Table of Contents
U.S. 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, 2012
o
Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
(No fee required)
for the period from to
Commission File Number 0-27666
NORTHERN CALIFORNIA BANCORP, INC.
(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 77-0421107
Address: 601 Munras Avenue, Monterey, CA 93940
Telephone: (831) 649-4600
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
o
Indicate by check mark whether the registrant is an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the 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
As of May 11, 2011, the Corporation had 1,785,891 shares of common stock outstanding.
Table of Contents
PART I-FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
|
|
MARCH 31
|
|
DECEMBER 31
|
|
(Dollars in thousands, except share data)
|
|
2012
|
|
2011
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
ASSETS:
|
|
|
|
|
|
Cash and Due From Banks
|
|
$
|
30,014
|
|
$
|
10,536
|
|
Trading Assets
|
|
18
|
|
17
|
|
Investment Securities, available for sale (Note 6)
|
|
24,363
|
|
41,793
|
|
Other Investments
|
|
3,108
|
|
3,227
|
|
Loans Held for Sale, at lower of cost or market
|
|
1,775
|
|
1,471
|
|
Loans, net of allowance for loan losses of $4,323 in 2012; $4,320 in 2011 (Note 7)
|
|
140,257
|
|
148,027
|
|
Bank Premises and Equipment, Net
|
|
4,358
|
|
4,427
|
|
Cash Surrender Value of Life Insurance
|
|
4,385
|
|
4,354
|
|
Foreclosed assets
|
|
28,722
|
|
28,722
|
|
Interest Receivable and Other Assets
|
|
2,527
|
|
3,103
|
|
Total Assets
|
|
$
|
239,527
|
|
$
|
245,677
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
Non interest-bearing demand
|
|
$
|
36,846
|
|
$
|
31,331
|
|
Interest-bearing demand
|
|
21,041
|
|
19,358
|
|
Savings
|
|
14,202
|
|
14,405
|
|
Time less than $100,000
|
|
79,197
|
|
90,040
|
|
Time in denominations of $100,000 or more
|
|
46,388
|
|
48,479
|
|
Total Deposits
|
|
197,674
|
|
203,613
|
|
|
|
|
|
|
|
Federal Home Loan Bank borrowed funds
|
|
23,000
|
|
23,000
|
|
Revolving line of credit
|
|
2,700
|
|
2,700
|
|
Junior Subordinated Debt Securities
|
|
8,248
|
|
8,248
|
|
Payable for Investment Securities Purchased
|
|
427
|
|
|
|
Interest Payable and Other Liabilities
|
|
3,384
|
|
4,520
|
|
Total Liabilities
|
|
235,433
|
|
242,081
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
Common Stock - No Par Value
|
|
|
|
|
|
Authorized 50,000,000 shares
|
|
|
|
|
|
Outstanding:1,785,891 in 2012 and 2011
|
|
5,094
|
|
5,094
|
|
Accumulated Deficit
|
|
(2,198
|
)
|
(3,265
|
)
|
Accumulated Other Comprehensive Income
|
|
1,198
|
|
1,767
|
|
Total Shareholders Equity
|
|
4,094
|
|
3,596
|
|
Total Liabilities & Shareholders Equity
|
|
$
|
239,527
|
|
$
|
245,677
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
THREE-MONTH
|
|
|
|
PERIOD ENDING
|
|
|
|
March 31
|
|
(Dollars in thousands except share data)
|
|
2012
|
|
2011
|
|
INTEREST INCOME:
|
|
|
|
|
|
Loans
|
|
$
|
2,111
|
|
$
|
2,205
|
|
Time deposits with other financial institutions
|
|
6
|
|
6
|
|
Investment securities
|
|
449
|
|
592
|
|
Total Interest Income
|
|
2,566
|
|
2,803
|
|
|
|
|
|
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
Interest-bearing transaction accounts
|
|
5
|
|
5
|
|
Savings and time deposit accounts
|
|
284
|
|
366
|
|
Time deposits in denominations of $100,000 or more
|
|
197
|
|
301
|
|
Notes payable and other
|
|
339
|
|
410
|
|
Total Interest Expense
|
|
825
|
|
1,082
|
|
|
|
|
|
|
|
Net Interest Income
|
|
1,741
|
|
1,721
|
|
Provision for loan losses
|
|
|
|
1,100
|
|
Net interest income, after provision for loan losses
|
|
1,741
|
|
621
|
|
|
|
|
|
|
|
NON-INTEREST INCOME:
|
|
|
|
|
|
Service charges on deposit accounts
|
|
76
|
|
85
|
|
Income from sales and servicing of Small Business Administration Loans
|
|
111
|
|
50
|
|
Gain on sales of investment securities
|
|
800
|
|
8
|
|
Other income
|
|
171
|
|
1,087
|
|
Total non-interest income
|
|
1,158
|
|
1,230
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSE:
|
|
|
|
|
|
Salaries and Employee Benefits
|
|
874
|
|
912
|
|
Occupancy and Equipment Expense
|
|
238
|
|
263
|
|
Foreclosed assets, net
|
|
(138
|
)
|
326
|
|
Professional Fees
|
|
332
|
|
461
|
|
Data Processing
|
|
56
|
|
56
|
|
FDIC and State Assessments
|
|
161
|
|
222
|
|
Other general and administrative
|
|
307
|
|
1,009
|
|
Total non-interest expenses
|
|
1,830
|
|
3,249
|
|
|
|
|
|
|
|
Income (loss) before tax provision
|
|
1,069
|
|
(1,398
|
)
|
Income tax provision
|
|
1
|
|
59
|
|
Net income (loss)
|
|
$
|
1,068
|
|
$
|
(1,457
|
)
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
Basic
|
|
$
|
0.60
|
|
$
|
(0.82
|
)
|
Diluted
|
|
$
|
0.60
|
|
$
|
(0.82
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
For the three months ended
March 31
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,068
|
|
$
|
(1,457
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
Net unrealized holding gain on securities available for sale
|
|
231
|
|
232
|
|
Reclassification adjustment for gains realized inincome
|
|
(800
|
)
|
(8
|
)
|
Net unrealized gain (loss)
|
|
(569
|
)
|
224
|
|
Tax effect
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
(569
|
)
|
224
|
|
Total Comprehensive income (loss)
|
|
$
|
499
|
|
$
|
(1,233
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive
|
|
|
|
|
|
Number of
|
|
Common
|
|
Retained
|
|
Income
|
|
|
|
(in thousands except share data)
|
|
Shares
|
|
Stock
|
|
Earnings
|
|
(Loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
1,783,230
|
|
$
|
5,088
|
|
$
|
11,092
|
|
$
|
(30
|
)
|
$
|
16,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
|
|
|
(706
|
)
|
|
|
(706
|
)
|
Change in net unrealized loss on AFS securities and other assets, net of recalssification adjustment and tax effect
|
|
|
|
|
|
|
|
(1,144
|
)
|
(1,144
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
(1,850
|
)
|
Exercise of stock options
|
|
2,661
|
|
6
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 (Audited)
|
|
1,785,891
|
|
5,094
|
|
10,386
|
|
(1,174
|
)
|
14,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
|
|
|
(13,652
|
)
|
|
|
(13,652
|
)
|
Change in net unrealized loss on AFS securities and other assets, net of recalssification adjustment and tax effect
|
|
|
|
|
|
|
|
2,941
|
|
2,941
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
(10,711
|
)
|
Balance at December 31, 2011 (Audited)
|
|
1,785,891
|
|
5,094
|
|
(3,266
|
)
|
1,767
|
|
3,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
|
|
|
1,068
|
|
|
|
1,068
|
|
Change in net unrealized loss on AFS securities and other assets net of tax recalssification adjustment
|
|
|
|
|
|
|
|
(569
|
)
|
(569
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2012 (Unaudited)
|
|
1,785,891
|
|
$
|
5,094
|
|
$
|
(2,198
|
)
|
$
|
1,198
|
|
$
|
4,094
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
THREE MONTH PERIOD ENDED
|
|
|
|
MARCH 31,
|
|
|
|
2012
|
|
2011
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,068
|
|
$
|
(1,457
|
)
|
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
|
|
|
|
|
|
Depreciation and amortization expense
|
|
70
|
|
84
|
|
Provision for loan losses
|
|
|
|
1,100
|
|
Provision for foreclosed asset losses
|
|
|
|
83
|
|
Realized gain on sales of available-for-sale securities, net
|
|
(800
|
)
|
(8
|
)
|
Amortization of deferred loan (fees), net
|
|
26
|
|
17
|
|
Net amortization (accretion) of discounts and premiums on investment securities, net
|
|
(15
|
)
|
(28
|
)
|
Deferred income tax provision (benefit)
|
|
|
|
373
|
|
Increase in cash surrender value of life insurance
|
|
(31
|
)
|
(32
|
)
|
(Increase) decrease in assets:
|
|
|
|
|
|
Trading assets
|
|
(1
|
)
|
2
|
|
Loans held for sale
|
|
(304
|
)
|
772
|
|
Interest receivable
|
|
369
|
|
194
|
|
Other assets
|
|
206
|
|
679
|
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
Interest payable
|
|
(35
|
)
|
(157
|
)
|
Other liabilities
|
|
(1,101
|
)
|
(635
|
)
|
Net cash provided (used) by operating activities
|
|
(548
|
)
|
987
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Activity in available-for sale securities
|
|
|
|
|
|
Sales
|
|
17,997
|
|
514
|
|
Maturities, prepayments, and calls
|
|
105
|
|
38
|
|
Purchases
|
|
|
|
(3,445
|
)
|
Redemption of stock investments, restricted
|
|
119
|
|
119
|
|
Net (increase) decrease in loans
|
|
7,745
|
|
(6,439
|
)
|
Proceeds from sale of equipment
|
|
|
|
144
|
|
Additions to bank premises and equipment
|
|
(1
|
)
|
(24
|
)
|
Net cash provided (used) by investing activities
|
|
25,965
|
|
(9,093
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Net decrease in deposits
|
|
(5,939
|
)
|
(4,950
|
)
|
Proceeds from borrowings
|
|
|
|
5,245
|
|
Net cash provided (used) by financing activities
|
|
(5,939
|
)
|
295
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
19,478
|
|
(7,811
|
)
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING
|
|
10,536
|
|
16,400
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, ENDING
|
|
$
|
30,014
|
|
$
|
8,589
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE 1) NATURE OF BUSINESS AND
BASIS OF PRESENTATION
Nature of Business
Northern California Bancorp, Inc. (the Corporation) was incorporated on August 29, 1995, as a for-profit corporation under the California Corporate laws for the principal purpose of engaging in banking and non-banking activities as allowed for a bank holding company. The Corporations sources of revenues at this time are dividends on investments, gains on securities transactions and potential dividends, management fees and tax equalization payments, if any, from its wholly-owned bank subsidiary, Monterey County Bank (the Bank).
The Corporation owns 100% of the Bank which operates four full service branches in Monterey County, California. The Corporation owns 100% of the common stock of two unconsolidated special purpose business trusts, Northern California Bancorp, Inc. Trust I and Northern California Bancorp, Inc. Trust II.
Basis of Presentation
The interim condensed consolidated financial statements of the Corporation and the Bank are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of Management, necessary for a fair presentation, in all material respects, of the consolidated financial position and operating results of the Corporation for the interim periods. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2012. The year-end consolidated balance sheet data at December 31, 2011 was derived from the Corporations consolidated audited financial statements. All material intercompany balances and transactions have been eliminated in consolidation.
This financial information should be read in conjunction with the consolidated audited financial statements and the notes thereto included in the Corporations Form 10-K for the fiscal year ended December 31, 2011.
(NOTE 2) CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires Management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the Corporations financial statements and accompanying notes. Management believes that the judgments, estimates and assumptions used in preparation of the Corporations financial statements are appropriate given the factual circumstances as of March 31, 2012.
Various elements of the Corporations accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Critical accounting policies are those that involve the most complex and subjective decisions and assessments and have the greatest potential impact on the Corporations results of operation. In particular, Management has identified one accounting policy that, due to judgments, estimates and assumptions inherent in this policy and the sensitivity of the Corporations financial statements to those judgments, estimates and assumptions, is critical to an understanding of the Corporations financial statements.
8
Table of Contents
This policy relates to the methodology that determines the Corporations allowance for loan losses. Management has discussed the development and selection of this critical accounting policy with the Corporations Audit Committee of the Board of Directors. Although Management believes the level of the allowance at March 31, 2012 is adequate to absorb losses inherent in the loan portfolio, a decline in the regional economy may result in increasing losses that cannot reasonably be predicted at this time. For further information regarding the allowance for loan losses see Provision and Allowance for Loan Losses included elsewhere herein.
Due to the credit concentration of the Corporations loan portfolio in real estate secured loans, the value of collateral is heavily dependent upon real estate values in the Monterey region. Therefore, a decrease in real estate values in this region could have a negative impact on the allowance for loan losses. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Corporations allowance for loan losses and may require the Corporation to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
Another critical accounting policy relates to the valuation of other real estate owned (OREO). Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by Management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. Any write-down to fair value at the time of transfer to OREO is charged to the allowance for loan losses. Property is evaluated regularly to ensure that the recorded amount is supported by its current fair value and that valuation allowances to reduce the carrying amount to fair value less estimated costs to dispose are recorded as necessary. Revenue and expenses from operations of OREO and changes in the valuation allowance are included in net expenses from OREO.
A third critical accounting policy relates to the valuation of deferred tax assets. The Corporation is permitted to recognize deferred tax assets only to the extent that they are expected to be used to reduce amounts that have been paid or will be paid to tax authorities. Management reviews this each quarter by comparing the amount of the deferred tax assets with amounts paid in the past that might be recovered by carryback provisions in the tax code and with anticipated taxable income expected to be generated from operations in the future. If it does not appear that the deferred tax assets are usable, a valuation allowance would be established to acknowledge their uncertain benefit.
(NOTE 3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued an accounting standards update to improve the comparability between U.S. GAAP fair value accounting and reporting requirements and International Financial Reporting Standards (IFRS) fair value accounting and reporting requirements. Additional disclosures required by the update include: (i) disclosure of quantitative information regarding the unobservable inputs used in any fair value measurement classified as Level 3 in the fair value hierarchy in addition to an explanation of the valuation techniques used in valuing Level 3 items and information regarding the sensitivity in the valuation of Level 3 items to changes in the values assigned to unobservable inputs; (ii) categorization by level within the fair value hierarchy of items not recognized on the balance sheet at fair value but for which fair values are required to be disclosed; and (iii) instances where the fair values disclosed for non-financial assets were based on a highest and best use assumption when in fact the assets are not being utilized in that capacity.
9
Table of Contents
The amendments in the update are effective for interim and annual periods beginning on or after December 15, 2011. The required disclosures became effective for the Corporation on January 1, 2012, and are reflected in Note 9. The provisions of this update had no impact on the Corporations financial position, results of operations or cash flows.
