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Table Of Contents

 



 

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

Commission File Number 001-34226

 

1st Century Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

26-1169687

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1875 Century Park East, Suite 1400

Los Angeles, California 90067

(Address of principal executive offices)

(Zip Code)

 

(310) 270-9500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☒  No ☐

 

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  ☒  No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer ☐

Accelerated filer ☐

   

Non-accelerated filer ☐

Smaller reporting company ☒

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

 

10,146,078 shares of common stock of the registrant were outstanding as of August 1, 2014.

 



 

 

1st Century Bancshares, Inc.

Quarterly Report on Form 10-Q

June 30, 2014

 

Table of Contents

 

   

Page

PART I. FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

 
     
 

Consolidated Balance Sheets — June 30, 2014 (unaudited) and December 31, 2013

4

     
 

Unaudited Consolidated Statements of Operations and Comprehensive Income — Three and six months ended June 30, 2014 and 2013

5

     
 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity — Six months ended June 30, 2014 and 2013

6

     
 

Unaudited Consolidated Statements of Cash Flows — Six months ended June 30, 2014 and 2013

7

     
 

Notes to Unaudited Consolidated Financial Statements

8

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

     

Item 4.

Controls and Procedures

43

     

 PART II. OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

44

     

Item 1A.

Risk Factors

44

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

     

Item 3.

Defaults Upon Senior Securities

44

     

Item 4.

Mine Safety Disclosures

44

     

Item 5.

Other Information

44

     

Item 6.

Exhibits

45

     

Signatures

 

46

 

 

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

 

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” and other similar expressions in this Quarterly Report on Form 10-Q. With respect to any such forward-looking statements, the Company claims the protection of the safe harbor provided for in the Private Securities Litigation Reform Act of 1995, as amended. The Company cautions investors that any forward-looking statements presented in this Quarterly Report on Form 10-Q, or those that the Company may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information available to, management at the time such statements are first made. Actual outcomes will be affected by known and unknown risks, trends, uncertainties and factors that are beyond the Company’s control or ability to predict.  Although the Company believes that management’s beliefs and assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, the Company’s actual future results can be expected to differ from management’s expectations, and those differences may be material and adverse to the Company’s business, results of operations and financial condition. Accordingly, investors should use caution in placing any reliance on forward-looking statements to anticipate future results or trends.

 

Some of the risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed include, but are not limited to, the following: the impact of changes in interest rates; political instability; changes in the monetary policies of the U.S. Government; a renewed decline in economic conditions; deterioration in the value of California real estate, both residential and commercial; an increase in the level of non-performing assets and charge-offs; further increased competition among financial institutions; the Company’s ability to continue to attract interest bearing deposits and quality loan customers; further government regulation and the implementation and costs associated with the same; internal and external fraud and cyber-security threats including the loss of bank or customer funds, loss of system functionality or the theft or loss of data; management’s ability to successfully manage the Company’s operations; the possibility that we will be unable to comply with the requirements set forth in the OCC’s Consent Order, which could result in restrictions on our operations; and the other risks set forth in the Company’s reports filed with the U.S. Securities and Exchange Commission. For further discussion of these and other factors, see “Item 1A. Risk Factors” in the Company’s 2013 Annual Report on Form 10-K.

 

Any forward-looking statements in this Quarterly Report on Form 10-Q and all subsequent written and oral forward-looking statements attributable to the Company or any person acting on behalf of the Company are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. The Company does not undertake any obligation to release publicly any revisions to forward-looking statements to reflect events or circumstances after the date such forward looking statements are made, and hereby specifically disclaims any intention to do so, unless required by law.

 

 

PART I. FINANCIAL INFORMATION

 

Item 1 — Financial Statements

 

1st Century Bancshares, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

   

June 30, 2014

(unaudited)

   

December 31, 2013

 

ASSETS

               

Cash and due from banks

  $ 10,392     $ 6,648  

Interest earning deposits at other financial institutions

    49,906       38,040  

Total cash and cash equivalents

    60,298       44,688  

Investment securities — Available for Sale (“AFS”), at estimated fair value

    78,060       106,272  

Loans, net of allowance for loan losses of $7,367 and $7,236 at June 30, 2014 and December 31, 2013, respectively

    405,346       376,312  

Premises and equipment, net

    1,230       1,285  

Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock

    4,767       4,632  

Accrued interest and other assets

    4,712       4,956  

Total Assets

  $ 554,413     $ 538,145  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Non-interest bearing demand deposits

  $ 261,987     $ 236,869  

Interest bearing deposits:

               

Interest bearing checking (“NOW”)

    23,594       21,005  

Money market deposits and savings

    140,830       151,879  

Certificates of deposit less than $100

    806       870  

Certificates of deposit of $100 or greater

    40,555       42,143  

Total deposits

    467,772       452,766  

Other borrowings

    25,000       27,500  

Accrued interest and other liabilities

    2,481       2,491  

Total Liabilities

    495,253       482,757  
                 

Commitments and contingencies (Note 9)

               
                 

Stockholders’ Equity:

               

Preferred stock, $0.01 par value — 10,000,000 shares authorized, none issued and outstanding at June 30, 2014 and December 31, 2013, respectively

           

Common stock, $0.01 par value — 50,000,000 shares authorized, 12,109,310 and 11,378,710 issued at June 30, 2014 and December 31, 2013, respectively

    121       114  

Additional paid-in capital

    70,158       67,231  

Accumulated deficit

    (2,855

)

    (4,036

)

Accumulated other comprehensive income

    227       52  

Treasury stock at cost — 1,967,262 and 1,897,902 shares at June 30, 2014 and December 31, 2013, respectively

    (8,491

)

    (7,973

)

Total Stockholders’ Equity

    59,160       55,388  

Total Liabilities and Stockholders’ Equity

  $ 554,413     $ 538,145  

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

 

1st Century Bancshares, Inc.

Unaudited Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

 

 

 

   

Three Months Ended

June 30,

   

Six Months Ended

 June 30,

 
    2014     2013     2014     2013  
Interest and fee income on:                                

Loans

  $ 4,082     $ 3,307     $ 7,950     $ 6,565  

Investments

    508       714       1,069       1,493  

Other

    106       54       215       105  

Total interest and fee income

    4,696       4,075       9,234       8,163  
                                 

Interest expense on:

                               

Deposits

    107       124       217       254  

Borrowings

    80       83       162       157  

Total interest expense

    187       207       379       411  

Net interest income

    4,509       3,868       8,855       7,752  
                                 

Provision for (reduction of) loan losses

    100             100       (500

)

Net interest income after provision for (reduction of) loan losses

    4,409       3,868       8,755       8,252  
                                 

Non-interest income

                               

Gain on sale of AFS investment securities

    533       535       786       535  

Other operating income

    190       302       302       661  

Total non-interest income

    723       837       1,088       1,196  

Non-interest expenses:

                               

Compensation and benefits

    2,218       1,970       4,677       3,952  

Occupancy

    404       379       776       736  

Professional fees

    159       191       312       316  

Technology

    201       191       394       370  

Marketing

    86       79       162       142  

FDIC assessments

    108       55       185       143  

Other operating expenses

    612       655       1,281       1,124  

Total non-interest expenses

    3,788       3,520       7,787       6,783  

Income before income taxes

    1,344       1,185       2,056       2,665  

Income tax provision (benefit)

    565       (3,216

)

    875       (3,178

)

Net income

    779       4,401       1,181       5,843  
                                 

Other Comprehensive Income:

                               

Net change in unrealized gains (losses) on AFS investments, net of tax

    63       (1,767

)

    175       (1,930

)

Comprehensive Income

  $ 842     $ 2,634     $ 1,356     $ 3,913  
                                 

Basic earnings per share

  $ 0.08     $ 0.51     $ 0.13     $ 0.68  

Diluted earnings per share

  $ 0.08     $ 0.49     $ 0.12     $ 0.65  

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

 

1st Century Bancshares, Inc.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

(in thousands, except share data)

  

    Common Stock                     Accumulated Other     Treasury Stock     Total  
    Issued             Additional     Accumulated     Comprehensive     Number of             Stockholders’  
    Shares     Amount     Paid-in Capital     Deficit     Income     Shares     Amount     Equity  

Balance at December 31, 2012

    10,965,560     $ 110     $ 65,038     $ (10,899

)

  $ 2,436       (1,828,432

)

  $ (7,512

)

  $ 49,173  

Restricted stock issued

    138,500       1       (1

)

                             

Forfeiture of restricted stock

    (4,750

)

          (11

)

                            (11

)

Compensation expense associated with restricted stock awards, net of estimated forfeitures

                404                               404  

Shares surrendered to pay taxes on stock based compensation

                                  (23,270


)

    (138 )     (138

)

Common stock repurchased

                                  (105

)

           

Net income

                      5,843                         5,843  

Other comprehensive loss

                            (1,930

)

                (1,930

)

Balance at June 30, 2013

    11,099,310     $ 111     $ 65,430     $ (5,056

)

  $ 506       (1,851,807

)

  $ (7,650

)

  $ 53,341  
                                                                 

Balance at December 31, 2013

    11,378,710     $ 114     $ 67,231     $ (4,036

)

  $ 52       (1,897,902

)

  $ (7,973

)

  $ 55,388  

Restricted stock issued

    228,000       2       (2

)

                             

Exercise of stock options

    502,600       5       2,508                               2,513  

Compensation expense associated with restricted stock awards, net of estimated forfeitures

                421                               421  

Shares surrendered to pay taxes on stock based compensation

                                  (69,360

)

    (518

)

    (518

)

Net income

                      1,181                         1,181  

Other comprehensive income

                            175                   175  

Balance at June 30, 2014

    12,109,310     $ 121     $ 70,158     $ (2,855

)

  $ 227       (1,967,262

)

  $ (8,491

)

  $ 59,160  

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

 

1st Century Bancshares, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

   

Six Months Ended June 30,

 
   

2014

   

2013

 

Cash flows from operating activities:

               

Net income

  $ 1,181     $ 5,843  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization of premises and equipment

    244       253  

Amortization of premiums on investment securities, net

    447       980  

Provision for (reduction of) loan losses

    100       (500

)

Deferred income tax expense (benefit)

    290       (3,249

)

Amortization of deferred loan cost, net of fees

    4       1  

Gain on sale of AFS investment securities

    (786

)

    (535

)

Gain on sale of OREO

    (47

)

     

Non-cash stock compensation, net of forfeitures

    421       393  

(Increase) decrease in accrued interest and other assets

    (259

)

    88  

Decrease in accrued interest and other liabilities

    (10

)

    (512

)

Net cash provided by operating activities

    1,585       2,762  

Cash flows from investing activities:

               

Activities in AFS investment securities:

               

Purchases

    (24,865

)

     

Maturities and principal reductions

    9,515       22,983  

Proceeds from sale of securities

    44,199       10,840  

Increase in loans, net

    (29,138

)

    (44,574

)

Proceeds from sale of OREO

    137        

Purchase of premises and equipment

    (189

)

    (83

)

Purchase of FRB stock and FHLB stock

    (135

)

    (724

)

Net cash used in investing activities

    (476

)

    (11,558

)

Cash flows from financing activities:

               

Net increase (decrease) in deposits

    15,006       (9,820

)

Net repayment of short-term borrowings

          (4,475

)

Repayment of other long-term borrowings

    (2,500

)

    (2,500

)

Proceeds from exercise of stock options

    2,513       5,000  

Shares surrendered to pay taxes on vesting of stock based compensation

    (518

)

    (138

)

Net cash provided by (used in) financing activities

    14,501       (11,933

)

Increase (decrease) in cash and cash equivalents

    15,610       (20,729

)

Cash and cash equivalents, beginning of period

    44,688       50,555  

Cash and cash equivalents, end of period

  $ 60,298     $ 29,826  
                 

Supplemental cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 383     $ 528  

Income taxes

  $ 405     $ 79  

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

 

1st Century Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

(1)

Summary of Significant Accounting Policies

 

Nature of Operations

 

1st Century Bancshares, Inc., a Delaware corporation (“Bancshares”) is a bank holding company with one subsidiary, 1st Century Bank, National Association (the “Bank”). The Bank commenced operations on March 1, 2004 in the State of California operating under the laws of a National Association (“N.A.”) regulated by the Office of the Comptroller of the Currency (the “OCC”). The Bank is a commercial bank that focuses on closely held and family owned businesses and their employees, professional service firms, real estate professionals and investors, the legal, accounting and medical professions, and small and medium-sized businesses and individuals principally in Los Angeles County. The Bank provides a wide range of banking services to meet the financial needs of the local residential community, with an orientation primarily directed toward owners and employees of the Bank’s business client base. The Bank is subject to both the regulations of and periodic examinations by the OCC, which is the Bank’s federal regulatory agency. Bancshares and the Bank are collectively referred to herein as “the Company.”

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim period presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2013, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC, under the Securities and Exchange Act of 1934, (the “Exchange Act”). The unaudited consolidated financial statements include the accounts of Bancshares and the Bank. All intercompany accounts and transactions have been eliminated.

 

The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2014.

 

The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry. A summary of the significant accounting and reporting policies consistently applied in the preparation of the accompanying unaudited consolidated financial statements follows:

 

Use of Estimates

 

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant assumptions and estimates used by management in preparation of the consolidated financial statements include assumptions and assessments made in connection with calculating the allowance for loan losses and determining the realizability of the Company’s deferred tax assets.  It is at least reasonably possible that certain assumptions and estimates could prove to be incorrect and cause actual results to differ materially and adversely from the amounts reported in the consolidated financial statements included herewith.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash and due from banks, interest earning deposits at other financial institutions with original maturities less than 90 days and all highly liquid investments with original maturities of less than 90 days.

 

Cash Flows

 

Cash and cash equivalents include cash, deposits with other financial institutions with maturities fewer than 90 days, and federal funds sold. Net cash flows are reported for loan and deposit transactions, interest bearing deposits in other financial institutions and short-term borrowings.

 

 

Investment Securities

 

Investment securities are classified in three categories. Debt securities that management has a positive intent and ability to hold to maturity are classified as “Held to Maturity” or “HTM” and are recorded at amortized cost. Debt and equity securities bought and held principally for the purpose of selling in the near term are classified as “Trading” securities and are measured at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as “Held to Maturity” or “Trading” with readily determinable fair values are classified as “Available for Sale” or “AFS” and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The Company uses estimates from third parties in arriving at fair value determinations which are derived in accordance with fair value measurement standards.

 

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of investment securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income provided that management does not have the intent to sell the securities and it is more likely than not that management will not have to sell the security before recovery of its cost basis. In estimating other-than-temporary impairment losses, management considers (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, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

 

Federal Reserve Bank Stock and Federal Home Loan Bank Stock

 

The Bank is a member of the Federal Reserve System (“Fed” or “FRB”). FRB stock is carried at cost and is considered a nonmarketable equity security. Cash dividends from the FRB are reported as interest income on an accrual basis.

 

The Bank is a member and stockholder of the capital stock of the Federal Home Loan Bank of San Francisco (“FHLB of San Francisco” or “FHLB”). Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB of San Francisco stock is carried at cost and is considered a nonmarketable equity security. Both cash and stock dividends are reported as interest income.

 

Loans

 

Loans, net, are stated at the unpaid principal balances less the allowance for loan losses and unamortized deferred fees and costs. Loan origination fees, net of related direct costs, are deferred and accreted to interest income as an adjustment to yield over the respective maturities of the loans using the effective interest method.

