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 March 31, 2010
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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). o Yes o No
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 April 30, 2010: 2,003,131.
Index
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| Page | |
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Part I — Financial Information |
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Item 1. | Consolidated Financial Statements (unaudited except year end) |
| |
| Consolidated Balance Sheets | 3 | |
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| |
| Consolidated Statements of Income | 4 | |
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| |
| Consolidated Statements of Cash Flows | 5 | |
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| 6 | ||
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| 7 | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
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28 | |||
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28 | |||
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29 | |||
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29 | |||
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29 | |||
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29 | |||
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29 | |||
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29 | |||
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29 | |||
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| 29 | ||
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| 30 | ||
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Certifications |
|
| |
(in thousands)
|
| 31-Mar-10 |
| 31-Dec-09 |
| ||
|
| (unaudited) |
|
|
| ||
Assets |
|
|
|
|
| ||
Cash and due from banks |
| $ | 5,714 |
| $ | 6,588 |
|
Federal funds sold |
| 8,700 |
| 2,500 |
| ||
Total cash and cash equivalents |
| 14,414 |
| 9,088 |
| ||
|
|
|
|
|
| ||
Securities available for sale |
| 39,729 |
| 40,990 |
| ||
Loans, net |
| 198,891 |
| 198,099 |
| ||
Premises and equipment, net |
| 8,096 |
| 8,223 |
| ||
Deferred income tax asset |
| 2,160 |
| 1,429 |
| ||
Cash surrender value of life insurance |
| 5,438 |
| 5,391 |
| ||
Federal Reserve Bank and Federal Home Loan Bank stock, at cost |
| 1,643 |
| 1,643 |
| ||
Other Real Estate Owned |
| 1,122 |
| 428 |
| ||
Accrued interest and other assets |
| 4,142 |
| 4,632 |
| ||
Total Assets |
| $ | 275,635 |
| $ | 269,923 |
|
|
|
|
|
|
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Liabilities and Shareholders' Equity |
|
|
|
|
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Deposits: |
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|
|
|
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Noninterest-bearing demand |
| $ | 68,886 |
| $ | 69,850 |
|
Interest-bearing demand and NOW accounts |
| 14,375 |
| 14,215 |
| ||
Money market |
| 41,651 |
| 37,396 |
| ||
Savings |
| 27,917 |
| 27,478 |
| ||
Time certificates of deposit of $100,000 or more |
| 55,323 |
| 52,146 |
| ||
Other time certificates |
| 37,138 |
| 37,638 |
| ||
Total Deposits |
| 245,290 |
| 238,723 |
| ||
Short-term borrowings |
| — |
| — |
| ||
Long-term debt |
| 5,988 |
| 6,155 |
| ||
Accrued interest and other liabilities |
| 2,112 |
| 2,015 |
| ||
Total Liabilities |
| 253,390 |
| 246,893 |
| ||
Commitments and contingencies |
| — |
| — |
| ||
Shareholders' equity |
|
|
|
|
| ||
Preferred Stock - Series A |
| 3,849 |
| 3,839 |
| ||
Common stock - no par value; authorized 20,000,000 shares; Issued and outstanding, 1,964,035 shares at March 31, 2010 and 1,961,334 shares at December 31, 2009 |
| 10,209 |
| 10,350 |
| ||
Additional Paid-in Capital |
| 847 |
| 814 |
| ||
Retained earnings |
| 7,082 |
| 7,698 |
| ||
Accumulated other comprehensive income-net unrealized gains on available-for-sale securities, net of taxes |
| 258 |
| 329 |
| ||
Total shareholders' equity |
| 22,245 |
| 23,030 |
| ||
Total liabilities and shareholders' equity |
| $ | 275,635 |
| $ | 269,923 |
|
(see accompanying notes)
Santa Lucia Bancorp
Consolidated Statements of Income
(in thousands except per share data)
|
| For the three month period ending |
| ||||
|
| 31-Mar-10 |
| 31-Mar-09 |
| ||
|
| (unaudited) |
| (unaudited) |
| ||
Interest Income |
|
|
|
|
| ||
Interest and fees on loans |
| $ | 3,023 |
| $ | 3,050 |
|
Federal funds sold |
| 1 |
| — |
| ||
Investment securities |
| 314 |
| 413 |
| ||
|
| 3,338 |
| 3,463 |
| ||
Interest expense |
|
|
|
|
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Time certificates of deposit of $100,000 or more |
| 253 |
| 279 |
| ||
Other deposits |
| 377 |
| 391 |
| ||
Short-term borrowings |
| — |
| 38 |
| ||
Long-term debt |
| 34 |
| 57 |
| ||
|
| 664 |
| 765 |
| ||
|
|
|
|
|
| ||
Net interest income |
| 2,674 |
| 2,698 |
| ||
|
|
|
|
|
| ||
Provision for credit losses |
| 1,408 |
| 240 |
| ||
Net interest income after provision for loan losses |
| 1,266 |
| 2,458 |
| ||
Noninterest income |
|
|
|
|
| ||
Service charges and fees |
| 120 |
| 121 |
| ||
Gain on sale of investment securities |
| — |
| 92 |
| ||
Other income |
| 93 |
| 110 |
| ||
|
| 213 |
| 323 |
| ||
Noninterest expense |
|
|
|
|
| ||
Salaries and employee benefits |
| 1,380 |
| 1,380 |
| ||
Occupancy |
| 158 |
| 167 |
| ||
Equipment |
| 144 |
| 165 |
| ||
Professional services |
| 137 |
| 153 |
| ||
Data processing |
| 119 |
| 132 |
| ||
Office related expenses |
| 104 |
| 102 |
| ||
Marketing |
| 81 |
| 101 |
| ||
Regulatory assessments |
| 111 |
| 45 |
| ||
Directors' fees and expenses |
| 89 |
| 88 |
| ||
Other |
| 97 |
| 98 |
| ||
|
| 2,420 |
| 2,431 |
| ||
Earnings before income taxes |
| (941 | ) | 350 |
| ||
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|
|
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Income taxes (benefit) |
| (245 | ) | 119 |
| ||
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|
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Net Earnings (Loss) |
| $ | (696 | ) | $ | 231 |
|
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Per Common Share Data |
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|
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|
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Net Earnings (Loss) - basic |
| $ | (0.38 | ) | $ | 0.10 |
|
Net Earnings (Loss) - diluted |
| $ | (0.38 | ) | $ | 0.10 |
|
(see accompanying notes)
Santa Lucia Bancorp
Consolidated Statements of Cash Flow
(in thousands)
(see accompanying notes)
Santa Lucia Bancorp
Consolidated Statement of Shareholders' Equity
(in thousands except shares outstanding)
For year ending December 31, 2009 and the period ending March 31, 2010
SANTA LUCIA BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 Company’s 2009 Annual Report as filed on Form 10K.
