Notes to Unaudited Consolidated Financial Statements
(1)
Summary of Significant Accounting Policies
Nature of Operations
1
st
Century Bancshares, Inc., a Delaware corporation (Bancshares) is a bank holding company with one subsidiary, 1
st
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 nine months ended September 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 four 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 September 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 September 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 September 30, 2012 and December 31, 2011, the Company maintained a deferred tax liability of $2.1 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 September 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.
For the three and nine months ended September 30, 2012 and 2011, there were 1,179,373 stock options that were excluded from the diluted earnings per share calculation due to their antidilutive impact. For the three and nine months ended September 30, 2012, there were none and 145,000, respectively, of restricted shares that were excluded from the diluted earnings per share calculation due to their antidilutive impact. For the three and nine months ended September 30, 2011, there were 104,500 restricted shares that were excluded from the diluted earnings per share calculation due to their antidilutive impact.
|
|
Three Months Ended
September 30,
|
|
|
Nine months Ended
September 30,
|
|
(dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net income
|
|
$
|
687
|
|
|
$
|
354
|
|
|
$
|
2,030
|
|
|
$
|
593
|
|
Average number of common shares outstanding
|
|
|
8,531,823
|
|
|
|
8,763,972
|
|
|
|
8,552,857
|
|
|
|
8,831,843
|
|
Effect of dilution of restricted stock
|
|
|
286,754
|
|
|
|
159,193
|
|
|
|
269,015
|
|
|
|
168,583
|
|
Average number of common shares outstanding used to calculate diluted earnings per common share
|
|
|
8,818,577
|
|
|
|
8,923,165
|
|
|
|
8,821,872
|
|
|
|
9,000,426
|
|
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. T
he 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 September 30, 2012 and December 31, 2011:
(in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
At September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Gov't Treasuries
|
|
$
|
2,118
|
|
|
$
|
85
|
|
|
$
|
|
|
|
$
|
2,203
|
|
Corporate Notes
|
|
|
34,585
|
|
|
|
701
|
|
|
|
|
|
|
|
35,286
|
|
Residential Mortgage-Backed Securities
|
|
|
152,973
|
|
|
|
4,198
|
|
|
|
(1
|
)
|
|
|
157,170
|
|
Total
|
|
$
|
189,676
|
|
|
$
|
4,984
|
|
|
$
|
(1
|
)
|
|
$
|
194,659
|
|
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 Collateralized Mortgage Obligations (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 September 30, 2012 or December 31, 2011.
Additionally, at September 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 $41.8 million and $53.6 million, respectively. Deposits from the State of California were $34.0 million at both September 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 September 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 3.28 years at September 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
|
|
$
|
|
|
|
|
|
%
|
|
$
|
2,203
|
|
|
|
0.13
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
2,203
|
|
|
|
0.13
|
%
|
Corporate Notes
|
|
|
3,517
|
|
|
|
1.28
|
|
|
|
31,769
|
|
|
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,286
|
|
|
|
2.23
|
|
Residential Mortgage-Backed Securities
|
|
|
61
|
|
|
|
4.58
|
|
|
|
576
|
|
|
|
4.31
|
|
|
|
90,094
|
|
|
|
2.03
|
|
|
|
66,439
|
|
|
|
2.14
|
|
|
|
157,170
|
|
|
|
2.09
|
|
Total
|
|
$
|
3,578
|
|
|
|
1.34
|
%
|
|
$
|
34,548
|
|
|
|
2.23
|
%
|
|
$
|
90,094
|
|
|
|
2.03
|
%
|
|
$
|
66,439
|
|
|
|
2.14
|
%
|
|
$
|
194,659
|
|
|
|
2.09
|
%
|
A total of one and nine securities had unrealized losses at September 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 September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage-Backed Securities
|
|
$
|
(1
|
)
|
|
$
|
2,050
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 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 September 30, 2012 and December 31, 2011, gross loans outstanding totaled $241.3 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 84.7% and 74.9% of all loans are secured by real estate at September 30, 2012 and December 31, 2011, respectively.
