Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the fiscal year ended December 31, 2015 | |
|
OR | |
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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 |
90067 | |
| Los Angeles, California | (Zip Code) | |
|
(Address of Principal Executive Offices) |
(310) 270-9500
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
Name of each exchange on which registered | |
|
Common Stock, par value $0.01 per share |
The NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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 such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
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. (Check one):
|
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 ☒
The aggregate market value of the common equity held by non-affiliates was approximately $55.9 million based on the closing sales price of a share of Common Stock of $7.00 as of June 30, 2015.
10,336,884 shares of common stock of the registrant were outstanding as of February 19, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2016 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference in Part III of this Form 10-K.
Index to
Annual Report on Form 10-K
For the Year Ended December 31, 2015
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K, 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 or continued sluggish growth; 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, including regulations regarding capital requirements, 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; 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”.
Any forward-looking statements in this Annual Report on Form 10-K 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.
|
Item 1 |
- Business |
Overview
1st Century Bancshares, Inc. (“Bancshares”), a Delaware corporation, is registered with the Board of Governors of the Federal Reserve System (the “FRB”) as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Bancshares has one subsidiary, 1st Century Bank, National Association (the “Bank”). The Bank is subject to both the regulation of, and periodic examinations by the Office of the Comptroller of the Currency (the “OCC”), which is the Bank’s primary federal regulatory agency.
Bancshares and the Bank are collectively referred to herein as “we”, “our”, “us” or “the Company.”
Bancshares’ common stock trades on the NASDAQ Stock Market LLC Capital Market (“NASDAQ CM”) under the symbol “FCTY.” All companies listed on the NASDAQ CM must meet certain financial requirements and adhere to NASDAQ CM’s corporate governance standards.
Bancshares’ principal source of income is dividends from the Bank. Bancshares’ operating costs, including certain professional fees and stockholders’ costs, are paid from dividends paid to Bancshares by the Bank.
At December 31, 2015 and 2014, the Company had consolidated assets of $732.0 million and $585.2 million, respectively, total loans of $598.4 million and $442.9 million, respectively, deposits of $598.2 million and $503.2 million, respectively, and stockholders’ equity of $64.9 million and $61.7 million, respectively.
The Company maintains a website at http://www.1cbank.com. By including the foregoing website address, the Company does not intend to and shall not be deemed to incorporate by reference any material contained therein. The Company makes available, free of charge through the Company’s website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after such reports are filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The Bank
Headquartered in the West Los Angeles area of Los Angeles, California, known as Century City, the Bank is a full service commercial bank. The Bank was organized as a national banking association on October 27, 2003 and opened for business on March 1, 2004. In addition to a full service branch in Century City, the Bank has relationship offices in Santa Monica and Beverly Hills, California. The Bank’s primary focus is relationship banking to family and closely held middle market businesses, professional service firms, and high net worth individuals, real estate investors and entrepreneurs. The Bank also 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 our business client base.
The Bank’s founders and directors represent leading business executives and professionals in many industries with extensive personal contacts, and business, professional and community relationships throughout the Los Angeles area. The Bank’s goal is to utilize the founders and directors as a source of referrals for developing business relationships and expanding the Bank’s franchise in its target market of the Westside of Los Angeles. The Bank’s management team brings together a wealth of experience with complementary skills designed to build and grow a superior community financial institution from these relationships.
Market Area
The general market area we serve is loosely defined as La Cienega Boulevard to the east, the Santa Monica Mountains to the north, the Pacific Ocean to the west and the Los Angeles International Airport to the south. This is a highly diversified market with most businesses operating in the service industry, and also includes a concentration of high net worth individuals. According to SNL Financial LC, the median household income and per capita income within our general market were $75,919 and $58,674, respectively, in 2015 exceeding all other regions of Los Angeles County. The median household income and per capita income of Los Angeles County during the same period were $57,864 and $28,126, respectively. The micro-economic market of Century City, where the Bank is based, is much more concentrated. Smaller businesses dominate this market with 68.5% of employers having less than 5 employees. According to the U.S. Department of Commerce, Bureau of the Census data for 2012, there are approximately 2,500 businesses located in Century City’s one square mile area, of which 799 (32.1%) are professional services firms. Other industries heavily represented in Century City include entertainment, financial services and real estate.
With a population of nearly a million residents and a workforce of more than 500,000, the Westside of Los Angeles is a major force in the Southern California economy. This area supports over 52 million square feet of rentable office space and has recently been referred to as “Silicon Beach” due to its emergence as a new hub of digital media and high-tech advancements.
Target Customers
The target market for our products and services is family and closely held middle market business, professional service firms, high net worth individuals, real estate investors and entrepreneurs with basic borrowing needs between $250,000 and $5,000,000 and/or with the need for non-credit services, including operating account services and cash management needs. Loans in excess of our borrowing limits to one customer or related entities are participated out to other financial institutions as a way of accommodating customers with higher borrowing needs. Our market territory is characterized by a sizeable number of small businesses in proportion to the number of large employers. Service firms, merchandising, distribution and support industries make up the vast majority of firms and the employment base. Within the professional services markets, we have made loans to and attracted deposits from law firms, medical practices and individual physicians, business management and accounting firms, real estate professionals, managers and investors and other family and closely held corporations. We also supply credit and depository services to meet the personal needs of their principals, families and employees.
We develop business through personalized and direct marketing programs, utilizing experienced banking officers. We rely greatly on our ability to access our investor and founder base, along with referrals from satisfied clients. In addition, we have a very strong commitment to civic, community and business groups important to our client base.
Competition
The Bank competes with other banks and financial institutions to attract relationships. The Bank faces competition from established local and regional banks. Many of them have larger customer bases, greater name recognition and brand awareness, greater financial and other resources and longer operating histories. In order to compete with the other financial service providers, the Company principally relies upon local promotional activities, personal relationships established by founders, investors, officers, directors, and employees with its customers, and specialized services tailored to meet its customers’ needs. In those instances where the Company is unable to accommodate a customer’s needs, the Company seeks to arrange for such loans on a participation basis with other financial institutions or to have those services provided in whole, or in part, by its correspondent banks. See Part I, Item 1 – “Business - Supervision and Regulation.”
Products and Services
The Bank’s goal is to deliver the most responsive and adaptive depository and lending products and services to our clientele. While the Bank will endeavor to maintain maximum flexibility with regards to structure, pricing and terms, the Bank’s product offerings are along the following lines:
Loans
|
● |
Business and personal lines of credit and term loans, |
|
● |
Tenant improvement and equipment financing, |
|
● |
Bridge and/or specific purpose loans, |
|
● |
Commercial, industrial, multi-family and 1-4 single family residential real estate lending, |
|
● |
Personal home equity loans and lines of credit, and |
|
● |
Credit cards for business and personal use. |
Deposits
|
● |
Business checking, money market and certificates of deposit, |
|
● |
Personal checking, money market and certificates of deposits, |
|
● |
Attorney-Client trust accounts, |
|
● |
Trust accounts, |
|
● |
Cash management and on-line banking, and |
|
● |
Debit cards. |
Loan Approval
Our Board of Directors (the “Board”) establishes lending policies to ensure the above objectives are met. The Board has established an approval process that generally requires a high level of review relative to any credit consideration.
The Board has granted loan approval authority to the President/Chief Executive Officer and the Executive Vice President/Chief Credit Officer, which may be exercised individually or jointly up to designated approval limits. The Board has also established the Bank’s Board of Directors’ Loan Committee (the “Directors’ Loan Committee”), which approves loans above designated amounts. The Directors’ Loan Committee consists of three outside Bank board members and has approval authority for any one loan up to the Bank’s legal lending limit, which was approximately $11.1 million at December 31, 2015.
In addition, the full Board must approve any loan that is subject to FRB Regulation O, which governs loans made by the Bank to the Company’s Directors, executive officers, and principal shareholders as those terms are defined in Regulation O.
Loan Review
We recognize that the proper monitoring of loans is essential for evaluating the quality of our loan portfolio and for ensuring that the allowance for loan losses is adequate. We have established a loan grading system consisting of nine different categories (Grades 1 through 4 and 4w, and 5 through 8). Grades 1 through 4 and 4w reflect strong, good and satisfactory risk. Grades 5 through 8 include Special Mention (criticized assets) and the classified assets categories of Substandard, Doubtful, and Loss. Loans graded 5 through 8 are evaluated for impairment.
The following describes grades 5 through 8 of our loan grading system:
|
● |
Special Mention – Grade 5. Loan assets categorized as “Special Mention” have potential weaknesses that deserve management’s close attention. Borrower and guarantor’s capacity to meet all financial obligations is marginally adequate or deteriorating. |
|
● |
Substandard – Grade 6. Loan assets classified “Substandard” are 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 – Grade 7. Loan assets classified as “Doubtful” have 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 – Grade 8. Loan assets classified as “Loss” are 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 all of a perceived asset even though partial recovery may be collected in the future. |
It is the underwriting department’s responsibility to grade each credit. However, the grade may be changed as the loan moves through the approval process.
To further ensure proper risk grading of loans and administration of the loan portfolio, we engaged an independent third party to conduct annual reviews of this function. These reviews assess the quality of (i) the current administration of the loans, (ii) loans that require the attention of management, and (iii) the risk grade identification. The reviews primarily focus on credit quality, compliance with internal policies, loan agreement covenants, laws and regulations, and documentation.
Concentrations/Customers
Approximately 74.6% of total loans at December 31, 2015, consisted of real estate loans, including first trust deeds on single family residential properties, undeveloped land, multi-family residential properties, commercial/industrial real estate, and construction-in-process. Of the total loans outstanding at December 31, 2015, there were 206 loans that had outstanding balances of $1,000,000 or more, which totals approximately $453.4 million, or 75.8% of the total loan portfolio (some lending relationships will include more than one of these loans). Overall, the loan portfolio has changed from approximately 696 loans totaling $442.8 million at December 31, 2014 to approximately 814 loans totaling $598.1 million at December 31, 2015. At December 31, 2015 and 2014, the average balance per loan was $735,000 and $636,000, respectively. Substantially all of the Company’s loan and deposit customers are located in Southern California.
Correspondent Banks
Correspondent bank deposit accounts are generally maintained to enable the Bank to transact types of activities that it would otherwise be unable to perform or would not be cost effective due to the size of the Bank or the volume of activity. The Bank has utilized several correspondent banks to process a variety of transactions.
Employees
At December 31, 2015, the Company had 80 full-time equivalent employees.
Economic Conditions, Government Policies, Legislation, and Regulation
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.
Our business is also influenced by the monetary and fiscal policies of the U.S. federal government and the policies of regulatory agencies, particularly the FRB. The FRB implements national monetary policies (with objectives such as curbing inflation and combating unemployment) through its open-market operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates earned on interest-earning assets and paid on interest bearing liabilities. The nature and impact on us of any future changes in monetary and fiscal policies cannot be predicted.
Economic Conditions
In late 2007, economic conditions in the United States began deteriorating, resulting in a decline in residential and commercial real estate values, as well as a significant reduction in business activity across a wide range of industries and regions. Although the domestic economy has shown signs of improvement, there can be no assurance that the economy will not enter into another recession, whether in the near or long term future. Market developments such as a relapse or worsening of economic conditions in other parts of the world may exacerbate the lingering effects of the difficult market conditions experienced by us and others in the financial services industry and could further slow, stall or reverse the slow recovery in the U.S.
Legislation and Regulation
From time to time, legislation, as well as regulations, are enacted which have the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures, and before various regulatory agencies. Such legislation may change banking statutes and our operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings banks, credit unions, and other financial institutions. We cannot predict whether any potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. See Part I, Item 1 - “Business - Supervision and Regulation.”
The Dodd-Frank Act
The most recent financial crisis has led to numerous new laws and regulatory pronouncements in the United States and internationally for financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), enacted in 2010, is one of the most far reaching legislative actions affecting the financial services industry in decades and significantly restructures the financial regulatory regime in the United States.
The Dodd-Frank Act broadly affects the financial services industry by creating new resolution authorities, requiring ongoing stress testing of capital, mandating higher capital and liquidity requirements, increasing regulation of executive and incentive-based compensation and requiring numerous other provisions aimed at strengthening the sound operation of the financial services sector depending, in part, on the size of the financial institution. Various provisions of the Dodd-Frank Act are effective and have been fully implemented, including: the revisions in the deposit insurance assessment base for the Federal Deposit Insurance Corporation (“FDIC”) insurance; the permanent increase in coverage to $250,000; the permissibility of paying interest on business checking accounts; the removal of barriers to interstate branching; and required disclosure and shareholder advisory votes on executive compensation. Implementation in 2014 of additional Dodd-Frank Act regulatory provisions included aspects of the final new capital rules, and a final rule to implement the so called “Volcker Rule” restrictions on certain proprietary trading and investment activities.
In 2014, the Consumer Finance Protection Bureau (the “CFPB”) adopted revisions to Regulation Z, which implement the Truth in Lending Act, pursuant to the Dodd-Frank Act, and apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans). The revisions mandate specific underwriting criteria for home loans in order for creditors to make a reasonable, good faith determination of a consumer's ability to repay, and establish certain protections from liability under this requirement for “qualified mortgages” meeting certain standards. In particular, it will prevent banks from making “no doc” and “low doc” home loans, as the rules require that banks determine a consumer’s ability to pay based in part on verified and documented information. Because we do not originate “no doc” or “low doc” loans, we do not believe this regulation has or will have a significant impact on our operations. However, because a substantial portion of the mortgage loans originated by the Bank do not meet the definitions for a “qualified mortgage” under final regulations adopted by the CFPB, the Bank may be subject to additional disclosure obligations and extended time periods for the assertion of defenses by the borrower against enforcement in connection with such mortgage loans.
Supervision and Regulation
Bank Holding Company and Bank Regulation
Bank holding companies and their bank and non-bank subsidiaries are subject to significant regulation and restrictions by Federal and State laws and regulatory agencies. These laws, regulations and restrictions, which may affect the cost of doing business, limit permissible activities and expansion or impact the competitive balance between banks and other financial services providers, are intended primarily for the protection of depositors and the FDIC deposit insurance fund (“DIF”), and secondarily for the stability of the U.S. banking system. They are not intended for the benefit of shareholders of financial institutions. The following discussion of key statutes and regulations to which the Company is subject is a summary and does not purport to be complete nor does it address all applicable statutes and regulations. This discussion is qualified in its entirety by reference to the statutes and regulations referred to in this discussion.
The wide range of requirements and restrictions contained in both Federal and State banking laws include:
|
● |
Requirements that bank holding companies and banks meet or exceed minimum capital requirements. See Part 1, Item 1. “Business – Capital Standards.” |
|
● |
Requirements that bank holding companies serve as a source of financial and managerial strength for their banking subsidiaries. In addition, the regulatory agencies have “prompt corrective action” authority to limit activities and require a limited guaranty of a required bank capital restoration plan by a bank holding company if the capital of a bank subsidiary falls below capital levels required by the regulators. Under the new capital rules summarized below, in order to generally be considered “well-capitalized” for bank regulatory purposes, as of January 1, 2015 the Bank is required to meet the new common equity Tier 1 ratio of 6.5%, an increased Tier 1 ratio of 8% (increased from 6%), a total capital ratio of 10% (unchanged) and a leverage ratio of 5% (unchanged). |
|
● |
Limitations on dividends payable to shareholders. Bancshare’s ability to pay dividends on both its common and preferred stock are subject to legal and regulatory restrictions, and would be derived from dividends paid by the Bank. |
|
● |
Limitations on dividends payable by bank subsidiaries. These dividends are subject to various legal and regulatory restrictions. The federal banking agencies have indicated that paying dividends that deplete a depositary institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. |
|
● |
Safety and soundness requirements. Banks must be operated in a safe and sound manner and meet standards applicable to internal controls, information systems, internal audit, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, as well as other operational and management standards. These safety and soundness requirements give bank regulatory agencies significant latitude in exercising their supervisory authority and their authority to initiate informal or formal enforcement action. |
|
● |
Requirements for approval of acquisitions and activities. Prior approval or nonobjection of the applicable federal regulatory agencies is required for most acquisitions and mergers and in order for Bancshares or the Bank to engage in certain nonbanking activities and activities that have been determined by the Federal Reserve to be financial in nature, incidental to financial activities, or complementary to a financial activity. |
|
● |
Compliance with the Community Reinvestment Act (the “CRA”). The CRA requires that banks help meet the credit needs in their communities, including the availability of credit to low and moderate income individuals. If the Company or the Bank fails to adequately serve their communities, penalties may be imposed, including denials of applications for branches, to add subsidiaries and affiliates, or to merge with or purchase other financial institutions. In its last reported examination by the OCC in May 2014, the Bank received a CRA rating of “Satisfactory.” |
|
● |
Compliance with the Bank Secrecy Act of 1970 (“BSA”), the USA Patriot Act of 2001, and other anti-money laundering laws. These laws and regulations require financial institutions to assist U.S. Government agencies in detecting and preventing money laundering and other illegal acts by maintaining policies, procedures and controls designed to detect and report money laundering, terrorist financing, and other suspicious activity. |
|
● |
Limitations on the amount of loans to one borrower and its affiliates and to executive officers and directors. |
|
● |
Limitations on transactions with affiliates. |
|
● |
Restrictions on the nature and amount of any investments in, and ability to underwrite certain securities. |
|
● |
Requirements for opening of branches intra- and interstate. |
|
● |
Truth in lending and other consumer protection and disclosure laws to ensure equal access to credit and to protect consumers in credit transactions. |
|
● |
Provisions of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and other federal and state laws dealing with privacy for nonpublic personal information of customers. |
Reports and Examinations
Bancshares is required to file with the FRB annual reports and other information regarding its business operations and those of its nonbanking subsidiaries. It is also subject to supervision and examination by the FRB. Examinations are designed to inform the FRB of the financial condition and nature of the operations of the bank holding company and its subsidiaries and to monitor compliance with the BHC Act and other laws affecting the operations of bank holding companies. To determine whether potential weaknesses in the condition or operations of bank holding companies might pose a risk to the safety and soundness of their subsidiary banks, examinations focus on whether a bank holding company has adequate systems and internal controls in place to manage the risks inherent in its business, including credit risk, interest rate risk, market risk (for example, from changes in value of portfolio instruments and foreign currency), liquidity risk, operational risk, legal risk, and reputation risk. FRB enforcement actions may include the issuance of cease and desist orders, the imposition of civil money penalties, the requirement to meet and maintain specific capital levels for any capital measure, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against officers or directors and other “institution-affiliated” parties.
The Bank is subject to examination by the OCC and also files publicly available call reports on its operating results. If, as a result of an examination of the Bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the OCC and separately the FDIC as the insurer of the Bank’s deposits, have residual authority to: enjoin “unsafe or unsound” practices; require affirmative action to correct any conditions resulting from any violation or practice; issue an administrative order that can be judicially enforced; direct an increase in capital; restrict growth; assess civil monetary penalties; remove officers and directors; institute a receivership; and, ultimately terminate the bank’s deposit insurance, which would result in a revocation of its charter.
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 required the Bank to take corrective action to enhance its program and procedures for compliance with the BSA and other anti-money laundering regulations (“AML”).
On February 23, 2015, the Board of Directors of the Bank was notified by the OCC that the OCC was terminating its Consent Order with the Bank, dated September 11, 2013, effective immediately.
In the exercise of their supervisory and examination authority, the FRB and OCC have emphasized corporate governance, stress testing, enterprise risk management and other board responsibilities; anti-money laundering compliance and enhanced high risk customer due diligence; vendor management; cyber security and fair lending and other consumer compliance obligations.
Dividends and Other Transfers of Funds
Holders of Bancshares’ common stock are entitled to receive dividends as and when declared by the Board out of funds legally available under the laws of the State of Delaware. Delaware corporations such as Bancshares may make distributions to their stockholders out of their surplus, or out of their net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. However, dividends may not be paid out of a corporation’s net profits if, after the payment of the dividend, the corporation’s capital would be less than the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets.
The FRB has advised bank holding companies that it believes that payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, banks and their holding companies may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items such as sales of buildings or other large assets in order to generate profits to enable payment of future dividends. Further, the FRB’s position that holding companies are expected to provide a source of managerial and financial strength to their subsidiary banks potentially restricts a bank holding company’s ability to pay dividends.
The Bank is a legal entity that is separate and distinct from Bancshares. Bancshares may receive income through dividends paid by the Bank. Subject to the regulatory restrictions described below, future cash dividends by the Bank will depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors.
Bank regulators also have authority to prohibit a bank from engaging in business practices considered to be unsafe or unsound. It is possible, depending upon the financial condition of a bank and other factors, that such regulators could assert that the payment of dividends or other payments might, under certain circumstances, be an unsafe or unsound practice, even if technically permissible.
FDIC Insurance
Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. FDIC insurance expense totaled $400,000 and $373,000 in 2015 and 2014, respectively. All FDIC-insured institutions are also required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the DIF. These assessments will continue until the FICO bonds mature in 2017.
