Income |
| Equity |
| ||||||
Balance at January 1, 2007 |
| 1,928,097 |
| $ | 9,567 |
| $ | 216 |
|
|
| $ | 9,625 |
| $ | (271 | ) | $ | 19,137 |
| |
Cash Dividends |
|
|
|
|
|
|
|
|
| (871 | ) |
|
|
|
| ||||||
Exercise of Stock Options |
| 29,247 |
| 284 |
| 19 |
|
|
| (121 | ) |
|
|
|
| ||||||
Repurchase and retirement of stock |
| (32,471 | ) |
|
|
|
|
|
| (853 | ) |
|
|
|
| ||||||
Stock-based compensation expense |
|
|
|
|
| 123 |
|
|
|
|
|
|
|
|
| ||||||
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net earnings for the year |
|
|
|
|
|
|
| $ | 3,003 |
| 3,003 |
|
|
|
|
| |||||
Change in unrealized gain (loss) on available-for-sale securities, net of tax |
|
|
|
|
|
|
| 467 |
|
|
| 468 |
|
|
| ||||||
Total Comprehensive Income |
|
|
|
|
|
|
| $ | 3,470 |
|
|
|
|
|
|
| |||||
Balance at December 31, 2007 |
| 1,924,873 |
| $ | 9,851 |
| $ | 358 |
|
|
| $ | 10,783 |
| $ | 197 |
| $ | 21,189 |
| |
|
|
|
|
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|
|
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| ||||||
|
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|
|
| Accumulated |
|
|
| ||||||
|
|
|
|
|
| Additional |
|
|
|
|
| Other |
|
|
| ||||||
|
| Shares |
| Common |
| Paid-in |
| Comprehensive |
| Retained |
| Comprehensive |
| Total |
| ||||||
|
| Outstanding |
| Stock |
| Capital |
| Income |
| Earnings |
| Income |
| Equity |
| ||||||
Balance at January 1, 2008 |
| 1,924,873 |
| $ | 9,851 |
| $ | 358 |
|
|
| $ | 10,783 |
| $ | 197 |
| $ | 21,189 |
| |
Cash Dividends |
|
|
|
|
|
|
|
|
| (963 | ) |
|
|
|
| ||||||
Exercise of Stock Options |
| 4,360 |
| 43 |
|
|
|
|
| (28 | ) |
|
|
|
| ||||||
Repurchase and retirement of stock |
| (6,180 | ) |
|
|
|
|
|
| (146 | ) |
|
|
|
| ||||||
Stock-based compensation expense |
|
|
|
|
| 110 |
|
|
|
|
|
|
|
|
| ||||||
Cumulative effect of change in accounting principle for Split-Dollar Life Insurance Arrangements |
|
|
|
|
|
|
|
|
| (102 | ) |
|
|
|
| ||||||
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net earnings for the year |
|
|
|
|
|
|
| $ | 1,251 |
| 1,251 |
|
|
|
|
| |||||
Change in unrealized gain (loss) on available-for-sale securities, net of tax |
|
|
|
|
|
|
| 51 |
|
|
| 51 |
|
|
| ||||||
Total Comprehensive Income |
|
|
|
|
|
|
| $ | 1,302 |
|
|
|
|
|
|
| |||||
Balance at September 30, 2008 |
| 1,923,053 |
| $ | 9,894 |
| $ | 468 |
|
|
| $ | 10,795 |
| $ | 248 |
| $ | 21,405 |
|
6
SANTA LUCIA BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
Note 1 Bases of Presentation:
The accompanying unaudited condensed consolidated financial statements of Santa Lucia Bancorp (the “Company”) and its subsidiary Santa Lucia Bank (the “Bank”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. Nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Bank’s 2007 Annual Report as filed on Form 10-KSB “as amended”.
In the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of the Company with respect to the interim consolidated financial statements and the results of its operations for the interim period ended September 30, 2008, have been included. The results of operations for interim periods are not necessarily indicative of the results for a full year.
Note 2 Loans and Related Allowance for Loan Losses:
A summary of loans as of September 30, 2008 and December 31, 2007 is as follows:
|
| (in thousands) |
| ||||
|
| 30-Sep-08 |
| 31-Dec-07 |
| ||
|
|
|
|
|
| ||
Real estate - construction |
| $ | 52,224 |
| $ | 47,819 |
|
Real estate - other |
| 95,384 |
| 81,895 |
| ||
Commercial |
| 38,512 |
| 38,017 |
| ||
Consumer |
| 1,217 |
| 1,237 |
| ||
Gross Loans |
| 187,337 |
| 168,968 |
| ||
|
|
|
|
|
| ||
Deferred loan fees |
| (759 | ) | (676 | ) | ||
Allowance for loan losses |
| (1,791 | ) | (1,673 | ) | ||
Net Loans |
| $ | 184,787 |
| $ | 166,619 |
|
The Bank’s loan portfolio consists primarily of loans to borrowers within the San Luis Obispo and northern Santa Barbara Counties, California. Although the Bank seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Bank’s market areas. As a result, the Bank’s loan and collateral portfolios are, to some degree, concentrated in those industries. When real estate is taken as collateral, advances are generally limited to a certain percentage of the appraised value of the collateral at the time the loan is made, depending on the type of loan, the underlying property and other factors.
The Bank’s allowance for loan losses as a percentage of total loans was .96% as of September 30, 2008 and 0.99% as of December 31, 2007. Management believes that the allowance for loan losses at September 30, 2008 is adequate based upon its analysis of the loan portfolio and the methodologies used for this purpose.
7
Concentration of Credit Risk. As of September 30, 2008, real estate served as the principal source of collateral with respect to approximately 79.9% of our loan portfolio, of which, 45.27% is considered commercial real estate (CRE). Within the makeup of our CRE, approximately 26.7% of our commercial term loans are granted for owner use, which is repaid from the cash flow of the owner’s business. We believe that this factor coupled with the diversification of business types, location, conservative underwriting and loss history further mitigates the risk in our CRE portfolio. The Bank targets commercial term loans for owners use as it supports the local business economy. The Bank believes that owner occupied properties do not carry the same risk as commercial strip centers and other income properties with higher vacancy factors that rely on third parties for repayment.
The Bank also targets experienced local builders that are active in residential construction for owner’s use, spec construction and small-scale residential construction projects. The Bank originates loans on a limited number of large projects and 20.9% of our construction loans are in owner occupied residential construction and commercial properties for owner use.
A decline in current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of real estate owned by us, as well as our financial condition and results of operations in general.
Note 3 Commitments and Contingencies
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those commitments. Commitments to extend credit (such as the unfunded portion on lines of credit and commitments to fund new loans) as of September 30, 2008 and 2007 amount to approximately $60,746,000 and $56,090,000 respectively, of which approximately $3,106,000 and $4,470,000 are related to standby letters of credit, respectively. The Bank uses the same credit policies in these commitments as for all of its lending activities. As such, the credit risk involved in these transactions is essentially the same as that involved in extending loan facilities to customers.
Because of the nature of its activities, the Company and Bank are from time to time subject to pending and threatened legal actions, which arise out of the normal course of their business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
Note 4 Earnings Per Share
Basic earnings per share (“EPS”) are based on the weighted average number of shares outstanding before any dilution from common stock equivalents. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shares in the earnings of the entity.
