XNAS:FCTY 1st Century Bancshrs Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents



 


 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




FORM 10-Q


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


For the quarterly period ended March 31, 2012


Commission file number 001-34226


1st Century Bancshares, Inc.

(Exact name of registrant as specified in its charter)


Delaware

 

26-1169687

(State or other jurisdiction of incorporation or organization)

 

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


1875 Century Park East, Suite 1400

Los Angeles, California  90067

(Address of principal executive offices)

(Zip Code)


(310) 270-9500

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes x  No o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o


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 o

Accelerated filer o

 

 

Non-accelerated filer o

Smaller reporting company x

(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  o  No  x


9,027,938 shares of common stock of the registrant were outstanding as of May 4, 2012.







Table of Contents



1st Century Bancshares, Inc.

Quarterly Report on Form 10-Q

March 31, 2012


Table of Contents


 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets — March 31, 2012 (unaudited) and December 31, 2011

4

 

 

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Income — Three months ended March 31, 2012 and 2011

5

 

 

 

 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity — Three months ended March 31, 2012 and 2011

6

 

 

 

 

Unaudited Consolidated Statements of Cash Flows — Three months ended March 31, 2012 and 2011

7

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

 

Item 2.

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

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

 

 

 

Item 4.

Controls and Procedures

40

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

Item 1A.

Risk Factors

40

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 3.

Defaults Upon Senior Securities

41

 

 

 

Item 4.

Mine Safety Disclosures

41

 

 

 

Item 5.

Other Information

41

 

 

 

Item 6.

Exhibits

41

 

 

 

Signatures

 

42




2



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


This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” and other similar expressions in this Quarterly Report on Form 10-Q.  With respect to any such forward-looking statements, the Company claims the protection of the safe harbor provided for in the Private Securities Litigation Reform Act of 1995.  The Company cautions investors that any forward-looking statements presented in this Quarterly Report on Form 10-Q, or those that the Company may make orally or in writing from time to time, are based on the beliefs of, on 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 the following: the impact of changes in interest rates; a renewed decline in economic conditions; further increased competition among financial institutions; the Company’s ability to continue to attract interest bearing deposits and quality loan customers; further government regulation and the implementation and costs associated with the same; 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” in the Company’s 2011 Annual Report on Form 10-K.


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




3



PART I. FINANCIAL INFORMATION


Item 1 — Financial Statements


1st Century Bancshares, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)


 

 

March 31, 2012 (unaudited)

 

December 31, 2011

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

9,527

 

$

9,785

 

Interest earning deposits at other financial institutions

 

63,630

 

32,141

 

Total cash and cash equivalents

 

73,157

 

41,926

 

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

 

130,051

 

129,906

 

Loans, net of allowance for loan losses of $5,288 and $5,284 at March 31, 2012 and December 31, 2011, respectively

 

224,722

 

227,721

 

Premises and equipment, net

 

1,001

 

1,095

 

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

 

2,881

 

2,962

 

Accrued interest and other assets

 

1,586

 

1,664

 

Total Assets

 

$

433,398

 

$

405,274

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Non-interest bearing demand deposits

 

$

135,753

 

$

122,843

 

Interest bearing deposits:

 

 

 

 

 

Interest bearing checking (“NOW”)

 

20,790

 

20,739

 

Money market deposits and savings

 

156,935

 

142,061

 

Certificates of deposit less than $100

 

1,587

 

1,956

 

Certificates of deposit of $100 or greater

 

45,128

 

44,855

 

Total deposits

 

360,193

 

332,454

 

Other borrowings

 

25,000

 

25,000

 

Accrued interest and other liabilities

 

2,499

 

2,769

 

Total Liabilities

 

387,692

 

360,223

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.01 par value — 10,000,000 shares authorized, none issued and outstanding at March 31, 2012 and December 31, 2011, respectively

 

 

 

Common stock, $0.01 par value — 50,000,000 shares authorized, 10,841,033 issued at March 31, 2012 and December 31, 2011

 

108

 

108

 

Additional paid-in capital

 

64,624

 

64,488

 

Accumulated deficit

 

(13,249

)

(13,841

)

Accumulated other comprehensive income

 

1,660

 

1,567

 

Treasury stock at cost — 1,813,095 and 1,769,248 shares at March 31, 2012 and December 31, 2011, respectively

 

(7,437

)

(7,271

)

Total Stockholders’ Equity

 

45,706

 

45,051

 

Total Liabilities and Stockholders’ Equity

 

$

433,398

 

$

405,274

 


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




4



1st Century Bancshares, Inc.

Unaudited Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)


 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Interest and fee income on:

 

 

 

 

 

Loans

 

$

2,734

 

$

2,316

 

Investments

 

754

 

533

 

Other

 

53

 

55

 

Total interest and fee income

 

3,541

 

2,904

 

 

 

 

 

 

 

Interest expense on:

 

 

 

 

 

Deposits

 

168

 

185

 

Borrowings

 

74

 

8

 

Total interest expense

 

242

 

193

 

Net interest income

 

3,299

 

2,711

 

 

 

 

 

 

 

Provision for loan losses

 

 

200

 

Net interest income after provision for loan losses

 

3,299

 

2,511

 

 

 

 

 

 

 

Non-interest income

 

347

 

204

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

Compensation and benefits

 

1,707

 

1,416

 

Occupancy

 

298

 

239

 

Professional fees

 

189

 

183

 

Technology

 

150

 

151

 

Marketing

 

53

 

52

 

FDIC assessments

 

71

 

110

 

Other operating expenses

 

570

 

441

 

Total non-interest expenses

 

3,038

 

2,592

 

Income before income taxes

 

608

 

123

 

Income tax provision

 

16

 

 

Net income

 

 

592

 

 

123

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

Net change in unrealized gains on AFS investment securities, net of tax

 

 

93

 

 

(97

)

Comprehensive income

 

$

685

 

$

26

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.07

 

$

0.01

 

Diluted earnings per share

 

$

0.07

 

$

0.01

 


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




5



1st Century Bancshares, Inc.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

(in thousands, except share data)


 

 

Common Stock

 

 

 

 

 

Accumulated Other

 

Treasury Stock

 

Total

 

 

 

Issued

 

 

 

Additional

 

Accumulated

 

Comprehensive

 

Number of

 

 

 

Stockholders’

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Deficit

 

Income

 

Shares

 

Amount

 

Equity

 

Balance at December 31, 2010

 

10,672,676

 

$

107

 

$

64,069

 

$

(14,866

)

$

838

 

(1,370,385

)

$

(5,810

)

$

44,338

 

Forfeiture of restricted stock

 

(1,000

)

 

 

 

 

 

 

 

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

 

 

 

127

 

 

 

 

 

127

 

Common stock repurchased

 

 

 

 

 

 

(2,512

)

(10

)

(10

)

Net income

 

 

 

 

123

 

 

 

 

123

 

Other comprehensive income

 

 

 

 

 

(97

)

 

 

(97

)

Balance at March 31, 2011

 

10,671,676

 

$

107

 

$

64,196

 

$

(14,743

)

$

741

 

(1,372,897

)

$

(5,820

)

$

44,481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

10,841,033

 

$

108

 

$

64,488

 

$

(13,841

)

$

1,567

 

(1,769,248

)

$

(7,271

)

$

45,051

 

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

 

 

 

136

 

 

 

 

 

136

 

Common stock repurchased

 

 

 

 

 

 

(43,847

)

(166

)

(166

)

Net income

 

 

 

 

592

 

 

 

 

592

 

Other comprehensive income

 

 

 

 

 

93

 

 

 

93

 

Balance at March 31, 2012

 

10,841,033

 

$

108

 

$

64,624

 

$

(13,249

)

$

1,660

 

(1,813,095

)

$

(7,437

)

$

45,706

 


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




6



1st Century Bancshares, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)


 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

592

 

$

123

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization of premises and equipment

 

107

 

84

 

Amortization of premiums on investment securities, net

 

299

 

51

 

Provision for loan losses

 

 

200

 

(Accretion) amortization of deferred loan fees, net of costs

 

(10

)

23

 

Non-cash stock compensation, net of forfeitures

 

136

 

127

 

Decrease (increase) in accrued interest and other assets

 

78

 

(25

)

Decrease in accrued interest and other liabilities

 

(336

)

(2,090

)

Net cash provided by (used in) operating activities

 

866

 

(1,507

)