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 March 31, 2010, have been included. The results of operations for interim periods are not necessarily indicative of the results for a full year. Certain reclassifications were made to prior year’s presentations to conform to the current year these reclassifications had no material impact to the Company’s previously reported financial statements.
Note 2 Loans and Related Allowance for Loan Losses:
A summary of loans as of March 31, 2010 and December 31, 2009 is as follows:
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| (in thousands) |
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| 31-Mar-10 |
| 31-Dec-09 |
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Real estate - construction |
| $ | 38,208 |
| $ | 47,458 |
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Real estate - other |
| 119,230 |
| 111,183 |
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Commercial |
| 44,405 |
| 41,744 |
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Consumer |
| 1,653 |
| 1,783 |
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Gross Loans |
| 203,496 |
| 202,168 |
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|
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Deferred loan fees |
| (719 | ) | (683 | ) | ||
Allowance for loan losses |
| (3,886 | ) | (3,386 | ) | ||
Net Loans |
| $ | 198,891 |
| $ | 198,099 |
|
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 1.91% as of March 31, 2010 an increase of 0.25% compared to 1.67% as of December 31, 2009. The primary reasons for the increase were the amount of net loan charge-offs, the increase in non-performing loans, the write downs of several loans to the fair value due to the downturn in the real estate market and the $1,328,000 growth in loans. Management believes that the Allowance for loan losses at March 31, 2010 is adequate after considering the above factors. Although management believes the allowance for loan loss is adequate there is no assurance that at any given period the Company will not sustain charge-offs that are substantial in relation to the size of the allowance.
Concentration of Credit Risk. As of March 31, 2010, real estate served as the principal source of collateral with respect to approximately 77.4% of our loan portfolio, of which, 58.0% is considered commercial real estate (CRE). Within the makeup of our CRE, approximately 46.4% 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 46.7% of our construction loans are in owner occupied residential construction and commercial properties for owner use.
A continued decline in current economic conditions and the declining interest rates have had an 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 March 31, 2010 and 2009 amounts to approximately $42,921,000 and $54,433,000 respectively, of which approximately $1,510,000 and $2,758,000 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.
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 |
| Three Months Ending |
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|
| 31-Mar-10 |
| 31-Mar-09 |
| |||||
|
| Income |
| Shares |
| Income |
| Shares |
| |
|
| (Numerator) |
| (Denominator) |
| (Numerator) |
| (Denominator) |
| |
Net Income |
| (696 | ) |
|
| $ | 231 |
|
|
|
Less Dividends and Accreation on Preferred Stock |
| (60 | ) |
|
| $ | (41 | ) |
|
|
Average Shares Outstanding |
|
|
| 2,001,961 |
|
|
| 1,923,053 |
| |
Used in Basic EPS |
| (756 | ) | 2,001,961 |
| 190 |
| 1,923,053 |
| |
Dilutive Effect of Outstanding Stock Options |
|
|
| 44,849 |
|
|
| 10,605 |
| |
Used in Diluted EPS |
| (756 | ) | 2,046,810 |
| $ | 190 |
| 1,933,658 |
|
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. The Company recognizes the cost of employee services received in exchange for awards of stock options or other equity instruments, based on the grant-date fair value of those awards. The cost is recognized over the period which an employee is required to provide services in exchange for the award, generally the vesting period.
Note 6- Fair Value Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
· Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date
· Level 2 — Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 —Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1).
Collateral-Dependent Impaired Loans: The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect (1) partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (2) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants (Level 3).
Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount of fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at March 31, 2010 and December 31, 2009.
|
| Fair Value Measurements as of March 31, 2010 using |
|
|
| ||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Assets and liabilities measured at fair value on a recurring basis |
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Assets: |
|
|
|
|
|
|
|
|
| ||||
Securities Available for Sale |
| $ | 39,290,355 |
| $ | — |
| $ | — |
| $ | 39,290,355 |
|
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Assets measured at fair value on a non-recurring basis |
|
|
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Collateral-Dependent Impaired Loans, Net of Specific Reserves |
| $ | — |
| $ | — |
| $ | 13,122,884 |
| $ | 13,122,884 |
|
Other Real Estate Owned |
| $ | — |
| $ | — |
| $ | 1,122,232 |
| $ | 1,122,232 |
|
|
| Fair Value Measurements as of December 31, 2009 using |
|
|
| ||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Assets and liabilities measured at fair value on a recurring basis |
|
|
|
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|
|
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|
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Securities Available for Sale |
| $ | 40,989,899 |
| $ | — |
| $ | — |
| $ | 40,989,899 |
|
|
|
|
|
|
|
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Assets measured at fair value on a non-recurring basis |
|
|
|
|
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Collateral-Dependent Impaired Loans, Net of Specific Reserves |
| $ | — |
| $ | — |
| $ | 6,407,114 |
| $ | 6,407,114 |
|
Other Real Estate Owned |
| $ | — |
| $ | — |
| $ | 428,000 |
| $ | 428,000 |
|
Collateral-dependent impaired loans has a net carry value of $13,122,884 which is made up of the loan balance, net of specific reserves of $0.00 at March 31, 2010 compared to $6,407,114 at December 31, 2009.
Other real estate owned had a net carrying amount of $1,122,232, which is made up of the outstanding balance of $1,122,232, net of valuation allowance of $0.00 at March 31, 2010 compared to $428,000 at December 31, 2009.
Note 7- Investment Securities
The amortized cost, carrying value and estimated fair values of investment securities available for sale as of March 31, 2010 and December 31, 2009 are as follows:
|
| March 31, 2010 |
| ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Estimated |
| ||||
|
| cost |
| gains |
| losses |
| fair value |
| ||||
Securities Available for Sale: |
|
|
|
|
|
|
|
|
| ||||
U.S. government and agency securities |
| $ | 21,818,742 |
| $ | 137,415 |
| $ | (11,700 | ) | $ | 21,944,457 |
|
States and political subdivisions |
| 3,206,751 |
| 98,511 |
| (3,765 | ) | $ | 3,301,497 |
| |||
Mortgage-backed securities |
| 10,721,901 |
| 291,914 |
| (44,226 | ) | $ | 10,969,589 |
| |||
GNMA Securities |
| 3,542,961 |
| — |
| (29,361 | ) | $ | 3,513,600 |
| |||
|
| $ | 39,290,355 |
| $ | 527,840 |
| $ | (89,052 | ) | $ | 39,729,143 |
|
|
| December 31, 2009 |
| ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Estimated |
| ||||
|
| cost |
| gains |
| losses |
| fair value |
| ||||
Securities Available for Sale: |
|
|
|
|
|
|
|
|
| ||||
U.S. government and agency securities |
| $ | 21,824,979 |
| $ | 217,016 |
| $ | (8,531 | ) | $ | 22,033,464 |
|
States and political subdivisions |
| 3,714,014 |
| 95,484 |
| (5,416 | ) | 3,804,082 |
| ||||
Mortgage-backed securities |
| 11,240,354 |
| 294,505 |
| (31,845 | ) | 11,503,014 |
| ||||
GNMA Securities |
| 3,650,205 |
| — |
| (866 | ) | 3,649,339 |
| ||||
|
| $ | 40,429,552 |
| $ | 607,005 |
| $ | (46,658 | ) | $ | 40,989,899 |
|
The carrying value of investment securities pledged to secure public funds, borrowings and for other purposes as required or permitted by law amounts to approximately $12,427,000 at March 31, 2010 and $12,368,000 at December 31, 2009. During 2009 the Company had proceeds from the sale of $5,176,324 in Mortgage Backed Securities and gross gains of $224,875. The Company has not sold any securities in 2010.