8
The following is a reconciliation of the net income and shares outstanding to the income and number of shares used to compute EPS:
|
| Three Months Ending |
| Nine Months Ending |
| ||||||
|
| 30-Sep-08 |
| 30-Sep-08 |
| ||||||
|
| Income |
| Shares |
| Income |
| Shares |
| ||
|
| (Numerator) |
| (Denominator) |
| (Numerator) |
| (Denominator) |
| ||
Net income |
| $ | 349 |
|
|
| $ | 1,251 |
|
|
|
Average shares outstanding |
|
|
| 1,923,053 |
|
|
| 1,924,349 |
| ||
Used in Basic EPS |
| 349 |
| 1,923,053 |
| 1,251 |
| 1,924,349 |
| ||
Dilutive effect of outstanding stock options |
|
|
| 27,614 |
|
|
| 43,576 |
| ||
Used in Diluted EPS |
| $ | 349 |
| 1,950,667 |
| $ | 1,251 |
| 1,967,925 |
|
|
| Three Months Ending |
| Nine Months Ending |
| ||||||
|
| 30-Sep-07 |
| 30-Sep-07 |
| ||||||
|
| Income |
| Shares |
| Income |
| Shares |
| ||
|
| (Numerator) |
| (Denominator) |
| (Numerator) |
| (Denominator) |
| ||
Net income |
| $ | 755 |
|
|
| $ | 2,347 |
|
|
|
Average shares outstanding |
|
|
| 1,937,193 |
|
|
| 1,933,510 |
| ||
Used in Basic EPS |
| 755 |
| 1,937,193 |
| 2,347 |
| 1,933,510 |
| ||
Dilutive effect of outstanding stock options |
|
|
| 79,737 |
|
|
| 90,870 |
| ||
Used in Diluted EPS |
| $ | 755 |
| 2,016,930 |
| $ | 2,347 |
| 2,024,380 |
|
Note 5 Stock Based Compensation
The Company has two stock option plans, which are fully described in Note K in the Bank’s Annual Report on Form 10-KSB. On January 1, 2006, the Company implemented Statement of Financial Accounting Standards 123(R), “Share-Based Payments” (“SFAS123R”) which replaced SFAS 123 and supersedes APB Opinion No. 25 and the related implementation guidance. SFAS 123R addresses accounting for equity-based compensation arrangements, including employee stock options. The Company adopted the “modified prospective method” where stock-based compensation expense is recorded beginning on the adoption date and prior periods are not restated. Under this method, compensation expense is recognized using the fair-value based method for all new awards granted after January 1, 2006. Additionally, compensation expense for unvested options that were outstanding at December 31, 2005 is recognized over the requisite service period based on the fair value of those options as previously calculated under the pro forma disclosures of SFAS 123.
Note 6 Recent Accounting Pronouncements
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115”, became effective January 1, 2008. The Company has not elected to fair value any existing financial instruments under SFAS No. 159.
Effective January 1, 2008, upon adoption of SFAS 157, “Fair Value Measurements”, we group our financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
· Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York exchange. Level 1 also includes U.S. Treasury, other U.S. government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
9
· Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.
· Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
The only assets and liabilities measured at fair value on a recurring basis are our securities available for sale which total $40.8 million, all of which are valued using Level 2 valuations.
In September 2006, the FASB ratified the FASB’s Emerging Issues Task Force (or “EITF”) consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” and in March 2007 the FASB ratified EITF Issue No. 06-10, “Accounting for Collateral Assignment Split Dollar Life Insurance Arrangements.” The EITF’s consensus on both of these issues focuses on the accounting for arrangements in which a company has agreed to share a portion of the value of the insurance policy with the employee. These arrangements are referred to as “split-dollar” arrangements. Entities with split-dollar life insurance policies had to accrue, for years beginning after December 15, 2007, liabilities and associated expense for those insurance benefits under the same rules that apply when such benefits are provided by means other than life insurance. The provisions of EITF No 06-4 was applied through a cumulative effect adjustment to our beginning retained earnings totaling $102,000.
10
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is management’s discussion and analysis of the major factors that influenced our financial performance for the three and nine months ended September 30, 2008. This analysis should be read in conjunction with the Company’s 2007 Annual Report as filed on Form 10-KSB “as amended” and with the unaudited financial statements and notes as set forth in this report. Unless the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refers to Santa Lucia Bancorp on a consolidated basis.
FORWARD LOOKING INFORMATION
Certain statements contained in this Quarterly Report on Form 10-QSB (“Report”), including, without limitation, statements containing the words “estimate,” “believes,” “anticipates,” “intends,” “may,” “expects,” “could,” and words of similar import, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements relate to, among other things, our current expectations regarding future operating results, net interest margin, strength of the local economy, and allowance for credit losses. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: the current turmoil in United States and foreign financial markets and the response of government and bank regulators thereto, general economic and business conditions in those areas in which we operate, demographic changes, competition, natural disasters, growth in loans and deposits, fluctuations in interest rates, changes in business strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of our business, economic, political and global changes arising from the war on terrorism, and other factors referenced in the Company’s 2007 Annual Report as filed on form 10-KSB, as amended, including in “Item 1. Business - Factors That May Affect Future Results of Operations.” When relying on forward-looking statements to make decisions with respect to our Company, investors and others are cautioned to consider these and other risks and uncertainties. We disclaim any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
This discussion should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this report.
EXECUTIVE OVERVIEW
General
Santa Lucia Bancorp (the “Company”) (OTC Bulletin Board SLBA.OB) is a California corporation organized in 2006 to act as the holding company for Santa Lucia Bank (the “Bank”), a four office bank serving San Luis Obispo and northern Santa Barbara Counties.
The Company reported financial results driven by the economic realities in its market areas. Net income for the nine month period ending September 30, 2008 decreased 46.7% to $1,251,000 compared to $2,347,000 for the same period in 2007. Net income for the three months ended September 30, 2008 decreased 53.80% to $349,000 compared to $755,000 for the comparable period in 2007. Diluted earnings per share for the three months ended September 30, 2008 decreased 51.4% to $0.18 from $0.37 for the same three month period in 2007 and decreased 44.8% to $0.64 from $1.16 for the nine months ended September 30, 2008 compared to the same period in 2007. The primary reason for the decrease in Earnings Per Share was the Federal Reserve Bank reduction in the Fed Funds Rate by 2.00% in the first quarter 2008 and an additional .25% in the second quarter 2008 following a 1.00% decrease in the last two quarters of 2007. The Company is asset sensitive, which means when interest rates decrease, the Company’s variable rate loans reprice more rapidly than its fixed rate deposits. A declining interest rate environment has a negative effect on the Bank’s net interest margin. Such was the case in the last two quarters of 2007 and the first three quarters of 2008. The decrease in the prime lending rate coupled with a shift of deposits from non interest bearing to money market accounts caused the Company’s net interest margin to decrease from 6.01% to 5.01% for the three months ended September 30,
11
2008 a decrease of 16.6%. The net interest margin for the nine months ended September 30, 2008 decreased from 6.1% to 5.1% or 16.2% when comparing the nine months ended September 30, 2007. Net interest income for the three months ended decreased 12.6% from $3,297,000 at September 30, 2007 to $2,883,000 at September 30, 2008. Net interest income decreased 12.5% from $9,797,000 at September 30, 2007 to $8,569,000 at September 30, 2008. This was primarily due to the declining yields on variable rate loans which comprises approximately 64.7% of our loan portfolio and repricing of some fixed rate loans in order to retain customer relationships.
Noninterest income for the three months ended September 30, 2008 increased 0.8% to $248,000 compared to $246,000 for the comparable period in 2007. Noninterest income for the nine months ended September 30, 2008 increased 9.5% to $867,000 compared to $792,000 for the comparable period in 2007. The increase is primarily due to the sale of $5,500,000 in mortgage back securities in the first quarter of 2008 which created a net gain of $108,000. The mortgage backed securities were sold to increase liquidity for the anticipated loan fundings during the second and third quarters of 2008.
