XNAS:FCTY Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


 
FORM 10-Q

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

For the quarterly period ended June 30, 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

9,117,976 shares of common stock of the registrant were outstanding as of August 4, 2012.
 


 
1st Century Bancshares, Inc.
Quarterly Report on Form 10-Q
June 30, 2012

Table of Contents

   
Page
  PART I. FINANCIAL INFORMATION  
     
 
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
30
     
44
     
44
     
  PART II. OTHER INFORMATION  
     
44
     
44
     
44
     
45
     
Item 4. Mine Safety Disclosures  45
     
45
     
45
     
 
46
 
 
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” and other similar expressions in this Quarterly Report on Form 10-Q.  With respect to any such forward-looking statements, the Company claims the protection of the safe harbor provided for in the Private Securities Litigation Reform Act of 1995.  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 to reflect events or circumstances after the date such forward looking statements are made, and hereby specifically disclaims any intention to do so, unless required by law.
 

 
Item 1 — Financial Statements

 
1st Century Bancshares, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)

   
June 30, 2012
(unaudited)
   
December 31, 2011
 
ASSETS
           
Cash and due from banks
  $ 9,564     $ 9,785  
Interest earning deposits at other financial institutions
    44,007       32,141  
Total cash and cash equivalents
    53,571       41,926  
Investment securities — Available for Sale (“AFS”), at estimated fair value
    162,891       129,906  
Loans, net of allowance for loan losses of $4,866 and $5,284 at June 30, 2012 and December 31, 2011, respectively
    231,395       227,721  
Premises and equipment, net
    977       1,095  
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock
    3,721       2,962  
Accrued interest and other assets
    1,844       1,664  
Total Assets
  $ 454,399     $ 405,274  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Non-interest bearing demand deposits
  $ 150,441     $ 122,843  
Interest bearing deposits:
               
Interest bearing checking (“NOW”)
    22,334       20,739  
Money market deposits and savings
    161,395       142,061  
Certificates of deposit less than $100
    1,341       1,956  
Certificates of deposit of $100 or greater
    44,373       44,855  
Total deposits
    379,884       332,454  
Other borrowings
    25,000       25,000  
Accrued interest and other liabilities
    2,867       2,769  
Total Liabilities
    407,751       360,223  
                 
Commitments and contingencies (Note 9)
               
                 
Stockholders’ Equity:
               
Preferred stock, $0.01 par value — 10,000,000 shares authorized, none issued and outstanding at June 30, 2012 and December 31, 2011, respectively
           
Common stock, $0.01 par value — 50,000,000 shares authorized, 10,946,408 and 10,841,033 issued at June 30, 2012 and December 31, 2011, respectively
    109       108  
Additional paid-in capital
    64,697       64,488  
Accumulated deficit
    (12,498 )     (13,841 )
Accumulated other comprehensive income
    1,852       1,567  
Treasury stock at cost — 1,828,432 and 1,769,248 shares at June 30, 2012 and December 31, 2011, respectively
    (7,512 )     (7,271 )
Total Stockholders’ Equity
    46,648       45,051  
Total Liabilities and Stockholders’ Equity
  $ 454,399     $ 405,274  

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

1st Century Bancshares, Inc.
Unaudited Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
 
   
Three Months Ended June 30,
   
Six months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Interest and fee income on:
                       
Loans
  $ 2,717     $ 2,322     $ 5,451     $ 4,638  
Investments
    864       564       1,618       1,097  
Other
    57       70       110       126  
Total interest and fee income
    3,638       2,956       7,179       5,861  
                                 
Interest expense on:
                               
Deposits
    180       221       348       407  
Borrowings
    75       16       149       24  
Total interest expense
    255       237       497       431  
Net interest income
    3,383       2,719       6,682       5,430  
                                 
Provision for loan losses
          75             275  
Net interest income after provision for loan losses
    3,383       2,644       6,682       5,155  
                                 
Non-interest income
    489       192       836       396  
                                 
Non-interest expenses:
                               