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
(dollars in thousands)
|
|
Amount
Outstanding
|
|
|
Percent
of Total
|
|
|
Amount
Outstanding
|
|
|
Percent
of Total
|
|
Commercial (1)
|
|
$
|
58,964
|
|
|
|
24.4
|
%
|
|
$
|
70,945
|
|
|
|
30.4
|
%
|
Commercial real estate
|
|
|
93,589
|
|
|
|
38.8
|
%
|
|
|
70,269
|
|
|
|
30.2
|
%
|
Residential
|
|
|
45,688
|
|
|
|
19.0
|
%
|
|
|
54,944
|
|
|
|
23.6
|
%
|
Land and construction
|
|
|
21,729
|
|
|
|
9.0
|
%
|
|
|
16,670
|
|
|
|
7.2
|
%
|
Consumer and other (2)
|
|
|
21,278
|
|
|
|
8.8
|
%
|
|
|
20,140
|
|
|
|
8.6
|
%
|
Loans, gross
|
|
|
241,248
|
|
|
|
100.0
|
%
|
|
|
232,968
|
|
|
|
100.0
|
%
|
Net deferred costs
|
|
|
72
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
Less allowance for loan losses
|
|
|
(4,881
|
)
|
|
|
|
|
|
|
(5,284
|
)
|
|
|
|
|
Loans, net
|
|
$
|
236,439
|
|
|
|
|
|
|
$
|
227,721
|
|
|
|
|
|
(1)
Unsecured commercial loan balances were $11.6 million and $11.5 million at September 30, 2012 and December 31, 2011, respectively.
(2)
Unsecured consumer and other loan balances were $784,000 and $2.8 million at September 30, 2012 and December 31, 2011, respectively.
As of September 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 nine months ended September 30, 2012:
(in thousands)
|
|
Commercial
|
|
|
Commercial Real Estate
|
|
|
Residential
|
|
|
Land and Construction
|
|
|
Consumer and Other
|
|
|
Total
|
|
Three Months Ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,943
|
|
|
$
|
1,680
|
|
|
$
|
463
|
|
|
$
|
461
|
|
|
$
|
319
|
|
|
$
|
4,866
|
|
Provision for loan losses
|
|
|
(180
|
)
|
|
|
220
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Ending balance
|
|
$
|
1,778
|
|
|
$
|
1,900
|
|
|
$
|
438
|
|
|
$
|
461
|
|
|
$
|
304
|
|
|
$
|
4,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,584
|
|
|
$
|
1,252
|
|
|
$
|
583
|
|
|
$
|
516
|
|
|
$
|
349
|
|
|
$
|
5,284
|
|
Provision for loan losses
|
|
|
(805
|
)
|
|
|
1,045
|
|
|
|
(145
|
)
|
|
|
(50
|
)
|
|
|
(45
|
)
|
|
|
|
|
Charge-offs
|
|
|
(25
|
)
|
|
|
(400
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(430
|
)
|
Recoveries
|
|
|
24
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Ending balance
|
|
$
|
1,778
|
|
|
$
|
1,900
|
|
|
$
|
438
|
|
|
$
|
461
|
|
|
$
|
304
|
|
|
$
|
4,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012:
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
500
|
|
Ending balance: collectively evaluated for impairment
|
|
|
1,278
|
|
|
|
1,900
|
|
|
|
438
|
|
|
|
461
|
|
|
|
304
|
|
|
|
4,381
|
|
Total
|
|
$
|
1,778
|
|
|
$
|
1,900
|
|
|
$
|
438
|
|
|
$
|
461
|
|
|
$
|
304
|
|
|
$
|
4,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
2,120
|
|
|
$
|
3,117
|
|
|
$
|
|
|
|
$
|
1,085
|
|
|
$
|
345
|
|
|
$
|
6,667
|
|
Ending balance: collectively evaluated for impairment
|
|
|
56,844
|
|
|
|
90,472
|
|
|
|
45,688
|
|
|
|
20,644
|
|
|
|
20,933
|
|
|
|
234,581
|
|
Total
|
|
$
|
58,964
|
|
|
$
|
93,589
|
|
|
$
|
45,688
|
|
|
$
|
21,729
|
|
|
$
|
21,278
|
|
|
$
|
241,248
|
|
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 nine months ended September 30, 2011:
(in thousands)
|
|
Commercial
|
|
|
Commercial Real Estate
|
|
|
Residential
|
|
|
Land and Construction
|
|
|
Consumer and Other
|
|
|
Total
|
|
Three Months Ended September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,671
|
|
|
$
|
902
|
|
|
$
|
296
|
|
|
$
|
886
|
|
|
$
|
329
|
|
|
$
|
5,084
|
|
Provision for loan losses
|
|
|
(162
|
)
|
|
|
|
|
|
|
62
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
Ending balance
|
|
$
|
2,671
|
|
|
$
|
902
|
|
|
$
|
358
|
|
|
$
|
986
|
|
|
$
|
329
|
|
|
$
|
5,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2011:
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,812
|
|
|
$
|
888
|
|
|
$
|
213
|
|
|
$
|
995
|
|
|
$
|
375
|
|
|
$
|
5,283
|
|
Provision for loan losses
|
|
|
(99
|
)
|
|
|
294
|
|
|
|
145
|
|
|
|
(9
|
)
|
|
|
(56
|
)
|
|
|
275
|
|
Charge-offs
|
|
|
(222
|
)
|
|
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(502