Cash flows from investing activities:

 

 

 

 

 

Activities in AFS investment securities:

 

 

 

 

 

Purchases

 

(8,303

)

(12,137

)

Maturities and principal reductions

 

8,018

 

5,786

 

Decrease (increase) in loans, net

 

3,009

 

(9,257

)

Purchase of premises and equipment

 

(13

)

(45

)

Redemption of FRB stock and FHLB stock

 

81

 

80

 

Net cash provided by (used in) investing activities

 

2,792

 

(15,573

)

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

27,739

 

12,694

 

Purchase of treasury stock

 

(166

)

(10

)

Net cash provided by financing activities

 

27,573

 

12,684

 

Increase (decrease) in cash and cash equivalents

 

31,231

 

(4,396

)

Cash and cash equivalents, beginning of period

 

41,926

 

69,012

 

Cash and cash equivalents, end of period

 

$

73,157

 

$

64,616

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

233

 

$

179

 

Income taxes

 

$

70

 

$

 

 

 

 

 

 

 

 

 


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




7



1st Century Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements


(1)

Summary of Significant Accounting Policies


Nature of Operations


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


Basis of Presentation


The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2011, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC, under the Securities and Exchange Act of 1934, (the “Exchange Act”).  The unaudited consolidated financial statements include the accounts of Bancshares and the Bank.  All intercompany accounts and transactions have been eliminated.


The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2012.


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


Use of Estimates


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


Cash and Cash Equivalents


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


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



8



readily determinable fair values are classified as “Available for Sale” or “AFS” and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The Company uses estimates from third parties in arriving at fair value determinations which are derived in accordance with fair value measurement standards.


Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of investment securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income provided that management does not have the intent to sell the securities and it is more likely than not that management will not have to sell the security before recovery of its cost basis.  In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.


Federal Reserve Bank Stock and Federal Home Loan Bank Stock


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


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


Loans


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


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


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


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


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


Troubled Debt Restructurings


In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is



9



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.  Effective July 1, 2011, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2011-02, Receivables (“Topic 310”) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“ASU 11-02”).  


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 three 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 March 31, 2012 and December 31, 2011 was adequate to absorb probable incurred credit losses inherent in the loan portfolio.


Other Real Estate Owned


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.  As of March 31, 2012 and December 31, 2011, the Company did not have any OREO.


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 five 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.



10



Advertising Costs


Advertising costs are expensed as incurred.


Income Taxes


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


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


During the year ended December 31, 2009, the Company established a full valuation allowance against the deferred tax assets due to the uncertainty regarding its realizability.  At March 31, 2012 and December 31, 2011, management reassessed the need for this valuation allowance and concluded that a full valuation allowance remained appropriate.  Management reached this conclusion as a result of the Company’s cumulative losses since inception, and the anticipated near term economic climate in which the Company will operate.  Management will continue to evaluate the potential realizability of the deferred tax assets and will continue to maintain a valuation allowance to the extent it is determined that it is more likely than not that these assets will not be realized. At March 31, 2012 and December 31, 2011, the Company maintained a deferred tax liability of $1.2 million and $1.1 million, respectively, in connection with net unrealized gains on investment securities, which is included in Accrued Interest and Other Liabilities within the accompanying Consolidated Balance Sheets.  The Company did not utilize this deferred tax liability to reduce its tax valuation allowance due to the fact that management does not currently intend to dispose of these investments and realize the associated gains.


At March 31, 2012 and December 31, 2011, the Company did not have any tax benefits disallowed under accounting standards for uncertainties in income taxes.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  If applicable, the Company has elected to record interest accrued and penalties related to unrecognized tax benefits in tax expense.


Comprehensive Income


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


Earnings per Share


The Company reports both basic and diluted earnings per share. Basic earnings per share is determined by dividing net income by the average number of shares of common stock outstanding, while diluted earnings per share is determined by dividing net income by the average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents. Potential dilutive common shares related to outstanding stock options and restricted stock are determined using the treasury stock method.  At both March 31, 2012 and 2011, there were 1,179,373 stock options that were excluded from this calculation due to their antidilutive impact.

 

 

Three Months Ended March 31,

(dollars in thousands)

 

2012

 

2011

Net income

 

$

592

 

$

123

Average number of common shares outstanding

 

 

8,505,031

 

 

8,854,671

Effect of dilution of restricted stock

 

 

216,273

 

 

188,365

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

 

 

8,721,304

 

 

9,043,036


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 May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Fair Value Measurement (“Topic 820”) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 11-04”).  This ASU amends Topic 820, "Fair Value Measurements and Disclosures," to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards.  ASU 11-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 11-04 is effective for annual periods beginning after December 15, 2011.  The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations, or cash flows.


In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (“Topic 220”) – Presentation of Comprehensive Income (“ASU 11-05”).  This ASU amends Topic 220, "Comprehensive Income," to require that all nonowner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 11-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders' equity was eliminated. ASU 11-05 is effective for annual periods beginning after December 15, 2011.  The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations, or cash flows.


In December 2011, the FASB issued ASU 2011-11, Balance Sheet (“Topic 210”) Disclosures about Offsetting Assets and Liabilities (“ASU 11-11”).  This ASU amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement.  ASU 11-11 is effective for annual and interim periods beginning on January 1, 2013.  Management does not believe that the adoption of this ASU will have a significant impact on the Company’s financial position, results of operations, or cash flows.  



12




In December 2011, the FASB issued ASU 2011-12 Comprehensive Income (“Topic 220”) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 11-12”).  This ASU defers changes in ASU 11-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income.  ASU 11-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 11-05.  All other requirements in ASU 11-05 are not affected by ASU 11-12.  ASU 11-12 is effective for annual and interim periods beginning after December 15, 2011.  The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations, or cash flows.


(2)

Investments


The following is a summary of the investments categorized as Available for Sale at March 31, 2012 and December 31, 2011:


 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

At March 31, 2012:

 

 

 

 

 

 

 

 

 

Investments — Available for Sale

 

 

 

 

 

 

 

 

 

U.S. Gov’t Treasuries

 

$

2,102

 

$

63

 

$

 

$

2,165

 

Corporate Notes

 

14,541

 

85

 

 

14,626

 

Residential Mortgage-Backed Securities

 

110,175

 

2,680

 

(6

)

112,849

 

Residential Collateralized Mortgage Obligations (“CMOs”)

 

412

 

 

(1

)

411

 

Total

 

$

127,230

 

$

2,828

 

$

(7

)

$

130,051

 

At December 31, 2011:

 

 

 

 

 

 

 

 

 

Investments — Available for Sale

 

 

 

 

 

 

 

 

 

U.S. Gov’t Treasuries

 

$

2,102

 

$

37

 

$

 

$

2,139

 

Corporate Notes

 

 

6,280

 

 

43

 

 

(2

)

 

6,321

 

Residential Mortgage-Backed Securities

 

118,170

 

2,624

 

(38

)

120,756

 

Residential CMOs

 

692

 

 

(2

)

690

 

Total

 

$

127,244

 

$

2,704

 

$

(42

)

$

129,906

 


The Company did not have any investment securities categorized as “Held to Maturity” or “Trading” at March 31, 2012 or December 31, 2011.


Additionally, at March 31, 2012 and December 31, 2011, the carrying amount of securities pledged to the State of California Treasurer’s Office to secure their deposits was $49.6 million and $53.6 million, respectively.  Deposits from the State of California were $34.0 million at both March 31, 2012 and December 31, 2011.


The following table summarizes the fair value of AFS securities and the weighted average yield of investment securities by contractual maturity at March 31, 2012.  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 3.33 years at March 31, 2012.


