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 |
| ||
For the quarterly period ended June 30, 2009 | ||
| ||
o |
| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT |
| ||
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 hether 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 Reg 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 o no o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
| Accelerated filer o |
|
|
|
Non- accelerated filer o |
| 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 August 11, 2009: 1,923,053.
|
| Page |
| ||
|
|
|
Consolidated Financial Statements (unaudited except year end) |
| |
|
|
|
| Consolidated Balance Sheet June 30, 2009 and December 31, 2008 | 3 |
|
|
|
| 4 | |
|
|
|
| Consolidated Statements of Cash Flows For six months ended June 30, 2009 and June 30, 2008 | 5 |
|
|
|
| 6 | |
|
|
|
| 7 - 10 | |
|
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 – 25 | |
|
|
|
25 | ||
|
|
|
25 | ||
|
|
|
| ||
|
|
|
26 | ||
|
|
|
26 | ||
|
|
|
26 | ||
|
|
|
26 | ||
|
|
|
26 | ||
|
|
|
26 | ||
|
|
|
26 | ||
|
|
|
27 | ||
|
| |
28 | ||
|
| |
Certifications |
|
2
PART I - - FINANCIAL INFORMATION
Santa Lucia Bancorp
(in thousands)
|
| 30-Jun-09 |
| 31-Dec-08 |
| ||
|
| (unaudited) |
|
|
| ||
Assets |
|
|
|
|
| ||
Cash and due from banks |
| $ | 7,686 |
| $ | 8,220 |
|
Federal funds sold |
| 15,000 |
| — |
| ||
Total cash and cash equivalents |
| 22,686 |
| 8,220 |
| ||
|
|
|
|
|
| ||
Securities available for sale |
| 33,886 |
| 38,471 |
| ||
Loans, net |
| 196,330 |
| 186,632 |
| ||
Premises and equipment, net |
| 8,883 |
| 8,624 |
| ||
Cash surrender value of life insurance |
| 5,292 |
| 5,195 |
| ||
Federal Reserve Bank and Federal Home Loan Bank stock, at cost |
| 1,643 |
| 1,517 |
| ||
Accrued interest and other assets |
| 2,921 |
| 3,221 |
| ||
Total Assets |
| $ | 271,641 |
| $ | 251,880 |
|
|
|
|
|
|
| ||
Liabilities and Shareholders’ Equity |
|
|
|
|
| ||
Deposits: |
|
|
|
|
| ||
Noninterest-bearing demand |
| $ | 71,214 |
| $ | 75,155 |
|
Interest-bearing demand - NOW |
| 13,267 |
| 12,889 |
| ||
Money Market |
| 34,169 |
| 26,214 |
| ||
Savings |
| 27,524 |
| 26,754 |
| ||
Time certificates of deposit of $100,000 or more |
| 48,720 |
| 37,894 |
| ||
Other time certificates |
| 37,505 |
| 33,411 |
| ||
Total Deposits |
| 232,399 |
| 212,317 |
| ||
Short-term borrowings |
| 5,000 |
| 5,000 |
| ||
Long-term debt |
| 6,488 |
| 6,822 |
| ||
Accrued interest and other liabilities |
| 2,290 |
| 2,190 |
| ||
Total Liabilities |
| 246,177 |
| 226,329 |
| ||
Commitments and contingencies |
| — |
| — |
| ||
Preffered Stock - Series A |
| 3,819 |
| 3,799 |
| ||
Shareholders’ Equity |
|
|
|
|
| ||
Common stock - no par value; authorized 20,000,000 shares; Issued and outstanding, 1,923,053 shares at June 30, 2009 and 1,923,053 shares at December 31, 2008 |
| 9,894 |
| 9,894 |
| ||
Additional Paid-in Capital |
| 746 |
| 677 |
| ||
Retained earnings |
| 10,570 |
| 10,683 |
| ||
Accumulated other comprehensive income-net unrealized gains on available-for-sale securities, net of taxes |
| 435 |
| 498 |
| ||
Total Shareholders’ Equity |
| 25,464 |
| 25,551 |
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 271,641 |
| $ | 251,880 |
|
3
Santa Lucia Bancorp
Consolidated Statements of Income
(in thousands except per share data)
|
| For the three month period ending |
| For the six month period ending |
| ||||||||
|
| 30-Jun-09 |
| 30-Jun-08 |
| 30-Jun-09 |
| 30-Jun-08 |
| ||||
|
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
| ||||
Interest Income |
|
|
|
|
|
|
|
|
| ||||
Interest and fees on loans |
| $ | 3,202 |
| $ | 3,153 |
| $ | 6,252 |
| $ | 6,531 |
|
Federal funds sold |
| 1 |
| 13 |
| 1 |
| 16 |
| ||||
Investment securities |
| 369 |
| 573 |
| 782 |
| 1,242 |
| ||||
|
| 3,572 |
| 3,739 |
| 7,035 |
| 7,789 |
| ||||
Interest expense |
|
|
|
|
|
|
|
|
| ||||
Interest-bearing demand deposits |
| 15 |
| 9 |
| 25 |
| 18 |
| ||||
Money Market |
| 144 |
| 129 |
| 276 |
| 279 |
| ||||
Savings |
| 17 |
| 16 |
| 33 |
| 54 |
| ||||
Time certificates of deposit |
| 530 |
| 663 |
| 1,042 |
| 1,441 |
| ||||
Short-term borrowings |
| 36 |
| 41 |
| 74 |
| 100 |
| ||||
Long-term debt |
| 52 |
| 91 |
| 109 |
| 211 |
| ||||
|
| 794 |
| 949 |
| 1,559 |
| 2,103 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
| 2,778 |
| 2,790 |
| 5,476 |
| 5,686 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Provision for credit losses |
| 110 |
| 40 |
| 350 |
| 40 |
| ||||
Net interest income after provision for loan losses |
| 2,668 |
| 2,750 |
| 5,126 |
| 5,646 |
| ||||
Noninterest income |
|
|
|
|
|
|
|
|
| ||||
Service charges and fees |
| 130 |
| 136 |
| 251 |
| 285 |
| ||||
Gain on sale of investment securities |
| — |
| — |
| 92 |
| 108 |
| ||||
Other income |
| 112 |
| 128 |
| 222 |
| 226 |
| ||||
|
| 242 |
| 264 |
| 565 |
| 619 |
| ||||
Noninterest expense |
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
| 1,351 |
| 1,397 |
| 2,731 |
| 2,813 |
| ||||
Occupancy |
| 156 |
| 154 |
| 323 |
| 314 |
| ||||
Equipment |
| 155 |
| 169 |
| 320 |
| 327 |
| ||||
Professional services |
| 159 |
| 132 |
| 312 |
| 281 |
| ||||
Data processing |
| 142 |
| 130 |
| 274 |
| 252 |
| ||||
Office related expenses |
| 106 |
| 83 |
| 208 |
| 180 |
| ||||
Marketing |
| 101 |
| 99 |
| 202 |
| 204 |
| ||||
Regulatory assessments |
| 180 |
| 45 |
| 225 |
| 79 |
| ||||
Directors’ fees and expenses |
| 90 |
| 85 |
| 178 |
| 166 |
| ||||
Other |
| 106 |
| 102 |
| 204 |
| 188 |
| ||||
|
| 2,546 |
| 2,396 |
| 4,977 |
| 4,804 |
| ||||
Earnings before income taxes |
| 364 |
| 618 |
| 714 |
| 1,461 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income taxes |
| 127 |
| 236 |
| 246 |
| 559 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Earnings |
| $ | 237 |
| $ | 382 |
| $ | 468 |
| $ | 902 |
|
|
|
|
|
|
|
|
|
|
| ||||
Per Share Data |
|
|
|
|
|
|
|
|
| ||||
Net earnings - basic |
| $ | 0.09 |
| $ | 0.20 |
| $ | 0.19 |
| $ | 0.47 |
|
Net Earnings - diluted |
| $ | 0.09 |
| $ | 0.19 |
| $ | 0.19 |
| $ | 0.46 |
|
(see accompanying notes)
4
Santa Lucia Bancorp
Consolidated Statements of Cash Flow
(in thousands)
|
| (For the six month period ended) |
| ||||
|