Noninterest expense for the three months ended September 30, 2008 increased 7.0% or $160,000 to $2,434,000 compared $2,274,000 for the comparable period in 2007. Noninterest expense for the nine months ended September 30, 2008 increased by 7.7% or $517,000 to $7,238,000 compared to $6,721,000 for the comparable period in 2007. The increase in noninterest expense was primarily attributed to legal fees related to the collection of non-accrual loans and increases in salary and employee benefits.
Net loans increased $6,355,000 or 3.6% during the three months ending September 30, 2008 compared to an increase of $651,000 or 0.4% during the same period in 2007. Net loans increased $18,200,000 or 10.9% during the nine months ending September 30, 2008 compared to a decrease of $10,600,000 or 6.2% during the same period in 2007. Loans secured by real estate increased $17,900,000 or 21.9% and commercial loans increased $250,000 or 0.66% during the first nine months of 2008.
Deposits increased $3,900,000 or 1.9% during the three months ending September 30, 2008 compared to an increase of $8,179,000 or 3.8% during the same period in 2007. Deposits increased $674,000 or 0.3% during the first nine months of 2008 compared to an increase of $8,900,000 or 4.2% during the same period in 2007. Non-interest bearing demand deposits decreased $3,000,000 during the nine month period ending September 30, 2008 compared to a decrease of $1,200,000 million during the nine month period ending September 30, 2007. Interest bearing demand deposits increased $922,000, money market accounts increased $2,600,000, savings increased $412,000, certificates of deposits over $100,000 and decreased $801,000 and other time certificates increased $674,000 during the nine month period ending September 30, 2008.
12
SELECTED FINANCIAL INFORMATION
|
| (in thousands, except share data and ratios) |
| (in thousands, except share data and ratios) |
| ||||||||||||
|
| Unaudited |
| Unaudited |
| ||||||||||||
|
| Three Months Ended |
|
|
| Nine Months Ended |
|
|
| ||||||||
|
| September 30, |
| % |
| September 30, |
| % |
| ||||||||
|
| 2008 |
| 2007 |
| Change |
| 2008 |
| 2007 |
| Change |
| ||||
Summary of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Income |
| $ | 3,793 |
| $ | 4,505 |
| -15.80 | % | $ | 11,582 |
| $ | 13,279 |
| -12.78 | % |
Interest Expense |
| 910 |
| 1,208 |
| -24.67 | % | 3,013 |
| 3,482 |
| -13.47 | % | ||||
Net Interest Income |
| 2,883 |
| 3,297 |
| -12.56 | % | 8,569 |
| 9,797 |
| -12.53 | % | ||||
Provision for Loan Loss |
| 160 |
| — |
| n/a |
| 200 |
| — |
| n/a |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net Interest Income After Provision for Loan Losses |
| 2,723 |
| 3,297 |
| -17.41 | % | 8,369 |
| 9,797 |
| -14.58 | % | ||||
Noninterest Income |
| 248 |
| 246 |
| 0.81 | % | 867 |
| 792 |
| 9.47 | % | ||||
Noninterest Expense |
| 2,434 |
| 2,274 |
| 7.04 | % | 7,238 |
| 6,721 |
| 7.69 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income Before Income Taxes |
| 537 |
| 1,269 |
| -57.68 | % | 1,998 |
| 3,868 |
| -48.35 | % | ||||
Income Taxes |
| 188 |
| 514 |
| -63.42 | % | 747 |
| 1,521 |
| -50.89 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
| $ | 349 |
| $ | 755 |
| -53.77 | % | $ | 1,251 |
| $ | 2,347 |
| -46.70 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash Dividends Paid |
| $ | 481 |
| $ | 484 |
| -0.62 | % | $ | 963 |
| $ | 871 |
| 10.56 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings Per Share - Basic |
| $ | 0.18 |
| $ | 0.39 |
| -53.85 | % | $ | 0.65 |
| $ | 1.21 |
| -46.28 | % |
Earnings Per Share - Diluted |
| $ | 0.18 |
| $ | 0.37 |
| -51.35 | % | $ | 0.64 |
| $ | 1.16 |
| -44.83 | % |
Dividends |
| $ | 0.25 |
| $ | 0.25 |
| 0.00 | % | $ | 0.50 |
| $ | 0.45 |
| 11.11 | % |
Book Value |
| $ | 11.13 |
| $ | 10.57 |
| 5.30 | % | $ | 11.13 |
| $ | 10.57 |
| 5.30 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common Outstanding Shares: |
| 1,923,053 |
| 1,936,773 |
| -0.71 | % | 1,923,053 |
| 1,936,773 |
| -0.71 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Statement of Financial Condition Summary: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Assets |
|
|
|
|
|
|
| $ | 253,911 |
| $ | 251,767 |
| 0.85 | % | ||
Total Deposits |
|
|
|
|
|
|
| 213,392 |
| 221,894 |
| -3.83 | % | ||||
Total Net Loans |
|
|
|
|
|
|
| 184,787 |
| 159,103 |
| 16.14 | % | ||||
Allowance for Loan Losses |
|
|
|
|
|
|
| 1,791 |
| 1,682 |
| 6.48 | % | ||||
Total Shareholders’ Equity |
|
|
|
|
|
|
| 21,405 |
| 20,481 |
| 4.51 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selected Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Return on Average Assets |
| 0.55 | % | 1.22 | % | -54.97 | % | 0.67 | % | 1.28 | % | -47.88 | % | ||||
Return on Average Equity |
| 6.47 | % | 14.77 | % | -56.20 | % | 7.71 | % | 15.71 | % | -50.96 | % | ||||
Net interest margin |
| 5.01 | % | 6.01 | % | -16.64 | % | 5.07 | % | 6.05 | % | -16.20 | % | ||||
Average Loans as a Percentage of Average Deposits |
| 85.46 | % | 73.22 | % | 16.73 | % | 82.62 | % | 75.10 | % | 10.01 | % | ||||
Allowance for Loan Losses to Total Loans |
| 0.96 | % | 1.04 | % | -7.69 | % | 0.96 | % | 1.04 | % | -7.69 | % | ||||
Tier I Capital to Average Assets - “Bank Only” |
|
|
|
|
|
|
| 9.68 | % | 9.65 | % | 0.31 | % | ||||
Tier I Capital to Risk-Weighted Assets - “Bank Only” |
|
|
|
|
|
|
| 11.77 | % | 12.28 | % | -4.15 | % | ||||
Total Capital to Risk-Weighted Assets - “Bank Only” |
|
|
|
|
|
|
| 13.04 | % | 13.80 | % | -5.51 | % |
13
KEY FACTORS IN EVALUATING FINANCIAL CONDITION AND OPREATING PERFORMANCE
As a publicly traded community bank holding company, we focus on several key factors including:
· Return to our shareholders
· Return on average assets
· Asset quality
· Asset growth
· Operating efficiency
Return to our shareholders. Our return to our shareholders is measured in the form of return on average equity, or ROAE. Our net income decreased 53.8%, to $349,000 for the three month period ending September 30, 2008 from $755,000 for the same period in 2007. Net income decreased 46.7%, to $1,251,000 for the nine months ended September 30, 2008 from $2,347,000 for the same period in 2007. The Company is asset sensitive, which means when interest rates decrease, the Company’s variable rate loans reprice more rapidly than its fixed rate deposits. A declining interest rate environment has a negative effect on net interest margin. Such was the case the last two quarters of 2007 and in the first two quarters of 2008. During the first quarter of 2008 the Federal Reserve Bank reduced the Prime Lending Rate by 2.00% followed by an additional .25% reduction in the second quarter 2008. This caused the Company’s net interest margin to decline for the three months ended September 30, 2008 to 5.01% compared to 6.01% for the same period in 2007, a decrease of 1.00%. For the nine months ending September 30, 2008 the Company’s net interest margin declined to 5.07% compared to 6.05% for the same period in 2007, a decrease of 0.98%. Net interest income was $8,569,000 for the nine months ended September 30, 2008 compared to $9,797,000 for the same period in 2007, a decrease of $1,228,000 or 12.53%. Basic and diluted earnings per share for the quarter ended September 30, 2008 were $0.18 and $0.18, which compares to $0.39 and $0.37 for the quarter ended September 30, 2007, a decrease of $0.21 and $0.19. Basic and diluted earnings per share for the nine months ended September 30, 2008 were $0.65 and $0.64, which compares to $1.21 and $1.16 for the quarter ended September 30, 2007, a decrease of $0.56 and $0.52. ROAE for the quarter ending September 30, 2008, decreased to 6.47% compared to 14.77% for the same period in 2007, a decrease of 8.30%. ROAE for the nine months ending September 30, 2008, decreased to 7.71% compared to 15.71% for the same period in 2007, a decrease of 8.00%.