 

Interest on loans is accrued as earned on a daily basis, except where reasonable doubt exists as to the collection of interest and principal, in which case the accrual of interest is discontinued and the loan is placed on non-accrual status. Loans are placed on non-accrual at the time principal or interest is 90 days delinquent unless well secured and in the process of collection. Interest on non-accrual loans is accounted for on a cash-basis or cost-recovery method, until qualifying for return to accrual status. In order for a loan to return to accrual status, all principal and interest amounts owed must be brought current and future payments must be reasonably assured.

 

A loan is charged-off at any time the loan is determined to be uncollectible. Collateral dependent loans, which generally include commercial real estate loans, residential loans, and construction and land loans, are typically charged down to their net realizable value when a loan is impaired or on non-accrual status. All other loans are typically charged-off when, based upon current available facts and circumstances, it’s determined that either: (1) a loan is uncollectible, (2) repayment is determined to be protracted beyond a reasonable time frame, or (3) the loan is classified as a loss determined by either the Bank’s internal review process or by external examiners.

 

Loans are considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect all principal and interest amounts due according to the original contractual terms of the loan agreement on a timely basis. The Company evaluates impairment on a loan-by-loan basis. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or by using the loan’s most recent market value or the fair value of the collateral if the loan is collateral dependent. Loans that experience insignificant payment delays or payment shortfalls are generally not considered to be impaired.

 

When the measurement of an impaired loan is less than the recorded amount of the loan, a valuation allowance is established by recording a charge to the provision for loan losses. Subsequent increases or decreases in the valuation allowance for impaired loans are recorded by adjusting the existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses. The Company’s policy for recognizing interest income on impaired loans is the same as that for non-accrual loans.

 

 

Troubled Debt Restructurings

 

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a troubled debt restructuring (“TDR”). Management strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before their loan reaches nonaccrual status. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

 

Allowance for Loan Losses

 

The allowance for loan losses is established through a provision for loan losses charged to operations and represents an estimate of credit losses inherent in the Company’s loan portfolio that have been incurred as of the balance sheet date. Loan losses are charged against the allowance when management believes that principal is uncollectible. Subsequent repayments or recoveries, if any, are credited to the allowance. Management periodically assesses the adequacy of the allowance for loan losses by reference to many quantitative and qualitative factors that may be weighted differently at various times depending on prevailing conditions. The provisions reflect management’s evaluation of the adequacy of the allowance based, in part, upon the historical loss experience of the loan portfolio, as well as estimates from historical peer group loan loss data and the loss experience of other financial institutions, augmented by management judgment. During this process, loans are separated into the following portfolio segments: commercial loans, commercial real estate, residential, land and construction, and consumer and other loans. The relative significance of risk considerations vary by portfolio segment. For commercial loans, commercial real estate loans and land and construction, the primary risk consideration is a borrower’s ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for commercial real estate and land and construction loans. The primary risk consideration for residential loans and consumer loans are a borrower’s personal cash flow and liquidity, as well as collateral value.

 

Loss ratios for all portfolio segments are evaluated on a quarterly basis. Loss ratios associated with historical loss experience are determined based on a rolling migration analysis of each portfolio segment within the portfolio. This migration analysis estimates loss factors based on the performance of each portfolio segment over a four and a half year time period. These loss ratios are then adjusted, if determined necessary, based on other factors including, but not limited to, historical peer group loan loss data and the loss experience of other financial institutions. Management carefully monitors changing economic conditions, the concentrations of loan categories, values of collateral, the financial condition of the borrowers, the history of the loan portfolio, and historical peer group loan loss data to determine the adequacy of the allowance for loan losses. As a part of this process, management typically focuses on loan-to-value (“LTV”) percentages to assess the adequacy of loss ratios of collateral dependent loans within each portfolio segment discussed above, trends within each portfolio segment, as well as general economic and real estate market conditions where the collateral and borrower are located. For loans that are not collateral dependent, which generally consist of commercial and consumer and other loans, management typically focuses on general business conditions where the borrower operates, trends within the portfolio, and other external factors to evaluate the severity of loss factors. The allowance is based on estimates and actual losses may vary from the estimates.

 

In addition, regulatory agencies, as a part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations. No assurance can be given that adverse future economic conditions will not lead to increased delinquent loans, and increases in the provision for loan losses and/or charge-offs.

 

Other Real Estate Owned

 

OREO represents real estate acquired through or in lieu of foreclosure. OREO is held for sale and is initially recorded at fair value less estimated costs of disposition 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 cost or estimated fair value less costs of disposition. OREO is included in accrued interest and other assets within the Consolidated Balance Sheets and the net operating results, if any, from OREO are recognized as non-interest expense within the unaudited Consolidated Statements of Operations and Comprehensive Income.

 

Furniture, Fixtures and Equipment, net

 

Leasehold improvements and furniture, fixtures and equipment are carried at cost, less depreciation and amortization. Furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful life of the asset (three to ten years). Leasehold improvements are depreciated using the straight-line method over the terms of the related leases or the estimated lives of the improvements, whichever is shorter.

 

 

Advertising Costs

 

Advertising costs are expensed as incurred.

 

Income Taxes

 

The Company files consolidated federal and combined state income tax returns. Income tax expense or benefit is the total of the current year income tax payable or refundable and the change in the deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates.

 

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in the rates and laws. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Company records a valuation allowance if it believes, based on all available evidence, that it is “more likely than not” that the future tax assets will not be realized. This assessment requires management to evaluate the Company’s ability to generate sufficient future taxable income or use eligible tax carrybacks, if any, to determine the need for a valuation allowance.

 

During the year ended December 31, 2009, the Company established a full valuation allowance against the deferred tax assets due to the uncertainty regarding its realizability. During the year ended December 31, 2013, management reassessed the need for this valuation allowance and concluded that a valuation allowance was no longer appropriate and that it is more likely than not that these assets will be realized. As a result, management reversed the valuation allowance as an income tax benefit in the unaudited Consolidated Statements of Operations and Comprehensive Income. This reversal occurred during the quarter ended June 30, 2013. In making this determination, management analyzed, among other things, our recent history of earnings and cash flows, forecasts of future earnings, improvements in the credit quality of the Company’s loan portfolio, the nature and timing of future deductions and benefits represented by the deferred tax assets and our cumulative earnings for the 12 quarters preceding the reversal of this valuation allowance.

 

At June 30, 2014 and December 31, 2013, we had a net deferred tax asset of approximately $2.7 million and $3.1 million, respectively. Our net deferred tax asset primarily consists of deferred tax assets related to federal and state net operating loss carryforwards and the allowance for loan losses.

 

At June 30, 2014 and December 31, 2013, the Company did not have any tax benefits disallowed under accounting standards for uncertainties in income taxes. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. If applicable, the Company has elected to record interest accrued and penalties related to unrecognized tax benefits in tax expense.

 

Comprehensive Income

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on Available for Sale securities, are reported as a separate component of the stockholders’ equity section of the Consolidated Balance Sheets and, along with net income, are components of comprehensive income.

 

Earnings per Share

 

The Company reports both basic and diluted earnings per share. Basic earnings per share is determined by dividing net income by the average number of shares of common stock outstanding, while diluted earnings per share is determined by dividing net income by the average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents. Potential dilutive common shares related to outstanding stock options and restricted stock are determined using the treasury stock method. For both the three and six months ended June 30, 2014, there were 350,073 of weighted average stock options that were excluded from the diluted earnings per share calculation due to their antidilutive impact. For the three and six months ended June 30, 2013, there were 370,073 weighted average stock options that were excluded from the diluted earnings per share calculation due to their antidilutive impact. For the quarter and six months ended June 30, 2014, there were none and 97,860, respectively, of weighted average restricted shares that were excluded from the diluted earnings per share calculation due to their antidilutive impact. For the three and six months ended June 30, 2013, there were 94,363 and 47,442, respectively, of weighted average restricted shares that were excluded from the diluted earnings per share calculation due to their antidilutive impact.

 

 

   

Three Months Ended June 30,

   

Six months Ended June 30,

 

(dollars in thousands)

 

2014

   

2013

   

2014

   

2013

 

Net income

  $ 779     $ 4,401     $ 1,181     $ 5,843  

Average number of common shares outstanding

    9,448,548       8,619,056       9,370,900       8,596,282  

Effect of dilution of stock options

    3,351       114,211       27,653       70,835  

Effect of dilution of restricted stock

    277,605       269,076       274,513       278,873  

Average number of common shares outstanding used to calculate diluted earnings per common share

    9,729,504       9,002,343       9,673,066       8,945,990  

 

Fair Value of Financial Instruments

 

The Company is required to make certain disclosures about its use of fair value measurements in the preparation of its financial statements. These standards establish a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect management’s estimates about market data.

 

Level 1

 

Valuation is based upon quoted prices for identical instruments traded in active markets.  Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange, as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.

     

Level 2

 

Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.  Level 2 instruments include securities traded in less active dealer or broker markets.

 

Level 3

 

Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

Stock-Based Compensation

 

The Company has granted restricted stock awards to directors, employees, and a vendor under the Company’s 2005 Amended and Restated Equity Incentive Plan (the “Equity Incentive Plan”) and the 2013 Equity Incentive Plan. The restricted stock awards are considered fixed awards as the number of shares and fair value is known at the date of grant and the fair value at the grant date is amortized over the vesting and/or service period.

 

Recent Accounting Pronouncements

 

In January 2014, the Financial Accounting Standard Board (FASB) issued Accounting Standard Update (ASU) No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (ASU 2014-04). The amendments of ASU are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. This ASU is effective for annual periods beginning after December 15, 2014 and interim periods beginning after December 15, 2015. The Company is currently evaluating the effect of ASU 2014-04 on its financial statements and disclosures, if any.

 

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) – Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08). The amendments in ASU 2014-08 change the criteria for reporting discontinued operations and improve related disclosures. This ASU also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance. ASU 2014-08 will be effective for annual financial statements with fiscal years beginning on or after December 31, 2014 and interim periods thereafter. The Company is currently evaluating the effects ASU 2014-08 will have on its financial statements and disclosures, if any.

 

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). This update to the ASC is the culmination of efforts by the FASB and the International Accounting Standards Board (IASB) to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 supersedes Topic 605 – Revenue Recognition and most industry-specific guidance. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 describes a 5-step process entities can apply to achieve the core principle of revenue recognition and requires disclosures sufficient to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and the significant judgments used in determining that information. The amendments in ASU 2014-9 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and early application is not allowed. The Company is currently evaluating the effects of ASU 2014-04 on its financial statements and disclosures, if any.

 

(2)

Investments

 

The following is a summary of the investments categorized as Available for Sale at June 30, 2014 and December 31, 2013:

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 

At June 30, 2014:

                               

Investments — Available for Sale

                               

U.S. Government Agencies

  $ 5,959     $ 5     $ (3

)

  $ 5,961  

Corporate Notes

    2,551       24             2,575  

Residential Mortgage-Backed Securities

    69,164       659       (299

)

    69,524  

Total

  $ 77,674     $ 688     $ (302

)

  $ 78,060  

At December 31, 2013:

                               

Investments — Available for Sale

                               

Corporate Notes

  $ 3,074     $ 34     $     $ 3,108  

Residential Mortgage-Backed Securities

    103,109       959       (904

)

    103,164  

Total

  $ 106,183     $ 993     $ (904

)

  $ 106,272  

 

The Company did not have any investment securities categorized as “Held to Maturity” or “Trading” at June 30, 2014 or December 31, 2013. At June 30, 2014 and December 31, 2013, there were no holdings of securities of any one issuer other than the U.S. government or its agencies, in an amount greater than 10% of shareholders’ equity.

 

Additionally, at June 30, 2014 and December 31, 2013, the fair value of securities pledged to the State of California Treasurer’s Office to secure their deposits was $47.9 million and $45.4 million, respectively. Deposits from the State of California were $38.0 million at both June 30, 2014 and December 31, 2013.

 

The following table summarizes the fair value of AFS securities and the weighted average yield of investment securities by contractual maturity at June 30, 2014. Residential mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. The weighted average life of these securities was 4.42 years at June 30, 2014.

 

(dollars in thousands)

Available for Sale

 

1 Year or

Less

   

Weighted Average

Yield

   

After 1 Through 5 Years

   

Weighted Average

Yield

   

After 5 Through 10 Years

   

Weighted Average

Yield

   

After 10

Years

   

Weighted Average

Yield

   

Total

   

Weighted Average Yield

 

U.S. Government Agencies

  $      

%

  $      

%

  $ 5,961       2.13

%

  $      

%

  $ 5,961       2.13

%

Corporate Notes

    510       1.53       2,065       1.31                               2,575       1.35  

Residential Mortgage-Backed Securities

                            33,706       1.74       35,818       2.34       69,524       2.05  

Total

  $ 510       1.53

%

  $ 2,065       1.31

%

  $ 39,667       1.80

%

  $ 35,818       2.34

%

  $ 78,060       2.03

%

 

A total of 26 and 36 securities had unrealized losses at June 30, 2014 and December 31, 2013, respectively. Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

 

    Less than Twelve Months     Twelve Months or More  
(in thousands)  

Gross

Unrealized

Losses

    Fair Value    

Gross

Unrealized

Losses

    Fair Value  
At June 30, 2014:                                
Investments-Available for Sale                                

U.S. Government Agencies

  $ (3

)

  $ 1,928     $     $  

Residential Mortgage-Backed Securities

    (34

)

    11,013       (265

)

    23,189  

Total

  $ (37

)

  $ 12,941     $ (265

)

  $ 23,189  
At December 31, 2013:                                
Investments-Available for Sale                                
Residential Mortgage-Backed Securities   $ (904 )   $ 51,847     $     $  

 

The Company’s assessment that it has the ability to continue to hold impaired investment securities along with its evaluation of their future performance provide the basis for it to conclude that its impaired securities are not other-than-temporarily impaired. In assessing whether it is more likely than not that the Company will be required to sell any impaired security before its anticipated recovery, which may be at their maturity, it considers the significance of each investment, the amount of impairment, as well as the Company’s liquidity position and the impact on the Company’s capital position. As a result of its analyses, the Company determined at June 30, 2014 and December 31, 2013 that the unrealized losses on its securities portfolio on which impairments had not been recognized are temporary.

 

During the three and six months ended June 30, 2014, the Company sold available for sale investment securities with an amortized cost of $28.6 million and $43.4 million, respectively. These securities consisted entirely of residential mortgage-backed securities and resulted in realized gains of $533,000 and $786,000, respectively, which were recorded in non-interest income within the unaudited Consolidated Statement of Operations and Comprehensive Income. During the three and six months ended June 30, 2013 the Company sold a total of $10.8 million of available for sale securities resulting in a realized gain of $535,000.

 

(3)

Loans, Allowance for Loan Losses, and Non-Performing Assets

 

Loans

 

The categories of loans listed below are grouped in accordance with the primary purpose of the loans, but in the aggregate 87.7% and 86.9% of all loans are secured by real estate at June 30, 2014 and December 31, 2013, respectively.

 

 

 

   

June 30, 2014

   

December 31, 2013

 
   

Amount

   

Percent

   

Amount

   

Percent

 

(dollars in thousands)

 

Outstanding

   

of Total

   

Outstanding

   

of Total

 

Commercial (1)

  $ 78,455       19.0

%

  $ 76,397       19.9

%

Commercial real estate

    178,576       43.3

%

    167,419       43.7

%

Residential

    102,149       24.8

%

    82,795       21.6

%

Land and construction

    29,423       7.1

%

    30,102       7.8

%

Consumer and other (2)

    23,989       5.8

%

    26,787       7.0

%

Loans, gross

    412,592       100.0

%

    383,500       100.0

%

Net deferred costs

    121               48          

Less — allowance for loan losses

    (7,367

)

            (7,236

)

       

Loans, net

  $ 405,346             $ 376,312          
       
 

(1)

Unsecured commercial loan balances were $11.9 million and $13.2 million at June 30, 2014 and December 31, 2013, respectively.