The amortized cost and estimated fair value of debt securities at March 31, 2010, by contractual maturity, are shown below. Mortgage-backed securities are classified in accordance with their estimated lives. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations.
|
| Amortized |
| Estimated |
| ||
|
| cost |
| fair value |
| ||
Securities available for sale: |
|
|
|
|
| ||
Due in one year or less |
| $ | 7,311,897 |
| $ | 7,449,575 |
|
Due after one year through five years |
| 19,816,198 |
| 20,037,086 |
| ||
Due after five years through ten years |
| 9,282,252 |
| 9,380,545 |
| ||
Due after ten years |
| 2,880,008 |
| 2,861,937 |
| ||
|
| $ | 39,290,355 |
| $ | 39,729,143 |
|
The gross unrealized loss and related estimated fair value of investment securities that have been in a continuous loss position for less than twelve months and over twelve months at March 31, 2010, and December 31, 2009 are as follows:
|
| Less than twelve months |
| Over twelve months |
| Total |
| ||||||||||||
|
| Unrealized |
| Estimated |
| Unrealized |
| Estimated |
| Unrealized |
| Estimated |
| ||||||
|
| loss |
| fair value |
| loss |
| fair value |
| loss |
| fair value |
| ||||||
March 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government and agency securities |
| $ | — |
| $ | — |
| $ | (11,700 | ) | $ | 2,191,954 |
| $ | (11,700 | ) | $ | 2,191,954 |
|
States and political subdivisions |
| — |
| — |
| (3,765 | ) | 294,989 |
| (3,765 | ) | 294,989 |
| ||||||
Mortgage-backed securities |
| — |
| — |
| (44,226 | ) | 4,984,610 |
| (44,226 | ) | 4,984,610 |
| ||||||
GNMA Securities |
| — |
| — |
| (29,361 | ) | 2,146,600 |
| (29,361 | ) | 2,146,600 |
| ||||||
|
| $ | — |
| $ | — |
| $ | (89,052 | ) | $ | 9,618,153 |
| $ | (89,052 | ) | $ | 9,618,153 |
|
|
| Less than twelve months |
| Over twelve months |
| Total |
| ||||||||||||
|
| Unrealized |
| Estimated |
| Unrealized |
| Estimated |
| Unrealized |
| Estimated |
| ||||||
|
| loss |
| fair value |
| loss |
| fair value |
| loss |
| fair value |
| ||||||
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government and agency securities |
| $ | (8,531 | ) | $ | 3,995,450 |
| $ | — |
| $ | — |
| $ | (8,531 | ) | $ | 3,995,450 |
|
States and political subdivisions |
| — |
| — |
| (5,416 | ) | 290,678 |
| (5,416 | ) | 290,678 |
| ||||||
Mortgage-backed securities |
| (31,845 | ) | 3,038,225 |
| — |
| — |
| (31,845 | ) | 3,038,225 |
| ||||||
GNMA Securities |
| — |
| — |
| (866 | ) | 198,720 |
| (866 | ) | 198,720 |
| ||||||
|
| $ | (40,376 | ) | $ | 7,033,675 |
| $ | (6,282 | ) | $ | 489,398 |
| $ | (46,658 | ) | $ | 7,523,073 |
|
As of March 31, 2010, the Company had 8 investment securities where the total estimated fair market value had decreased 0.69% from amortized cost. Unrealized losses on the eight securities have not been recognized into income because the issuer bonds are of high credit quality (rated AAA), management does not intend to sell and it is not likely that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach maturity.
Note 8 Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Financial Assets
The carrying amounts of cash, short term investments, due from customers on acceptances and bank acceptances outstanding are considered to approximate fair value. Short term investments include federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with banks. The fair values of investment securities, including available for sale, are discussed in Note 6. The fair value of loans are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments where available.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand, commercial paper, and other borrowed funds are considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of long term debt is based on rates currently available for debt with similar terms and remaining maturities.
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 March 31, 2010 and December 31, 2009 are summarized as follows:
|
| March 31, 2010 |
| December 31, 2009 |
| ||||||||
|
| Carrying |
| Market |
| Carrying |
| Market |
| ||||
Financial Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 5,714,000 |
| $ | 5,714,000 |
| $ | 6,588,396 |
| $ | 6,588,396 |
|
Fed Funds sold |
| 8,700,000 |
| 8,700,000 |
| 2,500,000 |
| 2,500,000 |
| ||||
Investment securities |
| 39,729,000 |
| 39,729,000 |
| 40,989,899 |
| 40,989,899 |
| ||||
Loans receivable, net |
| 198,891,000 |
| 199,961,000 |
| 198,098,998 |
| 195,723,998 |
| ||||
Cash surrender value of life insurance |
| 5,438,000 |
| 5,438,000 |
| 5,390,410 |
| 5,390,410 |
| ||||
Federal Reserve Bank and FHLB stock |
| 1,643,000 |
| 1,643,000 |
| 1,643,400 |
| 1,643,400 |
| ||||
Accrued interest receivable and other assets |
| 4,142,000 |
| 4,142,000 |
| 6,060,528 |
| 6,060,528 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Time deposits |
| $ | 92,461,000 |
| $ | 92,682,000 |
| $ | 89,782,887 |
| $ | 90,088,000 |
|
Other deposits |
| 152,829,000 |
| 146,187,000 |
| 148,939,637 |
| 145,844,637 |
| ||||
Other borrowings |
| — |
| — |
| — |
| — |
| ||||
Long-term debt |
| 5,988,000 |
| 5,988,000 |
| 6,154,932 |
| 6,154,932 |
| ||||
Accrued interest and other liabilities |
| 2,112,000 |
| 2,112,000 |
| 2,015,491 |
| 2,015,491 |
|
Note 9— Recently Issued Accounting Pronouncements
In February 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated as this requirement would have potentially conflicted with SEC reporting requirements. Removal of the disclosure requirement is not expected to affect the nature or timing of subsequent events evaluations performed by the Company. This ASU became effective upon issuance.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 which added disclosure requirements about significant transfers into and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of the valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements. The Company adopted these provisions of the ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2010. The adoption of these provisions of this ASU, which was subsequently codified into Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s statements of income and condition. See Note 6 and 7 to the Consolidated Financial Statements for the disclosures required by this ASU.
This ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number as currently permitted. This provision of the ASU is effective for the Company’s reporting period ending March 31, 2011. As this provision amends only the disclosure requirements for fair value measurements, the adoption will have no impact on the Company’s statements of income and condition.
Note 10 — Stock Dividend
On March 31, 2010, the Company declared a two percent (2%) stock dividend on the Company’s common stock to the shareholders on record as of that date and payable on April 23, 2010. All per share data in the financial statements and footnotes have been adjusted to give retroactive effect of this dividend.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 following is management’s discussion and analysis of the major factors that influenced our financial performance for the three months ended March 31, 2010. This analysis should be read in conjunction with the Company’s 2009 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: general economic and business conditions in the areas in which the Company operated, the ongoing financial crises and recession in the United States, California and foreign financial markets and the response of federal and state regulators and governments thereto, the increase in nonperforming loans and the decrease in real estate values collateralizing many of the Company’s loans, demographic changes, competition, fluctuations in interest rates, changes in business strategy or developmental plans, changes in federal and state banking laws or regulations , worsening credit quality, availability of capital to fund company’s business and other factors discussed in Item 1A. Risk Factors of the company’s 2009 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
The highlights for the quarter ended March 31, 2010 were as follows (please note that given the results of the fourth quarter of 2009, the Company has added comparative information for that period as well as for the first quarter of 2009 for a more complete comparison of the Company performance):
· For the first quarter of 2010, the Company reported a net loss applicable to common shareholders of $696,000 or $0.38 per fully diluted share. This compares to a net loss applicable to common shareholders of $1,944,000 or $1.02 per fully diluted share for the linked quarter ended December 31, 2009. For the first quarter of 2009, the Company showed a net profit applicable to common shareholders of $231,000 or $0.10 per fully diluted share.
· Net (loss) for the three month period ending March 31, 2010 was primarily the result of the $1,408,000 provision to the allowance for loan losses coupled with the 30 basis point decrease in the net interest margin.
· The allowance for loan losses increased to $3,886,000 or 1.91% of total loans as of March 31, 2010 compared to $3,386,000 or 1.67% at December 31, 2009 and $2,132,000 or 1.08% at the end of the first quarter of 2009. Non-performing loans increased to $8,959,000 as of March 31, 2010 compared to $6,835,000 at December 31, 2009 and $1,058,000 for the first quarter ended 2009. Non-performing loans totaled 4.40% of total gross loans as of March 31, 2010, compared to 0.53% as of the same period in 2009 and 3.17% as of December 31, 2009. Net charge offs were $908,000 for the first quarter of 2010, $3,776,000 in the fourth quarter of 2009 and $418,000 in the first quarter of 2009, respectively.
· Net interest margin fell to 4.35% for the period, compared to 4.65% for the same period in 2009 and 4.49% for the quarter ended December 31, 2009, primarily due to drops in average loan and investments yields during the quarter of 32 basis points and 128 basis points, respectively, when compared with the year earlier quarter.
· Total shareholders equity decreased to $22,245,000 as of March 31, 2010 compared to $23,030,000 at December 31, 2009 and $25,294,000 for the same period in 2009. The Company’s capital ratios at March 31, 2010 were all well above regulatory requirements for “well capitalized” institutions. The capital ratios for March 31, 2010 were as follows: Tier 1 Capital to Average Assets 10.03%; Tier 1 Capital to Risk-Weighted Assets 12.20%; and Total Capital to Risk-Weighted Assets 13.51%.
· The Company declared a 2% stock dividend to all shareholders of record as of March 31, 2010 reflecting the Board’s 2009 decision to issue a stock dividend rather than a cash dividend during these difficult economic times. This compares to a $0.25 per share cash dividend that was paid in the same period for 2009.
· Total loans net of unearned income increased $5,454,000 to $202,777,000 as of March 31, 2010 compared to $201,485,000 at December 31, 2009 and $197,323,000 as of March 31, 2009.
· Total deposits increased $6,567,000 or 2.8% from $238,723,000 at December 31, 2009 to $245,290,000 at March 31, 2010 compared to $220,551,000 at March 31, 2009.
SELECTED FINANCIAL INFORMATION
|
| (in thousands, except share data and ratios) |
| ||||||
|
| Three Months Ended |
| % |
| ||||
|
| 2010 |
| 2009 |
| Change |
| ||
Summary of Operations: |
|
|
|
|
|
|
| ||
Interest Income |
| $ | 3,338 |
| $ | 3,463 |
| -3.61 | % |
Interest Expense |
| 664 |
| 765 |
| -13.20 | % | ||
Net Interest Income |
| 2,674 |
| 2,698 |
| -0.89 | % | ||
Provision for Loan Loss |
| 1,408 |
| 240 |
| 486.67 | % | ||
|
|
|
|
|
|
|
| ||
Net Interest Income After Provision for Loan Losses |
| 1,266 |
| 2,458 |
| -48.49 | % | ||
Noninterest Income |
| 213 |
| 323 |
| -34.06 | % | ||
Noninterest Expense |
| 2,420 |
| 2,431 |
| -0.45 | % | ||
|
|
|
|
|
|
|
| ||
Income Before Income Taxes |
| (941 | ) | 350 |
| -368.86 | % | ||
Income Taxes |
| (245 | ) | 119 |
| -305.88 | % | ||
|
|
|
|
|
|
|
| ||
Net Income |
| $ | (696 | ) | $ | 231 |
| -401.30 | % |
|
|
|
|
|
|
|
| ||
Cash Dividends Paid |
| $ | — |
| $ | 481 |
| -100.00 | % |
Cash Dividends Paid Preferred Stock |
| $ | 50 |
| $ | 31 |
| 61.29 | % |
|
|
|
|
|
|
|
| ||
Per Common Share Data: |
|
|
|
|
|
|
| ||
Net Income - Basic |
| $ | (0.38 | ) | $ | 0.10 |
| -480.00 | % |
Net Income - Diluted |
| $ | (0.38 | ) | $ | 0.10 |
| -480.00 | % |
Dividends |
| $ | — |
| $ | 0.250 |
| -100.00 | % |
Book Value |
| $ | 9.29 |
| $ | 11.07 |
| -16.08 | % |
|
|
|
|
|
|
|
| ||
Common Outstanding Shares: |
| 1,964,035 |
| 1,923,053 |
| 2.13 | % | ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
Statement of Financial Condition Summary: |
|
|
|
|
|
|
| ||
Total Assets |
| $ | 275,635 |
| $ | 260,039 |
| 6.00 | % |
Total Deposits |
| 245,290 |
| 220,551 |
| 11.22 | % | ||
Total Net Loans |
| 198,891 |
| 195,191 |
| 1.90 | % | ||
Allowance for Loan Losses |
| 3,886 |
| 2,132 |
| 82.27 | % | ||
Total Shareholders’ Equity |
| 22,245 |
| 25,294 |
| -12.05 | % | ||
|
|
|
|
|
|
|
| ||
Selected Ratios: |
|
|
|
|
|
|
| ||
Return on Average Assets |
| -1.03 | % | 0.36 | % | -383.62 | % | ||
Return on Average Equity |
| -12.09 | % | 3.61 | % | -434.88 | % | ||
Net interest margin |
| 4.35 | % | 4.65 | % | -6.45 | % | ||