Compensation and benefits
    1,594       1,454       3,301       2,870  
Occupancy
    328       263       626       502  
Professional fees
    153       213       342       396  
Technology
    195       159       345       310  
Marketing
    79       55       132       107  
FDIC assessments
    88       115       159       225  
Other operating expenses
    665       461       1,235       901  
Total non-interest expenses
    3,102       2,720       6,140       5,311  
Income before income taxes
    770       116       1,378       240  
Income tax provision
    19             35        
Net income
    751       116       1,343       240  
                                 
Other Comprehensive Income:
                               
Net change in unrealized gains on AFS investments, net of tax
    192       562       285       464  
Comprehensive Income
  $ 943     $ 678     $ 1,628     $ 704  
                                 
Basic earnings per share
  $ 0.09     $ 0.01     $ 0.16     $ 0.03  
Diluted earnings per share
  $ 0.09     $ 0.01     $ 0.15     $ 0.03  
 
The accompanying notes are an integral part of the unaudited consolidated financial statements.
 

1st Century Bancshares, Inc.
Unaudited Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share data)
 
   
Common Stock
               
Accumulated Other
   
Treasury Stock
   
Total
 
    Issued
Shares
     
Amount
    Additional
Paid-in Capital
    Accumulated
Deficit
    Comprehensive
Income
    Number of
Shares
     
Amount
    Stockholders’
Equity
 
Balance at December 31, 2010
    10,672,676     $ 107     $ 64,069     $ (14,866 )   $ 838       (1,370,385 )   $ (5,810 )   $ 44,338  
Restricted stock issued
    104,500       1                                     1  
Forfeiture of restricted stock
    (8,000 )                                          
Compensation expense associated with restricted stock awards, net of estimated forfeitures
                238                               238  
Shares surrendered to pay taxes on vesting of restricted stock
                                  (15,681 )     (62 )     (62 )
Common stock repurchased
                                  (19,518 )     (76 )     (76 )
Net income
                      240                         240  
Other comprehensive income
                            464                   464  
Balance at June 30, 2011
    10,769,176     $ 108     $ 64,307     $ (14,626 )   $ 1,302       (1,405,584 )   $ (5,948 )   $ 45,143  
                                                                 
Balance at December 31, 2011
    10,841,033     $ 108     $ 64,488     $ (13,841 )   $ 1,567       (1,769,248 )   $ (7,271 )   $ 45,051  
Restricted stock issued
    145,000       2       (2 )                              
Forfeiture of restricted stock
    (39,625 )     (1 )     (69 )                             (70 )
Compensation expense associated with restricted stock awards, net of estimated forfeitures
                280                               280  
Shares surrendered to pay taxes on vesting of restricted stock
                                  (15,337 )     (75 )     (75 )
Common stock repurchased
                                  (43,847 )     (166 )     (166 )
Net income
                      1,343                         1,343  
Other comprehensive income
                            285                   285  
Balance at June 30, 2012
    10,946,408     $ 109     $ 64,697     $ (12,498 )   $ 1,852       (1,828,432 )   $ (7,512 )   $ 46,648  

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

1st Century Bancshares, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)

   
Six Months Ended June 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income
  $ 1,343     $ 240  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization of premises and equipment
    215       172  
Amortization of premiums on investment securities, net
    618       104  
Provision for loan losses
          275  
(Accretion) amortization of deferred loan fees, net of costs
    (10 )     39  
Non-cash stock compensation, net of forfeitures
    210       238  
Other, net
          1  
(Increase) decrease in accrued interest and other assets
    (40 )     174  
Decrease in accrued interest and other liabilities
    (102 )     (1,874 )
Net cash provided by (used in) operating activities
    2,234       (631 )
Cash flows from investing activities:
               
Activities in AFS investment securities:
               
Purchases
    (49,631 )     (26,173 )
Maturities and principal reductions
    16,513       8,898  
Proceeds from the sale of securities
          140  
Increase in loans, net
    (3,804 )     (7,910 )
Purchase of premises and equipment
    (97 )     (174 )
(Purchase) Redemption of FRB stock and FHLB stock
    (759 )     232  
Net cash used in investing activities
    (37,778 )     (24,987 )
Cash flows from financing activities:
               