| 30-Jun-09 |
| 30-Jun-08 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net earnings |
| $ | 468 |
| $ | 902 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 304 |
| 322 |
| ||
Provision for loan losses |
| 350 |
| 40 |
| ||
Stock-based compensation expense |
| 68 |
| 72 |
| ||
Gain on sale of investment securities |
| (92 | ) | (108 | ) | ||
Other items, net |
| 442 |
| 536 |
| ||
Net cash provided by operating activities |
| 1,540 |
| 1,764 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Proceeds from maturities of investment securities |
| 7,039 |
| 5,051 |
| ||
Proceeds from sale of investment securities |
| 2,438 |
| 5,513 |
| ||
Purchases of investment securities |
| (5,127 | ) | — |
| ||
Net change in loans |
| (10,512 | ) | (11,852 | ) | ||
Purchases of bank premises and equipment |
| (99 | ) | (150 | ) | ||
Net cash provided in investing activities |
| (6,261 | ) | (1,438 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Net change in deposits |
| 20,083 |
| (3,226 | ) | ||
Proceeds and tax benefit from exercise of stock options |
| — |
| 15 |
| ||
Net change in borrowings |
| (334 | ) | 3,400 |
| ||
Stock Repurchase |
| — |
| (146 | ) | ||
Dividends paid on Preferred Stock |
| (81 | ) | — |
| ||
Cash dividends paid |
| (481 | ) | (482 | ) | ||
Net cash provided by financing activities |
| 19,187 |
| (439 | ) | ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
| 14,466 |
| (113 | ) | ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 8,220 |
| 7,399 |
| ||
Cash and cash equivalents at end of period |
| $ | 22,686 |
| $ | 7,286 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
Interest paid |
| $ | 1,598 |
| $ | 2,113 |
|
Income taxes paid |
| $ | — |
| $ | 510 |
|
Transfer of loans to Other Real Estate Owned |
| $ | 464 |
| $ | — |
|
(see accompanying notes)
5
Santa Lucia Bancorp
Consolidated Statement of Shareholders’ Equity
(in thousands except shares outstanding)
For year ending December 31, 2008 and the period ending June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
| ||||||
|
|
|
|
|
| Common Stock |
| Additional |
|
|
| Other |
| ||||||||
|
| Comprehensive |
|
|
| Shares |
|
|
| Paid-in |
| Retained |
| Comprehensive |
| ||||||
|
| Income |
| Preferred Stock |
| Outstanding |
| Amount |
| Capital |
| Earnings |
| Income |
| ||||||
Balance at January 1, 2008 |
|
|
|
|
| 1,924,873 |
| 9,851,392 |
| 358,203 |
| 10,782,741 |
| 196,510 |
| ||||||
Cash dividends - $0.50 per share |
|
|
|
|
|
|
|
|
|
|
| (962,534 | ) |
|
| ||||||
Exercise of stock options, including the realization of tax benefits of $19,000 |
|
|
|
|
| 4,360 |
| 43,115 |
| 19,000 |
| (27,725 | ) |
|
| ||||||
Repurchase and retirement of stock |
|
|
|
|
| (6,180 | ) |
|
|
|
| (146,649 | ) |
|
| ||||||
Cumulative - effect adjustment of change in accounting for split-dollar life insurance arrangements |
|
|
|
|
|
|
|
|
|
|
| (101,815 | ) |
|
| ||||||
Preferred Stock - Series A |
|
|
| 3,799,003 |
|
|
|
|
| 150,997 |
|
|
|
|
| ||||||
Stock Option Compensation Expense |
|
|
|
|
|
|
|
|
| 148,534 |
|
|
|
|
| ||||||
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net earnings for the year |
| $ | 1,138,904 |
|
|
|
|
|
|
|
|
| 1,138,904 |
|
|
| |||||
Change in unrealized gain on available-for-sale securities, net of taxes of $255,702 |
| 364,837 |
|
|
|
|
|
|
|
|
|
|
| 364,837 |
| ||||||
Less reclassification adjustment for gains included in net income, deferred of tax of $44,347 |
| (63,816 | ) |
|
|
|
|
|
|
|
|
|
| (63,816 | ) | ||||||
Total Comprehensive Income |
| $ | 1,439,925 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2008 |
|
|
| $ | 3,799,003 |
| 1,923,053 |
| $ | 9,894,507 |
| $ | 676,734 |
| $ | 10,682,922 |
| $ | 497,531 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
| ||||||
|
|
|
|
|
| Common Stock |
| Additional |
|
|
| Other |
| ||||||||
|
| Comprehensive |
|
|
| Shares |
|
|
| Paid-in |
| Retained |
| Comprehensive |
| ||||||
|
| Income |
| Preferred Stock |
| Outstanding |
| Amount |
| Capital |
| Earnings |
| Income |
| ||||||
Balance at December 31, 2008 |
|
|
| 3,799,003 |
| 1,923,053 |
| 9,894,507 |
| 676,734 |
| 10,682,922 |
| 497,531 |
| ||||||
Dividend Preferred Stock |
|
|
|
|
|
|
|
|
|
|
| (81,111 | ) |
|
| ||||||
Common Cash dividends - $0.25 per share |
|
|
|
|
|
|
|
|
|
|
| (480,763 | ) |
|
| ||||||
Accretion on Preferred Stock |
|
|
| 20,100 |
|
|
|
|
|
|
| (20,100 | ) |
|
| ||||||
Stock Option Compensation Expense |
|
|
|
|
|
|
|
|
| 68,136 |
|
|
|
|
| ||||||
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net earnings for the year |
| $ | 468,299 |
|
|
|
|
|
|
|
|
| 468,299 |
|
|
| |||||
Change in unrealized gain on available-for-sale securities, net of taxes of $43,668 |
| (62,192 | ) |
|
|
|
|
|
|
|
|
|
| (62,192 | ) | ||||||
Refund TARP expenses |
|
|
|
|
|
|
|
|
| 759 |
|
|
|
|
| ||||||
Total Comprehensive Income |
| $ | 406,107 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at June 30, 2009 |
|
|
| $ | 3,819,103 |
| 1,923,053 |
| $ | 9,894,507 |
| $ | 745,629 |
| $ | 10,569,247 |
| $ | 435,339 |
| |
6
SANTA LUCIA BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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 2008 Annual Report as filed on Form 10-K.
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 June 30, 2009, 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 June 30, 2009 and December 31, 2008 is as follows:
|
| (in thousands) |
| ||||
|
| 30-Jun-09 |
| 31-Dec-08 |
| ||
|
|
|
|
|
| ||
Real estate - construction |
| $ | 56,040 |
| $ | 52,389 |
|
Real estate - other |
| 101,200 |
| 94,372 |
| ||
Commercial |
| 39,835 |
| 41,478 |
| ||
Consumer. |
| 2,071 |
| 1,415 |
| ||
Gross Loans |
| 199,146 |
| 189,654 |
| ||
|
|
|
|
|
| ||
Deferred loan fees |
| (642 | ) | (712 | ) | ||
Allowance for loan losses |
| (2,174 | ) | (2,310 | ) | ||
Net Loans |
| $ | 196,330 |
| $ | 186,632 |
|
The Bank’s loan portfolios consist 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 1.09% as of June 30, 2009 and 1.22% as of December 31, 2008. Management believes that the allowance for loan losses at June 30, 2009 is adequate based upon its analysis of the loan portfolio and the methodologies used for this purpose.