(dollars in thousands)

Available for Sale

 

1 Year or Less

 

Weighted Average Yield

 

After 1 Through 5 Years

 

Weighted Average Yield

 

After 5 Through 10 Years

 

Weighted Average Yield

 

After 10 Years

 

Weighted Average Yield

 

Total

 

Weighted Average Yield

 

U.S. Government Treasuries

 

$

 

 %

$

2,165

 

0.13

%

$

 

%

$

 

%

$

2,165

 

0.13

%

Corporate Notes

 

507

 

0.62

 

14,119

 

1.84

 

 

 

 

 

14,626

 

1.80

 

Residential Mortgage-Backed Securities

 

3

 

3.57

 

905

 

4.35

 

77,822

 

2.35

 

34,119

 

3.01

 

112,849

 

2.57

 

Residential CMOs

 

 

 

 

 

111

 

1.53

 

300

 

0.52

 

411

 

0.79

 

Total

 

$

510

 

0.64

 %

$

17,189

 

1.76

%

$

77,933

 

2.35

%

$

34,419

 

2.99

%

$

130,051

 

2.43

%




13




A total of three and nine securities had unrealized losses at March 31, 2012 and December 31, 2011, 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 March 31, 2012:

 

 

 

 

 

 

 

 

 

Investments-Available for Sale

 

 

 

 

 

 

 

 

 

Residential Mortgage-Backed Securities

 

$

(6

)

$

3,823

 

$

 

$

 

Residential CMOs

 

 

(1

)

 

300

 

 

 

 

 

Total

 

$

(7

)

$

4,123

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2011:

 

 

 

 

 

 

 

 

 

Investments-Available for Sale

 

 

 

 

 

 

 

 

 

Corporate Notes

 

$

(2

)

$

2,157

 

$

 

$

 

Residential Mortgage-Backed Securities

 

 

(38

)

 

11,188

 

 

 

 

 

Residential CMOs

 

 

(2

)

 

690

 

 

 

 

 

Total

 

$

(42

)

$

14,035

 

$

 

$

 


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 March 31, 2012 and December 31, 2011 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 March 31, 2012 and December 31, 2011, gross loans outstanding totaled $229.9 million and $233.0 million, respectively, within the following loan categories:


 

 

March 31, 2012

 

December 31, 2011

 

 

Amount

 

Percent

 

Amount

 

Percent

 

(dollars in thousands)

 

Outstanding

 

of Total

 

Outstanding

 

of Total

 

Commercial (1)

 

$

64,732

 

28.2

%

$

70,945

 

30.4

%

Commercial real estate

 

72,536

 

31.5

%

70,269

 

30.2

%

Residential

 

52,796

 

23.0

%

54,944

 

23.6

%

Land and construction

 

19,727

 

8.6

%

16,670

 

7.2

%

Consumer and other (2)

 

20,132

 

8.7

%

20,140

 

8.6

%

Loans, gross

 

229,923

 

100.0

%

232,968

 

100.0

%

Net deferred costs

 

87

 

 

 

37

 

 

 

Less — allowance for loan losses

 

(5,288

)

 

 

(5,284

)

 

 

Loans, net

 

$

224,722

 

 

 

$

227,721

 

 

 


(1)

Unsecured commercial loan balances were $10.9 million and $11.5 million at March 31, 2012 and December 31, 2011, respectively.

(2)

Unsecured consumer and other loan balances were $980,000 and $2.8 million at March 31, 2012 and December 31, 2011, respectively.


As of March 31, 2012 and December 31, 2011, substantially all of the Company’s loan customers were located in Southern California.



14



Allowance for Loan Losses and Recorded Investment in Loans


The following is a summary of activities for the allowance for loan losses and recorded investment in loans as of and for the three months ended March 31, 2012:


(in thousands)

 

Commercial

 

Commercial Real Estate

 

Residential

 

Land and Construction

 

Consumer and Other

 

Total

 

Three Months Ended March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,584

 

$

1,252

 

$

583

 

$

516

 

$

349

 

$

5,284

 

Provision for loan losses

 

 

(300

)

 

350

 

 

(35

)

 

 

 

(15

)

 

 

Charge-offs

 

 

(3

)

 

 

 

 

 

(5

)

 

 

 

(8

)

Recoveries

 

 

9

 

 

3

 

 

 

 

 

 

 

 

12

 

Ending balance

 

$

2,290

 

$

1,605

 

$

548

 

$

511

 

$

334

 

$

5,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

700

 

$

 

$

 

$

 

$

 

$

700

 

Ending balance: collectively evaluated for impairment

 

 

1,590

 

 

1,605

 

 

548

 

 

511

 

 

334

 

 

4,588

 

Total

 

$

2,290

 

$

1,605

 

$

548

 

$

511

 

$

334

 

$

5,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

2,229

 

$

3,724

 

$

 

$

1,325

 

$

345

 

$

7,623

 

Ending balance: collectively evaluated for impairment

 

 

62,503

 

 

68,812

 

 

52,796

 

 

18,402

 

 

19,787

 

 

222,300

 

Total

 

$

64,732

 

$

72,536

 

$

52,796

 

$

19,727

 

$

20,132

 

$

229,923

 


The following is a summary of activities for the allowance for loan losses and recorded investment in loans as of and for the three months ended March 31, 2011:


(in thousands)

 

Commercial

 

Commercial Real Estate

 

Residential

 

Land and Construction

 

Consumer and Other

 

Total

 

Three Months Ended March 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,812

 

$

888

 

$

213

 

$

995

 

$

375

 

$

5,283

 

Provision for loan losses

 

 

(90

)

 

220

 

 

70

 

 

 

 

 

 

200

 

Charge-offs

 

 

(22

)

 

 

 

 

 

 

 

 

 

(22

)

Recoveries

 

 

12

 

 

 

 

 

 

 

 

3

 

 

15

 

Ending balance

 

$

2,712

 

$

1,108

 

$

283

 

$

995

 

$

378

 

$

5,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

1,097

 

$

220

 

$

 

$

 

$

40

 

$

1,357

 

Ending balance: collectively evaluated for impairment

 

 

1,615

 

 

888

 

 

283

 

 

995

 

 

338

 

 

4,119

 

Total

 

$

2,712

 

$

1,108

 

$

283

 

$

995

 

$

378

 

$

5,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

1,631

 

$

5,012

 

$

 

$

 

$

345

 

$

6,988

 

Ending balance: collectively evaluated for impairment

 

 

63,711

 

 

51,625

 

 

29,525

 

 

15,978

 

 

20,722

 

 

181,561

 

Total

 

$

65,342

 

$

56,637

 

$

29,525

 

$

15,978

 

$

21,067

 

$

188,549

 




15




The following is a summary of the allowance for loan losses and recorded investment in loans as of December 31, 2011:


(in thousands)

 

Commercial

 

Commercial Real Estate

 

Residential

 

Land and Construction

 

Consumer and Other

 

Total

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

700

 

$

 

$

 

$

 

$

 

$

700

Ending balance: collectively evaluated for impairment

 

 

1,884

 

 

1,252

 

 

583

 

 

516

 

 

349

 

 

4,584

Total

 

$

2,584

 

$

1,252

 

$

583

 

$

516

 

$

349

 

$

5,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

2,175

 

$

3,756

 

$

 

$

1,330

 

$

345

 

$

7,606

Ending balance: collectively evaluated for impairment

 

 

68,770

 

 

66,513

 

 

54,944

 

 

15,340

 

 

19,795

 

 

225,362

Total

 

$

70,945

 

$

70,269

 

$

54,944

 

$

16,670

 

$

20,140

 

$

232,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There were no loans acquired with deteriorated credit quality as of March 31, 2012 and December 31, 2011.


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 risk according to the Company’s internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments.  Provision for credit losses related to unfunded lending commitments is reported in other operating expenses in the unaudited Consolidated Statements of Operations.  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 March 31, 2012 and December 31, 2011, the allowance for unfunded lending commitments was $203,000 and is primarily related to $68.3 million and $57.0 million in commitments to extend credit to customers and $1.7 million and $2.5 million in standby/commercial letters of credit at March 31, 2012 and December 31, 2011, respectively.


Non-Performing Assets


The following table presents an aging analysis of the recorded investment of past due loans as of March 31, 2012. Payment activity is reviewed by management on a monthly basis to determine the performance of each loan.  Loans are considered to be non-performing when a loan is greater than 90 days delinquent.  Loans that are 90 days or more past due may still accrue interest if they are well-secured and in the process of collection.  There were no additions to non-performing loans during the three months ended March 31, 2012 and 2011.  Non-performing loans represented 3.2% and 3.3% of total loans at March 31, 2012 and December 31, 2011, respectively.  There were no accruing loans past due 90 days or more at March 31, 2012 and December 31, 2011.