Capital Standards
Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
The FRB, the OCC and the FDIC have substantially similar risk-based capital ratio and leverage ratio guidelines for banking organizations. The guidelines are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the guidelines, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A depository institution’s or holding company’s capital, in turn, is classified in one of three tiers, depending on type: Core Capital (Tier 1), Supplementary Capital (Tier 2) and Market Risk Capital (Tier 3).
The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. In 2004, the Basel Committee published a capital accord (“Basel II”) to replace Basel I. Basel II provided two approaches for setting capital standards for credit risk – an internal ratings-based approach tailored to individual institutions’ circumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines. Basel II also set capital requirements for operational risk and refines the existing capital requirements for market risk exposures.
In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified as “Basel III.” When fully phased-in, it will require bank holding companies and their bank subsidiaries to maintain substantially more capital than previously required, with a greater emphasis on common equity. The Dodd-Frank Act also required the FRB, the OCC and the FDIC to adopt regulations imposing a continuing "floor" of the Basel I-based capital requirements in cases where the Basel II and now Basel III based capital requirements otherwise would permit lower requirements.
On July 2, 2013, the Federal Reserve approved the final rules implementing the Basel III capital guidelines for U.S. banks. Under the final rules, minimum requirements 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 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 new rules also require a 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 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. The FDIC and OCC also approved final rules covering 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 began 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. The Bank is currently in compliance with these guidelines and management continues to further evaluate the impact of the phased-in provisions of the final rules.
The implementation of these more stringent requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income and return on equity, restrict the ability to pay dividends and require the raising of additional capital.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits and other restrictions on its business. Significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements under the regulatory agencies’ prompt corrective action authority.
Federal Home Loan Bank
The Bank is a member and stockholder of the capital stock of the Federal Home Loan Bank of San Francisco. Among other benefits, each Federal Home Loan Bank (“FHLB”) serves as a reserve or central bank for its members within its assigned region and makes available loans or advances to its members. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system.
Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. Each member of the FHLB of San Francisco is required to own stock in an amount equal to the greater of (i) a membership stock requirement with an initial cap of $25 million (100% of “membership asset value” as defined), or (ii) an activity based stock requirement (based on percentage of outstanding advances). At December 31, 2015, the Bank was in compliance with the FHLB’s stock ownership requirement and the investment in FHLB capital stock totaled $3.2 million.
Federal Reserve System
The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts (primarily checking and non-personal time deposits). Additionally, each member bank is required to hold stock in its regional federal reserve bank. The stock cannot be sold, traded, or pledged as collateral for loans. As specified by law, member banks receive a six percent annual dividend on their federal reserve bank stock. At December 31, 2015, the Bank was in compliance with these requirements and the investment in federal reserve bank stock totaled $1.7 million.
Securities Laws and Corporate Governance
The Company is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), both as administered by the SEC. As a company listed on the NASDAQ CM, the Company is subject to NASDAQ CM listing standards for listed companies.
The Company is also subject to the Sarbanes-Oxley Act of 2002 and other federal and state laws and regulations which address, among other issues, required executive certification of financial presentations, corporate governance requirements for board audit committees and their members, and disclosure of controls and procedures and internal control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. NASDAQ CM has also adopted corporate governance rules, which are intended to allow shareholders and investors to more easily and efficiently monitor the performance of companies and their directors.
|
Item 1A. |
Risk Factors |
The following section includes the most significant factors that may adversely affect our business and operations. This is not an exhaustive list, and additional factors could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. This discussion of risk factors may include forward-looking statements. For cautions about relying on such forward-looking statements, please refer to the section entitled “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995” at the beginning of this Annual Report on Form 10-K immediately prior to Item 1.
The Company’s Business May Be Adversely Affected By Conditions In The Financial Markets and Economic Conditions Generally
In recent years, economic growth and business activity across a wide range of industries and regions in the United States has been slow and uneven. There can be no assurance that economic conditions will continue to improve, and these conditions could worsen. In addition, declining oil prices, monetary policy decisions, international economic conditions, and the level of U.S. debt may have a destabilizing effect on financial markets.
The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is highly dependent upon the business environment in the markets where the Company operates.
Overall, during recent years, the business environment has been adverse for many households and businesses in the United States and worldwide. While economic conditions have shown signs of improvement, there can be no assurance that this improvement will continue. Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing and savings habits. Such conditions could have a material adverse effect on the credit quality of the Company’s loans and the Company’s business, financial condition, results of operations, cash flows and stock price.
The Company may have difficulty managing its growth which may divert resources and limit the Company’s ability to successfully expand its operations.
The Company has grown since it began operations in March 2004. At December 31, 2015, the Company had $732.0 million in total assets, $589.5 million in net loans and $598.2 million in deposits. The Company’s future success will depend on the ability of its officers and key employees to continue to implement and improve its operational, financial and management controls, reporting systems and procedures, and manage a growing number of customer relationships. The Company’s future level of profitability will depend in part on its continued ability to grow; however, the Company may not be able to sustain its historical growth rate or even be able to grow at all, which would have a material and adverse effect on our business, financial condition, results of operations, cash flows and stock price.
If the Company cannot attract deposits, its growth may be inhibited.
The Company plans to increase the level of its assets, including its loan portfolio. The Company’s ability to increase its assets depends in large part on its ability to attract additional deposits at competitive rates. The Company intends to seek additional deposits by continuing to establish and strengthen its personal relationships with its customers and by offering deposit products that are competitive with those offered by other financial institutions in its markets. The Company cannot ensure that these efforts will be successful. The Company’s inability to attract additional deposits at competitive rates could have a material and adverse effect on its business, financial condition, results of operations, cash flows and stock price.
Our 20 largest deposit clients account for 28.83% of our core deposits.
As of December 31, 2015, our 20 largest bank depositors accounted for, in the aggregate, 28.83% of our core deposits, which we define to include non-interest bearing demand deposits, interest bearing demand deposits and money market deposits and savings. As a result, a material decrease in the volume of those deposits by a relatively small number of our depositors could reduce our liquidity, in which event it could became necessary for us to replace those deposits with higher-cost deposits, lower-yielding securities or FHLB borrowings, which would adversely affect our net interest income and, therefore, our results of operations.
The Company relies heavily on its senior management team and other employees, the loss of whom could significantly harm its business.
The Company’s success depends heavily on the abilities and continued service of its executive officers, especially Alan I. Rothenberg, Chairman and Chief Executive Officer, Jason P. DiNapoli, President and Chief Operating Officer, Bradley S. Satenberg, Executive Vice President and Chief Financial Officer and J. Kevin Sampson, Executive Vice President and Chief Credit Officer. These four individuals are integral to implementing the Company’s business plan. If the Company loses the services of any of these executive officers, the Company’s business, financial condition, results of operations, cash flows and stock price may be materially and adversely affected. Furthermore, attracting suitable replacements may be difficult and may require significant management time and resources.
The Company also relies to a significant degree on the abilities and continued service of our deposit generating, lending, administrative, operational, accounting and financial reporting, compliance, marketing and technical personnel. Competition for qualified employees in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California independent banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out the Company’s strategies is often lengthy. If the Company fails to attract and retain the necessary deposit generating, lending, administrative, operational, accounting and financial reporting, marketing and technical personnel, the Company’s business, financial condition, results of operations, cash flows and stock price may be materially and adversely affected.
If the Company’s underwriting practices are not effective, the Company may suffer losses in its loan portfolio and its results of operations may be affected.
The Company seeks to mitigate the risks inherent in its loan portfolio by adhering to specific underwriting practices. Depending on the type of loan, these practices include analysis of a borrower’s prior credit history, financial statements, tax returns and cash flow projections, valuation of collateral based on reports of independent appraisers and verification of liquid assets. If the Company’s underwriting criteria prove to be ineffective, the Company may incur losses in its loan portfolio, which could have a material and adverse effect on our business, financial condition, results of operations, cash flows and stock price.
A significant source of risk arises from the possibility that losses could be sustained because borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. The underwriting and credit monitoring policies and procedures that the Company has adopted to address this risk may not prevent unexpected losses that could have a material and adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price. Unexpected losses may arise for a wide variety of reasons, many of which are beyond the Company’s ability to predict, influence or control. Some of these reasons could include a renewed economic downturn in the State of California or the United States, a renewed decline in the state or national real estate market, wars and acts of terrorism, and natural disasters.
If the Company’s allowance for loan losses is inadequate to cover actual losses, the Company’s financial results would be affected.
Like all financial institutions, the Company maintains an allowance for loan losses to provide for probable incurred loan losses. The Company’s allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect the Company’s business, financial condition, results of operations, cash flows and stock price. The Company’s allowance for loan losses reflects the Company’s best estimate of the losses incurred in the existing loan portfolio at the relevant balance sheet date and is based on management’s evaluation of the collectability of the loan portfolio, which evaluation is based on historical loss experience, the loss experience of other financial institutions, and other significant factors. The determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond the Company’s control, and these losses may exceed current estimates. While the Company believes that its allowance for loan losses is adequate to cover probable incurred losses, the Company cannot assure that it will not increase the allowance for loan losses further or that the allowance for loan losses will be adequate to cover probable incurred losses in any event. Future provisions for loan losses or losses in excess of the allowance for loan losses could materially and adversely affect the Company’s business, financial condition, results of operations, cash flows and stock price.
See discussion of the Company’s nonperforming assets and allowance for loan losses in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition.”
Bank regulators may require the Company to increase its allowance for loan losses, which could have a negative effect on the Company’s financial condition and results of operations.
Bank regulators, as an integral part of their respective supervisory functions, periodically review the Company’s allowance for loan losses. The bank regulators may require the Company to increase its allowance for loan losses through additional provisioning or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s. Any increase in the allowance for loan losses or further loan charge-offs required by bank regulators could have a material and adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
The Company’s lending limit may adversely affect the Company’s competitiveness.
The Company’s regulatory lending limit as of December 31, 2015 to any one customer or related group of customers was approximately $11.1 million. The Company’s lending limit is substantially smaller than those of most financial institutions with which it competes and it may affect the Company’s ability to attract or maintain customers or to compete with other financial institutions. Moreover, to the extent that the Company incurs losses and does not obtain additional capital, the Company’s lending limit, which depends upon the amount of its capital, will decrease, which could have a material and adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
We may enter into new lines of business or offer new products and services which expose us to additional risk or which are not successful.
We may enter into new lines of business or offer new products or services as new opportunities arise or as our business strategy changes. New lines of business or new products or services may involve significant business, reputational or regulatory risk, including increased regulatory scrutiny. The success of these efforts depends on many factors, including the competitive landscape, market adoption and successful implementation. We may experience significant losses to the extent that we invest significant time and resources to a new line of business, product or service and it is not successful. There can be no assurance that we can successfully manage these risks and failure to do so could have a material adverse effect on our financial condition or results of operations.
Failure to successfully execute our strategic plan may adversely affect our performance.
Our financial performance and profitability depend on our ability to execute our corporate strategies. Our near-term business strategy includes pursuing organic growth within our geographic footprint within the markets we currently serve. We cannot provide any assurance that we will continue to be able to maintain our rate of growth at acceptable risk levels and upon acceptable terms, while managing the costs and implementation risks associated with our growth strategy. We may be unable to continue to increase our volume of loans and deposits or to introduce new products and services at acceptable risk levels for a variety of reasons, including an inability to maintain capital and liquidity sufficient to support continued growth. If we are successful in continuing our growth, we cannot assure you that further growth would offer the same levels of potential profitability, or that it would be successful in controlling costs and maintaining asset quality. Other factors that may adversely affect our ability to attain our long-term financial performance goals include an inability to control non-interest expense, including, but not limited to, rising employee compensation, regulatory compliance and healthcare costs, limitations imposed on us through regulatory actions, and our inability to increase net-interest income due to continued downward pressure on interest rates. Accordingly, an inability to maintain growth, or an inability to effectively manage growth, could adversely affect our results of operations, financial condition and stock price.
Our concentration of commercial real estate loans is subject to unique risks that could adversely affect our earnings.
Our commercial real estate portfolio was $259.0 million at December 31, 2015 comprising 43.3% of total loans. Commercial real estate loans are often riskier and tend to have significantly larger balances than home equity loans or residential mortgage loans to individuals. While we believe that the commercial real estate concentration risk is mitigated by sound underwriting practices, and ongoing portfolio monitoring and market analysis, the repayments of these loans usually depends on the successful operation of a business or the sale of the underlying property. As a result, these loans are more likely to be unfavorably affected by adverse conditions in the real estate market or the economy in general.
The federal banking regulators have issued guidance for those institutions that are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions that are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced significant growth in its commercial real estate portfolio in recent years. Commercial real estate loans represent 357.2% of total risk-based capital as of December 31, 2015. Management implemented heightened monitoring, reporting and risk management measures, but there can be no assurance that these enhanced concentration risk management systems will mitigate the increased risk. Although not currently anticipated, we may be required to maintain higher levels of capital than we would otherwise be expected to maintain as a result of our level of commercial real estate loans, which may require us to obtain additional capital sooner than we would otherwise seek it, which may reduce stockholder returns.
Our concentration of construction loans is subject to unique risks that could adversely affect our earnings.
Our construction loan portfolio, which includes land and construction loans, was $59.8 million at December 31, 2015 comprising 10.0% of total loans. Construction loans are often riskier and tend to have significantly larger balances than home equity loans or residential mortgage loans to individuals. Although we believe that the construction loan concentration risk is mitigated by sound underwriting practices, and ongoing portfolio monitoring and market analysis, the repayments of these loans usually depends on the successful operation of a business, ability of the borrower to obtain permanent financing, or the sale of the building or underlying property. As a result, these loans are more likely to be unfavorably affected by adverse conditions in the real estate market or the economy in general.
Our concentration of commercial and industrial loans is subject to unique risks that could adversely affect our earnings.
Our commercial and industrial loans portfolio was $112.9 million at December 31, 2015. Commercial and industrial loans comprise 18.9% of the total loan portfolio. These loans are collateralized by various business assets, the value of which may decline during adverse market and economic conditions. Adverse conditions in the real estate market and the economy generally may result in increasing levels of loan charge-offs and non-performing assets and the reduction of earnings. Additionally, if and when we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then-fair market value of the collateral, which may ultimately result in a loss and a reduction of earnings.
The Company faces strong competition from financial services companies and other companies that offer banking services, and its failure to compete effectively with these companies could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
Within the Los Angeles metropolitan area, the Company faces intense competition for loans, deposits, and other financial products and services. Increased competition within the Company’s market may result in reduced loan originations and deposits. Ultimately, the Company may not be able to compete successfully against current and future competitors. Many competitors offer the types of loans and banking services that the Company offers. These competitors include national banks, regional banks and other independent banks. The Company also faces competition from many other types of financial institutions, including finance companies, brokerage firms, insurance companies, mortgage banks and other financial intermediaries. In particular, the Company’s competitors include financial institutions whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may have larger lending limits which would allow them to serve the credit needs of larger customers. These institutions, particularly to the extent they are more diversified than the Company, may be able to offer the same loan products and services the Company offers at more competitive rates and prices.
The Company also faces competition from out-of-state financial intermediaries that have opened loan production offices or that solicit deposits in the Company’s market areas. If the Company is unable to attract and retain banking customers, it may be unable to continue its loan growth and level of deposits, and its business, financial condition, results of operations, cash flows and stock price may be materially adversely affected.
The occurrence of fraudulent activity, breaches of our information security, and cyber-security attacks could have a material adverse effect on our business, financial condition, results of operations or future prospects.
As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our clients and that may result in financial losses or increased costs to us or our clients, disclosure or misuse of confidential information belonging to us or personal or confidential information belonging to our clients, misappropriation of assets, litigation, or damage to our reputation. Fraudulent activity may take many forms, including check “kiting” or fraud, electronic fraud, wire fraud, “phishing” and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to data processing or data storage systems used by us or by our clients, denial or degradation of service attacks, and malware or other cyber-attacks. We have been seeing increases in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, including in the commercial banking sector, as cyber-criminals have been targeting commercial bank and brokerage accounts on an increasing basis. Moreover, in recent periods, several large corporations, including financial service organizations and retail companies, have suffered major data breaches, in some cases exposing not only their confidential and proprietary corporate information, but also sensitive financial and other personal information of their clients or customers and their employees, and subjecting those corporations to potential fraudulent activity and their clients and customers to identity theft and fraudulent activity in their credit card and banking accounts. Therefore, security breaches and cyber-attacks can cause significant increases in operating costs, including the costs of compensating clients and customers for any resulting losses they may incur and the costs and capital expenditures required to correct the deficiencies in and strengthen the security of data processing and storage systems.
Although we invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and we conduct periodic tests of our security systems and processes, there is no assurance that we will succeed in anticipating or adequately protecting against or preventing all security breaches and cyber-attacks from occurring due to a number of possible causes, many of which will be outside of our control, including the changing nature and increasing frequency of such attacks, the increasing sophistication of cyber-criminals, and possible weaknesses that go undetected in our data systems notwithstanding the testing we conduct of those systems. If we are unable to detect or prevent a security breach or cyber-attack from occurring, then, we and our clients could incur losses or damages; and we could sustain damage to our reputation, lose clients and business, suffer disruptions to our business and incur increased operating costs, and be exposed to additional regulatory scrutiny or penalties and to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
The Company relies on communications, information, operating and financial control systems technology from third-party service providers, and the Company may suffer an interruption in, security breach or break of those systems that may result in lost business and the Company may not be able to obtain substitute providers on terms that are as favorable if its relationships with its existing service providers are interrupted.
The Company relies heavily on third-party service providers for much of its communications, information, operating and financial control systems technology, including customer relationship management, general ledger, deposit, and servicing, information technology monitoring and loan origination systems. The Company cannot assure that failures or interruptions in these systems will not occur or, if they do occur, that they will be adequately addressed by it or the third parties on which the Company relies. The occurrence of any failures or interruptions could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price. If any of the Company’s third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in the Company’s relationships with them, the Company may be required to locate alternative sources of such services, and the Company cannot assure that it could negotiate terms that are as favorable to the Company, or could obtain services with similar functionality as found in its existing systems without the need to expend substantial resources, if at all. Any of these circumstances could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
The Company may experience certain risks in connection with its online banking services that could adversely affect its business.
The Company’s business depends in part upon the use of the internet and online services as a medium for banking and commerce by customers. The Company’s inability to modify or adapt its infrastructure in a timely manner or the expenses incurred in making such adaptations could have a material and adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price. Additionally, any compromise in the secured transmission of confidential information over public networks could have a material and adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
Our network and information systems are important to our operating activities and any shutdown to our network and information systems could have a material adverse impact on our operating activities.
Our network and information systems are important to our operating activities and any network and information system shutdowns could disrupt our ability to process loan applications, originate loans, service our existing loan portfolios, or service our deposit accounts, which could have a material adverse impact on our operating activities. Shutdowns may be caused by unforeseen catastrophic events, including natural disasters, terrorist attacks, large-scale power outages, software or hardware defects, computer viruses, cyber-attacks, external or internal security breaches, acts of vandalism, misplaced or lost data, programming or human errors, difficulties in migrating technology facilities from one location to another, or other similar events.
We maintain and regularly assess a disaster recovery plan, but there can be no guarantees that our disaster recovery plan will mitigate or resolve the possible material adverse effects of a disaster.
Although we maintain, and regularly assess the adequacy of, a disaster recovery plan designed to effectively manage the effects of unforeseen events, we cannot be certain that such plan will function as intended, or otherwise resolve or compensate for such effects. Such a failure of our disaster recovery plan, if and when experienced, may have a material adverse effect on our business, financial condition, results of operations, cash flows and stock price.
Changes in economic conditions, and in particular the State of California and the United States, could have a material and adverse effect on the Company’s business.
The Company’s business is directly affected by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in governmental monetary and fiscal policies and inflation, all of which are beyond the Company’s control. The Company is particularly susceptible to conditions and changes affecting the State of California and Southern California in particular in view of the concentration of its operations and collateral securing, and likely to secure its loan portfolio in Southern California. The deterioration in economic conditions, in California and Southern California in particular, may have the following consequences, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price:
|
● |
Renewed increases in problem assets and foreclosures. |
|
● |
Renewed increases in loan delinquencies. |
|
● |
Decline in demand for loans and other products and services. |
|
● |
Deposits may decrease. |
|
● |
Collateral for loans made by the Company, especially real estate, may experience declines in value, in turn reducing customers’ borrowing power or capacity to repay, and reducing the value of assets and collateral associated with the Company’s existing loans. |
In addition, because the Company makes loans to small to medium-sized businesses, many of the Company’s customers may be particularly susceptible to the slow recovery from the recession and may be unable to make scheduled principal or interest payments during similar periods of recession.
The Company is subject to extensive government regulation and supervision
The Company is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors' funds, consumers, and the banking system as a whole, not stockholders. These regulations affect the Company's lending practices, capital structure, investment practices and growth. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the performance of and government intervention in the financial services sector. Other changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, and shifts in regulatory scrutiny during the examination process, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, other compliance burdens, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.