  (2) Unsecured consumer and other loan balances were $2.2 million and $2.3 million at June 30, 2014 and December 31, 2013, respectively.

 

As of June 30, 2014 and December 31, 2013, substantially all of the Company’s loan customers were located in Southern California.

 

 

Allowance for Loan Losses and Recorded Investment in Loans

 

The following is a summary of activities for the allowance for loan losses and recorded investment in loans as of and for the three and six months ended June 30, 2014 and 2013:

 

(in thousands)

 

Commercial

   

Commercial

Real Estate

   

Residential

   

Land and

Construction

   

Consumer

and Other

   

Total

 

Three Months Ended June 30, 2014:

                                         

Allowance for loan losses:

                                         

Beginning balance

  $ 1,579     $ 3,660     $ 778     $ 811     $ 424     $ 7,252  

Provision for loan losses

    10       140       110       (120

)

    (40

)

    100  

Charge-offs

                                   

Recoveries

    15                               15  

Ending balance

  $ 1,604     $ 3,800     $ 888     $ 691     $ 384     $ 7,367  

Six Months Ended June 30, 2014:

                                         

Allowance for loan losses:

                                         

Beginning balance

  $ 1,583     $ 3,660     $ 758     $ 811     $ 424     $ 7,236  

Provision for loan losses

    (10

)

    140       130       (120

)

    (40

)

    100  

Charge-offs

                                   

Recoveries

    31                               31  

Ending balance

  $ 1,604     $ 3,800     $ 888     $ 691     $ 384     $ 7,367  

As of June 30, 2014:

                                         

Ending balance: individually evaluated for impairment

  $ 35     $     $     $     $     $ 35  

Ending balance: collectively evaluated for impairment

    1,569       3,800       888       691       384       7,332  

Total

  $ 1,604     $ 3,800     $ 888     $ 691     $ 384     $ 7,367  

Loans:

                                         

Ending balance: individually evaluated for impairment

  $ 899     $     $     $     $ 29     $ 928  

Ending balance: collectively evaluated for impairment

    77,556       178,576       102,149       29,423       23,960       411,664  

Total

  $ 78,455     $ 178,576     $ 102,149     $ 29,423     $ 23,989     $ 412,592  

Three Months Ended June 30, 2013:

                                         

Allowance for loan losses:

                                         

Beginning balance

  $ 1,631     $ 3,200     $ 698     $ 741     $ 349     $ 6,619  

Provision for loan losses

    (100

)

    (25

)

    50       25       50        

Charge-offs

                                   

Recoveries

    1                               1  

Ending balance

  $ 1,532     $ 3,175     $ 748     $ 766     $ 399     $ 6,620  

Six Months Ended June 30, 2013:

                                         

Allowance for loan losses:

                                         

Beginning balance

  $ 2,277     $ 2,450     $ 508     $ 411     $ 369     $ 6,015  

Provision for (reduction of) loan losses

    (1,800

)

    725       240       355       (20

)

    (500

)

Charge-offs

                                   

Recoveries

    1,055                         50       1,105  

Ending balance

  $ 1,532     $ 3,175     $ 748     $ 766     $ 399     $ 6,620  

As of June 30, 2013:

                                         

Ending balance: individually evaluated for impairment

  $ 50     $     $     $     $     $ 50  

Ending balance: collectively evaluated for impairment

    1,482       3,175       748       766       399       6,570  

Total

  $ 1,532     $ 3,175     $ 748     $ 766     $ 399     $ 6,620  

Loans:

                                         

Ending balance: individually evaluated for impairment

  $ 1,023     $     $     $     $ 345     $ 1,368  

Ending balance: collectively evaluated for impairment

    62,614       126,309       70,006       30,343       21,657       310,929  

Total

  $ 63,637     $ 126,309     $ 70,006     $ 30,343     $ 22,002     $ 312,297  

 

 

The following is a summary of the allowance for loan losses and recorded investment in loans as of December 31, 2013

 

(in thousands)

 

Commercial

   

Commercial

Real Estate

   

Residential

   

Land and Construction

   

Consumer

and Other

   

Total

 

Allowance for loan losses:

                                         

Ending balance: individually evaluated for impairment

  $ 35     $     $     $     $     $ 35  

Ending balance: collectively evaluated for impairment

    1,548       3,660       758       811       424       7,201  

Total

  $ 1,583     $ 3,660     $ 758     $ 811     $ 424     $ 7,236  

Loans:

                                         

Ending balance: individually evaluated for impairment

  $ 924     $     $     $     $ 29     $ 953  

Ending balance: collectively evaluated for impairment

    75,473       167,419       82,795       30,102       26,758       382,547  

Total

  $ 76,397     $ 167,419     $ 82,795     $ 30,102     $ 26,787     $ 383,500  

 

In addition to the allowance for loan losses, the Company also estimates probable losses related to unfunded lending commitments. Unfunded lending commitments are subject to individual reviews and are analyzed and segregated by product type. These classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments. Provision for credit losses related to unfunded lending commitments is reported in other operating expenses in the unaudited Consolidated Statements of Operations and Comprehensive Income. The allowance held for unfunded lending commitments is reported in accrued interest and other liabilities within the accompanying Consolidated Balance Sheets, and not as part of the allowance for loan losses in the above tables. As of June 30, 2014 and December 31, 2013, the allowance for unfunded lending commitments was $270,000, and is primarily related to $125.6 million and $104.3 million in commitments to extend credit to customers and $2.4 million and $2.6 million in standby/commercial letters of credit at June 30, 2014 and December 31, 2013, respectively.

 

Non-Performing Assets

 

The following table presents an aging analysis of the recorded investment of past due loans as of June 30, 2014 and December 31, 2013. Payment activity is reviewed by management on a monthly basis to determine the performance of each loan. Loans are considered to be non-performing when a loan is greater than 90 days delinquent. Loans that are 90 days or more past due may still accrue interest if they are well-secured and in the process of collection. There were no additions to non-performing loans during the six months ended June 30, 2014 and 2013. Non-performing loans represented 0.18% and 0.19% of total loans at June 30, 2014 and December 31, 2013, respectively. There were no accruing loans past due 90 days or more at June 30, 2014 and December 31, 2013.

 

(in thousands)

 

30-59

Days Past

Due

   

60-89

Days Past

Due

   

> 90 Days

Past Due

   

Total

Past Due

   

Current

   

Total

 

As of June 30, 2014:

                                                 

Commercial

  $     $     $ 572     $ 572     $ 77,883     $ 78,455  

Commercial real estate

                            178,576       178,576  

Residential

                            102,149       102,149  

Land and construction

                            29,423       29,423  

Consumer and other

                29       29       23,960       23,989  

Totals

  $     $     $ 601     $ 601     $ 411,991     $ 412,592  

As of December 31, 2013:

                                               

Commercial

  $ 187     $     $ 706     $ 893     $ 75,504     $ 76,397  

Commercial real estate

                            167,419       167,419  

Residential

                            82,795       82,795  

Land and construction

                            30,102       30,102  

Consumer and other

                29       29       26,758       26,787  

Totals

  $ 187     $     $ 735     $ 922     $ 382,578     $ 383,500  

 

 

The following table sets forth non-accrual loans and other real estate owned at June 30, 2014 and December 31, 2013:

 

(dollars in thousands)

 

June 30, 2014

   

December 31, 2013

 

Non-accrual loans:

               

Commercial

  $ 702     $ 706  

Consumer and other

    29       29  

Total non-accrual loans

    731       735  

OREO

          90  

Total non-performing assets

  $ 731     $ 825  
                 

Non-performing assets to gross loans and OREO

    0.18

%

    0.22

%

Non-performing assets to total assets

    0.13

%

    0.15

%

 

Credit Quality Indicators

 

The following table represents the credit exposure by internally assigned grades at June 30, 2014 and December 31, 2013. This grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements in accordance with the loan terms. The Company’s internal credit risk grading system is based on management’s experiences with similarly graded loans. Credit risk grades are reassessed each quarter based on any recent developments potentially impacting the creditworthiness of the borrower, as well as other external statistics and factors, which may affect the risk characteristics of the respective loan.

 

The Company’s internally assigned grades are as follows:

 

Pass – Strong credit with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention – Potential weaknesses that deserve management’s close attention. Borrower and guarantor’s capacity to meet all financial obligations is marginally adequate or deteriorating.

Substandard – Inadequately protected by the paying capacity of the Borrower and/or collateral pledged. The borrower or guarantor is unwilling or unable to meet loan terms or loan covenants for the foreseeable future.

Doubtful – All the weakness inherent in one classified as Substandard with the added characteristic that those weaknesses in place make the collection or liquidation in full, on the basis of current conditions, highly questionable and improbable.

Loss – Considered uncollectible or no longer a bankable asset. This classification does not mean that the asset has absolutely no recoverable value. In fact, a certain salvage value is inherent in these loans. Nevertheless, it is not practical or desirable to defer writing off a portion or whole of a perceived asset even though partial recovery may be collected in the future.

(in thousands)

   

Commercial

   

Commercial

Real Estate

   

Residential

   

Land and Construction

   

Consumer

and Other

 

As of June 30, 2014:

                                       

Grade:

                                         

Pass

  $ 76,782     $ 178,006     $ 102,149     $ 29,423     $ 23,911  

Special Mention

    152                          

Substandard

    1,521       570                   78  

Total

  $ 78,455     $ 178,576     $ 102,149     $ 29,423     $ 23,989  

As of December 31, 2013:

                                 

Grade:

                                         

Pass

  $ 73,824     $ 166,828     $ 82,795     $ 26,801     $ 26,503  

Special Mention

    1,149                   3,301       206  

Substandard

    1,424       591                   78  

Total

  $ 76,397     $ 167,419     $ 82,795     $ 30,102     $ 26,787  

 

There were no loans assigned to the Doubtful or Loss grade as of June 30, 2014 and December 31, 2013.

 

Impaired Loans

 

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Management determined the specific allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded. Also presented in the table below are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on non-accrual status, contractual interest is credited to interest income when received, under the cash basis method. The average balances are calculated based on the month-end balances of the loans of the period reported.

 

 

(in thousands)

   

Recorded

Investment

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Recorded

Investment

 

As of and for the six months ended June 30, 2014:

                               

With no related allowance recorded:

                                 

Commercial

  $ 769     $ 1,045     $     $ 783  

Commercial real estate

                       

Residential

                       

Land and construction

                       

Consumer and other

    29       29             29  

With an allowance recorded:

                                 

Commercial

  $ 130     $ 142     $ 35     $ 134  

Commercial real estate

                       

Residential

                       

Land and construction

                       

Consumer and other

                       

Totals:

                                 

Commercial

  $ 899     $ 1,187     $ 35     $ 917  

Commercial real estate

  $     $     $     $  

Residential

  $     $     $     $  

Land and construction

  $     $     $     $  

Consumer and other

  $ 29     $ 29     $     $ 29  

As of and for the year ended December 31, 2013:

                                 

With no related allowance recorded:

                                 

Commercial

  $ 789     $ 1,065     $     $ 841  

Commercial real estate

                       

Residential

                       

Land and construction

                       

Consumer and other

    29       29             240  

With an allowance recorded:

                                 

Commercial

  $ 135     $ 142     $ 35     $ 155  

Commercial real estate

                       

Residential

                       

Land and construction

                       

Consumer and other

                       

Totals:

                                 

Commercial

  $ 924     $ 1,207     $ 35     $ 996  

Commercial real estate

  $     $     $     $  

Residential

  $     $     $     $  

Land and construction

  $     $     $     $  

Consumer and other

  $ 29     $ 29     $     $ 240  

 

During the three and six months ended June 30, 2014, the average balance of impaired loans was $939,000 and $946,000, respectively. As of June 30, 2014 and December 31, 2013, there were $731,000 and $735,000, respectively, of impaired loans on non-accrual status. During the three and six months ended June 30, 2014, interest income recognized on impaired loans subsequent to their classification as impaired was $3,000 and $5,000, respectively. The Company stops accruing interest on these loans on the date they are classified as non-accrual and reverses any uncollected interest that had been previously accrued as income. The Company may begin recognizing interest income on these loans as cash interest payments are received, if collection of principal is reasonably assured.

 

 

Troubled Debt Restructurings

 

There were no troubled debt restructurings during the three and six months ended June 30, 2014. The impact on the Company’s determination of the allowance for loan losses related to troubled debt restructurings was not material and resulted in no charge-offs during the three and six months ended June 30, 2014. During the three and six months ended June 30, 2014, there were no defaults recorded on any loans that were modified as troubled debt restructurings during the preceding twelve months. During the three months ended June 30, 2013, there were no defaults recorded on any loans that were modified as troubled debt restructurings. During the six months ended June 30, 2013, there was one commercial loan with a recorded investment of $572,000 at June 30, 2013, that defaulted within twelve months of its modification date. A troubled debt restructuring is considered to be in default once it becomes 60 days or more past due following a modification.

 

(4)

Derivative Financial Instruments

 

The fair value of derivative positions outstanding is included in accrued interest receivable and other assets and accrued interest payable and other liabilities in the accompanying Consolidated Balance Sheets and in the net change in each of these financial statement line items in the accompanying unaudited Consolidated Statements of Cash Flows.

 

Interest Rate Derivatives. The Company utilizes interest rate swaps to facilitate the needs of its customers. The Company has entered into interest rate swaps that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.

 

The notional amounts and estimated fair values of interest rate derivative contracts outstanding at June 30, 2014 and December 31, 2013 are presented in the following table. The Company obtains dealer quotations to value its interest rate derivative contracts.

 

   

June 30, 2014

   

December 31, 2013

 

(in thousands)

 

Notional

Amount

   

Estimated

Fair Value

   

Notional

Amount

   

Estimated

Fair Value

 

Non-hedging interest rate derivatives:

                               

Commercial loan interest rate swaps

  $ 2,676     $ (21

)

  $ 2,706     $ 15  

Commercial loan interest rate swaps

  $ (2,676

)

  $ 21     $ (2,706

)

  $ (15

)

 

The weighted-average rates paid and received for interest rate swaps outstanding at June 30, 2014 and December 31, 2013 were as follow:

 

   

June 30, 2014

Weighted-Average

   

December 31, 2013

Weighted-Average

 
   

Interest Rate

Paid

   

Interest

Rate

Received

   

Interest Rate

Paid

   

Interest

Rate

Received

 

Non-hedging interest rate swaps

    3.35

%

    4.85

%

    3.37

%

    4.85

%

Non-hedging interest rate swaps

    4.85

%

    3.35

%

    4.85

%

    3.37

%

 

Gains, Losses and Derivative Cash Flows. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other non-interest income and other non-interest expense in the accompanying unaudited Consolidated Statements of Operations and Comprehensive Income.

 

As stated above, the Company enters into non-hedge related derivative positions primarily to accommodate the business needs of its customers. Upon the origination of a derivative contract with a customer, the Company simultaneously enters into an offsetting derivative contract with a third party. The Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third party. Because the Company acts only as an intermediary for its customer, subsequent changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.