Return on Average Assets. Our return on average assets, or ROAA, is a measurement we use to compare our performance with other banks and bank holding companies. ROAA for the quarter ended September 30, 2008 was 0.55% compared to 1.22% for the same period in 2007, a decrease of 0.67%. ROAA for the nine months ended September 30, 2008 was 0.67% compared to 1.28% for the same period in 2007, a decrease of 0.61% primarily due to the reductions in net interest income and in net interest margin.
Asset Quality. For all banks and bank holding companies, asset quality has a significant impact on overall financial condition and results of operations. Asset quality is measured in terms of nonperforming loans and assets as a percentage of total assets and net charge-offs as a percentage of average loans. These measures are key elements in estimating the future earnings of a company. There were two nonperforming loans totaling $1,500,000 million as of September 30, 2008, compared to three loans totaling $2,175,000 at December 31, 2007 and no nonperforming loans at September 30, 2007. Nonperforming loans as a percentage of total loans decreased to 0.79% as of September 30, 2008, compared to 1.29% at December 31, 2007 and 0.00% as of September 30, 2007. Charge-offs to average loans were 0.06% for the nine months ended September 30, 2008, compared to 0.04% as of December 31, 2007 and 0.04% as of September 30, 2007. Allowance for loan losses increased 6.48% to $1,791,000 from $1,682,000 when comparing September 30, 2007 to September 30, 2008. The allowance decreased to 0.96% of total loans when comparing 0.99% as of December 31, 2007. Additions to the allowance for loan losses for the nine months ended September 30, 2008 totaled $200,000 compared to no additions for the same period in 2007, of which amount $160,000 was provided in the third quarter ended September 30, 2008.
Asset Growth. As revenues from both net interest income and non-interest income are a function of asset size, the slight growth in assets has a direct impact on increasing net income and EPS. The majority of our assets are loans, and the majority of our liabilities are deposits; therefore the ability to generate loans and deposits are fundamental to our asset growth. Total assets increased 2.12% to $253,900,000 as of September 30, 2008 from $248,600,000 as of December 31, 2007 and $251,800,000 as of September 30, 2007. Total deposits decreased $8,500,000 for the nine months ending September 30, 2008 to $213,400,000 or 3.83% compared to $212,700,000 as of December 31, 2007.
14
Deposit growth has slowed during 2008 due to the intense competition for deposits, as well as the availability of alternative investments such as mutual funds, money market funds, and the stock market. Gross loans increased $18,300,000 or 10.87% to $187,300,000 as of September 30, 2008 compared to $169,000,000 as of December 31, 2007 and $161,500,000 as of September 30, 2007. The investment portfolio decreased 27.21% or $15,300,000 over the past nine months from $56,100,000 as of December 31, 2007 to $40,800,000. This was primarily due to the sale of $5,500,000 in mortgage back securities in the first quarter 2008 coupled with called securities and normal maturities which were reinvested in loans.
Operating Efficiency. Operating efficiency is the measure of how efficiently earnings before taxes are generated as a percentage of revenue. Our efficiency ratio decreased to 76.70% for the first nine months of 2008 compared to 63.50% for the same period in 2007, primarily due to decreases in the bank’s net interest income, resulting from a decrease in the net interest margin, and the increase in noninterest expense. Net interest income before provision decreased 12.54% to $8,600,000 for the nine months ended September 30, 2008, while operating expenses increased 7.70% to $7,200,000 from $6,700,000.
Economic Conditions
The Company believes that the local economies, in which it operates, Atascadero, Paso Robles, Arroyo Grande, and Santa Maria continues to experience a slowdown in the construction industry and real estate market. However, competition for deposits continues to be very strong both from traditional sources as well as alternative investments such as mutual funds, money market accounts and the stock market. The Bank’s growth in the loan portfolio reflects increased demand for real estate products. During the first quarter 2008 the prime lending rate decreased 200 basis points followed by an additional 25 basis points in the second quarter placing additional pressure on the Company’s margins.
The following sections set forth a discussion of the significant operating changes, business trends, financial condition, earnings, capital position and liquidity that occurred, in the three months and nine months ended September 30, 2008 compared with the three and nine months ended September 30, 2007.
RESULTS OF OPERATIONS
Net Income
Net income of $349,000 for the three months ended September 30, 2008, reflects a $406,000 or 53.8% decrease over the like period in 2007. Net income of $1,251,000 for the nine months ended September 30, 2008, reflects a $1,096,000 or 46.7% decrease over the like period in 2007. Net interest income decreased primarily due to the Federal Reserve Bank decreasing the prime lending rate 2.00% in the first quarter of 2008 followed by a .25% in the second quarter 2008. The Company’s loan portfolio was repricing at a faster rate than deposits causing net interest income and the net interest margin to decrease.
Net Interest Income
Net interest income is the Company’s largest source of operating income and is derived from interest and fees received on interest earning assets, less interest expense incurred on interest bearing liabilities. The most significant impact on the Company’s net interest income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest earning assets and interest bearing liabilities. The volume of loans, investment securities and other interest earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with the spread, produces changes in the net interest income between periods.
Loans increased $18,400,000 or 10.9% for the nine months ending September 30, 2008 compared to a decrease of $11,800,000 or 12.6% for same period in 2007.
The following table presents for the periods indicated, condensed average balance sheet information for the Company, together with interest income and yields earned on average interest earnings assets, as well as interest expense and rates paid on average interest bearing liabilities.
