Financial Condition Analysis
Funds held at the Federal Reserve Bank of San Francisco ("FRB-SF") decreased from $21.0 million at December 31, 2012 to $17.6 million at March 31, 2013. This reduction resulted from the Bank's decision to invest excess on-balance sheet liquidity primarily into floating rate tranches of collateralized mortgage obligations ("CMOs") issued by the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") in order to augment interest income. During the second quarter of 2013, the Bank is targeting funds held at the FRB-SF in the $5.0 million to $10.0 million range in order to further increase interest income. Funds held at the FRB-SF earned a yield of 0.25% during the first quarter of 2013, compared to a yield of 0.43% for the U.S. Agency floating rate CMOs.
Time deposits at other financial institutions remained constant at $9.3 million between December 31, 2012 and March 31, 2013, as there were no time deposit maturities and no new time deposit investments during the first quarter of 2013. Time deposits at other financial institutions of $4.7 million mature by the end of 2013.
Securities categorized as available for sale increased from $41.8 million at December 31, 2012 to $62.9 million at March 31, 2013. During the first quarter of 2013, the Bank invested deposit inflows in excess of loan portfolio growth plus some of its balances at the FRB-SF into variable rate tranches of U.S. Agency CMOs. The CMOs were all AA+ rated and float at a margin over 1 month LIBOR, subject to lifetime caps. The loans underlying the CMOs are residential or multifamily mortgages. The fair value of the Bank's $62.9 million in securities at March 31, 2013 exceeded its amortized cost basis by $605 thousand.
At March 31, 2013, the Bank maintained a very strong liquidity profile, consisting of a significant volume of on-balance sheet assets (including cash & cash equivalents and securities available for sale) and over $100 million in off-balance sheet borrowing capacity. The increase in the Bank's liquidity profile during the first quarter of 2013 is reflected in the ratio of net loans to deposits, which decreased from 81.1% at December 31, 2012 to 77.4% at March 31, 2013. Commenting on the Bank's liquidity, Dale Diederick, the Bank's Chief Credit Officer, stated: "The Bank concluded the first quarter of 2013 with ample funds for lending. We continue to proactively market to local businesses and professionals, some of whom have been recently impacted by ownership, technology, and operational changes at their current financial institutions."
Net loans increased from $238.9 million at December 31, 2012 to $239.8 million at March 31, 2013. While the Bank originated $16.1 million in new credit commitments during the first quarter of 2013, loan payoffs and curtailments, principal reductions on lines of credit, and scheduled principal amortization combined to limit net portfolio growth.
During April 2013, the Bank relocated its expanded government guaranteed lending department to the Monterey Branch. This will provide more office and client meeting space for that team, which recently added Helen Dunston as a Business Development Officer. Ms. Dunston is an experienced financial services professional who is well-known throughout Monterey County. The Bank has been allocating more of its marketing and promotion budget during 2013 to various government lending programs (including those through the U.S. Small Business Administration or "SBA" and the U.S. Department of Agriculture or "USDA") in order to be able to offer increased and / or longer term financing to newer stage businesses than would otherwise be available and in order to take advantage of the current attractive secondary market prices for the guaranteed portion of such loans.
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