 

 

(5)

Comprehensive Income

 

Comprehensive income, which includes net income and the net change in unrealized gains on investment securities available for sale, is presented below:

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 

(in thousands)

 

2014

   

2013

   

2014

    2013  

Net income

  $ 779     $ 4,401     $ 1,181     $ 5,843  

Other comprehensive income:

                               

Increase (decrease) in net unrealized gains on investment securities available for sale, net of tax (expense) benefit of ($263) and ($445) for the three and six months ended June 30, 2014, respectively, and $1,016 and $1,129 for the three and six months ended June 30, 2013, respectively

    377       (1,452

)

    638       (1,615

)

Reclassification for net gains included in earnings, net of tax expense of $219 and $323 for the three and six months ended June 30, 2014, respectively, and $220 for the three and six months ended June 30, 2013

    (314

)

    (315

)

    (463

)

    (315

)

Comprehensive income

  $ 842     $ 2,634     $ 1,356     $ 3,913  

 

Reclassification adjustments of $533,000 and $786,000 for the three and six months ended June 30, 2014, respectively, and $535,000 for both the three and six months ended June 30, 2013, are included in non-interest income within the unaudited Consolidated Statements of Operations and Comprehensive Income. Income tax expense associated with these reclassification adjustments for the three and six months ended June 30, 2014 was $219,000 and $323,000, respectively, and $220,000 for the three and six months ended June 30, 2013, and is included in income tax provision within the unaudited Consolidated Statements of Operations and Comprehensive Income.

 

Activity of investment securities available for sale included in accumulated other comprehensive income, net of tax, is as follows:

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 

(in thousands)

 

2014

   

2013

   

2014

   

2013

 

Beginning balance

  $ 164     $ 2,273     $ 52     $ 2,436  

Other comprehensive income (loss) before reclassifications

    377       (1,452

)

    638       (1,615

)

Amounts reclassified from accumulated other comprehensive income

    (314

)

    (315

)

    (463

)

    (315

)

Net other comprehensive income (loss)

    63       (1,767

)

    175       (1,930

)

Ending balance

  $ 227     $ 506     $ 227     $ 506  

 

 

(6)

 Premises and Equipment

 

Premises and equipment are stated at cost less accumulated depreciation and amortization. Premises and equipment at June 30, 2014 and December 31, 2013 are comprised of the following:

 

(in thousands)

 

June 30, 2014

   

December 31, 2013

 

Leasehold improvements

  $ 1,353     $ 1,316  

Furniture & equipment

    2,614       2,515  

Software

    743       767  

Total

    4,710       4,598  

Accumulated depreciation

    (3,480

)

    (3,313

)

Premises and equipment, net

  $ 1,230     $ 1,285  

 

Depreciation and amortization included in occupancy expense was $121,000 and $244,000 for the three and six months ended June 30, 2014, respectively, and $121,000 and $253,000 for the three and six months ended June 30, 2013, respectively.

 

 

(7)

Deposits

 

The following table reflects the summary of deposit categories by dollar and percentage at June 30, 2014 and December 31, 2013:

 

   

June 30, 2014

   

December 31, 2013

 

(dollars in thousands)

 

Amount

   

% of Total

   

Amount

   

% of Total

 

Non-interest bearing demand deposits

  $ 261,987       56.0

%

  $ 236,869       52.3

%

Interest bearing checking

    23,594       5.1

%

    21,005       4.6

%

Money market deposits and savings

    140,830       30.1

%

    151,879       33.6

%

Certificates of deposit

    41,361       8.8

%

    43,013       9.5

%

Total

  $ 467,772       100.0

%

  $ 452,766       100.0

%

 

At June 30, 2014, the Company had two certificates of deposit with the State of California Treasurer’s Office for a total of $38.0 million, which represented 8.1% of total deposits. The deposits outstanding at June 30, 2014 are scheduled to mature in the third quarter of 2014. The Company intends to renew each of these deposits at maturity. However, there can be no assurance that the State of California Treasurer’s Office will continue to maintain deposit accounts with the Company. At December 31, 2013, the Company had four certificates of deposit with the State of California Treasurer’s Office for a total of $38.0 million, which represented 8.4% of total deposits. The Company was required to pledge $41.8 million of agency mortgage-backed securities at both June 30, 2014 and December 31, 2013, in connection with these certificates of deposit.

 

The aggregate amount of certificates of deposit of $100,000 or greater at June 30, 2014 and December 31, 2013 was $40.6 million and $42.1 million, respectively. At June 30, 2014, the maturity distribution of certificates of deposit of $100,000 or greater, including deposit accounts with the State of California Treasurer’s Office and CDARS, was as follows: $40.4 million maturing in six months or less, $147,000 maturing in six months to one year and none maturing in more than one year.

 

The table below sets forth the range of interest rates, amount and remaining maturities of the certificates of deposit at June 30, 2014.

 

(in thousands)

 

Six months

and less

   

Greater than six months through

one year

   

Greater than

one year

 

0.00% to 0.99%

  $ 40,853     $ 370     $ 98  
1.00% to 1.99%                 40  

Total

  $ 40,853     $ 370     $ 138  

 

(8)

Other Borrowings

 

At June 30, 2014 and December 31, 2013, the Company had a borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB of $186.1 million and $169.9 million, respectively. The Company had $25.0 million and $27.5 million of long-term borrowings outstanding under this borrowing/credit facility with the FHLB at June 30, 2014 and December 31, 2013, respectively. The Company had no overnight borrowings outstanding under this borrowing/credit facility at June 30, 2014 and December 31, 2013.

      

The following table summarizes the outstanding long-term borrowings under the borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB at June 30, 2014 and December 31, 2013 (dollars in thousands):

      

Maturity Date

 

Interest Rate

   

June 30, 2014

   

December 31, 2013

 
May 23, 2014     1.14%             2,500  

December 29, 2014

    0.83%       5,000       5,000  

December 30, 2014

    0.74%       2,500       2,500  

May 26, 2015

    1.65%       2,500       2,500  

May 23, 2016

    2.07%       2,500       2,500  

December 29, 2016

    1.38%       5,000       5,000  

December 30, 2016

    1.25%       2,500       2,500  

May 2, 2018

    0.93%       5,000       5,000  
Total     $ 25,000     $ 27,500  

 

At June 30, 2014 and December 31, 2013, the Company also had $27.0 million in Federal fund lines of credit available with other correspondent banks that could be used to disburse loan commitments and to satisfy demands for deposit withdrawals. Each of these lines of credit is subject to conditions that the Company may not be able to meet at the time when additional liquidity is needed. As of June 30, 2014 and December 31, 2013, the Company had pledged $2.6 million and $3.1 million, respectively, of corporate notes related to these lines of credit.

 

 

(9)

Commitments and Contingencies

 

Commitments to Extend Credit

 

The Company is 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, standby/commercial letters of credit and guarantees on revolving credit card limits. These instruments involve various levels and elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated financial statements. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company had $125.6 million and $104.3 million in commitments to extend credit to customers and $2.4 million and $2.6 million in standby/commercial letters of credit at June 30, 2014 and December 31, 2013, respectively. The Company also guarantees the outstanding balance on credit cards offered at the Company, but underwritten by another financial institution. The outstanding balances on these credit cards were $62,000 and $73,000 as of June 30, 2014 and December 31, 2013, respectively.

 

Lease Commitments

 

The Company leases office premises under three operating leases that will expire in December 2018, May 2019 and June 2024, respectively. Rental expense, which is included in occupancy expense and is reduced for any sublease income earned during the period, was $220,000 and $417,000 for the three and six months ended June 30, 2014, respectively, and $190,000 and $358,000 for the three and six months ended June 30, 2013, respectively. On April 1, 2013, the Company ended its sublease agreement.

 

The projected minimum rental payments under the term of the leases at June 30, 2014 are as follows (in thousands):

 

Years ending December 31,

       

2014 (July – December)

  $ 470  

2015

    956  

2016

    985  

2017

    1,015  

2018

    1,047  

Thereafter

    4,433  

Total

  $ 8,906  

 

Litigation

 

The Company from time to time is party to lawsuits, which arise out of the normal course of business. At June 30, 2014 and December 31, 2013, the Company did not have any litigation that management believes will have a material impact on the Consolidated Balance Sheets or unaudited Consolidated Statements of Operations and Comprehensive Income.

 

Restricted Stock

 

The following table sets forth the Company’s future restricted stock expense, net of estimated forfeitures (in thousands).

 

Years ending December 31,

       

2014 (July-December)

  $ 458  

2015

    554  

2016

    359  

2017

    202  

2018

    129  

Thereafter

    227  

Total

  $ 1,929  

 

 

(10)

Fair Value Measurements

 

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2014 and December 31, 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

Assets and Liabilities Measured on a Recurring Basis

 

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

           

Fair Value Measurements Using

 

(in thousands)

 

Fair Value

   

Quoted Prices in Active Markets for Identical Assets

(Level 1)

   

Other Observable Inputs (Level 2)

   

Significant Unobservable

Inputs (Level 3)

 

At June 30, 2014:

                               

Investments-Available for Sale

                               

U.S. Government Agencies

  $ 5,961     $     $ 5,961     $  

Corporate Notes

    2,575             2,575        

Residential Mortgage-Backed Securities

    69,524             69,524        

Derivative Assets Interest Rate Swaps

    21             21        

Derivative Liabilities Interest Rate Swaps

    21             21        

At December 31, 2013:

                               

Investments-Available for Sale

                               

Corporate Notes

  $ 3,108     $     $ 3,108     $  

Residential Mortgage-Backed Securities

    103,164             103,164        

Derivative Assets – Interest Rate Swaps

    15             15        

Derivative Liabilities – Interest Rate Swaps

    15             15        

 

AFS securities — As of June 30, 2014 and December 31, 2013, the Level 2 fair value of the Company’s residential mortgage-backed securities was $69.5 million and $103.2 million, respectively. These securities consist primarily of agency mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). The underlying loans for these securities are residential mortgages that were primarily originated beginning in the year of 2003 through the current period. These loans are geographically dispersed throughout the United States. At June 30, 2014 and December 31, 2013, the weighted average yield and weighed average life of these securities were 2.05% and 2.12%, respectively, and 4.42 years and 3.85 years, respectively.

 

The valuation for investment securities utilizing Level 2 inputs were primarily determined by quotes received from an independent pricing service using matrix pricing, which is a mathematical technique widely used in the industry to value securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. There were no transfers into or out of Level 1 or 2 measurements during the three and six months ended June 30, 2014 and 2013.

 

 

Assets Measured on a Non-Recurring Basis

 

Assets measured at fair value on a non-recurring basis are summarized below:

 

            Fair Value Measurements Using  
(in thousands)   Fair Value     Quoted Prices in Active Markets for Identical Assets (Level 1)    

Other Observable Inputs

(Level 2)

    Significant Unobservable Inputs (Level 3)  
At June 30, 2014:                                

Impaired loans

                               

Commercial

  $ 667     $     $     $ 667  

Total

  $ 667     $     $     $ 667  

At December 31, 2013:

                               

Impaired loans

                               

Commercial

  $ 672     $     $     $ 672  

OREO

                               

Land and construction

    90                   90  

Total

  $ 762     $     $     $ 762  

 

Impaired loans — At the time a loan is considered impaired, it is valued at the lower of cost or fair value. The fair value of impaired loans that are collateral dependent is determined using various valuation techniques which are not readily observable in the market place, including consideration of appraised values and other pertinent real estate market data. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Other real estate owned — OREO represents real estate acquired through or in lieu of foreclosure. OREO is held for sale and is initially recorded at fair value less estimated costs of disposition 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 cost or estimated fair value less costs of disposition. The fair value of OREO is determined using various valuation techniques which are not readily observable in the market place, including consideration of appraised values and other pertinent real estate market data.

 

(11)

Estimated Fair Value Information

 

The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many cases, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize in a current market exchange.

 

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value are explained below.

 

Cash and cash equivalents

      

The carrying amounts are considered to be their estimated fair values and are classified as Level 1 because of the short-term maturity of these instruments which includes Federal funds sold and interest-earning deposits at other financial institutions.

 

Investment securities

 

AFS investment securities are carried at fair value, which are based on quoted prices of exact or similar securities, or on inputs that are observable, either directly or indirectly. The Company obtains quoted prices through third party brokers. Investment securities are classified as Level 1 to the extent that they are based on quoted prices for identical instrument traded in active markets. Investment securities are classified as Level 2 for valuations based on quotes prices for similar securities or inputs that are observable, either directly or indirectly.

 

 

 

FRB and FHLB stock

 

It is not practical to determine the fair value of FRB and FHLB stock due to restrictions placed on its transferability.

 

Loans, net

 

For loans, the fair value is estimated using market quotes for similar assets or the present value of future cash flows, discounted using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same maturities and giving consideration to estimated prepayment risk and credit risk. The fair value of loans is determined utilizing estimates resulting in a Level 3 classification.

 

Impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company may measure impairment based on a loan’s observable market price, or the fair value of the collateral (net of estimated costs to sell) if the loan is collateral dependent. The fair value of impaired loans is determined utilizing estimates resulting in a Level 3 classification.

 

Off-balance sheet credit-related instruments

 

The fair values of commitments, which include standby letters of credit and commercial letters of credit, are based upon fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The related fees are not considered material to the Company’s financial statements as a whole and the fair market value of the Company’s off-balance sheet credit-related instruments cannot be readily determined. The fair value of these items is determined utilizing estimates resulting in a Level 3 classification.

 

Derivatives

 

The fair value of derivatives is based on valuation models using observable market data as of the measurement date and is classified as Level 2.

 

Deposits

 

For demand deposits, the carrying amount approximates fair value. The fair values of interest bearing checking, savings, and money market deposits are estimated by discounting future cash flows using the interest rates currently offered for deposits of similar products. Because of the short-term maturity of these deposits, the carrying amounts are considered to be their estimated fair values and are classified as Level 1.

 

The fair values of the certificates of deposit are estimated by discounting future cash flows based on the rates currently offered for certificates of deposit with similar interest rates and remaining maturities. The fair value of certificates of deposit is determined utilizing estimates resulting in a Level 2 classification.

 

Other borrowings

 

The fair values of long term FHLB advances are estimated based on the rates currently offered by the FHLB for advances with similar interest rates and remaining maturities. The fair value of other borrowings is determined utilizing estimates resulting in a Level 2 classification.

 

Accrued interest

 

The estimated fair value for both accrued interest receivable and accrued interest payable are considered to be equivalent to the carrying amounts, resulting in a Level 1 classification.

 

 

The estimated fair value and carrying amounts of the financial instruments at June 30, 2014 and December 31, 2013 are as follows:

 

    Carrying     Fair Value Measurements Using:  

(dollars in thousands)

 

Amount

   

Level 1

   

Level 2

   

Level 3

   

Total

 

As of June 30, 2014

                                       

Assets

                                       

Cash and cash equivalents

  $ 60,298     $ 60,298     $     $     $ 60,298  

Investment securities

    78,060             78,060             78,060  

FRB stock

    1,600                      

N/A

 

FHLB stock

    3,167                      

N/A

 

Loans, net

    405,346                   404,213       404,213  

Non-hedging interest rate swaps

    21             21             21  

Accrued interest receivable

    1,209       1,209                   1,209  

Liabilities

                                       

Non-interest bearing deposits

  $ 261,987     $ 261,987     $     $     $ 261,987  

Interest bearing deposits

    205,785       164,424       41,361             205,785  

Other borrowings

    25,000             25,102             25,102  

Non-hedging interest rate swaps

    21             21             21  

Accrued interest payable

    24       24                   24  

As of December 31, 2013

                                       

Assets

                                       

Cash and cash equivalents

  $ 44,688     $ 44,688     $     $     $ 44,688  

Investment securities

    106,272             106,272             106,272  

FRB stock

    1,570                      

N/A

 

FHLB stock

    3,062                      

N/A

 

Loans, net

    376,312                   376,249       376,249  

Non-hedging interest rate swaps

    15             15             15  

Accrued interest receivable

    1,132       1,132                   1,132  

Liabilities

                                       

Non-interest bearing deposits

  $ 236,869     $ 236,869     $     $     $ 236,869  

Interest bearing deposits

    215,897       172,884       43,013             215,897  

Other borrowings

    27,500             27,562             27,562  

Non-hedging interest rate swaps

    15             15             15  

Accrued interest payable

    29       29                   29  

(12)

Non-Interest Income

 

The following table summarizes the information regarding non-interest income for the three months and six ended June 30, 2014 and 2013, respectively:

 

   

Three Months Ended June 30,

   

Six months Ended June 30,

 

(in thousands)

 

2014

   

2013

   

2014

   

2013

 

Loan arrangement fees

  $     $ 308     $     $ 544  

Gain on sale of AFS investment securities

    533       535       786       535  

Service charges and other operating income

    190       (6

)

    302       117  

Total non-interest income

  $ 723     $ 837     $ 1,088     $ 1,196  

 

(13)

Stock-Based Compensation

 

On May 8, 2013, the shareholders of the Company approved the Company’s 2013 Equity Incentive Plan (the “Plan”), which provides for the grant of up to 750,000 shares of Common Stock to employees, including officers and directors, non-employee directors and consultants. Stock options, stock appreciation rights, restricted stock and other stock awards, and restricted stock units are all available for grant pursuant to the terms and conditions of the Plan. The Plan was established to consolidate and replace all other previous stock plans and the remaining shares available for grant under these previous plans were cancelled.