|
)
|
Recoveries
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
190
|
|
Ending balance
|
|
$
|
2,671
|
|
|
$
|
902
|
|
|
$
|
358
|
|
|
$
|
986
|
|
|
$
|
329
|
|
|
$
|
5,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
1,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,000
|
|
Ending balance: collectively evaluated for impairment
|
|
|
1,671
|
|
|
|
902
|
|
|
|
358
|
|
|
|
986
|
|
|
|
329
|
|
|
|
4,246
|
|
Total
|
|
$
|
2,671
|
|
|
$
|
902
|
|
|
$
|
358
|
|
|
$
|
986
|
|
|
$
|
329
|
|
|
$
|
5,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
2,252
|
|
|
$
|
4,041
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
345
|
|
|
$
|
6,638
|
|
Ending balance: collectively evaluated for impairment
|
|
|
59,903
|
|
|
|
48,075
|
|
|
|
32,110
|
|
|
|
20,674
|
|
|
|
17,417
|
|
|
|
178,179
|
|
Total
|
|
$
|
62,155
|
|
|
$
|
52,116
|
|
|
$
|
32,110
|
|
|
$
|
20,674
|
|
|
$
|
17,762
|
|
|
$
|
184,817
|
|
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 September 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. T
he 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 September 30, 2012 and December 31, 2011, the allowance for unfunded lending commitments was
$203,000
and
is primarily related to $70.0 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 September 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 September 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 nine months ended September 30, 2012 and 2011 was none and $891,000, respectively. Non-performing loans represented 2.6% and 3.3% of total loans at September 30, 2012 and December 31, 2011, respectively. There were no accruing loans past due 90 days or more at September 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 September 30, 2012:
|
|
Commercial
|
|
$
|
|
|
|
$
|
594
|
|
|
$
|
|
|
|
$
|
594
|
|
|
$
|
58,370
|
|
|
$
|
58,964
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,589
|
|
|
|
93,589
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,688
|
|
|
|
45,688
|
|
Land and construction
|
|
|
|
|
|
|
|
|
|
|
1,085
|
|
|
|
1,085
|
|
|
|
20,644
|
|
|
|
21,729
|
|
Consumer and other
|
|
|
|
|
|
|
50
|
|
|
|
345
|
|
|
|
395
|
|
|
|
20,883
|
|
|
|
21,278
|
|
Totals
|
|
$
|
|
|
|
$
|
644
|
|
|
$
|
1,430
|
|
|
$
|
2,074
|
|
|
$
|
239,174
|
|
|
$
|
241,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2012 and December 31, 2011:
(dollars in thousands)
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,812
|
|
|
$
|
2,175
|
|
Commercial real estate
|
|
|
3,117
|
|
|
|
3,756
|
|
Land and construction
|
|
|
1,085
|
|
|
|
1,330
|
|
Consumer and other
|
|
|
345
|
|
|
|
345
|
|
Total non-accrual loans
|
|
|
6,359
|
|
|
|
7,606
|
|
OREO
|
|
|
140
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
6,499
|
|
|
$
|
7,606
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to gross loans and OREO
|
|
|
2.69
|
%
|
|
|
3.26
|
%
|
Non-performing assets to total assets
|
|
|
1.37
|
%
|
|
|
1.88
|
%
|
Credit Quality Indicators
The following table represents the credit exposure by internally assigned grades at September 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 September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
55,239
|
|
|
$
|
89,828
|
|
|
$
|
45,688
|
|
|
$
|
20,644
|
|
|
$
|
20,883
|
|
Special Mention
|
|
|
888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
|
2,837
|
|
|
|
3,761
|
|
|
|
|
|
|
|
1,085
|
|
|
|
395
|
|
Total
|
|
$
|
58,964
|
|
|
$
|
93,589
|
|
|
$
|
45,688
|
|
|
$
|
21,729
|
|
|
$
|
21,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 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 nine months ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,034
|
|
|
$
|
1,334
|
|
|
$
|
|
|
|
$
|
1,129
|
|
Commercial real estate
|
|
|
3,117
|
|
|
|
4,505
|
|
|
|
|
|
|
|
3,462
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and construction
|
|
|
1,085
|
|
|
|
1,360
|
|
|
|
|
|
|
|
1,299
|
|
Consumer and other
|
|
|
345
|
|
|
|
345
|
|
|
|
|
|
|
|
345