In June 2011, the FASB issued an accounting standards update to increase the prominence of items included in Other Comprehensive Income and facilitate the convergence of U.S. GAAP with IFRS. The update prohibits continued presentation of Other Comprehensive Income in the Statement of Shareholders Equity. The update requires that all non-owner changes in shareholders equity be presented in either a single continuous statement of comprehensive income or in two separate but continuous statements. The amendments in the update are effective for interim and annual periods beginning on or after December 15, 2011. The Corporation adopted the provisions of this update on January 1, 2012 and therefore has presented other comprehensive income in conformity with the new reporting requirements as of March 31, 2012. The provisions of this update had no impact on the Corporations financial position, results of operation or cash flows.
(NOTE 4) STOCK BASED COMPENSATION
The Corporations compensation cost relating to share-based payment transactions is recognized in the financial statements based upon the fair value of the equity or liability instruments issued. Based on the stock-based compensation awards outstanding for the three months ended March 31, 2012 and 2011, there was no stock-based compensation expense.
Under the Corporations 1998 Stock Option Plan, the Corporation may grant incentive stock options and non-qualified stock options to directors, officers, and employees of the Corporation and its subsidiary, so long as the Corporation owns a majority of the equity interest of such subsidiary. Incentive stock options are granted at fair value of the common stock on the date of grant. However, an incentive stock option granted to an individual owning 10% or more of the Corporations stock after such grant must have an exercise price of at least 110%
of such fair market value and an exercise period of not more than five years. Non-qualified stock options may be granted at prices not lower than 85% of the fair market value of the common stock on the date of grant. The Board of Directors (the Board) is authorized to determine when options become exercisable within a period not exceeding 10 years from the date of grant. Under the 1998 Stock Option Plan, 12,500 shares of common stock have been reserved for the granting of these options. At March 31, 2012, 12,500 options were outstanding. During 2012, no options were granted and no options were exercised by officers, employees, or Board members. As of March 31, 2012, all options have vested.
No further options may be granted under the 1998 Stock Option Plan. The plan provided that options could be granted for a period of ten years from the date the Plan was adopted by the Board. The Board adopted the Plan on April 16, 1998. The Plan remains in effect until all options granted under the Plan have been exercised or have expired.
Under the Corporations 2007 Stock Option Plan, the Corporation may grant incentive stock options and non-qualified stock options to directors, officers, and employees of the Corporation and its subsidiary, so long as the Corporation owns a majority of the equity interest of such subsidiary. Incentive stock options are granted at fair value of the common stock on the date of grant.
10
Table of Contents
However, an incentive stock option granted to an individual owning 10% or more of the Corporations stock after such grant must have an exercise price of at least 110%
of such fair market value and an exercise period of not more than five years. The Board is authorized to determine when options become exercisable within a period not exceeding 10 years from the date of grant. Under the Plan, 300,000 shares of common stock have been reserved for the granting of these options. As of March 31, 2012, no options have been granted under the 2007 Stock Option Plan.
(NOTE 5) EARNINGS PER SHARE
Basic earnings (loss) per share represents income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects additional common shares that would have been outstanding, if potential dilutive common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate to outstanding stock options and are determined using the treasury stock method.
The weighted-average number of shares used in computing basic and diluted earnings (loss) per share is as follows:
|
|
Earnings (Loss) per share Calculation
|
|
|
|
For the three months ended March 31
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Net
|
|
Average
|
|
Per Share
|
|
Net
|
|
Average
|
|
Per Share
|
|
|
|
Income
|
|
Shares
|
|
Amount
|
|
Income
|
|
Shares
|
|
Amount
|
|
Basic earnings (loss) per share
|
|
$
|
1,068
|
|
1,785,891
|
|
$
|
0.60
|
|
$
|
(1,457
|
)
|
1,785,891
|
|
$
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive shares assumed exercise of outstanding options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
1,068
|
|
1,785,891
|
|
$
|
0.60
|
|
$
|
(1,457
|
)
|
1,785,891
|
|
$
|
(0.82
|
)
|
(NOTE 6) INVESTMENT SECURITIES
The following table presents investment securities available for sale at March 31, 2012 and December 31, 2011:
|
|
March 31, 2012
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Loss
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
Mortgage Backed Securities
|
|
$
|
520
|
|
$
|
25
|
|
$
|
|
|
$
|
545
|
|
State/Local Agency Securities
|
|
22,685
|
|
1,133
|
|
|
|
23,818
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
23,205
|
|
$
|
1,158
|
|
$
|
|
|
$
|
24,363
|
|
11
Table of Contents
|
|
December 31, 2011
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Loss
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
Mortgage Backed Securities
|
|
$
|
525
|
|
$
|
|
|
$
|
(1
|
)
|
$
|
524
|
|
State/Local Agency Securities
|
|
39,539
|
|
1,798
|
|
(68
|
)
|
41,269
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
40,064
|
|
$
|
1,798
|
|
$
|
(69
|
)
|
$
|
41,793
|
|
In addition, the Corporation maintains a trading account, at fair value, consisting of marketable securities. At March 31, 2012 and December 31, 2011 the account value was $18,000 and $17,000, respectively.
The amortized cost and fair value of debt securities by contractual maturity date at March 31, 2012 are as follows:
|
|
Available for Sale
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Due between five and ten years
|
|
$
|
360
|
|
$
|
363
|
|
Due after ten years
|
|
22,845
|
|
24,000
|
|
Total securities available for sale
|
|
$
|
23,205
|
|
$
|
24,363
|
|
Proceeds from calls, maturity, payments and sales of investment securities for the three months ended March 31, 2012 and 2011 were $18,102,000 and $552,000, respectively. Realized gains for the three months ended March 31, 2012 and 2011 were $800,000, and $8,000, respectively.
At December 31, 2011, mortgage-backed obligations with a carrying value of $524,000 were pledged to secure advances from the Federal Home Loan Bank FHLB. No securities were pledged to secure advances from the FHLB at March 31, 2012.
At March 31, 2012 and December 31, 2011, state/local agency obligations with a carrying value of $7,835,000 and $9,137,000, respectively, were pledged to secure a discount window line with the Federal Reserve Bank.
At March 31, 2012, no securities had a gross unrealized loss.
Information pertaining to securities with gross unrealized losses at December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
12
Table of Contents
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
Value
|
|
Loss
|
|
Value
|
|
Loss
|
|
Value
|
|
Loss
|
|
|
|
(Dollars in thousands)
|
|
Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State/Local Agency Securities
|
|
$
|
524
|
|
$
|
(1
|
)
|
$
|
2,231
|
|
$
|
(68
|
)
|
$
|
2,755
|
|
$
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At a minimum, Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) the Banks intention not to sell the security; and (4) the lack of any need to sell the security before recovery of its cost basis.
On December 31, 2011, 5 securities had an unrealized loss with aggregate depreciation of 0.17% from the Banks amortized cost basis. The unrealized losses relate to securities issued by state and local government agencies. All such securities are deemed to be investment grade as determined either by Moody or Standard and Poors or, for unrated securities, by an independent consultant. Based on this and the factors stated in the previous paragraph, no decline is deemed to be other-than-temporary.
(NOTE 7) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table presents information on loans and the allowance for loan losses at March 31, 2012 and December 31, 2011:
|
|
March 31
|
|
December 31
|
|
|
|
2012
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Commercial and industrial
|
|
$
|
22,369
|
|
$
|
22,630
|
|
Construction and land
|
|
10,497
|
|
9,064
|
|
Real Estate - commercial
|
|
63,395
|
|
69,824
|
|
Real Estate - residential
|
|
40,332
|
|
43,630
|
|
Consumer
|
|
193
|
|
223
|
|
SBA - unguaranteed portion held for investment
|
|
4,291
|
|
4,088
|
|
SBA - guaranteed portion
|
|
4,365
|
|
3,586
|
|
Other
|
|
993
|
|
880
|
|
Total
|
|
146,435
|
|
153,925
|
|
Allowance for loan losses
|
|
(4,323
|
)
|
(4,320
|
)
|
Deferred origination fees, net
|
|
(80
|
)
|
(107
|
)
|
Loans, net
|
|
$
|
142,032
|
|
$
|
149,498
|
|
Loans held for sale totaled $1,775,000 and $1,471,000 at March 31, 2012 and December 31, 2011, respectively, and are included in the SBA guaranteed portion above.
13
Table of Contents
The following tables present an analysis of credit quality indicators by loan class at March 31, 2012 and December 31, 2011. Information has been updated for each credit quality indicator as of these dates.
|
|
March 31, 2012
|
|
|
|
Grade
|
|
|
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land:
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
6,480
|
|
$
|
|
|
$
|
4,017
|
|
$
|
|
|
$
|
10,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four residential:
|
|
|
|
|
|
|
|
|
|
|
|
First liens
|
|
31,127
|
|
|
|
3,876
|
|
|
|
35,003
|
|
Junior liens
|
|
4,287
|
|
|
|
1,042
|
|
|
|
5,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
20,395
|
|
|
|
5,415
|
|
|
|
25,810
|
|
Non-owner occupied
|
|
35,202
|
|
|
|
2,383
|
|
|
|
37,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
10,216
|
|
|
|
1,160
|
|
|
|
11,376
|
|
Unsecured
|
|
9,364
|
|
1,045
|
|
239
|
|
345
|
|
10,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
193
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA:
|
|
|
|
|
|
|
|
|
|
|
|
SBA, unguaranteed portion held for investment
|
|
4,127
|
|
|
|
164
|
|
|
|
4,291
|
|
SBA, guaranteed portion
|
|
2,794
|
|
|
|
|
|
1,571
|
|
4,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
993
|
|
|
|
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
125,178
|
|
$
|
1,045
|
|
$
|
18,296
|
|
$
|
1,916
|
|
$
|
146,435
|
|
14
Table of Contents
|
|
December 31, 2011
|
|
|
|
Grade
|
|
|
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land:
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
7,668
|
|
$
|
|
|
$
|
1,396
|
|
$
|
|
|
$
|
9,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four residential:
|
|
|
|
|
|
|
|
|
|
|
|
First liens
|
|
34,049
|
|
|
|
3,749
|
|
|
|
37,798
|
|
Junior liens
|
|
4,788
|
|
163
|
|
881
|
|
|
|
5,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
25,138
|
|
|
|
5,436
|
|
|
|
30,574
|
|
Non-owner occupied
|
|
36,865
|
|
|
|
2,385
|
|
|
|
39,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
10,702
|
|
|
|
1,337
|
|
|
|
12,039
|
|
Unsecured
|
|
10,192
|
|
|
|
50
|
|
349
|
|
10,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
189
|
|
|
|
34
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA:
|
|
|
|
|
|
|
|
|
|
|
|
SBA, unguaranteed portion held for investment
|
|
3,917
|
|
|
|
171
|
|
|
|
4,088
|
|
SBA, guaranteed portion
|
|
2,337
|
|
|
|
85
|
|
1,164
|
|
3,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
880
|
|
|
|
|
|
|
|
880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
136,725
|
|
$
|
163
|
|
$
|
15,524
|
|
$
|
1,513
|
|
$
|
153,925
|
|
The Corporations policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable or improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.
When assets are classified as substandard or doubtful, the Corporation allocates a portion of the related general loss allowances to such assets as the Corporation deems prudent. Determinations as to the classification of assets and the amount of loss allowances are subject to review by regulatory agencies, who can require that we establish additional loss allowances. The Bank regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.
15
Table of Contents
The following tables set forth an aging analysis of past due loans by loan class at March 31, 2012 and December 31, 2011:
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
Investment
|
|
|
|
30-59 Days
|
|
60-89 Days
|
|
or More
|
|
Total
|
|
|
|
Total
|
|
90 Days or more
|
|
|
|
Past Due
|
|
Past Due
|
|
Past Due
|
|
Past Due
|
|
Current
|
|
Loans
|
|
and Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
|
|
$
|
|
|
$
|
2,817
|
|
$
|
2,817
|
|
$
|
7,680
|
|
$
|
10,497
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First liens
|
|
492
|
|
115
|
|
54
|
|
661
|
|
34,342
|
|
35,003
|
|
|
|
Junior liens
|
|
|
|
|
|
|
|
|
|
5,329
|
|
5,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
|
|
|
|
|
|
|
25,810
|
|
25,810
|
|
|
|
Non-owner occupied
|
|
|
|
|
|
851
|
|
851
|
|
36,734
|
|
37,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
|
|
|
|
|
|
|
|
11,376
|
|
11,376
|
|
|
|
Unsecured
|
|
|
|
345
|
|
|
|
345
|
|
10,648
|
|
10,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
193
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA, unguaranteed portion held for investment
|
|
266
|
|
|
|
|
|
266
|
|
4,025
|
|
4,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA, guaranteed portion
|
|
|
|
|
|
1,571
|
|
1,571
|
|
2,794
|
|
4,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
993
|
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
758
|
|
$
|
460
|
|
$
|
5,293
|
|
$
|
6,511
|
|
$
|
139,924
|
|
$
|
146,435
|
|
$
|
|
|
16
Table of Contents
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
Investment
|
|
|
|
30-59 Days
|
|
60-89 Days
|
|
or More
|
|
Total
|
|
|
|
Total
|
|
90 Days or more
|
|
|
|
Past Due
|
|
Past Due
|
|
Past Due
|
|
Past Due
|
|
Current
|
|
Loans
|
|
and Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,498
|
|
$
|
|
|
$
|
196
|
|
$
|
2,694
|
|
$
|
6,370
|
|
$
|
9,064
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First liens
|
|
415
|
|
192
|
|
|
|
607
|
|
37,191
|
|
37,798
|
|
|
|
Junior liens
|
|
|
|
163
|
|
|
|
163
|
|
5,669
|
|
5,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
|
|
|
|
|
|
|
31,918
|
|
31,918
|
|
|
|
Non-owner occupied
|
|
|
|
|
|
851
|
|
851
|
|
37,055
|
|
37,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
69
|
|
|
|
|
|
69
|
|
11,969
|
|
12,038
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
|
|
10,592
|
|
10,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
223
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA, unguaranteed portion held for investment
|
|
15
|
|
|
|
|
|
15
|
|
4,073
|
|
4,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA, guaranteed portion
|
|
|
|
|
|
1,249
|
|
1,249
|
|
2,337
|
|
3,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
880
|
|
880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,997
|
|
$
|
355
|
|
$
|
2,296
|
|
$
|
5,648
|
|
$
|
148,277
|
|
$
|
153,925
|
|
$
|
|
|
17
Table of Contents
Loans by portfolio segment, and the related allowance for loan loss for each segment, are presented below as of March 31, 2012 and December 31, 2011. Loans and the allowance for loan losses are further segregated by impairment methodology.