 

Prior to the approval of the Plan, the Company granted restricted stock awards to directors and employees under the 2005 Equity Incentive Plan. Restricted stock awards are considered fixed awards as the number of shares and fair value is known at the date of grant and the fair value at the grant date is amortized over the requisite service period.

 

 

Non-cash stock compensation expense recognized in the unaudited Consolidated Statements of Operations and Comprehensive Income related to the restricted stock awards, net of estimated forfeitures, was $235,000 and $421,000 for the three and six months ended June 30, 2014, respectively, and $205,000 and $393,000 for the three and six months ended June 30, 2013, respectively. The fair value of restricted stock awards that vested was $388,000 and $400,000 for the three and six months ended June 30, 2014, respectively, and $511,000 and $534,000 for the three and six months ended June 30, 2013, respectively.

 

The following table reflects a combined summary of the activities related to restricted stock awards outstanding for the six months ended June 30, 2014 and 2013, respectively.

 

   

Six Months Ended June 30,

 
   

2014

   

2013

 

Restricted Shares

 

Number
of
Shares

   

Weighted Avg

Fair Value at
Grant
Date

   

Number
of
Shares

   

Weighted Avg

Fair Value at
Grant
Date

 

Beginning balance

    529,529     $ 4.62       563,516     $ 4.23  

Granted

    228,000       7.63       138,500       5.82  

Vested

    (93,750

)

    4.01       (124,047

)

    4.31  

Forfeited and surrendered

                (4,750

)

    4.03  

Ending balance

    663,779     $ 5.74       573,219     $ 4.60  

 

The Company recognizes compensation expense for stock options by amortizing the fair value at the grant date over the service, or vesting period.

 

During the six months ended June 30, 2014 and 2013, there were 72,000 and none, respectively, options exercised under the 2004 Founder Stock Option Plan at a weighted average exercise price of $5.00 per share. During the six months ended June 30, 2014, the remaining 19,800 of unexercised options under the plan expired and were automatically cancelled. The weighted average exercise price of the cancelled options was $5.00 per share. There were no options cancelled under the plan for the six months ended June 30, 2013. As of June 30, 2014, there was no remaining options outstanding related to the plan. The remaining contractual life of the 2004 Founder Stock Options outstanding was 0.65 years at June 30, 2013. All options under the 2004 Founder Stock Option Plan were exercisable at June 30 2013. At June 30, 2013, the weighted average exercise price of the 133,700 shares outstanding under the 2004 Founder Stock Option Plan was $5.00.

 

There have been no options granted, or cancelled under the Director and Employee Stock Option Plan for the six months ended June 30, 2014 or 2013. There have been 430,600 and none options exercised during the six months ended June 30, 2014 and 2013, respectively, at a weighted average price of $5.00 per share. The remaining contractual life of the Director and Employee Stock Options outstanding was 1.03 years and 1.14 years at June 30, 2014 and 2013, respectively. All options under the Directors and Employee Stock Option Plan were exercisable at June 30, 2014 and 2013. At June 30, 2014 and 2013, the weighted average exercise price of the 370,073 and 1,045,673 shares, respectively, outstanding under the Director and Employee Stock Option Plan was $7.97 and $6.05, respectively.

 

The following tables detail the amount of shares authorized and available under all stock plans as of June 30, 2014:

 

   

Shares Reserved

   

Less Shares Previously
Exercised/Vested

   

Less Shares
Outstanding

   

Total Shares
Available for
Future Issuance

 

2004 Founder Stock Option Plan

    150,000       121,900              
                                 

Director and Employee Stock Option Plan

    1,434,000       892,524       370,073        

 

                               

2005 Equity Incentive Plan

    1,200,000       751,494       435,779        

 

                               

2013 Equity Incentive Plan

    750,000             228,000       522,000  

 

 

(14)

Regulatory Matters

 

Capital

 

Bancshares and the Bank are subject to the various regulatory capital requirements administered by federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bancshares and the Bank must meet specific capital guidelines that involve quantitative measures of 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. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Company.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that as of June 30, 2014 and December 31, 2013, the Company and the Bank met all capital adequacy requirements to which they are subject.

 

At December 31, 2013, the most recent notification from the OCC categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To generally be categorized as a “well-capitalized” financial institution, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since the notification that management believes have changed the Bank’s categorization.

 

The Company’s and the Bank’s capital ratios as of June 30, 2014 and December 31, 2013 are presented in the table below:

●     

   

Company

   

Bank

   

For Capital
Adequacy Purposes

    For the Bank to be
Well-Capitalized Under
Prompt Corrective
Measures
 

(dollars in thousands)

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

    Amount    

Ratio

 

June 30, 2014:

                                                               

Total Risk-Based Capital Ratio

  $ 63,479       14.38

%

  $ 59,469       13.47

%

  $ 35,323       8.00

%

  $ 44,153       10.00

%

Tier 1 Risk-Based Capital Ratio

  $ 57,934       13.12

%

  $ 53,923       12.21

%

  $ 17,661       4.00

%

  $ 26,492       6.00

%

Tier 1 Leverage Ratio

  $ 57,934       10.58

%

  $ 53,923       9.84

%

  $ 21,907       4.00

%

  $ 27,402       5.00

%

December 31, 2013:

                                                               

Total Risk-Based Capital Ratio

  $ 58,620       14.18

%

  $ 56,555       13.69

%

  $ 33,062       8.00

%

  $ 41,326       10.00

%

Tier 1 Risk-Based Capital Ratio

  $ 53,425       12.93

%

  $ 51,361       12.43

%

  $ 16,531       4.00

%

  $ 24,796       6.00

%

Tier 1 Leverage Ratio

  $ 53,425       9.70

%

  $ 51,361       9.32

%

  $ 22,025       4.00

%

  $ 27,541       5.00

%

 

On July 2, 2013, the Federal Reserve approved the final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5%. The new rules also require a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets over each of the required capital ratios that will be phased in from 2016 to 2019 and must be met to avoid limitations the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments, excluding trust preferred securities, mortgage servicing rights and certain deferred tax assets, and including unrealized gains and losses on available for sale debt and equity securities. On July 9, 2013, the FDIC and OCC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC and OCC's rules are identical in substance to the final rules issued by the FRB.

 

The phase-in period for the final rules will begin for the Company and the Bank on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule. Management is currently evaluating the provisions of the final rules and their expected impact.

 

Dividends

 

In the ordinary course of business, Bancshares is dependent upon dividends from the Bank to provide funds for the payment of dividends to stockholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Currently, the Bank is prohibited from paying dividends to Bancshares until such time as the accumulated deficit is eliminated.

 

 

To date, Bancshares has not paid any cash dividends. Payment of stock or cash dividends in the future will depend upon earnings and financial condition and other factors deemed relevant by Bancshares’ Board of Directors, as well as Bancshares’ legal ability to pay dividends. Accordingly, no assurance can be given that any cash dividends will be declared in the foreseeable future.

 

Consent Order

 

On September 11, 2013, the Board of Directors of the Bank entered into a stipulation and consent to the issuance of a consent order with the OCC consenting to the issuance of a consent order (the “Consent Order”) by the OCC, effective as of that date. The Consent Order requires the Bank to take corrective action to enhance its program and procedures for compliance with the Bank Secrecy Act and other anti-money laundering regulations. Failure to comply with the Consent Order may result in additional regulatory action, including restrictions on our operations, civil money penalties against the Bank and its officers and directors or enforcement of the Consent Order through court proceedings.

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Introduction

 

Our profitability, like most banks, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by us on interest bearing liabilities, such as deposits and other borrowings, and the interest rates received by us on our interest-earning assets, such as loans extended to our clients and securities held in our investment portfolio, comprises the major portion of our earnings. In addition, we may, from time to time, supplement our earnings by monetizing gains in our investment portfolio. 

 

Critical Accounting Policies and Estimates

 

The accounting and reporting policies followed by us conform, in all material respects, to accounting principles generally accepted in the United States, or GAAP, and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base our estimates on historical experience, current information and other factors deemed by us to be relevant, actual results could differ materially and adversely from those estimates.

 

We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting polices related to the allowance for loan losses (“ALL”) and income taxes are considered to be critical, as these policies involve considerable subjective judgment and estimation by management. Critical accounting policies, and our procedures related to these policies, are summarized below. There have been no changes to our critical accounting policies and estimates during the three months ended June 30, 2014.

 

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to operations and represents an estimate of probable incurred losses inherent in the Company’s loan portfolio that have been incurred as of the balance sheet date. Loan losses are charged against the allowance when management believes that principal is uncollectible. Subsequent repayments or recoveries, if any, are credited to the allowance. Management periodically assesses the adequacy of the allowance for loan losses by reference to many quantitative and qualitative factors that may be weighted differently at various times depending on prevailing conditions. The provisions reflect management’s evaluation of the adequacy of the allowance based, in part, upon the historical loss experience of the loan portfolio, as well as estimates from historical peer group loan loss data and the loss experience of other financial institutions, augmented by management judgment. During this process, loans are separated into the following portfolio segments: commercial, commercial real estate, residential, land and construction, and consumer and other loans. The relative significance of risk considerations vary by portfolio segment. For commercial loans, commercial real estate loans and land and construction loans, the primary risk consideration is a borrower’s ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for commercial real estate and land and construction loans. The primary risk consideration for residential loans and consumer loans are a borrower’s personal cash flow and liquidity, as well as collateral value.

 

Loss ratios for all portfolio segments are evaluated on a quarterly basis. Loss ratios associated with historical loss experience are determined based on a rolling migration analysis of each portfolio segment within the portfolio. This migration analysis estimates loss factors based on the performance of each portfolio segment over a four and a half year time period. These loss ratios are then adjusted, if determined necessary by management, based on other factors including, but not limited to, historical peer group loan loss data and the loss experience of other financial institutions. Management carefully monitors changing economic conditions, the concentrations of loan categories, values of collateral, the financial condition of the borrowers, the history of the loan portfolio, and historical peer group loan loss data to determine the adequacy of the allowance for loan losses. As a part of this process, management typically focuses on loan-to-value (“LTV”) percentages to assess the adequacy of loss ratios of collateral dependent loans within each portfolio segment discussed above, trends within each portfolio segment, as well as general economic and real estate market conditions where the collateral and borrower are located. For loans that are not collateral dependent, which generally consist of commercial and consumer and other loans, management typically focuses on general business conditions where the borrower operates, trends within the portfolio, and other external factors to evaluate the severity of loss factors. The allowance is based on estimates and actual losses may vary materially and adversely from the estimates.

 

 

In addition, regulatory agencies, as a part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance through provisioning based on their judgment about information available to them at the time of their examinations. No assurance can be given that adverse future economic conditions will not lead to increased delinquent loans, and increases in the provision for loan losses and/or charge-offs. See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations Allowance for Loan Losses” for further details considered by management in estimating the necessary level of the allowance for loan losses.

 

Income Taxes. Provision for income taxes is the amount of estimated tax due reported on our tax returns and the change in the amount of deferred tax assets and liabilities. Deferred income taxes represent the estimated net income tax expense payable (or benefits receivable) for temporary differences between the carrying amounts for financial reporting purposes and the amounts used for tax purposes. A valuation allowance is required if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of deferred tax assets is highly subjective and dependent upon management’s evaluation of both positive and negative evidence, including historic financial performance, forecasts of future income, existence of feasible tax planning strategies, length of statutory carryforward period, and assessments of current and future economic and business conditions. Management evaluates the positive and negative evidence and determines the realizability of the deferred tax asset, and the corresponding need for or adequacy of a valuation allowance on a quarterly basis. See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Deferred Tax Asset” for further discussion of our deferred tax asset and management’s evaluation of the same.

 

Summary of Financial Condition and Results of Operations

 

For the three and six months ended June 30, 2014, the Company recorded net income of $779,000, or $0.08 per diluted share, and $1.2 million, or $0.12 per diluted share, respectively. During the same periods last year, the Company reported net income of $4.4 million, or $0.49 per diluted share, and $5.8 million or $0.65 per diluted share, respectively. The decline in net income during the three and six months ended June 30, 2014 as compared to the same periods last year was primarily due to the $3.2 million income tax benefit recorded in connection with the reversal of our deferred tax valuation allowance during the quarter ended June 30, 2013. Income before income taxes increased by $159,000 during the three months ended June 30, 2014 and declined by $609,000 during the six months ended June 30, 2014, as compared to the same periods last year. The increase during the three months ended June 30, 2014 was primarily related to an increase in net interest income of $641,000, partially offset by a $268,000 increase in non-interest expense, a decline in non-interest income of $114,000 and an increase of $100,000 in provision for loan losses. The decline during the quarter and six months ended June 30, 2014 was primarily related to a $1.0 million increase in non-interest expense and a $500,000 reversal of provision for loan losses that was recorded during the six months ended June 30, 2013. These declines were partially offset by an increase in net interest income of $1.1 million. Included in net income for the three and six months ended June 30, 2014 are gains in connection with the sale of securities of $533,000 and $786,000, respectively, compared to $535,000 for the same periods last year.

 

Total assets at June 30, 2014 were $554.4 million, representing an increase of $16.3 million, or 3.0%, from $538.1 million at December 31, 2013. Cash and cash equivalents at June 30, 2014 were $60.3 million, representing an increase of $15.6 million, or 34.9%, from $44.7 million at December 31, 2013. Loans increased by $29.2 million, from $383.5 million at December 31, 2013 to $412.7 million at June 30, 2014. Loan originations were $77.0 million and $101.3 million during the three and six months ended June 30, 2014, respectively, compared to $41.1 million and $107.4 million during the same periods last year. Prepayment speeds for the three and six months ended June 30, 2014 were 11.5% and 12.9%, respectively, compared to 19.2% and 17.3% for the same periods last year. Investment securities were $78.1 million at June 30, 2014, compared to $106.3 million at December 31, 2013, representing a decline of $28.2 million, or 26.5%. During the quarter and six months ended June 30, 2014, the Company sold investment securities with an amortized cost of $28.6 million and $43.4 million, respectively, recognizing gains of $533,000 and $786,000, respectively. During the three and six months ended June 30, 2013, the Company sold $10.8 million of investment securities, recognizing a gain of $535,000. In addition, the unrealized gain on investment securities increased to $386,000 at June 30, 2014, compared to $89,000 at December 31, 2013. The weighted average life of our investment securities was 4.42 years and 3.78 years at June 30, 2014 and December 31, 2013, respectively.