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,086
|
|
|
$
|
2,225
|
|
|
$
|
500
|
|
|
$
|
1,114
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,120
|
|
|
$
|
3,559
|
|
|
$
|
500
|
|
|
$
|
2,243
|
|
Commercial real estate
|
|
$
|
3,117
|
|
|
$
|
4,505
|
|
|
$
|
|
|
|
$
|
3,462
|
|
Residential
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Land and construction
|
|
$
|
1,085
|
|
|
$
|
1,360
|
|
|
$
|
|
|
|
$
|
1,299
|
|
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
|
|
During the three and nine months ended September 30, 2011, the average balance of impaired loans was $6.7 million and $6.8 million, respectively. As of September 30, 2012 and December 31, 2011, there was $6.4 million and $7.6 million, respectively, of impaired loans on non-accrual status. During the three and nine months ended September 30, 2012, interest income recognized on impaired loans subsequent to their classification as impaired was $3,000 and $9,000, respectively. During the three and nine months ended September 30, 2011, there was no interest income recognized on impaired these loans subsequent to their classification as impaired. 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 and nine months ended September 30, 2012 are set forth in the following table.
|
|
For the Three Months Ended
September 30, 2012
|
|
|
For the Nine Months Ended
September 30, 2012
|
|
(dollars in thousands)
|
|
Number of Loans
|
|
|
Pre Modification Outstanding Recorded Investment
|
|
|
Post Modification Outstanding Recorded Investment
|
|
|
Number of Loans
|
|
|
Pre Modification Outstanding Recorded Investment
|
|
|
Post Modification Outstanding Recorded Investment
|
|
Troubled Debt Restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
3
|
|
|
$
|
1,034
|
|
|
$
|
1,034
|
|
The modifications in connection with the troubled debt restructurings during the nine months ended September 30, 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 and nine months ended September 30, 2012. As of September 30, 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 and nine months ended September 30, 2011.
(4) Derivative Financial Instruments
The fair value of derivative positions outstanding is included in accrued interest receivable and other assets and accrued interest payable and other liabilities in the accompanying Consolidated Balance Sheets and in the net change in each of these financial statement line items in the accompanying unaudited Consolidated Statements of Cash Flows.
Interest Rate Derivatives.
The Company utilizes interest rate swaps to facilitate the needs of its customers. The Company has entered into interest rate swaps that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company's customer to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company's results of operations.
The notional amounts and estimated fair values of interest rate derivative contracts outstanding at September 30, 2012 are presented in the following table. There were no derivative contracts outstanding during the year ended December 31, 2011. The Company obtains dealer quotations to value its interest rate derivative contracts.
|
|
September 30, 2012
|
|
(in thousands)
|
|
Notional
Amount
|
|
|
Estimated
Fair Value
|
|
Non-hedging interest rate derivatives:
|
|
|
|
|
|
|
|
|
Commercial loan interest rate swaps
|
|
$
|
2,800
|
|
|
$
|
114
|
|
Commercial loan interest rate swaps
|
|
$
|
(2,800
|
)
|
|
$
|
(114
|
)
|
The weighted-average rates paid and received for interest rate swaps outstanding at September 30, 2012 were as follows:
|
|
Weighted-Average
|
|
|
|
Interest
Rate
Paid
|
|
|
Interest
Rate
Received
|
|
Non-hedging interest rate swaps
|
|
|
3.41
|
%
|
|
|
4.85
|
%
|
Non-hedging interest rate swaps
|
|
|
4.85
|
%
|
|
|
3.41
|
%
|
Gains, Losses and Derivative Cash Flows
. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other non-interest income and other non-interest expense in the accompanying Consolidated Statements of Operations and Comprehensive Income.