We are also subject to numerous other laws and government regulations that are applicable to banks and other financial institutions, which include but are not limited to various consumer protection and fair lending laws, the BSA, the USA PATRIOT ACT of 2001, and other anti-money laundering laws and regulations, and increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control.
Failure to comply with laws, regulations or policies could result in private rights of action (and class actions) or sanctions by regulatory agencies, such as cease and desist orders, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
Many of the Company’s loans are secured by real estate, and an additional downturn in the real estate market could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
A renewed downturn in the real estate market may have an adverse effect on the Company’s business because many of the Company’s loans are secured by real estate. At December 31, 2015, approximately 83.7% of the Company’s total loans were secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates, the availability of loans to potential purchasers, changes in tax laws and other laws, regulations and policies and war and acts of terrorism. In addition, real estate values in California could be affected by, among other things, earthquakes, droughts, wildfires, floods, mudslides and other national disasters particular to the state. When real estate prices decline, the value of real estate collateral securing the Company’s loans is reduced. As a result, the Company may experience greater charge-offs and, similarly, its ability to recover on defaulted loans by foreclosing and selling the real estate collateral may be diminished and as a result the Company is more likely to suffer losses on defaulted loans, which would have a material and adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
Our real estate lending also exposes us to the risk of environmental liabilities.
In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to environmental liabilities, our business, financial condition, results of operations, cash flows and stock price could be materially and adversely affected. In addition, we may not have adequate remedies against prior owners or other responsible parties or could find it difficult or impossible to sell the affected properties, which could also materially adversely affect our business, financial condition, results of operations, cash flows and stock price.
A natural disaster, especially in California, could harm the Company’s business.
Historically, Southern California has been vulnerable to natural disasters. Therefore, the Company is susceptible to the risks of natural disasters, such as earthquakes, droughts, wildfires, floods and mudslides. Natural disasters could harm the Company’s operations directly through interference with communications, as well as through the destruction of facilities and its operational, financial and management information systems. Uninsured or underinsured disasters may reduce a borrower’s ability to repay mortgage loans. Disasters may also reduce the value of the real estate securing the Company’s loans, impairing its ability to recover on defaulted loans. The occurrence of natural disasters could impair the value of the real estate in those areas affected and could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
The Company’s operations are concentrated in the Los Angeles metropolitan area.
The Company’s loan and deposit activities are largely based in the Los Angeles metropolitan area. As a result, the Company’s financial performance will depend largely upon economic conditions in this area. Adverse local economic conditions have caused and in the future may cause the Company to experience an increase in loan delinquencies, an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, all of which could materially and adversely affect the Company’s business, financial condition, results of operations, cash flows and stock price.
The Company is subject to interest rate risk.
The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, (ii) the fair value of the Company’s financial assets and liabilities, and (iii) the average duration of the Company’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be materially and adversely affected. Earnings could also be materially and adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected or prolonged change in interest rates could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
See discussion of the Company’s net interest income in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”
The Company may be materially and adversely affected by the soundness of other financial institutions.
Financial institutions are inter-related as a result of trading, clearing, counterparty and other relationships. In the normal course of business, the Company executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers and correspondent banks. These transactions expose the Company to credit risk in the event of a default by a counterparty. On a quarterly basis, the Company reviews the counterparties’ financial information, such as SEC filings, Call Reports and press releases, as well as any announcements made by appropriate industry regulators and government agencies, to monitor the counterparties’ financial stability and/or any regulatory disciplinary actions imposed on such counterparties. At December 31, 2015, the Company did not have any unsecured federal funds sold with any correspondent banks. However, no assurance can be given that the Company will not be materially and adversely affected as a result of a negative occurrence, such as a default, at one of the financial institutions with which the Company transacts business.
The Company is subject to liquidity risk.
The Company requires liquidity to meet its deposit and debt obligations as they come due. 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 FHLB and other correspondent financial institutions. The lines of credit are subject to conditions, including collateral requirements, that the Company may not be able to meet at the time when additional liquidity is needed.
The Company’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or economy generally. Factors that could reduce its access to liquidity sources include a downturn in the California economy, difficult credit markets or adverse regulatory actions against the Company. The Company’s access to deposits may also be affected by the liquidity needs of its depositors. In particular, a substantial majority of the Company’s liabilities are demand, savings, interest checking and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. The Company may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
The Company may need to raise additional capital in the future, and such capital may not be available when needed or at all.
The Company may need to raise additional capital in the future to meet recent changes in the minimum capital requirements for banks or to provide it with sufficient capital resources and liquidity to meet its commitments and business needs, particularly if its asset quality or earnings were to deteriorate. The Company’s ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of its control, and its financial performance. Economic conditions and the loss of confidence in financial institutions may increase the Company’s cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the FHLB.
The Company cannot ensure that such capital will be available on acceptable terms or at all. Any occurrence that may limit the Company’s access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of the Bank or counterparties participating in the capital markets may adversely affect the Company’s capital costs and its ability to raise capital and, in turn, its liquidity. Moreover, if the Company needs to raise capital in the future, it may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on the Company’s businesses, financial condition, results of operations, cash flows and stock price.
The price of our common stock may fluctuate significantly, which may make it difficult for investors to resell shares of common stock at a time or price they find attractive.
Our stock price may fluctuate significantly as a result of a variety of factors, many of which are beyond our control. These factors include:
|
● |
Actual or anticipated quarterly fluctuations in our operating results and financial condition; |
|
● |
Changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions; |
|
● |
Reports in the press or investment community generally or relating to our reputation or the financial services industry; |
|
● |
Strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions, or financings; |
|
● |
Fluctuations in the stock price and operating results of our competitors; |
|
● |
Future sales of our equity or equity-related securities; |
|
● |
Proposed or adopted regulatory changes or developments; |
|
● |
Anticipated or pending investigations, proceedings, or litigation that may involve or affect us; |
|
● |
Domestic and international economic and political factors unrelated to our performance; and |
|
● |
General market conditions and, in particular, developments related to market conditions for the financial services industry. |
In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to their operating performance. These broad market fluctuations may adversely affect our stock price, notwithstanding our operating results. We expect that the market price of our common stock will continue to fluctuate and there can be no assurances about the levels of the market prices for our common stock.
We may not pay dividends on our common stock and our business is subject to certain restrictions on the payment of dividends.
Holders of our common stock are entitled to receive only such dividends as our board of directors may declare out of funds legally available for such payments. We have not previously paid cash dividends on our common stock. It is our current intention to invest our cash flow and earnings in the growth of our businesses and, therefore, we have no plans to pay cash dividends for the foreseeable future. Any future determination relating to this dividend policy will be made by our board of directors and will depend on a number of factors, including our financial condition and results of operations, tax considerations, capital requirements, industry standards, and economic conditions.
Further, as a bank holding company, our ability to declare and pay dividends is dependent on certain federal regulatory considerations, including guidelines regarding capital adequacy and dividends. In addition, our ability to pay dividends depends primarily on our receipt of dividends from our bank, the payment of which is subject to numerous limitations under federal and state banking laws, regulations and policies.
The Company is incorporated in Delaware and is governed by the Delaware General Corporation Law (the “DGCL”). The DGCL allows a corporation to pay dividends only out of surplus, as determined under the DGCL or, if there is no surplus, out of net profits for the fiscal year in which the dividend was declared and for the preceding fiscal year. Under the DGCL, however, the Company cannot pay dividends out of net profits if, after it pays the dividend, its capital would be less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets. Additionally, the FRB’s policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing.
The Bank’s regulators have the authority to prohibit the payment of dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice. As a national bank, the Bank must obtain the prior approval of the OCC to pay a dividend if the total of all dividends declared by it in any calendar year would exceed its net income for the year combined with its retained net income for the preceding two calendar years, less any required transfers to surplus or to fund the retirement of any preferred stock. Currently, the Bank is prohibited from paying dividends to the Company until such time as its accumulated deficit is eliminated. As a consequence of these various limitations and restrictions, we may not pay dividends on our common stock.
The volume of trading in our common stock has not been significant. As a result, stockholders may not be able to sell their common stock, particularly in large quantities.
Although our common stock is listed for trading on The NASDAQ CM and a number of brokers offer to make a market in our common stock, trading volume to date has been limited. There can be no assurance that a more active and liquid market for our common stock will develop or can be maintained. As a result, stockholders may find it difficult to sell a significant number of shares of our common stock at the prevailing market price.
Certain banking laws and provisions of our certificate of incorporation may have an anti-takeover effect.
Provisions of federal banking laws, including regulatory approval requirements, could make it difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our stockholders. Acquisition of 10% or more of any class of voting stock of a bank holding company or depository institution, including shares of our common stock, generally creates a rebuttable presumption that the acquirer “controls” the bank holding company or depository institution. Also, a bank holding company must obtain the prior approval of the FRB before, among other things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, including our bank. There also are provisions in our certificate of incorporation and bylaws, such as limitations on the ability to call a special meeting of our stockholders, that may be used to delay or block a takeover attempt. In addition, our board of directors is authorized under our certificate of incorporation to issue shares of our preferred stock, and determine the rights, terms conditions and privileges of such preferred stock, without stockholder approval. These provisions may effectively inhibit a non-negotiated merger or other business combination, which, in turn, could have a material adverse effect on the market price of our common stock.
An investment in our common stock is not an insured deposit and is not guaranteed by the FDIC, so you could lose some or all of your investment.
An investment in our common stock is not a bank deposit and is not insured against loss or guaranteed by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described herein. As a result, if you acquire our common stock, you could lose some or all of your investment.
The internal controls that we have implemented in order to mitigate risks inherent to the business of banking might fail or be circumvented.
Management regularly reviews and updates our internal controls and procedures over financial reporting that are designed to manage the various risks in our business, including credit risk, operational risk, and interest rate risk. No system of controls, however well-designed and operated, can provide absolute assurance that the objectives of the system will be met. If we fail to achieve and maintain effective internal controls over financial reporting, or if internal controls were circumvented, there could be a material adverse effect on our financial condition and results of operations.
|
Item 1B. |
Unresolved Staff Comments |
None.
|
Item 2. |
Properties |
The main and executive offices of Bancshares and the Bank are located at 1875 Century Park East, Los Angeles, California 90067 on the 1st and 14th floors of a multi-story commercial office building. The Bank has a branch office and a Private Banking Center at this same location. The Company’s main office consists of approximately 3,158 square feet of usable ground floor space for the branch office and administrative offices, 10,843 square feet of usable space for the administrative offices on the 14th floor of the building, as well as 2,746 square feet of usable ground floor space for the Bank’s Private Banking Center. The lease term for this space expires in June 2024. The total future minimum commitments for the leases at 1875 Century Park East at December 31, 2015 was $6.4 million.
In addition, the Bank has relationship offices in Santa Monica, CA and Beverly Hills, CA. The Santa Monica office is approximately 1,957 square feet of usable space with a lease expiring in December 2018. The total future minimum commitments for this lease at December 31, 2015 was $308,000. The Beverly Hills office is approximately 2,200 square feet of usable space with a lease expiring in May 2019. The total future minimum commitments for this lease at December 31, 2015 was $744,000.
|
Item 3. |
Legal Proceedings |
At present, there are no pending or, to the Company’s knowledge, threatened proceedings against the Company which, if determined adversely, would have a material and adverse 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 routine legal proceedings incidental to the business.
|
Item 4. |
Mine Safety Disclosures |
Not applicable.
PART II
|
Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
The Company’s common stock trades on the NASDAQ CM under the symbol “FCTY.” All companies listed on the NASDAQ CM must meet certain financial requirements and adhere to NASDAQ CM’s corporate governance standards. Any investment in the Company’s common stock should be considered a long-term investment. In addition, the price of the Company’s common stock is unpredictable.
Trading prices are based on information received from the NASDAQ CM based on all transactions reported on the NASDAQ CM. The following table sets forth the range of high and low closing prices of the Company’s common stock for the years ended December 31, 2015 and 2014.
|
Year ended December 31, 2015 |
High |
Low |
||||||
|
Fourth Quarter |
$ | 8.37 | $ | 6.85 | ||||
|
Third Quarter |
$ | 8.47 | $ | 6.98 | ||||
|
Second Quarter |
$ | 8.40 | $ | 6.64 | ||||
|
First Quarter |
$ | 7.00 | $ | 6.40 | ||||
|
Year ended December 31, 2014 |
||||||||
|
Fourth Quarter |
$ | 7.37 | $ | 6.35 | ||||
|
Third Quarter |
$ | 7.85 | $ | 7.08 | ||||
|
Second Quarter |
$ | 8.10 | $ | 7.42 | ||||
|
First Quarter |
$ | 8.49 | $ | 6.87 |
As of December 31, 2015, there were 939 registered shareholders of record of the Company’s common stock, including persons or entities holding stock in nominee or street name through various brokers or banks.
Dividends
As a bank holding company that currently has no significant assets other than its equity interest in the Bank, Bancshares’ ability to declare dividends depends primarily upon dividends it receives from the Bank. The Bank’s dividend practices in turn depend upon legal restrictions, the Bank’s earnings, financial position, current and anticipated capital requirements, and other factors deemed relevant by the Bank’s Board of Directors.
The Bank’s regulators have the authority to prohibit the payment of dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice. As a national bank, the Bank must obtain the prior approval of the OCC to pay a dividend if the total of all dividends declared by it in any calendar year would exceed its net income for the year combined with its retained net income for the preceding two calendar years, less any required transfers to surplus or to fund the retirement of any preferred stock. Additionally, the FRB’s policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing.
To date, Bancshares has not paid any cash dividends. Payment of stock or cash dividends in the future will depend upon the Company’s earnings and financial condition and other factors deemed relevant by its Board, as well as its legal ability to pay dividends. Accordingly, no assurance can be given that any cash dividends will be declared in the foreseeable future.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
None.
Repurchases of Equity Securities
None.
|
Item 6. |
Selected Financial Data |
Not applicable.
|
Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 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 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. See Note 1 “Summary of Significant Accounting Policies” in Part II, Item 8. “Financial Statements and Supplementary Data” for more information.
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, 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 through provisioning based on their judgment about information available to them at the time of their examinations. See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Allowance for Loan Losses” for further details considered by management in estimating the necessary level of the allowance for loan losses.
Provision for 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 periods, 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 on a quarterly basis.
Summary of the Results of Operation and Financial Condition
For the years ended December 31, 2015 and 2014, the Company recorded net income of $2.6 million, or $0.26 per diluted share, and $2.4 million, or $0.24 per diluted share, respectively. The increase in net income during the year ended December 31, 2015 as compared to the same period last year was primarily due to an increase in net interest income of $4.5 million, resulting from an increase in the average balance of loans during the current year as compared to the same period last year. This item was partially offset by a $1.2 million increase in provision for loan losses, a $2.0 million increase in non-interest expenses and a $1.1 million decline in gains from the sale of securities.
Total assets at December 31, 2015 were $732.0 million, representing an increase of $146.7 million, or 25.1%, from $585.2 million at December 31, 2014. Cash and cash equivalents at December 31, 2015 were $54.6 million, representing a decrease of $3.9 million, or 6.7%, from $58.5 million at December 31, 2014. Loans increased by $155.6 million, from $442.9 million at December 31, 2014 to $598.4 million at December 31, 2015. Loan originations were $291.7 million during the year ended December 31, 2015, compared to $226.3 million during the same period last year. Prepayment speeds for the year ended December 31, 2015 were 11.8%, compared to 16.7% for the same period last year. Investment securities were $74.0 million at December 31, 2015, compared to $79.7 million at December 31, 2014, representing a decline of $5.7 million, or 7.1%. During the year ended December 31, 2015, the Company sold investment securities with an amortized cost of $5.9 million, recognizing gains of $75,000. During the year ended December 31, 2014, the Company sold investment securities with an amortized cost of $59.9 million, recognizing gains of $1.2 million. The weighted average life of our investment securities was 3.85 years and 4.02 years at December 31, 2015 and December 31, 2014, respectively.
Total liabilities at December 31, 2015 increased by $143.5 million, or 27.4%, to $667.0 million compared to $523.5 million at December 31, 2014. This increase is primarily due to a $95.0 million increase in deposits and a $50.0 million overnight borrowing with the FHLB at December 31, 2015. The overnight borrowing was repaid in January 2016. Total core deposits, which includes non-interest bearing demand deposits, interest bearing demand deposits and money market deposits and savings, were $550.4 million and $462.4 million at December 31, 2015 and December 31, 2014, respectively, representing an increase of $88.0 million, or 19.0%.
Average interest earning assets increased $92.2 million, from $563.5 million for the year ended December 31, 2014 to $655.7 million for the year ended December 31, 2015. The weighted average interest rate on interest earning assets was 3.61% and 3.41% for the years ended December 31, 2015 and 2014, respectively. The 20 basis point increase in yield on earning assets is primarily attributable to an increase in the average balance of loans relative to total earning assets as compared to the same period last year.
Average interest bearing deposits and borrowings increased $5.9 million from $246.7 million for the year ended December 31, 2014 to $252.7 million for the year ended December 31, 2015. The average cost of interest bearing deposits and borrowings was 0.28% during the year ended December 31, 2015 compared to 0.31% for the same period last year.
At December 31, 2015, the Company’s stockholders’ equity totaled $64.9 million compared to $61.7 million at December 31, 2014. The $3.2 million increase in stockholders’ equity during the year ended December 31, 2015 was primarily attributable to net income of $2.6 million. At December 31, 2015, the Bank’s total risk-based capital ratio, tier 1 risk-based capital ratio, common equity tier 1 capital ratio, and tier 1 leverage ratio were 11.16%, 9.91%, 9.91% and 8.92%, respectively, compared to the requirements of 10.00%, 8.00%, 6.50%, and 5.00%, respectively, to generally be considered a “well capitalized” financial institution for regulatory purposes.
At December 31, 2015 and 2014, the Company’s book value per share was $6.29 and $6.08, respectively. The $0.21 increase in book value per share during the year was primarily attributable to net income of $2.6 million.
Set forth below are certain key financial performance ratios and other financial data for the periods indicated:
|
Years ended December 31, |
||||||||
|
2015 |
2014 |
|||||||
|
Return on average assets |
0.39% | 0.41% | ||||||
|
Return on average stockholders’ equity |
4.04% | 4.00% | ||||||
|
Average equity to average assets |
9.54% | 10.36% | ||||||
|
Net interest margin |
3.50% | 3.28% | ||||||
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 repricing 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 3.50% and 3.25% at December 31, 2015 and 2014, respectively. In December 2015, the targeted federal funds rate was increased from 0.00%-0.25% to 0.25%-0.50%. Prior to that, this rate had remained at 0.00%-0.25%. During the year ended December 31, 2014, the targeted federal funds rate was unchanged, 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 Part II, Item 7- “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Asset/Liability Management.”
During the year ended December 31, 2015, net interest income was $22.9 million, compared to $18.5 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 year ended December 31, 2015 as compared to the same period last year, partially offset by declines in the average balance of our investment portfolio during the same period. The average balances of our loan portfolio was $514.7 million during the year ended December 31, 2015, compared to $404.3 million for the same period last year. The average balances of our investment portfolio was $74.4 million during the year ended December 31, 2015, compared to $87.1 million for the same period last year.
The Company’s net interest spread was 3.33% for the year ended December 31, 2015, compared to 3.10% for the same period last year.
The Company’s net interest margin was 3.50% for the year ended December 31, 2015, compared to 3.28% for the same period last year. 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. The percentage of average loans to total average earning assets increased to 78.5% during the year ended December 31, 2015, compared to 71.7% during the same period last year.