 

Total liabilities at June 30, 2014 increased by $12.5 million, or 2.6%, to $495.3 million compared to $482.8 million at December 31, 2013. This increase is primarily due to a $15.0 million increase in deposits. Total core deposits, which includes non-interest bearing demand deposits, interest bearing demand deposits and money market deposits and savings, were $426.4 million and $409.8 million at June 30, 2014 and December 31, 2013, respectively, representing an increase of $16.7 million, or 4.1%.

 

 

Average interest earning assets increased $50.3 million, from $492.3 million for the three months ended June 30, 2013 to $542.6 million for the three months ended June 30, 2014. The weighted average interest rate on interest earning assets was 3.47% and 3.32% for the three months ended June 30, 2014 and 2013, respectively. The improvement in this rate was primarily attributable to an increase in the average balance of loans relative to total average earning assets as compared to the same period last year, partially offset by a decline in loan yield during the current quarter as compared to the same period last year. The decrease in loan yield is primarily attributable to a general decline in interest rates, as well as competitive loan pricing conditions in our market, which have continued to intensify and compress loan yields.

 

Average interest earning assets increased $57.2 million, from $485.2 million for the six months ended June 30, 2013 to $542.3 million for the six months ended June 30, 2014. The weighted average interest rate on interest earning assets was 3.43% and 3.39% for the six months ended June 30, 2014 and 2013, respectively. This improvement in weighted average interest rate was primarily due to an increase in the average balance of loans relative to total earning assets as compared to the same period last year, partially offset by a decline in loan yield as compared to the same period last year and a recovery of $294,000 in deferred interest income from the repayment of non-accrual and previously charged off loan balances during the six months ended June 30, 2013. The decline in loan yield was caused by a general downward trend in interest rates, as well as competitive loan pricing conditions in our market, which have continued to compress loan yields.

 

Average interest bearing deposits and borrowings decreased $13.4 million, from $253.0 million for the three months ended June 30, 2013 to $239.5 million for the three months ended June 30, 2014. The average cost of interest bearing deposits and borrowings was 0.31% during the three months ended June 30, 2014 compared to 0.33% for the same period last year. The decline in our cost of interest bearing deposits and borrowings is primarily attributable to a decrease in interest rates paid on these accounts.

 

Average interest bearing deposits and borrowings decreased $6.1 million, from $250.3 million for the six months ended June 30, 2013 to $244.1 million for the six months ended June 30, 2014. The average cost of interest bearing deposits and borrowings was 0.31% during the six months ended June 30, 2014 compared to 0.33% for the same period last year. The decline in our cost of interest bearing deposits and borrowings is primarily attributable to a decrease in interest rates paid on these accounts.

 

At June 30, 2014, stockholders’ equity totaled $59.2 million, or 10.7% of total assets, as compared to $55.4 million, or 10.3% of total assets at December 31, 2013. The Company’s book value per share of common stock was $5.83 as of June 30, 2014, compared to $5.77 and $5.84 per share as of June 30, 2013 and December 31, 2013, respectively.

 

Set forth below are certain key financial performance ratios and other financial data for the period indicated:

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Annualized return on average assets

    0.57

%

    3.55

%

    0.43

%

    2.40

%

                                 

Annualized return on average stockholders’ equity

    5.31

%

    34.28

%

    4.10

%

    23.29

%

                                 

Average stockholders’ equity to average assets

    10.71

%

    10.37

%

    10.59

%

    10.29

%

                                 

Net interest margin

    3.33

%

    3.15

%

    3.29

%

    3.22

%

 

Results of Operations

 

Net Interest Income

 

The management of interest income and interest expense is fundamental to the performance of the Company. Net interest income, which is the difference between interest income on interest earning assets, such as loans and investment securities, and interest expense on interest bearing liabilities, such as deposits and other borrowings, is the largest component of the Company’s total revenue. Management closely monitors both net interest income and net interest margin (net interest income divided by average earning assets).

 

Net interest income and net interest margin are affected by several factors including (1) the level of, and the relationship between the dollar amount of interest earning assets and interest bearing liabilities; and (2) the relationship between re-pricing or maturity of our variable-rate and fixed-rate loans, securities, deposits and borrowings.

 

 

The majority of the Company’s loans are indexed to the national prime rate. Movements in the national prime rate have a direct impact on the Company’s loan yield and interest income. The national prime rate, which generally follows the targeted federal funds rate, was 3.25% at June 30, 2014 and 2013. There was no change in the targeted federal funds rate during the three and six months ended June 30, 2014 and 2013, remaining at 0.00%-0.25%.

 

The Company, through its asset and liability management policies and practices, seeks to maximize net interest income without exposing the Company to a level of interest rate risk deemed excessive by management. Interest rate risk is managed by monitoring the pricing, maturity and re-pricing characteristics of all classes of interest bearing assets and liabilities. This is discussed in more detail in Item 2- “Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Asset/Liability Management.”

 

During the quarter ended June 30, 2014, net interest income was $4.5 million compared to $3.9 million for the same period last year. The improvement in net interest income was primarily attributable to increases in the average balances of our loan portfolio during the quarter ended June 30, 2014 as compared to the same period last year. The average balances of our loan portfolio were $393.3 million during the quarter ended June 30, 2014, compared to $308.6 million for the same period last year. The additional interest earned related to the increase in the average balance of loans was partially offset by a decline in loan yield, which decreased to 4.16% during the three months ended June 30, 2014, compared to 4.30% during the same period last year. The decrease in loan yield is primarily attributable to a general decline in interest rates, as well as competitive loan pricing conditions in our market, which have continued to intensify and compress loan yields.

 

The Company’s net interest spread was 3.16% for the three months ended June 30, 2014 compared to 2.99% for the same period last year.

 

The Company’s net interest margin (net interest income divided by average interest earning assets) was 3.33% for the three months ended June 30, 2014, compared to 3.15% for the same period last year. The 18 basis point increase in net interest margin is primarily due to an increase in the average balance of loans relative to total average earning assets as compared to the same period last year and, to a lesser extent, a decline in the cost of our interest bearing liabilities. The percentage of average loans to total average earning assets increased to 72.5% during the quarter ended June 30, 2014, compared to 62.7% during the same period last year. The average cost of interest bearing deposits and borrowings was 0.31% during the quarter ended June 30, 2014 compared to 0.33% for the same period last year. These factors were partially offset by a general decline in the loan yields. The decline in loan yield was primarily caused by a general downward trend in interest rates, as well as competitive loan pricing conditions in our market, which have continued to compress loan yields.

 

The following table sets forth the average balances of certain assets, interest income/expense, average yields on interest earning assets, average rates paid on interest bearing liabilities, net interest margins and net interest income/spread for the three months ended June 30, 2014 and 2013, respectively.

 

 

   

Three Months Ended June 30,

 
   

2014

   

2013

 
   

Average

   

Interest

           

Average

   

Interest

         

(dollars in thousands)

 

Balance

   

Inc/Exp

   

Yield

   

Balance

   

Inc/Exp

   

Yield

 

Assets

                                               

Interest earning deposits at other financial institutions

  $ 48,043     $ 31       0.26

%

  $ 20,139     $ 13       0.25

%

U.S. Gov’t Treasuries and agencies

    5,534       30       2.15

%

    2,201       18       3.35

%

Corporate notes

    2,662       9       1.33

%

    33,827       180       2.13

%

Residential mortgage-backed securities

    88,326       469       2.12

%

    123,248       516       1.67

%

Federal Reserve Bank stock

    1,599       24       6.00

%

    1,428       21       6.00

%

Federal Home Loan Bank stock

    3,139       51       6.56

%

    2,884       20       2.80

%

Loans (1) (2)

    393,284       4,082       4.16

%

    308,575       3,307       4.30

%

Earning assets

    542,587       4,696       3.47

%

    492,302       4,075       3.32

%

Other assets

    6,610                       4,439                  

Total assets

  $ 549,197                     $ 496,741                  

Liabilities & Equity

                                               

Interest checking (NOW)

  $ 23,725       8       0.14

%

  $ 21,454       8       0.16

%

Money market deposits and savings

    147,568       90       0.24

%

    153,946       88       0.23

%

CDs

    41,826       9       0.08

%

    46,867       28       0.24

%

Borrowings

    26,429       80       1.21

%

    30,690       83       1.08

%

Total interest bearing deposits and borrowings

    239,548       187       0.31

%

    252,957       207       0.33

%

Demand deposits

    248,649                       189,156                  

Other liabilities

    2,188                       3,132                  

Total liabilities

    490,385                       445,245                  

Equity

    58,812                       51,496                  

Total liabilities & equity

  $ 549,197                     $ 496,741                  
                                                 

Net interest income / spread

          $ 4,509       3.16

%

          $ 3,868       2.99

%

                                                 

Net interest margin

                    3.33

%

                    3.15

%

                                                 

 

(1)

Before allowance for loan losses and net deferred loan fees and costs. Included in net interest income was net loan origination (cost amortization) and fee accretion of ($11,000) and $11,000 for the three months ended June 30, 2014 and 2013, respectively.

  (2) Includes average non-accrual loans of $734,000 and $983,000 for the three months ended June 30, 2014 and 2013, repectively.

 

The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest earning assets and interest bearing liabilities for the noted period, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in the average balance times the prior period rate and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column.

 

   

Three Months Ended June 30, 2014 Compared to 2013

Increase (Decrease) Due to Changes in:

 

(in thousands)

 

Volume

   

Rate

   

Total

 

Interest income:

                       

Interest earning deposits at other financial institutions

  $ 18     $     $ 18  

U.S. Gov’t Treasuries and agencies

    20       (8

)

    12  

Corporate notes

    (122

)

    (49

)

    (171

)

Residential mortgage-backed securities

    (166

)

    119       (47

)

Federal Reserve Bank stock

    3             3  

Federal Home Loan Bank stock

    2       29       31  

Loans

    880       (105

)

    775  

Total increase (decrease) in interest income

    635       (14

)

    621  

Interest expense:

                       

Interest checking (NOW)

    1       (1

)

    0  

Money market deposits and savings

    (3

)

    5       2  

CDs

    (3

)

    (16

)

    (19

)

Borrowings

    (12

)

    9       (3

)

Total increase (decrease) in interest expense

    (17

)

    (3

)

    (20

)

Net increase (decrease) in net interest income

  $ 652     $ (11

)

  $ 641  

 

 

During the six months ended June 30, 2014, net interest income was $8.9 million, compared to $7.8 million for the same period last year. The increase was primarily attributable to additional interest earned in connection with our loan portfolio as compared to the same period last year. The average balances of our loan portfolio were $384.3 million and $290.8 million during the six months ended June 30, 2014 and 2013, respectively. This increase was partially offset by a decline in loan yield, which decreased to 4.17% during the six months ended June 30, 2014, compared to 4.55% during the same period last year, as well as $294,000 of additional interest income recognized during the six months ended June 30, 2013 in connection with the pay-off of non-accrual and previously charged off loans. The decrease in loan yield is primarily attributable to a general decline in interest rates, as well as competitive loan pricing conditions in our market, which have continued to intensify and compress loan yields.

 

The Company’s net interest spread was 3.12% for the six months ended June 30, 2014 compared to 3.06% for the same period last year.

 

The Company’s net interest margin was 3.29% for the six months ended June 30, 2014, compared to 3.22% for the same period last year. As discussed above, the improvement in our net interest margin is primarily due to an increase in the average balance of loans relative to total earning assets as compared to the same period last year, and, to a lesser extent, a decline in the cost of our interest bearing liabilities. The percentage of average loans to total average earning assets increased to 70.9% during the six months ended June 30, 2014, compared to 59.9% during the same period last year. The decline in the cost of interest bearing deposits and borrowings is primarily attributable to a decrease in interest rates paid on these accounts. The average cost of interest bearing deposits and borrowings was 0.31% during the six months ended June 30, 2014 compared to 0.33% during the same period last year. These factors were partially offset by a general decline in the loan yields and a recovery of $294,000 in deferred interest income from the repayment of non-accrual and previously charged off loan balances during the six months ended June 30, 2013. The decline in loan yield was caused by a general downward trend in interest rates, as well as competitive loan pricing conditions in our market, which have continued to compress loan yields.

 

The following table sets forth the average balances of certain assets, interest income/expense, average yields on interest earning assets, average rates paid on interest bearing liabilities, net interest margins and net interest income/spread for the six months ended June 30, 2014 and 2013, respectively.

 

   

Six Months Ended June 30,

 
   

2014

   

2013

 
   

Average

   

Interest

           

Average

   

Interest

         

(dollars in thousands)

 

Balance

   

Inc/Exp

   

Yield

   

Balance

   

Inc/Exp

   

Yield

 

Assets

                                               

Interest earning deposits at other financial institutions

  $ 51,368     $ 65       0.25

%

  $ 23,135     $ 29       0.25

%

U.S. Gov’t Treasuries

    3,224       34       2.15

%

    2,204       7       0.59

%

Corporate notes

    2,882       19       1.32

%

    34,405       368       2.14

%

Residential mortgage-backed securities

    95,866       1,016       2.12

%

    130,545       1,118       1.71

%

Federal Reserve Bank stock

    1,585       47       6.00

%

    1,395       42       6.00

%

Federal Home Loan Bank stock

    3,101       103       6.69

%

    2,651       34       2.59

%

Loans (1) (2)

    384,291       7,950       4.17

%

    290,826       6,565       4.55

%

Earning assets

    542,317       9,234       3.43

%

    485,161       8,163       3.39

%

Other assets

    6,636                       6,614                  

Total assets

  $ 548,953                     $ 491,775                  

Liabilities & Equity

                                               

Interest checking (NOW)

  $ 21,813       16       0.14

%

  $ 22,477       18       0.16

%

Money market deposits and savings

    153,140       183       0.24

%

    153,968       178       0.23

%

CDs

    42,201       18       0.09

%

    45,934       58       0.26

%

Borrowings

    26,963       162       1.21

%

    27,886       157       1.14

%

Total interest bearing deposits and borrowings

    244,117       379       0.31

%

    250,265       411       0.33

%

Demand deposits

    244,334                       187,527                  

Other liabilities

    2,343                       3,397                  

Total liabilities

    490,794                       441,189                  

Equity

    58,159                       50,586                  

Total liabilities & equity

  $ 548,953                     $ 491,775                  
                                                 

Net interest income / spread

          $ 8,855       3.12

%

          $ 7,752       3.06

%

                                                 

Net interest margin

                    3.29

%

                    3.22

%

                                                 

 

(1)

Before allowance for loan losses and net deferred loan fees and costs. Included in net interest income was net loan origination cost amortization of $4,000 and $1,000 for the six months ended June 30, 2014 and 2013, respectively.

  (2) Includes average non-accrual loans of $735,000 and $1.1 million for the six months ended June 30, 2014 and 2013, respectively.

 

 

The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest earning assets and interest bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in the average balance times the prior period rate and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column.