Average Loans as a Percentage of Average Deposits |
| 84.58 | % | 91.17 | % | -7.22 | % | ||
Allowance for Loan Losses to Total Loans |
| 1.91 | % | 1.08 | % | 13.68 | % | ||
Tier I Capital to Average Assets - “Bank Only” |
| 9.55 | % | 11.11 | % | -14.04 | % | ||
Tier I Capital to Risk-Weighted Assets - “Bank Only” |
| 11.52 | % | 13.07 | % | -11.86 | % | ||
Total Capital to Risk-Weighted Assets - “Bank Only” |
| 12.84 | % | 14.45 | % | -11.14 | % | ||
Tier I Capital to Average Assets - “Bancorp” |
| 10.03 | % | 11.76 | % | -14.71 | % | ||
Tier I Capital to Risk-Weighted Assets - “Bancorp” |
| 12.20 | % | 13.85 | % | -11.91 | % | ||
Total Capital to Risk-Weighted Assets - “Bancorp” |
| 13.51 | % | 15.23 | % | -11.29 | % |
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 401.30% to ($696) thousand for the quarter ended March 31, 2010 from $231 thousand for the same period in 2009. 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. In a declining interest rate environment, this has a negative effect on net interest margin. The primary reason for the decrease in EPS was the additional allocation to the loan loss provision of $1.4 million. Net interest income was $2.7 million at March 31, 2010 and March 31, 2009. Basic and diluted earnings per share for the quarter ended March 31, 2010 were ($0.38), and ($0.38), respectively, which compares to $0.10 and $0.10 for the quarter ended March 31, 2009. ROAE for the quarter ending March 31, 2010, decreased to -12.09% compared to 3.61% for the same period in 2009.
Comparing Information from the linked fourth quarter of 2009 to the first quarter of 2010 was as follows: net loss applicable to common shareholders for the first quarter of 2010 was $696,000 or $0.38 per fully diluted share compared to a net loss for the fourth quarter of 2009 of $1,944,000 or $1.02 per fully diluted share. The provision for loan losses in the first quarter of 2010 was $1,408,000 compared to $3,900,000 made during the fourth quarter of 2009. Net interest income for the first quarter of 2010 was $ 2,674,000 compared to $2,640,000 for the fourth quarter of 2009. ROAE was (7.18%) for the fourth quarter of 2009.
Return on Average Assets. Our return on average assets, or ROAA, is a measure we use to compare our performance with other bank’s and bank holding companies. ROAA for the quarter ended March 31, 2010 was -1.03% compared to 0.36% for the same period in 2009 primarily due to the reductions in net interest income and in net interest margin and the additional allocation to the loan loss provision of $1.4 million. ROAA was -0.69%for the quarter ended December 31, 2009.
Asset Quality. For all bank’s 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 thirteen nonperforming loans totaling $9.0 million as of March 31, 2010 compared to eight loans totaling $6.4 million at December 31, 2009 and $1.0 million at March 31, 2009. Nonperforming loans as a percentage of total loans increased to 4.40% as of March 31, 2010, compared to 3.17% at December 31, 2009 and 0.53% as of March 31, 2009, due primarily to the decline in the current market values coupled with the decline in customer cash flows. Charged off loans for the three months ended March 31, 2010 was $960 thousand or 0.47% compared to $4.4 million or 2.17% at December 31, 2009 and $418 thousand or 0.21% at March 31, 2009. The Company had two Other Real Estate Owned properties at March 31, 2010 totaling $1.1 million or 0.55%, $428 thousand or 0.31% at December 31, 2009 and $418 thousand or 0.23% at March 31, 2009. Allowance for loan losses increased to $3.9 million as of March 31, 2010 compared to $2.1 million at March 31, 2009 and $3.4 million as of December 31, 2009. The allowance as a percentage of total loans was 1.91% at March 31, 2010, 1.67% at December 31, 2009 and 1.08% at March 31, 2009, respectively.
Asset Growth. Total assets of $275.8 million increased $5.9 million or 2.18% for the period ending March 31, 2010 compared to December 31, 2009. Total assets for the period ending March 31, 2010 of $275.8 million increased $15.8 million or 6.06% compared to $260.0 million as of March 31, 2009. Net loans increased $3.7 million or 1.90% from $195.1 million as of March 31, 2009 to $198.9 million for the same period in 2010 and $198.0 million at December 31, 2009. Total deposits increased to $245.3 million as of March 31, 2010 compared to $238.7 million as of December 31, 2009 and $220.6 million as of March 31, 2009. This increase of $24.7 million or 11.22% is primarily due to the increase in money market and time deposits over $100 thousand when comparing March 31, 2010 to March 31, 2009.
Operating Efficiency. Operating efficiency is the measure of how efficiently earnings before taxes are generated as a percentage of revenue. Our efficiency ratio increased to 83.8% for the first three months of 2010 compared to 80.50% for the same period in 2009 and 81.8% at December 31, 2009.This is due to a decrease in the bank’s net interest margin. Net interest income before provision decreased 0.89% to $2.7 million for the three months ended March 31, 2010, while operating expenses decreased 0.45% or $11 thousand to $2.42 million for the quarter ended March 31, 2010 from $2.43 million for the year earlier quarter and $2.6 million for the quarter ended December 31, 2009.
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 well as the real estate market. Residential real estate prices have continued to decline and the vacancy rates in commercial properties have increased in our markets. Recent indications show the (not seasonally adjusted) unemployment rate within California as of March 31, 2010 of 13.0% compared to December 31, 2009 of 12.1% this is up 7.44%. 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 net of payoffs and charge offs reflects increased demand for commercial and real estate loans and a decrease in construction loans.
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 ended March 31, 2010 compared with the three months ended March 31, 2009.
RESULTS OF OPERATIONS
Net Income
Our net loss of ($696) thousand for the three months ended March 31, 2010, reflects a $927 thousand or 401.30% decrease over the like period in 2009 compared to a net loss of ($1.9) million at December 31, 2009. Net interest income decreased primarily due to a decrease in net interest margin from 4.65% for the first quarter 2009, 4.49% for December 31, 2009 to 4.35% for the same period in 2010. The decrease is largely attributable to the decrease of 54 basis points in the yield on earning assets for the three months ended March 31, 2010 and the additional allocation to the provision for loan loss of $1.4 million.
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.
Total net loans increased $792 thousand or 0.40% for the three months ended March 31, 2010 when comparing December 31, 2009 of $198.1 million and $198.9 million as of March 31, 2010. The Company continues to experience positive loan growth.