As stated above, the Company enters into non-hedge related derivative positions primarily to accommodate the business needs of its customers. Upon the origination of a derivative contract with a customer, the Company simultaneously enters into an offsetting derivative contract with a third party. The Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third party. Because the Company acts only as an intermediary for its customer, subsequent changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company's results of operations.
Amounts included in the unaudited Consolidated Statements of Operations and Comprehensive Income related to non-hedging interest rate derivative instruments are presented in the table below.
(in thousands)
|
|
Three Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2012
|
|
Non-hedging interest rate derivatives:
|
|
|
|
|
|
|
|
|
Other non-interest income
|
|
$
|
26
|
|
|
$
|
158
|
|
Other non-interest expense
|
|
$
|
27
|
|
|
$
|
114
|
|
(5) Comprehensive Income
Comprehensive income, which includes net income, the net change in unrealized gains on investment securities available for sale and the reclassification of net (gains) losses included in earnings, is presented below:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net income
|
|
$
|
687
|
|
|
$
|
354
|
|
|
$
|
2,030
|
|
|
$
|
593
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net unrealized gains on investment securities available for sale, net of tax expense of $755 and $956 for the three and nine months ended September 30, 2012, respectively, and $484 and $809 for the three and nine months ended September 30, 2011, respectively
|
|
|
1,080
|
|
|
|
692
|
|
|
|
1,365
|
|
|
|
1,158
|
|
Reclassification for net gains included in earnings, net of tax expense of $1 for the nine months ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Comprehensive income
|
|
$
|
1,767
|
|
|
$
|
1,046
|
|
|
$
|
3,395
|
|
|
$
|
1,750
|
|
The Company did not sell any available for sale securities during the three and nine months ended September 30, 2012. The Company did not sell any available for sale securities during the three months ended September 30, 2011. The Company sold one available for sale security totaling $140,000 during the nine months ended September 30, 2011, resulting in a realized gain of $2,000.
These gains were reported in non-interest income within the accompanying unaudited Consolidated Statements of Operations and Comprehensive Income.
(6)
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 September 30, 2012 and December 31, 2011 are comprised of the following:
(in thousands)
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Leasehold improvements
|
|
$
|
973
|
|
|
$
|
973
|
|
Furniture & equipment
|
|
|
2,106
|
|
|
|
1,907
|
|
Software
|
|
|
661
|
|
|
|
561
|
|
Total
|
|
|
3,740
|
|
|
|
3,441
|
|
Accumulated depreciation
|
|
|
(2,674
|
)
|
|
|
(2,346
|
)
|
Premises and equipment, net
|
|
$
|
1,066
|
|
|
$
|
1,095
|
|
Depreciation and amortization included in occupancy expense was $113,000 and $328,000 for the three and nine months ended September 30, 2012, respectively, and $94,000 and $266,000 for the three and nine months ended September 30, 2011, respectively.
(7) Deposits
The following table reflects the summary of deposit categories by dollar and percentage at September 30, 2012 and December 31, 2011:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Percent of Total
|
|
|
Amount
|
|
|
Percent of Total
|
|
Non-interest bearing demand deposits
|
|
$
|
170,568
|
|
|
|
43.0
|
%
|
|
$
|
122,843
|
|
|
|
37.0
|
%
|
Interest bearing checking
|
|
|
28,014
|
|
|
|
7.1
|
%
|
|
|
20,739
|
|
|
|
6.2
|
%
|
Money market deposits and savings
|
|
|
152,185
|
|
|
|
38.3
|
%
|
|
|
142,061
|
|
|
|
42.7
|
%
|
Certificates of deposit
|
|
|
46,115
|
|
|
|
11.6
|
%
|
|
|
46,811
|
|
|
|
14.1
|
%
|
Total
|
|
$
|
396,882
|
|
|
|
100.0
|
%
|
|
$
|
332,454
|
|
|
|
100.0
|
%
|
At September 30, 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 8.6% of total deposits. Each of these deposits are scheduled to mature in the fourth 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 September 30, 2012 and December 31, 2011 in connection with these certificates of deposit.
At September 30, 2012, the Company had $4.9 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 September 30, 2012 and December 31, 2011 was $44.7 million and $44.9 million, respectively. At September 30, 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, $5.2 million maturing in six months to one year and $228,500 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 September 30, 2012.