15
AVERAGE BALANCE SHEET INFORMATION
|
| For the three months ended September 30, |
| ||||||||||||||
|
| 2008 |
| 2007 |
| ||||||||||||
|
| Average |
|
|
| Yield/ |
| Average |
|
|
| Yield/ |
| ||||
|
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
| ||||
|
| (dollars in thousands) |
| ||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans |
| $ | 184,306 |
| $ | 3,242 |
| 7.04 | % | $ | 161,324 |
| $ | 3,791 |
| 9.40 | % |
Investment securities |
| 44,066 |
| 543 |
| 4.93 | % | 50,724 |
| 620 |
| 4.89 | % | ||||
Federal funds sold |
| 1,704 |
| 8 |
| 1.88 | % | 7,437 |
| 94 |
| 5.06 | % | ||||
Interest-earning deposits with other institutions |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||
Total average interest-earning assets |
| 230,076 |
| 3,793 |
| 6.59 | % | 219,485 |
| 4,505 |
| 8.21 | % | ||||
Other assets |
| 25,644 |
|
|
|
|
| 29,707 |
|
|
|
|
| ||||
Less allowance for loan losses |
| (1,702 | ) |
|
|
|
| (1,716 | ) |
|
|
|
| ||||
Total average assets |
| $ | 254,018 |
|
|
|
|
| $ | 247,476 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Shareholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing demand - NOW |
| $ | 12,587 |
| $ | 9 |
| 0.29 | % | $ | 14,020 |
| $ | 21 |
| 0.60 | % |
Money Market |
| 26,253 |
| 131 |
| 2.00 | % | 24,763 |
| 150 |
| 2.42 | % | ||||
Savings |
| 26,688 |
| 17 |
| 0.25 | % | 27,408 |
| 71 |
| 1.04 | % | ||||
Time certificates of deposits |
| 73,100 |
| 612 |
| 3.35 | % | 69,680 |
| 826 |
| 4.74 | % | ||||
Total average interest-bearing deposits |
| 138,628 |
| 769 |
| 2.22 | % | 135,871 |
| 1,068 |
| 3.14 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
| 7,337 |
| 52 |
| — |
| — |
| — |
| — |
| ||||
Long-term debt |
| 7,141 |
| 89 |
| 4.99 | % | 7,155 |
| 140 |
| 7.83 | % | ||||
Total interest-bearing liabilities |
| 153,106 |
| 910 |
| 2.38 | % | 143,026 |
| 1,208 |
| 3.38 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand deposits |
| 77,032 |
|
|
|
|
| 82,128 |
|
|
|
|
| ||||
Other liabilities |
| 2,297 |
|
|
|
|
| 1,873 |
|
|
|
|
| ||||
Shareholders’ equity |
| 21,583 |
|
|
|
|
| 20,449 |
|
|
|
|
| ||||
Total average liabilities and shareholders’ equity |
| $ | 254,018 |
|
|
|
|
| $ | 247,476 |
|
|
|
|
| ||
Net interest income |
|
|
| $ | 2,883 |
|
|
|
|
| $ | 3,297 |
|
|
| ||
Net interest margin |
|
|
|
|
| 5.01 | % |
|
|
|
| 6.01 | % |
16
AVERAGE BALANCE SHEET INFORMATION
|
| For the nine months ended September 30, |
| ||||||||||||||
|
| 2008 |
| 2007 |
| ||||||||||||
|
| Average |
|
|
| Yield/ |
| Average |
|
|
| Yield/ |
| ||||
|
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
| ||||
|
| (dollars in thousands) |
| ||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans |
| $ | 174,979 |
| $ | 9,773 |
| 7.45 | % | $ | 163,128 |
| $ | 11,412 |
| 9.33 | % |
Investment securities |
| 48,812 |
| 1,785 |
| 4.88 | % | 46,377 |
| 1,627 |
| 4.68 | % | ||||
Federal funds sold |
| 1,566 |
| 24 |
| 2.04 | % | 6,355 |
| 240 |
| 5.04 | % | ||||
Interest-earning deposits with other institutions |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||
Total average interest-earning assets |
| 225,357 |
| 11,582 |
| 6.85 | % | 215,860 |
| 13,279 |
| 8.20 | % | ||||
Other assets |
| 25,756 |
|
|
|
|
| 29,772 |
|
|
|
|
| ||||
Less allowance for loan losses |
| (1,665 | ) |
|
|
|
| (1,716 | ) |
|
|
|
| ||||
Total average assets |
| $ | 249,448 |
|
|
|
|
| $ | 243,916 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Shareholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing demand - NOW |
| $ | 12,465 |
| $ | 27 |
| 0.29 | % | $ | 13,604 |
| $ | 45 |
| 0.44 | % |
Money Market |
| 25,819 |
| 410 |
| 2.12 | % | 24,061 |
| 423 |
| 2.34 | % | ||||
Savings |
| 25,919 |
| 71 |
| 0.37 | % | 26,944 |
| 218 |
| 1.08 | % | ||||
Time certificates of deposit |
| 71,960 |
| 2,053 |
| 3.80 | % | 68,136 |
| 2,374 |
| 4.65 | % | ||||
Total average interest-bearing deposits |
| 136,163 |
| 2,561 |
| 2.51 | % | 132,745 |
| 3,060 |
| 3.07 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
| 6,744 |
| 152 |
| 3.01 | % | 198 |
| 8 |
| 5.39 | % | ||||
Long-term debt |
| 7,150 |
| 300 |
| 5.59 | % | 7,155 |
| 414 |
| 7.71 | % | ||||
Total interest-bearing liabilities |
| 150,057 |
| 3,013 |
| 2.68 | % | 140,098 |
| 3,482 |
| 3.31 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand deposits |
| 75,635 |
|
|
|
|
| 82,192 |
|
|
|
|
| ||||
Other liabilities |
| 2,111 |
|
|
|
|
| 1,711 |
|
|
|
|
| ||||
Shareholders’ equity |
| 21,645 |
|
|
|
|
| 19,915 |
|
|
|
|
| ||||
Total average liabilities and shareholders’ equity |
| $ | 249,448 |
|
|
|
|
| $ | 243,916 |
|
|
|
|
| ||
Net interest income |
|
|
| $ | 8,569 |
|
|
|
|
| $ | 9,797 |
|
|
| ||
Net interest margin |
|
|
|
|
| 5.07 | % |
|
|
|
| 6.05 | % |
Net interest income decreased 12.60%, for the quarter ended September 30, 2008 and decreased 12.50% for the nine months ended September 30, 2008 as compared to the same periods in 2007, as yields decreased quickly on earning assets, and higher cost funds repriced more slowly. For the nine months ending September 30, 2008 the yield on interest-earning assets decreased to 6.90% compared to 8.20% for the same period in 2007. The cost of total interest-bearing deposits decreased 56 basis points to 2.51% for the nine months ending September 30, 2008 compared to 3.07% in the same nine month period in 2007.
17
Net interest margin for the three months ended September 30, 2008 was 5.01% compared to 6.01% for the three months ended September 30, 2007. Net interest margin for the nine months ended September 30, 2008 was 5.07% compared to 6.05% for the nine months ended September 30, 2007. This represents a decrease of 98 basis points or 12.60% between nine month periods. The decrease in the Bank’s net interest margin was primarily caused by the prime lending rate reduction of 200 basis points in the first quarter 2008 followed by a 25 basis point reduction in the second quarter 2008. These reductions in the prime lending rate had an immediate negative impact on the earnings of the company as variable rate loans repriced faster than fixed rate deposits.
For the three months ended September 30, 2008, the average prime rate was 5.00%, the average Federal Funds rate was 1.88%, and the yield on the investment portfolio averaged 4.93%. During the three months ended September 30, 2007 the average prime rate was 8.17%, the average Federal Fund rate was 5.06%, and the Bank’s investment portfolio posted an average yield of 4.89%. For the nine months ended September 30, 2008, the average prime rate was 5.43%, the average Federal Fund rate was 2.04%, and the yield on the investment portfolio averaged 4.88%. During the nine months ended September 30, 2007 the average prime rate was 8.25%, the average Federal Fund rate was 5.04%, and the Bank’s investment portfolio posted an average yield of 4.68%.
