PART I
Item 1 - Business
Overview
1st Century Bancshares, Inc. (“Bancshares”), a Delaware corporation is registered with the Board of Governors of the Federal Reserve System (the “FRB”) as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Bancshares has one subsidiary, 1st Century Bank, National Association (the “Bank”). The Bank is subject to both the regulation of and periodic examinations by the Office of the Comptroller of the Currency (the “OCC”), which is the Bank’s primary federal regulatory agency.
Bancshares and the Bank are collectively referred to herein as “we”, “our”, “us” or “the Company.”
Bancshares’ common stock trades on the NASDAQ Stock Market LLC Capital Market (“NASDAQ CM”) under the symbol “FCTY.” All companies listed on the NASDAQ CM must meet certain financial requirements and adhere to NASDAQ CM’s corporate governance standards.
Bancshares’ principal source of income is dividends from the Bank. Bancshares’ operating costs, including certain professional fees and stockholders’ costs are paid from dividends paid to Bancshares by the Bank.
At December 31, 2013, the Company had consolidated assets of $538.1 million, deposits of $452.8 million and stockholders’ equity of $55.4 million.
The Company maintains a website at http://www.1cbank.com. By including the foregoing website address link, the Company does not intend to and shall not be deemed to incorporate by reference any material contained therein. The Company makes available, free of charge through the Company’s website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after such reports are filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The Bank
Headquartered in the West Los Angeles area of Los Angeles, California, known as Century City, the Bank is a full service commercial bank. The Bank was organized as a national banking association on October 27, 2003 and opened for business on March 1, 2004. In 2011, the Bank opened a relationship office in Santa Monica, California. The Bank’s primary focus is relationship banking to family and closely held middle market businesses, professional service firms, and high net worth individuals, real estate investors and entrepreneurs. The Bank also provides a wide range of banking services to meet the financial needs of the local residential community, with an orientation primarily directed toward owners and employees of our business client base.
The Bank’s founders and directors represent leading business executives and professionals in many industries with extensive personal contacts, and business, professional and community relationships throughout the Los Angeles area. The Bank's goal is to utilize the founders and directors as a source of referrals for developing business relationships and expanding the Bank’s franshise in its target market of the Westside of Los Angeles. The Bank’s management team brings together a wealth of experience with complementary skills necessary to build and grow a superior community financial institution from these relationships.
Market Area
The general market area we serve is loosely defined as La Cienega Boulevard to the east, the Santa Monica Mountains to the north, the Pacific Ocean to the west and the Los Angeles International Airport to the south. This is a highly diversified market with most businesses operating in the service industry, and also includes a concentration of high net worth individuals. According to the Los Angeles Economic Development Corporation (the “LAEDC”), the median household income and per cpatia income of the Westside of Los Angeles were $72,600 and $47,700, respectively in 2012 exceeding all other regions of Los Angeles County. The median household income and per capita income of Los Angeles County during the same period were $44,100 and $24,500, respectively. The LAEDC defines the Westside of Los Angeles as the five incorporated cities of Beverly Hills, Culver City, Malibu, Santa Monica, West Hollywood, as well as major portions of the city of Los Angeles. The latter includes some distinct communities such as Bel Air, Brentwood, Century City, Hollywood, Korea Town, Miracle Mile, Pacific Palisades, Westchester, Westwood and Venice. The micro-economic market of Century City, where the Bank is based, is much more concentrated. Smaller businesses dominate this market with 67.8% of employers having less than 5 employees. According to the U.S. Department of Commerce, Bureau of the Census data for 2010, there are approximately 2,450 businesses located in Century City’s one square mile area, of which 575 (23.5%) are legal services firms. Other industries heavily represented in Century City include entertainment, financial services, real estate investment and accounting/business management.
Target Customers
The target market for our products and services is those middle market business and professional firms with basic borrowing needs between $250,000 and $5,000,000 and/or with the need for non-credit services, including operating account services and cash management needs. Loans in excess of our borrowing limits to one customer or related entities are participated out to other financial institutions as a way of accommodating customers with higher borrowing needs. Our market territory is characterized by a sizeable number of small businesses in proportion to the number of large employers. Service firms, merchandising, distribution and support industries make up the vast majority of firms and the employment base. Within the professional services markets, we have made loans to and attracted deposits from law firms, medical practices and individual physicians, business management and accounting firms, real estate professionals, managers and investors and other family and closely held corporations. We also supply credit and depository services to meet the personal needs of their principals, families and employees.
We develop business through personalized and direct marketing programs, utilizing experienced banking officers. We rely greatly on our ability to access our investor and founder base, along with referrals from satisfied clients. In addition, we have a very strong commitment to civic, community and business groups important to our client base.
Competition
The Bank competes with other banks and financial institutions to attract relationships. The Bank faces competition from established local and regional banks and savings banks. Many of them have larger customer bases, greater name recognition and brand awareness, greater financial and other resources and longer operating histories. In order to compete with the other financial service providers, the Company principally relies upon local promotional activities, personal relationships established by founders, investors, officers, directors, and employees with its customers, and specialized services tailored to meet its customers’ needs. In those instances where the Company is unable to accommodate a customer’s needs, the Company seeks to arrange for such loans on a participation basis with other financial institutions or to have those services provided in whole, or in part, by its correspondent banks. See Part I, Item 1
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“Business - Supervision and Regulation.”
Products and Services
The Bank’s goal is to deliver the most responsive and adaptive depository and lending products and services to our clientele. While the Bank will endeavor to maintain maximum flexibility with regards to structure, pricing and terms, the Bank’s product offerings are along the following lines:
Loans
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Business and personal lines of credit and term loans,
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Tenant improvement and equipment financing,
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Bridge and/or specific purpose loans,
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Commercial, industrial, multi-family and 1-4 single family residential real estate lending,
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Personal home equity loans and lines of credit, and
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Credit cards for business and personal use.
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Deposits
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Business checking, money market and certificates of deposit,
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Personal checking, money market and certificates of deposits,
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Attorney-Client trust accounts,
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Cash management and on-line banking, and
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Loan Approval
Our Board of Directors (the “Board”) establishes lending policies to ensure the above objectives are met. The Board has established an approval process that generally requires a high level of review relative to any credit consideration.
The Board has granted loan approval authority to the President/Chief Executive Officer and the Executive Vice President/Chief Credit Officer, which may be exercised individual or jointly up to designated approval limits. The Board has also established the Bank’s Board of Directors’ Loan Committee (the “Directors’ Loan Committee”), which approves loans above designated amounts. The Directors’ Loan Committee consists of three outside Bank board members and has approval authority for any one loan up to the Bank’s legal lending limit, which was approximately $8.8 million at December 31, 2013.
In addition, the full Board must approve any loan that is subject to FRB Regulation O, which governs loans made by the Bank to the Company’s Directors, executive officers, and principal shareholders as those terms are defined in Regulation O.
Loan Review
We recognize that the proper monitoring of loans is essential for evaluating the quality of our loan portfolio and for ensuring that the allowance for loan losses is adequate. We have established a loan grading system consisting of nine different categories (Grades 1 through 4 and 4w, and 5 through 8). Grades 1 through 4 and 4w reflect strong, good and satisfactory risk. Grades 5 through 8 include Special Mention (criticized assets) and the classified assets categories of Substandard, Doubtful, and Loss. Loans graded 5 through 8 are evaluated for impairment.
The following describes grades 5 through 8 of our loan grading system:
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Special Mention
– Grade 5. Loan assets categorized as “Special Mention” have potential weaknesses that deserve management’s close attention. Borrower and guarantor’s capacity to meet all financial obligations is marginally adequate or deteriorating.
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Substandard
– Grade 6. Loan assets classified “Substandard” are inadequately protected by the paying capacity of the Borrower and/or collateral pledged. The borrower or guarantor is unwilling or unable to meet loan terms or loan covenants for the foreseeable future.
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Doubtful
– Grade 7. Loan assets classified as “Doubtful” have all the weakness inherent in one classified as Substandard with the added characteristic that those weaknesses in place make the collection or liquidation in full, on the basis of current conditions, highly questionable and improbable.
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Loss
– Grade 8. Loan assets classified as “Loss” are considered uncollectible or no longer a bankable asset. This classification does not mean that the asset has absolutely no recoverable value. In fact, a certain salvage value is inherent in these loans. Nevertheless, it is not practical or desirable to defer writing off a portion or all of a perceived asset even though partial recovery may be collected in the future.
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It is the underwriting department’s responsibility to grade each credit. However, the grade may be changed as the loan moves through the approval process.
To further ensure proper risk grading of loans and administration of the loan portfolio, we engaged an independent third party to conduct annual reviews of this function. These reviews assess the quality of (i) the current administration of the loans, (ii) loans that require the attention of management, and (iii) the risk grade identification. The reviews primarily focus on credit quality, compliance with internal policies, loan agreement covenants, laws and regulations, and documentation.
Concentrations/Customers
Approximately 73.1% of total loans at December 31, 2013, consisted of real estate loans, including first trust deeds on single family residential properties, undeveloped land, multi-family residential properties, commercial/industrial real estate, and construction-in-process. Of the total loans outstanding at December 31, 2013, there are 136 loans that have outstanding balances of $1,000,000 or more, which totals approximately $283.7 million, or 74.0% of the total loan portfolio (some lending relationships will include more than one of these loans). Overall, the loan portfolio has changed from approximately 460 loans totaling $266.6 million at December 31, 2012 to approximately 587 loans totaling $383.5 million at December 31, 2013. At December 31, 2012 and 2013, the average balance per loan was $580,000 and $653,000, respectively. Substantially all of the Company’s loan, as well as deposit customers are located in Southern California.
Correspondent Banks
Correspondent bank deposit accounts are generally maintained to enable the Bank to transact types of activities that it would otherwise be unable to perform or would not be cost effective due to the size of the Bank or the volume of activity. The Bank has utilized several correspondent banks to process a variety of transactions.
Employees
At December 31, 2013, the Company had 63 full-time equivalent employees.
Economic Conditions, Government Policies, Legislation, and Regulation
Introduction
Our profitability, like most banks, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by us on interest bearing liabilities, such as deposits and other borrowings, and the interest rates received by us on our interest-earning assets, such as loans extended to our clients and securities held in our investment portfolio, comprises the major portion of our earnings.
Our business is also influenced by the monetary and fiscal policies of the U.S. federal government and the policies of regulatory agencies, particularly the FRB. The FRB implements national monetary policies (with objectives such as curbing inflation and combating unemployment) through its open-market operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates earned on interest-earning assets and paid on interest bearing liabilities. The nature and impact on us of any future changes in monetary and fiscal policies cannot be predicted.
From time to time, legislation, as well as regulations, are enacted which have the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures, and before various regulatory agencies. Such legislation may change banking statutes and our operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings banks, credit unions, and other financial institutions. We cannot predict whether any potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. See Part I, Item 1 -
“Business - Supervision and Regulation.”
Economic Conditions
In late 2007, economic conditions in the United States began deteriorating, resulting in a decline in residential and commercial real estate values, as well as a significant reduction in business activity across a wide range of industries and regions. More recently, real estate markets have improved, while equity markets have exceeded pre-recession highs, resulting in stronger consumer spending, wealth and improved liquidity in credit markets. Despite these positive trends, historically high levels of unemployment and underemployment in the U.S. and our market areas, as well as uncertainty in connection with the impact of Federal Open Market Committee monetary policy decisions and congressional debates regarding fiscal issues, may negatively impact the economy, our business and our financial results.
Legislation and Regulation
From time to time, legislation, as well as regulations, are enacted which have the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures, and before various regulatory agencies. Such legislation may change banking statutes and our operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings banks, credit unions, and other financial institutions. We cannot predict whether any potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. See Part I, Item 1 -
“Business - Supervision and Regulation.”
The Dodd-Frank Act
The economic events of the past several years have led to numerous new laws and regulatory pronouncements in the United States and internationally for financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), enacted in 2010, is one of the most far reaching legislative actions affecting the financial services industry in decades and significantly restructures the financial regulatory regime in the United States.