(in thousands)
|
|
Six months
and less
|
|
|
Greater than six months through one year
|
|
|
Greater than one year
|
|
0.00%
|
to
|
0.99%
|
|
$
|
40,084
|
|
|
$
|
2,469
|
|
|
$
|
345
|
|
1.00%
|
to
|
1.99%
|
|
|
157
|
|
|
|
3,000
|
|
|
|
60
|
|
|
Total
|
|
|
$
|
40,241
|
|
|
$
|
5,469
|
|
|
$
|
405
|
|
(8)
Other Borrowings
At September 30, 2012 and December 31, 2011, the Company had a borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB of $96.1 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 September 30, 2012 and December 31, 2011. The Company had no overnight borrowings outstanding under this borrowing/credit facility at September 30, 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 September 30, 2012 and December 31, 2011 (dollars in thousands):
Maturity Date
|
|
Interest Rate
|
|
September 30, 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 September 30, 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 September 30, 2012 and December 31, 2011. As of September 30, 2012 and December 31, 2011, the Company had pledged $6.3 million of corporate notes in connection with these lines of credit.
(9)
Commitments and Contingencies
Commitments to Extend Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby/commercial letters of credit and guarantees on revolving credit card limits. These instruments involve various levels and elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated financial statements. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company had $70.0 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 September 30, 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 $37,000 and $54,000 as of September 30, 2012 and December 31, 2011, respectively.
Lease Commitments
The Company leases office premises under three operating leases that will expire in December 2013, 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 $135,000 and $417,000 for the three and nine months ended September 30, 2012 and $143,000 and $400,000 for the three and nine months ended September 30, 2011, respectively. Sublease income earned was $28,000 and $81,000 during the three and nine months ended September 30, 2012 and $27,000 and $79,000 for the three and nine months ended September 30, 2011, respectively.
The projected minimum rental payments under the term of the leases at September 30, 2012 are as follows (in thousands):
Years ending December 31,
|
|
|
|
|
2012 (October December)
|
|
$
|
177
|
|
2013
|
|
|
706
|
|
2014
|
|
|
374
|
|
2015
|
|
|
107
|
|
2016
|
|
|
111
|
|
Thereafter
|
|
|
104
|
|
Total
|
|
$
|
1,579
|
|
Litigation
The Company from time to time is party to lawsuits, which arise out of the normal course of business. At September 30, 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 (October December)
|
|
$
|
142
|
|
2013
|
|
|
449
|
|
2014
|
|
|
310
|
|
2015
|
|
|
148
|
|
2016
|
|
|
54
|
|
Thereafter
|
|
|
10
|
|
Total
|
|
$
|
1,113
|
|
(10)
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 September 30, 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 nine months ended September 30, 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.
(11)
Fair Value Measurements
The following tables present information about the Company's assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 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 and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
Fair Value Measurements Using
|
|
(in thousands)
|
|
Fair Value
|
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
At September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Gov't treasuries
|
|
$
|
2,203
|
|
|
$
|
2,203
|
|
|
$
|
|
|
|
$
|
|
|
Corporate Notes
|
|
|
35,286
|
|
|
|
|
|
|
|
35,286
|
|
|
|
|
|
Residential Mortgage-Backed Securities
|
|
|
157,170
|
|
|
|
|
|
|
|
157,170
|
|
|
|
|
|
Derivative Assets -
Interest Rate Swaps
|
|
|
114
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
Derivative Liabilities -
Interest Rate Swaps
|
|
|
114
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
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
|
|
|
|
|
|
AFS securities
As of September 30, 2012 and December 31, 2011, the Level 2 fair value of the Company's residential mortgage-backed securities was $157.2 million and $120.8 million, respectively. These securities consist primarily of agency mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). The underlying loans for these securities are residential mortgages that were primarily originated beginning in the year of 2003 through the current period. These loans are geographically dispersed throughout the United States. At September 30, 2012 and December 31, 2011, the weighted average rate and weighed average life of these securities were 2.09% and 2.60%, respectively, and 3.28 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 and nine months ended September 30, 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 September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,180
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,180
|
|
Commercial real estate
|
|
|
3,117
|
|
|
|
|
|
|
|
|
|
|
|
3,117
|
|
Land and construction
|
|
|
1,085
|
|
|
|
|
|
|
|
|
|
|
|
1,085
|
|
OREO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
Land and construction
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
Total
|
|
$
|
5,522
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,522
|
|
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 $15,000 on impaired loans during the three months ended September 30, 2012 and net charge-offs of $403,000 during the nine months ended September 30, 2012. The Company recorded net recoveries of $162,000 on impaired loans during the three months ended September 30, 2011 and net charge-offs of $312,000 during the nine months ended September 30, 2011.