(in thousands)

 

30-59 Days Past Due

 

60-89 Days Past Due

 

> 90 Days Past Due

 

Total Past Due

 

Current

 

Total

As of March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

657

 

$

 

$

657

 

$

64,075

 

$

64,732

Commercial real estate

 

 

 

 

 

 

540

 

 

540

 

 

71,996

 

 

72,536

Residential

 

 

 

 

 

 

 

 

 

 

52,796

 

 

52,796

Land and construction

 

 

 

 

1,325

 

 

 

 

1,325

 

 

18,402

 

 

19,727

Consumer and other

 

 

48

 

 

 

 

345

 

 

393

 

 

19,739

 

 

20,132

Totals

 

$

48

 

$

1,982

 

$

885

 

$

2,915

 

$

227,008

 

$

229,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

364

 

$

4

 

$

683

 

$

1,051

 

$

69,894

 

$

70,945

Commercial real estate

 

 

 

 

 

 

540

 

 

540

 

 

69,729

 

 

70,269

Residential

 

 

 

 

 

 

 

 

 

 

54,944

 

 

54,944

Land and construction

 

 

 

 

 

 

 

 

 

 

16,670

 

 

16,670

Consumer and other

 

 

50

 

 

 

 

345

 

 

395

 

 

19,745

 

 

20,140

Totals

 

$

414

 

$

4

 

$

1,568

 

$

1,986

 

$

230,982

 

$

232,968

The following table sets forth non-accrual loans and other real estate owned at March 31, 2012 and December 31, 2011:


(dollars in thousands)

 

March 31, 2012

 

December 31, 2011

 

Non-accrual loans:

 

 

 

 

 

Commercial

 

$

1,891

 

$

2,175

 

Commercial real estate

 

3,724

 

3,756

 

Land and construction

 

1,325

 

1,330

 

Consumer and other

 

345

 

345

 

Total non-accrual loans

 

7,285

 

7,606

 

OREO

 

 

 

Total non-performing assets

 

$

7,285

 

$

7,606

 

 

 

 

 

 

 

Non-performing assets to gross loans and OREO

 

3.17

%

3.26

%

Non-performing assets to total assets

 

1.68

%

1.88

%


Credit Quality Indicators


The following table represents the credit exposure by internally assigned grades at March 31, 2012 and December 31, 2011.  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 March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

59,902

 

$

67,347

 

$

52,796

 

$

16,230

 

$

19,739

 

Special Mention

 

 

1,162

 

 

800

 

 

 

 

2,172

 

 

 

Substandard

 

 

3,668

 

 

4,389

 

 

 

 

1,325

 

 

393

 

Total

 

$

64,732

 

$

72,536

 

$

52,796

 

$

19,727

 

$

20,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

64,838

 

$

65,837

 

$

54,944

 

$

12,933

 

$

19,745

 

Special Mention

 

 

1,245

 

 

 

 

 

 

2,407

 

 

 

Substandard

 

 

4,862

 

 

4,432

 

 

 

 

1,330

 

 

395

 

Total

 

$

70,945

 

$

70,269

 

$

54,944

 

$

16,670

 

$

20,140

 


There were no loans assigned to the Doubtful or Loss grade as of March 31, 2012 and December 31, 2011.



17




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 three months ended March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,103

 

$

1,385

 

$

 

$

1,263

Commercial real estate

 

 

3,724

 

 

7,917

 

 

 

 

3,734

Residential

 

 

 

 

 

 

 

 

Land and construction

 

 

1,325

 

 

1,600

 

 

 

 

1,328

Consumer and other

 

 

345

 

 

345

 

 

 

 

345

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,126

 

$

2,225

 

$

700

 

$

1,133

Commercial real estate

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

Land and construction

 

 

 

 

 

 

 

 

Consumer and other

 

 

 

 

 

 

 

 

Totals:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,229

 

$

3,610

 

$

700

 

$

2,396

Commercial real estate

 

$

3,724

 

$

7,917

 

$

 

$

3,734

Residential

 

$

 

$

 

$

 

$

Land and construction

 

$

1,325

 

$

1,600

 

$

 

$

1,328

Consumer and other

 

$

345

 

$

345

 

$

 

$

345

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the year ended December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,029

 

$

1,291

 

$

 

$

699

Commercial real estate

 

 

3,756

 

 

7,950

 

 

 

 

3,892

Residential

 

 

 

 

 

 

 

 

Land and construction

 

 

1,330

 

 

1,600

 

 

 

 

111

Consumer and other

 

 

345

 

 

345

 

 

 

 

173

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,146

 

$

2,225

 

$

700

 

$

1,288

Commercial real estate

 

 

 

 

 

 

 

 

478

Residential

 

 

 

 

 

 

 

 

Land and construction

 

 

 

 

 

 

 

 

Consumer and other

 

 

 

 

 

 

 

 

172

Totals:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,175

 

$

3,516

 

$

700

 

$

1,987

Commercial real estate

 

$

3,756

 

$

7,950

 

$

 

$

4,370

Residential

 

$

 

$

 

$

 

$

Land and construction

 

$

1,330

 

$

1,600

 

$

 

$

111

Consumer and other

 

$

345

 

$

345

 

$

 

$

345

 

 

 

 

 

 

 

 

 

 

 

 

 




18



The average balance of impaired loans at March 31, 2011 was $7.0 million.  As of March 31, 2012 and December 31, 2011, there was $7.3 million and $7.6 million, respectively, of impaired loans on non-accrual status.  During the three months ended March 31, 2012 and 2011, interest income recognized on impaired loans subsequent to their classification as impaired was $3,000 and none, 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 three months ended March 31, 2012 are set forth in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2012

 

(dollars in thousands)

 

Number of Loans

 

Pre Modification Outstanding Recorded Investment

 

Post Modification Outstanding Recorded Investment

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

3

 

$

1,103

 

$

1,103

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

Land and construction

 

 

 —

 

 

 —

 

 

 

 

 

Consumer and other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

3

 

$

1,103

 

$

1,103

 

 

 

 

 

 

 

 

 

 


The modifications in connection with the troubled debt restructurings during the three months ended March 31, 2012 were primarily related to extending the amortization period of these loans.  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 three months ended March 31, 2012.  As of March 31, 2012, there have been no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months.  There were no troubled debt restructurings during the three months ended March 31, 2011.


(4)

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) losses included in earnings, is presented below:

 

 

Three Months Ended March 31,

(in thousands)

 

2012

 

2011

 

Net income

 

$

592

 

$

123

 

Other comprehensive income:

 

 

 

 

 

 

 

Increase (decrease) in net unrealized gains on investment securities available for sale, net of tax (expense) benefit of ($66) and $68 for the three months ended March 31, 2012 and 2011, respectively

 

 

93

 

 

(97

)

Comprehensive income

 

$

685

 

$

26

 


The Company did not sell any available for sale securities during the three months ended March 31, 2012 and 2011.



19




(5)

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 March 31, 2012 and December 31, 2011 are comprised of the following:


(in thousands)

 

March 31, 2012

 

December 31, 2011

 

Leasehold improvements

 

$

973

 

$

973

 

Furniture & equipment

 

1,921

 

1,907

 

Software

 

560

 

561

 

Total

 

3,454

 

3,441

 

Accumulated depreciation

 

(2,453

)

(2,346

)

Premises and equipment, net

 

$

1,001

 

$

1,095

 


Depreciation and amortization included in occupancy expense was $107,000 and $84,000 for the three months ended March 31, 2012 and 2011, respectively.


(6)

Deposits


The following table reflects the summary of deposit categories by dollar and percentage at March 31, 2012 and December 31, 2011:


 

 

March 31, 2012

 

December 31, 2011

 

(dollars in thousands)

 

Amount

 

Percent of Total

 

Amount

 

Percent of Total

 

Non-interest bearing demand deposits

 

$

135,753

 

37.7

%

$

122,843

 

37.0

%

Interest bearing checking

 

20,790

 

5.8

%

20,739

 

6.2

%

Money market deposits and savings

 

156,935

 

43.6

%

142,061

 

42.7

%

Certificates of deposit

 

46,715

 

12.9

%

46,811

 

14.1

%

Total

 

$

360,193

 

100.0

%

$

332,454

 

100.0

%


At March 31, 2012, the Company had three certificates of deposits with the State of California Treasurer’s Office for a total of $34.0 million that represented 9.4% of total deposits. Each of these deposits are scheduled to mature in the second quarter of 2012. 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, 2011, the Company had three certificate of deposit accounts with the State of California Treasurer’s Office for a total of $34.0 million that represented 10.2% of total deposits.  The Company was required to pledge $37.4 million of agency mortgage backed securities at March 31, 2012 and December 31, 2011 in connection with these certificates of deposit.