|
|
March 31, 2012
|
|
|
|
Loan Balance
|
|
Allowance for Loan & Lease Losses:
|
|
|
|
Individually
evaluated for
impairment
|
|
Collectively
evaluated for
impairment
|
|
Balance
|
|
Individually
evaluated for
impairment
|
|
Collectively
evaluated for
impairment
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land
|
|
$
|
4,017
|
|
$
|
6,480
|
|
$
|
10,497
|
|
$
|
14
|
|
$
|
144
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to Four Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
3,822
|
|
31,181
|
|
35,003
|
|
400
|
|
521
|
|
921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior lien
|
|
1,095
|
|
4,234
|
|
5,329
|
|
93
|
|
359
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
7,798
|
|
55,597
|
|
63,395
|
|
320
|
|
502
|
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
1,744
|
|
20,625
|
|
22,369
|
|
322
|
|
1,101
|
|
1,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
193
|
|
193
|
|
|
|
2
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA - unguaranteed portion
|
|
164
|
|
4,127
|
|
4,291
|
|
44
|
|
386
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA - guaranteed portion
|
|
1,572
|
|
2,793
|
|
4,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
993
|
|
993
|
|
|
|
14
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
101
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,212
|
|
$
|
126,223
|
|
$
|
146,435
|
|
$
|
1,193
|
|
$
|
3,130
|
|
$
|
4,323
|
|
|
|
December 31, 2011
|
|
|
|
Loan Balance
|
|
Allowance for Loan & Lease Losses:
|
|
|
|
Individually
evaluated for
impairment
|
|
Collectively
evaluated for
impairment
|
|
Balance
|
|
Individually
evaluated for
impairment
|
|
Collectively
evaluated for
impairment
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land
|
|
$
|
3,894
|
|
$
|
5,170
|
|
$
|
9,064
|
|
$
|
14
|
|
$
|
130
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to Four Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
3,749
|
|
34,049
|
|
37,798
|
|
392
|
|
558
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior lien
|
|
1,044
|
|
4,788
|
|
5,832
|
|
88
|
|
409
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
8,208
|
|
61,616
|
|
69,824
|
|
352
|
|
385
|
|
737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
1,736
|
|
20,894
|
|
22,630
|
|
386
|
|
1,104
|
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
34
|
|
189
|
|
223
|
|
26
|
|
2
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA - unguaranteed portion
|
|
171
|
|
3,917
|
|
4,088
|
|
78
|
|
368
|
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA - guaranteed portion
|
|
1,249
|
|
2,337
|
|
3,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
880
|
|
880
|
|
|
|
13
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
15
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,085
|
|
$
|
133,840
|
|
$
|
153,925
|
|
$
|
1,336
|
|
$
|
2,984
|
|
$
|
4,320
|
|
18
Table of Contents
Management segregates the loan portfolio into portfolio segments for purposes of estimating the allowance for loan losses. A portfolio segment is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by Management and revised as deemed appropriate.
The Banks loan portfolio is segregated into the following portfolio segments:
Construction and Land Loan.
This portfolio segment consists of the origination of one-to-four residential construction loans, commercial real estate construction loans, loans for the development of building lots and loans secured by vacant land.
One-to Four-Residential First Lien.
This portfolio segment consists of the origination of first mortgage loans secured by one-to-four family owner occupied residential properties located in the Banks market area.
One-to Four-Residential Junior Lien.
This
portfolio segment consists of loans secured by junior liens on one-to-four residential properties. Such lending involves additional risks, since the lien position is junior to higher priority liens.
Commercial Real Estate Loans.
This portfolio segment includes loans secured by commercial real estate, including multi-family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than one-to-four residential mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrowers ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.
Commercial and Industrial Loans.
This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than one- to four-residential loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrowers business.
Consumer Loans.
This portfolio segment includes loans to individuals for personal lines of credit, life insurance premium financing, automobiles, and overdraft protection.
Small Business Administration (SBA) Guaranteed Loans.
This portfolio segment includes loans to small businesses which qualify for the SBAs loan guarantee program. Borrowers must meet certain SBA guidelines in order to qualify for the program. SBA loans generally have a higher risk factor than traditional commercial and industrial loans.
Loans evaluated individually for impairment have been classified as substandard or doubtful at March 31, 2012 and December 31, 2011, respectively. Loans evaluated collectively for impairment consist of all loans in the portfolio which are not impaired.
19
Table of Contents
The following table summarizes the activity in the allowance for loan loss by loan class for the three months ended March 31, 2012 and the year ended December 31, 2012.
|
|
March 31, 2012
|
|
|
|
Beginning
Balance
|
|
Loan Charged
Offs
|
|
Recoveries
|
|
Provision for
Losses
|
|
Ending
Balance
|
|
|
|
(Dollars in thousands)
|
|
Construction and Land
|
|
$
|
144
|
|
$
|
|
|
$
|
|
|
$
|
14
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to Four Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
950
|
|
|
|
|
|
(29
|
)
|
921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior lien
|
|
497
|
|
|
|
2
|
|
(47
|
)
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
737
|
|
|
|
|
|
85
|
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
1,490
|
|
|
|
|
|
(67
|
)
|
1,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
28
|
|
|
|
|
|
(26
|
)
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA - unguaranteed portion
|
|
446
|
|
|
|
|
|
(16
|
)
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
13
|
|
|
|
1
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
|
|
15
|
|
|
|
|
|
86
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,320
|
|
$
|
|
|
$
|
3
|
|
$
|
|
|
$
|
4,323
|
|
|
|
December 31, 2011
|
|
|
|
Beginning
Balance
|
|
Loan Charged
Offs
|
|
Recoveries
|
|
Provision for
Losses
|
|
Ending
Balance
|
|
|
|
(Dollars in thousands)
|
|
Construction and Land
|
|
$
|
371
|
|
$
|
1,333
|
|
$
|
|
|
$
|
1,106
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to Four Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
482
|
|
781
|
|
|
|
1,249
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior lien
|
|
419
|
|
1,226
|
|
1
|
|
1,303
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
985
|
|
38
|
|
|
|
(210
|
)
|
737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
310
|
|
2,711
|
|
|
|
3,891
|
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
6
|
|
113
|
|
1
|
|
134
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA - unguaranteed portion
|
|
469
|
|
496
|
|
2
|
|
471
|
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
8
|
|
5
|
|
|
|
10
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
|
|
109
|
|
|
|
|
|
(94
|
)
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,159
|
|
$
|
6,703
|
|
$
|
4
|
|
$
|
7,860
|
|
$
|
4,320
|
|
20
Table of Contents
The following table summarizes loans on nonaccrual status by loan class at March 31, 2012 and December 31, 2011:
|
|
March 31, 2012
|
|
December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
Construction and land:
|
|
|
|
|
|
Land
|
|
$
|
2,817
|
|
$
|
2,695
|
|
|
|
|
|
|
|
One to four residential:
|
|
|
|
|
|
First liens
|
|
54
|
|
|
|
Junior liens
|
|
|
|
634
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
Owner occupied
|
|
|
|
851
|
|
Non-owner occupied
|
|
851
|
|
|
|
|
|
|
|
|
|
Commercial and industrial:
|
|
|
|
|
|
Unsecured
|
|
345
|
|
349
|
|
|
|
|
|
|
|
SBA guaranteed protion
|
|
1,572
|
|
1,249
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,639
|
|
$
|
5,778
|
|
Loans past due greater than 90 days totaled $5,293,000 compared to total nonaccrual loans of $5,639,000 at March 31, 2012. The difference of $345,000 was due to a loan which was past due less than 90 days but was classified as nonaccrual.
Loans past due greater than 90 days totaled $2,296,000 compared to total nonaccrual loans of $5,778,000 at December 31, 2011. The difference of $3,482,000 was due to three loans which were past due less than 90 days but were classified as nonaccrual.
21
Table of Contents
The following tables summarize the Banks investment in loans for which impairment has been recognized as of and for the three months ended March 31, 2012 and as of and for the twelve months ended December 31, 2011.
|
|
March 31, 2012
|
|
|
|
Recorded
Investment
|
|
Unpaid Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land:
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,621
|
|
$
|
2,621
|
|
$
|
|
|
$
|
2,544
|
|
$
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied
|
|
1,147
|
|
1,147
|
|
|
|
1,151
|
|
11
|
|
One to four residential:
|
|
|
|
|
|
|
|
|
|
|
|
Junior Liens
|
|
626
|
|
626
|
|
|
|
631
|
|
|
|
Commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
121
|
|
124
|
|
|
|
123
|
|
2
|
|
SBA:
|
|
|
|
|
|
|
|
|
|
|
|
SBA. guaranteed portion
|
|
1,572
|
|
1,572
|
|
|
|
1,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land:
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
1,396
|
|
1,415
|
|
14
|
|
1,396
|
|
10
|
|
One to four residential:
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
3,822
|
|
4,519
|
|
400
|
|
3,813
|
|
27
|
|
Junior Liens
|
|
469
|
|
469
|
|
93
|
|
576
|
|
6
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
933
|
|
933
|
|
158
|
|
934
|
|
13
|
|
Non-owner occupied
|
|
5,718
|
|
5,811
|
|
162
|
|
5,727
|
|
53
|
|
Commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
1,623
|
|
1,622
|
|
322
|
|
1,628
|
|
11
|
|
SBA:
|
|
|
|
|
|
|
|
|
|
|
|
SBA, unguaranteed portion held for investment
|
|
164
|
|
164
|
|
44
|
|
165
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
$
|
4,017
|
|
$
|
4,036
|
|
$
|
14
|
|
$
|
3,940
|
|
$
|
10
|
|
One to four residential First Lien
|
|
3,822
|
|
4,519
|
|
400
|
|
3,813
|
|
27
|
|
One to four residential Junior Lien
|
|
1,095
|
|
1,095
|
|
93
|
|
1,207
|
|
6
|
|
Commercial real estate - owner occupied
|
|
933
|
|
933
|
|
158
|
|
934
|
|
13
|
|
Commercial real estate non-owner occupied
|
|
6,865
|
|
6,958
|
|
162
|
|
6,878
|
|
64
|
|
Commercial and industrial - secured
|
|
1,744
|
|
1,746
|
|
322
|
|
1,751
|
|
13
|
|
Commercial and industrial - unsecured
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
SBA Unguaranteed portion
|
|
164
|
|
164
|
|
44
|
|
165
|
|
8
|
|
SBA Guaranteed portion
|
|
1,572
|
|
1,572
|
|
|
|
1,292
|
|
|
|
|
|
$
|
20,212
|
|
$
|
21,023
|
|
$
|
1,193
|
|
$
|
19,980
|
|
$
|
141
|
|
22
Table of Contents
|
|
December 31, 2011
|
|
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land:
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
3,698
|
|
$
|
4,435
|
|
$
|
|
|
$
|
2,838
|
|
$
|
89
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied
|
|
1,534
|
|
2,178
|
|
|
|
1,704
|
|
66
|
|
One to four residential:
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
|
|
|
|
|
1,372
|
|
4
|
|
Junior Liens
|
|
634
|
|
1,025
|
|
|
|
582
|
|
33
|
|
Commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
124
|
|
2,785
|
|
|
|
2,734
|
|
|
|
Consumer
|
|
|
|
13
|
|
|
|
2
|
|
|
|
SBA:
|
|
|
|
|
|
|
|
|
|
|
|
SBA, unguaranteed portion held for investment
|
|
|
|
391
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA. guaranteed portion
|
|
1,249
|
|
1,366
|
|
|
|
1,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land:
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
196
|
|
215
|
|
14
|
|
201
|
|
|
|
One to four residential:
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
3,749
|
|
4,446
|
|
392
|
|
1,716
|
|
200
|
|
Junior Liens
|
|
410
|
|
522
|
|
88
|
|
71
|
|
23
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
934
|
|
934
|
|
168
|
|
3
|
|
57
|
|
Non-owner occupied
|
|
5,740
|
|
5,832
|
|
184
|
|
3,486
|
|
245
|
|
Commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
1,612
|
|
1,612
|
|
386
|
|
316
|
|
17
|
|
Consumer
|
|
34
|
|
34
|
|
26
|
|
|
|
1
|
|
SBA:
|
|
|
|
|
|
|
|
|
|
|
|
SBA, unguaranteed portion held for investment
|
|
171
|
|
171
|
|
78
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
$
|
3,894
|
|
$
|
4,650
|
|
$
|
14
|
|
$
|
3,039
|
|
$
|
89
|
|
One to four residential First Lien
|
|
3,749
|
|
4,446
|
|
392
|
|
3,088
|
|
204
|
|
One to four residential Junior Lien
|
|
1,044
|
|
1,547
|
|
88
|
|
653
|
|
56
|
|
Commercial real estate owner occupied
|
|
934
|
|
934
|
|
168
|
|
3
|
|
57
|
|
Commercial real estate non-owner occupied
|
|
7,274
|
|
8,010
|
|
184
|
|
5,190
|
|
311
|
|
Commercial and industrial
|
|
1,736
|
|
4,397
|
|
386
|
|
3,050
|
|
17
|
|
Consumer
|
|
34
|
|
47
|
|
26
|
|
2
|
|
1
|
|
SBA Unguaranteed portion
|
|
171
|
|
562
|
|
78
|
|
195
|
|
27
|
|
SBA Guaranteed portion
|
|
1,249
|
|
1,366
|
|
|
|
1,397
|
|
|
|
|
|
$
|
20,085
|
|
$
|
25,959
|
|
$
|
1,336
|
|
$
|
16,617
|
|
$
|
762
|
|
Management evaluates loans for impairment at the time the loans evidence some form of credit deterioration. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by Management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior
23
Table of Contents
payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Substantially all of the Banks loans that have been identified as impaired have been measured by the fair value of existing collateral.
The accrual of interest on loans is discontinued at the time the loan is deemed to be impaired unless the credit is well-secured and in process of collection. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
(NOTE 8) FORECLOSED ASSETS
As of March 31, 2012 and December 31, 2011, foreclosed assets totaled $28,722,000, net of a valuation allowance. Based on property values, a valuation allowance of $2,904,000 was deemed necessary at March 31, 2012 and December 31, 2011.
Operating expenses and provision for losses on foreclosed assets for the three months ended March 31, 2012 was a credit of $138,000 compared to an expense of $326,000 during the same period in 2011. The decrease of $464,000 was due primarily to reduced provisions for valuation allowances on foreclosed assets of $256,000 and a recovery of $212,000 on a claim under a title insurance policy.
(NOTE 9) FAIR VALUE MEASUREMENTS:
The fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1:
Valuation for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2:
Valuation 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:
Valuation 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. These valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
Fair Value Measured on a Recurring Basis
The following tables present the balance of assets whose fair values are measured on a recurring basis by level within the valuation hierarchy:
24
Table of Contents
|
|
March 31, 2012
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
18
|
|
$
|
|
|
$
|
18
|
|
$
|
|
|
Mortgage Backed Securities
|
|
545
|
|
|
|
545
|
|
|
|
State/Local Agency Securities
|
|
23,818
|
|
|
|
23,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
24,381
|
|
$
|
|
|
$
|
24,381
|
|
$
|
|
|
|
|
December 31, 2011
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
17
|
|
$
|
|
|
$
|
17
|
|
$
|
|
|
Mortgage Backed Securities
|
|
524
|
|
|
|
524
|
|
|
|
State/Local Agency Securities
|
|
41,269
|
|
|
|
41,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
41,810
|
|
$
|
|
|
$
|
41,810
|
|
$
|
|
|
The fair values of the Corporations trading securities and securities available for sale are determined using Level 2 inputs, which are derived from readily available pricing sources and third-party pricing services for identical or comparable instruments, respectively.