7
Concentration of Credit Risk. As of June 30, 2009, real estate served as the principal source of collateral with respect to approximately 80.09% of our loan portfolio, of which, 52.91% is considered commercial real estate (CRE). Within the makeup of our CRE, approximately 57.97% 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 23.1% 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 June 30, 2009 and 2008 amounts to approximately $46,365,000 and $53,307,000 respectively, of which approximately $1,645,000 and $3,141,000 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 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 |
| Six Months Ending |
| ||||||
|
| 30-Jun-09 |
| 30-Jun-09 |
| ||||||
|
| Income |
| Shares |
| Income |
| Shares |
| ||
|
| (Numerator) |
| (Denominator) |
| (Numerator) |
| (Denominator) |
| ||
Net income |
| $ | 237 |
|
|
| $ | 468 |
|
|
|
Less dividends Preferred Stock |
| $ | (60 | ) |
|
| $ | (101 | ) |
|
|
Average shares outstanding |
|
|
| 1,923,053 |
|
|
| 1,923,053 |
| ||
Used in Basic EPS |
| 177 |
| 1,923,053 |
| 367 |
| 1,923,053 |
| ||
Dilutive effect of outstanding stock options |
|
|
| 10,984 |
|
|
| 10,794 |
| ||
Used in Diluted EPS |
| $ | 177 |
| 1,934,037 |
| $ | 367 |
| 1,933,847 |
|
|
| Three Months Ending |
| Six Months Ending |
| ||||||
|
| 30-Jun-08 |
| 30-Jun-08 |
| ||||||
|
| Income |
| Shares |
| Income |
| Shares |
| ||
|
| (Numerator) |
| (Denominator) |
| (Numerator) |
| (Denominator) |
| ||
Net income |
| $ | 382 |
|
|
| $ | 902 |
|
|
|
Less dividends Preferred Stock |
| — |
|
|
| — |
|
|
| ||
Average shares outstanding |
|
|
| 1,924,165 |
|
|
| 1,925,004 |
| ||
Used in Basic EPS |
| 382 |
| 1,924,165 |
| 902 |
| 1,925,004 |
| ||
Dilutive effect of outstanding stock options |
|
|
| 49,407 |
|
|
| 51,557 |
| ||
Used in Diluted EPS |
| $ | 382 |
| 1,973,572 |
| $ | 902 |
| 1,976,561 |
|
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-K. On January 1, 2006, the Company implemented Statement of Financial Accounting Standards 123(R), “Share-Based Payments” (“SFAS 123R”) 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 Fair Value Measurement
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:
9
· 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.
· 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 $33.9 million and the $464 thousand in OREO which are all valued using level 2 valuations.
Note 7— Recently Issued Accounting Pronouncements
In June 2009, SFAS no. 165 “Subsequent Events” SFAS No. 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS No. 165 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements (ii) the circumstances under which an entity should recognized events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 became effective for the Corporation’s financial statements for the period ending after June 15, 2009. SFAS No.165 did not have a significant impact on the Corporation’s financial statements.
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed,” FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures.
In April 2009, the FASB issued FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” The FSP amends FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, and EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to make the other-than-temporary impairment guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This statement applies to other-than-temporary impairments of debt and equity securities and requires a company to assert that (a) it does not have the intent to sell the security in question and (b) it is more likely than not that it will not have to sell the security in question before recovery of its cost basis to avoid an impairment being considered other-than-temporary. This FSP also changes the amount of impairment losses recognized in earnings. Under this FSP impairments are separated into two components: (i) the amount of impairments related to credit losses and (ii) and the amount related to other factors. The amount of impairment related to credit losses is reflected as a charge to earnings, while the amount deemed to be related to other factors is reflected as an adjustment to shareholders’ equity through other comprehensive income.
In April 2009 the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instrument.” FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements. The new interim disclosures required by FSP FAS No. 107 - - 1 and APB 28 - 1 are included in Note 6 — Fair Value Measurements.
The standards summarized in the preceding paragraphs are effective for periods ending after June 15, 2009.
10
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following is management’s discussion and analysis of the major factors that influenced our financial performance for the three and six months ended June 30, 2009. This analysis should be read in conjunction with the Company’s 2008 Annual Report as filed on Form 10-K 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-Q (“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 economic downturn and turmoil in financial markets and the response of federal and state regulators thereto; the effect of changing regional and national economic conditions; significant changes in interest rates and prepayment speeds; credit risks of lending and investment activities; changes in federal and state banking laws or regulations; competitive pressure in the banking industry; changes in governmental fiscal or monetary policies; uncertainty regarding the economic outlook resulting from the continuing war on terrorism, as well as actions taken or to be taken by the U.S. or other governments as a result of further acts or threats of terrorism; and other factors discussed in Item 1A. Risk Factors of the company’s 2008 Annual Report as filed on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.
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 six month period ending June 30, 2009 decreased 48.12% to $468,000 compared to $902,000 for the same period in 2008. Net income for the three months ended June 30, 2009 decreased 37.96% to $237,000 compared to $382,000 for the comparable period in 2008. Diluted earnings per share for the three months ended June 30, 2009 decreased 53.00% to $0.09 from $0.19 for the same three month period in 2008 and decreased 59.00% to $0.19 from $0.46 for the six months ended June 30, 2009 compared to the same period in 2008. The sharper decline in earnings per share over net income is attributable to the inclusion of preferred stock dividends and expenses when calculating earnings per share. The primary reason for the decrease in net earnings, return on averages assets and return on average equity was the 35 basis point decrease in the Company’s net interest margin from 4.99% for the three months ending June 30, 2008 to 4.64% for the same period in 2009 and the decrease of 46 basis points for the six months ending June 30, 2009 to 4.64%. These decreases in net interest margin were primarily due to the rapid reduction in interest rates by the Federal Reserve in the latter part of 2008. These reductions resulted in an earnings compaction as variable rate loans repriced downward faster than did fixed rate deposits. In addition, the $350,000 addition to the loan loss provision contributed to the decrease. Net interest income decreased $12,000 or 0.43% for the three months ending June 30, 2009 compared to the
11
same period in 2008 and decreased $210,000 or 3.69% for the six months ending June 30, 2009 compared to the same period in 2008.
Noninterest income for the three months ended June 30, 2009 decreased $22,000 or 8.33% to $242,000 compared to $264,000 for the comparable period in 2008. Noninterest income for the six months ended June 30, 2009 decreased $54,000 or 8.72% to $565,000 compared to $619,000 for the comparable period in 2008. The decrease is primarily due to the reduction in fees collected on non-sufficient funds.
Noninterest expense for the three months ended June 30, 2009 increased by $150,000 or 6.26% to $2,546,000 compared to $2,396,000 for the comparable period in 2008. Noninterest expense for the six months ended June 30, 2009 increased by $174,000 or 3.62% to $4,978,000 compared to $4,804,000 for the comparable period in 2008. The increase in noninterest expense was primarily attributed to the increase in the FDIC insurance special assessments on all banks.