Net increase in deposits
    47,430       45,465  
Proceeds from other borrowings
          10,000  
Repayment of other borrowings
          (2,000 )
Purchase of treasury stock
    (75 )     (76 )
Shares surrendered to pay taxes on vesting of restricted stock
    (166 )     (62 )
Net cash provided by financing activities
    47,189       53,327  
Increase in cash and cash equivalents
    11,645       27,709  
Cash and cash equivalents, beginning of period
    41,926       69,012  
Cash and cash equivalents, end of period
  $ 53,571     $ 96,721  
                 
Supplemental cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 466     $ 382  
Income taxes
  $ 100     $  
                 
Supplemental disclosure of non-cash investing activity:
               
Transfer of commercial real estate loan to other real estate owned (“OREO”)
  $ 140     $  

The accompanying notes are an integral part of the unaudited consolidated financial statements.
 
 
1st Century Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

(1)           Summary of Significant Accounting Policies

Nature of Operations

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

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim 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 and six months ended June 30, 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 readily determinable fair values are classified as “Available for Sale” or “AFS” and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The Company uses estimates from third parties in arriving at fair value determinations which are derived in accordance with fair value measurement standards.
 

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

Federal Reserve Bank Stock and Federal Home Loan Bank Stock

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

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

Loans

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

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

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

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

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

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a troubled debt restructuring (“TDR”).  Management strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before their loan reaches nonaccrual status.  Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.  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 June 30, 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.

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.
 
 
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 June 30, 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 June 30, 2012 and December 31, 2011, the Company maintained a deferred tax liability of $1.3 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 June 30, 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 June 30, 2012, there were 1,179,373 stock options and 145,000 restricted shares that were excluded from this calculation due to their antidilutive impact.  At June 30, 2011, there were 1,179,373 stock options and 104,500 restricted shares that were excluded from this calculation due to their antidilutive impact.
 

   
Three Months Ended June 30,
   
Six months Ended June 30,
 
(dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Net income
  $ 751     $ 116     $ 1,343     $ 240  
Average number of common shares outstanding
    8,514,498       8,877,879       8,509,759       8,866,341  
Effect of dilution of restricted stock
    282,194       175,163       269,016       179,049  
Average number of common shares outstanding used to calculate diluted earnings per common share
    8,796,692       9,053,042       8,778,775       9,045,390  

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.

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 June 30, 2012 and December 31, 2011:

(in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
At June 30, 2012:
                       
Investments — Available for Sale
                       
U.S. Gov’t Treasuries
  $ 2,130     $ 48     $     $ 2,178  
Corporate Notes
    34,634       138       (117 )     34,655  
Residential Mortgage-Backed Securities
    122,823       3,124       (45 )     125,902  
Residential Collateralized Mortgage Obligations (“CMOs”)
    156                   156  
Total
  $ 159,743     $ 3,310     $ (162 )   $ 162,891  
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 June 30, 2012 or December 31, 2011.

Additionally, at June 30, 2012 and December 31, 2011, the carrying amount of securities pledged to the State of California Treasurer’s Office to secure their deposits was $45.5 million and $53.6 million, respectively.  Deposits from the State of California were $34.0 million at both June 30, 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 June 30, 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 3.39 years at June 30, 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
  $       %   $ 2,178       0.13 %   $       %   $       %   $ 2,178       0.13 %
Corporate Notes
    505       0.62       34,150       2.25                               34,655       2.23  
Residential Mortgage-Backed Securities
                762       4.34       81,094       2.26       44,046       2.68       125,902       2.42  
Residential CMOs
                                        156       1.12       156       1.12  
Total
  $ 505       0.62 %   $ 37,090       2.17 %   $ 81,094       2.26 %   $ 44,202       2.67 %   $ 162,891       2.35 %

A total of fifteen and nine securities had unrealized losses at June 30, 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 June 30, 2012:                        
Investments-Available for Sale                        
Corporate Notes
  $ (117 )   $ 16,004     $     $  
Residential Mortgage-Backed Securities
    (45 )     14,642              
Total
  $ (162 )   $ 30,646     $     $  
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 June 30, 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 June 30, 2012 and December 31, 2011, gross loans outstanding totaled $236.2 million and $233.0 million, respectively.  The categories of loans listed below are grouped in accordance with the primary purpose of the loans, but in the aggregate 80.1% of all loans are secured by real estate.
 