The following table sets forth our average balances, average yields on earning assets, average rates paid on interest bearing liabilities, net interest margins and net interest income/spread for the years ended December 31, 2015, 2014 and 2013.
|
Years ended December 31, |
||||||||||||||||||||||||||||||||||||
|
2015 |
2014 |
2013 |
||||||||||||||||||||||||||||||||||
|
(dollars in thousands) |
Average Balance |
Interest Inc/Exp |
Yield |
Average Balance |
Interest Inc/Exp |
Yield |
Average Balance |
Interest Inc/Exp |
Yield |
|||||||||||||||||||||||||||
|
Assets |
||||||||||||||||||||||||||||||||||||
|
Interest earning deposits at other financial institutions |
$ | 61,777 | $ | 166 | 0.26 |
% |
$ | 67,380 | $ | 172 | 0.26 |
% |
$ | 36,294 | $ | 91 | 0.25 |
% | ||||||||||||||||||
|
U.S. Treasuries and Gov’t agencies |
27,393 | 506 | 1.85 |
% |
6,577 | 135 | 2.05 |
% |
2,058 | 15 | 0.75 |
% | ||||||||||||||||||||||||
|
Corporate notes |
1,582 | 21 | 1.31 |
% |
2,720 | 36 | 1.33 |
% |
26,724 | 572 | 2.14 |
% | ||||||||||||||||||||||||
|
Residential mortgage backed securities and CMOs |
45,430 | 769 | 1.69 |
% |
77,798 | 1,558 | 2.00 |
% |
117,500 | 2,122 | 1.81 |
% | ||||||||||||||||||||||||
|
Federal Reserve Bank stock |
1,714 | 102 | 6.00 |
% |
1,606 | 96 | 6.00 |
% |
1,446 | 87 | 5.99 |
% | ||||||||||||||||||||||||
|
Federal Home Loan Bank stock |
3,167 | 383 | 12.09 |
% |
3,134 | 220 | 7.00 |
% |
2,858 | 115 | 4.01 |
% | ||||||||||||||||||||||||
|
Loans (1) (2) |
514,683 | 21,695 | 4.22 |
% |
404,300 | 16,998 | 4.20 |
% |
321,551 | 14,014 | 4.36 |
% | ||||||||||||||||||||||||
|
Earning assets |
655,746 | 23,642 | 3.61 |
% |
563,515 | 19,215 | 3.41 |
% |
508,431 | 17,016 | 3.35 |
% | ||||||||||||||||||||||||
|
Other assets |
7,293 | 6,421 | 6,719 | |||||||||||||||||||||||||||||||||
|
Total assets |
$ | 663,039 | $ | 569,936 | $ | 515,150 | ||||||||||||||||||||||||||||||
|
Liabilities & Equity |
||||||||||||||||||||||||||||||||||||
|
Interest checking (NOW) |
$ | 28,944 | 40 | 0.14 |
% |
$ | 22,205 | 30 | 0.14 |
% |
$ | 21,021 | 32 | 0.15 |
% | |||||||||||||||||||||
|
Money market deposits and savings |
161,675 | 407 | 0.25 |
% |
156,758 | 378 | 0.24 |
% |
159,958 | 370 | 0.23 |
% | ||||||||||||||||||||||||
|
CDs |
45,918 | 35 | 0.08 |
% |
41,869 | 34 | 0.08 |
% |
44,821 | 81 | 0.18 |
% | ||||||||||||||||||||||||
|
Borrowings |
16,131 | 218 | 1.35 |
% |
25,918 | 314 | 1.21 |
% |
27,692 | 325 | 1.17 |
% | ||||||||||||||||||||||||
|
Total interest bearing deposits and borrowings |
252,668 | 700 | 0.28 |
% |
246,750 | 756 | 0.31 |
% |
253,492 | 808 | 0.32 |
% | ||||||||||||||||||||||||
|
Demand deposits |
344,218 | 261,448 | 206,385 | |||||||||||||||||||||||||||||||||
|
Other liabilities |
2,914 | 2,673 | 2,747 | |||||||||||||||||||||||||||||||||
|
Total liabilities |
599,800 | 510,871 | 462,624 | |||||||||||||||||||||||||||||||||
|
Equity |
63,239 | 59,065 | 52,526 | |||||||||||||||||||||||||||||||||
|
Total liabilities & equity |
$ | 663,039 | $ | 569,936 | $ | 515,150 | ||||||||||||||||||||||||||||||
|
Net interest income / spread |
$ | 22,942 | 3.33 |
% |
$ | 18,459 | 3.10 |
% |
$ | 16,208 | 3.03 |
% | ||||||||||||||||||||||||
|
Net interest margin |
3.50 |
% |
3.28 |
% |
3.19 |
% | ||||||||||||||||||||||||||||||
|
(1) |
Before allowance for loan losses and net deferred loan fees and costs. Included in net interest income was net loan origination (cost amortization) fee accretion of ($13,000), $15,000 and $23,000 for the years ended December 31, 2015, 2014 and 2013, respectively. |
|
(2) |
Includes average non-accrual loans of $678,000, $697,000 and $987,000 for the years ended December 31, 2015, 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.
|
Years ended December 31, 2015 Compared to 2014 Increase (Decrease) Due to Changes in: |
||||||||||||
|
(in thousands) |
Volume |
Rate |
Total |
|||||||||
|
Interest income: |
||||||||||||
|
Interest earning deposits at other financial institutions |
$ | (13 |
) |
$ | 7 | $ | (6 |
) | ||||
|
U.S. Treasuries and Gov’t agencies |
385 | (14 |
) |
371 | ||||||||
|
Corporate notes |
(15 |
) |
— | (15 |
) | |||||||
|
Residential mortgage backed securities |
(575 |
) |
(214 |
) |
(789 |
) | ||||||
|
Federal Reserve Bank stock |
6 | — | 6 | |||||||||
|
Federal Home Loan Bank stock |
2 | 161 | 163 | |||||||||
|
Loans |
4,653 | 44 | 4,697 | |||||||||
|
Total increase (decrease) in interest income |
4,443 | (16 |
) |
4,427 | ||||||||
|
Interest expense: |
||||||||||||
|
Interest checking (NOW) |
10 | — | 10 | |||||||||
|
Money market deposits and savings |
12 | 17 | 29 | |||||||||
|
CDs |
3 | (2 |
) |
1 | ||||||||
|
Borrowings |
(129 |
) |
33 | (96 |
) | |||||||
|
Total increase (decrease) in interest expense |
(104 |
) |
48 | (56 |
) | |||||||
|
Net increase (decrease) in net interest income |
$ | 4,547 | $ | (64 |
) |
$ | 4,483 | |||||
|
Years ended December 31, 2014 Compared to 2013 Increase (Decrease) Due to Changes in: |
||||||||||||
|
(in thousands) |
Volume |
Rate |
Total |
|||||||||
|
Interest income: |
||||||||||||
|
Interest earning deposits at other financial institutions |
$ | 80 | $ | 1 | $ | 81 | ||||||
|
U.S. Treasuries and Gov’t agencies |
67 | 53 | 120 | |||||||||
|
Corporate notes |
(377 |
) |
(159 |
) |
(536 |
) | ||||||
|
Residential mortgage backed securities |
(776 |
) |
212 | (564 |
) | |||||||
|
Federal Reserve Bank stock |
9 | — | 9 | |||||||||
|
Federal Home Loan Bank stock |
12 | 93 | 105 | |||||||||
|
Loans |
3,494 | (510 |
) |
2,984 | ||||||||
|
Total increase (decrease) in interest income |
2,509 | (310 |
) |
2,199 | ||||||||
|
Interest expense: |
||||||||||||
|
Interest checking (NOW) |
1 | (3 |
) |
(2 |
) | |||||||
|
Money market deposits and savings |
(7 |
) |
15 | 8 | ||||||||
|
CDs |
(5 |
) |
(42 |
) |
(47 |
) | ||||||
|
Borrowings |
(21 |
) |
10 | (11 |
) | |||||||
|
Total decrease in interest expense |
(32 |
) |
(20 |
) |
(52 |
) | ||||||
|
Net increase (decrease) in net interest income |
$ | 2,541 | $ | (290 |
) |
$ | 2,251 | |||||
Provision for Loan Losses
The provision for loan losses was $1.3 million and $100,000 for years ended December 31, 2015 and 2014, respectively. The provision for loan losses recorded during the year ended December 31, 2015 was primarily recorded to supplement the Bank’s allowance for loan losses (“ALL”) as a result of loan growth experienced. During the year ended December 31, 2015, total loans increased by $155.6 million, from $442.9 million at December 31, 2014 to $598.4 million at December 31, 2015. Criticized and classified loans generally consist of special mention, substandard and doubtful loans. Special mention, substandard and doubtful loans were $179,000, $759,000 and none, respectively, at December 31, 2015, compared to $180,000, $1.9 million and none, respectively, at December 31, 2014. We had net recoveries of $37,000 during the year ended December 31, 2015, compared to net recoveries of $263,000 during the same period last year. At December 31, 2015, the ALL to total loans was 1.50% compared to 1.72% at December 31, 2014. 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 December 31, 2015 and December 31, 2014 was adequate to absorb probable and inherent risks in the loan portfolio. The provision for loan losses was recorded based on an analysis of the factors discussed in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Financial Condition – Allowance for Loan Losses.
As a percentage of our total loan portfolio, the amount of non-performing loans was 0.12% and 0.14%, respectively, at December 31, 2015 and 2014. As a percentage of our total assets, the amount of non-performing assets was 0.10% and 0.11%, respectively, at December 31, 2015 and 2014.
Non-Interest Income
Non-interest income was $668,000 for the year ended December 31, 2015, compared to $1.7 million for the same period last year. During the year ended December 31, 2015, the Company sold investment securities with an amortized cost of $5.9 million, recognizing gains of $75,000. During the year ended December 31, 2014, the Company sold $59.9 million of investment securities, recognizing gains of $1.2 million. With the exception of such gains, non-interest income primarily consists of customer related fee income. See Note 13 “Non-Interest Income” in Part II, Item 8. “Financial Statements and Supplementary Data” for more information regarding non-interest income for the years ended December 31, 2015 and 2014.
Non-Interest Expense
Non-interest expense was $17.8 million for the year ended December 31, 2015, compared to $15.8 million for the same period last year. The increase in non-interest expense during the year ended December 31, 2015 as compared to the same period last year is primarily due to the costs incurred to expand the Bank’s business development and related operational support teams, as well as additional costs incurred to sustain the Bank’s growth during these periods. See Note 14 “Other Operating Expenses” in Part II, Item 8. “Financial Statements and Supplementary Data” for more information regarding other operating expenses for the years ended December 31, 2015 and 2014.
Income Tax Provision
We recorded a tax provision of $1.9 million for both the years ended December 31, 2015 and 2014.
See discussion of management’s evaluation regarding the valuation allowance for the deferred tax assets in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Deferred Tax Asset.
Financial Condition
Assets
Total assets at December 31, 2015 were $732.0 million, representing an increase of $146.7 million, or 25.1%, from $585.2 million at December 31, 2014. Cash and cash equivalents at December 31, 2015 were $54.6 million, representing a decrease of $3.9 million, or 6.7%, from $58.5 million at December 31, 2014. Loans increased by $155.6 million, from $442.9 million at December 31, 2014 to $598.4 million at December 31, 2015. Loan originations were $291.7 million during the year ended December 31, 2015, compared to $226.3 million during the same period last year. Prepayment speeds for the year ended December 31, 2015 were 11.8%, compared to 16.7% for the same period last year. Investment securities were $74.0 million at December 31, 2015, compared to $79.7 million at December 31, 2014, representing a decline of $5.7 million, or 7.1%. During the year ended December 31, 2015, the Company sold investment securities with an amortized cost of $5.9 million, recognizing gains of $75,000. During the year ended December 31, 2014, the Company sold investment securities with an amortized cost of and $59.9 million, recognizing gains of $1.2 million. The weighted average life of our investment securities was 3.85 years and 4.02 years at December 31, 2015 and December 31, 2014, respectively.
Cash and Cash Equivalents
Cash and cash equivalents totaled $54.6 million and $58.5 million at December 31, 2015 and 2014, respectively. 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 December 31, 2015, investment securities totaled $74.0 million compared to $79.7 million at December 31, 2014. 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 and debt securities issued by Government Sponsored Agencies. The underlying loans for the mortgage backed 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 December 31, 2015 and 2014, the weighted average rate and weighed average life of these residential-mortgage backed securities were 1.79% and 1.82%, respectively, and 3.36 years and 3.64 years, respectively. At December 31, 2015 and 2014, the weighted average rate and weighted average life of debt securities issued by Government Sponsored Agencies were 1.88% and 1.89%, respectively, and 4.43 years and 5.07 years, respectively. At December 31, 2015 and 2014, the unrealized gains in the investment portfolio were $18,000 and $275,000, respectively. We will continue to evaluate the Company’s investments and liquidity needs and will adjust the amount of investment securities accordingly.
See Note 2 “Investment Securities” in Part II, Item 8. “Financial Statements and Supplementary Data” for more information regarding investment securities at December 31, 2015 and 2014.
The following is a summary of the investments categorized as Available for Sale at December 31, 2013:
|
December 31, 2013 |
||||||||||||||||
|
(in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
|
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 December 31, 2015, 2014 or 2013.
Loans
Loans, net of the allowance for loan losses and deferred loan origination costs/unearned fees, increased 35.4%, or $154.2 million, from $435.3 million at December 31, 2014 to $589.5 million at December 31, 2015. As of December 31, 2015 and 2014, total loans outstanding totaled $598.1 million and $442.8 million, respectively. The majority of growth within our loan portfolio related to increases of $73.3 million in commercial real estate loans, $28.6 million in residential loans, $22.7 million in construction and land development loans, and $21.2 million in commercial loans. Loan originations were $291.7 million during the year ended December 31, 2015, compared to $226.3 million during the same period last year. The following table sets forth the comparison of our loan portfolio by major categories as of the dates indicated:
|
December 31, |
||||||||||||||||||||||||||||||||||||||||
|
2015 |
2014 |
2013 |
2012 |
2011 |
||||||||||||||||||||||||||||||||||||
|
(dollars in thousands) |
Amount Outstanding |
Percent of Total |
Amount Outstanding |
Percent of Total |
Amount Outstanding |
Percent of Total |
Amount Outstanding |
Percent of Total |
Amount Outstanding |
Percent of Total |
||||||||||||||||||||||||||||||
|
Commercial (1) |
$ | 112,861 | 18.9 |
% |
$ | 91,694 | 20.7 |
% |
$ | 76,397 | 19.9 |
% |
$ | 58,769 | 22.0 |
% |
$ | 70,945 | 30.4 |
% | ||||||||||||||||||||
|
Commercial real estate |
259,013 | 43.3 |
% |
185,752 | 42.0 |
% |
167,419 | 43.7 |
% |
110,031 | 41.3 |
% |
70,269 | 30.2 |
% | |||||||||||||||||||||||||
|
Residential |
127,367 | 21.3 |
% |
98,806 | 22.3 |
% |
82,795 | 21.6 |
% |
53,162 | 19.9 |
% |
54,944 | 23.6 |
% | |||||||||||||||||||||||||
|
Land and construction |
59,808 | 10.0 |
% |
37,075 | 8.4 |
% |
30,102 | 7.8 |
% |
19,080 | 7.2 |
% |
16,670 | 7.2 |
% | |||||||||||||||||||||||||
|
Consumer and other (2) |
39,058 | 6.5 |
% |
29,458 | 6.6 |
% |
26,787 | 7.0 |
% |
25,584 | 9.6 |
% |
20,140 | 8.6 |
% | |||||||||||||||||||||||||
|
Loans, gross |
598,107 | 100.0 |
% |
442,785 | 100.0 |
% |
383,500 | 100.0 |
% |
266,626 | 100.0 |
% |
232,968 | 100.0 |
% | |||||||||||||||||||||||||
|
Plus — net deferred costs |
326 | 71 | 48 | 45 | 37 | |||||||||||||||||||||||||||||||||||
|
Less — allowance for loan losses |
(8,961 |
) |
(7,599 |
) |
(7,236 |
) |
(6,015 |
) |
(5,284 |
) |
||||||||||||||||||||||||||||||
|
Loans, net |
$ | 589,472 | $ | 435,257 | $ | 376,312 | $ | 260,656 | $ | 227,721 | ||||||||||||||||||||||||||||||
|
(1) |
Unsecured commercial loan balances were $34.4 million, $25.1 million, $13.2 million, $10.0 million, and $11.5 million at December 31, 2015, 2014, 2013, 2012, and 2011, respectively. | |
|
(2) |
Unsecured consumer and other loan balances were $10.6 million, $5.1 million, $2.3 million, $901,000, and $2.8 million at December 31, 2015, 2014, 2013, 2012, and 2011, respectively. |
As of December 31, 2015, substantially all of the Company’s loan customers are located in Southern California. Additionally, the Company does not have any subprime mortgages.
The table below reflects the maturity distribution for the loans (except for the consumer and other loans) in our loan portfolio at December 31, 2015 and 2014:
|
(in thousands) |
One Year or Less |
Greater than one year through five years |
Greater than five years |
Total |
||||||||||||
|
At December 31, 2015: |
||||||||||||||||
|
Commercial Loans |
||||||||||||||||
|
Floating rate |
$ | 53,903 | $ | 30,133 | $ | 427 | $ | 84,463 | ||||||||
|
Fixed rate |
4,760 | 20,863 | 2,775 | 28,398 | ||||||||||||
|
Real Estate Loans |
||||||||||||||||
|
Floating rate |
102,887 | 67,087 | 81,326 | 251,300 | ||||||||||||
|
Fixed rate |
11,849 | 118,590 | 64,449 | 194,888 | ||||||||||||
| $ | 173,399 | $ | 236,673 | $ | 148,977 | $ | 559,049 | |||||||||
|
At December 31, 2014: |
||||||||||||||||
|
Commercial Loans |
||||||||||||||||
|
Floating rate |
$ | 43,459 | $ | 22,789 | $ | 1,730 | $ | 67,978 | ||||||||
|
Fixed rate |
3,488 | 18,330 | 1,898 | 23,716 | ||||||||||||
|
Real Estate Loans |
||||||||||||||||
|
Floating rate |
71,402 | 54,303 | 60,240 | 185,945 | ||||||||||||
|
Fixed rate |
9,789 | 76,419 | 49,480 | 135,688 | ||||||||||||
| $ | 128,138 | $ | 171,841 | $ | 113,348 | $ | 413,327 | |||||||||
As of December 31, 2015 and 2014, $11.1 million and $15.4 million, respectively, of our floating rate loans were at or below their floor rates. The weighted average minimum interest rate on these loans was 4.25% and 3.89% at December 31, 2015 and 2014, respectively. Included within floating rate loans are hybrid adjustable rate loans, which typically reprice after an initial fixed period of three to five years.
Non-Performing Assets
The following table sets forth non-accrual loans and other real estate owned (“OREO”) at December 31, 2015, 2014, 2013, 2012 and 2011:
|
December 31, |
||||||||||||||||||||
|
(dollars in thousands) |
2015 |
2014 |
2013 |
2012 |
2011 |
|||||||||||||||
|
Non-accrual loans: |
||||||||||||||||||||
|
Commercial |
$ | 712 | $ | 632 | $ | 706 | $ | 1,509 | $ | 2,175 | ||||||||||
|
Commercial real estate |
— | — | — | — | 3,756 | |||||||||||||||
|
Residential |
— | — | — | — | — | |||||||||||||||
|
Land and Construction |
— | — | — | — | 1,330 | |||||||||||||||
|
Consumer and other |
— | — | 29 | 345 | 345 | |||||||||||||||
|
Total non-accrual loans |
712 | 632 | 735 | 1,854 | 7,606 | |||||||||||||||
|
OREO |
— | — | 90 | 90 | — | |||||||||||||||
|
Total non-performing assets |
$ | 712 | $ | 632 | $ | 825 | $ | 1,944 | $ | 7,606 | ||||||||||
|
Non-performing assets to total loans and OREO |
0.12 |
% |
0.14 |
% |
0.22 |
% |
0.73 |
% |
3.26 |
% | ||||||||||
|
Non-performing assets to total assets |
0.10 |
% |
0.11 |
% |
0.15 |
% |
0.39 |
% |
1.88 |
% | ||||||||||
Non-accrual loans totaled $712,000 and $632,000 at December 31, 2015 and 2014, respectively. There were no accruing loans past due 90 days or more at December 31, 2015 and 2014. Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms was $36,000 and $38,000 for the years ended December 31, 2015 and 2014, respectively. As a percentage of total assets, the amount of non-performing assets was 0.10% and 0.11% at December 31, 2015 and 2014, respectively.
At December 31, 2015, non-accrual loans consisted of three commercial loans totaling $712,000. At December 31, 2014, non-accrual loans consisted of two commercial loans totaling $632,000.
During the year ended December 31, 2014, the Bank disposed of its OREO for approximately $137,000, recognizing a gain of $47,000 in connection with this disposition. The Bank held no OREO during the year ended December 31, 2015.
At December 31, 2015 and 2014, the recorded investment in impaired loans was $759,000 and $681,000, respectively. At December 31, 2015, the Company had a $35,000 specific allowance for loan losses on $140,000 of impaired loans. At December 31, 2014, the Company had a $20,000 specific allowance for loan losses on $60,000 of impaired loans. There were $619,000 and $621,000, respectively, of impaired loans with no specific allowance for loan losses at December 31, 2015 and 2014, respectively. The average outstanding balance of impaired loans for the year ended December 31, 2015 was $727,000, compared to $849,000 for the same period last year. As of December 31, 2015 and 2014, there was $712,000 and $632,000, respectively, of impaired loans on non-accrual status. During the years ended December 31, 2015 and 2014, interest income recognized on impaired loans subsequent to their classification as impaired was $3,000 and $8,000, 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.