Net loans increased $9,698,000 or 5.20% during the six months ending June 30, 2009 compared to an increase of $11,813,000 or 7.09% during the same period in 2008. Real estate loans increased $10,479,000 or 7.14% for the six months ending June 2009 compared to the increase of $10,261,000 or 7.91% for the same period in 2008. Commercial loans decreased $1,643,000 or 3.96% during the first six months of 2009 compared to an increase of $1,441,000 or 3.79% for the same period in 2008.
Deposits increased $22,082,000 or 9.46% during the first six months of 2009 compared to a decrease of $3,226,000 or 1.52% during the same period in 2008. Non-interest bearing demand deposits decreased $3,941,000 or 5.24% during the six month period ending June 30, 2009 compared to a decrease of $701,000 or 0.91% during the six month period ending June 30, 2008. Interest bearing deposits increased $24,023,000 or 10.34% during the six month period ending June 30, 2009 compared to a decrease of $2,525,000 or 1.90% during the six month period ending June 30, 2008. Interest bearing demand deposits increased $378,000 or 2.93% during the six month period ending June 30, 2009. During the six month period ending June 30, 2009, Money Market deposits increased $7,955,000 or 30.35%, Savings increased $770,000 or 2.88%, Time Certificates of Deposits over $100,000 increased $10,826,000 or 28.57% and other Time Certificates of Deposits increased $4,094,000 or 12.25%. Non interest bearing deposits have decreased overall primarily due to customers shifting deposits into interest bearing products within the Bank.
The capital ratios of the Company and Bank at June 30, 2009 improved significantly over those ratios at June 30, 2008 since we sold $4,000,000 to the United States Treasury Department in December 2008 pursuant to the CPP program. The dividends on the preferred stock currently are paid at an annual rate of 5%.
On July 8, 2009 the OREO property was sold for $525,000 with a resulting loss to the bank of $56,000 which will be reflected in the third quarter of 2009. The bank currently holds no OREO property now.
12
SELECTED FINANCIAL INFORMATION
|
| (in thousands, except share data and ratios) |
| (in thousands, except share data and ratios) |
| ||||||||||||
|
| Unaudited |
| Unaudited |
| ||||||||||||
|
| Three Months Ended |
|
|
| Six Months Ended |
|
|
| ||||||||
|
| June 30, |
| % |
| June 30, |
| % |
| ||||||||
|
| 2009 |
| 2008 |
| Change |
| 2009 |
| 2008 |
| Change |
| ||||
Summary of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Income |
| $ | 3,572 |
| $ | 3,739 |
| -4.47 | % | $ | 7,035 |
| $ | 7,789 |
| -9.68 | % |
Interest Expense |
| 794 |
| 949 |
| -16.33 | % | 1,559 |
| 2,103 |
| -25.87 | % | ||||
Net Interest Income |
| 2,778 |
| 2,790 |
| -0.43 | % | 5,476 |
| 5,686 |
| -3.69 | % | ||||
Provision for Loan Loss |
| 110 |
| 40 |
| 175.00 | % | 350 |
| 40 |
| 775.00 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net Interest Income After Provision for Loan Losses |
| 2,668 |
| 2,750 |
| -2.98 | % | 5,126 |
| 5,646 |
| -9.21 | % | ||||
Noninterest Income |
| 242 |
| 264 |
| -8.33 | % | 565 |
| 619 |
| -8.72 | % | ||||
Noninterest Expense |
| 2,546 |
| 2,396 |
| 6.26 | % | 4,977 |
| 4,804 |
| 3.60 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income Before Income Taxes |
| 364 |
| 618 |
| -41.10 | % | 714 |
| 1,461 |
| -51.13 | % | ||||
Income Taxes |
| 127 |
| 236 |
| -46.19 | % | 246 |
| 559 |
| -55.99 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
| $ | 237 |
| $ | 382 |
| -37.96 | % | $ | 468 |
| $ | 902 |
| -48.12 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash Dividends Paid |
| $ | 481 |
| $ | 482 |
| -0.21 | % | $ | 481 |
| $ | 482 |
| -0.21 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Per Common Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings Per Common Share - Basic |
| $ | 0.09 |
| $ | 0.20 |
| -55.00 | % | $ | 0.19 |
| $ | 0.47 |
| -59.57 | % |
Earnings Per Common Share - Diluted |
| $ | 0.09 |
| $ | 0.19 |
| -52.63 | % | $ | 0.19 |
| $ | 0.46 |
| -58.70 | % |
Dividends Per Common Share |
| $ | 0.25 |
| $ | 0.25 |
| 0.00 | % | $ | 0.25 |
| $ | 0.25 |
| 0.00 | % |
Book Value Per Common Share |
| $ | 11.16 |
| $ | 11.15 |
| 0.12 | % | $ | 11.16 |
| $ | 11.15 |
| 0.12 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common Outstanding Shares: |
| 1,923,053 |
| 1,923,053 |
| 0.00 | % | 1,923,053 |
| 1,923,053 |
| 0.00 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Statement of Financial Condition Summary: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Assets |
|
|
|
|
|
|
| $ | 271,641 |
| $ | 249,431 |
| 8.90 | % | ||
Total Deposits |
|
|
|
|
|
|
| 232,399 |
| 209,492 |
| 10.93 | % | ||||
Total Net Loans |
|
|
|
|
|
|
| 196,330 |
| 178,432 |
| 10.03 | % | ||||
Allowance for Loan Losses |
|
|
|
|
|
|
| 2,174 |
| 1,656 |
| 31.28 | % | ||||
Total Shareholders’ Equity |
|
|
|
|
|
|
| 25,464 |
| 21,436 |
| 18.79 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selected Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Return on Average Assets |
| 0.36 | % | 0.62 | % | 41.94 | % | 0.36 | % | 0.73 | % | -50.51 | % | ||||
Return on Average Equity |
| 3.67 | % | 7.10 | % | -48.30 | % | 3.64 | % | 8.32 | % | -56.23 | % | ||||
Net interest margin |
| 4.64 | % | 4.99 | % | -7.01 | % | 4.64 | % | 5.10 | % | -9.02 | % | ||||
Average Loans as a Percentage of Average Deposits |
| 89.08 | % | 82.50 | % | 7.98 | % | 90.09 | % | 81.10 | % | 11.08 | % | ||||
Allowance for Loan Losses to Total Loans |
| 1.09 | % | 0.92 | % | 18.54 | % | 1.09 | % | 0.92 | % | 21.74 | % | ||||
Tier I Capital to Average Assets - “Bank Only” |
|
|
|
|
|
|
| 10.87 | % | 9.98 | % | 8.92 | % | ||||
Tier I Capital to Risk-Weighted Assets - “Bank Only” |
|
|
|
|
|
|
| 13.07 | % | 12.20 | % | 7.13 | % | ||||
Total Capital to Risk-Weighted Assets - “Bank Only” |
|
|
|
|
|
|
| 14.45 | % | 13.63 | % | 6.02 | % | ||||
Tier I Capital to Average Assets - “Bancorp” |
|
|
|
|
|
|
| 11.44 | % | 12.04 | % | -4.98 | % | ||||
Tier I Capital to Risk-Weighted Assets - “Bancorp” |
|
|
|
|
|
|
| 13.79 | % | 14.71 | % | -6.25 | % | ||||
Total Capital to Risk-Weighted Assets - “Bancorp” |
|
|
|
|
|
|
| 15.18 | % | 16.15 | % | -6.01 | % |
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 37.96%, to $237,000 for the three month period ending June 30, 2009 from $382,000 for the same period in 2008. Net income decreased 48.12%, to $468,000 for the six months ended June 30, 2009 from $902,000 for the same period in 2008. 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. The primary reason for the decrease in EPS was the Federal Reserve Bank actions that reduced the Bank’s Prime Lending Rate by 2.00% over the last twelve months coupled with the preferred stock dividends and expenses deducted from earnings when calculating earning per share. The reduction in the prime lending rate has caused the Company’s net interest margin to decline for the three months ended June 30, 2009 to 4.64% compared to 4.99% for the same period in 2008. For the six months ending June 30, 2009 the Company’s net interest margin declined to 4.64% compared to 5.10% for the same period in 2008. Net interest income was $5,476,000 for the six months ended June 30, 2008 compared to $5,686,000 for the same period in 2008. Basic and diluted earnings per share for the quarter ended June 30, 2009 were $0.09 and $0.09, which compares to $0.20 and $0.19 for the quarter ended June 30, 2008. Basic and diluted earnings per share for the six months ended June 30, 2009 were $0.19 and $0.19, which compares to $0.47 and $0.46 for the quarter ended June 30, 2008. The sharper decline in earning per share over net income is attributable to the inclusion of preferred stock dividends and expenses when calculating earning per share. ROAE for the quarter ending June 30, 2009, decreased to 3.67% compared to 7.10% for the same period in 2008. ROAE for the six months ending June 30, 2009, decreased to 3.64% compared to 8.32% for the same period in 2008. The capital ratios of the company and bank at June 30, 2009 improved significantly over those ratios at June 30, 2008 since we sold $4,000,000 to the United States Treasury Department in December 2008 pursuant to the CPP program. The dividends on the preferred stock currently are paid at an annual rate of 5%.