The Dodd-Frank Act broadly affects the financial services industry by creating new resolution authorities, requiring ongoing stress testing of capital, mandating higher capital and liquidity requirements, increasing regulation of executive and incentive-based compensation and requiring numerous other provisions aimed at strengthening the sound operation of the financial services sector depending, in part, on the size of the financial institution. Among other things, the Dodd-Frank Act provides for:
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capital standards applicable to bank holding companies may be no less stringent than those applied to insured depository institutions;
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annual stress tests and early remediation or so-called living wills are required for larger banks with more than $50 billon of assets as well risk committees of its board of directors that include a risk expert and such requirements may have the effect of establishing new best practices standards for smaller banks;
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trust preferred securities must generally be deducted from Tier 1 capital over a three-year phase-in period ending in 2016, although for depository institution holding companies with assets of less than $15 billion as of year-end 2009
existing trust preferred capital will still qualify as Tier 1 to be phased out over a ten year period and small bank holding companies with less than $500 million in assets may issue new trust preferred securities, which may still qualify as Tier 1;
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the assessment base for federal deposit insurance was changed to consolidated assets less tangible capital instead of the amount of insured deposits, which generally increased the insurance fees of larger banks, but had relatively less impact on smaller banks;
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repeal of the federal prohibition on the payment of interest on demand deposits, including business checking accounts, and made permanent the $250,000 limit for federal deposit insurance;
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the establishment of the Consumer Finance Protection Bureau (the “CFPB”) with responsibility for promulgating regulations designed to protect consumers’ financial interests and prohibit unfair, deceptive and abusive acts and practices by financial institutions, and with authority to directly examine those financial institutions with $10 billion or more in assets for compliance with the regulations promulgated by the CFPB;
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limits, or places significant burdens and compliance and other costs, on activities traditionally conducted by banking organizations, such as originating and securitizing mortgage loans and other financial assets, arranging and participating in swap and derivative transactions, proprietary trading and investing in private equity and other funds;
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the establishment of new compensation restrictions and standards regarding the time, manner and form of compensation given to key executives and other personnel receiving incentive compensation, including documentation and governance, proxy access by stockholders, deferral and claw-back requirements; and
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implementation of the “Volker Rule”, which prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds).
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Many of the regulations to implement the Dodd-Frank Act have not yet been published for comment or adopted in final form and/or will take effect over several years, making it difficult to anticipate the overall financial impact on Bancshares and the Bank, our customers or the financial industry more generally. Individually and collectively, these proposed regulations resulting from the Dodd-Frank Act may materially and adversely affect the Bancshare’s and the Bank’s business, financial condition, and results of operations. Recently passed rules that implement provisions in the legislation that require revisions to the capital requirements of Bancshares and the Bank may require Bancshares and the Bank to seek additional sources of capital in the future.
Supervision and Regulation
Bank Holding Company and Bank Regulation
Bank holding companies and their bank and non-bank subsidiaries are subject to significant regulation and restrictions by Federal and State laws and regulatory agencies. These laws, regulations and restrictions, which may affect the cost of doing business, limit permissible activities and expansion or impact the competitive balance between banks and other financial services providers, are intended primarily for the protection of depositors and the FDIC deposit insurance fund (“DIF”), and secondarily for the stability of the U.S. banking system. They are not intended for the benefit of shareholders of financial institutions. The following discussion of key statutes and regulations to which the Company is subject is a summary and does not purport to be complete nor does it address all applicable statutes and regulations. This discussion is qualified in its entirety by reference to the statutes and regulations referred to in this discussion.
The wide range of requirements and restrictions contained in both Federal and State banking laws include:
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Requirements that bank holding companies and banks meet or exceed minimum capital requirements. See Part 1, Item 1. “Business – Capital Standards.”
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Requirements that bank holding companies serve as a source of financial and managerial strength for their banking subsidiaries. In addition, the regulatory agencies have “prompt corrective action” authority to limit activities and require a limited guaranty of a required bank capital restoration plan by a bank holding company if the capital of a bank subsidiary falls below capital levels required by the regulators.
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Limitations on dividends payable to shareholders. Bancshare’s ability to pay dividends on both its common and preferred stock are subject to legal and regulatory restrictions, and would be derived from dividends paid by the Bank.
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Limitations on dividends payable by bank subsidiaries. These dividends are subject to various legal and regulatory restrictions. The federal banking agencies have indicated that paying dividends that deplete a depositary institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.
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Safety and soundness requirements. Banks must be operated in a safe and sound manner and meet standards applicable to internal controls, information systems, internal audit, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, as well as other operational and management standards. These safety and soundness requirements give bank regulatory agencies significant latitude in exercising their supervisory authority and their authority to initiate informal or formal enforcement action.
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Requirements for approval of acquisitions and activities. Prior approval or nonobjection of the applicable federal regulatory agencies is required for most acquisitions and mergers and in order for Bancshares or Bank to engage in certain nonbanking activities and activities that have been determined by the Federal Reserve to be financial in nature, incidental to financial activities, or complementary to a financial activity.
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Compliance with the Community Reinvestment Act (the “CRA”). The CRA requires that banks help meet the credit needs in their communities, including the availability of credit to low and moderate income individuals. If the Company or the Bank fails to adequately serve their communities, penalties may be imposed, including denials of applications for branches, to add subsidiaries and affiliates, or to merge with or purchase other financial institutions. In its last reported examination by the OCC in June 2012, the Bank received a CRA rating of “Satisfactory.”
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Compliance with the Bank Secrecy Act, the USA Patriot Act, and other anti-money laundering laws. These laws and regulations require financial institutions to assist U.S. Government agencies in detecting and preventing money laundering and other illegal acts by maintaining policies, procedures and controls designed to detect and report money laundering, terrorist financing, and other suspicious activity.
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Limitations on the amount of loans to one borrower and its affiliates and to executive officers and directors.
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Limitations on transactions with affiliates.
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Restrictions on the nature and amount of any investments in, and ability to underwrite certain securities.
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Requirements for opening of branches intra- and interstate.
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Truth in lending and other consumer protection and disclosure laws to ensure equal access to credit and to protect consumers in credit transactions.
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Provisions of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and other federal and state laws dealing with privacy for nonpublic personal information of customers.
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Reports and Examinations
Bancshares is required to file with the FRB annual reports and other information regarding its business operations and those of its nonbanking subsidiaries. It is also subject to supervision and examination by the FRB. Examinations are designed to inform the FRB of the financial condition and nature of the operations of the bank holding company and its subsidiaries and to monitor compliance with the BHC Act and other laws affecting the operations of bank holding companies. To determine whether potential weaknesses in the condition or operations of bank holding companies might pose a risk to the safety and soundness of their subsidiary banks, examinations focus on whether a bank holding company has adequate systems and internal controls in place to manage the risks inherent in its business, including credit risk, interest rate risk, market risk (for example, from changes in value of portfolio instruments and foreign currency), liquidity risk, operational risk, legal risk, and reputation risk. FRB enforcement actions may include the issuance of cease and desist orders, the imposition of civil money penalties, the requirement to meet and maintain specific capital levels for any capital measure, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against officers or directors and other “institution-affiliated” parties.
The Bank is subject to examination by the OCC and also files publicly available call reports on its operating results. If, as a result of an examination of the Bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the OCC and separately the FDIC as the insurer of the Bank’s deposits, have residual authority to: enjoin “unsafe or unsound” practices; require affirmative action to correct any conditions resulting from any violation or practice; issue an administrative order that can be judicially enforced; direct an increase in capital; restrict growth; assess civil monetary penalties; remove officers and directors; institute a receivership; and, ultimately terminate the bank’s deposit insurance, which would result in a revocation of its charter.
On September 11, 2013, the Board of Directors of the Bank entered into a stipulation and consent to the issuance of a consent order with the OCC consenting to the issuance of a consent order (the “Consent Order”) by the OCC, effective as of that date. The Consent Order requires the Bank to take corrective action to enhance its program and procedures for compliance with the Bank Secrecy Act (“BSA”) and other anti-money laundering regulations (“AML”). Manangement and the Board have been working diligently to comply with the Consent Order and believe they have allocated sufficient resources to address the corrective actions required by the OCC. Compliance and resolution of the Consent Order will ultimately be determined by the OCC.
Dividends and Other Transfers of Funds
Holders of Bancshares’ common stock are entitled to receive dividends as and when declared by the Board out of funds legally available under the laws of the State of Delaware. Delaware corporations such as Bancshares may make distributions to their stockholders out of their surplus, or out of their net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. However, dividends may not be paid out of a corporation’s net profits if, after the payment of the dividend, the corporation’s capital would be less than the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets.
The FRB has advised bank holding companies that it believes that payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, banks and their holding companies may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items such as sales of buildings or other large assets in order to generate profits to enable payment of future dividends. Further, the FRB’s position that holding companies are expected to provide a source of managerial and financial strength to their subsidiary banks potentially restricts a bank holding company’s ability to pay dividends.
The Bank is a legal entity that is separate and distinct from Bancshares. Bancshares may receive income through dividends paid by the Bank. Subject to the regulatory restrictions described below, future cash dividends by the Bank will depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors.
Bank regulators also have authority to prohibit a bank from engaging in business practices considered to be unsafe or unsound. It is possible, depending upon the financial condition of a bank and other factors, that such regulators could assert that the payment of dividends or other payments might, under certain circumstances, be an unsafe or unsound practice, even if technically permissible.
FDIC Insurance
Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. FDIC insurance expense totaled $274,000 and $325,000 in 2013 and 2012, respectively.
All FDIC-insured institutions are also required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the DIF. These assessments will continue until the FICO bonds mature in 2017.
Capital Standards
Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
The FRB, the OCC and the FDIC have substantially similar risk-based capital ratio and leverage ratio guidelines for banking organizations. The guidelines are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the guidelines, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A depository institution’s or holding company’s capital, in turn, is classified in one of three tiers, depending on type:
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Core Capital (Tier 1)
. Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock at the holding company level, minority interests in equity accounts of consolidated subsidiaries, and qualifying trust preferred securities for certain banking organizations, less goodwill, most intangible assets and certain other assets.
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Supplementary Capital (Tier 2).
Tier 2 capital includes, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for possible loan and lease losses, subject to limitation.
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Market Risk Capital (Tier 3).
Tier 3 capital includes qualifying unsecured subordinated debt.
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The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. In 2004, the Basel Committee published a new capital accord (“Basel II”) to replace Basel I. Basel II provides two approaches for setting capital standards for credit risk – an internal ratings-based approach tailored to individual institutions’ circumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines. Basel II also sets capital requirements for operational risk and refines the existing capital requirements for market risk exposures.
In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified as “Basel III.” When implemented by the U.S. banking agencies and fully phased-in, it would require bank holding companies and their bank subsidiaries to maintain substantially more capital than currently required, with a greater emphasis on common equity. The Dodd-Frank Act also required the FRB, the OCC and the FDIC to adopt regulations imposing a continuing "floor" of the Basel I-based capital requirements in cases where the Basel II-based capital requirements and any changes in capital regulations resulting from Basel III otherwise would permit lower requirements.
On July 2, 2013, the Federal Reserve approved the final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5%. The new rules also require a capital conservation buffer of 2.5% of risk-weighted assets over each of the required capital ratios that will be phased in from 2016 to 2019 and must be met to avoid limitations the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments, excluding trust preferred securities, mortgage servicing rights and certain deferred tax assets, and including unrealized gains and losses on available for sale debt and equity securities. On July 9, 2013, the FDIC and OCC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC and OCC's rules are identical in substance to the final rules issued by the FRB.
The phase-in period for the final rules will begin for the Company and the Bank on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule. Management is currently evaluating the provisions of the final rules and their expected impact.
An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary executive bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions. While the proposed new regulatory capital requirements will likely result in generally higher regulatory capital standards for the Company, it is difficult at this time to predict when or how many of the proposed provisions will ultimately be adopted or whether broader exemptions may be provided for community banks. In addition, bank regulators may also continue their past policies of expecting banks to maintain additional capital beyond the new minimum requirements. The implementation of more stringent requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income and return on equity, restrict the ability to pay dividends and require the raising of additional capital.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits and other restrictions on its business. Significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements under the regulatory agencies’ prompt corrective action authority.