 

At March 31, 2012, the Company had $4.4 million of Certificate of Deposit Accounts Registry Service (“CDARS”) reciprocal deposits, which represented 1.2% of total deposits.  At December 31, 2011, the Company had $3.4 million of CDARS reciprocal deposits, which represented 1.0% of total deposits.


The aggregate amount of certificates of deposit of $100,000 or greater at March 31, 2012 and December 31, 2011 was $45.1 million and $44.9 million, respectively.  At March 31, 2012, the maturity distribution of certificates of deposit of $100,000 or greater, including deposit accounts with the State of California Treasurer’s Office and CDARS, was as follows: $39.3 million maturing in six months or less, $2.7 million maturing in six months to one year and $3.1 million 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 March 31, 2012.


(in thousands)

 

Six months

and less

 

Greater than six months through one year

 

Greater than one year

 

0.00% to 0.99%

 

$

40,194

 

$

2,246

 

$

1,087

 

1.00% to 1.99%

 

 

156

 

3,032

 

Total

 

$

40,194

 

$

2,402

 

$

4,119

 




20



(7)

Other Borrowings


At March 31, 2012 and December 31, 2011, the Company had a borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB of $92.2 million and $53.7 million, respectively. The Company had $25.0 million of long-term borrowings outstanding under this borrowing/credit facility with the FHLB at March 31, 2012 and December 31, 2011.  The Company had no overnight borrowings outstanding under this borrowing/credit facility at March 31, 2012 and December 31, 2011.

  

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 March 31, 2012 and December 31, 2011 (dollars in thousands):


Maturity Date

 

Interest Rate

 

March 31, 2012

 

December 31, 2011

 

May 23, 2013

 

0.63%

 

$

2,500

 

$

2,500

 

May 23, 2014

 

1.14%

 

 

2,500

 

 

2,500

 

December 29, 2014

 

0.83%

 

 

5,000

 

 

5,000

 

December 30, 2014

 

0.74%

 

 

2,500

 

 

2,500

 

May 26, 2015

 

1.65%

 

 

2,500

 

 

2,500

 

May 23, 2016

 

2.07%

 

 

2,500

 

 

2,500

 

December 29, 2016

 

1.38%

 

 

5,000

 

 

5,000

 

December 30, 2016

 

1.25%

 

 

2,500

 

 

2,500

 

 

 

Total

 

$

25,000

 

$

25,000

 


At March 31, 2012 and December 31, 2011, 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 March 31, 2012 and December 31, 2011.  As of March 31, 2012 and December 31, 2011, the Company had pledged $6.4 million and $6.3 million, respectively, of corporate notes in connection with these lines of credit.


(8)

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 $68.3 million and $57.0 million in commitments to extend credit to customers and $1.7 million and $2.5 million in standby/commercial letters of credit at March 31, 2012 and December 31, 2011, 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 $42,000 and $54,000 as of March 31, 2012 and December 31, 2011, respectively.


Lease Commitments


The Company leases office premises under three operating leases that will expire in May 2012, June 2014 and November 2017, respectively.  Rental expense, which is included in occupancy expense and is reduced for any sublease income earned during the period, was $143,000 and $119,000 for the three months ended March 31, 2012 and 2011, respectively. Sublease income earned was $27,000 and $26,000 during the three months ended March 31, 2012 and 2011, respectively.


The projected minimum rental payments under the term of the leases at March 31, 2012 are as follows (in thousands):


Years ending December 31,

 

 

 

2012 (April – December)

 

$

486

 

2013

 

639

 

2014

 

374

 

2015

 

107

 

2016

 

111

 

Thereafter

 

104

 

Total

 

$

1,821

 

Litigation


The Company from time to time is party to lawsuits, which arise out of the normal course of business. At March 31, 2012 and December 31, 2011, the Company did not have any litigation that management believes will have a material impact on the Consolidated Balance Sheets or unaudited Consolidated Statements of Operations.


Restricted Stock


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


Years ending December 31,

 

 

 

2012 (April – December)

 

$

316

 

2013

 

277

 

2014

 

140

 

2015

 

47

 

2016

 

12

 

Total

 

$

792

 


(9)

Stock Repurchase Program


In August 2010, the Company’s Board of Directors (the “Board”) authorized the purchase of up to $2.0 million of the Company’s common stock, which was announced by press release and Current Report on Form 8-K on August 16, 2010.  Under this stock repurchase program, the Company has been acquiring its common stock in the open market from time to time beginning in August 2010.  The shares repurchased by the Company under this stock repurchase program are held as treasury stock.  As of March 31, 2012, the Company had repurchased 534,171 shares in the open market at a cost ranging from $3.35 to $4.02 per share in connection with this program.  During the three months ended March 31, 2012, the Company repurchased 43,847 shares in the open market at a cost ranging from $3.52 to $3.99 per share in connection with this program.  This stock repurchase program may be modified, suspended or terminated by the Board at any time without notice.


(10)

Fair Value Measurements


The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2012 and December 31, 2011, 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 Measured on a Recurring Basis


Assets 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 March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments-Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Gov’t treasuries

 

$

2,165

 

$

2,165

 

$

 

$

 

Corporate Notes

 

 

14,626

 

 

 

 

14,626

 

 

 

Residential Mortgage-Backed Securities

 

 

112,849

 

 

 

 

112,849

 

 

 

Residential CMOs

 

 

411

 

 

 

 

411

 

 

 

Total

 

$

130,051

 

$

2,165

 

$

127,886

 

$

 

At December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments-Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Gov’t treasuries

 

$

2,139

 

$

2,139

 

$

 

$

 

Corporate Notes

 

 

6,321

 

 

 

 

6,321

 

 

 

Residential Mortgage-Backed Securities

 

 

120,756

 

 

 

 

120,756

 

 

 

Residential CMOs

 

 

690

 

 

 

 

690

 

 

 

Total

 

$

129,906

 

$

2,139

 

$

127,767

 

$

 





22



AFS securities — As of March 31, 2012 and December 31, 2011, the Level 2 fair value of the Company’s residential mortgage-backed securities and collateralized mortgage obligations was $112.8 million and $120.8 million, respectively.  These securities consist entirely 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 March 31, 2012 and December 31, 2011, the weighted average rate and weighed average life of these securities were 2.57% and 2.60%, respectively, and 3.33 years and 3.57 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 2 measurements during the three months ended March 31, 2012 and 2011.


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 March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,037

 

$

 

$

 

$

1,037

 

Commercial real estate

 

 

3,724

 

 

 

 

 

 

3,724

 

Residential

 

 

 

 

 

 

 

 

 

Land and construction

 

 

1,325

 

 

 

 

 

 

1,325

 

Total

 

$

6,086

 

$

 

$

 

$

6,086

 

At December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,127

 

$

 

$

 

$

1,127

 

Commercial real estate

 

 

3,756

 

 

 

 

 

 

3,756

 

Land and construction

 

 

1,330

 

 

 

 

 

 

1,330

 

Total

 

$

6,213

 

$

 

$

 

$

6,213

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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 $4,000 on impaired loans during the three months ended March 31, 2012, compared to net charge-offs of $7,000 during the same period last year.


(11)

Estimated Fair Value Information


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


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



23



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.  


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.




24



The estimated fair value and carrying amounts of the financial instruments at March 31, 2012 and December 31, 2011 are as follows:


 

 

Carrying

Fair Value Measurements Using:

 

(dollars in thousands)

 

Amount

Level 1

Level 2

Level 3

 

Total

 

As of March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

73,157

 

$

73,157

 

$

 

$

 

$

73,157

 

Investment securities

 

 

130,051

 

2,165

 

127,886

 

 

130,051

 

FRB stock

 

 

1,265

 

 

 

 

N/A

 

FHLB stock

 

 

1,616

 

 

 

 

N/A

 

Loans, net

 

 

224,722

 

 

 

224,830

 

224,830

 

Accrued interest receivable

 

 

991

 

991

 

 

 

991

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

135,753

 

$

135,753

 

$

 

$

 

$

135,753

 

Interest bearing deposits

 

 

224,440

 

177,724

 

46,713

 

 

224,437

 

Other borrowings

 

 

25,000

 

 

25,020

 

 

25,020

 

Accrued interest payable

 

 

136

 

136

 

 

 

136

 


 

 

Carrying

 

Estimated

 

(dollars in thousands)

 

Amount

 

Fair Value

 

As of December 31, 2011

 

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

41,926

 

$

41,926

 

Investment securities

 

129,906

 

129,906

 

FRB stock

 

1,265

 

N/A

 

FHLB stock

 

1,697

 

N/A

 

Loans, net

 

227,721

 

228,044

 

Accrued interest receivable

 

996

 

996

 

Liabilities

 

 

 

 

 

Non-interest bearing deposits

 

$

122,843

 

$

122,843

 

Interest bearing deposits

 

209,611

 

209,612

 

Other borrowings

 

25,000

 

25,020

 

Accrued interest payable

 

127

 

127

 


(12)

Non-Interest Income


The following table summarizes the information regarding non-interest income for the three months ended March 31, 2012 and 2011, respectively:


 

 

Three Months Ended March 31,

(in thousands)

 

2012

 

2011

Loan arrangement fees

 

$

278

 

$

114

Service charges and other operating income

 

69

 

90

Total non-interest income

 

$

347

 

$

204




25



(13)

Stock-Based Compensation


The Company grants restricted stock awards to directors and employees under the 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.  No restricted stock awards were granted during the three months ended March 31, 2012 or 2011.