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 ending March 31, |
| ||||||||||||||
|
| 2010 |
| 2009 |
| ||||||||||||
|
| Average |
|
|
| Yield/ |
| Average |
|
|
| Yield/ |
| ||||
|
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
| ||||
|
| (in thousands) |
| ||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans |
| $ | 202,387 |
| $ | 3,023 |
| 5.97 | % | $ | 193,981 |
| $ | 3,050 |
| 6.29 | % |
Investment securities |
| 39,437 |
| 314 |
| 3.18 | % | 37,046 |
| 413 |
| 4.46 | % | ||||
Federal funds sold |
| 4,223 |
| 1 |
| 0.09 | % | 966 |
| — |
| 0.00 | % | ||||
Interest-earning deposits with other institutions |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||
Total average interest-earning assets |
| 246,047 |
| 3,338 |
| 5.43 | % | 231,993 |
| 3,463 |
| 5.97 | % | ||||
Other assets |
| 28,035 |
|
|
|
|
| 25,014 |
|
|
|
|
| ||||
Less allowance for loan losses |
| (3,481 | ) |
|
|
|
| (2,281 | ) |
|
|
|
| ||||
Total average assets |
| $ | 270,601 |
|
|
|
|
| $ | 254,726 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Shareholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing demand — NOW |
| $ | 14,097 |
| $ | 11 |
| 0.31 | % | $ | 13,137 |
| $ | 10 |
| 0.30 | % |
Money Market |
| 40,340 |
| 163 |
| 1.62 | % | 28,149 |
| 132 |
| 1.88 | % | ||||
Savings |
| 27,277 |
| 17 |
| 0.25 | % | 26,304 |
| 16 |
| 0.24 | % | ||||
Time certificates of deposit |
| 91,768 |
| 439 |
| 1.91 | % | 73,476 |
| 512 |
| 2.79 | % | ||||
Total average interest-bearing deposits |
| 173,482 |
| 630 |
| 1.45 | % | 141,066 |
| 670 |
| 1.90 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
| 67 |
| — |
| 0.00 | % | 7,291 |
| 38 |
| 2.08 | % | ||||
Long-term borrowings |
| 6,140 |
| 34 |
| 2.21 | % | 6,807 |
| 57 |
| 3.35 | % | ||||
Total interest-bearing liabilities |
| 179,689 |
| 664 |
| 1.48 | % | 155,164 |
| 765 |
| 1.97 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand deposits |
| 65,797 |
|
|
|
|
| 71,706 |
|
|
|
|
| ||||
Other liabilities |
| 2,094 |
|
|
|
|
| 2,269 |
|
|
|
|
| ||||
Shareholders’ equity |
| 23,021 |
|
|
|
|
| 25,587 |
|
|
|
|
| ||||
Total average liabilities and shareholders’ equity |
| $ | 270,601 |
|
|
|
|
| $ | 254,726 |
|
|
|
|
| ||
Net interest income |
|
|
| $ | 2,674 |
|
|
|
|
| $ | 2,698 |
|
|
| ||
Net interest margin |
|
|
|
|
| 4.35 | % |
|
|
|
| 4.65 | % |
Net interest income decreased 0.89% for the quarter ended March 31, 2010 as compared to the same period in 2009, as decreasing yields on earning assets, and the slower effect of repricing higher cost of funds combined to decrease our net interest margin. The yield on interest-earning assets decreased to 5.43% for the current quarter, as compared to 5.74% in the immediately preceding quarter and 5.97% a year ago. The cost of total interest-bearing liabilities decreased to 1.48% for the current quarter, as compared to 1.82% in the immediately preceding quarter and 1.97% a year ago. Net interest margin for the three months ended March 31, 2010 was 4.35% compared to 4.65% for the three months ended March 31, 2009. This represents a decrease of 30 basis points or 6.45%. The table below indicates an increase in the fed fund portfolio from 0.42% of average earning assets as of March 31, 2009 to 1.72% as of March 31, 2010. The table also indicates a decrease in the loan portfolio from 83.62% of average earning assets at March 31, 2009 to 82.26% at March 31, 2009 and 82.55% at December 31, 2009 and an increase in the investment portfolio from 15.96% to 16.02% when comparing March 31, 2009 to March 31, 2010. This percentage at December 31, 2009 was 15.34%.
The table below indicates an increase in the fed fund portfolio from 0.42% of average earning assets as of March 31, 2009 to 1.72% as of March 31, 2010. The table also indicates a decrease in the loan portfolio from 83.62% of average earning assets to 82.26% and an increase in investment portfolio from 15.96% to 16.02% when comparing March 31, 2009 to March 31, 2010:
|
| (dollars in thousands) |
| ||||||||
|
|
|
| Percent of |
|
|
| Percent of |
| ||
|
| March |
| Earning |
| March |
| Earning |
| ||
|
| 2010 |
| Assets |
| 2009 |
| Assets |
| ||
Federal Funds Sold |
| 4,223 |
| 1.72 | % | 966 |
| 0.42 | % | ||
Loans |
| $ | 202,387 |
| 82.26 | % | $ | 193,981 |
| 83.62 | % |
Investments |
| 39,437 |
| 16.02 | % | 37,046 |
| 15.96 | % | ||
Total Average Earning Assets |
| $ | 246,047 |
| 100.00 | % | $ | 231,993 |
| 100.00 | % |
For the three months ended March 31, 2010, the average prime rate was 3.25%, the average Fed Fund rate was .09%, and the yield on the investment portfolio averaged 3.18%. During the three months ended March 31, 2009 the average prime rate was 3.25%, the average Fed Fund rate was 0.10%, and the Bank’s investment portfolio posted an average yield of 4.46%.
Deposit interest expense for the three months ended March 31, 2010 totaled $630 thousand, which reflects a decrease of $43 thousand compared to the three months ended December 31, 2009 and $40 thousand or 5.97% over the like period in 2009. The decrease in deposit interest expense was due to the declining interest rates despite the fact that there was an increase in interest bearing deposits. The schedule shown below indicates that average interest bearing savings and time deposits increased $19.2 million or 19.31% from March of 2009 to March of 2010. During the same period, average non interest bearing deposits decreased $5.9 million or 8.24%.
|
| (dollars in thousands) |
| |||||||||
|
| March |
| March |
| Dollar |
| Percent |
| |||
|
| 2010 |
| 2009 |
| Variance |
| Variance |
| |||
Average noninterest bearing deposits |
| 65,797 |
| 71,706 |
| $ | (5,909 | ) | -8.24 | % | ||
Average interest bearing demand deposits |
| 54,437 |
| 41,286 |
| 13,151 |
| 31.85 | % | |||
Average interest bearing savings and time |
| 119,045 |
| 99,780 |
| 19,265 |
| 19.31 | % | |||
Total Deposits |
| $ | 239,279 |
| $ | 212,772 |
| $ | 26,507 |
| 12.46 | % |
The average deposit cost of funds for the three months ended March 31, 2010 decreased 45 basis points from 1.90% in March of 2009 to 1.45% in March of 2010. The Company anticipates a continued decrease in its deposit cost of funds during the balance of this year as higher cost fixed rate deposits mature.