Liquidity Requirements
Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III final framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward will be required by regulation. One test, referred to as the liquidity coverage ratio ("LCR"), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity's expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other, referred to as the net stable funding ratio ("NSFR"), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. The LCR was implemented for an observation period beginning in 2011, but will not be introduced as a requirement until January 1, 2015, and the NSFR will not be introduced as a requirement until January 1, 2018.
Federal Home Loan Bank
The Bank is a member and stockholder of the capital stock of the Federal Home Loan Bank of San Francisco. Among other benefits, each Federal Home Loan Bank (“FHLB”) serves as a reserve or central bank for its members within its assigned region and makes available loans or advances to its members. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system.
Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. Each member of the FHLB of San Francisco is required to own stock in an amount equal to the greater of (i) a membership stock requirement with an initial cap of $25 million (100% of “membership asset value” as defined), or (ii) an activity based stock requirement (based on percentage of outstanding advances). At December 31, 2013, the Bank was in compliance with the FHLB’s stock ownership requirement and the investment in FHLB capital stock totaled $3.1 million.
Federal Reserve System
The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts (primarily checking and non-personal time deposits). Additionally, each member bank is required to hold stock in its regional federal reserve bank. The stock cannot be sold, traded, or pledged as collateral for loans. As specified by law, member banks receive a six percent annual dividend on their federal reserve bank stock. At December 31, 2013, the Bank was in compliance with these requirements and the investment in federal reserve bank stock totaled $1.6 million.
Securities Laws and Corporate Governance
The Company is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the SEC. As a company listed on the NASDAQ Capital Market, the Company is subject to NASDAQ listing standards for listed companies.
The Company is also subject to the Sarbanes-Oxley Act of 2002, provisions of the Dodd-Frank Act, and other federal and state laws and regulations which address, among other issues, required executive certification of financial presentations, corporate governance requirements for board audit committees and their members, and disclosure of controls and procedures and internal control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. NASDAQ has also adopted corporate governance rules, which are intended to allow shareholders and investors to more easily and efficiently monitor the performance of companies and their directors.
Item 1A. Risk Factors
The following section includes the most significant factors that may adversely affect our business and operations. This is not an exhaustive list, and additional factors could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. This discussion of risk factors may include forward-looking statements. For cautions about relying on such forward-looking statements, please refer to the section entitled “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995” at the beginning of this Report immediately prior to Item 1.
Certain regulatory actions were taken against us
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On September 11, 2013, the Board of Directors of the Bank entered into a stipulation and consent to the issuance of a consent order with the OCC consenting to the issuance of a consent order (the “Consent Order”) by the OCC, effective as of that date. The Consent Order requires the Bank to take corrective action to enhance its program and procedures for compliance with the Bank Secrecy Act and other anti-money laundering regulations.
Our failure to comply with the Consent Order may result in additional regulatory action, including civil money penalties against the Bank and its officers and directors or enforcement of the Consent Order through court proceedings, which could have a material and adverse effect on our business, results of operations, financial condition, cash flows and stock price.
Difficult market conditions have adversely affected our industry.
Declines in the housing market over the past several years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors significantly reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. A renewed deterioration of these conditions would likely exacerbate the adverse effects of these difficult market conditions on the Company and others in the banking industry. In particular, the Company may face the following risks in connection with these events:
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The Company is facing increased regulation of the banking industry. Compliance with such regulation has increased costs and could limit the Company’s ability to pursue business opportunities.
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Market developments may again affect consumer confidence levels and may cause declines in credit card usage and adverse changes in payment patterns, causing increases in delinquencies and default rates, which could impact charge-offs and provision for credit losses.
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The process the Company uses to estimate losses inherent in its credit exposure or estimate the value of certain assets requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impact the ability of our borrowers to repay their loans or affect the value of assets. During uncertain economic times, these assessments are more difficult, and can impact the reliability of the process.
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The Company’s ability to borrow from other financial institutions could be adversely affected by further disruptions in the capital markets or other events.
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Competition in the banking industry has intensified as a result of the increasing consolidation of financial services companies in connection with current market conditions.
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The Company may have difficulty managing its growth which may divert resources and limit the Company’s ability to successfully expand its operations.
The Company has grown since it began operations in March 2004. At December 31, 2013, the Company had $538.1 million in total assets, $376.3 million in net loans and $452.8 million in deposits. The Company’s future success will depend on the ability of its officers and key employees to continue to implement and improve its operational, financial and management controls, reporting systems and procedures, and manage a growing number of customer relationships. The Company’s future level of profitability will depend in part on its continued ability to grow; however, the Company may not be able to sustain its historical growth rate or even be able to grow at all, which would have a material and adverse effect on our business, financial condition, results of operations, cash flows and stock price.
If the Company cannot attract deposits, its growth may be inhibited.
The Company plans to increase the level of its assets, including its loan portfolio. The Company’s ability to increase its assets depends in large part on its ability to attract additional deposits at competitive rates. The Company intends to seek additional deposits by continuing to establish and strengthen its personal relationships with its customers and by offering deposit products that are competitive with those offered by other financial institutions in its markets. The Company cannot ensure that these efforts will be successful. The Company’s inability to attract additional deposits at competitive rates could have a material and adverse effect on its business, financial condition, results of operations, cash flows and stock price.
The Company relies heavily on its senior management team and other employees, the loss of whom could significantly harm its business.
The Company’s success depends heavily on the abilities and continued service of its executive officers, especially Alan I. Rothenberg, Chairman and Chief Executive Officer, Jason P. DiNapoli, President and Chief Operating Officer, Bradley S. Satenberg, Executive Vice President and Chief Financial Officer and J. Kevin Sampson, Executive Vice President and Chief Credit Officer. These four individuals are integral to implementing the Company’s business plan. If the Company loses the services of any of these executive officers, the Company’s business, financial condition, results of operations, cash flows and stock price may be materially and adversely affected. Furthermore, attracting suitable replacements may be difficult and may require significant management time and resources.
The Company also relies to a significant degree on the abilities and continued service of our deposit generating, lending, administrative, operational, accounting and financial reporting, marketing and technical personnel. Competition for qualified employees in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California independent banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out the Company’s strategies is often lengthy. If the Company fails to attract and retain the necessary deposit generating, lending, administrative, operational, accounting and financial reporting, marketing and technical personnel, the Company’s business, financial condition, results of operations, cash flows and stock price may be materially and adversely affected.
If the Company’s underwriting practices are not effective, the Company may suffer losses in its loan portfolio and its results of operations may be affected.
The Company seeks to mitigate the risks inherent in its loan portfolio by adhering to specific underwriting practices. Depending on the type of loan, these practices include analysis of a borrower’s prior credit history, financial statements, tax returns and cash flow projections, valuation of collateral based on reports of independent appraisers and verification of liquid assets. If the Company’s underwriting criteria prove to be ineffective, the Company may incur losses in its loan portfolio, which could have a material and adverse effect on our business, financial condition, results of operations, cash flows and stock price.
A significant source of risk arises from the possibility that losses could be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. The underwriting and credit monitoring policies and procedures that the Company has adopted to address this risk may not prevent unexpected losses that could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price, particularly during the slow recovery from the recent global economic downturn. Unexpected losses may arise for a wide variety of reasons, many of which are beyond the Company’s ability to predict, influence or control. Some of these reasons could include a continued slow recovery from the prolonged economic downturn in the State of California or the United States, a renewed decline in the state or national real estate market, wars and acts of terrorism, and natural disasters.
If the Company’s allowance for loan losses is inadequate to cover actual losses, the Company’s financial results would be affected.
Like all financial institutions, the Company maintains an allowance for loan losses to provide for loan defaults and non-performance. The Company’s allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect the Company’s business, financial condition, results of operations, cash flows and stock price. The Company’s allowance for loan losses reflects the Company’s best estimate of the losses inherent in the existing loan portfolio at the relevant balance sheet date and is based on management’s evaluation of the collectability of the loan portfolio, which evaluation is based on historical loss experience, the loss experience of other financial institutions, and other significant factors. The determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond the Company’s control, and these losses may exceed current estimates. While the Company believes that its allowance for loan losses is adequate to cover current losses, the Company cannot assure that it will not increase the allowance for loan losses further or that the allowance for loan losses will be adequate to cover current losses in any event. Future provisions for loan losses or losses in excess of the allowance for loan losses could materially and adversely affect the Company’s business, financial condition, results of operations, cash flows and stock price.
See discussion of the Company’s nonperforming assets and allowance for loan losses in Part II, Item 7. “
Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition
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Bank regulators may require the Company to increase its allowance for loan losses, which could have a negative effect on the Company’s financial condition and results of operations.
Bank regulators, as an integral part of their respective supervisory functions, periodically review the Company’s allowance for loan losses. They may require the Company to increase its provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s. Any increase in the allowance for loan losses or further loan charge-offs required by bank regulators could have a material and adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
The Company’s lending limit may adversely affect the Company’s competitiveness.
The Company’s regulatory lending limit as of December 31, 2013 to any one customer or related group of customers was approximately $8.8 million. The Company’s lending limit is substantially smaller than those of most financial institutions with which it competes and it may affect the Company’s ability to attract or maintain customers or to compete with other financial institutions. Moreover, to the extent that the Company incurs losses and does not obtain additional capital, the Company’s lending limit, which depends upon the amount of its capital, will decrease, which could have a material and adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
The Company faces strong competition from financial services companies and other companies that offer banking services, and its failure to compete effectively with these companies could have a material adverse affect on the Company’s business, financial condition, results of operations, cash flows and stock price.
Within the Los Angeles metropolitan area, the Company faces intense competition for loans, deposits, and other financial products and services. Increased competition within the Company’s pricing market may result in reduced loan originations and deposits. Ultimately, the Company may not be able to compete successfully against current and future competitors. Many competitors offer the types of loans and banking services that the Company offers. These competitors include national banks, regional banks and other independent banks. The Company also faces competition from many other types of financial institutions, including finance companies, brokerage firms, insurance companies, mortgage banks and other financial intermediaries. In particular, the Company’s competitors include financial institutions whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may have larger lending limits which would allow them to serve the credit needs of larger customers. These institutions, particularly to the extent they are more diversified than the Company, may be able to offer the same loan products and services the Company offers at more competitive rates and prices.
The Company also faces competition from out-of-state financial intermediaries that have opened loan production offices or that solicit deposits in the Company’s market areas. If the Company is unable to attract and retain banking customers, it may be unable to continue its loan growth and level of deposits, and its business, financial condition, results of operations, cash flows and stock price may be materially adversely affected.
The Company relies on communications, information, operating and financial control systems technology from third-party service providers, and the Company may suffer an interruption in or break of those systems that may result in lost business and the Company may not be able to obtain substitute providers on terms that are as favorable if its relationships with its existing service providers are interrupted.
The Company relies heavily on third-party service providers for much of its communications, information, operating and financial control systems technology, including customer relationship management, general ledger, deposit, and servicing and loan origination systems. Any failure or interruption or breach in security of these systems could result in failures or interruptions in the Company’s customer relationship management, general ledger, deposit, and servicing and/or loan origination systems. The Company cannot assure that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by it or the third parties on which the Company relies. The occurrence of any failures or interruptions could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price. If any of the Company’s third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in the Company’s relationships with them, the Company may be required to locate alternative sources of such services, and the Company cannot assure that it could negotiate terms that are as favorable to the Company, or could obtain services with similar functionality as found in its existing systems without the need to expend substantial resources, if at all. Any of these circumstances could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
The Company may experience certain risks in connection with its online banking services that could adversely affect its business.