Return on Average Assets. Our return on average assets, or ROAA, is a measure we use to compare our performance with other banks and bank holding companies. ROAA for the quarter ended June 30, 2009 was 0.36% compared to 0.62% for the same period in 2008 a decrease of 41.94% and 54.10% respectively. ROAA for the six months ended June 30, 2009 was 0.36% compared to 0.73% a decrease of 50.68% and 44.70% respectively for the same period in 2008 primarily due to the reductions in net interest income and the 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 $441,000 as of June 30, 2009, compared to three loans totaling $1,614,000 at December 31, 2008 and one $900,000 loan at June 30, 2008. Nonperforming loans as a percentage of total loans decreased to 0.22% as of June 30, 2009, compared to 0.85% at December 31, 2008 and 0.50% as of June 30, 2008. Charge-offs to total loans were 0.24% for the six months ended June 30, 2009, compared to 0.19% as of December 31, 2008 and 0.03% as of June 30, 2008. Allowance for loan losses increased 31.28% to $2,174,000 when comparing June 30, 2008 to June 30, 2009. The allowance as a percent of total loans decreased to 1.09% of total loans when compared to 1.22% as of December 31, 2008. On July 8, 2009 the OREO property was sold for $525,000 with a resulting loss to the bank of $56,000 which will be reflected in the third quarter of 2009. The bank currently holds no OREO property now.
Asset Growth. As revenues from both net interest income and non-interest income are in part 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 $19,761,000 or 7.85% to $271,641,000 as of June 30, 2009 from $251,880,000 as of December 31, 2008 and $249,431,000 as of June 30, 2008. Total deposits increased $20,082,000 for
14
the six months ending to $232,399,000 or 9.46% as of June 30, 2009 compared to $212,317,000 as of December 31, 2008 and $209,492,000 as of June 30, 2008. Deposit growth during 2009 continues to increase despite the intense competition for deposits, as well as alternative investments such as mutual funds, money market funds, and the stock market. The company has seen a shifting of deposits from non interest bearing deposits to interest bearing deposits coupled with new customer growth. Gross loans increased $9,492,000 or 5.00% to $199,146,000 as of June 30, 2009 compared to $189,654,000 as of December 31, 2008 and $180,705,000 as of June 30, 2008. The investment portfolio decreased 11.92% or $4,585,000 over the past six months from $38,471,000 as of December 31, 2008 to $33,886,000 as of June 30, 2009 and $10,615,000 as of June 30, 2008.
Operating Efficiency. Operating efficiency is the measure of how efficiently earnings before taxes are generated as a percentage of revenue. Our efficiency ratio worsened as it increased to 82.39% for the period ending June 30, 2009 compared to 76.2% for the same period in 2008, primarily due to decreases in the bank’s net interest margin, and the increase in noninterest expense. Net interest income before provision for the allowance for loan and lease losses decreased $210,000 or 3.69% for the six months ended June 30, 2009, while operating expenses increased 3.60% to $4,977,000 from $4,804,000 primarily due to the FDIC special insurance assessment fee of $120,000.
Economic Conditions
The Company believes that the local economies, in which it operates, Atascadero, Paso Robles, Arroyo Grande, and Santa Maria continue to decline as the loss of jobs increase, businesses cash flows continue to decline as a result of reduced consumer spending. Although the Company has experienced an increase in deposits, competition 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 various real estate and construction products while the commercial loan demand has declined. During the past twelve months the prime lending rate decreased 200 basis points placing additional pressure on the Company’s margins as variable rate loans repriced downward more rapidly than fixed rate deposits.
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 six months ended June 30, 2009 compared with the three and six months ended June 30, 2008.
RESULTS OF OPERATIONS
Net Income
Net income of $237,000 for the three months ended June 30, 2009, reflects a $145,000 or 37.96% decrease over the like period in 2008. Net income of $468,000 for the six months ended June 30, 2009, reflects a $434,000 or 48.12% decrease over the like period in 2008. Net interest income decreased despite an increase in loans primarily due to the Federal Reserve Bank decreasing the prime lending rate 2.00% in the last twelve months. The Company’s loan portfolio was repricing at a faster rate than the deposits causing net 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.
Net loan growth increased $9,698,000 or 5.20% for the six months ending June 30, 2009, primarily due to the increase in real estate products including construction loans compared to an increase of $11,813,000 or 12.61% for same period in 2008.
15
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.