Allowance for Loan Losses
The ALL 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 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 other elements:
|
• |
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, 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 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 December 31, 2015 and 2014 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 years ended December 31, 2015, 2014, 2013 and 2012:
|
(in thousands) |
Commercial |
Commercial Real Estate |
Residential |
Land and Construction |
Consumer and Other |
Total |
||||||||||||||||||
|
Year Ended December 31, 2015: |
||||||||||||||||||||||||
|
Allowance for loan losses: |
||||||||||||||||||||||||
|
Beginning balance |
$ | 1,752 | $ | 3,825 | $ | 747 | $ | 816 | $ | 459 | $ | 7,599 | ||||||||||||
|
Provision for loan losses |
— | 755 | 160 | 330 | 80 | 1,325 | ||||||||||||||||||
|
Charge-offs |
— | — | — | — | (18 |
) |
(18 |
) | ||||||||||||||||
|
Recoveries |
55 | — | — | — | — | 55 | ||||||||||||||||||
|
Ending balance |
$ | 1,807 | $ | 4,580 | $ | 907 | $ | 1,146 | $ | 521 | $ | 8,961 | ||||||||||||
|
Year Ended December 31, 2014: |
||||||||||||||||||||||||
|
Allowance for loan losses: |
||||||||||||||||||||||||
|
Beginning balance |
$ | 1,583 | $ | 3,660 | $ | 758 | $ | 811 | $ | 424 | $ | 7,236 | ||||||||||||
|
Provision for loan losses |
115 | 165 | (220 |
) |
5 | 35 | 100 | |||||||||||||||||
|
Charge-offs |
— | — | — | — | — | — | ||||||||||||||||||
|
Recoveries |
54 | — | 209 | — | — | 263 | ||||||||||||||||||
|
Ending balance |
$ | 1,752 | $ | 3,825 | $ | 747 | $ | 816 | $ | 459 | $ | 7,599 | ||||||||||||
|
Year Ended December 31, 2013: |
||||||||||||||||||||||||
|
Allowance for loan losses: |
||||||||||||||||||||||||
|
Beginning balance |
$ | 2,277 | $ | 2,450 | $ | 508 | $ | 411 | $ | 369 | $ | 6,015 | ||||||||||||
|
Provision for loan losses |
(1,765 |
) |
1,210 | 250 | 400 | 5 | 100 | |||||||||||||||||
|
Charge-offs |
— | — | — | — | — | — | ||||||||||||||||||
|
Recoveries |
1,071 | — | — | — | 50 | 1,121 | ||||||||||||||||||
|
Ending balance |
$ | 1,583 | $ | 3,660 | $ | 758 | $ | 811 | $ | 424 | $ | 7,236 | ||||||||||||
|
Year Ended December 31, 2012: |
||||||||||||||||||||||||
|
Allowance for loan losses: |
||||||||||||||||||||||||
|
Beginning balance |
$ | 2,584 | $ | 1,252 | $ | 583 | $ | 516 | $ | 349 | $ | 5,284 | ||||||||||||
|
Provision for loan losses |
(305 |
) |
485 | (75 |
) |
(100 |
) |
(5 |
) |
— | ||||||||||||||
|
Charge-offs |
(26 |
) |
(400 |
) |
— | (5 |
) |
— | (431 |
) | ||||||||||||||
|
Recoveries |
24 | 1,113 | — | — | 25 | 1,162 | ||||||||||||||||||
|
Ending balance |
$ | 2,277 | $ | 2,450 | $ | 508 | $ | 411 | $ | 369 | $ | 6,015 | ||||||||||||
|
Year Ended December 31, 2011: |
||||||||||||||||||||||||
|
Allowance for loan losses: |
||||||||||||||||||||||||
|
Beginning balance |
$ | 2,812 | $ | 888 | $ | 213 | $ | 995 | $ | 375 | $ | 5,283 | ||||||||||||
|
Provision for loan losses |
(724 |
) |
894 | 370 | (209 |
) |
(56 |
) |
275 | |||||||||||||||
|
Charge-offs |
(223 |
) |
(530 |
) |
— | (270 |
) |
— | (1,023 |
) | ||||||||||||||
|
Recoveries |
719 | — | — | — | 30 | 749 | ||||||||||||||||||
|
Ending balance |
$ | 2,584 | $ | 1,252 | $ | 583 | $ | 516 | $ | 349 | $ | 5,284 | ||||||||||||
There were no loans acquired with deteriorated credit quality during the years ended December 31, 2015 and 2014.
The ALL was $9.0 million, or 1.50% of our total loan portfolio, at December 31, 2015, compared to $7.6 million, or 1.72% of our total loan portfolio, at December 31, 2014. At December 31, 2015 and 2014, our non-performing loans were $712,000 and $632,000 respectively. The ratio of our ALL to non-performing loans was 1,259.18% and 1,203.03% at December 31, 2015 and 2014, respectively. In addition, our ratio of non-performing loans to total loans was 0.12% and 0.14% at December 31, 2015 and December 31, 2014, 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.
Allocation of the Allowance for Loan Losses
|
December 31, |
||||||||||||||||||||||||||||||||||||||||
|
2015 |
2014 |
2013 |
2012 |
2011 |
||||||||||||||||||||||||||||||||||||
|
(dollars in thousands) |
Balance of Allowance for Loan Losses |
Percentage of Loans in Each Category |
Balance of Allowance for Loan Losses |
Percentage of Loans in Each Category |
Balance of Allowance for Loan Losses |
Percentage of Loans in Each Category |
Balance of Allowance for Loan Losses |
Percentage of Loans in Each Category |
Balance of Allowance for Loan Losses |
Percentage of Loans in Each Category |
||||||||||||||||||||||||||||||
|
Commercial and real estate loans |
$ | 8,440 | 93.5 |
% |
$ | 7,140 | 93.3 |
% |
$ | 6,812 | 93.0 |
% |
$ | 5,646 | 90.4 |
% |
$ | 4,935 | 91.4 |
% | ||||||||||||||||||||
|
Consumer and other loans |
521 | 6.5 | 459 | 6.7 | 424 | 7.0 | 369 | 9.6 | 349 | 8.6 | ||||||||||||||||||||||||||||||
|
Total |
$ | 8,961 | 100.0 |
% |
$ | 7,599 | 100.0 |
% |
$ | 7,236 | 100.0 |
% |
$ | 6,015 | 100.0 |
% |
$ | 5,284 | 100.0 |
% | ||||||||||||||||||||
Deferred Tax Asset
At December 31, 2015 and 2014, we had a net deferred tax asset of approximately $4.6 million and $3.0 million, respectively. Our net deferred tax asset at December 31, 2015, primarily consists of deferred tax assets related to the allowance for loan losses and equity compensation.
See Note 16 “Income Taxes” in Part II, Item 8. “Financial Statements and Supplementary Data” for more information regarding the Company’s income taxes and deferred tax assets at December 31, 2015 and 2014.
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 December 31, 2015, total deposits were $598.2 million compared to $503.2 million at December 31, 2014, representing an increase of 18.9%, or $95.0 million. This increase is primarily due to growth within our non-interest bearing deposits of $80.2 million, due to continued core deposit gathering efforts. Total core deposits, which include non-interest bearing demand deposits, interest bearing demand deposits, and money market deposits and savings, were $550.4 million and $462.4 million at December 31, 2015 and 2014, respectively. Non-interest bearing deposits represent 60.6% of total deposit at December 31, 2015, compared to 56.1% at December 31, 2014.
The following table reflects a summary of deposit categories by dollar and percentage at December 31, 2015 and 2014:
|
December 31, 2015 |
December 31, 2014 |
|||||||||||||||
|
(dollars in thousands) |
Amount |
Percent of Total |
Amount |
Percent of Total |
||||||||||||
|
Non-interest bearing demand deposits |
$ | 362,451 | 60.6 |
% |
$ | 282,217 | 56.1 |
% | ||||||||
|
Interest bearing checking |
32,406 | 5.4 |
% |
25,492 | 5.1 |
% | ||||||||||
|
Money market deposits and savings |
155,572 | 26.0 |
% |
154,706 | 30.7 |
% | ||||||||||
|
Certificates of deposit |
47,748 | 8.0 |
% |
40,757 | 8.1 |
% | ||||||||||
|
Total |
$ | 598,177 | 100.0 |
% |
$ | 503,172 | 100.0 |
% | ||||||||
At December 31, 2015, the Company had two certificates of deposit with the State of California Treasurer’s Office for a total of $46.0 million, which represented 7.7% of total deposits. The Company was required to pledge $50.6 million of investment securities at December 31, 2015 in connection with these certificates of deposit. Each of these deposits outstanding at December 31, 2015 is scheduled to mature in the first quarter of 2016. 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. 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 8 “Deposits.”
At both December 31, 2015 and 2014, the Company had $505,000 of Certificate of Deposit Accounts Registry Service (“CDARS”) reciprocal deposits, which both represented 0.1% of total deposits.
The aggregate amount of certificates of deposit of $100,000 or more at December 31, 2015 and 2014, was $47.1 million and $40.0 million, respectively.
Scheduled maturities of certificates of deposit in amounts of $100,000 or more at December 31, 2015, including deposit accounts with the State of California Treasurer’s Office and CDARS were as follows:
|
(in thousands) |
||||
|
Due within 3 months or less |
$ | 47,013 | ||
|
Due after 3 months and within 6 months |
— | |||
|
Due after 6 months and within 12 months |
125 | |||
|
Due after 12 months |
— | |||
|
Total |
$ | 47,138 |
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, or 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 for operating requirements, divided by total assets) was 10.1% and 15.7% at December 31 2015 and 2014, respectively.
At December 31, 2015 and 2014, the Company had a borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB of $180.0 million and $146.0 million, respectively. The Company had $15.0 million and $17.5 million of long-term borrowings outstanding under this borrowing/credit facility with the FHLB at December 31, 2015 and 2014, respectively. At December 31, 2015, the Company had a $50.0 million overnight borrowing outstanding under this borrowing/credit facility at an interest rate of 0.27%. The Company did not incur any material interest expense in connection with this borrowing. The overnight borrowing was repaid in January 2016. There were no further overnight borrowings during the years ended December 31, 2015 and 2014.
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 December 31, 2015 and 2014 (dollars in thousands):
|
December 31, |
||||||||||||
|
Maturity Date |
Interest Rate |
2015 |
2014 |
|||||||||
|
May 26, 2015 |
1.65% | $ | — | $ | 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 |
$ | 15,000 | $ | 17,500 | ||||||||
At December 31, 2015 and 2014, 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. The Company did not have any borrowings outstanding under these lines of credit at December 31, 2015 and 2014. As of December 31, 2015 and 2014, the Company had pledged $2.3 million and $2.5 million, respectively, of investments 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 December 31, 2015, the Company was not subject to any material commitments for capital expenditures. For capital adequacy, see Part I, Item 1. Business — “Capital Standards.”
At December 31, 2015, the Company had total stockholders’ equity of $64.9 million, which included $127,000 in common stock, $75.4 million in additional paid-in capital, $878,000 in retained earnings, $11,000 in accumulated other comprehensive income, and $11.5 million in treasury stock.
The Company anticipates that, absent further developments, it may need to raise, at some point over the next several quarters, additional capital in order to maintain its well-capitalized status in light of, among other things, continued growth in its loan portfolio. The Company periodically considers its alternatives in this regard, which could include issuing shares of common stock under its previously filed registration statement on Form S-1 or other capital instruments, and there can be no assurance as to the form or nature of any such additional capital or the timing or amount thereof. The Company’s ability to raise any such additional capital is subject to various factors and uncertainties, many of which are beyond its control, including, among others, capital market conditions and general economic conditions. As of December 31, 2015, the Company had deferred financing costs with respect to the registration statement on Form S-1 of $173,000.
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) |
December 31, 2015 |
December 31, 2014 |
||||||
|
Commitments to extend credit |
$ | 159,855 | $ | 146,403 | ||||
|
Commitments to extend credit to directors and officers (undisbursed amount) |
$ | 380 | $ | 747 | ||||
|
Standby/commercial letters of credit |
$ | 3,245 | $ | 2,670 | ||||
|
Guarantees on revolving credit card limits |
$ | 671 | $ | 672 | ||||
|
Outstanding credit card balances |
$ | 82 | $ | 136 | ||||
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 December 31, 2015 and 2014, the allowance for unfunded commitments was $345,000 and $320,000, respectively, which both represented 0.21% of the undisbursed commitments and letters of credit.
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 II, Item 8. Financial Statements and Supplementary Data - Note 6 “Related Party Transactions” and Note 10 “Commitments and Contingencies.”
|
Item 7A. |
Quantitative and Qualitative Disclosure About Market Risk |
Not applicable.
|
Item 8. |
Financial Statements and Supplementary Data |
Financial statements are filed as a part of this report hereof beginning on page 41 and are incorporated herein by reference.
|
Item 9. |
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
|
Item 9A. |
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 periods 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 Annual Report on Form 10-K. 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 periods 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.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Principal Executive and Principal Financial Officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2015, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2015 is effective.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent public accounting firm pursuant to rules of the SEC that permit the Company, as a smaller reporting company, to provide only management’s report in this annual report.
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 December 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
|
Item 9B. |
Other Information |
None.
PART III
|
Item 10. |
Directors, Executive Officers and Corporate Governance |
Information required by this item will be contained in our definitive proxy statement for our 2015 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2015. Such Information is incorporated herein by reference.
|
Item 11. |
Executive Compensation |
Information required by this item will be contained in our Proxy Statement, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2015. Such information is incorporated herein by reference.
|
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information required by this item will be contained in our Proxy Statement to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2015.
Such information is incorporated herein by reference.
|
Certain Relationships and Related Transactions, and Director Independence |
Information required by this item will be contained in our Proxy Statement to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2015. Such information is incorporated herein by reference.
|
Item 14. |
Principal Accountant Fees and Services |
Information required by this item will be contained in our Proxy Statement to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2015. Such information is incorporated herein by reference.
PART IV
|
Item 15. |
Exhibits, Financial Statement Schedules |
|
(a) |
The following documents are filed as part of this Annual Report on Form 10-K: | ||||||||
|
|
|
|
|||||||
| 1. | Consolidated Financial Statements. Reference is made to Part II, Item 8, of this Annual Report on Form 10-K. | ||||||||
|
|
2. |
Consolidated Financial Statement Schedules. These schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. | |||||||
|
|
3. |
Exhibits. The exhibits to this Annual Report on Form 10-K listed below have been included only with the copy of this report filed with the Securities and Exchange Commission. Copies of individual exhibits will be furnished to shareholders upon written request to 1st Century Bancshares, Inc. and payment of a reasonable fee. | |||||||
| Incorporated by Reference | |||||||||||||
|
Exhibit Number |
Exhibit Description |
Filed Herewith |
Form | File No. | Exhibit |
Filing Date | |||||||
| 2.1 | Plan of Reorganization, dated December 18, 2007, by and between 1st Century Bancshares, Inc. and the 1st Century Bank, N.A. | 8-K | 333-148302 | 2.1 | 01/11/08 | ||||||||
| 3.1 | Certificate of Incorporation of 1st Century Bancshares, Inc. | 8-K | 333-148302 | 3.1 | 01/11/08 | ||||||||
| 3.2 | Bylaws of 1st Century Bancshares, Inc. | 8-K | 333-148302 | 3.2 | 01/11/08 | ||||||||
| 4.1 | Form of Common Stock certificate. | 8-A | 000-53050 | 4.1 | 01/30/08 | ||||||||
| 10.1 | Lease Amendment #1 by and between 1875/1925 Century Park East Company and 1st Century Bank, N.A., dated June 9, 2006. | 10-K | 000-53050 | 10.3 | 03/17/08 | ||||||||
| 10.2 | Lease Amendment #2 by and between 1875/1925 Century Park East Company and 1st Century Bank, N.A., dated October 9, 2007. | 10-K | 000-53050 | 10.4 | 03/17/08 | ||||||||
| 10.3 | Lease Amendment #3 by and between 1875/1925 Century Park East Company and 1st Century Bank, N.A., dated December 4, 2012. | 8-K | 001-34226 | 10.1 | 12/06/12 | ||||||||
| 10.4 | Amended and Restated 2005 Equity Incentive Plan. | S-8 | 333-148303 | 4.3 | 12/21/07 | ||||||||
| 10.5 | Equity Incentive Plan Form of Stock Option Grant Agreement. | S-8 | 333-148303 | 4.4 | 12/21/07 | ||||||||
| 10.6 | Form of Resale Restriction Agreement. | 10-K | 000-53050 | 10.8 | 03/17/08 | ||||||||
| 10.7 | Form of Restricted Stock Grant Agreement. | S-8 | 333-148303 | 4.5 | 12/21/07 | ||||||||
| 10.8 | Director and Employee Stock Option Plan. | S-8 | 333-148302 | 4.3 | 12/21/07 | ||||||||
| 10.9 | Director and Employee Stock Option Agreement. | S-8 | 333-148302 | 4.4 | 12/21/07 | ||||||||
|
10.10 |
|
Founder Stock Option Plan. |
|
|
|
S-8 |
|
333-190621 |
|
10.1 |
|
08/14/13 | |
|
|
|
|
|
|
|
Incorporated by Reference | |||||||
|
Exhibit Number |
Exhibit Description |
|
Filed Herewith |
|
Form |
|
File No. |
|
Exhibit |
|
Filing Date | ||
|
|
|
|
|
|
| ||||||||
|
10.11 |
|
Founder Stock Option Agreement. |
|
|
|
S-8 |
|
333-190621 |
|
10.2 |
|
08/14/13 | |
|
|
|
||||||||||||
|
10.12 |
|
2013 Equity Incentive Plan. |
|
|
|
8-K |
|
001-34226 |
|
10.1 |
|
05/10/13 | |
|
10.13 |
Notice of Grant and Stock Option Agreement. |
8-K |
001-34226 |
10.2 |
05/10/13 | ||||||||
|
10.14 |
Notice of Grant and Restricted Stock Agreement. |
8-K |
001-34226 |
10.3 |
05/10/13 | ||||||||
|
10.15 |
Restricted Stock Unit Agreement. |
8-K |
001-34226 |
10.4 |
05/10/13 | ||||||||
|
10.16 |
Stock Appreciation Rights Grant Agreement. |
8-K |
001-34226 |
10.5 |
05/10/13 | ||||||||
|
|
|
|
|||||||||||
|
10.17 |
Employment Agreement between Alan I. Rothenberg and 1st Century Bancshares, Inc. dated November 4, 2011. |
10-Q |
001-34226 |
10.1 |
11/08/11 | ||||||||
|
10.18 |
|
Employment Agreement between Jason P. DiNapoli and 1st Century Bancshares, Inc. dated November 4, 2011. |
|
|
|
10-Q |
|
001-34226 |
|
10.2 |
|
11/08/11 | |
|
10.19 |
|
Severance Agreement between Bradley S. Satenberg and 1st Century Bancshares, Inc. dated November 4, 2011. |
|
|
|
10-Q |
|
001-34226 |
|
10.3 |
|
11/08/11 | |
|
10.20 |
|
Severance Agreement between J. Kevin Sampson and 1st Century Bancshares, Inc. dated November 4, 2011. |
|
|
|
10-Q |
|
001-34226 |
|
10.4 |
|
11/08/11 | |
|
14 |
Code of Ethics. |
10-K |
000-53050 |
14 |
03/17/08 | ||||||||
|
21 |
|
Subsidiary of the Registrant. |
|
X |
|
|
|
|
|
|
|
| |
|
|
|
|
|
| |||||||||
|
23 |
|
Consent of Independent Registered Public Accounting Firm. |
|
X |
|
|
|
|
|
|
|
| |
|
|
|
|
|
| |||||||||
|
31.1 |
|
Rule 13a-14(a) Certification of the Chief Executive Officer. |
|
X |
|
|
|
|
|
|
|
| |
|
|
|
|
|
| |||||||||
|
31.2 |
Rule 13a-14(a) Certification of the Chief Financial Officer. |
X |
|||||||||||
|
32 |
|
Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer. |
|
X |
|
|
|
|
|
|
|
| |
|
101.INS |
XBRL Instance Document. |
X |
|||||||||||
|
101.SCH |
XBRL Taxonomy Extension Schema Document. |
X |
|||||||||||
|
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document. |
X |
|||||||||||
|
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document. |
X |
|||||||||||
|
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document. |
X |
|||||||||||
|
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document. |
X |
|||||||||||
|
(b) |
Exhibits - See exhibit index included in Item 15(a)3 of this Annual Report on Form 10-K. |
|
(c) |
Financial Statement Schedules - See Item 15(a)2 of this Annual Report on Form 10-K. |
Pursuant to the requirements of Section 13 or 15(d) 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, on the 3rd day of March, 2016.
|
1ST CENTURY BANCSHARES, INC. | ||
|
By: |
/s/ Alan I. Rothenberg. | |
|
Alan I. Rothenberg | ||
|
Chairman and Chief Executive Officer | ||
|
By: |
/s/ Jason P. DiNapoli. | |
|
Jason P. DiNapoli | ||
|
President and Chief Operating Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Signature |
Title |
Date | ||
|
/s/ William W. Brien. |
Director |
March 3, 2016 | ||
|
William W. Brien, M.D. |
||||
|
/s/ Dave Brooks. |
Director |
March 3, 2016 | ||
|
Dave Brooks |
||||
|
/s/ Joseph J. Digange. |
Director |
March 3, 2016 | ||
|
Joseph J. Digange |
||||
|
/s/ Jason P. DiNapoli. |
President and Chief Operating Officer, Director |
March 3, 2016 | ||
|
Jason P. DiNapoli |
||||
|
/s/ Eric M. George. |
Director |
March 3, 2016 | ||
|
Eric George |
||||
|
/s/ Alan D. Levy. |
Director |
March 3, 2016 | ||
|
Alan D. Levy |
||||
|
/s/ Robert A. Moore. |
Director |
March 3, 2016 | ||
|
Robert A. Moore |
||||
|
/s/ Barry D. Pressman. |
Director |
March 3, 2016 | ||
|
Barry D. Pressman, M.D. |
|
/s/ Alan I. Rothenberg. |
Chairman of the Board and Chief Executive Officer |
|
March 3, 2016 | ||
|
Alan I. Rothenberg |
(Principal Executive Officer) | ||||
| /s/ Bradley S. Satenberg. | Executive Vice President and Chief Financial Officer | March 3, 2016 | |||
| Bradley S. Satenberg | (Principal Financial and Accounting Officer) | ||||
|
/s/ Nadine I. Watt. |
Director |
March 3, 2016 | |||
|
Nadine I. Watt |
|||||
|
/s/ Lewis N. Wolff. |
Director |
March 3, 2016 | |||
|
Lewis N. Wolff |
|||||
|
/s/ Stanley R. Zax. |
Director |
March 3, 2016 | |||
|
Stanley R. Zax |
|||||
Financial Statements and Supplementary Data
Index to Financial Statements
1st Century Bancshares, Inc.
|
Page | |
|
Consolidated Balance Sheets as of December 31, 2015 and 2014 |
44 |
|
45 | |
|
46 | |
|
Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014 |
47 |
|
48 | |
|
74 |
1st Century Bancshares, Inc.