The Company’s business depends in part upon the use of the internet and online services as a medium for banking and commerce by customers. The Company’s inability to modify or adapt its infrastructure in a timely manner or the expenses incurred in making such adaptations could have a material and adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price. Additionally, any compromise in the secured transmission of confidential information over public networks could have a material and adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
Changes in economic conditions, and in particular the State of California and the United States, could have a material and adverse effect on the Company’s business.
The Company’s business is directly affected by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in governmental monetary and fiscal policies and inflation, all of which are beyond the Company’s control. The Company is particularly susceptible to conditions and changes affecting the State of California and Southern California in particular in view of the concentration of its operations and collateral securing, and likely to secure its loan portfolio in Southern California. The deterioration in economic conditions, in California and Southern California in particular, may have the following consequences, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price:
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Renewed increases in problem assets and foreclosures.
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Renewed increases in loan delinquencies.
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Further decline in demand for loans and other products and services may continue.
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Collateral for loans made by the Company, especially real estate, have declined and may experience further declines in value, in turn reducing customers’ borrowing power or capacity to repay, and reducing the value of assets and collateral associated with the Company’s existing loans.
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In addition, because the Company makes loans to small to medium-sized businesses, many of the Company’s customers may be particularly susceptible to the slow recovery from the recent recession and may be unable to make scheduled principal or interest payments during this and similar periods of recession.
The Company is subject to extensive government regulation and supervision
The Company is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors' funds, the DIF, and the banking system as a whole, not stockholders. These regulations affect the Company's lending practices, capital structure, investment practices and growth. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Other changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company's business, financial condition, results of operations, cash flows and stock price.
Many of the Company’s loans are secured by real estate, and an additional downturn in the real estate market could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
A renewed downturn in the real estate market may have an adverse effect on the Company’s business because many of the Company’s loans are secured by real estate. At December 31, 2013, approximately 86.9% of the Company’s total loans were secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other laws, regulations and policies and war and acts of terrorism. In addition, real estate values in California could be affected by, among other things, earthquakes and national disasters particular to the state. When real estate prices decline, the value of real estate collateral securing the Company’s loans is reduced. As a result, the Company may experience greater charge-offs and, similarly, its ability to recover on defaulted loans by foreclosing and selling the real estate collateral may be diminished and as a result the Company is more likely to suffer losses on defaulted loans, which would have a material and adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
Our real estate lending also exposes us to the risk of environmental liabilities.
In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, results of operations, cash flows and stock price could be materially and adversely affected. In addition, we may not have adequate remedies against the prior owner or other responsible parties or could find it difficult or impossible to sell the affected properties, which could also materially adversely affect our business, financial condition, results of operations, cash flows and stock price.
A natural disaster or recurring energy shortage, especially in California, could harm the Company’s business.
Historically, Southern California has been vulnerable to natural disasters. Therefore, the Company is susceptible to the risks of natural disasters, such as earthquakes, droughts, wildfires, floods and mudslides. Natural disasters could harm the Company’s operations directly through interference with communications, as well as through the destruction of facilities and its operational, financial and management information systems. Uninsured or underinsured disasters may reduce a borrower’s ability to repay mortgage loans. Disasters may also reduce the value of the real estate securing the Company’s loans, impairing its ability to recover on defaulted loans. Southern California has also experienced energy shortages which, if they recur, could impair the value of the real estate in those areas affected. The occurrence of natural disasters or energy shortages in Southern California could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and stock price.
The Company’s operations are concentrated in the Los Angeles metropolitan area
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The Company’s loan and deposit activities are largely based in the Los Angeles metropolitan area. As a result, the Company’s financial performance will depend largely upon economic conditions in this area. Adverse local economic conditions have caused and may continue to cause the Company to experience an increase in loan delinquencies, an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, all of which could materially and adversely affect the Company’s business, financial condition, results of operations, cash flows and stock price.
The Company is subject to interest rate risk.
The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, (ii) the fair value of the Company’s financial assets and liabilities, and (iii) the average duration of the Company’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s business, financial condition and results of operations.
See discussion of the Company’s net interest income in Part II, Item 7. “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
– Results of Operations.”
The Company may be materially and adversely affected by the soundness of other financial institutions.
Financial institutions are inter-related as a result of trading, clearing, counterparty and other relationships. In the normal course of business, the Company executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers and correspondent banks. These transactions expose the Company to credit risk in the event of a default by counterparty. On a quarterly basis, the Company reviews the counterparties’ financial information, such as SEC filings, Call Reports and press releases, as well as any announcements made by appropriate industry regulators and government agencies, to monitor the counterparties’ financial stability and/or any regulatory disciplinary actions imposed on such counterparties. At December 31, 2013, the Company did not have any unsecured federal funds sold with any correspondent banks. However, no assurance can be given that the Company will not be materially and adversely affected as a result of a negative occurrence, such as a default, at one of the financial institutions with which the Company transacts business.
The Company is subject to liquidity risk.
The Company requires liquidity to meet its deposit and debt obligations as they come due. The Company’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or economy generally. Factors that could reduce its access to liquidity sources include a downturn in the California market, difficult credit markets or adverse regulatory actions against the Company. The Company’s access to deposits may also be affected by the liquidity needs of its depositors. In particular, a substantial majority of the Company’s liabilities are demand, savings, interest checking and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. The Company may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company may need to raise additional capital in the future, and such capital may not be available when needed or at all.
The Company may need to raise additional capital in the future to meet pending proposed changes in the minimum capital requirements for banks or to provide it with sufficient capital resources and liquidity to meet its commitments and business needs, particularly if its asset quality or earnings were to deteriorate. The Company’s ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of its control, and its financial performance. Economic conditions and the loss of confidence in financial institutions may increase the Company’s cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the FHLB.
The Company cannot assure that such capital will be available on acceptable terms or at all. Any occurrence that may limit the Company’s access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of the Bank or counterparties participating in the capital markets may adversely affect the Company’s capital costs and its ability to raise capital and, in turn, its liquidity. Moreover, if the Company needs to raise capital in the future, it may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on the Company’s businesses, financial condition, results of operations, cash flows and stock price.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The main and executive offices of Bancshares and the Bank are located at 1875 Century Park East, Los Angeles, California 90067 on the 1
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and 14
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floors of a multi-story commercial office building. The Bank has a branch office and a Private Banking Center at this same location. The Company’s main office consists of approximately 3,158 square feet of usable ground floor space for the branch office and administrative offices, 16,747 square feet of usable space for the administrative offices on the 14th floor of the building, as well as 2,746 square feet of usable ground floor space for the Bank’s Private Banking Center. The lease term for this space expires in June 2024. The total future minimum commitments for the leases at 1875 Century Park East at December 31, 2013 was $7.7 million.
In addition, the Bank opened a relationship office during 2011, which is located at 1148 4
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Street, Santa Monica, California 90403. This office is approximately 1,957 square feet of usable space with a lease expiring in December 2018. The total future minimum commitments for this lease at December 31, 2013 was $499,000.
Item 3. Legal Proceedings
At present, there are no pending or threatened proceedings against the Company which, if determined adversely, would have a material effect on the Company’s business, financial position, results of operations, cash flows or stock price. In the ordinary course of operations, the Company may be party to various routine legal proceedings incidental to the business.
Item 4. Mine Safety Disclosures
Not applicable.
Notes To 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 consolidated financial statements include the accounts of Bancshares and the Bank. All inter-company accounts and transactions have been eliminated in consolidation.
Certain items in the 2012 consolidated financial statements have been reclassified to conform to the 2013 presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
The Company’s accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices within the banking industry. A summary of the significant accounting and reporting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Use of Estimates
Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant assumptions and estimates used by management in preparation of the consolidated financial statements include assumptions and assessments made in connection with calculating the allowance for loan losses and determining the realizability of the Company’s deferred tax assets. It is at least reasonably possible that certain assumptions and estimates could prove to be incorrect and cause actual results to differ materially and adversely from the amounts reported in the consolidated financial statements included herewith.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest earning deposits at other financial institutions with original maturities less than 90 days and all highly liquid investments with original maturities of less than 90 days.
Cash Flows
Cash and cash equivalents include cash, deposits with other financial institutions with maturities fewer than 90 days, and federal funds sold. Net cash flows are reported for loan and deposit transactions, interest bearing deposits in other financial institutions and short-term borrowings.
Investment Securities
Investment
securities are classified in three categories. Debt securities that management has a positive intent and ability to hold to maturity are classified as “Held to Maturity” or “HTM” and are recorded at amortized cost. Debt and equity securities bought and held principally for the purpose of selling in the near term are classified as “Trading” securities and are measured at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as “Held to Maturity” or “Trading” with readily determinable fair values are classified as “Available for Sale” or “AFS” and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The Company uses estimates from third parties in arriving at fair value determinations which are derived in accordance with fair value measurement standards.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of investment securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income provided that management does not have the intent to sell the securities and it is more likely than not that management will not have to sell the security before recovery of its cost basis. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Federal Reserve Bank Stock and Federal Home Loan Bank Stock
The Bank is a member of the Federal Reserve System (“Fed” or “FRB”). FRB stock is carried at cost and is considered a nonmarketable equity security. Cash dividends from the FRB are reported as interest income on an accrual basis.
The Bank is a member and stockholder of the capital stock of the Federal Home Loan Bank of San Francisco (“FHLB of San Francisco” or “FHLB”). Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB of San Francisco stock is carried at cost and is considered a nonmarketable equity security. Both cash and stock dividends are reported as interest income.
Loans
Loans, net, are stated at the unpaid principal balances less the allowance for loan losses and unamortized deferred fees and costs. Loan origination fees, net of related direct costs, are deferred and accreted to interest income as an adjustment to yield over the respective maturities of the loans using the effective interest method.
Interest on loans is accrued as earned on a daily basis, except where reasonable doubt exists as to the collection of interest and principal, in which case the accrual of interest is discontinued and the loan is placed on non-accrual status. Loans are placed on non-accrual at the time principal or interest is 90 days delinquent unless well secured and in the process of collection. Interest on non-accrual loans is accounted for on a cash-basis or cost-recovery method, until qualifying for return to accrual status. In order for a loan to return to accrual status, all principal and interest amounts owed must be brought current and future payments must be reasonably assured.
A loan is charged-off at any time the loan is determined to be uncollectible. Collateral dependent loans, which generally include commercial real estate loans, residential loans, and construction and land loans, are typically charged down to their fair value of collateral less selling costs when a loan is impaired or on non-accrual status. All other loans are typically charged-off when, based upon current available facts and circumstances, it’s determined that either: (1) a loan is uncollectible, (2) repayment is determined to be protracted beyond a reasonable time frame, or (3) the loan is classified as a loss determined by either the Bank’s internal review process or by external examiners.
Loans are considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect all principal and interest amounts due according to the original contractual terms of the loan agreement on a timely basis. The Company evaluates impairment on a loan-by-loan basis. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or by using the loan’s most recent market value or the fair value of the collateral if the loan is collateral dependent. Loans that experience insignificant payment delays or payment shortfalls are generally not considered to be impaired.
When the measurement of an impaired loan is less than the recorded amount of the loan, a valuation allowance is established by recording a charge to the provision for loan losses. Subsequent increases or decreases in the valuation allowance for impaired loans are recorded by adjusting the existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses. The Company’s policy for recognizing interest income on impaired loans is the same as that for non-accrual loans.
Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a troubled debt restructuring (“TDR”). Management strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before their loan reaches nonaccrual status. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Effective July 1, 2011, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2012-02,
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 and a half year time period. These loss ratios are then adjusted, if determined necessary, based on other factors including, but not limited to, historical peer group loan loss data and the loss experience of other financial institutions. Management carefully monitors changing economic conditions, the concentrations of loan categories, values of collateral, the financial condition of the borrowers, the history of the loan portfolio, and historical peer group loan loss data to determine the adequacy of the allowance for loan losses. As a part of this process, management typically focuses on loan-to-value (“LTV”) percentages to assess the adequacy of loss ratios of collateral dependent loans within each portfolio segment discussed above, trends within each portfolio segment, as well as general economic and real estate market conditions where the collateral and borrower are located. For loans that are not collateral dependent, which generally consist of commercial and consumer and other loans, management typically focuses on general business conditions where the borrower operates, trends within the portfolio, and other external factors to evaluate the severity of loss factors. The allowance is based on estimates and actual losses may vary from the estimates.