 

   

Six Months Ended June 30, 2014 Compared to 2013

Increase (Decrease) Due to Changes in:

 

(in thousands)

 

Volume

   

Rate

   

Total

 

Interest income:

                       

Interest earning deposits at other financial institutions

  $ 36     $     $ 36  

U.S. Gov’t Treasuries and agencies

    4       23       27  

Corporate notes

    (246

)

    (103

)

    (349

)

Residential mortgage-backed securities

    (332

)

    230       (102

)

Federal Reserve Bank stock

    5             5  

Federal Home Loan Bank stock

    7       62       69  

Loans

    1,970       (585

)

    1,385  

Total increase (decrease) in interest income

    1,444       (373

)

    1,071  

Interest expense:

                       

Interest checking (NOW)

    (1

)

    (1

)

    (2

)

Money market deposits and savings

    (1

)

    6       5  

CDs

    (4

)

    (36

)

    (40

)

Borrowings

    (5

)

    10       5  

Total increase (decrease) in interest expense

    (11

)

    (21

)

    (32

)

Net increase (decrease) in net interest income

  $ 1,455     $ (352

)

  $ 1,103  

 

Provision for Loan Losses

 

During the three and six months ended June 30, 2014, we recorded a provision for loan losses of $100,000, compared to none and a $500,000 reversal of provision for loan losses during the same periods last year. This reversal in provision for loan losses was primarily due to $1.1 million of net loan recoveries during the six months ended June 30, 2013, as well as the continued improvement in the level of our criticized and classified loans. These declines were partially offset by additional provisions required for the $31.1 million increase in our loan portfolio during that same period. Criticized and classified loans generally consist of special mention, substandard and doubtful loans. Special mention, substandard and doubtful loans were $152,000, $2.2 million and none, respectively, at June 30, 2014, compared to $737,000, $2.4 million and none, respectively, at June 30, 2013. We had net recoveries of $15,000 and $31,000 during the three and six months ended June 30, 2014, respectively, compared to $1,000 and $1.1 million for the same periods last year. At June 30, 2014, the ALL to total loans was 1.79% compared to 1.89% at December 31, 2013. The risks associated with the adequacy of our ALL and the decline in this ratio may have increased as a result of our loan growth. Management will continue to closely monitor the adequacy of the ALL and will make adjustments as warranted. Management believes that the ALL as of June 30, 2014 and December 31, 2013 was adequate to absorb known and inherent risks in the loan portfolio. The provision for loan losses was recorded based on an analysis of the factors discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Allowance for Loan Losses.

 

As a percentage of our total loan portfolio, the amount of non-performing loans was 0.18% and 0.19% at June 30, 2014 and December 31, 2013, respectively. As a percentage of our total assets, the amount of non-performing assets was 0.13% and 0.15% at June 30, 2014 and December 31, 2013, respectively.

 

Non-Interest Income

 

Non-interest income was $723,000 and $1.1 million for the three and six months ended June 30, 2014, compared to $837,000 and $1.2 million for the same periods last year. During the quarter and six months ended June 30, 2014, the Company sold investment securities with an amortized cost of $28.6 million and $43.4 million, respectively, recognizing gains of $533,000 and $786,000, respectively. In addition, the Company recognized a gain of $47,000 in connection with the disposition of its OREO during the three months ended June 30, 2014. With the exception of these gains, non-interest income during the three and six months ended June 30, 2014 primarily consist of customer related fee income. During the quarter and six months ended June 30, 2013, the Company sold $10.8 million of investment securities, recognizing a gain of $535,000. With the exception of this gain, non-interest income for the three and six months ended June 30, 2013, primarily consists of loan arrangement fees earned in connection with our college loan funding program. During 2013, the Company terminated this program and did not report any material loan arrangement fee earnings subsequent to the second quarter of 2013.

 

 

Non-Interest Expense

 

Non-interest expense was $3.8 million and $7.8 million for the three and six months ended June 30, 2014, compared to $3.5 million and $6.8 million for the same periods last year. The increases in non-interest expense during the three and six months ended June 30, 2014 as compared to the same periods last year is primarily due to the costs incurred to expand the Bank’s business development and related operational support teams, as well as the additional costs incurred to address regulatory compliance matters.

 

Income Tax Provision

 

During the three and six months ended June 30, 2014, we recorded a tax provision of $565,000 and $875,000, respectively, compared to a tax benefit of approximately $3.2 million during the same periods last year. The tax benefit recognized during the three and six months ended June 30, 2013 was related to the full reversal of the Company’s deferred tax valuation allowance that had been previously established during the year ended December 31, 2009. In making this determination, management analyzed, among other things, our recent history of earnings and cash flows, forecasts of future earnings, improvements in the credit quality of the Company’s loan portfolio, the nature and timing of future deductions and benefits represented by the deferred tax assets and our cumulative earnings for the 12 quarters preceding the reversal of this valuation allowance. At June 30, 2013, no further deferred tax valuation allowance remained. Beginning in January 2014, the Company began recording tax provisions at an estimated effective tax rate of approximately 42%.

 

Financial Condition

 

Assets

 

Total assets at June 30, 2014 were $554.4 million, representing an increase of $16.3 million, or 3.0%, from $538.1 million at December 31, 2013. Cash and cash equivalents at June 30, 2014 were $60.3 million, representing an increase of $15.6 million, or 34.9%, from $44.7 million at December 31, 2013. Loans increased by $29.2 million, from $383.5 million at December 31, 2013 to $412.7 million at June 30, 2014. Loan originations were $77.0 million and $101.3 million during the three and six months ended June 30, 2014, respectively, compared to $41.1 million and $107.4 million during the same periods last year. Prepayment speeds for the three and six months ended June 30, 2014 were 11.5% and 12.9%, respectively, compared to 19.2% and 17.3% for the same periods last year. Investment securities were $78.1 million at June 30, 2014, compared to $106.3 million at December 31, 2013, representing a decline of $28.2 million, or 26.5%. During the quarter and six months ended June 30, 2014, the Company sold investment securities with an amortized cost of $28.6 million and $43.4 million, respectively, recognizing gains of $533,000 and $786,000, respectively. During the quarter and six months ended June 30, 2013, the Company sold $10.8 million of investment securities, recognizing a gain of $535,000. In addition, the unrealized gain on investment securities increased to $386,000 at June 30, 2014, compared to $89,000 at December 31, 2013. The weighted average life of our investment securities was 4.42 years and 3.78 years at June 30, 2014 and December 31, 2013, respectively.

 

Cash and Cash Equivalents

 

Cash and cash equivalents totaled $60.3 million and $44.7 million at June 30, 2014 and December 31, 2013, respectively. The $15.6 million increase in cash and cash equivalents during the six months ended June 30, 2014 was primarily from a $15.0 million increase in deposits and the sale of $43.4 million of securities, partially offset by an increase of $29.2 million in net loan production. Cash and cash equivalents are managed based upon liquidity needs by investing excess liquidity in higher yielding assets such as loans and investment securities. See the section “Liquidity and Asset/Liability Management” below.

 

Investment Securities

 

The investment securities portfolio is generally the second largest component of the Company’s interest earning assets, and the structure and composition of this portfolio is important to any analysis of the financial condition of the Company. The investment portfolio serves the following purposes: (i) it can be readily reduced in size to provide liquidity for loan balance increases or deposit balance decreases; (ii) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.

 

 

At June 30, 2014, investment securities totaled $78.1 million compared to $106.3 million at December 31, 2013. The Company’s investment portfolio is primarily composed of residential mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. The underlying loans for these securities are residential mortgages that were primarily originated beginning in 2003 through the current period. These loans are geographically dispersed throughout the United States. At June 30, 2014 and December 31, 2013, the weighted average yield and weighed average life of these residential mortgage-backed securities were 2.05% and 2.12%, respectively, and 4.42 years and 3.85 years, respectively.

 

During the quarter and six months ended June 30, 2014, the Company sold investment securities with an amortized cost of $28.6 million and $43.4 million, respectively, recognizing gains of $533,000 and $786,000, respectively. During the quarter and six months ended June 30, 2013, the Company sold $10.8 million of investment securities, recognizing a gain of $535,000. These gains were recorded in non-interest income within the unaudited Consolidated Statement of Operations and Comprehensive Income. In addition, the unrealized gain on investment securities increased to $386,000 at June 30, 2014, compared to $89,000 at December 31, 2013. We will continue to evaluate the Company’s investments and liquidity needs and will adjust the amount of investment securities accordingly.

 

Loans

 

Loans, net of the ALL and deferred loan origination costs/unearned fees, increased 7.7%, or $29.0 million, from $376.3 million at December 31, 2013 to $405.3 million at June 30, 2014. As of June 30, 2014 and December 31, 2013, total loans outstanding totaled $412.7 million and $383.5 million, respectively. Loan originations were $77.0 million and $101.3 million during the three and six months ended June 30, 2014, respectively, compared to $41.1 million and $107.4 million during the same periods last year. Prepayment speeds for the three and six months ended June 30, 2014 were 11.5% and 12.9%, respectively, compared to 19.2% and 17.3% for the same periods last year.

 

As of June 30, 2014 and December 31, 2013, substantially all of the Company’s loan customers were located in Southern California.

 

Non-Performing Assets

 

The following table sets forth non-accrual loans and other real estate owned at June 30, 2014 and December 31, 2013:

 

(dollars in thousands)

 

June 30, 2014

   

December 31, 2013

 

Non-accrual loans:

               

Commercial

  $ 702     $ 706  

Consumer and other

    29       29  

Total non-accrual loans

    731       735  

Other real estate owned (“OREO”)

          90  

Total non-performing assets

  $ 731     $ 825  
                 

Non-performing assets to gross loans and OREO

    0.18

%

    0.22

%

Non-performing assets to total assets

    0.13

%

    0.15

%

 

Non-accrual loans totaled $731,000 and $735,000 at June 30, 2014 and December 31, 2013, respectively. There were no accruing loans past due 90 days or more at June 30, 2014 and December 31, 2013. Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms was $10,000 and $20,000 for the three and six months ended June 30, 2014, respectively, compared to $10,000 and $25,000 for the same periods last year.

 

At June 30, 2014, non-accrual loans consisted of two commercial loans totaling $702,000 and one consumer and other loan totaling $29,000. At December 31, 2013, non-accrual loans consisted of two commercial loans totaling $706,000 and one consumer and other loan totaling $29,000.

 

During the quarter ended June 30, 2014, the Bank disposed of its OREO for approximately $137,000, recognizing a gain of $47,000 in connection with this disposition. At December 31, 2013, OREO consisted of one undeveloped land property totaling $90,000. This property is located in Southern California.

 

At June 30, 2014 and December 31, 2013, the recorded investment in impaired loans was $927,000 and $953,000, respectively. At June 30, 2014 and December 31, 2013, the Company had a specific allowance for loan losses of $35,000 on impaired loans of $130,000 and $135,000, respectively. There were $797,000 and $818,000, respectively, of impaired loans with no specific allowance for loan losses at June 30, 2014 and December 31, 2013, respectively. The average outstanding balance of impaired loans for the six months ended June 30, 2014 was $946,000 compared to $1.4 million for the same period last year. As of June 30, 2014 and December 31, 2013, there was $731,000 and $735,000, respectively, of impaired loans on non-accrual status. During the three and six months ended June 30, 2014, interest income recognized on impaired loans subsequent to their classification as impaired was $3,000 and $5,000, respectively, compared to $2,000 and $5,000 for the same periods last year. The Company stops accruing interest on these loans on the date they are classified as non-accrual and reverses any uncollected interest that had been previously accrued as income. The Company may begin recognizing interest income on these loans as cash interest payments are received, if collection of principal is reasonably assured.

 

 

Allowance for Loan Losses

 

The ALL is established through provisions for loan losses charged to operations and represents probable incurred credit losses in the Company’s loan portfolio that have been incurred as of the balance sheet date. Loan losses are charged against the ALL when management believes that principal is uncollectible. Subsequent repayments or recoveries, if any, are credited to the ALL. Management periodically assesses the adequacy of the ALL by reference to many quantitative and qualitative factors that may be weighted differently at various times depending on prevailing conditions. These factors include, among others:

 

 

the risk characteristics of various classifications of loans;

 

 

general portfolio trends relative to asset and portfolio size;

 

 

asset categories;

 

 

potential credit concentrations;

 

 

delinquency trends within the loan portfolio;

 

 

changes in the volume and severity of past due and other classified loans;

 

 

historical loss experience and risks associated with changes in economic, social and business conditions; and

 

 

the underwriting standards in effect when the loan was made.

 

Accordingly, the calculation of the adequacy of the ALL is not based solely on the level of non-performing assets. The quantitative factors, included above, are utilized by our management to identify two different risk groups (1) individual loans (loans with specifically identifiable risks); and (2) homogeneous loans (groups of loan with similar characteristics). We base the allocation for individual loans on the results of our impairment analysis, which is typically based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or by using the loan’s most recent market value or the fair value of the collateral, if the loan is collateral dependent. Homogenous groups of loans are allocated reserves based on the loss ratio assigned to the pool based on its risk grade. The loss ratio is determined based primarily on the historical loss experience of our loan portfolio. These loss ratios are then adjusted, if determined necessary by management, based on other factors including, but not limited to, historical peer group loan loss data and the loss experience of other financial institutions. Loss ratios for all categories of loans are evaluated by management on a quarterly basis. Historical loss experience is determined based on a rolling migration analysis of each loan category within our portfolio. This migration analysis estimates loss factors based on the performance of each loan category over a four and a half year time period. These quantitative calculations are based on estimates and actual losses may vary materially and adversely from the estimates.

 

The qualitative factors, included above, are also utilized to identify other risks inherent in the portfolio and to determine whether the estimated credit losses associated with the current portfolio might differ from historical loss trends or the loss ratios discussed above. We estimate a range of exposure for each applicable qualitative factor and evaluate the current condition and trend of each factor. Because of the subjective nature of these factors, the actual losses incurred may vary materially and adversely from the estimated amounts.

 

In addition, regulatory agencies, as a part of their examination process, periodically review the Bank’s ALL, and may require the Bank to take additional provisions to increase the ALL based on their judgment about information available to them at the time of their examinations. No assurance can be given that adverse future economic conditions or other factors will not lead to increased delinquent loans, further provisions for loan losses and/or charge-offs. Management believes that the ALL as of June 30, 2014 and December 31, 2013 was adequate to absorb probable incurred credit losses inherent in the loan portfolio.

 

 

The following is a summary of the activity for the ALL for the three and six months ended June 30, 2014 and 2013:

  

(in thousands)   Commercial    

Commercial

Real Estate

    Residential     Land and Construction    

Consumer

and Other

    Total  
Three Months Ended June 30, 2014:                                                
Allowance for loan losses:                                                

Beginning balance

  $ 1,579     $ 3,660     $ 778     $ 811     $ 424     $ 7,252  

Provision for loan losses

    10       140       110       (120

)

    (40

)

    100  

Charge-offs

                                   

Recoveries

    15                               15  

Ending balance

  $ 1,604     $ 3,800     $ 888     $ 691     $ 384     $ 7,367  

Six Months Ended June 30, 2014:

                                         

Allowance for loan losses:

                                               

Beginning balance

  $ 1,583     $ 3,660     $ 758     $ 811     $ 424     $ 7,236  

Provision for loan losses

    (10

)

    140       130       (120

)

    (40

)

    100  

Charge-offs

                                   

Recoveries

    31                               31  

Ending balance

  $ 1,604     $ 3,800     $ 888     $ 691     $ 384     $ 7,367  

Three Months Ended June 30, 2013:

                                         

Allowance for loan losses:

                                               

Beginning balance

  $ 1,631     $ 3,200     $ 698     $ 741     $ 349     $ 6,619  

Provision for loan losses

    (100

)

    (25

)

    50       25       50        

Charge-offs

                                   

Recoveries

    1                               1  

Ending balance

  $ 1,532     $ 3,175     $ 748     $ 766     $ 399     $ 6,620  
Six Months Ended June 30, 2013:                                                
Allowance for loan losses:                                                
Beginning balance   $ 2,277     $ 2,450     $ 508     $ 411     $ 369     $ 6,015  
Provision for (reduction of) loan losses     (1,800 )     725       240       355       (20 )     (500 )
Charge-offs                                    
Recoveries     1,055                         50       1,105  
Ending balance   $ 1,532     $ 3,175     $ 748     $ 766     $ 399     $ 6,620  

  

There were no loans acquired with deteriorated credit quality during the three and six months ended June 30, 2014 and 2013.