Fair Value Measured on a Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following tables present such assets carried on the balance sheet by caption and by level within the valuation hierarchy:
|
|
At March 31, 2012
|
|
Total Losses Three
Months Ended
|
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
March 31, 2012
|
|
|
|
(Dollars in Thousands)
|
|
Impaired loans
|
|
$
|
20,212
|
|
$
|
|
|
$
|
4,842
|
|
$
|
15,370
|
|
$
|
1,200
|
|
Loans held for sale
|
|
1,775
|
|
|
|
1,775
|
|
|
|
|
|
Foreclosed assets
|
|
28,722
|
|
|
|
1,302
|
|
27,420
|
|
|
|
|
|
$
|
50,709
|
|
$
|
|
|
$
|
7,919
|
|
$
|
42,790
|
|
$
|
1,200
|
|
25
Table of Contents
|
|
|
|
|
|
|
|
|
|
Losses for the
|
|
|
|
|
|
|
|
|
|
|
|
Total Losses
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
At December 31, 2011
|
|
December 31,
|
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
2011
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
20,085
|
|
$
|
|
|
$
|
6,647
|
|
$
|
13,438
|
|
$
|
1,297
|
|
Loans held for sale
|
|
1,471
|
|
|
|
1,471
|
|
|
|
|
|
Foreclosed assets
|
|
28,722
|
|
|
|
22,383
|
|
6,339
|
|
|
|
|
|
$
|
50,278
|
|
$
|
|
|
$
|
30,501
|
|
$
|
19,777
|
|
$
|
1,297
|
|
There was $23,839,000 of assets transferred from Level 2 to Level 3, due to appraisals which were not considered current, during the three months ended March 31, 2012.
There was $1,471,000 of assets transferred from Level 3 to Level 2, due to obtaining current appraisals, during the three months ended March 31, 2012.
For collateral dependent Level 3 impaired loans and for all Level 3 foreclosed assets, the fair value of collateral is based on appraisals that are greater than six months old. Management has not made adjustments for the age of the appraisals based on their estimate that the values of the properties have not changed materially since the appraisal date. These estimates are based on qualitative judgments made by management on a case-by-case basis.
For non-collateral dependent Level 3 impaired loans, fair value is based on a discounted cash flow analysis that discounts projected loan payments to present value using the loans effective rate. Cash flow projections are based on managements estimate of the amounts that the borrower is believed to be capable of paying. Payment capacity is based on current financial information from the borrower, past payment history, and the facts and circumstances relevant to the borrowers financial condition and future performance.
Impaired Loans
Collateral-dependent impaired loans are carried at the fair value of the collateral less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Otherwise, collateral-dependent impaired loans are categorized under Level 2.
Impaired loans that are not collateral dependent are carried at the present value of expected future cash flows discounted at the loans effective interest rate. Troubled debt restructurings are also carried at the present value of expected future cash flows. However, expected cash flows for troubled debt restructurings are discounted using the loans original effective interest rate rather than the modified interest rate. Since fair value of these loans is based on Managements own projection of future cash flows, the fair value measurements are categorized as Level 3 measurements.
26
Table of Contents
Loans Held for Sale
Loans held for sale are required to be measured at the lower of cost or fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions, which are level 2 inputs. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At March 31, 2012 and December 31, 2011, the fair value of loans held for sale was greater than cost; therefore, the entire balance of loans held for sale was recorded at cost.
Foreclosed Assets
Assets acquired through foreclosure or other proceedings are initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, valuations are periodically performed, and foreclosed assets held for sale are carried at the lower of cost or fair value, less estimated costs of disposal. All foreclosed assets are real properties. The fair values of real properties initially are determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market or in the collateral. Subsequent valuations of the real properties are based on Management estimates or on updated appraisals. Foreclosed assets are categorized under Level 3 when significant adjustments are made by Management to appraised values based on unobservable inputs. Otherwise, foreclosed assets are categorized under Level 2 if their values are based solely on current appraisals.
Current authoritative guidance requires interim reporting period disclosure about the fair value of financial instruments, including assets, liabilities and off-balance sheet items for which it is practicable to estimate fair value. The fair value estimates are made based upon relevant market information, if available, and upon the characteristics of the financial instruments themselves. Because no market exists for a significant portion of the Corporations financial instruments, fair value estimates are based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimated fair value of the Corporations financial instruments as of March 31, 2012 and December 31, 2011 are shown below:
27
Table of Contents
|
|
March 31, 2012
|
|
|
|
Carrying
|
|
Fair Value
|
|
|
|
Amount
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,014
|
|
$
|
30,014
|
|
$
|
|
|
$
|
|
|
$
|
30,014
|
|
Investment Securities, available for sale
|
|
24,363
|
|
|
|
24,363
|
|
|
|
24,363
|
|
Other Investments
|
|
3,108
|
|
|
|
|
|
3,108
|
|
3,108
|
|
Trading Account
|
|
18
|
|
|
|
18
|
|
|
|
18
|
|
Loans, held for sale
|
|
1,775
|
|
|
|
1,775
|
|
|
|
1,775
|
|
Loans, net
|
|
140,257
|
|
|
|
125,331
|
|
15,370
|
|
140,701
|
|
Other Real Estate Owned
|
|
28,722
|
|
|
|
1,302
|
|
27,420
|
|
28,722
|
|
Accrued interest receivable
|
|
801
|
|
|
|
804
|
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Deposits non-interest bearing
|
|
36,846
|
|
|
|
|
|
|
|
36,846
|
|
Deposits interest bearing
|
|
160,828
|
|
|
|
|
|
161,191
|
|
161,191
|
|
Long-term debt
|
|
14,248
|
|
|
|
|
|
14,940
|
|
14,940
|
|
Short-term debt
|
|
19,700
|
|
|
|
|
|
1,970
|
|
1,970
|
|
Accrued Interest Payable
|
|
1,426
|
|
|
|
1,426
|
|
|
|
1,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
Financial Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,536
|
|
$
|
10,536
|
|
Trading assets
|
|
17
|
|
17
|
|
Investment securities AFS
|
|
41,793
|
|
41,793
|
|
Other investments
|
|
3,227
|
|
3,227
|
|
Loans, held for sale
|
|
1,471
|
|
1,471
|
|
Loans, net
|
|
148,027
|
|
157,742
|
|
Accrued interest receivable
|
|
1,152
|
|
1,152
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
Deposits
|
|
203,613
|
|
205,871
|
|
Long-term debt
|
|
23,248
|
|
19,814
|
|
Short-term debt
|
|
10,700
|
|
10,976
|
|
Accrued interest payable
|
|
1,461
|
|
1,461
|
|
|
|
|
|
|
|
|
|
(NOTE 10) OFF-BALANCE SHEET COMMITMENTS:
The Bank is a 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. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Banks exposure to credit loss is represented by the contractual amount of these commitments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
At March 31, 2012 and December 31, 2011, such commitments to extend credit were $9,242,000 and $10,159,000, respectively, of undisbursed lines of credit, undisbursed loans in process, and commitment letters.
28
Table of Contents
(NOTE 11) REGULATORY MATTERS
The Bank entered into a Consent Order with the FDIC and CDFI effective September 1, 2010 that, among other things, requires the Bank to maintain a minimum leverage capital ratio of 9.0% and a minimum total risk-based capital ratio of 12.0%. At March 31, 2012, the Banks leverage capital ratio was 5.96% which represents a capital shortfall of $7,280,000 in relation to the consent order. Its total risk-based capital ratio was 9.55% which represents a capital shortfall of $4,219,000 in relation to the consent order. Appropriate actions or a combination of actions may include soliciting additional capital through a securities offering, reducing the Banks assets through sales of branch offices, loans or other real estate owned, merger with another financial institution or sale of the Bank. No assurance can be given regarding the results of any capital-raising efforts. Failure to meet minimum capital requirements can result in certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporations and Banks results of operations and financial condition.
See Other Regulatory Matters in Item 2 below for more information on the Consent Order, as well as the Consent Order, Order for Restitution and Order to Pay Civil Money Penalties relating to the Banks credit card programs.
(NOTE 12) REVOLVING LINE OF CREDIT
The Corporation has a line of credit with BMO Harris Bank N.A., as successor to M & I Marshall & Ilsley Bank, in the amount of $3,000,000, at a floating interest rate based on the one-month LIBOR rate plus 3.75%, with a floor rate of 6.50% and a maturity date of October 31, 2011. The line of credit is secured by a pledge of 100% of the common stock issued by the Bank. At March 31, 2012, $2,700,000 was outstanding on the line of credit. At March 31, 2012 accrued and unpaid interest totaled $74,000. Management is in discussion with BMO Bank regarding a forbearance of principal and interest payments until 2013 or settlement of the debt from proceeds of a capital raise.
The loan agreement contains covenants requiring the Bank to maintain certain financial ratios. At March 31, 2012 the Bank did not satisfy the following covenants:
Finanical Covenant
|
|
Required
|
|
Actual
|
|
|
|
|
|
|
|
Capital Raios:
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Ratio
|
|
>=9.00
|
%
|
5.96
|
%
|
Total Risk-Based Capital Ratio
|
|
>=12.00
|
%
|
9.55
|
%
|
|
|
|
|
|
|
Non-Performing Assets to Tangible Capital plus Loan Loss Reserve
|
|
< 115.00
|
%
|
165.79
|
%
|
BMO Harris Bank N.A. has in the past agreed to the issuance of forbearance agreements for the covenant defaults, most recently as of September 29, 2011 for the quarter ended March 31, 2011. While it is anticipated that BMO Harris Bank N.A. will continue to forebear, no assurances can be given in that regard.
If BMO chooses not to forebear, it could potentially take possession of 100% of the outstanding common stock of the Bank, thereby leaving Northern California Bancorp, Inc. insolvent. Such a change in control, however, would require regulatory approval.
29
Table of Contents
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements Regarding Forward-Looking Information
Except for historical information contained herein, the matters discussed or incorporated by reference in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words anticipate, believe, estimate, may, intend, expect, and similar expressions identify certain of such forward-looking statements. Actual results of the Corporation and the Bank could differ materially from such forward-looking statements contained herein. Factors that could cause future results to vary from current expectations include, but are not limited to, the following: changes in economic conditions (both generally and more specifically in the markets in which the Bank operates); changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines and in government legislation and regulation (which change from time to time and over which the Bank has no control); other factors affecting the Banks operations, markets, products and services; and other risks detailed in this Form 10-Q and in the Banks other reports filed with Securities and Exchange Commission and pursuant to its rules and regulations. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect Managements analysis only as of the date hereof. The Corporation undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date thereof.
OVERVIEW OF THE RESULTS OF OPERATION AND FINANCIAL CONDITION
Results of Operations Summary
The net income for the quarter ended March 31, 2012 was $1,068,000 compared with a net loss of $1,457,000 for the quarter ended March 31, 2011. Basic income per share for the first quarter of 2012 was $0.60, compared to a loss per share ($0.82) for the first quarter of 2011. The Corporations annualized return on average equity was 113.14% and annualized return on average assets was 1.78% for the quarter ended March 31, 2012, compared to an annualized return on average equity of (41.72%) and an annualized return on assets of (2.20%) for same quarter in 2011. The primary reasons for the change in net income during the first quarter of 2012 are as follows:
·
No provision for loan losses was required during the first quarter of 2012 compared to a provision of $1,100,000 during the first quarter of 2011.
·
Total non-interest income was $1,158,000 during the first quarter of 2012 compared to $1,230,000 during the first quarter of 2011. The decrease of $72,000 or 5.85% was due primarily to increases of (i) $792,000 in gain on sales of investment securities and (ii) $61,000 in income from sales and servicing SBA loans. The increases were partially offset by a decrease of $916,000 in other income.
30
Table of Contents
·
Total non-interest expense was $1,830,000 during the first quarter of 2012 compared to $3,249,000 during the first quarter of 2011. The decrease of $1,419,000 or 43.68% in non-interest expense over the prior period was due primarily to decreases of (i) $464,000 or 142.33% in expenses for foreclosed assets; (ii) $702,000 or 69.57% in other general and administrative expense; (iii) $129,000 or 27.98% in professional fees; (iv) $61,000 or 27.48% in FDIC/State assessments; (v) $38,000 or 4.17% in salary and employee benefits and (vi) $25,000 or 9.51% in occupancy and equipment expense.
·
An income tax provision of $1,000 was recorded for the first quarter of 2012 compared to a provision of $59,000 for the first quarter of 2011.
31
Table of Contents
The following table sets forth certain selected financial data and ratios of the Corporation for the three months ended March 31, 2012 and 2011:
|
|
Three Months Ended March 31
|
|
(in thousands except share data)
|
|
2012
|
|
2011
|
|
Selected Financial Data
|
|
|
|
|
|
Summary of Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
2,566
|
|
$
|
2,803
|
|
Total interest expense
|
|
825
|
|
1,082
|
|
Net interest income
|
|
1,741
|
|
1,721
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
|
1,100
|
|
Net interest income after provision for loan losses
|
|
1,741
|
|
621
|
|
|
|
|
|
|
|
Total non-interest income
|
|
1,158
|
|
1,230
|
|
Total non-interest expenses
|
|
1,830
|
|
3,249
|
|
|
|
|
|
|
|
Income (loss) before provision
|
|
1,069
|
|
(1,398
|
)
|
Income tax provision
|
|
1
|
|
59
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,068
|
|
$
|
(1,457
|
)
|
|
|
|
|
|
|
Per Common Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income - Basic (1)
|
|
$
|
0.60
|
|
$
|
(0.82
|
)
|
Net (loss) income - Diluted (2)
|
|
0.60
|
|
(0.82
|
)
|
Book value, end of period
|
|
2.29
|
|
7.32
|
|
Shares outstanding at end of period (3)
|
|
1,785,891
|
|
1,785,891
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income and allowance for loan losses (4)
|
|
$
|
142,032
|
|
$
|
159,033
|
|
Total assets
|
|
239,527
|
|
263,887
|
|
Total deposits
|
|
197,674
|
|
203,048
|
|
Stockholders equity
|
|
4,094
|
|
13,074
|
|
|
|
|
|
|
|
Selected Financial Ratios:
|
|
|
|
|
|
Return on average assets (5)
|
|
1.78
|
%
|
(2.20
|
)%
|
Return on average stockholders equity (5)
|
|
113.14
|
%
|
(41.72
|
)%
|
Dividend payout ratio
|
|
0.00
|
%
|
0.00
|
%
|
Net interest spread
|
|
3.86
|
%
|
3.53
|
%
|
Net yield on interest earning assets (5)
|
|
3.87
|
%
|
3.62
|
%
|
Average shareholders equity to average assest (5)
|
|
1.57
|
%
|
5.28
|
%
|
Risked-Based capital ratios
|
|
|
|
|
|
Tier 1
|
|
2.27
|
%
|
8.35
|
%
|
Total
|
|
7.57
|
%
|
12.03
|
%
|
Total loans to total deposits at end of period (4)
|
|
74.08
|
%
|
78.32
|
%
|
Allowance for loan losses to total loans at end of period (4)
|
|
2.95
|
%
|
2.02
|
%
|
Nonperforming loans to total loans at end of period (4)
|
|
3.85
|
%
|
6.39
|
%
|
Net charge-offs to average loans (4)
|
|
0.00
|
%
|
0.66
|
%
|
(1)
Basic earnings (loss) per share amounts were computed on the basis of the weighted average number of shares of common stock outstanding during the year. The weighted average number of common shares used for this computation was 1,785,891 for the three months ended March 31, 2012 and 2011.