In addition, regulatory agencies, as a part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations. No assurance can be given that adverse future economic conditions will not lead to increased delinquent loans, and increases in the provision for loan losses and/or charge-offs. Management believes that the allowance as of December 31, 2013 and 2012 was adequate to absorb probable incurred credit losses inherent in the loan portfolio.
Other Real Estate Owned
OREO represents real estate acquired through or in lieu of foreclosure. OREO is held for sale and is initially recorded at fair value less estimated costs of disposition at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or estimated fair value less costs of disposition. OREO is included in accrued interest and other assets within the Consolidated Balance Sheets and the net operating results, if any, from OREO are recognized as non-interest expense within the Consolidated Statements of Operations and Comprehensive Income.
Furniture, Fixtures and Equipment, net
Leasehold improvements and furniture, fixtures and equipment are carried at cost, less depreciation and amortization. Furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful life of the asset (three to ten years). Leasehold improvements are depreciated using the straight-line method over the terms of the related leases or the estimated lives of the improvements, whichever is shorter.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
The Company files consolidated federal and combined state income tax returns. Income tax expense or benefit is the total of the current year income tax payable or refundable and the change in the deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates.
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in the rates and laws. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Company records a valuation allowance if it believes, based on all available evidence, that it is “more likely than not” that the future tax assets will not be realized. This assessment requires management to evaluate the Company’s ability to generate sufficient future taxable income or use eligible tax carrybacks, if any, to determine the need for a valuation allowance.
During the year ended December 31, 2009, management established a full valuation allowance against the Company’s deferred tax assets after we determined that it was “more likely than not” that the Company would not be able to realize the benefit of the deferred tax asset. During the year ended December 31, 2013, management reassessed the need for this valuation allowance and concluded that a valuation allowance was no longer appropriate and that it is more likely than not that these assets will be realized. As a result, management reversed the valuation allowance as an income tax benefit in the Consolidated Statements of Operations and Comprehensive Income. In making this determination, management analyzed, among other things, the Company’s recent history of earnings and cash flows, forecasts of future earnings, improvements in the credit quality of the Company’s loan portfolio, the nature and timing of future deductions and benefits represented by the deferred tax assets and our cumulative earnings for the 12 quarters preceding the reversal of this valuation allowance.
At December 31, 2013, the Company had a net deferred tax asset of approximately $3.1 million, compared to net deferred tax liability for net unrealized gains on investment securities of $1.7 million at December 31, 2012. The net deferred tax asset at December 31, 2013, primarily consists of deferred tax assets related to federal and state net operating loss carryforwards and the allowance for loan losses.
At December 31, 2013 and 2012, the Company did not have any tax benefits disallowed under accounting standards for uncertainties in income taxes. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. If applicable, the Company has elected to record interest accrued and penalties related to unrecognized tax benefits in tax expense.
See Note 16 “
Income Taxes
” for further discussion regarding the Company’s tax positions at December 31, 2013 and 2012.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on Available for Sale securities, are reported as a separate component of the stockholders’ equity section of the Consolidated Balance Sheets and, along with net income, are components of comprehensive income.
Earnings per Share
The Company reports both basic and diluted earnings per share. Basic earnings per share is determined by dividing net income by the average number of shares of common stock outstanding, while diluted earnings per share is determined by dividing net income by the average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents. Potential dilutive common shares related to outstanding stock options and restricted stock are determined using the treasury stock method. For the years ended December 31, 2013 and 2012, there were 370,073 and 1,179,373, respectively, of stock options that were excluded from the diluted earnings per share calculation due to their antidilutive impact. For the years ended December 31, 2013 and 2012, there were 91,660 and 164,152
, respectively, of weighted average restricted shares that were excluded from the diluted earnings per share calculation due to their antidilutive impact.
|
|
|
Years ended December 31,
|
|
|
(dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
Net income
|
|
$
|
6,863
|
|
|
$
|
2,942
|
|
|
Average number of common shares outstanding
|
|
|
8,660,641
|
|
|
|
8,520,420
|
|
|
Effect of dilution of stock options
|
|
|
161,046
|
|
|
|
—
|
|
|
Effect of dilution of restricted stock
|
|
|
257,955
|
|
|
|
265,144
|
|
|
Average number of common shares outstanding used to calculate diluted earnings per common share
|
|
|
9,079,642
|
|
|
|
8,785,564
|
|
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 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 was effective for annual and interim periods beginning on January 1, 2013. The adoption of this ASU did not have a significant impact on the Company’s financial position, results of operations, or cash flows.
In February 2013, the FASB issued ASU 2013-02,
Comprehensive Income
(“Topic 220”) –
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
(“ASU 13-02”). This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. ASU 13-02 was effective prospectively for annual and interim periods beginning after December 15, 2012. T
he adoption of this ASU did not have a material impact on the Company’s financial position, results of operations, or cash flows.
In December 2013, the FASB issued ASU 2013-12,
Definition of a Public Business Entity - An Addition to the Master Glossary
(“ASU 2013-12”). This ASU amends the Master Glossary of the FASB Accounting Standards Codification to include one definition of public business entity for future use in U.S. GAAP and identifies the types of business entities that are excluded from the scope of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies. ASU 2013-12 did not have a significant impact on the Company’s financial position, results of operations, or cash flows.
(2)
Investment Securities
The following is a summary of the investments categorized as Available for Sale at December 31, 2013 and 2012:
|
(in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
At December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments — Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Notes
|
|
|
3,074
|
|
|
|
34
|
|
|
|
—
|
|
|
|
3,108
|
|
|
Residential Mortgage-Backed Securities
|
|
|
103,109
|
|
|
|
959
|
|
|
|
(904
|
)
|
|
|
103,164
|
|
|
Total
|
|
$
|
106,183
|
|
|
$
|
993
|
|
|
$
|
(904
|
)
|
|
$
|
106,272
|
|
|
At December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments — Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Gov’t Treasuries
|
|
$
|
2,136
|
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
2,207
|
|
|
Corporate Notes
|
|
|
34,534
|
|
|
|
741
|
|
|
|
—
|
|
|
|
35,275
|
|
|
Residential Mortgage-Backed Securities
|
|
|
140,416
|
|
|
|
3,345
|
|
|
|
(18
|
)
|
|
|
143,743
|
|
|
Total
|
|
$
|
177,086
|
|
|
$
|
4,157
|
|
|
$
|
(18
|
)
|
|
$
|
181,225
|
|
The Company did not have any investment securities categorized as “Held to Maturity” or “Trading” at December 31, 2013 or 2012. At December 31, 2013 and 2012, there were no holdings of securities of any one issuer other than the U.S. government or its agencies, in an amount greater than 10% of shareholders’ equity.
Additionally, at December 31, 2013 and 2012, the carrying amount of securities pledged to the State of California Treasurer’s Office to secure their deposits was $45.4 million and $47.7 million, respectively. Deposits from the State of California were $38.0 million and $34.0 million at December 31, 2013 and 2012, respectively.
The following table summarizes the fair value of AFS securities and the weighted average yield of investment securities by contractual maturity at December 31, 2013. 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 3.78 years at December 31, 2013.
(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
|
|
|
Corporate Notes
|
|
$
|
502
|
|
|
|
1.12
|
%
|
|
$
|
2,606
|
|
|
|
1.35
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
3,108
|
|
|
|
1.31
|
%
|
|
Residential Mortgage-
Backed Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
54,317
|
|
|
|
1.84
|
|
|
|
48,847
|
|
|
|
2.42
|
|
|
|
103,164
|
|
|
|
2.12
|
|
|
Total
|
|
$
|
502
|
|
|
|
1.12
|
%
|
|
$
|
2,606
|
|
|
|
1.35
|
%
|
|
$
|
54,317
|
|
|
|
1.84
|
%
|
|
$
|
48,847
|
|
|
|
2.42
|
%
|
|
$
|
106,272
|
|
|
|
2.09
|
%
|
A total of 36 and four securities had unrealized losses at December 31, 2013 and 2012, respectively. Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
|
|
|
Less than Twelve Months
|
|
|
Twelve Months or More
|
|
|
(in thousands)
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
At December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage-Backed Securities
|
|
$
|
(904
|
)
|
|
$
|
51,847
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
At December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage-Backed Securities
|
|
$
|
(18
|
)
|
|
$
|
7,584
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company’s assessment that it has the ability to continue to hold impaired investment securities along with its evaluation of their future performance provide the basis for it to conclude that its impaired securities are not other-than-temporarily impaired. In assessing whether it is more likely than not that the Company will be required to sell any impaired security before its anticipated recovery, which may be at their maturity, it considers the significance of each investment, the amount of impairment, as well as the Company’s liquidity position and the impact on the Company’s capital position. As a result of its analyses, the Company determined at December 31, 2013 and 2012 that the unrealized losses on its securities portfolio on which impairments had not been recognized are temporary.
(3) Loans, Allowance for Loan Losses, and Non-Performing Assets
Loans
As of December 31, 2013 and 2012, total loans outstanding totaled $383.5 million and $266.7 million, respectively. The categories of loans listed below are grouped in accordance with the primary purpose of the loans, but in the aggregate 86.9% and 84.5% of all loans are secured by real estate at December 31, 2013 and 2012, respectively.
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
(dollars in thousands)
|
|
Amount
Outstanding
|
|
|
Percent
of Total
|
|
|
Amount
Outstanding
|
|
|
Percent
of Total
|
|
|
Commercial (1)
|
|
$
|
76,397
|
|
|
|
19.9
|
%
|
|
$
|
58,769
|
|
|
|
22.0
|
%
|
|
Commercial real estate
|
|
|
167,419
|
|
|
|
43.7
|
%
|
|
|
110,031
|
|
|
|
41.3
|
%
|
|
Residential
|
|
|
82,795
|
|
|
|
21.6
|
%
|
|
|
53,162
|
|
|
|
19.9
|
%
|
|
Land and construction
|
|
|
30,102
|
|
|
|
7.8
|
%
|
|
|
19,080
|
|
|
|
7.2
|
%
|
|
Consumer and other (2)
|
|
|
26,787
|
|
|
|
7.0
|
%
|
|
|
25,584
|
|
|
|
9.6
|
%
|
|
Loans, gross
|
|
|
383,500
|
|
|
|
100.0
|
%
|
|
|
266,626
|
|
|
|
100.0
|
%
|
|
Net deferred costs
|
|
|
48
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
Less — allowance for loan losses
|
|
|
(7,236
|
)
|
|
|
|
|
|
|
(6,015
|
)
|
|
|
|
|
|
Loans, net
|
|
$
|
376,312
|
|
|
|
|
|
|
$
|
260,656
|
|
|
|
|
|
|
|
(1)
|
Unsecured commercial loan balances were $13.2 million and $10.0 million at December 31, 2013 and 2012, respectively.
|
|
|
(2)
|
Unsecured consumer and other loan balances were $2.3 million and $901,000 at December 31, 2013 and 2012, respectively.
|
As of December 31, 2013 and 2012, substantially all of the Company’s loan customers were located in Southern California.