(in thousands, except share and per share data)
|
December 31, 2015 |
December 31, 2014 |
|||||||
|
ASSETS |
||||||||
|
Cash and due from banks |
$ | 8,889 | $ | 7,484 | ||||
|
Interest-earning deposits at other financial institutions |
45,676 | 50,980 | ||||||
|
Total cash and cash equivalents |
54,565 | 58,464 | ||||||
|
Investment securities — Available for Sale (“AFS”), at estimated fair value |
74,010 | 79,689 | ||||||
|
Loans, net of allowance for loan losses of $8,961 and $7,599 at December 31, 2015 and 2014, respectively |
589,472 | 435,257 | ||||||
|
Premises and equipment, net |
1,627 | 1,460 | ||||||
|
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock |
4,915 | 4,822 | ||||||
|
Accrued interest and other assets |
7,361 | 5,526 | ||||||
|
Total Assets |
$ | 731,950 | $ | 585,218 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
|
Non-interest bearing demand deposits |
$ | 362,451 | $ | 282,217 | ||||
|
Interest bearing deposits: |
||||||||
|
Interest bearing checking (“NOW”) |
32,406 | 25,492 | ||||||
|
Money market deposits and savings |
155,572 | 154,706 | ||||||
|
Certificates of deposit less than $250 |
1,243 | 2,185 | ||||||
|
Certificates of deposit of $250 or greater |
46,505 | 38,572 | ||||||
|
Total deposits |
598,177 | 503,172 | ||||||
|
Other borrowings |
65,000 | 17,500 | ||||||
|
Accrued interest and other liabilities |
3,870 | 2,853 | ||||||
|
Total Liabilities |
667,047 | 523,525 | ||||||
|
Commitments and contingencies (Note 10) |
||||||||
|
Stockholders’ Equity: |
||||||||
|
Preferred stock, $0.01 par value — 10,000,000 shares authorized, none issued and outstanding at December 31, 2015 and 2014, respectively |
— | — | ||||||
|
Common stock, $0.01 par value — 50,000,000 shares authorized, 12,655,633 and 12,129,310 issued at December 31, 2015 and 2014, respectively |
127 | 121 | ||||||
|
Additional paid-in capital |
75,396 | 71,736 | ||||||
|
Retained earnings (accumulated deficit) |
878 | (1,675 |
) | |||||
|
Accumulated other comprehensive income |
11 | 162 | ||||||
|
Treasury stock at cost — 2,336,749 and 1,988,869 shares at December 31, 2015 and 2014, respectively |
(11,509 |
) |
(8,651 |
) | ||||
|
Total Stockholders’ Equity |
64,903 | 61,693 | ||||||
|
Total Liabilities and Stockholders’ Equity |
$ | 731,950 | $ | 585,218 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
1st Century Bancshares, Inc.
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
|
Years Ended December 31, |
||||||||
|
2015 |
2014 |
|||||||
|
Interest and fee income on: |
||||||||
|
Loans |
$ | 21,695 | $ | 16,998 | ||||
|
Investments |
1,296 | 1,729 | ||||||
|
Other |
651 | 488 | ||||||
|
Total interest and fee income |
23,642 | 19,215 | ||||||
|
Interest expense on: |
||||||||
|
Deposits |
482 | 442 | ||||||
|
Borrowings |
218 | 314 | ||||||
|
Total interest expense |
700 | 756 | ||||||
|
Net interest income |
22,942 | 18,459 | ||||||
|
Provision for loan losses |
1,325 | 100 | ||||||
|
Net interest income after provision for loan losses |
21,617 | 18,359 | ||||||
|
Non-interest income: |
||||||||
|
Gain on sale of AFS investment securities |
75 | 1,178 | ||||||
|
Other operating income |
593 | 533 | ||||||
|
Total non-interest income |
668 | 1,711 | ||||||
|
Non-interest expenses: |
||||||||
|
Compensation and benefits |
10,333 | 9,202 | ||||||
|
Occupancy |
1,911 | 1,699 | ||||||
|
Professional fees |
839 | 734 | ||||||
|
Technology |
995 | 836 | ||||||
|
Marketing |
474 | 427 | ||||||
|
FDIC assessments |
400 | 373 | ||||||
|
Other operating expenses |
2,832 | 2,535 | ||||||
|
Total non-interest expenses |
17,784 | 15,806 | ||||||
|
Income before income taxes |
4,501 | 4,264 | ||||||
|
Income tax provision |
1,948 | 1,903 | ||||||
|
Net income |
$ | 2,553 | $ | 2,361 | ||||
|
Other Comprehensive Income: |
||||||||
|
Net change in unrealized gains (losses) on AFS investments, net of tax |
(151 |
) |
110 | |||||
|
Comprehensive Income |
$ | 2,402 | $ | 2,471 | ||||
|
Basic earnings per share |
$ | 0.27 | $ | 0.25 | ||||
|
Diluted earnings per share |
$ | 0.26 | $ | 0.24 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
1st Century Bancshares, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
Years ended December 31, 2015 and 2014
(in thousands, except share data)
|
Common Stock |
Retained Earnings |
Accumulated Other |
Treasury Stock |
Total |
||||||||||||||||||||||||||||
|
Issued Shares |
Amount |
Additional Paid-in Capital |
(Accumulated Deficit) |
Comprehensive Income |
Number of Shares |
Amount |
Stockholders’ Equity |
|||||||||||||||||||||||||
|
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 option |
522,600 | 5 | 2,638 | — | — | — | — | 2,643 | ||||||||||||||||||||||||
|
Earned restricted stock compensation, net of estimated forfeitures |
— | — | 879 | — | — | — | — | 879 | ||||||||||||||||||||||||
|
Excess tax benefit from stock based compensation |
— | — | 990 | — | — | — | — | 990 | ||||||||||||||||||||||||
|
Shares surrendered to pay taxes on stock based compensation |
— | — | — | — | — | (90,967 |
) |
(678 |
) |
(678 |
) | |||||||||||||||||||||
|
Net income |
— | — | — | 2,361 | — | — | — | 2,361 | ||||||||||||||||||||||||
|
Other comprehensive income |
— | — | — | — | 110 | — | — | 110 | ||||||||||||||||||||||||
|
Balance at December 31, 2014 |
12,129,310 | $ | 121 | $ | 71,736 | $ | (1,675 |
) |
$ | 162 | (1,988,869 |
) |
$ | (8,651 |
) |
$ | 61,693 | |||||||||||||||
|
Restricted stock issued |
218,750 | 3 | (3 |
) |
— | — | — | — | — | |||||||||||||||||||||||
|
Exercise of stock option |
307,573 | 3 | 2,461 | — | — | — | — | 2,464 | ||||||||||||||||||||||||
|
Earned restricted stock compensation, net of estimated forfeitures |
— | — | 994 | — | — | — | — | 994 | ||||||||||||||||||||||||
|
Excess tax benefit from stock based compensation |
— | — | 208 | — | — | — | — | 208 | ||||||||||||||||||||||||
|
Shares surrendered to pay taxes on stock based compensation |
— | — | — | — | — | (347,880 |
) |
(2,858 |
) |
(2,858 |
) | |||||||||||||||||||||
|
Net income |
— | — | — | 2,553 | — | — | — | 2,553 | ||||||||||||||||||||||||
|
Other comprehensive income |
— | — | — | — | (151 |
) |
— | — | (151 |
) | ||||||||||||||||||||||
|
Balance at December 31, 2015 |
12,655,633 | $ | 127 | $ | 75,396 | $ | 878 | $ | 11 | (2,336,749 |
) |
$ | (11,509 |
) |
$ | 64,903 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1st Century Bancshares, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
Years ended December 31, |
||||||||
|
2015 |
2014 |
|||||||
|
Cash flows from operating activities: |
||||||||
|
Net income |
$ | 2,553 | $ | 2,361 | ||||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
|
Depreciation and amortization of premises and equipment |
577 | 491 | ||||||
|
Amortization of premiums on investment securities, net |
599 | 812 | ||||||
|
Provision for loan losses |
1,325 | 100 | ||||||
|
Deferred income tax (benefit) expense |
(1,473 |
) |
67 | |||||
|
Amortization (accretion) of deferred loan fees and costs, net |
13 | (15 |
) | |||||
|
Gain on sale of AFS investment securities |
(75 |
) |
(1,178 |
) | ||||
|
Non-cash stock compensation, net of forfeitures |
994 | 879 | ||||||
|
Excess tax benefit related to stock option exercises and vesting of restricted stock |
(208 |
) |
(990 |
) | ||||
|
Gain on sale of OREO |
— | (47 |
) | |||||
|
(Increase) decrease in accrued interest and other assets |
(48 |
) |
186 | |||||
|
Increase in accrued interest and other liabilities |
1,017 | 362 | ||||||
|
Net cash provided by operating activities |
5,274 | 3,028 | ||||||
|
Cash flows from investing activities: |
||||||||
|
Activities in AFS investment securities: |
||||||||
|
Purchases |
(14,374 |
) |
(50,284 |
) | ||||
|
Maturities and principal reductions |
13,289 | 16,325 | ||||||
|
Proceeds from sale of securities |
5,983 | 61,095 | ||||||
|
Increase in loans, net |
(155,553 |
) |
(59,030 |
) | ||||
|
Proceeds from sale of OREO |
— | 137 | ||||||
|
Purchase of premises and equipment |
(744 |
) |
(666 |
) | ||||
|
Purchase of FRB stock and FHLB stock |
(93 |
) |
(190 |
) | ||||
|
Net cash used in investing activities |
(151,492 |
) |
(32,613 |
) | ||||
|
Cash flows from financing activities: |
||||||||
|
Net increase in deposits |
95,005 | 50,406 | ||||||
|
Proceeds from other short-term borrowings |
50,000 | — | ||||||
|
Repayment of other long-term borrowings |
(2,500 |
) |
(10,000 |
) | ||||
|
Proceeds from exercise of stock options |
2,464 | 2,643 | ||||||
|
Excess tax benefit related to stock option exercises and vesting of restricted stock |
208 | 990 | ||||||
|
Shares surrendered to pay taxes on vesting of stock based compensation |
(2,858 |
) |
(678 |
) | ||||
|
Net cash provided by financing activities |
142,319 | 43,361 | ||||||
|
(Decrease) increase in cash and cash equivalents |
(3,899 | ) | 13,776 | |||||
|
Cash and cash equivalents, beginning of year |
58,464 | 44,688 | ||||||
|
Cash and cash equivalents, end of year |
$ | 54,565 | $ | 58,464 | ||||
|
Supplemental disclosure of cash flow information: |
||||||||
|
Cash paid during the year for: |
||||||||
|
Interest |
$ | 700 | $ | 761 | ||||
|
Income taxes |
$ | 2,509 | $ | 1,033 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
1st Century Bancshares, Inc.
Notes To 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 consolidated financial statements include the accounts of Bancshares and the Bank. All inter-company accounts and transactions have been eliminated in consolidation.
Certain items in the 2014 consolidated financial statements have been reclassified to conform to the 2015 presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
The Company’s accounting and reporting policies conform to U.S. generally accepted accounting principles (“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 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. 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 fair value of collateral less selling costs 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. Management believes that the allowance as of December 31, 2015 and 2014 was adequate to absorb probable incurred credit losses inherent in the loan portfolio.
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 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, management established a full valuation allowance against the Company’s deferred tax assets after we determined that it was “more likely than not” that the Company would not be able to realize the benefit of the deferred tax asset. 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 Consolidated Statements of Operations and Comprehensive Income. In making this determination, management analyzed, among other things, the Company’s 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 December 31, 2015 and 2014, the Company had a net deferred tax asset of approximately $4.6 million and $3.0 million, respectively.
At December 31, 2015 and 2014, 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.
See Note 16 “Income Taxes” for further discussion regarding the Company’s tax positions at December 31, 2015 and 2014.
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 the years ended December 31, 2015 and 2014, there were 156,023 and 350,073, respectively, of stock options that were excluded from the diluted earnings per share calculation due to their antidilutive impact. For the years ended December 31, 2015 and 2014, there were 29,149 and 3,278, respectively, of weighted average restricted shares that were excluded from the diluted earnings per share calculation due to their antidilutive impact.
|
Years ended December 31, |
||||||||
|
(dollars in thousands) |
2015 |
2014 |
||||||
|
Net income |
$ | 2,553 | $ | 2,361 | ||||
|
Average number of common shares outstanding |
9,602,008 | 9,431,727 | ||||||
|
Effect of dilution of stock options |
— | 13,811 | ||||||
|
Effect of dilution of restricted stock |
255,453 | 295,710 | ||||||
|
Average number of common shares outstanding used to calculate diluted earnings per common share |
9,857,461 | 9,741,248 | ||||||
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 1st Century Bancshares 2005 Amended and Restated Equity Incentive Plan (the “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 both annual and interim periods beginning after December 15, 2014. The adoption of ASU 2014-04 did not have an impact on its financial statements and disclosures.
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 adoption of ASU 2014-08 did not have an impact on its financial statements and disclosures.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40) (ASU 2014-15). The objective of ASU 2014-15 is to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and provide related disclosures. Currently, GAAP does not provide guidance to evaluate whether there is substantial doubt regarding an organization’s ability to continue as a going concern. This ASU provides guidance to an organization’s management, with principles and definitions to reduce diversity in the timing and content of financial statement disclosures commonly provided by organizations. ASU 2014-15 is effective for periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) (ASU 2015-15). On May 28, 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), with an original effective date for annual reporting periods beginning after December 15, 2016. The core principal of ASU 2014-09 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. ASU 2015- 15 deferred the effective date of ASU 2014-09 to annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company is currently evaluating the effects of ASU 2015-14 on its financial statements and disclosures, if any.
|
(2) |
Investment Securities |
The following is a summary of the investments categorized as Available for Sale at December 31, 2015 and 2014:
|
(in thousands) |
Amortized Cost |
Gross Unrealized
Gains |
Gross Unrealized
Losses |
Fair Value |
||||||||||||
|
At December 31, 2015: |
||||||||||||||||
|
Investments — Available for Sale |
||||||||||||||||
|
U.S. Treasuries and Government Agencies |
$ | 34,417 | $ | 184 | $ | (2 |
) |
$ | 34,599 | |||||||
|
Residential Mortgage-Backed Securities |
39,575 | 116 | (280 |
) |
39,411 | |||||||||||
|
Total |
$ | 73,992 | $ | 300 | $ | (282 |
) |
$ | 74,010 | |||||||
|
At December 31, 2014: |
||||||||||||||||
|
Investments — Available for Sale |
||||||||||||||||
|
U.S. Treasuries and Government Agencies |
$ | 25,973 | $ | 160 | $ | (5 |
) |
$ | 26,128 | |||||||
|
Corporate Notes |
2,528 | 10 | — | 2,538 | ||||||||||||
|
Residential Mortgage-Backed Securities |
50,913 | 275 | (165 |
) |
51,023 | |||||||||||
|
Total |
$ | 79,414 | $ | 445 | $ | (170 |
) |
$ | 79,689 | |||||||
The Company did not have any investment securities categorized as “Held to Maturity” or “Trading” at December 31, 2015 or 2014. At December 31, 2015 and 2014, 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 December 31, 2015 and 2014, the carrying amount of securities pledged to the State of California Treasurer’s Office to secure their deposits was $55.9 million and $48.4 million, respectively. Deposits from the State of California were $46.0 million and $38.0 million at December 31, 2015 and 2014, respectively.
The following table summarizes the fair value of AFS securities and the weighted average yield of investment securities by contractual maturity at December 31, 2015. 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 3.36 years at December 31, 2015.
(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. Treasuries and Government Agencies |
$ | — | — |
% |
$ | 30,293 | 1.86 |
% |
$ | 4,306 | 2.08 |
% |
$ | — | — |
% |
$ | 34,599 | 1.89 |
% | ||||||||||||||||||||
|
Residential Mortgage-Backed Securities |
— | — | 818 | 3.49 | 18,622 | 1.56 | 19,971 | 1.93 | 39,411 | 1.79 | ||||||||||||||||||||||||||||||
|
Total |
$ | — | — |
% |
$ | 31,111 | 1.90 |
% |
$ | 22,928 | 1.66 |
% |
$ | 19,971 | 1.93 |
% |
$ | 74,010 | 1.83 |
% | ||||||||||||||||||||
A total of 31 and 26 securities had unrealized losses at December 31, 2015 and 2014, 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 December 31, 2015: |
||||||||||||||||
|
Investments-Available for Sale |
||||||||||||||||
|
U.S. Treasuries and Government Agencies |
$ | (2 |
) |
$ | 3,995 | $ | — | $ | — | |||||||
|
Residential Mortgage-Backed Securities |
(205 |
) |
23,942 | (75 |
) |
4,221 | ||||||||||
|
At December 31, 2014: |
||||||||||||||||
|
Investments-Available for Sale |
||||||||||||||||
|
U.S. Treasuries and Government Agencies |
$ | (5 |
) |
$ | 8,057 | $ | — | $ | — | |||||||
|
Residential Mortgage-Backed Securities |
(35 |
) |
11,694 | (130 |
) |
17,651 | ||||||||||
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 December 31, 2015 and 2014 that the unrealized losses on its securities portfolio on which impairments had not been recognized are temporary.
|
(3) |
Loans, Allowance for Loan Losses, and Non-Performing Assets |
Loans
As of December 31, 2015 and 2014, total loans outstanding totaled $598.1 million and $442.8 million, respectively. The categories of loans listed below are grouped in accordance with the primary purpose of the loans, but in the aggregate 83.7% and 83.5% of all loans are secured by real estate at December 31, 2015 and 2014, respectively.
| December 31, | ||||||||||||||||
|
2015 |
2014 |
|||||||||||||||
|
(dollars in thousands) |
Amount Outstanding |
Percent of Total |
Amount Outstanding |
Percent of Total |
||||||||||||
|
Commercial (1) |
$ | 112,861 | 18.9 |
% |
$ | 91,694 | 20.7 |
% | ||||||||
|
Commercial real estate |
259,013 | 43.3 |
% |
185,752 | 42.0 |
% | ||||||||||
|
Residential |
127,367 | 21.3 |
% |
98,806 | 22.3 |
% | ||||||||||
|
Land and construction |
59,808 | 10.0 |
% |
37,075 | 8.4 |
% | ||||||||||
|
Consumer and other (2) |
39,058 | 6.5 |
% |
29,458 | 6.6 |
% | ||||||||||
|
Loans, gross |
598,107 | 100.0 |
% |
442,785 | 100.0 |
% | ||||||||||
|
Net deferred costs |
326 | 71 | ||||||||||||||
|
Less — allowance for loan losses |
(8,961 |
) |
(7,599 |
) |
||||||||||||
|
Loans, net |
$ | 589,472 | $ | 435,257 | ||||||||||||
|
(1) |
Unsecured commercial loan balances were $34.4 million and $25.1 million at December 31, 2015 and 2014, respectively. |
|
(2) |
Unsecured consumer and other loan balances were $10.6 million and $5.1 million at December 31, 2015 and 2014, respectively. |
As of December 31, 2015 and 2014, 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 December 31, 2015 and 2014, respectively.