Deposit interest expense for the three months ended September 30, 2008 totaled $769,000, which reflects a decrease of $299,000 or 28.0% over the like period in 2007. Deposit interest expense for the nine months ended September 30, 2008 totaled $2,561,000, which reflects a decrease of $499,000 or 16.31% over the like period in 2007. The schedule shown below indicates that interest bearing deposits and time deposits increased $2,500,000 or 1.79% from September of 2007 to September of 2008. During the same period, noninterest bearing deposits decreased $11,000,000 or 12.88%.
|
| (dollars in thousands) |
| |||||||||
|
| September |
| September |
| Dollar |
| Percent |
| |||
|
| 2008 |
| 2007 |
| Variance |
| Variance |
| |||
Noninterest bearing deposits |
| $ | 74,082 |
| $ | 85,038 |
| $ | (10,956 | ) | -12.88 | % |
Interest bearing deposits |
| 40,921 |
| 38,984 |
| 1,937 |
| 4.97 | % | |||
Interest bearing time |
| 98,389 |
| 97,872 |
| 517 |
| 0.53 | % | |||
Total Deposits |
| $ | 213,392 |
| $ | 221,894 |
| $ | (8,502 | ) | -3.83 | % |
The average deposit cost of funds for the three months ended September 30, 2008 decreased 92 basis points from 3.14% in September of 2007 to 2.22% in September of 2008. The average deposit cost of funds for the nine months ended September 30, 2008 decreased 56 basis points from 3.07% in September of 2007 to 2.51% in September of 2008. The Company anticipates that its deposit cost of funds will decrease slightly for the balance of the year.
Noninterest Income
Noninterest income for the three months ended September 30, 2008 was $248,000 compared to $246,000 for the same period in 2007. Noninterest income for the nine months ended September 30, 2008 was $867,000 compared to $792,000 for the same period in 2007. That represents an increase of $75,000 or 9.5%, which is primarily due to the $108,000 gain on the sale of $5,500,000 in mortgage backed securities during the first quarter of 2008.
Service charges on deposit accounts for the three months ended September 30, 2008 totaled $172,000, which represents an increase of $26,000 or 17.8% over the same period in 2007. Service charges on deposit accounts for the nine months ended September 30, 2008 totaled $457,000, which represents an increase of $21,000 or 4.9% over the same period in 2007. The increase in service charges was primarily due to NSF fees collected.
Gain on sale of investment securities totaled $108,000 for the nine months ended September 30, 2008. During the same period ended September 30, 2007 no gains were realized.
18
Other noninterest income for the three months ended September 30, 2008 was $76,000 compared to $100,000 for the same period in 2007, a decrease of $24,000 or 24.0%. Other noninterest income for the nine months ended September 30, 2008 was $302,000 compared to $356,000 for the same period in 2007. That represents a decrease of $54,000 or 15.2% between the nine month periods ended September 30 2007 and 2008. The decrease is primarily due to a recovery of legal fees and costs on a previously charged off loan realized in 2007.
Operating Expenses
Salary and employee benefits for the three months ended September 30, 2008 totaled $1,409,000, which reflects an increase of $103,000 or 7.9% over the like period in 2007. Salary and employee benefits for the nine months ended September 30, 2008 totaled $4,222,000, which reflects an increase of $317,000 or 8.1% over the like period in 2007. This increase is attributed to the addition of a new senior credit administrator and normal salary and benefit related increases.
Occupancy expense for the three months ended September 30, 2008 totaled $171,000, which reflects an increase of $13,000 or 8.2% over the same period in 2007. Occupancy expense for the nine months ended September 30, 2008 totaled $485,000, which reflects an increase of $17,000 or 3.6% over the same period in 2007. This was primarily due to increased maintenance and repairs coupled with rising utility expenses.
Equipment expense for the three months ended September 30, 2008 totaled $175,000, which reflects an increase of $10,000 or 6.1% over the same period in 2007. Equipment expense for the nine months ended September 30, 2008 totaled $502,000, which reflects an increase of $4,000 or 0.8% over the same period in 2007.
Professional services for the three months ended September 30, 2008 totaled $144,000, which reflects an increase of $34,000 or 30.9% over the same period in 2007. Professional services for the nine months ended September 30, 2008 totaled $425,000, which reflects an increase of $103,000 or 32.0% over the same period in 2007. This was primarily due to the increase in legal fees related to the collection of non-accrual loans.
Data processing expense for the three months ended September 30, 2008 totaled $125,000, which reflects an increase of $6,000 or 5.0% from the same period in 2007. Data processing expense for the nine months ended September 30, 2008 totaled $377,000, which reflects an increase of $8,000 or 2.2% from the same period in 2007. This was primarily due to increased fees of 3.5%.
Office related expense for the three months ended September 30, 2008 totaled $101,000, which reflects an increase of $4,000 or 4.1% over the same period in 2007. Office related expense for the nine months ended September 30, 2008 totaled $281,000, which reflects an increase of $17,000 or 6.4% over the same period in 2007. This was primarily due to the increase in telephone expense coupled with an increase in stationary and supplies
Marketing related expense for the three months ended September 30, 2008 totaled $106,000, which reflects a decrease of $1,000 or .9% over the same period in 2007. Marketing related expense for the nine months ended September 30, 2008 totaled $310,000, which reflects an increase of $11,000 or 3.7% over the same period in 2007.
Regulatory assessment fees for the nine month period ending September 30, 2008 were $123,000, which reflects an increase of $75,000 or 156.3% over the same period in 2007. This was primarily due to the Federal Deposit Insurance Reform Act of 2005, which allowed the Bank to receive a one-time initial assessment credit to recognize its past contributions to the insurance fund. The Bank’s one-time assessment credit was $91,592. The Bank’s assessment credit was fully used by March 2008.
Director expense for the three months ended September 30, 2008 totaled $81,000, which reflects a decrease of $5,000 or 5.8% over the like period in 2007. Director expense for the nine months ended September 30, 2008 totaled $247,000, which reflects a decrease of $3,000 or 1.2% over the like period in 2007
Other expense for the three months ended September 30, 2008 totaled $78,000, which reflects a decrease of $31,000 or 28.4% over the same period in 2007. Other expense for the nine months ended September 30, 2008 totaled $266,000, which reflects a decrease of $32,000 or 10.7% over the same period in 2007. This decrease is primarily due to the reduction in messenger and courier expense in 2008.
19
Loan Related Data
The Company has taken several positive steps over the past years to improve upon the overall credit administration of the Bank. The Company has implemented additional controls to ensure the quality of the overall credit portfolio. The Bank has been able to increase the loan portfolio without lowering credit quality, which has been validated by the Bank’s outside credit review firm. The Bank’s credit portfolio continues to be reviewed by our outside loan review firm on a monthly basis and it is the opinion of management as well as the outside credit review firm that there are no significant weaknesses in the credit portfolio.
On a comparative basis, problem loan and loan related data are detailed in the following tables:
|
| September |
| December |
| September |
| ||||
|
| 2008 |
| 2007 |
| 2007 |
| ||||
Charge offs |
| $ | 89 |
| $ | 61 |
| $ | 51 |
| |
Recoveries |
| 7 |
| 80 |
| 79 |
| ||||
OREO |
| — |
| — |
| — |
| ||||
Nonaccrual Loans |
| 1,481 |
| 2,175 |
| — |
| ||||
Accruing loans over 90 days past due |
| — |
| — |
| — |
| ||||
Allowance for Loan Loss |
| 1,791 |
| 1,673 |
| 1,682 |
| ||||
Period-end Gross Loans |
| 187,337 |
| 168,968 |
| 161,459 |
| ||||
|
|
|
|
|
|
|
| ||||
|
| September |
| December |
| September |
| ||||
|
| 2008 |
| 2007 |
| 2007 |
| ||||
Ratio comparison to Period-end Gross Loans to |
|
|
|
|
|
|
|
| |||
Charge offs |
|
| 0.06 | % | 0.04 | % | 0.04 | % | |||
Recoveries |
| 0.01 | % | 0.05 | % | 0.07 | % | ||||
OREO |
| 0.00 | % | 0.00 | % | 0.00 | % | ||||
Nonaccrual Loans |
| 0.79 | % | 1.29 | % | 0.00 | % | ||||
Accruing loans over 90 days past due |
| 0.00 | % | 0.00 | % | 0.00 | % | ||||
Allowance for Loan Loss |
| 0.96 | % | 0.99 | % | 1.04 | % | ||||
Allowance for Loan Losses
The Bank made $160,000 provision to its allowance for loan losses during the three month period ending September 30, 2008 compared to no provision during the same period of 2007. The nine month period ending September 30, 2008, totaled $200,000 compared to no additions during the same period of 2007. The Bank evaluates the allowance for possible loan losses based upon an individual analysis of specific categories of loans, specific categories of classified loans and individual classified assets. The adequacy of the allowance is determinable only on an approximate basis, since estimates as to the magnitude and timing of loan losses are not predictable because of the impact of external events. Based on the analysis performed by the Bank and its outside loan review firm, both believe that the allowance for loan loss at September 30, 2008 is adequate. The allowance on that date was 0.96% of total loans, compared to 0.99% at December 31, 2007 and 1.04% at September 30, 2007. While the total amount of the allowance is higher at September 30, 2008 when compared to prior periods, the percentage of the allowance for loan loss is lower attributable to the increase in total loans.
