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1st Quarter 2011 Shareholders Report (click here for full PDF version with Financial Supplement)
March 31, 2011 — Each quarter we look forward to providing our supporters and friends an update on the bank. This quarter is no different. We have all been reading the recent headlines about the rapidly evolving banking landscape and the concerns and effects of the downturn in the economy. As we have discussed in the past, these dramatic changes create both opportunities and challenges. This is indeed a historical time period we are all living through.
We continue to see good stable growth in deposits, liquidity and assets. Our core earnings remain strong and our allowance for loan loss is fully funded.
We have experienced a continued deterioration in loans as borrowers struggle to keep current and/or ride through this economic cycle. This quarter, we have also seen a slowdown in loan production and an increase in loan payoffs. At March 31, 2011, Total Loans dropped to $79 million from $86 million at the end of 2010. We have seen additional lenders come into the market, which could be read as a positive as the banking and insurance sectors become more active and confident in real estate values and the economy.
An area we continue to work very hard on is asset quality and problem loans. We have a few loans where the borrowers are stressed to make payments and we have been required to place additional reserves for a percentage of the loan balance and place the loans on non-accrual. What that means is we cannot recognize income on the loan until it improves in quality. At the end of March our non-accrual balance increased to $6.6 million. For example, if you assume the average yield on those loans is 6%, the impact was a decrease in potential income in the first quarter of $82,000 or $330,000 annually.
As a result, our net income for the first quarter was $65,000. During the quarter we set aside $175,000 in additional loan loss reserves, our pre-loan loss income was $240,000 or $960,000 annually. This is down slightly from our run rate last year due to the decline in loan balances and an increase in non-accrual loans. Our provision for loan loss brings our total allowance for loan loss up to 2.82% of total loans as of March 2011, compared to 2.24% in March 2010. Decreasing non accrual loans and improving credit quality is a top priority of our management team.
During this economic crisis and credit crunch dating back to October 2008, we have seen the FDIC increase its oversight to implement corrective actions within their regulations and statutes. Thus far, the Bank has been able to manage its credit risk and road to profitability through normal internal guidelines and policies.
We, like many banks, have been asked to agree to a Consent Order to provide the FDIC closer oversight of the Bank. As a result, effective March 31, 2011, the FDIC, within specific timeframes, is requiring the Bank to abide by certain financial, policy and reporting guidelines. Formal agreements with federal regulators are designed to strengthen financial performance, restore earnings, improve asset quality, and provide for adequate capital and liquidity.
Listed below are the specific areas of the order. Many of the requirements match traditional fiduciary goals of the Board and are well under way. We are committed to their completion and the lifting of the order as soon as possible. As you read you will see multiple compliance dates which are all attainable.
- The bank shall retain qualified management: The Board will actively review current management to effectively determine the current ability and future needs of the Bank during the order.
- Within 180 days from the effective date the bank shall increase and thereafter maintain Tier 1 capital to 10% and Tier 2 capital to 12%: Management and the Board are actively researching alternatives to raising capital either through a private placement within the community or the engagement of an investment banker to assist in a larger reaching capital raise. Within 60 days, the Bank is to submit its capital plan to the FDIC.
- The Bank shall not pay cash dividends: The Bank has not been in a position to pay common stock dividends yet. This does temporarily suspend the TARP dividend until regulators provide future approval.
- Within 30 days, the bank shall charge off 50% of the loans classified “Doubtful” and 100% of loans classified as “Loss”: The Bank has previously completed this effective September 30, 2010. The resulting total dollar amount of this item was $2,396. Within 60 days, the Bank shall submit a plan to reduce classified assets: The Board is committed to reducing problem assets. The borrowers remain current with payments, but struggle financially. Further legal action may be required to move these folks along.
- The Bank shall maintain adequate Allowance for Loan and Lease Losses: We continue to study our portfolio to ensure there are always adequate reserves. As loans change grades up or down adjustments are made. The Bank is reviewing its methodology and bolstering its documentation efforts to support its levels. Within 60 days, the Bank shall revise and implement an enhanced policy and reporting mechanism to the Board and FDIC.
- The Bank shall not extend additional credit to a borrower who has a loan classified or charged off: As a normal course of business this is already against Bank policy.
- Within 90 days the Bank shall revise, adopt and implement enhanced written loan and collection policies: Our loan policy has expanded significantly in the last year. Recommendations by the FDIC are being incorporated to meet their timeline.
- Within 90 days the bank shall draft a plan to retain profits within the bank: This is always our goal. The bank has made great strides in the area of core income. The key is to decrease the impact of continued provision for loan loss expense. Moving forward the Bank will continue to review all expense categories and revenue opportunities to meet this requirement.
- Within 180 days, the Bank shall develop, revise, adopt and implement a written three year strategic plan: The current plan in place will be reviewed and revised. The capital offering certainly will impact the ultimate strategic plan. As the banking and economic world changes, it is always a good idea to review and update your plan annually.
- Within 30 days of each quarter end the Bank shall furnish written progress reports: This will be accomplished on schedule. This will generate open dialog with the regulators to show our continued progress and accomplishments.
Most of these requirements have been satisfied or are in the process of being satisfied. A capital plan is being formulated and the plan will have to be implemented by raising capital through accredited investors. As to credit issues, we are addressing these issues aggressively, albeit it is difficult to see our friends and neighbors day in and day out in the grocery store or gas station, knowing some of them are struggling to pay us back
We will go into more detail and report on our progress at the Annual Shareholder meeting Saturday May 7, 2011. We welcome you and encourage you to attend the formal meeting and reception from 1:00 to 3:00 here in our Ojai lobby.
Between now and then, come visit. We still have homemade cookies Monday, Wednesday, and Friday mornings (they go quickly). You know our Board, management team and staff. We are committed to the cause and are here to address any questions in person. We look forward to seeing you here in May and to healthy progress throughout the rest of the year.
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