|
(in thousands) |
Commercial |
Commercial Real Estate |
Residential |
Land and Construction |
Consumer and Other |
Total |
||||||||||||||||||
|
For the Year Ended December 31, 2015: |
||||||||||||||||||||||||
|
Allowance for loan losses: |
||||||||||||||||||||||||
|
Beginning balance |
$ | 1,752 | $ | 3,825 | $ | 747 | $ | 816 | $ | 459 | $ | 7,599 | ||||||||||||
|
Provision for loan losses |
— | 755 | 160 | 330 | 80 | 1,325 | ||||||||||||||||||
|
Charge-offs |
— | — | — | — | (18 |
) |
(18 |
) | ||||||||||||||||
|
Recoveries |
55 | — | — | — | — | 55 | ||||||||||||||||||
|
Ending balance |
$ | 1,807 | $ | 4,580 | $ | 907 | $ | 1,146 | $ | 521 | $ | 8,961 | ||||||||||||
|
As of December 31, 2015: |
||||||||||||||||||||||||
|
Ending balance: individually evaluated for impairment |
$ | 35 | $ | — | $ | — | $ | — | $ | — | $ | 35 | ||||||||||||
|
Ending balance: collectively evaluated for impairment |
1,772 | 4,580 | 907 | 1,146 | 521 | 8,926 | ||||||||||||||||||
|
Total |
$ | 1,807 | $ | 4,580 | $ | 907 | $ | 1,146 | $ | 521 | $ | 8,961 | ||||||||||||
|
Loans: |
||||||||||||||||||||||||
|
Ending balance: individually evaluated for impairment |
$ | 712 | $ | — | $ | — | $ | — | $ | 47 | $ | 759 | ||||||||||||
|
Ending balance: collectively evaluated for impairment |
112,149 | 259,013 | 127,367 | 59,808 | 39,011 | 597,348 | ||||||||||||||||||
|
Total |
$ | 112,861 | $ | 259,013 | $ | 127,367 | $ | 59,808 | $ | 39,058 | $ | 598,107 | ||||||||||||
|
For the Year Ended December 31, 2014: |
||||||||||||||||||||||||
|
Allowance for loan losses: |
||||||||||||||||||||||||
|
Beginning balance |
$ | 1,583 | $ | 3,660 | $ | 758 | $ | 811 | $ | 424 | $ | 7,236 | ||||||||||||
|
Provision for loan losses |
115 | 165 | (220 |
) |
5 | 35 | 100 | |||||||||||||||||
|
Charge-offs |
— | — | — | — | — | — | ||||||||||||||||||
|
Recoveries |
54 | — | 209 | — | — | 263 | ||||||||||||||||||
|
Ending balance |
$ | 1,752 | $ | 3,825 | $ | 747 | $ | 816 | $ | 459 | $ | 7,599 | ||||||||||||
|
As of December 31, 2014: |
||||||||||||||||||||||||
|
Ending balance: individually evaluated for impairment |
$ | 20 | $ | — | $ | — | $ | — | $ | — | $ | 20 | ||||||||||||
|
Ending balance: collectively evaluated for impairment |
1,732 | 3,825 | 747 | 816 | 459 | 7,579 | ||||||||||||||||||
|
Total |
$ | 1,752 | $ | 3,825 | $ | 747 | $ | 816 | $ | 459 | $ | 7,599 | ||||||||||||
|
Loans: |
||||||||||||||||||||||||
|
Ending balance: individually evaluated for impairment |
$ | 632 | $ | — | $ | — | $ | — | $ | 49 | $ | 681 | ||||||||||||
|
Ending balance: collectively evaluated for impairment |
91,062 | 185,752 | 98,806 | 37,075 | 29,409 | 442,104 | ||||||||||||||||||
|
Total |
$ | 91,694 | $ | 185,752 | $ | 98,806 | $ | 37,075 | $ | 29,458 | $ | 442,785 | ||||||||||||
There were no loans acquired with deteriorated credit quality as of December 31, 2015 and 2014.
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 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 December 31, 2015 and 2014, the allowance for unfunded lending commitments was $345,000 and $320,000, respectively and is primarily related to $159.9 million and $146.4 million in commitments to extend credit to customers and $3.2 million and $2.7 million in standby/commercial letters of credit at December 31, 2015 and 2014, respectively.
Non-Performing Assets
The following table presents an aging analysis of the recorded investment of past due loans as of December 31, 2015 and 2014. 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. Total additions to non-performing loans during the years ended December 31, 2015 and 2014 were $100,000 and none, respectively. Non-performing loans represented 0.1% of total loans at both December 31, 2015 and 2014. There were no accruing loans past due 90 days or more at December 31, 2015 and 2014.
|
(in thousands) |
30-59 Days Past Due |
60-89 Days Past Due |
> 90 Days Past Due |
Total Past Due |
Current |
Total |
||||||||||||||||||
|
As of December 31, 2015: |
||||||||||||||||||||||||
|
Commercial |
$ | — | $ | — | $ | 712 | $ | 712 | $ | 112,149 | $ | 112,861 | ||||||||||||
|
Commercial real estate |
— | — | — | — | 259,013 | 259,013 | ||||||||||||||||||
|
Residential |
— | — | — | — | 127,367 | 127,367 | ||||||||||||||||||
|
Land and construction |
— | — | — | — | 59,808 | 59,808 | ||||||||||||||||||
|
Consumer and other |
— | — | — | — | 39,058 | 39,058 | ||||||||||||||||||
|
Totals |
$ | — | $ | — | $ | 712 | $ | 712 | $ | 597,395 | $ | 598,107 | ||||||||||||
|
As of December 31, 2014: |
||||||||||||||||||||||||
|
Commercial |
$ | — | $ | 60 | $ | 572 | $ | 632 | $ | 91,062 | $ | 91,694 | ||||||||||||
|
Commercial real estate |
— | — | — | — | 185,752 | 185,752 | ||||||||||||||||||
|
Residential |
— | — | — | — | 98,806 | 98,806 | ||||||||||||||||||
|
Land and construction |
— | — | — | — | 37,075 | 37,075 | ||||||||||||||||||
|
Consumer and other |
— | — | — | — | 29,458 | 29,458 | ||||||||||||||||||
|
Totals |
$ | — | $ | 60 | $ | 572 | $ | 632 | $ | 442,153 | $ | 442,785 | ||||||||||||
The following table sets forth non-accrual loans and other real estate owned at December 31, 2015 and 2014:
|
December 31, |
||||||||
|
(dollars in thousands) |
2015 |
2014 |
||||||
|
Non-accrual loans: |
||||||||
|
Commercial |
$ | 712 | $ | 632 | ||||
|
Commercial real estate |
— | — | ||||||
|
Land and construction |
— | — | ||||||
|
Consumer and other |
— | — | ||||||
|
Total non-accrual loans |
712 | 632 | ||||||
|
OREO |
— | — | ||||||
|
Total non-performing assets |
$ | 712 | $ | 632 | ||||
|
Non-performing assets to gross loans and OREO |
0.12 |
% |
0.14 |
% | ||||
|
Non-performing assets to total assets |
0.10 |
% |
0.11 |
% | ||||
Credit Quality Indicators
The following table represents the credit exposure by internally assigned grades at December 31, 2015 and 2014. 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 December 31, 2015: |
||||||||||||||||||||
|
Grade: |
||||||||||||||||||||
|
Pass |
$ | 111,970 | $ | 259,013 | $ | 127,367 | $ | 59,808 | $ | 39,011 | ||||||||||
|
Special Mention |
179 | — | — | — | — | |||||||||||||||
|
Substandard |
712 | — | — | — | 47 | |||||||||||||||
|
Total |
$ | 112,861 | $ | 259,013 | $ | 127,367 | $ | 59,808 | $ | 39,058 | ||||||||||
|
As of December 31, 2014: |
||||||||||||||||||||
|
Grade: |
||||||||||||||||||||
|
Pass |
$ | 90,235 | $ | 185,201 | $ | 98,806 | $ | 37,075 | $ | 29,409 | ||||||||||
|
Special Mention |
180 | — | — | — | — | |||||||||||||||
|
Substandard |
1,279 | 551 | — | — | 49 | |||||||||||||||
|
Total |
$ | 91,694 | $ | 185,752 | $ | 98,806 | $ | 37,075 | $ | 29,458 | ||||||||||
There were no loans assigned to the Doubtful or Loss grade as of December 31, 2015 and 2014.
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 year ended December 31, 2015: |
||||||||||||||||
|
With no related allowance recorded: |
||||||||||||||||
|
Commercial |
$ | 572 | $ | 848 | $ | — | $ | 572 | ||||||||
|
Commercial real estate |
— | — | — | — | ||||||||||||
|
Residential |
— | — | — | — | ||||||||||||
|
Land and construction |
— | — | — | — | ||||||||||||
|
Consumer and other |
47 | 47 | — | 48 | ||||||||||||
|
With an allowance recorded: |
||||||||||||||||
|
Commercial |
$ | 140 | $ | 155 | $ | 35 | $ | 107 | ||||||||
|
Commercial real estate |
— | — | — | — | ||||||||||||
|
Residential |
— | — | — | — | ||||||||||||
|
Land and construction |
— | — | — | — | ||||||||||||
|
Consumer and other |
— | — | — | — | ||||||||||||
|
Totals: |
||||||||||||||||
|
Commercial |
$ | 712 | $ | 1,003 | $ | 35 | $ | 679 | ||||||||
|
Commercial real estate |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Residential |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Land and construction |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Consumer and other |
$ | 47 | $ | 47 | $ | — | $ | 48 | ||||||||
|
As of and for the year ended December 31, 2014: |
||||||||||||||||
|
With no related allowance recorded: |
||||||||||||||||
|
Commercial |
$ | 572 | $ | 848 | $ | — | $ | 707 | ||||||||
|
Commercial real estate |
— | — | — | — | ||||||||||||
|
Residential |
— | — | — | — | ||||||||||||
|
Land and construction |
— | — | — | — | ||||||||||||
|
Consumer and other |
49 | 49 | — | 36 | ||||||||||||
|
With an allowance recorded: |
||||||||||||||||
|
Commercial |
$ | 60 | $ | 74 | $ | 20 | $ | 106 | ||||||||
|
Commercial real estate |
— | — | — | — | ||||||||||||
|
Residential |
— | — | — | — | ||||||||||||
|
Land and construction |
— | — | — | — | ||||||||||||
|
Consumer and other |
— | — | — | — | ||||||||||||
|
Totals: |
||||||||||||||||
|
Commercial |
$ | 632 | $ | 922 | $ | 20 | $ | 813 | ||||||||
|
Commercial real estate |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Residential |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Land and construction |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Consumer and other |
$ | 49 | $ | 49 | $ | — | $ | 36 | ||||||||
During the years ended December 31, 2015 and 2014, the average balance of impaired loans was $727,000 and $849,000, respectively. As of December 31, 2015 and 2014, there was $712,000 and $632,000, respectively, of impaired loans on non-accrual status. During the year ended December 31, 2015 and 2014, interest income recognized on impaired loans subsequent to their classification as impaired was $3,000 and $8,000, 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
Troubled debt restructurings for the years ended December 31, 2015 and 2014 are set forth in the following table.
|
For the Years Ended December 31, |
||||||||||||||||||||||||
|
2015 |
2014 |
|||||||||||||||||||||||
|
(dollars in thousands) |
Number of Loans |
Pre Modification Outstanding Recorded Investment |
Post Modification Outstanding Recorded Investment |
Number of Loans |
Pre Modification Outstanding Recorded Investment |
Post Modification Outstanding Recorded Investment |
||||||||||||||||||
|
Troubled Debt Restructurings: |
||||||||||||||||||||||||
|
Commercial |
— | $ | — | $ | — | 1 | $ | 50 | $ | 50 | ||||||||||||||
The modification in connection with the troubled debt restructurings during the year ended December 31, 2014 was primarily related to extending the amortization period of this loan. The impact on the Company’s determination of the allowance for loan losses related to these troubled debt restructurings was not material and resulted in no charge-offs during the years ended December 31, 2015 and 2014. During the years ended December 31, 2015 and 2014, there had been no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months. 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 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 December 31, 2015 and 2014 are presented in the following table. The Company obtains dealer quotations to value its interest rate derivative contracts.
|
December 31, 2015 |
December 31, 2014 |
|||||||||||||||
|
(in thousands) |
Notional |
Estimated |
Notional |
Estimated |
||||||||||||
|
Non-hedging interest rate derivatives: |
||||||||||||||||
|
Commercial loan interest rate swaps |
$ | 2,032 | $ | (30 |
) |
$ | 2,650 | $ | (23 |
) | ||||||
|
Commercial loan interest rate swaps |
$ | (2,032 |
) |
$ | 30 | $ | (2,650 |
) |
$ | 23 | ||||||
The weighted-average rates paid and received for interest rate swaps outstanding at December 31, 2015 and 2014 were as follows:
|
December 31, 2015 Weighted-Average |
December 31, 2014 Weighted-Average |
|||||||||||||||
|
Interest |
Interest |
Interest |
Interest |
|||||||||||||
|
Non-hedging interest rate swaps |
3.68 |
% |
4.96 |
% |
3.37 |
% |
4.85 |
% | ||||||||
|
Non-hedging interest rate swaps |
4.96 |
% |
3.68 |
% |
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 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, the net change in unrealized gains on investment securities available for sale and the reclassification of net gains included in earnings, is presented below:
|
For the Years Ended December 31, |
||||||||
|
(in thousands) |
2015 |
2014 |
||||||
|
Net income |
$ | 2,553 | $ | 2,361 | ||||
|
Other comprehensive income: |
||||||||
|
Change in net unrealized (losses) gains on investment securities available for sale, net of tax (benefit) expense of ($75) and $561, respectively |
(107 |
) |
804 | |||||
|
Reclassification for net gains included in earnings, net of tax expense of $31 and $484, respectively |
(44 |
) |
(694 |
) | ||||
|
Comprehensive income |
$ | 2,402 | $ | 2,471 | ||||
Reclassification adjustments of $75,000 and $1.2 million for the years ended December 31, 2015 and 2014, respectively, are included in non-interest income within the Consolidated Statements of Operations and Comprehensive Income. Income tax expense associated with these reclassification adjustments for the years ended December 31, 2015 and 2014 was $31,000 and $484,000, respectively, and is included in income tax provision within the 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:
|
For the Years Ended December 31, |
||||||||
|
(in thousands) |
2015 |
2014 |
||||||
|
Beginning balance |
$ | 162 | $ | 52 | ||||
|
Other comprehensive (loss) income before reclassifications |
(107 |
) |
804 | |||||
|
Amounts reclassified from accumulated other comprehensive income |
(44 |
) |
(694 |
) | ||||
|
Net other comprehensive (loss) income |
(151 |
) |
110 | |||||
|
Ending balance |
$ | 11 | $ | 162 | ||||
|
(6) |
Related Party Transactions |
In the normal course of business, the Company may make loans to officers and directors, as well as loans to companies and individuals affiliated with or guaranteed by officers and directors of the Company. Gross loan commitments for officers and directors of the Company were $3.6 million and $3.1 million at December 31, 2015 and 2014, respectively. The outstanding balances for these loans were $3.2 million and $2.4 million at December 31, 2015 and 2014, respectively.
The following is a summary of related party loan activities for the years ended December 31, 2015 and 2014:
|
December 31, |
||||||||
|
(in thousands) |
2015 |
2014 |
||||||
|
Beginning balance |
$ | 2,351 | $ | 1,514 | ||||
|
Disbursements |
1,185 | 1,030 | ||||||
|
Repayments |
(304 |
) |
(193 |
) | ||||
|
Ending balance |
$ | 3,232 | $ | 2,351 | ||||
Deposits by officers and directors of the Company at December 31, 2015 and 2014 totaled approximately $9.3 million and $8.5 million, respectively.
|
(7) |
Premises and Equipment |
Premises and equipment are stated at cost less accumulated depreciation and amortization. The depreciation and amortization are computed on a straight line basis over the lesser of the lease term, or the estimated useful lives of the assets, generally three to ten years.
Premises and equipment at December 31, 2015 and 2014 are comprised of the following:
| December 31, | ||||||||
|
(in thousands) |
2015 |
2014 |
||||||
|
Leasehold improvements |
$ | 1,881 | $ | 1,537 | ||||
|
Furniture & equipment |
3,150 | 2,803 | ||||||
|
Software |
871 | 847 | ||||||
|
Total |
5,902 | 5,187 | ||||||
|
Accumulated depreciation |
(4,275 |
) |
(3,727 |
) | ||||
|
Premises and equipment, net |
$ | 1,627 | $ | 1,460 | ||||
Depreciation and amortization included in occupancy expense for the years ended December 31, 2015 and 2014 amounted to $577,000 and $491,000, respectively.
|
(8) |
Deposits |
The following table reflects the summary of deposit categories by dollar and percentage at December 31, 2015 and 2014:
|
December 31, 2015 |
December 31, 2014 |
|||||||||||||||
|
(dollars in thousands) |
Amount |
Percent of Total |
Amount |
Percent of Total |
||||||||||||
|
Non-interest bearing demand deposits |
$ | 362,451 | 60.6 |
% |
$ | 282,217 | 56.1 |
% | ||||||||
|
Interest bearing demand deposits |
32,406 | 5.4 |
% |
25,492 | 5.1 |
% | ||||||||||
|
Money market deposits and savings |
155,572 | 26.0 |
% |
154,706 | 30.7 |
% | ||||||||||
|
Certificates of deposit |
47,748 | 8.0 |
% |
40,757 | 8.1 |
% | ||||||||||
|
Total |
$ | 598,177 | 100.0 |
% |
$ | 503,172 | 100.0 |
% | ||||||||
At December 31, 2015, the Company had two certificates of deposits with the State of California Treasurer’s Office for a total of $46.0 million that represented 7.7% of total deposits. Each of these deposits are scheduled to mature in the first quarter of 2016. 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, 2014, the Company had two certificate of deposit accounts with the State of California Treasurer’s Office for a total of $38.0 million that represented 7.6% of total deposits. The Company was required to pledge $50.6 million and $41.8 million of investment securities at December 31, 2015 and 2014, respectively, in connection with these certificates of deposit.
At both December 31, 2015 and 2014, the Company had $505,000 of Certificate of Deposit Accounts Registry Service (“CDARS”) reciprocal deposits, which both represented 0.1% of total deposits.
The aggregate amount of certificates of deposit of $250,000 or greater at December 31, 2015 and 2014 was $46.5 million and $38.6 million, respectively. At December 31, 2015, the maturity distribution of certificates of deposit of $250,000 or greater, including deposit accounts with the State of California Treasurer’s Office and CDARS, was as follows: $46.5 million maturing in six months or less, none 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 December 31, 2015.
|
(dollars in thousands) |
Six months |
Greater than |
Greater than |
|||||||||||
| 0.00% | to | 0.99% | $ | 47,467 | $ | 184 | $ | 69 | ||||||
| 1.00% | to | 1.99% | — | — | 28 | |||||||||
| Total | $ | 47,467 | $ | 184 | $ | 97 | ||||||||
|
(9) |
Other Borrowings |
At December 31, 2015 and 2014, the Company had a borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB of $180.0 million and $146.0 million, respectively. The Company had $15.0 million and $17.5 million of long-term borrowings outstanding under this borrowing/credit facility with the FHLB at December 31, 2015 and 2014, respectively. At December 31, 2015, the Company had a $50.0 million overnight borrowing outstanding under this borrowing/credit facility at an interest rate of 0.27%. The Company did not incur any material interest expense in connection with this borrowing. The overnight borrowing was repaid in January 2016. There were no further overnight borrowings during the years ended December 31, 2015 and 2014.
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 December 31, 2015 and 2014 (dollars in thousands):
|
December 31, |
||||||||||||
|
Maturity Date |
Interest Rate |
2015 |
2014 |
|||||||||
|
May 26, 2015 |
1.65% | $ | — | $ | 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 |
$ | 15,000 | $ | 17,500 | ||||||||
At December 31, 2015, 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. The Company did not have any borrowings outstanding under these lines of credit at December 31, 2015 and 2014. As of December 31, 2015 and 2014, the Company had pledged $2.3 million and $2.5 million, respectively of corporate notes related to these lines of credit.
|
(10) |
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 $159.9 million and $146.4 million in commitments to extend credit to customers and $3.2 million and $2.7 million in standby/commercial letters of credit at December 31, 2015 and 2014, 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 $82,000 and $136,000 as of December 31, 2015 and 2014, 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, was $1.1 million and $951,000 for the years ended December 31, 2015 and 2014, respectively.