Allowance for Loan Losses and Recorded Investment in Loans
The following is a summary of activities for the allowance for loan losses and recorded investment in loans as of December 31, 2013 and 2012, respectively:
|
(in thousands)
|
|
Commercial
|
|
|
Commercial
Real
Estate
|
|
|
Residential
|
|
|
Land and
Construction
|
|
|
Consumer
and Other
|
|
|
Total
|
|
|
For the Year Ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,277
|
|
|
$
|
2,450
|
|
|
$
|
508
|
|
|
$
|
411
|
|
|
$
|
369
|
|
|
$
|
6,015
|
|
|
Provision for loan losses
|
|
|
(1,765
|
)
|
|
|
1,210
|
|
|
|
250
|
|
|
|
400
|
|
|
|
5
|
|
|
|
100
|
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Recoveries
|
|
|
1,071
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
1,121
|
|
|
Ending balance
|
|
$
|
1,583
|
|
|
$
|
3,660
|
|
|
$
|
758
|
|
|
$
|
811
|
|
|
$
|
424
|
|
|
$
|
7,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35
|
|
|
Ending balance: collectively evaluated for impairment
|
|
|
1,548
|
|
|
|
3,660
|
|
|
|
758
|
|
|
|
811
|
|
|
|
424
|
|
|
|
7,201
|
|
|
Total
|
|
$
|
1,583
|
|
|
$
|
3,660
|
|
|
$
|
758
|
|
|
$
|
811
|
|
|
$
|
424
|
|
|
$
|
7,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
924
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
953
|
|
|
Ending balance: collectively evaluated for impairment
|
|
|
75,473
|
|
|
|
167,419
|
|
|
|
82,795
|
|
|
|
30,102
|
|
|
|
26,758
|
|
|
|
382,547
|
|
|
Total
|
|
$
|
76,397
|
|
|
$
|
167,419
|
|
|
$
|
82,795
|
|
|
$
|
30,102
|
|
|
$
|
26,787
|
|
|
$
|
383,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,584
|
|
|
$
|
1,252
|
|
|
$
|
583
|
|
|
$
|
516
|
|
|
$
|
349
|
|
|
$
|
5,284
|
|
|
Provision for loan losses
|
|
|
(305
|
)
|
|
|
485
|
|
|
|
(75
|
)
|
|
|
(100
|
)
|
|
|
(5
|
)
|
|
|
—
|
|
|
Charge-offs
|
|
|
(26
|
)
|
|
|
(400
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
(431
|
)
|
|
Recoveries
|
|
|
24
|
|
|
|
1,113
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
|
|
1,162
|
|
|
Ending balance
|
|
$
|
2,277
|
|
|
$
|
2,450
|
|
|
$
|
508
|
|
|
$
|
411
|
|
|
$
|
369
|
|
|
$
|
6,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
Ending balance: collectively evaluated for impairment
|
|
|
1,777
|
|
|
|
2,450
|
|
|
|
508
|
|
|
|
411
|
|
|
|
369
|
|
|
|
5,515
|
|
|
Total
|
|
$
|
2,277
|
|
|
$
|
2,450
|
|
|
$
|
508
|
|
|
$
|
411
|
|
|
$
|
369
|
|
|
$
|
6,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
1,799
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
345
|
|
|
$
|
2,144
|
|
|
Ending balance: collectively evaluated for impairment
|
|
|
56,970
|
|
|
|
110,031
|
|
|
|
53,162
|
|
|
|
19,080
|
|
|
|
25,239
|
|
|
|
264,482
|
|
|
Total
|
|
$
|
58,769
|
|
|
$
|
110,031
|
|
|
$
|
53,162
|
|
|
$
|
19,080
|
|
|
$
|
25,584
|
|
|
$
|
266,626
|
|
There were no loans acquired with deteriorated credit quality as of December 31, 2013 and 2012.
In addition to the allowance for loan losses, the Company also estimates probable losses related to unfunded lending commitments. Unfunded lending commitments are subject to individual reviews and are analyzed and segregated by product type. These classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments. Provision for credit losses related to unfunded lending commitments is reported in other operating expenses in the Consolidated Statements of Operations and Comprehensive Income. The allowance held for unfunded lending commitments is reported in accrued interest and other liabilities within the accompanying Consolidated Balance Sheets, and not as part of the allowance for loan losses in the above tables. As of December 31, 2013 and 2012, the allowance for unfunded lending commitments was $270,000 and $203,000, respectively and is primarily related to $104.3 million and $74.2 million in commitments to extend credit to customers and $2.6 million and $1.9 million in standby/commercial letters of credit at December 31, 2013 and 2012, respectively.
Non-Performing Assets
The following table presents an aging analysis of the recorded investment of past due loans as of December 31, 2013 and 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 years ended December 31, 2013 and 2012 were $198,000 and none, respectively. Non-performing loans represented 0.2% and 0.7% of total loans at December 31, 2013 and 2012, respectively. There were no accruing loans past due 90 days or more at December 31, 2013.
At December 31, 2012, there was one accruing residential loan totaling $2.3 million that was past due 90 days or more. This loan continued to accrue interest because it was well secured and in the process of collection.
|
(in thousands)
|
|
30-59
Days Past
Due
|
|
|
60-89
Days Past
Due
|
|
|
> 90 Days
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
|
|
|
As of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
187
|
|
|
$
|
—
|
|
|
$
|
706
|
|
|
$
|
893
|
|
|
$
|
75,504
|
|
|
$
|
76,397
|
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
167,419
|
|
|
|
167,419
|
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82,795
|
|
|
|
82,795
|
|
|
Land and construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,102
|
|
|
|
30,102
|
|
|
Consumer and other
|
|
|
—
|
|
|
|
—
|
|
|
|
29
|
|
|
|
29
|
|
|
|
26,758
|
|
|
|
26,787
|
|
|
Totals
|
|
$
|
187
|
|
|
$
|
—
|
|
|
$
|
735
|
|
|
$
|
922
|
|
|
$
|
382,578
|
|
|
$
|
383,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
599
|
|
|
$
|
577
|
|
|
$
|
812
|
|
|
$
|
1,988
|
|
|
$
|
56,781
|
|
|
$
|
58,769
|
|
|
Commercial real estate
|
|
|
4,828
|
|
|
|
—
|
|
|
|
2,300
|
|
|
|
7,128
|
|
|
|
102,903
|
|
|
|
110,031
|
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53,162
|
|
|
|
53,162
|
|
|
Land and construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,080
|
|
|
|
19,080
|
|
|
Consumer and other
|
|
|
—
|
|
|
|
—
|
|
|
|
345
|
|
|
|
345
|
|
|
|
25,239
|
|
|
|
25,584
|
|
|
Totals
|
|
$
|
5,427
|
|
|
$
|
577
|
|
|
$
|
3,457
|
|
|
$
|
9,461
|
|
|
$
|
257,165
|
|
|
$
|
266,626
|
|
The following table sets forth non-accrual loans and other real estate owned at December 31, 2013 and 2012:
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
706
|
|
|
$
|
1,509
|
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
Land and construction
|
|
|
—
|
|
|
|
—
|
|
|
Consumer and other
|
|
|
29
|
|
|
|
345
|
|
|
Total non-accrual loans
|
|
|
735
|
|
|
|
1,854
|
|
|
OREO
|
|
|
90
|
|
|
|
90
|
|
|
Total non-performing assets
|
|
$
|
825
|
|
|
$
|
1,944
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to gross loans and OREO
|
|
|
0.22
|
%
|
|
|
0.73
|
%
|
|
Non-performing assets to total assets
|
|
|
0.15
|
%
|
|
|
0.39
|
%
|
Credit Quality Indicators
The following table represents the credit exposure by internally assigned grades at December 31, 2013 and 2012. This grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements in accordance with the loan terms. The Company’s internal credit risk grading system is based on management’s experiences with similarly graded loans. Credit risk grades are reassessed each quarter based on any recent developments potentially impacting the creditworthiness of the borrower, as well as other external statistics and factors, which may affect the risk characteristics of the respective loan.
The Company’s internally assigned grades are as follows:
Pass
– Strong credit with no existing or known potential weaknesses deserving of management’s close attention.
Special Mention
– Potential weaknesses that deserve management’s close attention. Borrower and guarantor’s capacity to meet all financial obligations is marginally adequate or deteriorating.
Substandard
– Inadequately protected by the paying capacity of the Borrower and/or collateral pledged. The borrower or guarantor is unwilling or unable to meet loan terms or loan covenants for the foreseeable future.
Doubtful
– All the weakness inherent in one classified as Substandard with the added characteristic that those weaknesses in place make the collection or liquidation in full, on the basis of current conditions, highly questionable and improbable.
Loss
– Considered uncollectible or no longer a bankable asset. This classification does not mean that the asset has absolutely no recoverable value. In fact, a certain salvage value is inherent in these loans. Nevertheless, it is not practical or desirable to defer writing off a portion or whole of a perceived asset even though partial recovery may be collected in the future.
|
(in thousands)
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
|
|
|
Land and
Construction
|
|
|
Consumer
and Other
|
|
|
As of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
73,824
|
|
|
$
|
166,828
|
|
|
$
|
82,795
|
|
|
$
|
26,801
|
|
|
$
|
26,503
|
|
|
Special Mention
|
|
|
1,149
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,301
|
|
|
|
206
|
|
|
Substandard
|
|
|
1,424
|
|
|
|
591
|
|
|
|
—
|
|
|
|
—
|
|
|
|
78
|
|
|
Total
|
|
$
|
76,397
|
|
|
$
|
167,419
|
|
|
$
|
82,795
|
|
|
$
|
30,102
|
|
|
$
|
26,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
49,717
|
|
|
$
|
109,397
|
|
|
$
|
53,162
|
|
|
$
|
19,080
|
|
|
$
|
25,190
|
|
|
Special Mention
|
|
|
6,609
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Substandard
|
|
|
2,443
|
|
|
|
634
|
|
|
|
—
|
|
|
|
—
|
|
|
|
394
|
|
|
Total
|
|
$
|
58,769
|
|
|
$
|
110,031
|
|
|
$
|
53,162
|
|
|
$
|
19,080
|
|
|
$
|
25,584
|
|
There were no loans assigned to the Doubtful or Loss grade as of December 31, 2013 and 2012.
Impaired Loans
The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Management determined the specific allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded. Also presented in the table below are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on non-accrual status, contractual interest is credited to interest income when received, under the cash basis method. The average balances are calculated based on the month-end balances of the loans of the period reported.
|
(in thousands)
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
As of and for the year ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
789
|
|
|
$
|
1,065
|
|
|
$
|
—
|
|
|
$
|
841
|
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Land and construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer and other
|
|
|
29
|
|
|
|
29
|
|
|
|
—
|
|
|
|
240
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
135
|
|
|
$
|
142
|
|
|
$
|
35
|
|
|
$
|
155
|
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Land and construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
924
|
|
|
$
|
1,207
|
|
|
$
|
35
|
|
|
$
|
996
|
|
|
Commercial real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Residential
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Land and construction
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Consumer and other
|
|
$
|
29
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
240
|
|
|
As of and for the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
988
|
|
|
$
|
1,303
|
|
|
$
|
—
|
|
|
$
|
1,098
|
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,113
|
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Land and construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,155
|
|
|
Consumer and other
|
|
|
345
|
|
|
|
345
|
|
|
|
—
|
|
|
|
345
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
811
|
|
|
$
|
1,990
|
|
|
$
|
500
|
|
|
$
|
1,084
|
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Land and construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,799
|
|
|
$
|
3,293
|
|
|
$
|
500
|
|
|
$
|
2,182
|
|
|
Commercial real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,113
|
|
|
Residential
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Land and construction
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,155
|
|
|
Consumer and other
|
|
$
|
345
|
|
|
$
|
345
|
|
|
$
|
—
|
|
|
$
|
345
|
|
During the years ended December 31, 2013 and 2012, the average balance of impaired loans was $1.2 million and $6.8 million, respectively. As of December 31, 2013 and 2012, there was $735,000 and $1.9 million, respectively, of impaired loans on non-accrual status. During the year ended December 31, 2013 and 2012, interest income recognized on impaired loans subsequent to their classification as impaired was $9,000 and $12,000, respectively. The Company stops accruing interest on these loans on the date they are classified as non-accrual and reverses any uncollected interest that had been previously accrued as income. The Company may begin recognizing interest income on these loans as cash interest payments are received, if collection of principal is reasonably assured.
Troubled Debt Restructurings
Troubled debt restructurings for the years ended December 31, 2013 and 2012 are set forth in the following table.
