In a proactive move to allocate significant funds to a reserve account to compensate for loan losses, Sonoma Valley Bank President and CEO Sean Cutting reported a 2009 second quarter company loss of $1,477,833. This figure is compared to the earnings of $946,625 one year ago.
Cutting stated, “Management and the board of directors determined it prudent to aggressively add to the reserve account during the current quarter, with a $4,250,000 allocation vs. $310,000 last year. This raises the loan loss reserve level to 3.02 percent of all loans, the highest level for the bank in its history, and well above the peer group average. While this reserve allocation negatively impacts the profit and loss statement during this period, it is a responsible move in light of the current banking and real estate environments. This higher reserve level puts the Bank in a better position to deal with impaired assets as they arise.”
Commenting on the increase in non-performing assets during the quarter, Cutting noted, “The increase was primarily due to one large lending relationship secured by a commercial construction project and a separate land development project in Sonoma County. This one relationship accounts for over two-thirds of the total non-performing assets, and the bank is pursuing all options available to collect the full amount owed.”
The bank continues to monitor closely the performance of its loan portfolio and the adequacy of the reserve account and is prepared to make adjustments as necessary.
“The FDIC charges healthy banks to bolster failing ones,” said Cutting. “And this is real money for which we write and mail a check to the FDIC. An increase of over 3,000 percent in two years is a hard pill to swallow.”
According to Cutting, the reserve account is something bank management has elected to do to bolster its loan loss reserve account. Anticipating a continued risk in real estate lending – which makes up the bulk of the bank’s lending – management made the decision to set aside additional funds to cover potential non-performing real estate loans.
Cutting emphasized that the bank’s all-important net interest income remains very strong, with the first six months of this year exceeding last year’s six-month total, $7.18 million and $7.12 million, respectively.