AVERAGE BALANCE SHEET INFORMATION
|
| For the three months ended June 30, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| ||||||||||||
|
| Average |
|
|
| Yield/ |
| Average |
|
|
| Yield/ |
| ||||
|
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
| ||||
|
| (dollars in thousands) |
| ||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans |
| $ | 199,655 |
| $ | 3,202 |
| 6.42 | % | $ | 174,146 |
| $ | 3,153 |
| 7.24 | % |
Investment securities |
| 35,218 |
| 369 |
| 4.19 | % | 46,991 |
| 573 |
| 4.88 | % | ||||
Federal funds sold |
| 4,802 |
| 1 |
| 0.08 | % | 2,342 |
| 13 |
| 2.22 | % | ||||
Interest-earning deposits with other institutions |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||
Total average interest-earning assets |
| 239,675 |
| 3,572 |
| 5.96 | % | 223,479 |
| 3,739 |
| 6.69 | % | ||||
Other assets |
| 26,395 |
|
|
|
|
| 25,984 |
|
|
|
|
| ||||
Less allowance for loan losses |
| (2,155 | ) |
|
|
|
| (1,627 | ) |
|
|
|
| ||||
Total average assets |
| $ | 263,915 |
|
|
|
|
| $ | 247,836 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Shareholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing demand - NOW |
| $ | 13,843 |
| $ | 15 |
| 0.43 | % | $ | 12,635 |
| $ | 9 |
| 0.28 | % |
Money Market |
| 30,916 |
| 144 |
| 1.86 | % | 26,520 |
| 129 |
| 1.95 | % | ||||
Savings |
| 27,213 |
| 17 |
| 0.25 | % | 25,103 |
| 16 |
| 0.25 | % | ||||
Time certificates of deposits |
| 82,112 |
| 530 |
| 2.58 | % | 71,073 |
| 663 |
| 3.73 | % | ||||
Total average interest-bearing deposits |
| 154,084 |
| 706 |
| 1.83 | % | 135,331 |
| 817 |
| 2.41 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
| 5,019 |
| 36 |
| 2.87 | % | 5,907 |
| 41 |
| 2.78 | % | ||||
Long-term debt |
| 6,642 |
| 52 |
| 3.13 | % | 7,155 |
| 91 |
| 5.09 | % | ||||
Total interest-bearing liabilities |
| 165,745 |
| 794 |
| 1.92 | % | 148,393 |
| 949 |
| 2.56 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand deposits |
| 70,053 |
|
|
|
|
| 75,761 |
|
|
|
|
| ||||
Other liabilities |
| 2,310 |
|
|
|
|
| 2,176 |
|
|
|
|
| ||||
Shareholders’ equity |
| 25,807 |
|
|
|
|
| 21,506 |
|
|
|
|
| ||||
Total average liabilities and shareholders’ equity |
| $ | 263,915 |
|
|
|
|
| $ | 247,836 |
|
|
|
|
| ||
Net interest income |
|
|
| $ | 2,778 |
|
|
|
|
| $ | 2,790 |
|
|
| ||
Net interest margin |
|
|
|
|
| 4.64 | % |
|
|
|
| 4.99 | % |
16
AVERAGE BALANCE SHEET INFORMATION
|
| For the six months ended June 30, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| ||||||||||||
|
| Average |
|
|
| Yield/ |
| Average |
|
|
| Yield/ |
| ||||
|
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
| ||||
|
| (dollars in thousands) |
| ||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans |
| $ | 196,834 |
| $ | 6,252 |
| 6.35 | % | $ | 170,274 |
| $ | 6,531 |
| 7.67 | % |
Investment securities |
| 36,127 |
| 782 |
| 4.33 | % | 51,212 |
| 1,242 |
| 4.85 | % | ||||
Federal funds sold |
| 2,894 |
| 1 |
| 0.07 | % | 1,497 |
| 16 |
| 2.14 | % | ||||
Interest-earning deposits with other institutions |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||
Total average interest-earning assets |
| 235,855 |
| 7,035 |
| 5.97 | % | 222,983 |
| 7,789 |
| 6.99 | % | ||||
Other assets |
| 25,709 |
|
|
|
|
| 26,053 |
|
|
|
|
| ||||
Less allowance for loan losses |
| (2,218 | ) |
|
|
|
| (1,656 | ) |
|
|
|
| ||||
Total average assets |
| $ | 259,346 |
|
|
|
|
| $ | 247,380 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Shareholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing demand - NOW |
| $ | 13,492 |
| $ | 25 |
| 0.37 | % | $ | 12,403 |
| $ | 18 |
| 0.29 | % |
Money Market |
| 29,541 |
| 276 |
| 1.87 | % | 25,599 |
| 279 |
| 2.18 | % | ||||
Savings |
| 26,760 |
| 33 |
| 0.25 | % | 25,534 |
| 54 |
| 0.42 | % | ||||
Time certificates of deposit |
| 77,818 |
| 1,042 |
| 2.68 | % | 71,383 |
| 1,441 |
| 4.04 | % | ||||
Total average interest-bearing deposits |
| 147,611 |
| 1,376 |
| 1.86 | % | 134,919 |
| 1,792 |
| 2.66 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
| 6,149 |
| 74 |
| 2.41 | % | 6,443 |
| 100 |
| 3.10 | % | ||||
Long-term debt |
| 6,724 |
| 109 |
| 3.24 | % | 7,155 |
| 211 |
| 5.90 | % | ||||
Total interest-bearing liabilities |
| 160,484 |
| 1,559 |
| 1.94 | % | 148,517 |
| 2,103 |
| 2.83 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand deposits |
| 70,874 |
|
|
|
|
| 75,033 |
|
|
|
|
| ||||
Other liabilities |
| 2,291 |
|
|
|
|
| 2,154 |
|
|
|
|
| ||||
Shareholders’ equity |
| 25,697 |
|
|
|
|
| 21,676 |
|
|
|
|
| ||||
Total average liabilities and shareholders’ equity |
| $ | 259,346 |
|
|
|
|
| $ | 247,380 |
|
|
|
|
| ||
Net interest income |
|
|
| $ | 5,476 |
|
|
|
|
| $ | 5,686 |
|
|
| ||
Net interest margin |
|
|
|
|
| 4.64 | % |
|
|
|
| 5.10 | % |
Net interest income decreased 0.43%, for the quarter ended June 30, 2009 and decreased 3.69% for the six months ended June 30, 2009 as compared to the same periods in 2008, as yields decreased on earning assets, and higher cost funds repriced more slowly. For the six months ending June 30, 2009 the yield on interest-earning assets decreased to 5.97% compared to 6.99% for the same period in 2008. The cost of total interest-bearing deposits decreased 80 basis points to 1.86% for the six months ending June 30, 2009 compared to 46 basis points in the immediately preceding six months in 2008.
17
Net interest margin for the three months ended June 30, 2009 was 4.64% compared to 4.99% for the three months ended June 30, 2008. Net interest margin for the six months ended June 30, 2009 was 4.64% compared to 5.10% for the six months ended June 30, 2008. This represents a decrease of 46 basis points or 9.02% between six month periods. The decrease in the Bank’s net interest margin was primarily caused by the Federal Reserve Bank reduction of 200 basis points over the last twelve months. 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.
|
| (dollars in thousands) |
| ||||||||
|
|
|
| Percent of |
|
|
| Percent of |
| ||
|
| June |
| Earning |
| June |
| Earning |
| ||
|
| 2009 |
| Assets |
| 2008 |
| Assets |
| ||
Federal Funds Sold |
| $ | 2,894 |
| 1.23 | % | $ | 1,497 |
| 0.67 | % |
Gross Loans |
| $ | 196,834 |
| 83.46 | % | 170,274 |
| 76.36 | % | |
Investments |
| 36,127 |
| 15.32 | % | 51,212 |
| 22.97 | % | ||
Total Average Earning Assets |
| $ | 235,855 |
| 100.00 | % | $ | 222,983 |
| 100.00 | % |
For the three months ended June 30, 2009, the average prime rate was 3.25%, the average Federal Funds rate was 0.08%, and the yield on the investment portfolio averaged 4.63%. During the three months ended June 30, 2008 the average prime rate was 5.08%, the average Federal Fund rate was 2.22%, and the Bank’s investment portfolio posted an average yield of 4.88%. For the six months ended June 30, 2009, the average prime rate was 3.25%, the average Federal Fund rate was 0.07%, and the yield on the investment portfolio averaged 4.33%. During the six months ended June 30, 2008 the average prime rate was 5.65%, the average Federal Fund rate was 2.14%, and the Bank’s investment portfolio posted an average yield of 4.85%. These decreases were primarily due to the Federal Reserve Bank’s 200 basis point reduction during the last twelve months.