(2)
Diluted earnings (loss) per share amounts were computed on the basis of the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Common stock equivalents include director/employee stock options. The weighted average number of shares used for this computation was 1,785,891 for the three months ended March 31, 2012 and 2011, respectively.
(3)
Weighted average common shares.
(4)
Includes loans held for sale.
32
Table of Contents
(5)
Averages are of daily balances.
(6)
Calculated on an annualized basis.
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees earned on interest-earning assets and (b) interest paid on interest-bearing liabilities, is the most significant component of the Banks earnings. Changes in net interest income from period to period result from increases or decreases in the average balances of interest-earning assets and interest-bearing liabilities, the availability of particular sources of funds and changes in prevailing interest rates.
Net interest income for the three month period ended March 31, 2012 was $1,741,000 compared to $1,721,000 for the same period in 2011, which was an increase of $20,000, or 1.16%. The primary reasons for the increase in net interest income were:
·
A decrease of $94,000 in interest on loans due to a decrease of 6.07% in average loans outstanding while the yield increased 10 basis points.
·
A decrease of $143,000 in interest on investment securities due to 13.80% decrease in average investment securities and a decrease 16 basis points in the yield.
·
A decrease in interest expense of $257,000 resulting from a 4.65% decrease in average total interest-bearing liabilities and a decrease of 88 basis points in the rate paid.
DISTRIBUTION, RATE AND YIELD ANALYSIS OF NET INTEREST INCOME:
The following tables show the consolidated average balances of interest-earning assets and interest-bearing liabilities; the amount of interest income and interest expense; the average yield or rate for each category of average interest-earning assets and average interest-bearing liabilities; and the net interest income and the net interest spread for the periods indicated. Yields are computed on a tax-equivalent basis resulting in adjustments to interest earned on municipal bonds of $192,000 and $248,000 for the three months ended March 31, 2012 and 2011, respectively. Non-accrual loans and overdrafts are included in average loan balances. Average loans are presented net of unearned income.
33
Table of Contents
|
|
Three Months Ended March 31
|
|
Three Months Ended March 31
|
|
|
|
2012
|
|
2011
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
(dollars in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
148,273
|
|
$
|
2,111
|
|
5.69
|
%
|
$
|
157,852
|
|
$
|
2,205
|
|
5.59
|
%
|
Time deposits - in other banks
|
|
10,759
|
|
6
|
|
0.22
|
%
|
10,912
|
|
6
|
|
0.22
|
%
|
Investment securities - taxable
|
|
3,745
|
|
5
|
|
0.53
|
%
|
6,357
|
|
41
|
|
2.58
|
%
|
Investment securities - nontaxable
|
|
36,957
|
|
636
|
|
6.88
|
%
|
42,431
|
|
799
|
|
7.53
|
%
|
Total interest-earning assets
|
|
199,734
|
|
2,758
|
|
5.52
|
%
|
217,552
|
|
3,051
|
|
5.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
(4,384
|
)
|
|
|
|
|
(3,022
|
)
|
|
|
|
|
Non-interest bearing assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
3,774
|
|
|
|
|
|
4,889
|
|
|
|
|
|
Bank premises and equipment
|
|
4,399
|
|
|
|
|
|
4,659
|
|
|
|
|
|
Accrued interest receivable
|
|
982
|
|
|
|
|
|
1,169
|
|
|
|
|
|
Other assets
|
|
35,274
|
|
|
|
|
|
39,405
|
|
|
|
|
|
Total average assets
|
|
$
|
239,779
|
|
|
|
|
|
$
|
264,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
17,859
|
|
$
|
4
|
|
0.09
|
%
|
$
|
16,382
|
|
$
|
4
|
|
0.10
|
%
|
Money market savings
|
|
2,329
|
|
1
|
|
0.17
|
%
|
1,860
|
|
1
|
|
0.20
|
%
|
Savings deposits
|
|
14,390
|
|
9
|
|
0.25
|
%
|
10,827
|
|
13
|
|
0.48
|
%
|
Time deposits >$100M
|
|
47,220
|
|
197
|
|
1.67
|
%
|
62,193
|
|
301
|
|
1.94
|
%
|
Time deposits <$100M
|
|
83,013
|
|
275
|
|
1.33
|
%
|
78,586
|
|
353
|
|
1.80
|
%
|
Other Borrowings
|
|
33,948
|
|
339
|
|
3.99
|
%
|
38,615
|
|
410
|
|
4.25
|
%
|
Total interest-bearing liabilities
|
|
198,759
|
|
825
|
|
1.66
|
%
|
208,463
|
|
1,082
|
|
2.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing checking
|
|
33,010
|
|
|
|
|
|
35,824
|
|
|
|
|
|
Accrued interest payable
|
|
1,451
|
|
|
|
|
|
1,490
|
|
|
|
|
|
Other liabilities
|
|
2,783
|
|
|
|
|
|
4,908
|
|
|
|
|
|
Total Liabilities
|
|
236,003
|
|
|
|
|
|
250,685
|
|
|
|
|
|
Total shareholders equity
|
|
3,776
|
|
|
|
|
|
13,967
|
|
|
|
|
|
Total average liabilities and shareholders equity
|
|
$
|
239,779
|
|
|
|
|
|
$
|
264,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
1,933
|
|
|
|
|
|
$
|
1,969
|
|
|
|
Interest income as a percentage of average earning assets
|
|
|
|
|
|
5.52
|
%
|
|
|
|
|
5.61
|
%
|
Interest expense as a percentage of average earning assets
|
|
|
|
|
|
1.65
|
%
|
|
|
|
|
1.99
|
%
|
Net yield on interest earning assets
|
|
|
|
|
|
3.87
|
%
|
|
|
|
|
3.62
|
%
|
Net interest spread
|
|
|
|
|
|
3.86
|
%
|
|
|
|
|
3.53
|
%
|
34
Table of Contents
Rate and Volume Analysis:
The following tables show the increase or decrease in interest income, interest expense and net interest income resulting from changes in rates and volumes for the three months and three months ended March 31, 2012 compared with the same periods in 2011. Yields are computed on a tax-equivalent basis resulting in adjustments to interest earned on municipal bonds of $192,000 and $248,000 for the three months ended March 31, 2012 and 2011, respectively. Non-accrual loans and overdrafts are included in average loan balances. Average loans are presented net of unearned income.
|
|
Increase (decrease) in the three months ended
|
|
|
|
March 31, 2012 compared with March 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(134
|
)
|
$
|
40
|
|
$
|
(94
|
)
|
Time deposits - in other banks
|
|
|
|
|
|
|
|
Investment securities - taxable
|
|
(17
|
)
|
(19
|
)
|
(36
|
)
|
Investment securities - nontaxable
|
|
(103
|
)
|
(60
|
)
|
(163
|
)
|
|
|
(254
|
)
|
(39
|
)
|
(293
|
)
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
|
|
|
|
|
|
Money market savings
|
|
|
|
|
|
|
|
Savings deposits
|
|
4
|
|
(8
|
)
|
(4
|
)
|
Time deposits >$100M
|
|
(72
|
)
|
(32
|
)
|
(104
|
)
|
Time deposits <$100M
|
|
20
|
|
(98
|
)
|
(78
|
)
|
Other Borrowing
|
|
(50
|
)
|
(21
|
)
|
(71
|
)
|
|
|
(98
|
)
|
(159
|
)
|
(257
|
)
|
Increase (decrease) in net interest income:
|
|
$
|
(156
|
)
|
$
|
120
|
|
$
|
(36
|
)
|
Provision and Allowance for Loan and Lease Losses
The Corporation maintains a detailed, systematic analysis and procedural discipline to determine the appropriate amount of the allowance for loan and lease losses (the ALLL). The ALLL is based on estimates and is intended to be appropriate to provide for probable losses inherent in the loan portfolio. This process involves deriving probable loss estimates that are based on individual loan loss estimation, historical loss rates and Managements judgment.
The Corporation employs several methodologies for estimating probable losses. Methodologies are determined based on a number of factors, including type of asset, risk rating, concentrations, and collateral value.
The Corporation calculates the required ALLL on a quarterly basis and makes adjusting entries as needed. The review of the adequacy of the allowance takes into consideration such factors as concentrations of credit, changes in the growth, size and composition of the loan portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees and economic conditions that may affect the borrowers ability to pay and/or the value of the underlying collateral. Additional factors considered include: geographic location of borrowers, changes in the Corporations product-specific credit policy and lending staff experience. These estimates depend on subjective factors and, therefore, contain inherent uncertainties.
35
Table of Contents
The ALLL is maintained at a level believed appropriate by Management to absorb known and inherent probable losses on existing loans. A provision for loan losses is charged to expense. The allowance is charged for losses when Management believes that full recovery on the loan is unlikely. Generally, the Bank charges off any loan classified as a loss; portions of loans which are deemed to be uncollectible; overdrafts which have been outstanding for more than 90 days; and all other unsecured loans past due 120 or more days. Subsequent recoveries, if any, are credited to the ALLL.
Although no assurance can be given that actual losses will not exceed the amount provided for in the allowance, Management believes that the allowance is approprieate to provide for all estimated credit losses in light of all known relevant factors. At March 31, 2012 and 2011 the Banks allowance stood at 2.95% and 2.02% of total loans, respectively.
No provision was made to the ALLL during the three months ended March 31, 2012 compared to a provision of $1,100,000 for the same period in 2011. No loans were charged off during the three months ended March 31, 2012 compared to $1,040,000 for the same period in 2011. Recoveries were $3,000 and $1,000 during the three months ended March 31, 2012 and 2011, respectively.
The Banks net non-performing (delinquent 90 days or more and on non-accrual) loans as a percentage of total loans were 3.85% and 7.08% as of the end of March 31, 2012 and 2011, respectively.
Non-Interest Income
Total non-interest income for the three months ended March 31, 2012 was $1,158,000 compared with $1,230,000 for the same period in 2011. The decrease of $72,000 or 5.85% was due primarily to increases of $792,000 in gain on sales of investment securities and $61,000 in income from sales and servicing of SBA loans; partially offset by a decrease of $916,000 in other income. The decrease in other income was due primarily to decreases of $720,000 in merchant credit card discount fees, $149,000 in credit card program fees and $56,000 in gain on sale of furniture and fixtures.
The decrease in merchant credit card discount fees for the three month period ended March 31, 2012 is attributable to processing transactions during the first quarter of 2011 for the merchant accounts, substantially all of the Banks merchant accounts, sold to a third party in the fourth quarter of 2010 The decrease in credit card program fees is attractable to the non-renewal of a card program sponsorship agreement June 30, 2011.
Non-Interest Expense
Salary and benefits expense for the three months ended March 31, 2012 was $874,000 compared with $912,000 for the same period in 2011. The decrease of $38,000 or 4.17% is due to a reduction of five staff positions, partially offset by the employment of Senior Vice President and Enterprise Risk Manager.
Total occupancy and equipment expense for the three months ended March 31, 2012 was $238,000 compared to $263,000 for the same period in 2011. The decrease of $25,000 or 9.51% was due primarily to decreases of $20,000 in depreciation expense and $3,000 in rental expense.
36
Table of Contents
Professional fees for the three months ended March 31, 2012 were $332,000 compared to $461,000 for the same period in 2011. The $129,000 or 27.98% decrease was primarily due to decreases of $125,000 in audit/accounting expense, $68,000 in legal fees and $21,000 in collection expense; partially offset by an increase of $86,000 in consultancy and advisory fees.
Data processing expense for the three months ended March 31, 2012 and 2011 was $56,000.
FDIC and state assessments for the three months ended March 31, 2012 were $161,000 compared to $222,000 for the same period in 2011. The decrease of $61,000 or 27.48% was due to a decrease in the total deposits.
Other general and administrative expenses for the three months ended March 31, 2012 totaled $307,000 compared with $1,009,000 for the same period in 2011, a decrease of $702,000, or 69.57%. Significant changes occurred in the following categories; decreases occurred in merchant expense of $598,000, loan expense of $39,000, director fees of $24,000, information technology expense of $18,000 and bank fee expense of $11,000.
The decrease in merchant expense for the three month period ended March 31, 2012 is attributable to processing transactions during the first quarter of 2011 for the merchant accounts, substantially all of the Banks merchant accounts, sold to a third party in the fourth quarter of 2010 t.
OREO expenses and provision for losses on foreclosed assets for the three months ended March 31, 2012 was a credit of $138,000 compared to an expense of $326,000 during the same period in 2011. The decrease of $464,000 was due primarily to reduced provisions for valuation allowances on foreclosed assets of $256,000 and a recovery of $212,000 on a claim under a title insurance policy.
Provision for Income Taxes
The tax provision was $1,000 for the three months ended March 31, 2012 compared to a tax provision of $59,000 for the same period in 2011. The tax provision during the three months ended March 31, 2012 represents the minimum California annual franchise tax.
The amount of the tax provision or benefit is determined by applying the Corporations statutory income tax rates to pre-tax book income, adjusted for permanent differences between pre-tax book income and actual taxable income. Such permanent differences include but are not limited to tax-exempt interest income, increases in the cash surrender value of bank-owned life insurance, certain other expenses that are not allowed as tax deductions, and tax credits. The tax provision is further impacted by changes in the valuation allowance against the deferred tax asset.
Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. The Bank maintains a valuation allowance with respect to deferred tax assets due to the uncertainty surrounding the realization of certain net deferred tax assets.
At December 31, 2011, federal and state net operating losses available to offset future taxable income approximate $12,114,000 and $11,434,000, respectively. The federal and state net operating losses begin to expire in December 2031.
37
Table of Contents
LOANS
Average loans represented 74.24% of average earning assets and 61.84% of average total assets for the three months ended March 31, 2012 compared with 72.56% and 59.65%, respectively, during 2011. For the three months ended March 31, 2012, average loans decreased 6.07% to $148,273,000 from $157,852,000 for the same period in 2011. Average real estate loans decreased $6,015,000 or 5.16%, average commercial loans decreased $3,406,000, or 8.35%, average installment loans decreased $130,000, or 33.54% and average construction loans decreased $28,000, or 100.00%.