The projected minimum rental payments under the term of the leases at December 31, 2015 are as follows (in thousands):
|
Years ending December 31, |
||||
|
2016 |
$ | 985 | ||
|
2017 |
1,015 | |||
|
2018 |
1,046 | |||
|
2019 |
834 | |||
|
2020 |
760 | |||
|
Thereafter |
2,840 | |||
|
Total |
$ | 7,480 |
Litigation
The Company from time to time is party to lawsuits, which arise out of the normal course of business. At December 31, 2015 and 2014, the Company did not have any litigation that management believes will have a material impact on the Consolidated Balance Sheets or 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, |
||||
|
2016 |
$ | 707 | ||
|
2017 |
525 | |||
|
2018 |
323 | |||
|
2019 |
184 | |||
|
2020 |
126 | |||
|
Thereafter |
27 | |||
|
Total |
$ | 1,892 |
|
(11) |
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 December 31, 2015 and 2014, 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 December 31, 2015: |
||||||||||||||||
|
Investments-Available for Sale |
||||||||||||||||
|
U.S. Treasuries and Government Agencies |
$ | 34,599 | $ | 3,910 | $ | 30,689 | $ | — | ||||||||
|
Residential Mortgage-Backed Securities |
39,411 | — | 39,411 | — | ||||||||||||
|
Derivative Assets – Interest Rate Swaps |
30 | — | 30 | — | ||||||||||||
|
Derivative Liabilities – Interest Rate Swaps |
30 | — | 30 | — | ||||||||||||
|
At December 31, 2014: |
||||||||||||||||
|
Investments-Available for Sale |
||||||||||||||||
|
U.S. Treasuries and Government Agencies |
$ | 26,128 | $ | 3,885 | $ | 22,243 | $ | — | ||||||||
|
Corporate Notes |
2,538 | — | 2,538 | — | ||||||||||||
|
Residential Mortgage-Backed Securities |
51,023 | — | 51,023 | — | ||||||||||||
|
Derivative Assets – Interest Rate Swaps |
23 | — | 23 | — | ||||||||||||
|
Derivative Liabilities – Interest Rate Swaps |
23 | — | 23 | — | ||||||||||||
AFS securities — As of December 31, 2015 and 2014, the Level 2 fair value of the Company’s residential mortgage-backed securities was $39.4 million and $51.0 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 December 31, 2015 and 2014, the weighted average rate and weighted average life of these securities were 1.79% and 1.82%, respectively, and 3.36 years and 3.64 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 and 2 measurements during the years ended December 31, 2015 and 2014.
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 December 31, 2015: |
||||||||||||||||
|
Impaired loans |
||||||||||||||||
|
Commercial |
$ | 677 | $ | — | $ | — | $ | 677 | ||||||||
|
At December 31, 2014: |
||||||||||||||||
|
Impaired loans |
||||||||||||||||
|
Commercial |
$ | 612 | $ | — | $ | — | $ | 612 | ||||||||
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. The Company recorded net recoveries of $37,000 and $263,000 on impaired loans during the years ended December 31, 2015 and 2014, respectively.
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.
|
(12) |
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 December 31, 2015 and 2014 are as follows:
| Carrying | Fair Value Measurements Using: | |||||||||||||||||||
|
(dollars in thousands) |
Amount |
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||||
|
As of December 31, 2015 |
||||||||||||||||||||
|
Assets |
||||||||||||||||||||
|
Cash and cash equivalents |
$ | 54,565 | $ | 54,565 | $ | — | $ | — | $ | 54,565 | ||||||||||
|
Investment securities |
74,010 | 3,910 | 70,100 | — | 74,010 | |||||||||||||||
|
FRB stock |
1,748 | — | — | — | N/A | |||||||||||||||
|
FHLB stock |
3,167 | — | — | — | N/A | |||||||||||||||
|
Loans, net |
589,472 | — | — | 587,530 | 587,530 | |||||||||||||||
|
Non-hedging interest rate swaps |
30 | — | 30 | — | 30 | |||||||||||||||
|
Accrued interest receivable |
1,692 | 1,692 | — | — | 1,692 | |||||||||||||||
|
Liabilities |
||||||||||||||||||||
|
Non-interest bearing deposits |
$ | 362,451 | $ | 362,451 | $ | — | $ | — | $ | 362,451 | ||||||||||
|
Interest bearing deposits |
235,726 | 187,978 | 47,748 | — | 235,726 | |||||||||||||||
|
Other borrowings |
65,000 | — | 64,983 | — | 64,983 | |||||||||||||||
|
Non-hedging interest rate swaps |
30 | — | 30 | — | 30 | |||||||||||||||
|
Accrued interest payable |
23 | 23 | — | — | 23 | |||||||||||||||
|
As of December 31, 2014 |
||||||||||||||||||||
|
Assets |
||||||||||||||||||||
|
Cash and cash equivalents |
$ | 58,464 | $ | 58,464 | $ | — | $ | — | $ | 58,464 | ||||||||||
|
Investment securities |
79,689 | 3,885 | 75,804 | — | 79,689 | |||||||||||||||
|
FRB stock |
1,655 | — | — | — | N/A | |||||||||||||||
|
FHLB stock |
3,167 | — | — | — | N/A | |||||||||||||||
|
Loans, net |
435,257 | — | — | 433,588 | 433,588 | |||||||||||||||
|
Non-hedging interest rate swaps |
23 | — | 23 | — | 23 | |||||||||||||||
|
Accrued interest receivable |
1,418 | 1,418 | — | — | 1,418 | |||||||||||||||
|
Liabilities |
||||||||||||||||||||
|
Non-interest bearing deposits |
$ | 282,217 | $ | 282,217 | $ | — | $ | — | $ | 282,217 | ||||||||||
|
Interest bearing deposits |
220,955 | 180,198 | 40,757 | — | 220,955 | |||||||||||||||
|
Other borrowings |
17,500 | — | 17,551 | — | 17,551 | |||||||||||||||
|
Non-hedging interest rate swaps |
23 | — | 23 | — | 23 | |||||||||||||||
|
Accrued interest payable |
23 | 23 | — | — | 23 | |||||||||||||||
|
(13) |
Non-Interest Income |
The following table summarizes the information regarding non-interest income for the years ended December 31, 2015 and 2014, respectively:
|
Years ended December 31, |
||||||||
|
(in thousands) |
2015 |
2014 |
||||||
|
Gain on sale of AFS investment securities |
$ | 75 | $ | 1,178 | ||||
|
Service charges and other operating income |
593 | 533 | ||||||
|
Total non-interest income |
$ | 668 | $ | 1,711 | ||||
|
(14) |
Other Operating Expenses |
The following table summarizes the information regarding other operating expenses for the years ended December 31, 2015, and 2014, respectively:
|
Years ended December 31, |
||||||||
|
(in thousands) |
2015 |
2014 |
||||||
|
Loan expenses |
$ | 121 | $ | 85 | ||||
|
Board of Directors fees/non-cash stock expenses |
376 | 434 | ||||||
|
OCC assessments |
166 | 148 | ||||||
|
Branch and production office expenses |
992 | 777 | ||||||
|
Stationery and supplies |
122 | 109 | ||||||
|
Insurance |
82 | 76 | ||||||
|
Dues, memberships and subscriptions |
247 | 202 | ||||||
|
Stockholders expense |
126 | 128 | ||||||
|
Telephone |
145 | 102 | ||||||
|
Delaware Franchise Tax |
110 | 110 | ||||||
|
Provision for unfunded lending commitments |
25 | 50 | ||||||
|
Personnel hiring expenses |
69 | 76 | ||||||
|
Other expenses |
251 | 238 | ||||||
|
Total other operating expenses |
$ | 2,832 | $ | 2,535 | ||||
|
(15) |
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 Consolidated Statements of Operations and Comprehensive Income related to the restricted stock awards, net of estimated forfeitures, was $994,000 and $879,000 for the years ended December 31, 2015 and 2014, respectively. The fair value of restricted stock awards that vested during the years ended December 31, 2015, and 2014 was $778,000 and $541,000, respectively.
The following table reflects the activities related to restricted stock awards outstanding for the years ended December 31, 2015 and 2014, respectively.
|
Years Ended December 31, |
||||||||||||||||
|
2015 |
2014 |
|||||||||||||||
|
Restricted Shares |
Number |
Weighted Avg Fair Value at Grant Date |
Number |
Weighted Avg Fair Value at Grant Date |
||||||||||||
|
Beginning balance |
615,875 | $ | 5.92 | 529,529 | $ | 4.62 | ||||||||||
|
Granted |
218,750 | 6.98 | 228,000 | 7.63 | ||||||||||||
|
Vested |
(164,875 |
) |
4.72 | (141,654 |
) |
3.82 | ||||||||||
|
Forfeited and surrendered |
— | — | — | — | ||||||||||||
|
Ending balance |
669,750 | $ | 6.56 | 615,875 | $ | 5.92 | ||||||||||
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 years ended December 31, 2015 and 2014, there were none and 72,000, respectively, options exercised under the 2004 Founder Stock Option Plan at a weighted average exercise price of $5.00 per share. During the year ended December 31, 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. As of December 31, 2015 and 2014, there were no remaining options outstanding related to the plan.
There have been no options granted under the Director and Employee Stock Option Plan for the years ended December 31, 2015 or 2014. There have been 307,573 and 450,600 options exercised during the years ended December 31, 2015 and 2014, respectively, at a weighted average price of $8.01 and $5.07 per share, respectively. The remaining contractual life of the Director and Employee Stock Options outstanding was none and 0.58 years at December 31, 2015 and 2014, respectively. All options under the Directors and Employee Stock Option Plan were exercisable at December 31, 2014. During the year ended December 31, 2015, 42,500 of unexercised option under the plan expired and were automatically cancelled. The weighted average exercise price of the cancelled option was $8.40 per share. At December 31, 2014, the weighted average exercise price of the 350,073 shares outstanding under the Director and Employee Stock Option Plan was $8.06. As of December 31, 2015 there were no remaining options outstanding related to the plan.
The following tables detail the amount of shares authorized and available under all stock plans as of December 31, 2015:
|
Shares Reserved |
Less Shares Previously |
Less Shares |
Total Shares |
||||||
|
2004 Founder Stock Option Plan |
150,000 |
121,900 |
— |
— | |||||
|
Director and Employee Stock Option Plan |
1,434,000 |
1,220,097 |
— |
— |
|||||
|
2005 Equity Incentive Plan |
1,200,000 |
944,273 |
243,000 |
— |
|||||
|
2013 Equity Incentive Plan |
750,000 |
20,000 |
426,750 |
303,250 |
|||||
|
(16) |
Income Taxes |
The income tax provision consists of the following for the years ended December 31, 2015 and 2014:
|
(in thousands) |
2015 |
2014 |
||||||
|
Current: |
||||||||
|
Federal |
$ | 2,584 | $ | 1,573 | ||||
|
State |
837 | 263 | ||||||
|
Deferred: |
||||||||
|
Federal |
(1,096 |
) |
(77 |
) | ||||
|
State |
(377 |
) |
144 | |||||
|
Income tax provision |
$ | 1,948 | $ | 1,903 | ||||
A reconciliation of the amounts computed by applying the federal statutory rate of 34% for 2015 and 2014 to the loss before income tax provision and the effective tax rate are as follows:
|
2015 |
2014 |
|||||||||||||||
|
(dollars in thousands) |
Amount |
Percent of Pretax |
Amount |
Percent of Pretax |
||||||||||||
|
Federal income tax provision at statutory rate |
$ | 1,530 | 34 |
% |
$ | 1,450 | 34 |
% | ||||||||
|
Changes due to: |
||||||||||||||||
|
State franchise tax, net of federal income tax |
327 | 7 |
% |
310 | 7 |
% | ||||||||||
|
Other, net |
91 | 2 |
% |
143 | 4 |
% | ||||||||||
|
Total income tax provision (benefit) |
$ | 1,948 | 43 |
% |
$ | 1,903 | 45 |
% | ||||||||
The major components of the net deferred tax assets and liabilities at December 31, 2015 and 2014 are as follows:
|
(in thousands) |
2015 |
2014 |
||||||
|
Deferred tax assets: |
||||||||
|
Allowance for loan losses |
$ | 2,344 | $ | 1,336 | ||||
|
Equity compensation |
927 | 646 | ||||||
|
Depreciation |
86 | 96 | ||||||
|
Accrued compensation |
549 | 390 | ||||||
|
Deferred rent |
247 | 228 | ||||||
|
Other |
578 | 562 | ||||||
|
Total deferred tax assets |
4,731 | 3,258 | ||||||
|
Deferred tax liabilities: |
||||||||
|
Prepaid expenses |
93 | 93 | ||||||
|
Federal Home Loan Bank stock dividends |
57 | 57 | ||||||
|
Net unrealized gains on investment securities |
7 | 113 | ||||||
|
Total deferred tax liabilities |
157 | 263 | ||||||
|
Net deferred tax assets |
$ | 4,574 | $ | 2,995 | ||||
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 historic financial performance, the forecasts of future income, existence of feasible tax planning strategies, length of statutory carryforward periods, 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.
At December 31, 2015 and 2014, the Company had a net deferred tax asset of approximately $4.6 million and $3.0 million, respectively.
No uncertain tax positions were identified as of December 31, 2015 and 2014, and the Company had no tax reserve for uncertain tax positions at December 31, 2015 and 2014. The Company does not anticipate providing a reserve for uncertain tax positions in the next twelve months. Furthermore, the Company has elected to record interest accrued and penalties related to unrecognized tax benefits in tax expense. At December 31, 2015 and 2014, the Company did not have an accrual for interest and/or penalties associated with uncertain tax positions.
The Company files income tax returns in the U.S. federal and California jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2012 and 2011, respectively.
|
(17) |
Employee Benefit Plan |
The Company has a 401(k) plan for all employees and permits voluntary contributions of their salaries on a pre-tax basis, subject to statutory and Internal Revenue Service guidelines. The contributions to the 401(k) plan are invested at the directions of the participants. The Company matches 100% of the employee’s contribution up to the first 3% of the employee’s salary and 50% of the employee’s contribution up to the next 2% of the employee’s salary. The Company’s expense relating to the contributions made to the 401(k) plan for the benefit of the employees for the years ended December 31, 2015 and 2014 was $229,000 and $199,000, respectively.
|
(18) |
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 December 31, 2015 and 2014, the Company and the Bank met all capital adequacy requirements to which they are subject.
At December 31, 2015, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, 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 category.
The Company’s and the Bank’s capital ratios as of December 31, 2015 and 2014 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 |
||||||||||||||||||||||||
|
December 31, 2015: |
||||||||||||||||||||||||||||||||
|
Total Risk-Based Capital Ratio |
$ | 73,029 | 11.24 |
% |
$ | 72,520 | 11.16 |
% |
$ | 51,992 | 8.00 |
% |
$ | 64,989 | 10.00 |
% | ||||||||||||||||
|
Tier 1 Risk-Based Capital Ratio |
$ | 64,891 | 9.98 |
% |
$ | 64,381 | 9.91 |
% |
$ | 38,994 | 6.00 |
% |
$ | 51,991 | 8.00 |
% | ||||||||||||||||
|
Common Equity Tier 1 Capital Ratio |
$ | 64,891 | 9.98 |
% |
$ | 64,381 | 9.91 |
% |
$ | 29,245 | 4.50 |
% |
$ | 42,243 | 6.50 |
% | ||||||||||||||||
|
Tier 1 Leverage Ratio |
$ | 64,891 | 9.00 |
% |
$ | 64,381 | 8.92 |
% |
$ | 28,852 | 4.00 |
% |
$ | 36,078 | 5.00 |
% | ||||||||||||||||
|
December 31, 2014: |
||||||||||||||||||||||||||||||||
|
Total Risk-Based Capital Ratio |
$ | 67,275 | 13.94 |
% |
$ | 63,339 | 13.13 |
% |
$ | 38,603 | 8.00 |
% |
$ | 48,253 | 10.00 |
% | ||||||||||||||||
|
Tier 1 Risk-Based Capital Ratio |
$ | 61,220 | 12.69 |
% |
$ | 57,284 | 11.87 |
% |
$ | 19,302 | 4.00 |
% |
$ | 28,952 | 6.00 |
% | ||||||||||||||||
|
Tier 1 Leverage Ratio |
$ | 61,220 | 10.05 |
% |
$ | 57,284 | 9.40 |
% |
$ | 24,357 | 4.00 |
% |
$ | 30,456 | 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 commenced 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.
Dividends
In the ordinary course of business, Bancshares 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.
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 required the Bank to take corrective action to enhance its program and procedures for compliance with the Bank Secrecy Act (“BSA”) and other anti-money laundering regulations (“AML”).
On February 23, 2015, the Board of Directors of the Bank was notified by the OCC that the OCC is terminating its Consent Order with the Bank, dated September 11, 2013, effective immediately.
|
(19) |
Parent Company Only Condensed Financial Information |
The condensed financial statements of 1st Century Bancshares, Inc. as of and for the years ended December 31, 2015 and 2014 are presented below:
Condensed Balance Sheets
|
(in thousands) |
December 31, 2015 |
December 31, 2014 |
||||||
|
Assets |
||||||||
|
Cash and due from banks |
$ | 535 | $ | 3,961 | ||||
|
Investment in subsidiary bank |
64,392 | 57,757 | ||||||
|
Total Assets |
$ | 64,927 | $ | 61,718 | ||||
|
Liabilities and Stockholders’ Equity |
||||||||
|
Other liabilities |
$ | 24 | $ | 25 | ||||
|
Common stock |
127 | 121 | ||||||
|
Additional paid-in capital |
75,396 | 71,736 | ||||||
|
Retained earnings (accumulated deficit) |
878 | (1,675 |
) | |||||
|
Accumulated other comprehensive income |
11 | 162 | ||||||
|
Treasury stock at cost |
(11,509 |
) |
(8,651 |
) | ||||
|
Total Stockholders’ Equity |
64,903 | 61,693 | ||||||
|
Total Liabilities and Stockholders’ Equity |
$ | 64,927 | $ | 61,718 | ||||
Condensed Statements of Operations and Comprehensive Income
|
Years ended December 31, |
||||||||
|
(in thousands) |
2015 |
2014 |
||||||
|
Interest income |
$ | — | $ | — | ||||
|
Interest expense |
— | — | ||||||
|
Net interest income |
— | — | ||||||
|
Compensation and benefits |
(17 |
) |
(33 |
) | ||||
|
Other operating expenses |
(19 |
) |
(60 |
) | ||||
|
Loss before taxes |
(36 |
) |
(93 |
) | ||||
|
Income tax benefit |
5 | — | ||||||
|
Loss before equity in undistributed income of subsidiary bank |
(31 |
) |
(93 |
) | ||||
|
Equity in undistributed income of subsidiary bank |
2,584 | 2,454 | ||||||
|
Net income |
$ | 2,553 | $ | 2,361 | ||||
|
Comprehensive income |
$ | 2,402 | $ | 2,471 | ||||
Condensed Statements of Cash Flows
|
Years ended December, 31 |
||||||||
|
(in thousands) |
2015 |
2014 |
||||||
|
Cash flows from operating activities: |
||||||||
|
Net income |
$ | 2,553 | $ | 2,361 | ||||
|
Adjustments to reconcile net income to net cash used in operations: |
||||||||
|
Equity in undistributed net income of subsidiary bank |
(2,584 |
) |
(2,454 |
) | ||||
|
(Decrease) increase in other liabilities |
(1 |
) |
7 | |||||
|
Net cash used in operating activities |
(32 |
) |
(86 |
) | ||||
|
Cash flows from investing activities: |
||||||||
|
Investment in subsidiary bank |
(3,000 |
) |
— | |||||
|
Net cash used in investing activities |
(3,000 |
) |
— | |||||
|
Cash flows from financing activities: |
||||||||
|
Proceeds from exercise of stock options |
2,464 | 2,643 | ||||||
|
Shares surrendered on vesting and exercise of stock based compensation |
(2,858 |
) |
(678 |
) | ||||
|
Net cash provided by financing activities |
(394 |
) |
1,965 | |||||
|
Net change in cash and cash equivalents |
(3,426 |
) |
1,879 | |||||
|
Cash and cash equivalents, beginning of year |
3,961 | 2,082 | ||||||
|
Cash and cash equivalents, end of year |
$ | 535 | $ | 3,961 | ||||
|
(20) |
Shareholders' Equity |
The Company anticipates that, absent further developments, it may need to raise, at some point over the next several quarters, additional capital in order to maintain its well-capitalized status in light of, among other things, continued growth in its loan portfolio. The Company periodically considers its alternatives in this regard, which could include issuing shares of common stock under its previously filed registration statement on Form S-1 or other capital instruments, and there can be no assurance as to the form or nature of any such additional capital or the timing or amount thereof. The Company’s ability to raise any such additional capital is subject to various factors and uncertainties, many of which are beyond its control, including, among others, capital market conditions and general economic conditions. As of December 31, 2015, the Company had deferred financing costs with respect to the registration statement on Form S-1 of $173,000, which are included in the consolidated balance sheet as of December 31, 2015.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Stockholders of 1st Century Bancshares, Inc.
Los Angeles, CA
We have audited the accompanying consolidated balance sheets of 1st Century Bancshares, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of 1st Century Bancshares, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 1st Century Bancshares, Inc. as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
|
/s/ Crowe Horwath LLP |
|
Sherman Oaks, California |
|
March 3, 2016 |
74