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2013
|
|
|
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
|
|
|
$
|
988
|
|
|
$
|
988
|
|
The modifications in connection with the troubled debt restructurings during the year ended December 31, 2012 were primarily related to extending the amortization period of these loans. The impact on the Company’s determination of the allowance for loan losses related to these troubled debt restructurings was not material and resulted in no charge-offs during the year ended December 31, 2013 and 2012. During the year ended December 31, 2013, there was one commercial loan, with a recorded investment of $572,000 at December 31, 2013, that defaulted within twelve months of its modification date. As of December 31, 2012, there had been no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months. A troubled debt restructuring is considered to be in default once it becomes 60 days or more past due following a modification.
(4) Derivative Financial Instruments
The fair value of derivative positions outstanding is included in accrued interest receivable and other assets and accrued interest payable and other liabilities in the accompanying Consolidated Balance Sheets and in the net change in each of these financial statement line items in the accompanying Consolidated Statements of Cash Flows.
Interest Rate Derivatives.
The Company utilizes interest rate swaps to facilitate the needs of its customers. The Company has entered into interest rate swaps that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.
The notional amounts and estimated fair values of interest rate derivative contracts outstanding at December 31, 2013 and
2012 are presented in the following table. The Company obtains dealer quotations to value its interest rate derivative contracts.
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
(in thousands)
|
|
Notional
Amount
|
|
|
Estimated
Fair Value
|
|
|
Notional
Amount
|
|
|
Estimated
Fair Value
|
|
|
Non-hedging interest rate derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loan interest rate swaps
|
|
$
|
2,706
|
|
|
$
|
15
|
|
|
$
|
2,800
|
|
|
$
|
107
|
|
|
Commercial loan interest rate swaps
|
|
$
|
(2,706
|
)
|
|
$
|
(15
|
)
|
|
$
|
(2,800
|
)
|
|
$
|
(107
|
)
|
The weighted-average rates paid and received for interest rate swaps outstanding at December 31, 2013 and 2012 were as follows:
|
|
|
December 31, 2013
Weighted-Average
|
|
|
December 31, 2012
Weighted-Average
|
|
|
|
|
Interest
Rate
Paid
|
|
|
Interest
Rate
Received
|
|
|
Interest
Rate
Paid
|
|
|
Interest
Rate
Received
|
|
|
Non-hedging interest rate swaps
|
|
|
3.37
|
%
|
|
|
4.85
|
%
|
|
|
3.41
|
%
|
|
|
4.85
|
%
|
|
Non-hedging interest rate swaps
|
|
|
4.85
|
%
|
|
|
3.37
|
%
|
|
|
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.
(5)
Comprehensive Income
Comprehensive income, which includes net income, the net change in unrealized gains on investment securities available for sale and the reclassification of net gains included in earnings, is presented below:
|
|
|
For the Years Ended December 31,
|
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
Net income
|
|
$
|
6,863
|
|
|
$
|
2,942
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Increase in net unrealized (losses) gains on investment securities available for sale, net of tax (benefit) expense of ($1,327) and $608, respectively
|
|
|
(1,900
|
)
|
|
|
869
|
|
|
Reclassification for net gains included in earnings, net of tax expense of $338 and none, respectively
|
|
|
(484
|
)
|
|
|
—
|
|
|
Comprehensive income
|
|
$
|
4,479
|
|
|
$
|
3,811
|
|
Activity of investment securities available for sale included in accumulated other comprehensive income, net of tax, is as follows:
|
|
|
For the Years Ended December 31,
|
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
Beginning balance
|
|
$
|
2,436
|
|
|
$
|
1,567
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(1,900
|
)
|
|
|
869
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(484
|
)
|
|
|
—
|
|
|
Net other comprehensive income (loss) during the year
|
|
|
(2,384
|
)
|
|
|
869
|
|
|
Ending balance
|
|
$
|
52
|
|
|
$
|
2,436
|
|
(6)
Related Party Transactions
In the normal course of business, the Company may make loans to officers and directors, as well as loans to companies and individuals affiliated with or guaranteed by officers and directors of the Company. Gross loan commitments for officers and directors of the Company at December 31, 2013 and 2012 were $3.1 million and $1.4 million, respectively. The outstanding balances for these loans were $1.5 million and $792,000 at December 31, 2013 and 2012, respectively.
The following is a summary of related party loan activities for the years ended December 31, 2013 and 2012:
|
|
|
December 31,
|
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
Beginning balance
|
|
$
|
792
|
|
|
$
|
987
|
|
|
Credits granted
|
|
|
1,265
|
|
|
|
23
|
|
|
Repayments
|
|
|
(543
|
)
|
|
|
(218
|
)
|
|
Ending balance
|
|
$
|
1,514
|
|
|
$
|
792
|
|
Deposits by officers and directors of the Company at December 31, 2013 and 2012 totaled approximately $6.0 million and $10.8 million, respectively.
(7)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. The depreciation and amortization are computed on a straight line basis over the lesser of the lease term, or the estimated useful lives of the assets, generally three to ten years.
Premises and equipment at December 31, 2013 and 2012 are comprised of the following:
|
|
|
December 31,
|
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
Leasehold improvements
|
|
$
|
1,316
|
|
|
$
|
973
|
|
|
Furniture & equipment
|
|
|
2,515
|
|
|
|
2,191
|
|
|
Software
|
|
|
767
|
|
|
|
661
|
|
|
Total
|
|
|
4,598
|
|
|
|
3,825
|
|
|
Accumulated depreciation
|
|
|
(3,313
|
)
|
|
|
(2,805
|
)
|
|
Premises and equipment, net
|
|
$
|
1,285
|
|
|
$
|
1,020
|
|
Depreciation and amortization included in occupancy expense for the years ended December 31, 2013 and 2012 amounted to $508,000 and $459,000, respectively.
(8)
Deposits
The following table reflects the summary of deposit categories by dollar and percentage at December 31, 2013 and 2012:
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Percent of Total
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
Non-interest bearing demand deposits
|
|
$
|
236,869
|
|
|
|
52.3
|
%
|
|
$
|
196,026
|
|
|
|
47.0
|
%
|
|
Interest bearing demand deposits
|
|
|
21,005
|
|
|
|
4.6
|
%
|
|
|
23,233
|
|
|
|
5.6
|
%
|
|
Money market deposits and savings
|
|
|
151,879
|
|
|
|
33.6
|
%
|
|
|
152,094
|
|
|
|
36.5
|
%
|
|
Certificates of deposit
|
|
|
43,013
|
|
|
|
9.5
|
%
|
|
|
45,328
|
|
|
|
10.9
|
%
|
|
Total
|
|
$
|
452,766
|
|
|
|
100.0
|
%
|
|
$
|
416,681
|
|
|
|
100.0
|
%
|
At December 31, 2013, the Company had four certificates of deposits with the State of California Treasures’s Office for a total of $38.0 million that represented 8.4% of total deposits. Each of these deposits are scheduled to mature in the first quarter of 2014. The Company intends to renew each of these deposits at maturity. However, there can be no assurance that the State of California Treasurer’s Office will continue to maintain deposit accounts with the Company. At December 31, 2012, 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 8.2% of total deposits. The Company was required to pledge $41.8 million and $37.4 million of agency mortgage-backed securities at December 31, 2013 and 2012, respectively, in connection with these certificates of deposit.
At December 31, 2013, the Company had $2.1 million of Certificate of Deposit Accounts Registry Service (“CDARS”) reciprocal deposits, which represented 0.5% of total deposits. At December 31, 2012, the Company had $5.2 million of CDARS reciprocal deposits, which represented 1.3% of total deposits.
The aggregate amount of certificates of deposit of $100,000 or greater at December 31, 2013 and 2012 was $42.1 million and $44.0 million, respectively. At December 31, 2013, 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: $41.3 million maturing in six months or less, $806,000 maturing in six months to one year and none maturing in more than one year.
The table below sets forth the range of interest rates, amount and remaining maturities of the certificates of deposit at December 31, 2013.
|
(dollars in thousands)
|
|
|
Six months
and less
|
|
|
Greater than
six months
through one year
|
|
|
Greater than
one year
|
|
|
0.00%
|
to
|
0.99%
|
|
|
$
|
42,007
|
|
|
$
|
966
|
|
|
$
|
—
|
|
|
1.00%
|
to
|
1.99%
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40
|
|
|
Total
|
|
|
$
|
42,007
|
|
|
$
|
966
|
|
|
$
|
40
|
|
(9)
Other Borrowings
At December 31, 2013 and 2012, the Company had a borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB of $169.9 million and $105.1 million, respectively. The Company had $27.5 million and $25.0 million of long-term borrowings outstanding under this borrowing/credit facility with the FHLB at December 31, 2013 and 2012, respectively. The Company had no overnight borrowings outstanding under this borrowing/credit facility at December 31, 2013 and 2012.
The following table summarizes the outstanding long-term borrowings under the borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB at December 31, 2013 and 2012 (dollars in thousands):
|
|
|
|
|
|
|
|
December 31,
|
|
|
Maturity Date
|
|
|
Interest Rate
|
|
|
|
2013
|
|
|
|
2012
|
|
|
May 23, 2013
|
|
|
0.63%
|
|
|
$
|
—
|
|
|
$
|
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
|
|
|
May 2, 2018
|
|
|
0.93%
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
|
Total
|
|
|
$
|
27,500
|
|
|
$
|
25,000
|
|
At December 31, 2013, the Company also had $27.0 million in Federal fund lines of credit available with other correspondent banks that could be used to disburse loan commitments and to satisfy demands for deposit withdrawals. Each of these lines of credit is subject to conditions that the Company may not be able to meet at the time when additional liquidity is needed. The Company did not have any borrowings outstanding under these lines of credit at December 31, 2013. At December 31, 2012, there was a $4.5 million short-term overnight borrowing outstanding under these credit facilities at an interest rate of 1.09%. This borrowing was repaid on January 2, 2013. The Company did not incur any material interest expense charges in connection with this borrowing and there were no further borrowings under these facilities during the year ended December 31, 2013. As of December 31, 2013 and 2012, the Company had pledged $3.1 million of corporate notes related to these lines of credit.
(10)
Commitments and Contingencies
Commitments to Extend Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby/commercial letters of credit and guarantees on revolving credit card limits. These instruments involve various levels and elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated financial statements. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company had $104.3 million and $74.2 million in commitments to extend credit to customers and $2.6 million and $1.9 million in standby/commercial letters of credit at December 31, 2013 and 2012, 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 $73,000 and $67,000 as of December 31, 2013 and 2012, respectively.
Lease Commitments
The Company leases office premises under two operating leases that will expire in December 2018 and June 2024, respectively. Rental expense, which is included in occupancy expense was $739,000 and $562,000 for the years ended December 31, 2013 and 2012, respectively.
The projected minimum rental payments under the term of the leases at December 31, 2013 are as follows (in thousands):
|
Years ending December 31,
|
|
|
|
|
|
2014
|
|
$
|
738
|
|
|
2015
|
|
|
752
|
|
|
2016
|
|
|
775
|
|
|
2017
|
|
|
799
|
|
|
2018
|
|
|
823
|
|
|
Thereafter
|
|
|
4,339
|
|
|
Total
|
|
$
|
8,226
|
|
Litigation
The Company from time to time is party to lawsuits, which arise out of the normal course of business. At December 31, 2013 and 2012, the Company did not have any litigation that management believes will have a material impact on the Consolidated Balance Sheets or Consolidated Statements of Operations and Comprehensive Income.