Other real estate owned
OREO represents real estate acquired through or in lieu of foreclosure. OREO is held for sale and is initially recorded at fair value less estimated costs of disposition at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or estimated fair value less costs of disposition. The fair value of OREO is determined using various valuation techniques which are not readily observable in the market place, including consideration of appraised values and other pertinent real estate market data.
(12)
Estimated Fair Value Information
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many cases, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize in a current market exchange.
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value are explained below.
Cash and cash equivalents
The carrying amounts are considered to be their estimated fair values and are classified as Level 1 because of the short-term maturity of these instruments which includes Federal funds sold and interest-earning deposits at other financial institutions.
Investment securities
AFS investment securities are carried at fair value, which are based on quoted prices of exact or similar securities, or on inputs that are observable, either directly or indirectly. The Company obtains quoted prices through third party brokers. Investment securities are classified as Level 1 to the extent that they are based on quoted prices for identical instrument traded in active markets. Investment securities are classified as Level 2 for valuations based on quotes prices for similar securities or inputs that are observable, either directly or indirectly.
FRB and FHLB stock
It is not practical to determine the fair value of FRB and FHLB stock due to restrictions placed on its transferability.
Loans, net
For loans, the fair value is estimated using market quotes for similar assets or the present value of future cash flows, discounted using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same maturities and giving consideration to estimated prepayment risk and credit risk. The fair value of loans is determined utilizing estimates resulting in a Level 3 classification.
Impaired loans
are measured for impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral (net of estimated costs to sell) if the loan is collateral dependent. The fair value of impaired loans is determined utilizing estimates resulting in a Level 3 classification.
Off-balance sheet credit-related instruments
The fair values of commitments, which include standby letters of credit and commercial letters of credit, are based upon fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The related fees are not considered material to the Company's financial statements as a whole and the fair market value of the Company's off-balance sheet credit-related instruments cannot be readily determined. The fair value of these items is determined utilizing estimates resulting in a Level 3 classification.
Derivatives
The fair value of derivatives is based on valuation models using observable market data as of the measurement date and is classified as Level 2.
Deposits
For demand deposits, the carrying amount approximates fair value. The fair values of interest bearing checking, savings, and money market deposits are estimated by discounting future cash flows using the interest rates currently offered for deposits of similar products. Because of the short-term maturity of these deposits, the carrying amounts are considered to be their estimated fair values and are classified as Level 1.
The fair values of the certificates of deposit are estimated by discounting future cash flows based on the rates currently offered for certificates of deposit with similar interest rates and remaining maturities. The fair value of certificates of deposit is determined utilizing estimates resulting in a Level 2 classification.
Other borrowings
The fair values of long term FHLB advances are estimated based on the rates currently offered by the FHLB for advances with similar interest rates and remaining maturities. The fair value of other borrowings is determined utilizing estimates resulting in a Level 2 classification.
Accrued interest
The estimated fair value for both accrued interest receivable and accrued interest payable are considered to be equivalent to the carrying amounts, resulting in a Level 1 classification.