Noninterest Income
Noninterest income for the three months ended March 31, 2010 was $213 thousand compared to $323 thousand for the same period in 2009. That represents a decrease of $110 thousand or 34.06%, which is primarily due to the gain on sale of securities realized in 2009 of $92 thousand.
Service charges on deposit accounts for the three months ended March 31, 2010 totaled $120 thousand, which represents a decrease of $1 thousand or 0.83% compared to $121 thousand in the same period of 2009.
There were no gains on sale of investment securities during the first quarter 2010 and $92 thousand for the three months ended March 31, 2009.
Other noninterest income for the three months ended March 31, 2010 was $93 thousand compared to $110 thousand for a decrease of $17,000 or 15.45% compared to the same period of 2009, primarily due the reduction in mortgage referral fees collected.
Operating Expenses
Salary and employee benefits for the three months ended March 31, 2010 and March 31, 2009 totaled $1.38 million.
Occupancy expense for the three months ended March 31, 2010 totaled $158 thousand, which reflects a decrease of $9 thousand or 5.39% compared to $167 thousand over the same period in 2009. This was primarily due to the reduction maintenance on buildings.
Equipment expense for the three months ended March 31, 2010 totaled $144 thousand, which reflects a decrease of $21 thousand or 12.73% compared to $165 thousand over the same period in 2009. This was primarily due to fully depreciated equipment.
Professional services for the three months ended March 31, 2010 totaled $137 thousand, which reflects a decrease of $16 thousand or 10.46% compared to $153 thousand over the same period in 2009. This is primarily due to the reduction of legal fees.
Data processing expense for the three months ended March 31, 2010 totaled $119 thousand which reflects a decrease of $13 thousand or 9.85% compared to $132 thousand from the same period in 2009. This is primarily due to the extension of our data processing service contract rate.
Office related expense for the three months ended March 31, 2010 totaled $104 thousand, which reflects an increase of $2 thousand or 1.96% compared to $102 thousand over the same period in 2009. This was primarily due to an increase in stationery and supplies.
Marketing related expense for the three months ended March 31, 2010 totaled $81 thousand which reflects a decrease of $20 thousand 19.80% compared to $101 thousand over the same period in 2009. The decrease is primarily due to the reduction in advertising expense.
Regulatory assessment fees for the period ending March 31, 2010 were $111 thousand, which reflects an increase of $66 thousand or 146.67% compared to $45 thousand over the same period in 2009. This was primarily due to the increase in the Federal Deposit Insurance special assessment fees assessed on all banks, the increase in regular assessment fees and the company’s participation in the TLGP Transaction Account Guarantee Program,.
Director expense for the three months ended March 31, 2010 totaled $89 thousand, which reflects an increase of $1 thousand or 1.14% over the like period in 2009.
Other expense for the three months ended March 31, 2010 totaled $97 thousand which reflects a decrease of $1 thousand or 1.02% over the same period in 2009
Loan Related Data
While the Bank has continued to have increased loan demand for new loans, certain existing loans have been adversely affected by the decline in the local economy and its impact on our borrowers, especially real estate secured loans which constituted 77.4% of total loans at March 31, 2010. Of this number, 58% were commercial real estate loans. This compares to 78.5% and 79.2% secured by real estate as of December 31, 2009 and March 31, 2009, respectively. Commercial real estate loans comprised 45.0% and 56.2% of real estate secured loans as of those periods, respectively.
In general, collateral values have declined as real estate values have fallen in our markets throughout the periods covered by this Report and several borrowers, including some with long borrowing histories and relationships with the Bank have experienced difficulty in meeting contractual payments obligations. This has resulted in write downs of some of the collateral securing some of the Bank’s loans as well as the restructuring of some loans. Others have become non-performing and the Bank is pursuing various legal remedies including foreclosure
The Bank had thirteen non-performing loans totaling $8,959,000 as of March 31, 2010 (4.5% of total net loans)compared to eight non performing loans totaling $6,407,000 at December 31, 2009 (3.2% of total net loans)and three non-performing loans totaling $1,058,000 as of March 31, 2009 (0.5% of total net loans). The increase in non-performing loans as of March 31, 2010 was a result of the current economic downturn and a continued reduction in real estate collateral values. For loans that were considered to be impaired, the Bank determined the fair value of the real estate collateral and charged off the portions of such loans considered uncollectible based on these analyses.
The Bank experience net charge-offs of $908,000 in the first quarter of 2010, $3,776,000 in the fourth quarter of 2009 and $418,000 for the first quarter of 2009.
On a comparative basis, problem loan and loan related data are detailed in the following tables:
|
| March |
| December |
| March |
| |||
|
| 2010 |
| 2009 |
| 2009 |
| |||
Charge offs |
| $ | 960 |
| $ | 4,386 |
| $ | 418 |
|
Recoveries |
| 52 |
| 2 |
| — |
| |||
OREO |
| 1,122 |
| 428 |
| 464 |
| |||
Nonaccrual Loans |
| 8,959 |
| 6,407 |
| 1,058 |
| |||
Accruing loans over 90 days past due |
| — |
| — |
| — |
| |||
Allowance for Loan Loss |
| 3,886 |
| 3,386 |
| 2,132 |
| |||
Period-end Gross Loans |
| 203,496 |
| 202,168 |
| 197,996 |
| |||
|
| March |
| December |
| March |
|
|
| 2010 |
| 2009 |
| 2009 |
|
Ratio comparison to Period-end Gross Loans to |
|
|
|
|
|
|
|
Charge offs |
| 0.47 | % | 2.17 | % | 0.21 | % |
Recoveries |
| 0.03 | % | 0.00 | % | 0.00 | % |
OREO |
| 0.55 | % | 0.21 | % | 0.23 | % |
Nonaccrual Loans |
| 4.40 | % | 3.17 | % | 0.53 | % |
Accruing loans over 90 days past due |
| 0.00 | % | 0.00 | % | 0.00 | % |
Allowance for Loan Loss |
| 1.91 | % | 1.67 | % | 1.08 | % |
The Bank’s credit portfolio continues to be reviewed by our outside loan review firm on a monthly basis as well as the regular and enhanced review and ongoing evaluation of the loan portfolio by the Bank’s lending staff. It is management’s belief that although the additional controls are in place, there is no assurance with the current economic conditions, loss of jobs and declining market values on real estate that other existing long term lending relationships may decline causing the Company to charge off and write down loans to fair value and place additional loans on non accrual status.
Allowance for Loan Losses
The Bank made a $1.4 million addition to its allowance for loan losses during the three month period ending March 31, 2010 compared to $240 thousand in the first quarter 2009. The provision for the quarter ended December 31, 2009 was $3.9 million. The allowance on that date was 1.91% of total loans, compared to 1.67% at December 31, 2009 and 1.08% at March 31, 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 March 31, 2010 is adequate.