Deposit interest expense for the three months ended June 30, 2009 totaled $706,000, which reflects a decrease of $111,000 or 13.39% over the like period in 2008. Deposit interest expense for the six months ended June 30, 2009 totaled $1,376,000, which reflects a decrease of $416,000 or 23.21% over the like period in 2008. The decrease in deposit interest expense was due to the decrease in interest rates paid on interest bearing accounts in conjunction with the Federal Reserve Bank 2.00% decrease in the prime lending rate for the last twelve months. The schedule shown below indicates that interest bearing deposits and time deposits increased $28,093,000 or 21.11% from June of 2008 to June of 2009. During the same period, noninterest bearing deposits decreased $5,186,000 or 6.79% as deposits moved to interest bearing categories.
|
| (dollars in thousands) |
|
|
| |||||||
|
| June |
| June |
| Dollar |
| Percent |
| |||
|
| 2009 |
| 2008 |
| Variance |
| Variance |
| |||
Noninterest bearing deposits |
| $ | 71,214 |
| $ | 76,400 |
| $ | (5,186 | ) | -6.79 | % |
Interest bearing deposits |
| 74,960 |
| 37,469 |
| 37,491 |
| 100.06 | % | |||
Interest bearing time |
| 86,225 |
| 95,623 |
| (9,398 | ) | -9.83 | % | |||
Total Deposits |
| $ | 232,399 |
| $ | 209,492 |
| $ | 22,907 |
| 10.93 | % |
The average deposit cost of funds for the three months ended June 30, 2009 decreased 48 basis points from 2.41% in June of 2008 to 1.93% in June of 2009. The average deposit cost of funds for the six months ended June 30, 2008 decreased 80 basis points from 2.66% in June of 2008 to 1.86% in June of 2009.
Noninterest Income
Noninterest income for the three months ended June 30, 2009 was $242,000 compared to $264,000 for the same period in 2008, a decrease of 8.33%. Noninterest income for the six months ended June 30, 2009 was $565,000 compared to $619,000 for the same period in 2008. That represents a decrease of $54,000 or 8.72% for the six months ending June 30, 2009. The decrease was primarily due to a $16,000 decrease in gain on sale of investments, a $12,000 decrease in fee income on mortgage loans and a $27,000 decrease in NFF charges collected.
18
Service charges on deposit accounts for the three months ended June 30, 2009 totaled $130,000, which represents a decrease of $6,000 or 4.41% over the same period in 2008. Service charges on deposit accounts for the six months ended June 30, 2009 totaled $251,000, which represents a decrease of $34,000 or 11.93% over the same period in 2008. The decrease in services charges was primarily due to a reduction in NSF fees collected.
Gain on sale of investment securities totaled $92,000 for the six months ended June 30, 2009 compared to $108,000 during the same period ended June 30, 2008. There was no gain on sale of securities income for the three months ended 2009 and 2008.
Other noninterest income for the three months ended June 30, 2009 was $112,000 compared to $128,000 for the same period in 2008, a decrease of 12.50%. Other noninterest income for the six months ended June 30, 2009 was $222,000 compared to $226,000 for the same period in 2008. That represents a decrease of $4,000 or 1.77% between the six month periods ended June 30 2008 and 2009.
Operating Expenses
Salary and employee benefits for the three months ended June 30, 2009 totaled $1,351,000, which reflects a decrease of $46,000 or 3.29% over the like period in 2008. Salary and employee benefits for the six months ended June 30, 2009 totaled $2,731,000, which reflects a decrease of $82,000 or 2.92% over the like period in 2008. This decrease is primarily due to the reduction in officer salary continuation expense, ESOP and 401K contributions.
Occupancy expense for the three months ended June 30, 2009 totaled $156,000, which reflects an increase of $2,000 or 1.30% over the same period in 2008. Occupancy expense for the six months ended June 30, 2009 totaled $323,000, which reflects an increase of $9,000 or 2.87% over the same period in 2008. This was primarily due to increased maintenance and repairs coupled with rising utility expenses.
Equipment expense for the three months ended June 30, 2009 totaled $155,000, which reflects a decrease of $14,000 or 8.28% over the same period in 2008. Equipment expense for the six months ended June 30, 2009 totaled $320,000, which reflects a decrease of $7,000 or 2.14% over the same period in 2008. The decrease in equipment expense for the six months ending June 30, 2009 was caused by scheduled fixed assets dropping off the system after being fully depreciated.
Professional services for the three months ended June 30, 2009 totaled $159,000, which reflects an increase of $27,000 or 20.45% over the same period in 2008. Professional services for the six months ended June 30, 2009 totaled $312,000, which reflects an increase of $31,000 or 11.03% over the same period in 2008. This was primarily due to the increase in audits and examination fees.
Data processing expense for the three months ended June 30, 2009 totaled $142,000, which reflects an increase of $12,000 or 9.23% from the same period in 2008. Data processing expense for the six months ended June 30, 2009 totaled $274,000, which reflects an increase of $22,000 or 8.73% from the same period in 2008. This was primarily due to increased fees of 3.50% coupled with item processing expenses associated with deposit growth.
Office related expense for the three months ended June 30, 2009 totaled $106,000, which reflects an increase of $23,000 or 27.71% over the same period in 2008. Office related expense for the six months ended June 30, 2009 totaled $208,000, which reflects an increase of $28,000 or 15.56% over the same period in 2008. This was primarily due to the increase in telephone expense of $20,000 or 46.51% coupled with a 19.23% increase in postage expense.
Marketing related expense for the three months ended June 30, 2009 totaled $101,000, which reflects an increase of $2,000 over the same period in 2008. Marketing related expense for the six months ended June 30, 2009 totaled $202,000, which reflects a decrease of $2,000 or 0.98% over the same period in 2008. This is primarily due to the decrease in donations and dues and memberships.
Regulatory assessment fees for the three months ended June 30, 2009 totaled $180,000 or an increase of 300.00%over the same period in 2008. Regulatory assessment fees for the six month period ending June 30, 2009 was $225,000, which reflects an increase of $146,000 or 184.81% increase over the same period in 2008. This was primarily due to the FDIC special assessment of $120,000 coupled with the Company’s participation in the TLGP Transaction
19
Account Guarantee Program (TAGP) assessment.
Director expense for the three months ended June 30, 2009 totaled $90,000, which reflects an increase of $5,000 or 5.88% over the like period in 2008. Director expense for the six months ended June 30, 2009 totaled $178,000, which reflects an increase of $12,000 or 7.23% over the like period in 2008. This is primarily due to the retirement of the President and CEO in January 2009, who now receives director fees.
Other expense for the three months ended June 30, 2009 totaled $106,000, which reflects an increase of $4,000 or 3.92% over the same period in 2008. Other expense for the six months ended June 30, 2009 totaled $204,000, which reflects an increase of $16,000 or 8.51% over the same period in 2008. This increase is primarily due to the additional loan related expenses such as appraisals and recording fees.
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:
|
| June |
| December |
| June |
| |||
|
| 2009 |
| 2008 |
| 2008 |
| |||
Charge offs |
| $ | 486 |
| $ | 352 |
| $ | 63 |
|
Recoveries |
| 1 |
| 14 |
| 6 |
| |||
OREO |
| 464 |
| — |
| — |
| |||
Nonaccrual Loans |
| 441 |
| 1,614 |
| 900 |
| |||
Accruing loans over 90 days past due |
| — |
| — |
| — |
| |||
Allowance for Loan Loss |
| 2,174 |
| 2,310 |
| 1,656 |
| |||
Period-end Gross Loans |
| 199,146 |
| 189,654 |
| 180,705 |
| |||
|
| June |
| December |
| June |
|
|
| 2009 |
| 2008 |
| 2008 |
|
Ratio comparison to Period-end Gross Loans to |
|
|
|
|
|
|
|
Charge offs |
| 0.24 | % | 0.19 | % | 0.03 | % |
Recoveries |
| 0.00 | % | 0.01 | % | 0.00 | % |
OREO |
| 0.23 | % | 0.00 | % | 0.00 | % |
Nonaccrual Loans |
| 0.22 | % | 0.85 | % | 0.50 | % |
Accruing loans over 90 days past due |
| 0.00 | % | 0.00 | % | 0.00 | % |
Allowance for Loan Loss |
| 1.09 | % | 1.22 | % | 0.92 | % |
Allowance for Loan Losses
The Bank made a $350,000 provision to its allowance for loan losses during the six month period ending June 30, 2009. 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 June 30, 2009 is adequate. The allowance on that date was 1.09% of total loans, compared to 1.22% at December 31, 2008 and 0.92% at June 30, 2008.