Non-cash stock compensation expense recognized in the unaudited Consolidated Statements of Operations and Comprehensive Income related to the restricted stock awards, net of estimated forfeitures, was $136,000 and $127,000 for the three months ended March 31, 2012 and 2011, respectively.  The fair value of restricted stock awards that vested during the three months ended March 31, 2012 and 2011 was $36,000 and $32,600, respectively.


The following table reflects the activities related to restricted stock awards outstanding for the three months ended March 31, 2012 and 2011, respectively.

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Restricted Shares

 

Number
of
Shares

 

Weighted Avg Fair Value at
Grant Date

 

Number
of
Shares

 

Weighted Avg 

Fair Value at
Grant Date

 

Beginning balance

 

536,733

 

$

4.03

 

449,768

 

$

4.40

 

Vested

 

(8,790

)

4.11

 

(7,850

)

4.07

 

Forfeited and surrendered

 

 

 

(1,000

)

4.49

 

Ending balance

 

527,943

 

$

4.05

 

440,918

 

$

4.40

 


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


There have been no options granted, exercised or cancelled under the 2004 Founder Stock Option Plan for the three months ended March 31, 2012 or 2011.  The remaining contractual life of the 2004 Founder Stock Options outstanding was 1.91 and 2.91 years at March 31, 2012 and 2011, respectively. All options under the 2004 Founder Stock Option Plan were exercisable at March 31, 2012 and 2011.  At March 31, 2012 and 2011, the weighted average exercise price of the 133,700 shares outstanding under the 2004 Founder Stock Option Plan was $5.00.


There have been no options granted, exercised or cancelled under the Director and Employee Stock Option Plan for the three months ended March 31, 2012 or 2011.  The remaining contractual life of the Director and Employee Stock Options outstanding was 2.39 and 3.39 years at March 31, 2012 and 2011, respectively. All options under the Directors and Employee Stock Option Plan were exercisable at March 31, 2012 and 2011.  At March 31, 2012 and 2011, the weighted average exercise price of the 1,045,673 shares outstanding under the Director and Employee Stock Option Plan was $6.05.


The following tables detail the amount of shares authorized and available under all stock plans as of March 31, 2012:


 

 

Shares Reserved

 

Less Shares Previously 
Exercised/Vested

 

Less Shares 
Outstanding

 

Total Shares 
Available for 
Future Issuance

 

2004 Founder Stock Option Plan

 

150,000

 

8,000

 

133,700

 

8,300

 

Director and Employee Stock Option Plan

 

1,434,000

 

216,924

 

1,045,673

 

171,403

 

 

 

 

 

 

 

 

 

 

 

Equity Incentive Plan

 

1,200,000

 

408,553

 

527,943

 

263,504

 

 

 

 

 

 

 

 

 

 

 




26



(14)

Regulatory Matters


Capital


Bancshares and the Bank are subject to the various regulatory capital requirements administered by federal banking agencies.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bancshares and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Company.


Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that as of March 31, 2012 and December 31, 2011, the Company and the Bank met all capital adequacy requirements to which they are subject.


At December 31, 2011, 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 March 31, 2012 and December 31, 2011 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

 

March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital Ratio

 

$

47,394

 

17.85

%

$

46,068

 

17.34

%

$

21,247

 

8.00

%

$

26,562

 

10.00

%

Tier 1 Risk-Based Capital Ratio

 

$

44,047

 

16.59

%

$

42,721

 

16.08

%

$

10,623

 

4.00

%

$

15,937

 

6.00

%

Tier 1 Leverage Ratio

 

$

44,047

 

10.50

%

$

42,721

 

10.18

%

$

16,787

 

4.00

%

$

20,986

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital Ratio

 

$

46,777

 

17.91

%

$

45,258

 

17.32

%

$

20,899

 

8.00

%

$

26,123

 

10.00

%

Tier 1 Risk-Based Capital Ratio

 

$

43,484

 

16.64

%

$

41,965

 

16.06

%

$

10,450

 

4.00

%

$

15,674

 

6.00

%

Tier 1 Leverage Ratio

 

$

43,484

 

10.92

%

$

41,965

 

10.54

%

$

15,935

 

4.00

%

$

19,914

 

5.00

%


Dividends


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


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



27



Item 2.

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 our financial statements and accompanying notes. While we base our estimates and assumptions on historical experience, current information and other factors deemed by management to be relevant, actual results could differ materially and adversely from those estimates.


We consider accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimates in the current period, or changes in the accounting estimates that are reasonably likely to occur from period to period, could have a material impact on our financial statements.  We consider accounting polices related to the allowance for loan losses and income taxes 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 described in detail below.  There have been no changes to our critical accounting policies and estimates during the three months ended March 31, 2012.


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 three 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 loans and consumer and other loans, management typically focuses on general business conditions where the borrower operates, trends within the portfolio, and other external factors to evaluate the severity of loss factors.  The allowance is based on estimates and actual losses may vary materially from the estimates.  No assurance can be given that adverse future economic conditions will not lead to increased delinquent loans, further loan loss provisions and/or additional charge-offs of loans.  See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of OperationsAllowance for Loan Losses” for further factors considered by management in estimating the necessary level of the allowance for loan losses.


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.  See Part I, Item 2.



28



Management’s Discussion and Analysis of Financial Condition and Results of OperationsDeferred Tax Asset” for further discussion of our deferred tax asset and management’s evaluation of the same.


Summary of the Results of Operations and Financial Condition


For the three months ended March 31, 2012 and 2011, the Company recorded net income of $592,000, or $0.07 per diluted share, and $123,000, or $0.01 per diluted share, respectively.  The increase in net income during the current quarter, as compared to the same period last year, was primarily related to an increase in net interest income earned of $588,000 and a decline in provision for loan losses of $200,000, partially offset by an increase in non-interest expenses of $446,000.


Total assets at March 31, 2012 were $433.4 million, representing an increase of approximately $28.1 million, or 6.9%, from $405.3 million at December 31, 2011.  The increase in total assets is primarily attributable to an increase in cash and cash equivalents, resulting from growth in our deposit portfolio.  Cash and cash equivalents at March 31, 2012 were $73.2 million, representing an increase of $31.2 million, or 74.5%, from $41.9 million at December 31, 2011.  Investment securities were $130.1 million at March 31, 2012, compared to $129.9 million at December 31, 2011.  The average life of our investment securities were 3.21 years and 3.50 years at March 31, 2012 and December 31, 2011, respectively.  Loans were $230.0 million and $233.0 million at March 31, 2012 and December 31, 2011, respectively.


Total liabilities at March 31, 2012 increased by $27.5 million, or 7.6%, to $387.7 million, compared to $360.2 million at December 31, 2011.  This increase is primarily due to growth within our money market deposits and savings and non-interest bearing deposits of $14.9 million and $12.9 million, respectively.  These increases were 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 $313.5 million and $285.6 million at March 31, 2012 and December 31, 2011, respectively, representing an increase of $27.8 million, or 9.7%.


Average interest earning assets increased $108.2 million, from $306.3 million for the three months ended March 31, 2011 to $414.4 million for the three months ended March 31, 2012.  The weighted average interest rate on interest earning assets decreased to 3.43% for the three months ended March 31, 2012 from 3.84% for the same period last year.  The decrease in yield on earning assets is primarily attributable to a decline in interest rates earned on these assets during the quarter ended March 31, 2012, as compared to the same period last year, and was caused by a general decline in interest rates, as well as competitive loan pricing conditions in our market, which have continued to intensify and compress loan yields.