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 qualitative factors: changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups; the level of classified and nonperforming loans and the results of regulatory examinations. Consideration is also given to the possible effects of changes in lending policies and procedures; the experience and depth of lending management and staff; concentrations, and changes in underlying collateral values. For loans not considered to be impaired, management uses historical loss experience coupled with the previously mentioned qualitative factors to determined estimated reserves.
Impaired loans are analyzed on a loan by loan basis due to the unique characteristics of each loan. Loan are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments 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 contractual interest rate set in the loan
agreement. Collateral-dependent loans are measured for impairment based on the fair value of the collateral. A loan is considered collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. The fair value of the underlying collateral is generally determined by utilizing an appraisal of the collateral discounted for estimated costs to sell.
Nonaccrual Loans
The Bank had thirteen non-accrual loans totaling $9.0 million as of March 31, 2010, compared to three nonaccrual loans totaling $1.0 million at March 31, 2009. Eight of these are commercial loans to 6 borrowers totaling $2.7 million, with two of the loans supported by government guarantees from either Cal Coastal or SBA reducing the Bank’s exposure to $1.7 million. These loans were written down an aggregate of $280 thousand prior to quarter end. These loans are secured predominately with business assets and/or real estate. The Bank is working with the borrowers where possible and has obtained legal counsel where necessary to maximize repayment.
Nonperforming real estate secured loans consists of five loans totaling $6.3 million, which were written down a total of $617 thousand prior to quarter end. There is one loan for an individual’s personal residence within this category. The Bank is working with legal counsel and is proceeding through the foreclosure process. A commercial income property was placed on nonaccrual as of March 31, 2010. The Bank is considering accepting a deed in lieu of foreclosure on the property and is currently exploring legal options. An offsite development loan for a mixed use property was placed on nonaccrual as of December 31, 2009. The Bank continues to work with the borrowers to move this project forward. The Bank placed another offsite development loan on non accrual as of March 31, 2010. The borrowers continue to service the interest requirements and have listed the property for sale. The final property in this category for an offsite development project is one the Bank has a participation interest in with the property being located outside the Bank’s service area.
A portion of the Bank’s collateral totaling $694 thousand was transferred to OREO during the quarter. The originating Bank is working to obtain a release from the bankruptcy court so that foreclosure can be completed on the remaining collateral properties as well as pursuing legal action for collection from both the borrower and guarantors.
OREO
At March 31, 2010 the company had two Other Real Estate Owned properties totaling $1.1 million compared to one property at December 31, 2009 totaling $428 thousand and $464 thousand as of March 31, 2009. The first property is a single family residence totaling $428 thousand is actively being marketed for sale at this time with no loss anticipated. The second property is currently in escrow and the Company expects escrow to close in May 2010 with minimal loss exposure.
Other Borrowings
On March 31, 2010 the Company had no borrowings with Federal Home Loan Bank or its correspondent banks.
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. The Company paid $22 thousand in interest expense during the three month period ending March 31, 2010.
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 1.5%. The initial rate for the notes was 5.5%. The current balance and rate as of March 31, 2010, is $833 thousand at 4.75%. Quarterly principal payments of $166,678 began in the third quarter of 2008 and will continue over the next two years. The notes mature in June 2011.
Capital
Total shareholders’ equity at March 31, 2010 totaled $22.4 million compared to $23.0 million at December 31, 2009, for a decrease of $620 thousand or 2.69%. The decrease is due primarily to the payment of preferred stock dividend of $50 thousand and the net loss in earnings of $531 thousand.
As part of the United States Treasury’s Capital Purchase Program, the Company entered into a Purchase Agreement on December 19, 2008 with the United States Department of Treasury, where the Company agreed to issue and sell 4,000 shares of the Company’s Preferred Stock and a warrant to purchase 38,869 shares of the Company’s Common Stock for an aggregate purchase price of $4,000,000 in cash. The Preferred Stock will qualify as Tier 1 capital and will pay 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. The warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price equal to $15.436 (adjusted for the 2.0% stock dividend declared on March 17, 2010) per share of the Common Stock.
The Company maintains capital ratios above the Federal regulatory guidelines for a “well-capitalized” bank. The ratios were as follows:
|
| Regulatory |
| “Well Capitalized” |
| March 2010 |
| December 2009 |
|
Tier I Capital to Average Assets - “Bank Only” |
| 4.00 | % | 5.00 | % | 9.55 | % | 11.11 | % |
Tier I Capital to Risk-Weighted Assets - “Bank Only” |
| 4.00 | % | 6.00 | % | 11.52 | % | 13.07 | % |
Total Capital to Risk-Weighted Assets - “Bank Only” |
| 8.00 | % | 10.00 | % | 12.84 | % | 14.45 | % |
Tier I Capital to Average Assets - “Bancorp” |
| 4.00 | % | 5.00 | % | 10.03 | % | 11.76 | % |
Tier I Capital to Risk-Weighted Assets - “Bancorp” |
| 4.00 | % | 6.00 | % | 12.20 | % | 13.85 | % |
Total Capital to Risk-Weighted Assets - “Bancorp” |
| 83.00 | % | 10.00 | % | 13.51 | % | 15.23 | % |
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 federal fund lines totaling $6.0 million and two credit lines with FHLB totaling $43.6 million. The Bank’s current Liquidity policy is to maintain a liquidity ratio of not less than 20.0% based on regulatory formula. As of March 31, 2010 the Bank had a liquidity ratio of 22.5% compared to 19.0% at March 31, 2009 and 20.9% at December 31, 2009.
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). With a decrease in the prime lending rate loans reprice faster than the deposits.
The asset liability management reports as of March 31, 2010 indicate that the Bank has an actual dollar risk exposure of $136,000 if interest rates fall 100 basis points. This represents a 1.2% risk to interest income. The Equity to Asset ratio is 12.12% at zero basis points and 12.10% 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 |
| $ | (34 | ) | $ | 109 |
| $ | 0 |
| $ | 35 |
| $ | 199 |
|
Percent of Risk |
| (0.3 | )% | 1.0 | % | 0.0 | % | 0.3 | % | 1.8 | % | |||||
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.
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, 2009.
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.
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 March 31, 2010 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.
PART II — OTHER INFORMATION
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, 2009.
ITEM 2. Unregistered Sale of Equity Securities and Use of Proceeds.
None.
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. (Removed and Reserved)
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
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: | May 11, 2010 | |
| /s/ John C. Hansen |
|
| John C. Hansen | |
| President and Chief Executive Officer | |
|
| |
|
| |
Date: | May 11, 2010 | |
| /s/ James M. Cowan |
|
| James M. Cowan | |
Executive Vice President and Chief Financial Officer |
EXHIBIT INDEX
Exhibit |
| Sequential |
|
|
|
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 |