Nonaccrual Loans
The Bank had two nonaccrual loans as of September 30, 2008 totaling $1,481,000 for a decrease of $694,000 or 31.9% compared to December 31, 2007, and no nonaccrual loans as of September 30, 2007. The combination of collateral and the strength of the guarantor should alleviate the loss potential of these two credits significantly.
20
OREO
The Bank currently has no OREO property on its books.
Other Borrowings
On July 9, 2008 the Company entered into a one year advance from the Federal Home Loan Bank for $5,000,000 at a fixed rate of 2.91%, and on September 30, 2008 the Company had an overnight short term borrowing of $4,500,000 for a total of $9,500,000 as of September 30, 2008. This was primarily due to the decline in deposits during the third quarter and the increase in new loan requests.
Trust Preferred Securities
On April 28, 2006, the Company issued $5,155,000 in Trust Preferred securities. The issue was priced at 1.48% over the quarterly adjustable 3-month LIBOR. The issue was written for a term of 30-years, with an option to redeem in whole or part at par anytime after the fifth year. The Company contributed $3,000,000 to the Bank and retained $2,200,000 at the Company level. The Company incurred $188,000 in interest expense during the nine month period ending September 30, 2008.
Subordinated Debt
During the Third Quarter of 2003, the Bank completed a private placement of subordinated debentures (“notes”) to augment its Tier II capital. The total principal amount of the notes issued was $2,000,000. The notes were sold pursuant to an applicable exemption from registration under the Securities Act of 1933 to certain accredited investors, including some of the Bank’s directors and senior officers.
The $2.0 million in notes have a floating rate of interest, which is reset quarterly, equal to the prime rate published in the western edition of the Wall Street Journal plus 1.50%. The initial rate for the notes was 5.50%. The rate as of September 30, 2008, was 6.50%. Quarterly principal payments of $166,678 began in September 2008 and continue over the next three years. The notes mature in June 2011.
Capital
Total shareholders’ equity at September 30, 2008 totaled $21,405,000 compared to $21,189,000 at December 31, 2007, for an increase of $216,000 or 1.0%. This increase is due primarily to an increase in net income of $1,251,000, an increase in the market value of the investment portfolio of $51,000 and a decrease of $963,000 for the payment of cash dividends that were paid to shareholders of record as of March 31, 2008 and September 30, 2008.
In order to manage the Company’s capital position more efficiently, in 2006 the Company issued $5,155,000 in junior subordinated debt securities (the “debt securities”) to the Santa Lucia Bancorp (CA) Capital Trust, a statutory trust created under the laws of the State of Delaware. These debt securities are subordinated to effectively all borrowings of the Company and are due and payable on July 7, 2036. These debt securities may be redeemed for 105% of the principal balance through July 7, 2011, subject to any required regulatory approvals, and then at par thereafter. Interest is payable quarterly beginning July 7, 2006 at 1.48% over the quarterly adjustable 3-month LIBOR. Of this $5.2 million, the Company contributed $3.0 million to the Bank and retained $2.2 million at the Company level. The securities do not entitle the holders to voting rights in the Company but contain certain restrictive covenants, including restrictions on the payment of dividends to the holders of the Company’s common stock in the event that interest payments on the trust preferred securities are postponed. The capital received from the trust preferred issuance is designated as Tier 1 capital for regulatory purposes.
21
The Bank maintains capital ratios above the Federal regulatory guidelines for a “well-capitalized” bank. The ratios are as follows:
|
| Regulatory |
|
|
|
|
|
|
|
|
| Minimum Ratio |
|
|
|
|
|
|
|
|
| For |
| Regulatory |
| Sept. |
| Dec. |
|
|
| “Well-Capitalized” |
| Minimum Ratio |
| 2008 |
| 2007 |
|
Tier I Capital (to Average Assets) |
| 5.00 | % | 4.00 | % | 9.68 | % | 9.65 | % |
Tier I Capital (to Risk Weighted Assets) |
| 6.00 | % | 4.00 | % | 11.77 | % | 12.28 | % |
Total Capital (to Risk Weighted Assets) |
| 10.00 | % | 8.00 | % | 13.04 | % | 13.80 | % |
Liquidity
The Company closely monitors its liquidity so that the cash requirements for loans and deposit withdrawals are met in an orderly manner. Management monitors liquidity in relation to trends of loans and deposits for short term and long-term requirements. Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include cash, deposits with other banks, overnight Federal Fund investments, investment securities and the ability to sell loans. Our liquidity is actively managed on a daily basis and reviewed periodically by our ALCO Committee and Board of Directors. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flow for off-balance sheet instruments.
The ability to have readily available funds that are sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors and regulators. The Company’s liquidity (represented by cash and due from banks, federal funds sold and available-for-sale securities) is a result of its operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, the Company devotes time and resources to analyzing trends and demands and projecting the amount of funds that will be required and maintains relationships with a diversified customer base so funds are accessible. Liquidity requirements can also be met through short term borrowings or the disposition of short term assets. The Bank has two borrowing arrangements with the Federal Home Loan Bank of San Francisco. The first allows the Bank to borrow up to approximately $40.8 million against which the Bank has pledged approximately $108.7 million in its real estate secured loans. The second arrangement allows the Bank to borrow up to approximately $15.2 million against which the Bank has pledged approximately $15.5 million of its investment securities. The Bank also has two borrowing lines at correspondent banks totaling $5.9 million.
On September 30, 2008 the company had a total of $9,500,000 in borrowings with the Federal Home Loan Bank. On July 9, 2008 the Company entered into a one year advance from the Federal Home Loan Bank for $5,000,000 at a fixed rate of 2.91%, and on September 30, 2008 the Company had an overnight short term borrowing of $4,500,000.
The Bank’s current Liquidity policy is to maintain a liquidity ratio of not less than 20.0% based on regulatory formula. As of September 30, 2008 the Bank had a liquidity ratio of 20.18%. During the fourth quarter 2008 the bank has a $2,000,000 called security that will be used to augment liquidity.
Interest Rate Sensitivity
The Bank closely follows the maturities and repricing opportunities of both assets and liabilities to reduce gaps in interest spreads. An analysis is performed quarterly to determine the various interest sensitivity gaps, the economic value of equity and earnings at risk. The reports indicate that the Bank is asset sensitive, meaning that when interest rates change, assets (loans) will reprice faster than short-term liabilities (deposits). Therefore, higher interest rates improve short-term profits and lower rates decrease short-term profits.