   
June 30, 2012
   
December 31, 2011
 
(dollars in thousands)
 
Amount
Outstanding
   
Percent
of Total
   
Amount
Outstanding
   
Percent
of Total
 
Commercial (1)
  $ 62,062       26.3 %   $ 70,945       30.4 %
Commercial real estate
    80,513       34.1 %     70,269       30.2 %
Residential
    50,005       21.1 %     54,944       23.6 %
Land and construction
    21,950       9.3 %     16,670       7.2 %
Consumer and other (2)
    21,660       9.2 %     20,140       8.6 %
Loans, gross
    236,190       100.0 %     232,968       100.0 %
Net deferred costs
    71               37          
Less — allowance for loan losses
    (4,866 )             (5,284 )        
Loans, net
  $ 231,395             $ 227,721          

 
(1)
Unsecured commercial loan balances were $13.2 million and $11.5 million at June 30, 2012 and December 31, 2011, respectively.
 
(2)
Unsecured consumer and other loan balances were $836,000 and $2.8 million at June 30, 2012 and December 31, 2011, respectively.
 
 
As of June 30, 2012 and December 31, 2011, substantially all of the Company’s loan customers were located in Southern California.

Allowance for Loan Losses and Recorded Investment in Loans

The following is a summary of activities for the allowance for loan losses and recorded investment in loans as of and for the three and six months ended June 30, 2012:
 
(in thousands)
 
Commercial
   
Commercial Real Estate
   
Residential
   
Land and Construction
   
Consumer and Other
   
Total
 
Three Months Ended June 30, 2012:
                                   
Allowance for loan losses:
                                   
Beginning balance
  $ 2,290     $ 1,605     $ 548     $ 511     $ 334     $ 5,288  
Provision for loan losses
    (325 )     475       (85 )     (50     (15 )      
Charge-offs
    (22 )     (400                       (422 )
Recoveries
                                   
Ending balance
  $ 1,943     $ 1,680     $ 463     $ 461     $ 319     $ 4,866  
                                                 
Six Months Ended June 30, 2012:
                                               
Allowance for loan losses:
                                               
Beginning balance
  $ 2,584     $ 1,252     $ 583     $ 516     $ 349     $ 5,284  
Provision for loan losses
    (625 )     825       (120 )     (50 )     (30 )      
Charge-offs
    (25 )     (400           (5 )           (430 )
Recoveries
    9       3                         12  
Ending balance
  $ 1,943     $ 1,680     $ 463     $ 461     $ 319     $ 4,866  
                                                 
As of June 30, 2012:                                                
Ending balance: individually evaluated for impairment
  $ 500     $     $     $     $     $ 500  
Ending balance: collectively evaluated for impairment
    1,443       1,680       463       461       319       4,366  
Total
  $ 1,943     $ 1,680     $ 463     $ 461     $ 319     $ 4,866  
                                                 
Loans:                                                
Ending balance: individually evaluated for impairment
  $ 2,172     $ 3,154     $     $ 1,325     $ 345     $ 6,996  
Ending balance: collectively evaluated for impairment
    59,890       77,359       50,005       20,625       21,315       229,194  
Total
  $ 62,062     $ 80,513     $ 50,005     $ 21,950     $ 21,660     $ 236,190  
 
 
The following is a summary of activities for the allowance for loan losses and recorded investment in loans as of and for the three and six months ended June 30, 2011:
 
(in thousands)
 
Commercial
   
Commercial Real Estate
   
Residential
   
Land and Construction
   
Consumer and Other
   
Total
 
Three Months Ended June 30, 2011:
                                   
Allowance for loan losses:
                                   
Beginning balance
  $ 2,712     $ 1,108     $ 283     $ 995     $ 378     $ 5,476  
Provision for loan losses
    153       74       13       (109 )     (56 )     75  
Charge-offs
    (200 )     (280 )                       (480 )
Recoveries
    6                         7       13  
Ending balance
  $ 2,671     $ 902     $ 296     $ 886     $ 329     $ 5,084  
                                                 
