Commenting on the Bank's recent lending activity, Geoff Loftus, the Bank's Chief Credit Officer, stated: "The Bank was able to achieve meaningful growth in the loan portfolio during both the fourth quarter of 2012 and for the full year despite the limited pace of general economic growth, the continued de-leveraging by certain borrowers with strong cash flows in light of the historically low yields available on many fixed income investments, and the seasoning of the portfolio, which resulted in increased principal amortization." Mr. Loftus then continued: "While we forecast these factors continuing to provide a headwind during 2013, we are encouraged by the increasing visibility of the Bank in our local communities and the volume of referrals from existing clients."
The Bank's allowance for loan losses increased from $3.3 million, or 1.66% of total loans, at December 31, 2011 to $4.3 million, or 1.77% of total loans, at December 31, 2012. Factors that contributed to the increase in the ratio of allowance for loan losses to loans outstanding during 2012 included:
•A rise in the percentage and volume of loans categorized as Special Mention or Substandard from $5.4 million at December 31, 2011 (2.69% of loans) to $9.3 million at December 31, 2012 (3.82% of loans).
•An increase in specific reserves for impaired loans from $25 thousand at December 31, 2011 to $417 thousand at December 31, 2012. Impaired loans increased from one relationship totaling $240 thousand at December 31, 2011 to five relationships totaling $4.3 million at December 31, 2012.
Just $1.4 million of the $4.3 million in impaired loans at December 31, 2012 were on non-accrual status and only $0.5 million of loans on non-accrual status were 30 or more days delinquent at December 31, 2012. The Bank's ratio of allowance for loan losses to non-accrual loans was 299.38% at December 31, 2012.
Premises and equipment, net, increased from $0.6 million at December 31, 2011 to $1.3 million at December 31, 2012. The majority of this increase was due to investments in furniture and leasehold improvements as the Bank relocated and expanded its Monterey Branch to serve its growing customer base in that market. Total deposits associated with the Monterey Branch have approximately doubled over the past two years.
During the third quarter of 2012, the Bank purchased $4.5 million in BOLI. That total decreased to $3.6 million at December 31, 2012 due to the effect of the principal repayment associated with the aforementioned claim more than offsetting the impact of dividends credited to the cash surrender value of these policies.
The $41.0 million increase in total assets by the Bank during 2012 to a record $329.3 million better leveraged its capital, with the ratio of total equity to total assets decreasing from 11.03% at December 31, 2011 to 10.32% at December 31, 2012. Over time, the Bank generally seeks to maintain this ratio at between 9.00% and 10.00% in order to present a well-capitalized profile on the one hand, but also support return on average shareholders' equity on the other hand.
Non-interest bearing demand deposits increased from $118.4 million at December 31, 2011 and $102.7 million at September 30, 2012 to $123.4 million at December 31, 2012. The Bank has historically experienced an increase in demand deposits during the fourth quarter of each year in conjunction with seasonal cash flow patterns associated with certain clients.
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