 

The ALL was $7.4 million, or 1.79% of our total loan portfolio, at June 30, 2014, compared to $7.2 million, or 1.89% of our total loan portfolio, at December 31, 2013. At June 30, 2014 and December 31, 2013, our non-performing loans were $731,000 and $735,000, respectively. The ratio of our ALL to non-performing loans was 1,008.46% and 984.26% at June 30, 2014 and December 31, 2013, respectively. In addition, our ratio of non-performing loans to total loans was 0.18% and 0.19% at June 30, 2014 and December 31, 2013, respectively. The ALL is impacted by inherent risk in the loan portfolio, including the level of our non-performing loans, as well as specific reserves and charge-off activities. The remaining portion of our ALL is allocated to our performing loans based on the quantitative and qualitative factors discussed above.

 

Deferred Tax Asset

 

During the year ended December 31, 2009, the Company established a full valuation allowance against the deferred tax assets due to the uncertainty regarding its realizability. During the quarter ended June 30, 2013, management reassessed the need for this valuation allowance and concluded that a valuation allowance was no longer appropriate and that it is more likely than not that these assets will be realized. As a result, management reversed the valuation allowance as an income tax benefit in the unaudited Consolidated Statements of Operations and Comprehensive Income during the quarter ended June 30, 2013. In making this determination, management analyzed, among other things, our recent history of earnings and cash flows, forecasts of future earnings, improvements in the credit quality of the Company’s loan portfolio, the nature and timing of future deductions and benefits represented by the deferred tax assets and our cumulative earnings for the 12 quarters preceding the reversal of this valuation allowance.

 

At June 30, 2014 and December 31, 2013, we had a net deferred tax asset of $2.7 million and $3.1 million, respectively. Our net deferred tax asset primarily consists of deferred tax assets related to federal and state net operating loss carryforwards and the allowance for loan losses.

  

 

A valuation allowance is required if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including historical financial performance, the forecasts of future income, existence of feasible tax planning strategies, length of statutory carryforward period, and assessments of the current and future economic and business conditions. Management evaluates the positive and negative evidence and determines the realizability of the deferred tax asset on a quarterly basis. Management may reestablish a valuation allowances in the future to the extent that it is determined that it is more likely than not that these assets will not be realized.

 

Deposits

 

The Company’s activities are largely based in the Los Angeles metropolitan area. The Company’s deposit base is also primarily generated from this area.

 

At June 30, 2014, total deposits were $467.8 million compared to $452.8 million at December 31, 2013, representing an increase of 3.3%, or $15.0 million. Total core deposits, which include non-interest bearing demand deposits, interest bearing demand deposits, and money market deposits and savings, were $426.4 million and $409.8 million at June 30, 2014 and December 31, 2013, respectively. Non-interest bearing deposits represent 56.0% of total deposits at June 30, 2014, compared to 52.3% at December 31, 2013.

 

The following table reflects a summary of deposit categories by dollar and percentage at June 30, 2014 and December 31, 2013:

 

   

June 30, 2014

   

December 31, 2013

 

(dollars in thousands)

 

Amount

   

Percent of
Total

   

Amount

   

Percent of
Total

 

Non-interest bearing demand deposits

  $ 261,987       56.0

%

  $ 236,869       52.3

%

Interest bearing checking

    23,594       5.1

%

    21,005       4.6

%

Money market deposits and savings

    140,830       30.1

%

    151,879       33.6

%

Certificates of deposit

    41,361       8.8

%

    43,013       9.5

%

Total

  $ 467,772       100.0

%

  $ 452,766       100.0

%

 

At June 30, 2014, the Company had three certificates of deposit with the State of California Treasurer’s Office for a total of $38.0 million, which represented 8.1% of total deposits. The deposits outstanding at June 30, 2014 are scheduled to mature in the third quarter of 2014. The Company intends to renew each of these deposits at maturity. However, there can be no assurance that the State of California Treasurer’s Office will continue to maintain deposit accounts with the Company. At December 31, 2013, the Company had four certificates of deposit with the State of California Treasurer’s Office for a total of $38.0 million, which represented 8.4% of total deposits. The Company was required to pledge $41.8 million of agency mortgage-backed securities at both June 30, 2014 and December 31, 2013, in connection with these certificates of deposit. For further information on the Company’s certificates of deposit with the State of California Treasurer’s Office, see Part I, Item 1. Financial Statements - Note 7 “Deposits.”

 

The aggregate amount of certificates of deposit of $100,000 or more at June 30, 2014 and December 31, 2013 was $40.6 million and $42.1 million, respectively.

 

Scheduled maturities of certificates of deposit in amounts of $100,000 or more at June 30, 2014, including deposit accounts with the State of California Treasurer’s Office and CDARS were as follows:

 

(in thousands)

       

Due within 3 months or less

  $ 39,867  

Due after 3 months and within 6 months

    541  

Due after 6 months and within 12 months

    147  

Due after 12 months

     

Total

  $ 40,555  

 

Liquidity and Asset/Liability Management

 

Liquidity, as it relates to banking, is the ability to meet loan commitments and to honor deposit withdrawals through either the sale or maturity of existing assets or the acquisition of additional funds through deposits or borrowing. The Company’s main sources of funds to provide liquidity are its cash and cash equivalents, paydowns and maturities of investments, loan repayments, and increases in deposits and borrowings. The Company also maintains lines of credit with the Federal Home Loan Bank (“FHLB”), and other correspondent financial institutions.

 

The liquidity ratio (the sum of cash and cash equivalents and available for sale investments, excluding amounts required to be pledged and operating requirements, divided by total assets) was 16.7% at June 30, 2014 and 19.4% at December 31, 2013.

 

 

At June 30, 2014 and December 31, 2013, the Company had a borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB of $186.1 million and $169.9 million, respectively. The Company had $25.0 million and $27.5 million of long-term borrowings outstanding under this borrowing/credit facility with the FHLB at June 30, 2014 and December 31, 2013, respectively. The Company had no overnight borrowings outstanding under this borrowing/credit facility at June 30, 2014 and December 31, 2013.

 

The following table summarizes the outstanding long-term borrowings under the borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB at June 30, 2014 and December 31, 2013 (dollars in thousands):

 

Maturity Date     Interest Rate         June 30, 2014       December 31, 2013  

May 23, 2014

    1.14%               2,500  

December 29, 2014

    0.83%         5,000       5,000  

December 30, 2014

    0.74%         2,500       2,500  

May 26, 2015

    1.65%         2,500       2,500  

May 23, 2016

    2.07%         2,500       2,500  

December 29, 2016

    1.38%         5,000       5,000  

December 30, 2016

    1.25%         2,500       2,500  

May 2, 2018

    0.93%         5,000       5,000  
   

Total

  $ 25,000     $ 27,500  


At June 30, 2014 and December 31, 2013, the Company also had $27.0 million in Federal fund lines of credit available with other correspondent banks that could be used to disburse loan commitments and to satisfy demands for deposit withdrawals. Each of these lines of credit is subject to conditions that the Company may not be able to meet at the time when additional liquidity is needed. As of June 30, 2014 and December 31, 2013, the Company had pledged $2.6 million and $3.1 million, respectively, of corporate notes related to these lines of credit.

 

Management believes the level of liquid assets and available credit facilities are sufficient to meet current and anticipated funding needs. In addition, the Bank’s Asset/Liability Management Committee oversees the Company’s liquidity position by reviewing a monthly liquidity report. Management is not aware of any trends, demands, commitments, events or uncertainties that will result or are reasonably likely to result in a material change in the Company’s liquidity.

 

Capital Expenditures

 

As of June 30, 2014, the Company was not subject to any material commitments for capital expenditures.

 

Capital Resources

 

At June 30, 2014, the Company had total stockholders’ equity of $59.2 million, which included $121,000 in common stock, $70.2 million in additional paid-in capital, $2.9 million in accumulated deficit, $227,000 in accumulated other comprehensive income, and $8.5 million in treasury stock.

 

Capital

 

The Company and the Bank are subject to the various regulatory capital requirements administered by federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of 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. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material and adverse effect on the business, results of operations and financial condition of the Company.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that as of June 30, 2014 and December 31, 2013, the Company and the Bank met all capital adequacy requirements to which they are subject.

 

At December 31, 2013, the most recent notification from the OCC categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To generally be categorized as a “well-capitalized” financial institution, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since the notification that management believes have changed the Bank’s categorization.

 

 

 

The Company’s and the Bank’s capital ratios as of June 30, 2014 and December 31, 2013 are presented in the table below:

 

      Company       Bank       For Capital Adequacy Purposes       For the Bank to be Well- Capitalized Under Prompt Corrective Measures  
(dollars in thousands)     Amount       Ratio       Amount       Ratio       Amount       Ratio       Amount       Ratio  
June 30, 2014:                                                                

Total Risk-Based Capital Ratio

  $ 63,479       14.38

%

  $ 59,469       13.47

%

  $ 35,323       8.00

%

  $ 44,153       10.00

%

Tier 1 Risk-Based Capital Ratio

  $ 57,934       13.12

%

  $ 53,923       12.21

%

  $ 17,661       4.00

%

  $ 26,492       6.00

%

Tier 1 Leverage Ratio

  $ 57,934       10.58

%

  $ 53,923       9.84

%

  $ 21,907       4.00

%

  $ 27,402       5.00

%

                                                                 

December 31, 2013:

                                                               

Total Risk-Based Capital Ratio

  $ 58,620       14.18

%

  $ 56,555       13.69

%

  $ 33,062       8.00

%

  $ 41,326       10.00

%

Tier 1 Risk-Based Capital Ratio

  $ 53,425       12.93

%

  $ 51,361       12.43

%

  $ 16,531       4.00

%

  $ 24,796       6.00

%

Tier 1 Leverage Ratio

  $ 53,425       9.70

%

  $ 51,361       9.32

%

  $ 22,025       4.00

%

  $ 27,541       5.00

%

 

On July 2, 2013, the Federal Reserve approved the final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5%. The new rules also require a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets over each of the required capital ratios that will be phased in from 2016 to 2019 and must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments, excluding trust preferred securities, mortgage servicing rights and certain deferred tax assets, and including unrealized gains and losses on available for sale debt and equity securities. On July 9, 2013, the FDIC and OCC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC and OCC's rules are identical in substance to the final rules issued by the FRB.

 

The phase-in period for the final rules will begin for the Company and the Bank on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule. Management is currently evaluating the provisions of the final rules and their expected impact.

 

Dividends

 

In the ordinary course of business, the Company is dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Currently, the Bank is prohibited from paying dividends to the Company until such time as the accumulated deficit is eliminated.

 

To date, the Company has not paid any cash dividends. Payment of stock or cash dividends in the future will depend upon earnings and financial condition and other factors deemed relevant by the Company’s Board of Directors, as well as the Company’s legal ability to pay dividends. Accordingly, no assurance can be given that any cash dividends will be declared in the foreseeable future.

 

Consent Order

 

On September 11, 2013, the Board of Directors of the Bank entered into a stipulation and consent to the issuance of a consent order with the OCC consenting to the issuance of a consent order (the “Consent Order”) by the OCC, effective as of that date. The Consent Order requires the Bank to take corrective action to enhance its program and procedures for compliance with the Bank Secrecy Act and other anti-money laundering regulations. Failure to comply with the Consent Order may result in additional regulatory action, including restrictions on our operations, civil money penalties against the Bank and its officers and directors or enforcement of the Consent Order through court proceedings.

 

 

Off-Balance Sheet Arrangements

 

In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and letters of credit. To varying degrees, these instruments involve elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position.

 

(in thousands)

 

June 30, 2014

   

December 31, 2013

 

Commitments to extend credit

  $ 125,635     $ 104,330  

Commitments to extend credit to directors and officers (undisbursed amount)

  $ 1,086     $ 1,604  

Standby/commercial letters of credit

  $ 2,351     $ 2,616  

Guarantees on revolving credit card limits

  $ 566     $ 574  

Outstanding credit card balances

  $ 62     $ 73  

 

The Company maintains an allowance for unfunded commitments, based on the level and quality of the Company’s undisbursed loan funds, which comprises the majority of the Company’s off-balance sheet risk. As of June 30, 2014 and December 31, 2013, the allowance for unfunded commitments was $270,000, which represented 0.21% and 0.25% of the undisbursed commitments and letters of credit, respectively.

 

Management is not aware of any other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, and results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

For further information on commitments and contingencies, see Part I, Item 1. Financial Statements - Note 9 “Commitments and Contingencies.”

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

 

Not applicable.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

The Company’s management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the U.S. Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

Changes in Internal Controls

 

There have not been any changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

At present, there are no pending or threatened proceedings against the Company which, if determined adversely, would have a material effect on the Company’s business, financial position, results of operations, cash flows or stock price. In the ordinary course of operations, the Company may be party to various legal proceedings.

 

Item 1A.

 Risk Factors

 

Management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2013. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2013, which could materially and adversely affect the Company’s business, financial condition and results of operations. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not presently known to management or that management currently believes to be immaterial may also materially and adversely affect the Company’s business, financial condition or results of operations.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Unregistered Sales of Equity Securities

 

None.

 

Purchases of Equity Securities

 

The table below summarizes the Company’s monthly repurchases of equity securities during the three months ended June 30, 2014.

 

(dollars in thousands, except per share data)

Period

 

Total Number of Shares
Purchased

   

Average Price Paid Per Share

   

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)

   

Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans of Program (1)

 

April 1-30, 2014

        $           $ 29  

May 1-31, 2014

                      29  

June 1-30, 2014

                      29  

Total

        $           $ 29  
                                   

 (1)        In August 2010, the Company’s Board of Directors authorized the purchase of up to $2.0 million of the Company’s common stock, which was announced by press release and Current Report on Form 8-K on August 16, 2010. Under the Company’s stock repurchase program, the Company has been acquiring its common stock in the open market from time to time beginning in August 2010. The Company’s stock repurchase program may be modified, suspended or terminated by the Board of Directors at any time without notice.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures.

 

None.

 

Item 5.

Other Information

 

(a)     Additional Disclosures. None.

 

(b)     Stockholder Nominations. There have been no material changes in the procedures by which stockholders may recommend nominees to the Board of Directors during the three months ended June 30, 2014. Please see the discussion of these procedures in the most recent proxy statement on Schedule 14A filed with the SEC.

 

 

Item 6.

Exhibits

 

 

31.1

Principal Executive Officer Certification required under Section 302 of the Sarbanes—Oxley Act of 2002.

 

 

31.2

Principal Financial Officer Certification required under Section 302 of the Sarbanes—Oxley Act of 2002.

 

 

32

Principal Executive Officer and Principal Financial Officer Certification required under Section 906 of the Sarbanes—Oxley Act of 2002.

 

 

101.INS

XBRL Instance Document.

 

 

101.SCH

XBRL Taxonomy Extension Schema Document.

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

 

  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 1ST CENTURY BANCSHARES, INC.

   
   
 

By:

/s/ Alan I. Rothenberg.

   

Alan I. Rothenberg

   

Chairman and Chief Executive Officer

     
 

By:

/s/ Bradley S. Satenberg.

   

Bradley S. Satenberg

   

Executive Vice President and Chief Financial Officer