20
Table of Contents
Nonaccrual Loans
The Bank has two nonaccrual loans totaling $441,000 as of June 30, 2009, compared to three nonaccrual loans at December 31, 2008 totaling $1,614,000 and one nonaccrual loan totaling $900,000 at June 30, 2008. As of June 30, 2009 one nonaccrual loan secured by real estate in the amount of $600,000 was paid off and one loan secured by equipment had a principle payment of $18,000.
OREO
During the first two quarters of 2009 the Bank held one Other Real Estate Owned (OREO) property totaling $463,500. On July 8, 2009 the OREO property was sold for $525,000 for an estimated loss of $56,000. The bank currently holds no OREO property.
Other Borrowings
On July 8, 2008 the Company entered into a one year advance with FHLB for $5,000,000 at a fixed rate of 2.91%, This was primarily due to the decline in deposits during the first three quarters of 2008 and the increase in new loan requests. As of July 9, 2009 the Bank has no borrowings from FHLB.
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 $2,000,000 at the Company level in which $1,000,000 was used to repurchase the Company’s stock. The Company incurred $71,000 in interest expense during the six month period ending June 30, 2009. As of June 30, 2009 the trust preferred securities interest rate was 2.61%.
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 $2,000,000 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 June 30, 2009, was 4.75%. Quarterly principal payments of $166,678 began in the third quarter of 2008 and continue over the next three years as of June 30, 2009 the outstanding balance was $1,333,288. The notes mature in June 2011.
Capital
Total shareholders’ equity at June 30, 2009 totaled $25,464,000 compared to $25,551,000 at December 31, 2008, for a decrease of $87,000 or 0.34%. The decrease is due primarily to the payment of the preferred stock dividend and expenses of $81,000 and a $481,000 cash dividend on common stock that was paid to shareholders of record as of March 31, 2009 coupled with net earnings of $468,299. The preferred stock dividend is paid directly from capital not from expenses therefore reducing capital and EPS on common stock.
As part of the United States Treasury’s Capital Purchase Program, the Company entered into a Letter Agreement on December 19, 2008 with the United States Department of Treasury, pursuant to which the Company issued and sold 4,000 shares of the Company’s Preferred Stock and a warrant to purchase 37,360 shares of the Company’s Common Stock for an aggregate purchase price of $4,000,000 in cash. The Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. It is the Company’s intention to repay the capital within the five year time frame although no assurance can be given that we will be able to
21
do so. The warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price equal to $16.06 per share of the Common Stock.
The Company maintains capital ratios above the Federal regulatory guidelines for a “well-capitalized” bank. The ratios are as follows:
|
| Regulatory |
|
|
|
|
|
|
|
|
| Minimum Ratio |
|
|
|
|
|
|
|
|
| For |
| Regulatory |
| June |
| Dec. |
|
|
| “Well-Capitalized” |
| Minimum Ratio |
| 2009 |
| 2008 |
|
Bancorp |
|
|
|
|
|
|
|
|
|
Tier I Capital (to Average Assets) |
| 5.00 | % | 4.00 | % | 11.4 | % | 11.9 | % |
Tier I Capital (to Risk Weighted Assets) |
| 6.00 | % | 4.00 | % | 13.8 | % | 14.4 | % |
Total Capital (to Risk Weighted Assets) |
| 10.00 | % | 8.00 | % | 15.2 | % | 15.9 | % |
|
|
|
|
|
|
|
|
|
|
Bank |
|
|
|
|
|
|
|
|
|
Tier I Capital (to Average Assets) |
| 5.00 | % | 4.00 | % | 10.9 | % | 11.4 | % |
Tier I Capital (to Risk Weighted Assets) |
| 6.00 | % | 4.00 | % | 13.1 | % | 13.7 | % |
Total Capital (to Risk Weighted Assets) |
| 10.00 | % | 8.00 | % | 14.5 | % | 15.2 | % |
Liquidity
Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings. 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.
Our primary sources of liquidity are derived from financing activities that include the acceptance of customer deposits, federal fund purchase lines and a Federal Home Loan Bank advance line. The Bank currently has two unsecured federal fund lines totaling $6.0 million with two correspondent banks and two credit lines with FHLB totaling $43.6 million. On July 9, 2008 the Company entered into a one year advance with FHLB for $5,000,000 at a fixed rate of 2.91%. On July 9, 2009 the company had no borrowings with the Federal Home Loan Bank. The Bank’s current Liquidity policy is to maintain a liquidity ratio of not less than 20.0% based on regulatory formula. As of June 30, 2009 the Bank had a liquidity ratio of 22.8%.
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 reports as of June 30, 2009 indicate that the Bank has an actual dollar risk exposure of $17,000 if interest rates fall 100 basis points. This represents a 0.2% risk to interest income. The Equity to Asset ratio is 13.85% at zero basis points and 12.40% 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 |
| $ | -85 |
| $ | -17 |
| $ | 0 |
| $ | 170 |
| $ | 472 |
|
Percent of Risk |
| -0.8 | % | 0.2 | % | 0.0 | % | 1.5 | % | 4.3 | % | |||||
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
22
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.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair values of these financial instruments are not deemed to be material.
The estimated fair value of financial instruments at June 30, 2009 are summarized as follows:
|
| June 30, 2009 |
| ||||
|
| Carrying |
| Market |
| ||
|
| value |
| value |
| ||
Financial Assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 7,686,000 |
| $ | 7,686,000 |
|
Investment securities |
| 33,886,000 |
| 33,886,000 |
| ||
Loans receivable, net |
| 196,330,000 |
| 197,637,000 |
| ||
Cash surrender value of life insurance |
| 5,292,000 |
| 5,292,000 |
| ||
Federal Reserve Bank and FHLB stock |
| 1,643,000 |
| 1,643,000 |
| ||
Accrued interest receivable |
| 1,152,000 |
| 1,152,000 |
| ||
|
|
|
|
|
| ||
Financial Liabilities: |
|
|
|
|
| ||
Time deposits |
| $ | 86,225,000 |
| $ | 86,584,000 |
|
Other deposits |
| 146,174,000 |
| 137,612,000 |
| ||
Other borrowings |
| 5,000,000 |
| 5,000,000 |
| ||
Long-term debt |
| 6,488,000 |
| 6,488,000 |
| ||
Accrued interest and other liabilities |
| 2,290,000 |
| 2,290,000 |
|
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-K for the year ended December 31, 2008.
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.
24
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 June 30, 2009 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.
25
ITEM 1. Legal Proceedings.
The Company is involved in various legal proceedings occurring in the ordinary course of business which, in aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Company.
There have been no material changes from the risk factors disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2008.
ITEM 2. Unregistered Sale of Equity Securities and Use of Proceeds.
None.
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits
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
26
SIGNATURES
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: | August 13, 2009 |
|
|
|
|
| /s/ John C. Hansen |
|
| John C. Hansen |
|
| President and Chief Executive Officer |
|
|
|
|
|
|
|
Date: | August 13, 2009 |
|
|
|
|
| /s/ James M. Cowan |
|
| James M. Cowan |
|
Executive Vice President and Chief Financial Officer |
27
EXHIBIT INDEX
Exhibit |
| Sequential |
Number |
| Description |
|
|
|
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