The Banks commercial and industrial loans are generally made for the purpose of providing working capital, financing the purchase of equipment or inventory, and other business purposes. Such loans generally have maturities of one year or longer. Short-term business loans are generally intended to finance current transactions and typically provide for monthly interest payments with principal being payable at maturity or at 90-day intervals. Term loans (usually for a term of two to five years) normally provide for monthly installments of principal and interest. The Bank from time to time utilizes accounts receivable and inventory as security for loans.
The Bank is the recognized leader for Small Business Administration, or SBA, lending in Monterey County. Generally, SBA loans are guaranteed by the SBA for 75 to 85 percent of their principal amount, which can be retained in the loan portfolio or sold to investors. Such loans are made at floating interest rates, generally with longer terms (up to 25 years) than are available on a conventional loan basis to small businesses. The unguaranteed portion of the loans, although generally supported by collateral, is considered to be more risky than conventional commercial loans because they may be based upon credit standards the Bank would not otherwise apply, such as lower cash flow coverage or longer repayment terms.
The Banks real estate loan portfolio consists of both real estate construction loans and real estate mortgage loans. Real estate construction loans are made for a much shorter term and often at higher interest rates than conventional single-family residential real estate loans. The cost of administering such loans is often higher than for other real estate loans, as principal is drawn on periodically as construction progresses.
The Bank also makes real estate loans secured by a first deed of trust on single family residential properties and commercial and industrial real estate. California commercial banks are permitted, depending on the type and maturity of the loan, to lend up to 90 percent of the fair market value of real property (or more if the loan is insured either by private mortgage insurers or governmental agencies). In certain instances, the appraised value may exceed the actual amount that could be realized on foreclosure, or declines in market value subsequent to making the loan can impair the Banks security.
Consumer loans are made for the purpose of financing the purchase of various types of consumer goods, home improvement loans, auto loans and other personal loans. Consumer installment loans generally provide for monthly payments of principal and interest, at a fixed rate. Most of the Banks consumer installment loans are generally secured by the personal property being purchased. The Bank generally makes consumer loans to those customers with a prior banking relationship with the Bank.
The Bank has various off-balance sheet arrangements that might have an impact on its financial condition, liquidity, or results of operations. As of March 31, 2012 and 2011 the Bank had commitments to extend credit in the amount of $9,243,000 and $7,859,000, respectively.
38
Table of Contents
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements.
Non-performing and Non-accrual Loans
The Banks present policy is to cease accruing interest on loans which are past due as to principal or interest 90 days or more, except for loans which are well secured or when collection of interest and principal is deemed likely. When a loan is placed on non-accrual, previously accrued and unpaid interest is generally reversed out of income unless adequate collateral from which to collect the principal and interest on the loan is available and in the process of collection.
In relation to SBA loans sold, the Bank generally repurchases from the secondary market the guaranteed portion of SBA guaranteed loans when those loans are placed on non-accrual status. After the foreclosure and collection process is complete, the SBA reimburses the Bank for this principal balance. Therefore, although these balances do not earn interest during this period, they generally do not result in a loss of principal to the Bank.
The following table presents information with respect to loans which, as of the dates indicated, were past due 90 days or more or were placed on non-accrual status (referred to collectively as non-performing loans).
|
|
As of March 31,
|
|
Twelve months as
of December 31,
|
|
|
|
2012
|
|
2011
|
|
2011
|
|
Accruing, past due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
$
|
|
|
$
|
452
|
|
$
|
|
|
Commercial
|
|
|
|
648
|
|
|
|
Installment
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Total accruing
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
Performing loans classified as troubled debt restructurings (TDR) not in conformity with modified term
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
Nonaccrual Loans:
|
|
|
|
|
|
|
|
Real Estate
|
|
3,722
|
|
4,846
|
|
4,179
|
|
Commercial
|
|
1,917
|
|
5,315
|
|
1,599
|
|
Consumer
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Total nonaccrual
|
|
5,639
|
|
10,161
|
|
5,778
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
5,639
|
|
11,261
|
|
5,940
|
|
Other Real Estate Owned
|
|
28,722
|
|
25,832
|
|
28,722
|
|
Total nonperforming assets
|
|
$
|
34,361
|
|
$
|
37,093
|
|
$
|
34,662
|
|
|
|
|
|
|
|
|
|
Total loans end of period
|
|
$
|
146,435
|
|
$
|
159,033
|
|
$
|
153,925
|
|
|
|
|
|
|
|
|
|
Performing loans classified as troubled debt restructurings (TDR) in conformity with modified term
|
|
$
|
10,536
|
|
$
|
|
|
$
|
10,400
|
|
|
|
|
|
|
|
|
|
Ratio of nonperforming loans to total loans at end of period
|
|
3.85
|
%
|
6.39
|
%
|
3.86
|
%
|
Ratio nonperforming assets to total loans and OREO at end of period
|
|
19.62
|
%
|
20.06
|
%
|
18.98
|
%
|
39
Table of Contents
The following table reflects the activity in the allowance for loan losses as of and for the periods indicated.
|
|
|
|
|
|
As of the
|
|
|
|
As of the period
|
|
Year ended
|
|
|
|
Ended March 31,
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Average loans outstanding
|
|
$
|
148,273
|
|
$
|
157,852
|
|
$
|
155,710
|
|
|
|
|
|
|
|
|
|
Total loans outstanding at end of the period
|
|
$
|
146,435
|
|
$
|
159,033
|
|
$
|
153,925
|
|
|
|
|
|
|
|
|
|
Allowance, beginning of period
|
|
4,320
|
|
3,159
|
|
3,159
|
|
|
|
|
|
|
|
|
|
Loans charged off during period:
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
242
|
|
3,207
|
|
Consumer
|
|
|
|
100
|
|
113
|
|
Real Estate
|
|
|
|
698
|
|
3,378
|
|
Other
|
|
|
|
|
|
5
|
|
Total charge offs
|
|
|
|
1,040
|
|
6,703
|
|
|
|
|
|
|
|
|
|
Recoveries during period:
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
1
|
|
3
|
|
Consumer
|
|
|
|
|
|
1
|
|
Real Estate
|
|
2
|
|
|
|
|
|
Other
|
|
1
|
|
|
|
|
|
Total recoveries
|
|
3
|
|
1
|
|
4
|
|
|
|
|
|
|
|
|
|
Net Loans charged off during the period
|
|
(3
|
)
|
1,039
|
|
6,699
|
|
|
|
|
|
|
|
|
|
Additions to allowance for possible loan losses
|
|
|
|
1,100
|
|
7,860
|
|
|
|
|
|
|
|
|
|
Allowance, end of period
|
|
$
|
4,323
|
|
$
|
3,220
|
|
$
|
4,320
|
|
|
|
|
|
|
|
|
|
Ratio of net loans charged off to average loans outstanding during the period
|
|
0.00
|
%
|
0.66
|
%
|
4.30
|
%
|
|
|
|
|
|
|
|
|
Ratio of allowance to total loans at end of period
|
|
2.97
|
%
|
2.02
|
%
|
2.81
|
%
|
|
|
|
|
|
|
|
|
Ratio of nonperforming loans to allowance for loan losses at end of period
|
|
130.44
|
%
|
349.72
|
%
|
137.52
|
%
|
The following table provides a breakdown of the allowance for loan losses by categories as of the dates indicated:
|
|
March 31, 2012
|
|
December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
|
|
Amount
|
|
Percent of
Loans in
Catergory to
Total Loans
|
|
Amount
|
|
Percent of
Loans in
Catergory to
Total Loans
|
|
Commercial
|
|
$
|
1,853
|
|
21.18
|
%
|
$
|
1,936
|
|
19.69
|
%
|
Construction and Land
|
|
158
|
|
7.17
|
%
|
144
|
|
5.89
|
%
|
Real Estate
|
|
2,195
|
|
70.84
|
%
|
2,184
|
|
73.71
|
%
|
Consumer
|
|
2
|
|
0.13
|
%
|
28
|
|
0.14
|
%
|
Other
|
|
14
|
|
0.68
|
%
|
13
|
|
0.57
|
%
|
Unallocated
|
|
101
|
|
N/A
|
|
15
|
|
N/A
|
|
Total
|
|
$
|
4,323
|
|
100
|
%
|
$
|
4,320
|
|
100
|
%
|
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Table of Contents
Deposits
Average interest bearing and non-interest-bearing deposits for the three months ended March 31, 2012 were $197,821,000 a decrease of 3.82% compared with the same period in 2011. Average certificates of deposit represented 65.83% of average deposits for the three months ended March 31, 2012 compared with 68.45% for the same period in 2011. Average interest-bearing checking, money market and savings accounts as a group were 17.48% of average deposits for the three months ended March 31, 2012 compared with 14.13% for the same period in 2011. Average non-interest bearing deposits represented 16.69% of average deposits for the three months ended March 31, 2012 compared with 17.42% for the same period in 2011.
The following table sets forth the scheduled maturities of the Corporations time deposits in denominations of $100,000 or greater at March 31, 2012:
Maturities of Time Deposits of $100,000 or more
(Dollars in thousands)
Three months or less
|
|
$
|
7,758
|
|
Over three months through six months
|
|
7,842
|
|
Over six months through twelve months
|
|
10,600
|
|
Over twelve months
|
|
20,188
|
|
|
|
$
|
46,388
|
|
Borrowings
The Corporation has a line of credit with BMO Harris Bank N.A., as successor to M & I Marshall & Ilsley Bank, in the amount of $3,000,000, at a floating interest rate based on the one-month LIBOR rate plus 3.75%, with a floor rate of 6.50% and a maturity date of October 31, 2011. The line of credit is secured by a pledge of 100% of the common stock issued by the Bank. At March 31, 2012, $2,700,000 was outstanding on the line of credit. At March 31, 2012 accrued and unpaid interest totaled $74,000. Management is in discussion with BMO Bank regarding a forbearance of principal and interest payments until 2013 or settlement of the debt from proceeds of a capital raise.
The loan agreement contains covenants requiring the Bank to maintain certain financial ratios. At March 31, 2012 the Bank did not satisfy the following covenants:
Finanical Covenant
|
|
Required
|
|
Actual
|
|
|
|
|
|
|
|
Capital Raios:
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Ratio
|
|
>=9.00
|
%
|
5.96
|
%
|
Total Risk-Based Capital Ratio
|
|
>=12.00
|
%
|
9.55
|
%
|
|
|
|
|
|
|
Non-Performing Assets to Tangible Capital plus Loan Loss Reserve
|
|
<115.00
|
%
|
165.79
|
%
|
BMO Harris Bank N.A. has in the past agreed to the issuance of forbearance agreements for the covenant defaults, most recently as of September 29, 2011 for the quarter ended March 31, 2011. While it is anticipated that BMO Harris Bank N.A. will continue to forebear, no assurances can be given in that regard.
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Table of Contents
If BMO chooses not to forebear, it could potentially take possession of 100% of the outstanding common stock of the Bank, thereby leaving Northern California Bancorp, Inc. insolvent. Such a change in control, however, would require regulatory approval.
The Bank has lines of credit from the Federal Reserve Bank of San Francisco and the Federal Home Loan Bank (FHLB) of San Francisco with remaining available borrowing capacity on March 31, 2012 of $7,321,000 and $9,079,000, respectively. The Federal Reserve Bank discount window line is secured by a portion of the Banks investment securities at March 31, 2012. At March 31, 2012, the total book value of securities pledged to the Federal Reserve Bank was $8,153,000 with no outstanding loan balance. The Federal Home Loan Bank line of credit has a maximum borrowing capacity of 15% of the Banks total assets, adjusted quarterly. The Federal Home Loan Bank line of credit is secured by a certain of the Banks real estate secured loans at March 31, 2012. Additionally the line of credit is secured by a blanket lien on the Banks loan portfolio. The total principal balance at March 31, 2012 of the specifically pledged loans at the Federal Home Loan Bank was $47,633,000.
The following table provides information on six FHLB advances outstanding at March 31, 2012.
|
|
|
|
Funding
|
|
Maturity
|
|
Amount
|
|
Rate
|
|
Date
|
|
Date
|
|
$
|
5,000,000
|
|
5.21
|
%
|
7/30/07
|
|
7/30/12
|
|
3,000,000
|
|
4.85
|
%
|
10/1/07
|
|
10/1/12
|
|
4,000,000
|
|
0.87
|
%
|
1/31/11
|
|
1/31/13
|
|
5,000,000
|
|
1.75
|
%
|
3/15/10
|
|
3/15/13
|
|
5,000,000
|
|
5.01
|
%
|
9/18/07
|
|
9/18/14
|
|
1,000,000
|
|
7.72
|
%
|
6/1/00
|
|
6/3/30
|
|
$
|
23,000,000
|
|
|
|
|
|
|
|
Capital Resources
The Corporation and the Bank maintain capital to comply with legal requirements, to provide a margin of safety for the Banks depositors, and to provide for future growth and the ability to pay dividends. At March 31, 2012, consolidated shareholders equity was $4,094,000 versus $3,596,000 at December 31, 2011. The Corporation paid no cash dividends to shareholders for the three months ended March 31, 2012 and for the year ended December 31, 2011. The Bank paid no cash dividends to the Corporation for the three months ended March 31, 2012 and for the year ended December 31, 2011. The Bank is currently prohibited from paying, and the Corporation has agreed not to accept, cash dividends from the Bank absent prior regulatory authorization to do so.
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Corporations and Banks results of operations and financial condition.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
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Table of Contents
Under applicable regulatory guidelines, a portion of the Trust Preferred Securities qualifies as Tier 1 capital, and the remainder as Tier 2 capital. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Bank regulators may also impose higher capital requirements through the imposition of formal and informal regulatory actions. For example, the Bank is required under the terms of regulatory orders it became subject to in 2010 to maintain a Tier 1 leverage ratio and a Total Risk-Based capital ratio of 9% and 12% respectively, which is higher than the minimum capital required to be well capitalized. At March 31, 2012 the Banks leverage ratio was 5.96%, less than the 9% required by the regulatory order, while its Total Risk-Based capital ratio was 9.55%, less than the 12% required by the regulatory order.
In general, the risk-based capital guidelines provide detailed definitions of which obligations will be treated as capital, and assign different weights to various assets and off-balance sheet items, depending upon the perceived degree of credit risk associated with each asset. Each asset is assigned to one of four risk-weighted categories. For example, 0 percent for cash and unconditionally guaranteed government securities; 20 percent for deposits with other banks and Fed Funds; 50 percent for state bonds and certain residential real estate loans; and 100 percent for commercial loans and other assets. Capital is categorized as either Tier 1 capital, consisting of common shareholders equity, qualifying perpetual preferred stock to certain limits, minority interests in equity accounts of consolidated subsidiary and trust preferred securities to certain limits, less goodwill and other intangibles, or Tier 2 capital, which consist of supplementary capital including allowance for possible credit losses to certain limits, certain preferred stock, eligible subordinated debt, and other qualifying instruments. The guidelines also define and set minimum capital requirements (risk-based capital ratios). All banks are required to maintain Tier 1 capital of at least 4% and total capital of 8% of risk-adjusted assets. However, as a result of the regulatory orders, the Bank is required to maintain a minimum Total Risk-Based capital ratio of 12.0%. The Bank had a Tier 1 capital to total risk-adjusted assets capital ratio of 8.33% and 12.29% at March 31, 2012 and 2011, respectively. The Banks Tier 1 capital exceeds the minimum regulatory requirement by $3,861,000. The Bank had a Total Risk-Based capital to risk-adjusted assets ratio of 9.55% and 13.54% at March 31, 2012 and 2011, respectively. The Banks Total Risk-Based capital at March 31, 2012 represents a shortfall of $4,109,000 from the amount required by the regulatory order.