The asset liability management reports as of September 30, 2008 indicate that the Bank has an actual dollar risk exposure of $320,000 if interest rates fall 100 basis points. This represents a 2.8% risk to interest income. The Equity to Asset ratio is 16.75% at zero basis points and 15.76% at an assumed 100 basis points decline in interest rates.
Interest Income and Expense Under Rate Shock
|
| -200bp |
| -100bp |
| 0bp |
| +100bp |
| +200bp |
| |||||
Net Interest Income |
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings at Risk |
| $ | (239 | ) | $ | (320 | ) | $ | 0 |
| $ | 268 |
| $ | 603 |
|
Percent of Risk |
| -2.1 | % | -2.8 | % | 0.0 | % | 2.3 | % | 5.2 | % | |||||
22
Assumptions are inherently uncertain and, consequently, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and management strategy.
Off-Balance Sheet Arrangements
The Company, in the ordinary course of business, routinely enters into contracts for services. These contracts may require payment for services to be provided in the future and may also contain penalty clauses for the early termination of the contracts. The Company is also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Additionally, in connection with the issuance of trust preferred securities, the Company has committed to irrevocably and unconditionally guarantee the following payments or distributions with respect to the preferred securities to the holders thereof to the extent that the trust has not made such payments or distributions and has the funds, therefore: (i) accrued and unpaid distributions; (ii) the redemption price; and (iii) upon a dissolution or termination of the trust, the lesser of the liquidation amount and all accrued and unpaid distributions and the amount of assets of the trust remaining available for distribution. Management does not believe that these off-balance sheet arrangements have a material effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, but there can be no assurance that such arrangements will not have a future effect. See Consolidated Financial Statements in Note M for more information regarding the Company’s commitments contained in Item 7 of Part II of the Bank’s Form 10-KSB for the year ended December 31, 2007
23
Critical Accounting Policies
This discussion should be read in conjunction with the unaudited consolidated financial statements of the Company, including the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations and audited financial statements, including the note’s thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Bank’s Form 10-KSB for the year ended December 31, 2007.
Our accounting policies are integral to understanding the results reported. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates.
Allowance for Loan Losses
The allowance for loan losses represents management’s best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The provision for loan losses is determined based on management’s assessment of several factors: reviews and evaluation of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experiences, the level of classified and nonperforming loans and the results of regulatory examinations.
Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. In measuring the fair value of the collateral, management uses assumptions and methodologies consistent with those that would be utilized by unrelated third parties.
Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses and the associated provision for loan losses.
Available-for-Sale Securities
The fair value of most securities classified as available-for-sale are based on quoted market prices. If quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments.
Deferred Tax Assets
We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced.
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Deferred Compensation Liabilities
Management estimates the life expectancy of the participants and the accrual methods used to accrue compensation expense. If individuals or their beneficiaries outlive their assumed expectancies the amounts accrued for the payment of their benefits will be inadequate and additional charges to income will be required.
ITEM 3 - QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Management uses various asset/liability strategies to manage the re-pricing characteristics of the Company’s earning assets and funding liabilities to ensure that exposure to interest rate fluctuations is within its guidelines of acceptable risk-taking. Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of the Company’s securities are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.
Interest rate risk is addressed by our Asset Liability Management Committee (“ALCO”) which is comprised of senior management officers of the bank. The ALCO monitors interest rate risk by analyzing the potential impact on the net equity value and net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages the Company’s balance sheet in part to maintain, within acceptable ranges, the potential impact on net equity value and net interest income despite fluctuations in market interest rates.
Exposure to interest rate risk is reviewed on at least a quarterly basis by the ALCO and the Board of Directors. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the change in net portfolio value in the event of hypothetical changes in interest rates. If potential changes to net equity value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, management may adjust the asset and liability mix to bring interest rate risk within approved limits.
ITEM 4T - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures with respect to the information generated for use in this Quarterly Report. Based upon, and as of the date of that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosures controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There was no change in the Company’s internal controls over financial reporting during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
In designing and evaluating disclosure controls and procedures, the Company’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurances of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
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ITEM 2 - - Unregistered Sales of Equity Securities and Use of Proceeds (c) Stock Repurchases
On October 28, 2006, the Board authorized the repurchase of up $1,000,000 worth of the Company’s common stock. This authorization does not have an expiration date, the entire $1,000,000 authority was exhausted as of the second quarter 2008. There were no purchase of shares during the third quarter ended September 30, 2008.
10.1 |
| Agreement made by and between Santa Lucia Bank and Jerry W. DeCou, III dated October 15, 2008 |
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10.2 |
| Agreement made by and between Santa Lucia Bank and Douglas C. Filipponi dated October 15, 2008 |
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10.3 |
| Agreement made by and between Santa Lucia Bank and Khatchik Achadjian dated October 15, 2008 |
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10.4 |
| Agreement made by and between Santa Lucia Bank and Stanley R. Cherry dated October 15, 2008 |
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10.5 |
| Agreement made by and between Santa Lucia Bank and Jean Hawkins dated October 15, 2008 |
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10.6 |
| Agreement made by and between Santa Lucia Bank and Paul G. Moerman dated October 15, 2008 |
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10.7 |
| Agreement made by and between Santa Lucia Bank and D. Jack Stinchfield dated October 15, 2008 |
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10.8 |
| First Amendment to Amend and Restated Employment Agreement made by and between Santa Lucia Bank and Larry H. Putnam dated October 15, 2008 |
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10.9 |
| First Amendment to Amend and Restated Employment Agreement made by and between Santa Lucia Bank and John C. Hansen dated October 15, 2008 |
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10.10 |
| First Amendment to Amend and Restated Employment Agreement made by and between Santa Lucia Bank and James Cowan dated October 15, 2008 |
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31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SANTA LUCIA BANCORP
Date: | November 13, 2008 |
| /s/ Larry H. Putnam |
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| Larry H. Putnam |
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| President and Chief Executive Officer |
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Date: | November 13, 2008 |
| /s/ John C. Hansen |
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| John C. Hansen |
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| Executive Vice President and Chief Financial Officer |
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Exhibit | ||
Sequential |
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|
Number |
| Description |
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|
|
10.1 |
| Agreement made by and between Santa Lucia Bank and Jerry W. DeCou, III dated October 15, 2008 |
|
|
|
10.2 |
| Agreement made by and between Santa Lucia Bank and Douglas C. Filipponi dated October 15, 2008 |
|
|
|
10.3 |
| Agreement made by and between Santa Lucia Bank and Khatchik Achadjian dated October 15, 2008 |
|
|
|
10.4 |
| Agreement made by and between Santa Lucia Bank and Stanley R. Cherry dated October 15, 2008 |
|
|
|
10.5 |
| Agreement made by and between Santa Lucia Bank and Jean Hawkins dated October 15, 2008 |
|
|
|
10.6 |
| Agreement made by and between Santa Lucia Bank and Paul G. Moerman dated October 15, 2008 |
|
|
|
10.7 |
| Agreement made by and between Santa Lucia Bank and D. Jack Stinchfield dated October 15, 2008 |
|
|
|
10.8 |
| First Amendment to Amend and Restated Employment Agreement made by and between Santa Lucia Bank and Larry H. Putnam dated October 15, 2008 |
|
|
|
10.9 |
| First Amendment to Amend and Restated Employment Agreement made by and between Santa Lucia Bank and John C. Hansen dated October 15, 2008 |
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|
|
10.10 |
| First Amendment to Amend and Restated Employment Agreement made by and between Santa Lucia Bank and James Cowan dated October 15, 2008 |
|
|
|
31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2 |
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
28