Six Months Ended June 30, 2011:
                                               
Allowance for loan losses:
                                               
Beginning balance
  $ 2,812     $ 888     $ 213     $ 995     $ 375     $ 5,283  
Provision for loan losses
    63       294       83       (109 )     (56 )     275  
Charge-offs
    (222 )     (280 )                       (502 )
Recoveries
    18                         10       28  
Ending balance
  $ 2,671     $ 902     $ 296     $ 886     $ 329     $ 5,084  
                                                 
As of June 30, 2011:
                                               
Ending balance: individually evaluated for impairment
  $ 1,092     $     $     $     $ 40     $ 1,132  
Ending balance: collectively evaluated for impairment
    1,579       902       296       886       289       3,952  
Total
  $ 2,671     $ 902     $ 296     $ 886     $ 329     $ 5,084  
                                                 
Loans:
                                               
Ending balance: individually evaluated for impairment
  $ 2,283     $ 4,076     $     $     $ 345     $ 6,704  
Ending balance: collectively evaluated for impairment
    62,069       51,902       31,115       16,396       18,467       179,949  
Total
  $ 64,352     $ 55,978     $ 31,115     $ 16,396     $ 18,812     $ 186,653  
 
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 June 30, 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 product type. These classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments.  Provision for credit losses related to unfunded lending commitments is reported in other operating expenses in the unaudited Consolidated Statements of Operations and Comprehensive Income.  The allowance held for unfunded lending commitments is reported in accrued interest and other liabilities within the accompanying Consolidated Balance Sheets, and not as part of the allowance for loan losses in the above tables.  As of June 30, 2012 and December 31, 2011, the allowance for unfunded lending commitments was $203,000 and is primarily related to $66.4 million and $57.0 million in commitments to extend credit to customers and $1.8 million and $2.5 million in standby/commercial letters of credit at June 30, 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 June 30, 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.  Total additions to non-performing loans during the six months ended June 30, 2012 and 2011 was none and $891,000, respectively.  Non-performing loans represented 2.8% and 3.3% of total loans at June 30, 2012 and December 31, 2011, respectively.  There were no accruing loans past due 90 days or more at June 30, 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 June 30, 2012:                                                
Commercial
  $     $     $     $     $ 62,062     $ 62,062  
Commercial real estate
                            80,513       80,513  
Residential
                            50,005       50,005  
Land and construction
                1,325       1,325       20,625       21,950  
Consumer and other
          230       345       575       21,085       21,660  
Totals
  $     $ 230     $ 1,670     $ 1,900     $ 234,290     $ 236,190  
                                                 
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 June 30, 2012 and December 31, 2011:

(dollars in thousands)
 
June 30, 2012
   
December 31, 2011
 
Non-accrual loans:
           
Commercial
  $ 1,852     $ 2,175  
Commercial real estate
    3,154       3,756  
Land and construction
    1,325       1,330  
Consumer and other
    345       345  
Total non-accrual loans
    6,676       7,606  
OREO
    140        
Total non-performing assets
  $ 6,816     $ 7,606  
                 
Non-performing assets to gross loans and OREO
    2.88 %     3.26 %
Non-performing assets to total assets
    1.50 %     1.88 %

Credit Quality Indicators

The following table represents the credit exposure by internally assigned grades at June 30, 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 June 30, 2012:                              
Grade:
                             
Pass
  $ 57,503     $ 75,905     $ 50,005     $ 20,625     $ 21,265  
Special Mention
    1,086       800                    
Substandard
    3,473       3,808             1,325       395  
Total
  $ 62,062     $ 80,513     $ 50,005     $ 21,950     $ 21,660  
                                         
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 June 30, 2012 and December 31, 2011.

Impaired Loans

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

(in thousands)
 
Recorded
 Investment
   
Unpaid
 Principal
 Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
As of and for the six months ended June 30, 2012:
                       
With no related allowance recorded:
                       
Commercial
  $ 1,066     $ 1,358     $     $ 1,172  
Commercial real estate
    3,154       4,515             3,629  
Residential