Average interest bearing deposits and borrowings increased $76.6 million, from $167.7 million for the three months ended March 31, 2011 to $244.3 million for the three months ended March 31, 2012.  During the quarter ended March 31, 2012 as compared to the same period last year, there was a decline in our cost of interest bearing deposits and borrowings, which is primarily attributable to a decrease in interest rates paid on these accounts.  The average cost of interest bearing deposits and borrowings was 0.40% during the quarter ended March 31, 2012 compared to 0.47% for the same period last year.


At March 31, 2012, stockholders’ equity totaled $45.7 million, or 10.5% of total assets, as compared to $45.1 million, or 11.1% of total assets at December 31, 2011.  The Company’s book value per share of common stock was $5.06 as of March 31, 2012, compared to $4.97 per share as of December 31, 2011.


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


 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

Annualized return on average assets

 

0.56%

 

0.16%

 

 

 

 

 

 

 

Annualized return on average stockholders’ equity

 

5.24%

 

1.13%

 

 

 

 

 

 

 

Average stockholders’ equity to average assets

 

10.76%

 

14.12%

 

 

 

 

 

 

 

Net interest margin

 

3.20%

 

3.59%

 




29




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 3.25% at March 31, 2012 and 2011.  There was no change in the targeted federal funds rate during the three months ended March 31, 2012 and 2011, remaining at 0.00%-0.25%.


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


During the three months ended March 31, 2012, net interest income was $3.3 million compared to $2.7 million for the same period last year.  This increase is primarily related to an increase of $418,000 in interest earned in connection with our loan portfolio, and an increase of $221,000 in interest earned on our investment securities.  The increase in the interest earned on our loan portfolio was primarily related to a $44.3 million increase in the average balance of loans, partially offset by a 28 basis point decline in our loan yield.  The increase in interest earned on our investment portfolio was primarily due to a $58.3 million increase in the average balance of residential mortgage-backed securities and collateralized mortgage obligations, or CMOs, partially offset by a 108 basis point decline in the yield earned on these securities.


The Company’s net interest spread (yield on interest earning assets less the rate paid on interest bearing liabilities) was 3.03% for the three months ended March 31, 2012 compared to 3.37% for the same period last year.


The Company’s net interest margin was 3.20% for the three months ended March 31, 2012, compared to 3.59% for the same period last year.  This decline was primarily attributable to a decrease in the yield on interest earning assets of 41 basis points, partially offset by a decline of 7 basis points in the cost of interest bearing deposits and borrowings.  As discussed above, the decrease in yield on interest earning assets is primarily attributable to a decline in interest rates earned on these assets during the three months ended March 31, 2012, as compared to the same period last year, which was caused by a general decline in interest rates during the first quarter of the current year compared to the same period last year, as well as competitive loan pricing conditions in our market, which have continued to intensify and compress loan yields during this period.  The decline in our net interest margin was partially offset by a decline in our cost of interest bearing deposits and borrowings, which is primarily attributable to a general decrease in interest rates paid on these accounts.  The average cost of interest bearing deposits and borrowings was 0.40% during the three months ended March 31, 2012 compared to 0.47% for the same period last year.




30



The following table sets forth the average balances of certain assets, interest income/expense, average yields on interest earning assets, average rates paid on interest bearing liabilities, net interest margins and net interest income/spread for the three months ended March 31, 2012 and 2011, respectively.


 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

Average

 

Interest

 

 

 

Average

 

Interest

 

 

 

(dollars in thousands)

 

Balance

 

Inc/Exp

 

Yield

 

Balance

 

Inc/Exp

 

Yield

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits at other financial institutions

 

$

52,722

 

$

32

 

0.24

%

$

55,492

 

$

35

 

0.25

%

U.S. Gov’t Treasuries

 

2,154

 

 

%

141

 

 

0.18

%

Debt securities issued by the States of the United States

 

 

 

 

2,014

 

9

 

1.72

%

Corporate notes

 

8,717

 

37

 

1.68

%

 

 

%

Residential mortgage-backed securities and CMOs

 

118,289

 

717

 

2.42

%

59,950

 

524

 

3.50

%

Federal Reserve Bank stock

 

1,265

 

19

 

6.00

%

1,301

 

19

 

6.00

%

Federal Home Loan Bank stock

 

1,683

 

2

 

0.50

%

2,020

 

1

 

0.30

%

Loans (1) (2)

 

229,598

 

2,734

 

4.79

%

185,335

 

2,316

 

5.07

%

Earning assets

 

414,428

 

3,541

 

3.43

%

306,253

 

2,904

 

3.84

%

Other assets

 

8,150

 

 

 

 

 

8,458

 

 

 

 

 

Total assets

 

$

422,578

 

 

 

 

 

$

314,711

 

 

 

 

 

Liabilities & Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking (NOW)

 

$

20,074

 

9

 

0.19

%

$

31,631

 

22

 

0.28

%

Money market deposits and savings

 

152,888

 

127

 

0.33

%

76,701

 

103

 

0.55

%

CDs

 

46,293

 

32

 

0.27

%

57,368

 

60

 

0.42

%

Borrowings

 

25,001

 

74

 

1.20

%

2,001

 

8

 

1.59

%

Total interest bearing deposits and borrowings

 

244,256

 

242

 

0.40

%

167,701

 

193

 

0.47

%

Demand deposits

 

129,736

 

 

 

 

 

100,173

 

 

 

 

 

Other liabilities

 

3,127

 

 

 

 

 

2,410

 

 

 

 

 

Total liabilities

 

377,119

 

 

 

 

 

270,284

 

 

 

 

 

Equity

 

45,459

 

 

 

 

 

44,427

 

 

 

 

 

Total liabilities & equity

 

$

422,578

 

 

 

 

 

$

314,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income / spread

 

 

 

$

3,299

 

3.03

%

 

 

$

2,711

 

3.37

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

3.20

%

 

 

 

 

3.59

%


(1)

Average balance of loans excludes the allowance for loan losses and net deferred loan origination fees and costs.  Included in interest income from loans is net loan fee income accretion of $10,000 for the three months ended March 31, 2012 and net loan origination cost amortization of $23,000 for the three months ended March 31, 2011.

(2)

Includes average non-accrual loans of $7.8 million and $7.0 million for the three months ended March 31, 2012 and 2011, respectively.




31



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.


 

 

Three Months Ended March 31, 2012  Compared to 2011

Increase (Decrease) Due to Changes in:

 

 

(in thousands)

 

 

Volume

 

 

Rate

 

 

Total

 

Interest income:

 

 

 

 

 

 

 

 

 

 

Interest earning deposits at other financial institutions

 

$

(2

)

$

(1

)

$

(3

)

U.S. Gov’t Treasuries

 

 

 

 

 

 

 

Debt securities issued by the States of the United States

 

 

(9

)

 

 

 

(9

)

Corporate notes

 

 

37

 

 

 

 

37

 

Residential mortgage-backed securities and CMOs

 

 

396

 

 

(203

 

193

 

Federal Reserve Bank stock

 

 

 

 

 

 

 

Federal Home Loan Bank stock

 

 

 

 

1

 

 

1

 

Loans

 

 

534

 

 

(116

)

 

418

 

Total increase (decrease) in interest income

 

 

956

 

 

(319

)

 

637

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

Interest checking (NOW)

 

 

(7

 

(6

)

 

(13

Money market deposits and savings

 

 

75

 

 

(51

)

 

24

 

CDs

 

 

(10

)

 

(18

)

 

(28

)

Borrowings

 

 

69

 

 

(3

)

 

66

 

Total increase (decrease) in interest expense

 

 

127

 

 

(78

)

 

49

 

Net increase (decrease) in net interest income

 

$

 

829

 

$

 

(241

)

$

 

588

 


Provision for Loan Losses


There was no provision for loan losses for the three months ended March 31, 2012, compared to a $200,000 provision for loan losses for the same period last year.  The decline in provision for loan losses recorded during the three months ended March 31, 2012, as compared to the same period last year, is primarily due to the general improvement in the level of our criticized and classified loans, which generally consist of special mention, substandard and doubtful loans.  Special mention, substandard and doubtful loans were $4.1 million, $9.8 million and none, respectively, at March 31, 2012, compared to $4.9 million, $15.3 million, and $1.1 million at March 31, 2011.  We had net recoveries of $4,000 during the three months ended March 31, 2012, compared to net charge-offs of $7,000 during the same period last year.  The provision for loan losses is recorded based on an analysis of the factors discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Allowance for Loan Losses.”