The Tier 1 leverage capital ratio guidelines require a minimum leverage capital ratio of 4.0% of Tier 1 capital to total assets less goodwill. However, as a result of the regulatory orders, the Bank is required to maintain a minimum leverage capital ratio of 9.0%. The Bank had a leverage capital ratio of 5.96% and 8.98% at March 31, 2012 and 2011, respectively. The Banks Tier 1 capital at March 31, 2012 represents a shortfall of $7,280,000 from the amount required by the regulatory order.
Under regulatory guidelines, the $8 million in Trust Preferred Securities outstanding qualify as Tier 1 capital up to 25% of Tier 1 capital. Any additional Trust Preferred Securities will qualify as Tier 2 capital.
The Corporations Board of Directors approved a stock repurchase program pursuant to which the Corporation, from time to time and at Managements discretion, may repurchase up to $500,000 of the Corporations outstanding shares. Under the provisions of the Written Agreement with the FRB, the Corporation is precluded from repurchasing any additional stock.
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Table of Contents
Other Regulatory Matters
Commercial banking organizations, such as the Bank, may be subject to enforcement actions by the Federal Deposit Insurance Corporation (FDIC) and the California Department of Financial Institutions (CDFI) for engaging in unsafe or unsound practices in the conduct of their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits, the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the imposition of restrictions and sanctions under the prompt corrective action provisions of the Federal Deposit Insurance Act.
The Bank has entered into a Consent Order with the FDIC and the CDFI. The order became effective on September 1, 2010. The order was filed as an exhibit to the Corporations Current Report on Form 8-K filed on September 23, 2010.
The order requires that the Bank take corrective actions to address certain alleged violations of laws and/or regulations and imposes certain restrictions on the Bank. The following is a list of the corrective actions required of, and restrictions placed on, the Bank and the current status (in italics) of the actions taken as of the filing date hereof:
1.
Have and retain qualified management having such qualifications and experience commensurate with his or her duties and responsibilities at the Bank and notify the FDIC and the CDFI prior to adding any individual to the Banks Board of Directors or employing any individual as a senior executive officer of the Bank.
The Board of Directors has undertaken a review of the qualifications and experience of individuals serving in key management positions. As a result of this review the Board of Directors has initiated a search for a qualified individual to be hired to serve as President of the Bank, relieving the Chief Executive Officer of a portion of his heavy workload. The Bank has hired a qualified individual to serve as Chief Lending Officer in replacement of the Banks former Chief Lending Officer who resigned on February 28, 2011.
2.
Develop and adopt a capital plan that complies with the FDICs Statement of Policy on Risk-Based Capital contained in Appendix A to Part 325 of the FDICs rules and regulations in order to maintain Tier 1 capital in such an amount to ensure that the Banks leverage ratio equals or exceeds 9% and the Banks total risk-based capital ratio equals or exceeds 12%.
The Bank has developed a capital plan that it believes complies with the FDICs Statement of Policy on Risk-Based Capital contained in Appendix A of Part 325 of the FDICs rules and regulations to ensure that the Banks leverage ratio equals or exceeds 9% and the Banks total risk-based capital ratio equals or exceeds 12%. This capital plan was approved by the Board on October 28, 2010. The Banks total risk-based capital ratio was 9.55% at March 31, 2012, which was below the required 12%. The Banks leverage capital ratio was 5.96% at March 31, 2012, which was below the required 9%. The Bank is in the process of implementing its capital plan. Appropriate actions or combinations of actions may include raising additional capital, reducing the Banks assets through sales of branch offices, loans
44
Table of Contents
or other real estate owned, merger with another financial institution or sale of the Bank.
3.
Not pay cash dividends or make any other payments to the Banks shareholders absent the prior written consent of the FDIC and the CDFI;
The Board has acknowledged the prohibition on payment of dividends or any other payments to the Banks shareholder (the Corporation) without the prior written consent of the FDIC and the CDFI. The Bank has not paid any dividends to the Corporation since the effective date of the order.
4.
Eliminate, either by charge-off or collection, assets classified as Loss in the examination report of the FDIC and the CDFI relating to their examination of the Bank on February 16, 2010 (the ROE).
Assets classified as Loss in the examination report of the FDIC and the CDFI relating to their examination of the Bank on February 16, 2010 have been charged-off.
5.
Formulate a written plan to reduce the Banks risk exposure in adversely classified Substandard or Doubtful assets listed in the ROE.
A written plan to reduce the Banks risk exposure in adversely classified Substandard or Doubtful assets listed in the ROE was approved by the Board on November 26, 2010, and submitted to the FDIC Regional Director and CDFI Commissioner for their review and comment.
6.
Not extend any additional credit to or for the benefit of any borrower who has a loan or other extension of credit that either: (a) has been charged off or classified (in whole or in part) as Loss and is uncollected, or (b) absent the prior approval of the Banks board or loan committee, has been classified (in whole or in part) as Doubtful or Substandard;
The Bank has not extended any additional credit to or for the benefit of any borrower who has a loan or other extension of credit that either has been charged off or classified (in whole or in part) as Loss, since the date of the order. The Bank also has not extended any additional credit to or for the benefit of any borrower who has a loan or other extension of credit classified (in whole or in part) as Doubtful or Substandard without the prior approval of the Banks Board or loan committee since the date of the order.
7.
Review the appropriateness of the Banks allowance for loan and lease losses (the ALLL) and establish a comprehensive policy for determining the appropriate level of the ALLL, including documenting the analysis according to the standards set forth in the applicable policy guidelines of the FDIC.
The ALLL policy has been reviewed and revised to ensure the determination of the appropriate level of the ALLL, including documenting the analysis according to the standards set forth in the applicable policy guidelines of the FDIC. The revised policy was approved by the Board on October 14, 2010. The Board continues to review the ALLL on at least a quarterly basis to ensure it is at an appropriate level. The policy is under review by the newly appointed Chief Lending Officer and will be presented to the Board of Directors for approval.
45
Table of Contents
8.
Develop or revise, adopt, and implement a written lending and collection policy to provide effective guidance and control over the Banks lending functions in accordance with the requirements of the order.
The Banks written lending and collection policy has been revised and the Bank believes that it provides effective guidance and control over the Banks lending functions. The revised policy was approved by the Board on October 28, 2010. Additional revisions were approved by the Board on March 9, 2011. The policy is under review by the newly appointed Chief Lending Officer and as segments of the policy are updated they are presented to the Board of Directors for approval.
9.
Develop or revise, adopt, and implement a written liquidity and funds management policy that adequately addresses liquidity needs and contingency funding, appropriately reduces the Banks reliance on non-core funding sources and complies with FDICs Guidance on Liquidity Risk Management, dated August 26, 2008.
A revised liquidity and funds management policy which addresses liquidity needs and contingency funding and appropriately reduces reliance on non-core funding sources was approved by the Board on October 28, 2010, and has been implemented. Bank Management believes this policy complies with the FDICs Guidance on Liquidity Risk Management, dated August 26, 2008,
10.
Comply with the FDICs rules and regulations relating to brokered deposits and formulate and submit for approval, a written plan to eliminate the Banks reliance on brokered deposits.
The Bank believes it is in compliance with the FDICs rules and regulations relating to brokered deposits and has formulated and submitted to the FDIC a written plan to eliminate its reliance on brokered deposits. The plan was approved by the Board on October 28, 2010 and was submitted to the FDIC on October 29, 2010. The Banks total brokered deposits have been reduced to $6 million from $64 million.
11.
Develop or revise, adopt, and implement a written plan addressing retention of profits, reducing overhead expenses, and setting forth a comprehensive budget to cover the three-year period from January 1, 2011 to December 31, 2013, which shall include formal goals, strategies and benchmarks which are consistent with sound banking practices to improve the Banks net interest margin, increase interest income, reduce discretionary expenses, and improve and sustain earnings.
The Board approved a Strategic Plan and Budget for the period from January 1, 2011 through December 31, 2013 on December 30, 2010 and the plan was submitted to the FDIC Regional Director and the CDFI Commissioner for their review. The Board approved a revised Strategic Plan and Budget for the period from July 1, 2011 through December 31, 2013 on August 22, 2011.
12.
Develop and submit for regulatory review and approval, a written three-year strategic plan, including a written profit plan, which includes, among other things, specific goals for the dollar volume of total loans, total investment securities and total deposits as of December 31, 2011 through December 31, 2013.
See response to Item 11.
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Table of Contents
13.
Refrain from engaging in any expansionary activities, including opening any branches absent prior regulatory approval.
The Bank currently does not anticipate any expansionary activities and acknowledges the requirement for prior regulatory approval before undertaking any such activities.
14.
Inform the FDIC and the CDFI prior to making any planned public announcement or notification regarding changes to the Banks financial condition, executive management or board of directors.
The Board and management acknowledge the requirement to inform the FDIC and the CDFI prior to making any planned public announcement or notification regarding changes to the Banks financial condition, executive management or Board.
15.
Furnish written progress reports to the FDIC and the CDFI detailing the form and manner of any actions taken to secure compliance with the order; and provide a description of the order to the Banks shareholders in conjunction with the Banks next shareholder communication and also in conjunction with the Banks notice or proxy statement preceding the next shareholder meeting.
The Bank filed the required progress reports with the FDIC & CDFI on October 30, 2010, January 31, 2011, April 30, 2011, July 29, 2011, October 27, 2011, January 27, 2012 April 27, 2012.
The Bank has stipulated to the issuance of a Consent Order, Order for Restitution and Order to Pay Civil Money Penalties with the FDIC. The orders became effective on September 29, 2010. The orders were filed as an exhibit to the Corporations Current Report on Form 8-K, filed on October 5, 2010.
In connection with the issuance of the orders, the FDIC alleged that the Bank had engaged in unsafe or unsound banking practices, deceptive practices and violations of law by:
1.
offering credit cards (Balance Transfer Credit Cards) which are intended for the transfer and payment of charged-off consumer debt without disclosing the age of the debt and the fact that the transferred debt was time-barred and/or no longer reportable by credit reporting agencies;
2.
offering Balance Transfer Credit Cards to consumers when the Bank does not have sufficient substantiation that the debtor is obligated for the amount of indebtedness subject to the balance transfer;
3.
misleading consumers about the utility of Balance Transfer Credit Cards advertised as credit cards when, in fact, the consumers have no available credit at the time the credit card is issued;
4.
misrepresenting debt collection programs as a credit card offer;
5.
misleading consumers regarding the interest charged on debt transferred to Balance Transfer Credit Cards; and
47
Table of Contents
6.
misleading consumers concerning the fees associated with stored value debit cards through website solicitations for the cards.
The allegations contained in items 1 through 5 above were related to a credit card program offered to consumers under a card sponsorship agreement between the Bank and Tighorn Financial Services, LLC (Tighorn). Tighorn acquired consumer debt and solicited consumers as a part of its debt collection program. As an incentive to make payments, a portion of the debt was forgiven with the remainder of the debt transferred to a credit card.
The Bank agreed to issue credit cards on behalf of Tighorn to certain eligible consumers who Tighorn solicited. The card sponsorship agreement required, among other things, that Tighorns solicitations comply with laws, regulations and regulatory orders governing the Bank in the solicitation, issuance and administration of the credit cards.
In June 2008, the Bank provided notice of cancellation to Tighorn in accordance with provisions of the card sponsorship agreement. While the Bank continues to service existing credit card accounts, solicitations of new accounts were discontinued effective December 31, 2008.
The allegation contained in item 6 above was related to a stored value card program which was canceled in June 2008 in accordance with provisions of the card sponsorship agreement. The card portfolio was transferred to another issuer on or about December 31, 2008.
Without admitting or denying any of the alleged charges of unsafe or unsound banking practices and any violations of law, the Bank has agreed to take the following corrective actions to address the foregoing alleged violations of law and/or regulation. Below each listed action is a description of the status of the Banks efforts to comply with the required action (in italics).
1.
Provide full, accurate disclosure and refrain from making misleading statements to consumers regarding the Banks balance transfer credit card programs, the interest rates and fees associated with these programs, the Banks debt collection practices, and the Banks stored value card programs.
The Bank believes it has established procedures for the review of disclosures and solicitation materials for both credit card and stored value card programs which require disclosures and solicitation materials be reviewed by the Banks compliance department and independent legal counsel with expertise in credit card and stored value card regulations.
2.
The Board of Directors to participate fully in the oversight of the Banks compliance management system and to assume full responsibility for the approval of sound compliance policies and objectives. The Board of Directors to establish a compliance committee comprised of at least three directors who are not Bank officers that will meet at least monthly to review among other things, compliance with consumer laws and compliance with the Order. The Board of Directors to develop and adopt a comprehensive educational program for periodic training of Board members.
A Compliance Committee, which meets on a monthly basis, was established prior to entering into the orders and is still in place. A training program for the Board was prepared and approved by the Board on October 28, 2010. Board members are participating in training as provided for in the training program.
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Table of Contents
3.
Develop and maintain effective monitoring, training and audit procedures to review each aspect of the Banks agreement with third parties in order to ensure that third party vendors comply with consumer protection laws, regulatory guidance, regulations, and policies (consumer laws).
The Bank has engaged independent consultants with expertise in credit card and stored value card regulations to audit the third parties to ensure their compliance with consumer protection laws, regulatory guidance, regulations and policies.
4.
Develop and maintain an adequate compliance management system that implements a written compliance program to ensure the Banks compliance with consumer laws.
The Bank has developed and now maintains a written compliance program which it believes is designed to ensure compliance with consumer laws. A Compliance Committee, consisting of all of the outside directors, a Compliance Officer, who reports directly to the Committee, and the Chief Executive Officer, meets monthly and reports its activities to the full Board.
5.
Retain a qualified compliance officer with the requisite knowledge and experience to administer an effective compliance management system, including experience with third-party debit and credit card agreements.
The Bank has appointed a Compliance Officer with 19 years of banking experience and an Assistant Compliance Officer with 29 years of banking experience and has engaged legal counsel and consultants having experience with third-party debit and credit card agreements to augment staff experience.
6.
Have an independent audit to ensure compliance with consumer laws.
An independent audit has been conducted and the audit report indicates that the Bank is in compliance with consumer laws.
7.