The estimated fair value and carrying amounts of the financial instruments at September 30, 2012 and December 31, 2011 are as follows:
|
|
|
|
|
Fair Value Measurements Using:
|
|
(dollars in thousands)
|
|
Carrying
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
As of September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
36,502
|
|
|
$
|
36,502
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
36,502
|
|
Investment securities
|
|
|
194,659
|
|
|
|
2,203
|
|
|
|
192,456
|
|
|
|
|
|
|
|
194,659
|
|
FRB stock
|
|
|
1,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
FHLB stock
|
|
|
2,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
Loans, net
|
|
|
236,439
|
|
|
|
|
|
|
|
|
|
|
|
236,310
|
|
|
|
236,310
|
|
Non-hedging interest rate swaps
|
|
|
114
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
114
|
|
Accrued interest receivable
|
|
|
1,381
|
|
|
|
1,381
|
|
|
|
|
|
|
|
|
|
|
|
1,381
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
$
|
170,568
|
|
|
$
|
170,568
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
170,568
|
|
Interest bearing deposits
|
|
|
226,314
|
|
|
|
180,199
|
|
|
|
46,115
|
|
|
|
|
|
|
|
226,314
|
|
Other borrowings
|
|
|
25,000
|
|
|
|
|
|
|
|
25,455
|
|
|
|
|
|
|
|
25,455
|
|
Non-hedging interest rate swaps
|
|
|
114
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
114
|
|
Accrued interest payable
|
|
|
208
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
208
|
|
(dollars in thousands)
|
|
Carrying
Amount
|
|
|
Estimated
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
|
|
(13)
Non-Interest Income
The following table summarizes the information regarding non-interest income for the three and nine months ended September 30, 2012 and 2011, respectively:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Loan arrangement fees
|
|
$
|
328
|
|
|
$
|
170
|
|
|
$
|
895
|
|
|
$
|
421
|
|
Service charges and other operating income
|
|
|
70
|
|
|
|
52
|
|
|
|
207
|
|
|
|
197
|
|
Interest rate swap income
|
|
|
26
|
|
|
|
|
|
|
|
158
|
|
|
|
|
|
Total non-interest income
|
|
$
|
424
|
|
|
$
|
222
|
|
|
$
|
1,260
|
|
|
$
|
618
|
|
(14)
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. On May 15, 2012, the Company granted 145,000 restricted stock awards to employees with various vesting periods as follows: 50% or 72,500 awards that vest in three years, 25% or 36,250 awards that vest in four years, and 25% or 36,250 awards that vest in five years. On May 15, 2011, the Company granted 104,500 restricted stock awards to employees with various vesting periods as follows: 50% or 52,250 awards that vest in three years, 25% or 26,125 awards that vest in four years, and 25% or 26,125 awards that vest in five years.
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 $150,000 and $360,000 for the three and nine months ended September 30, 2012, respectively, and $52,000 and $290,000 for the three and nine months ended September 30, 2011, respectively. The fair value of restricted stock awards that vested during the three and nine months ended September 30, 2012 was $32,200 and $346,900, respectively, and $32,000 and $384,400 for the three and nine months ended September 30, 2011, respectively.
The following table reflects the activities related to restricted stock awards outstanding for the nine months ended September 30, 2012 and 2011, respectively.
|
|
Nine Months Ended September 30,
|
|
|
|
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
|
|
Granted
|
|
|
145,000
|
|
|
|
4.85
|
|
|
|
104,500
|
|
|
|
4.00
|
|
Vested
|
|
|
(79,413
|
)
|
|
|
4.37
|
|
|
|
(72,478
|
)
|
|
|
5.30
|
|
Forfeited and surrendered
|
|
|
(39,625
|
)
|
|
|
4.05
|
|
|
|
(33,500
|
)
|
|
|
4.33
|
|
Ending balance
|
|
|
562,695
|
|
|
$
|
4.19
|
|
|
|
448,290
|
|
|
$
|
4.16
|
|
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 nine months ended September 30, 2012 or 2011. The remaining contractual life of the 2004 Founder Stock Options outstanding was 1.41 and 2.41 years at September 30, 2012 and 2011, respectively. All options under the 2004 Founder Stock Option Plan were exercisable at September 30, 2012 and 2011. At September 30, 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 nine months ended September 30, 2012 or 2011. The remaining contractual life of the Director and Employee Stock Options outstanding was 1.89 and 2.89 years at September 30, 2012 and 2011, respectively. All options under the Directors and Employee Stock Option Plan were exercisable at September 30, 2012 and 2011. At September 30, 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 September 30, 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
|
|
|
|
479,176
|
|
|
|
562,695
|
|
|
|
158,129
|
|
(15) 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 September 30, 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 September 30, 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
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital Ratio
|
|
$
|
49,498
|
|
|
|
16.08
|
%
|
|
$
|
48,289
|
|
|
|
15.68
|
%
|
|
$
|
24,632
|
|
|
|
8.00
|
%
|
|
$
|
30,790
|
|
|
|
10.00
|
%
|
Tier 1 Risk-Based Capital Ratio
|
|
$
|
45,634
|
|
|
|
14.82
|
%
|
|
$
|
44,426
|
|
|
|
14.43
|
%
|
|
$
|
12,316
|
|
|
|
4.00
|
%
|
|
$
|
18,474
|
|
|
|
6.00
|
%
|
Tier 1 Leverage Ratio
|
|
$
|
45,634
|
|
|
|
9.75
|
%
|
|
$
|
44,426
|
|
|
|
9.49
|
%
|
|
$
|
18,728
|
|
|
|
4.00
|
%
|
|
$
|
23,413
|
|
|
|
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.