As a percentage of our total loan portfolio, the amount of non-performing loans was 3.17% and 3.26% at March 31, 2012 and December 31, 2011, respectively.  As a percentage of our total assets, the amount of non-performing assets was 1.68% and 1.88% at March 31, 2012 and December 31, 2011, respectively.


Non-Interest Income


Non-interest income was $347,000 for the three months ended March 31, 2012, compared to $204,000 for the same period last year.  The increase in non-interest income during the three months ended March 31, 2012, as compared to the same period last year, is primarily due to an increase of $164,000 in loan arrangement fees.


Non-interest income primarily consists of loan arrangement fees, service charges and fees on deposit accounts, as well as other operating income, which mainly consists of wire transfer and other consumer related fees.  Loan arrangement fees are related to a college loan funding program the Company established with a student loan provider.  The Company initially funds student loans originated by the student loan provider in exchange for non-interest income.  All loans are purchased by the student loan provider within 30 days of origination.  All purchase commitments are supported by collateralized deposit accounts.  See Note 12 “Non-Interest Income” in Part I, Item 1. “Financial Statements” for more information regarding non-interest income for the three months ended March 31, 2012 and 2011.




32



Non-Interest Expense


Non-interest expense was $3.0 million for the three months ended March 31, 2012, compared to $2.6 million for the same period last year.  Compensation and benefits was $1.7 million for the three months ended March 31, 2012, compared to $1.4 million for the same period last year.  Occupancy expense was $298,000 for the three months ended March 31, 2012, compared to $239,000 for the three months ended March 31, 2011.  The increase in non-interest expense is primarily due to the additional costs incurred related to expanding the Bank’s business development team and the opening of our Santa Monica relationship office in the middle of 2011.


Income Tax Provision


During the quarter ended March 31, 2012, we recorded a tax expense of approximately $16,000, in connection with alternative minimum taxes due.  The Company does not anticipate owing any substantial taxes for Federal or State purposes until the Company’s net operating losses are fully utilized.  During the quarter ended March 31, 2011, we did not record an income tax provision.


Financial Condition


Assets


Total assets at March 31, 2012 were $433.4 million, representing an increase of approximately $28.1 million, or 6.9%, from $405.3 million at December 31, 2011.  The increase in total assets is primarily attributable to an increase in cash and cash equivalents, resulting from growth in our deposit portfolio.  Cash and cash equivalents at March 31, 2012 were $73.2 million, representing an increase of $31.2 million, or 74.5%, from $41.9 million at December 31, 2011.  Investment securities were $130.1 million at March 31, 2012, compared to $129.9 million at December 31, 2011.  The average life of our investment securities were 3.21 years and 3.50 years at March 31, 2012 and December 31, 2011, respectively.  Loans were $230.0 million and $233.0 million at March 31, 2012 and December 31, 2011, respectively.


Cash and Cash Equivalents


Cash and cash equivalents totaled $73.2 million at March 31, 2012 and $41.9 million at December 31, 2011.  Cash and cash equivalents are managed based upon liquidity needs by investing excess liquidity in higher yielding assets such as loans and investment securities.  The increase in cash and cash equivalents has been primarily caused by the growth within our deposit portfolio and a lack of quality loan demand during the current quarter.  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 March 31, 2012, investment securities totaled $130.1 million compared to $129.9 million at December 31, 2011.  The Company’s investment portfolio is primarily composed of residential mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.  The underlying loans for these securities are residential mortgages that were primarily originated beginning in 2003 through the current period.  These loans are geographically dispersed throughout the United States.  At March 31, 2012 and December 31, 2011, the weighted average rate and weighed average life of these securities were 2.57% and 2.60%, respectively, and 3.33 years and 3.57 years, respectively.  We will continue to evaluate the Company’s investments and liquidity needs and will adjust the amount of investment securities accordingly.



33



Loans


Loans, net of the allowance for loan losses and deferred loan origination costs/unearned fees, decreased 1.3%, or $3.0 million, from $227.7 million at December 31, 2011 to $224.7 million at March 31, 2012.  This decrease in the loan portfolio is primarily within our commercial loan and residential real estate loan portfolios, which decreased by $6.2 million and $2.1 million, respectively, partially offset by increases in our commercial real estate and land and construction loan portfolios of $2.3 million and $3.1 million, respectively.  As of March 31, 2012 and December 31, 2011, gross loans outstanding totaled $230.0 million and $233.0 million, respectively.  Loan originations were $25.7 million during the three months ended March 31, 2012, as compared to $29.9 million during the same period last year.


As of March 31, 2012, substantially all of the Company’s loan customers were located in Southern California.  Additionally, the Company did not have any subprime mortgages.


Non-Performing Assets


The following table sets forth non-accrual loans and other real estate owned at March 31, 2012 and December 31, 2011:


(dollars in thousands)

 

March 31, 2012

 

December 31, 2011

 

Non-accrual loans:

 

 

 

 

 

Commercial

 

$

1,891

 

$

2,175

 

Commercial real estate

 

3,724

 

3,756

 

Land and Construction

 

1,325

 

1,330

 

Consumer and other

 

345

 

345

 

Total non-accrual loans

 

7,285

 

7,606

 

Other real estate owned (“OREO”)

 

 

 

Total non-performing assets

 

$

7,285

 

$

7,606

 

 

 

 

 

 

 

Non-performing assets to gross loans and OREO

 

3.17

%

3.26

%

Non-performing assets to total assets

 

1.68

%

1.88

%


Non-accrual loans totaled $7.3 million and $7.6 million at March 31, 2012 and December 31, 2011, respectively.   There were no accruing loans past due 90 days or more at March 31, 2012 and December 31, 2011.  Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms was $72,000 for the three months ended March 31, 2012, compared to $77,000 for the same period last year.  As a percentage of total assets, the amount of non-performing assets was 1.68% and 1.88% at March 31, 2012 and December 31, 2011, respectively.


At March 31, 2012, non-accrual loans consisted of three commercial loans totaling $1.9 million, two commercial real estate loans totaling $3.7 million, one commercial land loan totaling $1.3 million and one consumer and other loan totaling $345,000.  At December 31, 2011, non-accrual loans consisted of four commercial loans totaling $2.2 million, two commercial real estate loans totaling $3.8 million, one commercial land loan totaling $1.3 million and one consumer and other loan totaling $345,000.


At both March 31, 2012 and December 31, 2011, the recorded investment in impaired loans was $7.6 million.  At both March 31, 2012 and December 31, 2011, the Company had a $700,000, specific allowance for loan losses on $1.1 million of impaired loans.  There were $6.5 million of impaired loans with no specific allowance for loan losses at both March 31, 2012 and December 31, 2011.  The average outstanding balance of impaired loans for the three months ended March 31, 2012 was $7.8 million, compared to $7.0 million for the same period last year.  As of March 31, 2012 and December 31, 2011, there was $7.3 million and $7.6 million, respectively, of impaired loans on non-accrual status.  During the three months ended March 31, 2012 and 2011, interest income recognized on impaired loans subsequent to their classification as impaired was $3,000 and none, 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.



34




Allowance for Loan Losses


The allowance for loan losses (“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 three 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 March 31, 2012 and December 31, 2011 was adequate to absorb probable credit losses inherent in the loan portfolio.



35




The following is a summary of the activity for the ALL for the three months ended March 31, 2012 and 2011:


(in thousands)

 

Commercial

 

Commercial Real Estate

 

Residential

 

Land and Construction

 

Consumer

and Other

 

Total

 

Three Months Ended March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,584

 

$

1,252

 

$

583

 

$

516

 

$

349

 

$

5,284

 

Provision for loan losses

 

 

(300

)

 

350

 

 

(35

)

 

 

 

(15

)

 

 

Charge-offs

 

 

(3

)

 

 

 

 

 

(5

)

 

 

 

(8

)

Recoveries

 

 

9

 

 

3

 

 

 

 

 

 

 

 

12

 

Ending balance

 

$

2,290

 

$

1,605

 

$

548

 

$

511

 

$