Correct, to the extent possible, all violations of consumer laws and refrain from making, either directly or indirectly, any false, deceptive or misleading representations with respect to any extension of credit or other Bank product; and
The Bank continues to make efforts to correct, to the extent possible, all violations of consumer laws and to refrain from, and acknowledges its legal obligations to refrain from making, either directly or indirectly, any false, deceptive or misleading representations with respect to any extension of credit or other Bank product.
8.
Contribute $300,000 to an established local or national non-profit organization for the specific purpose of consumer financial education and counseling.
The Bank submitted the name and qualifications of a non-profit organization meeting the specific requirements as detailed in the orders for approval, and the FDIC Regional Director subsequently granted such approval. The Bank recorded the $300,000 expense in the third quarter of 2010 and funded the donation on February 2, 2011
.
9.
Make restitution payments to certain consumers who had or currently have a credit card and/or a prepaid debit card issued by the Bank through agreements with certain third party vendors.
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Table of Contents
In this regard, the Bank must prepare a restitution plan for regulatory approval with respect to making restitution payments to such consumers not to exceed $2.5 million in the aggregate and reserve or deposit into a segregated account for the payment of restitution an amount not less than $1.5 million. The Bank is also required to retain an independent accounting firm to determine compliance with the restitution plan.
The Bank submitted the name and qualifications of the independent accounting firm to the FDIC Regional Director for non-objection which was received on December 6, 2010. The restitution plans were submitted to the FDIC Regional Director for review and approval on November 29, 2010. On April 4, 2011 the Bank received approval from the FDIC for one of the restitution plans. The Bank completed implementation of this plan on May 2, 2011. For the remaining restitution plan, the FDIC requested that the Bank make certain revisions to the plan. The Bank resubmitted a revised plan to the FDIC Regional Director on April 18, 2011 for his review and approval. On June 7, 2011 the Bank received approval from the FDIC for the revised restitution plan. The Bank completed implementation of this plan on July 6, 2011. The Bank recorded the $1.5 million expense for the restitution payments in the third quarter of 2010. Under the approved restitution plans checks totaling $862,000 were issued to cardholders. The excess restitution payment funds of $638,000 were reversed after the Certified Public Accounting hired to review the Banks compliance with the restitution plans issued its agreed upon procedures report indicating it found no exceptions.
10.
Furnish written progress reports to the FDIC detailing the form and manner of any actions taken to secure compliance with the Order and provide a description of the Order to the Banks shareholders in conjunction with the Banks next shareholder communication and also in conjunction with the Banks notice or proxy statement preceding the next shareholder meeting.
The initial progress report was provided to the FDIC on October 29, 2010. The Bank was exempted from filing the progress report due January 30, 2011 since the FDIC performed an onsite visitation during December 2010 to monitor the Banks progress in complying with the orders. The Bank provided progress reports to the FDIC on April 30, 2011, July 28, 2011 and January 27, 2012. The Bank was exempted from the quarterly report due October 30, 2011 due to a recently completed Compliance Examination.
Additionally, as a result of the alleged violations of laws and/or regulation, the FDIC assessed a civil money penalty in the amount of $500,000 against the Bank which has been paid to the United States Treasury. The $500,000 expense was recorded in the third quarter of 2010.
The Corporation has entered into a written agreement (the Agreement) with the Federal Reserve Bank of San Francisco, effective as of October 29, 2010, pursuant to which the Corporation has agreed to take the following actions listed below. The Agreement was filed as an exhibit to the Corporations Current Report on Form 8-K, filed on November 2, 2010. Below each listed action is a description of the status of the Corporations efforts to comply with the required action (in italics).
1.
Take appropriate steps to fully utilize the Corporations financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure the Banks compliance with the Consent Order, dated September 1, 2010,
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between the Bank and the FDIC and any other supervisory action taken by the Banks federal and state regulators;
The Corporation provided the Bank with a capital injection of $400,000 on December 31, 2011 in order to enhance the Banks capital.
2.
Refrain from declaring or paying dividends, taking dividends or any form of payment from the Bank representing a reduction in the Banks capital, or making any distributions of interest, principal or other sums on the Corporations subordinated debentures or trust preferred securities absent prior regulatory approval;
The Board has acknowledged the requirement of obtaining regulatory approval prior to declaring or paying dividends, taking dividends or any form of payment from the Bank representing a reduction in the Banks capital, or making any distributions of interest, principal or other sums on the Corporations subordinated debentures or trust preferred securities. No such transactions have occurred which required regulatory approval.
3.
Refrain from incurring, increasing or guaranteeing any debt or repurchasing or redeeming any shares of its stock absent prior regulatory approval;
The Board has acknowledged the requirement of regulatory approval prior to incurring, increasing or guaranteeing any debt or repurchasing or redeeming any shares of its stock. No such transactions have occurred which required regulatory approval.
4.
Develop and submit for regulatory approval a cash flow projection of the Corporations planned sources and uses of cash for debt service, operating expenses and other purposes;
The required cash flow projections were submitted to the Federal Reserve Bank on December 27, 2010 and November 30, 2011.
5.
Comply with appropriate regulatory notice and approval requirements when appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer and comply with the limitations on indemnification and severance payments set forth in Section 18(k) of the Federal Deposit Insurance Act (12 USC 1828(i)) and Part 359 of the FDICs implementing regulations; and
The Board has acknowledged the notice and approval requirements when appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer and the obligation to comply with the limitations on indemnification and severance payments set forth in Section 18(k) of the Federal Deposit Insurance Act (12 USC 1828(i)) and Part 359 of the FDICs implementing regulations. No changes have occurred which required regulatory approval.
6.
Furnish written progress reports to the Federal Reserve Bank of San Francisco detailing the form and manner of any actions taken to secure compliance with the Agreement.
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The Corporation has filed the required progress reports with the Federal Reserve Bank of San Francisco on January 30, 2011, April 30, 2011, July 28, 201, October 26, 2011 and January 27, 2012.
The Board of Directors and Management believe the Corporation and the Bank are in substantial compliance or are taking steps toward compliance with all requirements of these regulatory actions.
Liquidity
Liquidity represents the ability to provide sufficient cash flows or cash resources in a manner that enables an entity to meet its obligations in a timely fashion and adequately provide for anticipated future cash needs.
For the Bank, liquidity considerations involve the capacity to meet expected and potential requirements of depositors seeking access to balances and to provide for the credit demands of borrowing customers. In the ordinary course of the Banks business, funds are generated from the repayment of loans, maturities within the investment securities portfolio and the acquisition of deposit balances and short-term borrowings. In addition, the Bank has a line of credit from the Federal Home Loan Bank of San Francisco of approximately $33,595,000, based on collateral pledged to secure the line of credit. The Banks maximum borrowing capacity, subject to collateralization is 15 percent of the Banks total assets as reported in the most recent quarterly Consolidated Reports of Condition and Income for a bank with Domestic Offices Only. At March 31, 2012, $9,079,000 in excess collateral was pledged. The Bank has a borrowing line with the Federal Reserve Bank of San Francisco secured
a portion of the Banks securities, with available borrowing of $7,321,000 at March 31, 2012.
As a matter of policy, the Bank seeks to maintain a level of liquid assets, including marketable investment securities, equal to at least 25 percent of total assets (total liquidity). Additionally the Bank maintains secondary sources of liquidity (borrowing lines from other institutions) equal to at least an additional 10 percent of assets. Within these ratios, the Bank generally has excess funds available to sell as federal funds on a daily basis, and is able to fund its own liquidity needs without the need of short-term borrowing. The Banks total liquidity at March 31, 2012 and 2011 was 21.90% and 24.06%, respectively, while its average loan to average deposit ratio for such years was 74.95% and 76.75%, respectively.
Brokered deposits are deposit instruments, such as certificates of deposit, deposit notes, bank investment contracts and certain municipal investment contracts that are issued through brokers and dealers who then offer and/or sell these deposit instruments to one or more investors. Additionally, deposits on which a financial institution pays an interest rate significantly higher than prevailing rates are considered to be brokered deposits. Federal law and regulation restricts banks from soliciting or accepting brokered deposits, unless the bank is well capitalized under Federal guidelines. The Bank had $6,091,000 in brokered deposits at March 31, 2012 compared with $31,187,000 in brokered deposits at March 31, 2011. The Corporation continues to reduce its reliance on brokered deposits by not opening or renewing any deposits classified as brokered.
Deferral of Interest Payments on Trust Preferred Securities
The Corporation has exercised its rights in accordance with Section 2.11 Extension of Interest Payment Period of the Indentures dated March 27, 2003 for Northern California Bancorp, Inc. Trust I and November 3, 2003 for Northern California Bancorp, Inc. Trust II to
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defer interest payments for an undetermined period of time, not to exceed twenty (20) consecutive quarterly payments. The deferral of interest payments on Northern California Bancorp, Inc. Trust I was effective with the October 7, 2009 interest payment. The accrued and unpaid interest totaled $328,000 and $297,000 at March 31, 2012 and December 31, 2011, respectively. The deferral of interest payments on Northern California Bancorp, Inc. Trust II was effective with the November 8, 2009 interest payment. The accrued and unpaid interest totaled $457,000 and $411,000 at March 31, 2012 and December 31, 2011, respectively.
Interest Rate Risk
Management of interest rate sensitivity (asset/liability management) involves matching and repricing rates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the constraints imposed by regulatory authorities, liquidity determinations and capital considerations. The Bank instituted formal asset/liability policies at the end of 1989.
The purpose for asset/liability management is to provide stable net interest income growth by protecting the Banks earnings from undue interest rate risk. The Bank expects to generate earnings from increasing loan volume, appropriate loan pricing and expense control and not from trying to accurately forecast interest rates. Another important function of asset/liability management is managing the risk/return relationships between interest rate risk, liquidity, market risk and capital adequacy. The Bank gives priority to liquidity concerns followed by capital adequacy, then interest rate risk and market risk in the investment portfolio. The policy of the Bank will be to control the exposure of the Banks earnings to changing interest rates by generally maintaining a position within a narrow range around an earnings neutral position. An earnings neutral position is defined as the mix of assets and liabilities that generate a net interest margin that is not affected by interest rate changes. However, Management does not believe that the Bank can maintain a totally earnings neutral position. Further, the actual timing of repricing of assets and liabilities does not always correspond to the timing assumed by the Bank for analytical purposes. Therefore, changes in market rates of interest will generally impact the Banks net interest income and net interest margin for long or short periods of time.
The Bank monitors its interest rate risk on a quarterly basis through the use of a model which calculates the effect on earnings of changes in the Fed Funds rate. The model converts a Fed Funds rate change into rate changes for each major class of asset and liability, then simulates the Banks net interest margin based on the Banks actual repricing over a one year period, assuming that maturities are reinvested in instruments identical to those maturing during the period. The following table shows the effect on net interest income of various rate shocks, expressed in basis points, at March 31, 2012. The table includes one projection for a decrease in rates, as the Federal Funds target rate is currently between 0% and 0.25%.
Rate Shock Change in
Basis Points
|
|
Percent Change in Net
Interest Income
|
|
-25
|
|
-0.3
|
%
|
100
|
|
2.3
|
%
|
200
|
|
4.7
|
%
|
300
|
|
6.8
|
%
|
400
|
|
8.9
|
%
|
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
(a)
Disclosure Controls and Procedures:
The Corporations Management, with the participation of its Chief Executive Officer and its Chief Financial Officer, carried out an evaluation of the effectiveness of the Corporations disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) promulgated under the Exchange Act. Based upon that evaluation, the Corporations Management has concluded that, as of the end of the period covered by this report, the Corporations disclosure controls and procedures were effective in ensuring that information relating to the Corporation (including its consolidated subsidiary) required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entitys disclosure objectives. The likelihood of achieving such objections is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process
(b)
Changes in Internal Controls
: The Corporations management, with the participation of the Corporations Chief Executive Officer and Chief Financial Officer, has evaluated whether there was any change in internal control over financial reporting that occurred during the quarter ended March 31, 2012 and determined that there was no change in internal control over financial reporting that occurred during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Corporations internal control over financial reporting.
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PART II-OTHER INFORMATION
Item 1. Legal Proceedings
Except as discussed below, as of the date hereof, there are no material pending legal proceedings to which we are a party or to which any of our properties are subject, nor are there material pending legal proceedings in which any of our directors, officers or affiliates, or any principal security holders or any associate of any of the foregoing, is a party in an action that is material to us or has an interest adverse to us.
On March 8, 2012 Biotab Nutraceuticals, Inc. (Biotab) filed a complaint in Orange County Superior Court against Monterey County Bank (MCB). The complaint asserts claims of breach of contract, common counts, and requests and accounting in connection with MCBs alleged refusal to pay what Biotab claims are surplus amounts in its reserve accounts. The complaint seeks damages in excess of $1,109,000, which is the amount that Biotab estimates is held by MCB as reserves, interest at the rate of 10% per year since November 14, 2004, and attorneys fees according to proof at trial.
In response to Biotabs complaint, MCB has filed its own cross-complaint asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, deceit, and declaratory judgment against both Biotab and its principal, who personally guaranteed Biotabs performance under the Merchant Processing Agreement. The cross-complaint asserts that Biotab fraudulently concealed that it was processing transactions for products covered by the Merchant Processing Agreement elsewhere, thereby, triggering its obligations to make monthly minimum payments, and that Biotab represented that it was engaged in the health supplements business and was complying with all applicable laws, when, in fact, Biotab failed to disclose that it was using pornography to promote its male enhancement products and that it was also allegedly engaged in illegal conduct. The cross complaint seeks to recover the outstanding monthly minimum fees, punitive and/or exemplary damages, costs and attorneys fees, as well as, a declaration that MCB is entitled to hold amounts that Biotab maintains in any account as MCB reserves under the Merchant Processing Agreement.
Although the amount of any ultimate liability with respect to the proceedings described above cannot be determined, in the opinion of management, any such liability will not have a material effect on the consolidated financial position of the Corporation and its subsidiary.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not Applicable
Item 5. Other Information.
None.
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Item 6. Exhibits
A.
EXHIBITS
31.1
|
|
Certification of the Chief Executive Officer of Northern California Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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|
|
|
31.2
|
|
Certification of the Chief Financial Officer of Northern California Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification of the Chief Executive Officer of Northern California Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification of the Chief Financial Officer of Northern California Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
101*
|
|
The following materials from the Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, are formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 (unaudited), (ii) Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011 (unaudited); (iii) Consolidated Statements of Changes in Shareholders Equity (unaudited), and (iv) Notes to Condensed Consolidated Financial Statements (unaudited), tagged as blocks of text.
|
*
This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
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.
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NORTHERN CALIFORNIA BANCORP, INC.
|
|
|
|
Date: May 22, 2012
|
By:
|
/s/ Charles T. Chrietzberg, Jr.
|
|
|
Charles T. Chrietzberg, Jr.
|
|
|
Chairman of the Board &
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
Date: May 22, 2012
|
By:
|
/s/ Bruce N. Warner
|
|
|
Bruce N. Warner
|
|
|
Chief Financial Officer and
|
|
|
Principal Accounting Officer
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56
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