Restricted Stock
The following table sets forth the Company’s future restricted stock expense, net of estimated forfeitures (in thousands):
|
Years ending December 31,
|
|
|
|
|
|
2014
|
|
$
|
602
|
|
|
2015
|
|
|
349
|
|
|
2016
|
|
|
165
|
|
|
2017
|
|
|
54
|
|
|
2018
|
|
|
10
|
|
|
Total
|
|
$
|
1,180
|
|
(11)
Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2013 and 2012, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
(in thousands)
|
|
Fair Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Other Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
At December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Notes
|
|
$
|
3,108
|
|
|
$
|
—
|
|
|
$
|
3,108
|
|
|
$
|
—
|
|
|
Residential Mortgage-Backed Securities
|
|
|
103,164
|
|
|
|
—
|
|
|
|
103,164
|
|
|
|
—
|
|
|
Derivative Assets –
Interest Rate Swaps
|
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
Derivative Liabilities –
Interest Rate Swaps
|
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
At December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Gov’t treasuries
|
|
$
|
2,207
|
|
|
$
|
2,207
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Corporate Notes
|
|
|
35,275
|
|
|
|
—
|
|
|
|
35,275
|
|
|
|
—
|
|
|
Residential Mortgage-Backed Securities
|
|
|
143,743
|
|
|
|
—
|
|
|
|
143,743
|
|
|
|
—
|
|
|
Derivative Assets –
Interest Rate Swaps
|
|
|
107
|
|
|
|
—
|
|
|
|
107
|
|
|
|
—
|
|
|
Derivative Liabilities –
Interest Rate Swaps
|
|
|
107
|
|
|
|
—
|
|
|
|
107
|
|
|
|
—
|
|
AFS securities
— As of December 31, 2013 and 2012, the Level 2 fair value of the Company’s residential mortgage-backed securities was $103.2 million and $143.7 million, respectively. These securities consist primarily of agency mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). The underlying loans for these securities are residential mortgages that were primarily originated beginning in the year of 2003 through the current period. These loans are geographically dispersed throughout the United States. At December 31, 2013 and 2012, the weighted average rate and weighed average life of these securities were 2.12% and 1.95%, respectively, and 3.85 years and 2.92 years, respectively.
The valuation for investment securities utilizing Level 2 inputs were primarily determined by quotes received from an independent pricing service using matrix pricing, which is a mathematical technique widely used in the industry to value securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. There were no transfers into or out of Level 1 and 2 measurements during the years ended December 31, 2013 and 2012.
Assets Measured on a Non-Recurring Basis
Assets measured at fair value on a non-recurring basis are summarized below:
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
(in thousands)
|
|
Fair Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Other Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
At December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
672
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
672
|
|
|
OREO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and construction
|
|
|
90
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90
|
|
|
Total
|
|
$
|
762
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
762
|
|
|
At December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
889
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
889
|
|
|
OREO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and construction
|
|
|
90
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90
|
|
|
Total
|
|
$
|
979
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
979
|
|
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 $1.1 million and $731,000 on impaired loans during the years ended December 31, 2013 and 2012, respectively.
Other real estate owned
— OREO represents real estate acquired through or in lieu of foreclosure. OREO is held for sale and is initially recorded at fair value less estimated costs of disposition at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or estimated fair value less costs of disposition. The fair value of OREO is determined using various valuation techniques which are not readily observable in the market place, including consideration of appraised values and other pertinent real estate market data.
(12)
Estimated Fair Value Information
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many cases, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize in a current market exchange.
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value are explained below.
Cash and cash equivalents
The carrying amounts are considered to be their estimated fair values and are classified as Level 1 because of the short-term maturity of these instruments which includes Federal funds sold and interest-earning deposits at other financial institutions.
Investment securities
AFS investment securities are carried at fair value, which are based on quoted prices of exact or similar securities, or on inputs that are observable, either directly or indirectly. The Company obtains quoted prices through third party brokers. Investment securities are classified as Level 1 to the extent that they are based on quoted prices for identical instrument traded in active markets. Investment securities are classified as Level 2 for valuations based on quotes prices for similar securities or inputs that are observable, either directly or indirectly.
FRB and FHLB stock
It is not practical to determine the fair value of FRB and FHLB stock due to restrictions placed on its transferability.
Loans, net
For loans, the fair value is estimated using market quotes for similar assets or the present value of future cash flows, discounted using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same maturities and giving consideration to estimated prepayment risk and credit risk. The fair value of loans is determined utilizing estimates resulting in a Level 3 classification.
Impaired loans
are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company may measure impairment based on a loan’s observable market price, or the fair value of the collateral (net of estimated costs to sell) if the loan is collateral dependent. The fair value of impaired loans is determined utilizing estimates resulting in a Level 3 classification.
Off-balance sheet credit-related instruments
The fair values of commitments, which include standby letters of credit and commercial letters of credit, are based upon fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The related fees are not considered material to the Company’s financial statements as a whole and the fair market value of the Company’s off-balance sheet credit-related instruments cannot be readily determined. The fair value of these items is determined utilizing estimates resulting in a Level 3 classification.
Derivatives
The fair value of derivatives is based on valuation models using observable market data as of the measurement date and is classified as Level 2.
Deposits
For demand deposits, the carrying amount approximates fair value. The fair values of interest bearing checking, savings, and money market deposits are estimated by discounting future cash flows using the interest rates currently offered for deposits of similar products. Because of the short-term maturity of these deposits, the carrying amounts are considered to be their estimated fair values and are classified as Level 1.
The fair values of the certificates of deposit are estimated by discounting future cash flows based on the rates currently offered for certificates of deposit with similar interest rates and remaining maturities. The fair value of certificates of deposit is determined utilizing estimates resulting in a Level 2 classification.
Other borrowings
The fair values of long term FHLB advances are estimated based on the rates currently offered by the FHLB for advances with similar interest rates and remaining maturities. The fair value of other borrowings is determined utilizing estimates resulting in a Level 2 classification.
Accrued interest
The estimated fair value for both accrued interest receivable and accrued interest payable are considered to be equivalent to the carrying amounts, resulting in a Level 1 classification.
The estimated fair value and carrying amounts of the financial instruments at December 31, 2013 and 2012 are as follows:
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44,688
|
|
|
$
|
44,688
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44,688
|
|
|
Investment securities
|
|
|
106,272
|
|
|
|
—
|
|
|
|
106,272
|
|
|
|
—
|
|
|
|
106,272
|
|
|
FRB stock
|
|
|
1,570
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
N/A
|
|
|
FHLB stock
|
|
|
3,062
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
N/A
|
|
|
Loans, net
|
|
|
376,312
|
|
|
|
—
|
|
|
|
—
|
|
|
|
376,249
|
|
|
|
376,249
|
|
|
Non-hedging interest rate swaps
|
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
|
Accrued interest receivable
|
|
|
1,132
|
|
|
|
1,132
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,132
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
$
|
236,869
|
|
|
$
|
236,869
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
236,869
|
|
|
Interest bearing deposits
|
|
|
215,897
|
|
|
|
172,884
|
|
|
|
43,013
|
|
|
|
—
|
|
|
|
215,897
|
|
|
Other borrowings
|
|
|
27,500
|
|
|
|
—
|
|
|
|
27,562
|
|
|
|
—
|
|
|
|
27,562
|
|
|
Non-hedging interest rate swaps
|
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
|
Accrued interest payable
|
|
|
29
|
|
|
|
29
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29
|
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
As of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
50,555
|
|
|
$
|
50,555
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,555
|
|
|
Investment securities
|
|
|
181,225
|
|
|
|
2,207
|
|
|
|
179,018
|
|
|
|
—
|
|
|
|
181,225
|
|
|
FRB stock
|
|
|
1,363
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
N/A
|
|
|
FHLB stock
|
|
|
2,415
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
N/A
|
|
|
Loans, net
|
|
|
260,656
|
|
|
|
—
|
|
|
|
—
|
|
|
|
260,482
|
|
|
|
260,482
|
|
|
Non-hedging interest rate swaps
|
|
|
107
|
|
|
|
—
|
|
|
|
107
|
|
|
|
—
|
|
|
|
107
|
|
|
Accrued interest receivable
|
|
|
1,322
|
|
|
|
1,322
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,322
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
$
|
196,026
|
|
|
$
|
196,026
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
196,026
|
|
|
Interest bearing deposits
|
|
|
220,655
|
|
|
|
175,327
|
|
|
|
45,328
|
|
|
|
—
|
|
|
|
220,655
|
|
|
Other borrowings
|
|
|
29,475
|
|
|
|
—
|
|
|
|
29,885
|
|
|
|
—
|
|
|
|
29,885
|
|
|
Non-hedging interest rate swaps
|
|
|
107
|
|
|
|
—
|
|
|
|
107
|
|
|
|
—
|
|
|
|
107
|
|
|
Accrued interest payable
|
|
|
157
|
|
|
|
157
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157
|
|
(13)
Non-Interest Income
The following table summarizes the information regarding non-interest income for the years ended December 31, 2013 and 2012, respectively:
|
|
|
Years ended December 31,
|
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
Loan arrangement fees
|
|
$
|
667
|
|
|
$
|
1,461
|
|
|
Gain on sale of AFS investment securities
|
|
|
822
|
|
|
|
—
|
|
|
Service charges and other operating income
|
|
|
304
|
|
|
|
525
|
|
|
Total non-interest income
|
|
$
|
1,793
|
|
|
$
|
1,986
|
|
(14)
Other Operating Expenses
The following table summarizes the information regarding other operating expenses for the years ended December 31, 2013, and 2012, respectively:
|
|
|
Years ended December 31,
|
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
Loan expenses
|
|
$
|
413
|
|
|
$
|
1,012
|
|
|
Board of Directors fees/non-cash stock expenses
|
|
|
362
|
|
|
|
261
|
|
|
OCC assessments
|
|
|
135
|
|
|
|
120
|
|
|
Branch/customer expense
|
|
|
525
|
|
|
|
451
|
|
|
Stationery and supplies
|
|
|
89
|
|
|
|
74
|
|
|
Insurance
|
|
|
87
|
|
|
|
76
|
|
|
Dues, memberships and subscriptions
|
|
|
123
|
|
|
|
129
|
|
|
Stockholders expense
|
|
|
136
|
|
|
|
74
|
|
|
Telephone
|
|
|
122
|
|
|
|
76
|
|
|
Delaware Franchise Tax
|
|
|
107
|
|
|
|
64
|
|
|
Provision for unfunded lending commitments
|
|
|
67
|
|
|
|
—
|
|
|
Other expenses
|
|
|
121
|
|
|
|
395
|
|
|
Total other operating expenses
|
|
$
|
2,287
|
|
|
$
|
2,732
|
|
(15)
Stock-Based Compensation
On May 8, 2013, the shareholders of the Company approved the Company’s 2013 Equity Incentive Plan (the “Plan”), which provides for the grant of up to 750,000 shares of Common Stock to employees, including officers and directors, non-employee directors and consultants. Stock options, stock appreciation rights, restricted stock and other stock awards, and restricted stock units are all available for grant pursuant to the terms and conditions of the Plan. As a result of shareholder approval of the Plan, no further grants will be made under the 2004 Founder Stock Option Plan, the Director and Employee Stock Option Plan or the 2005 Equity Incentive Plan, however these plans shall remain in effect with respect to options and restricted stock awards previously granted. As of December 31, 2013, there have been no awards granted under the Plan.
Prior to the approval of the Plan, the Company granted restricted stock awards to directors and employees under the 2005 Equity Incentive Plan. Restricted stock awards are considered fixed awards as the number of shares and fair value is known at the date of grant and the fair value at the grant date is amortized over the requisite service period. On April 30, 2013, the Company granted 138,500 restricted stock awards to employees with various vesting periods as follows: 50% or 69,250 awards that vest in three years, 25% or 34,625 awards that vest in four years, and 25% or 34,625 awards that vest in five years. 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.
Non-cash stock compensation expense recognized in the Consolidated Statements of Operations and Comprehensive Income related to the restricted stock awards, net of estimated forfeitures, was $749,000 and $552,000 for the years ended December 31, 2013 and 2012, respectively. The fair value of restricted stock awards that vested during the years ended December 31, 2013, and 2012 was $686,000 and $414,000, respectively.
The following table reflects the activities related to restricted stock awards outstanding for the years ended December 31, 2013 and 2012, respectively.
|
|
|
Years Ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Restricted Shares
|
|
Number
of
Shares
|
|
|
Weighted Avg
Fair Value at
Grant Date
|
|
|
Number
of
Shares
|
|
|
Weighted Avg
Fair Value at
Grant Date
|
|
|
Beginning balance
|
|
|
563,516
|
|
|
$
|
4.23
|
|
|
|
536,733
|
|
|
$
|
4.03
|
|
|
Granted
|
|
|
138,500
|
|
|
|
5.82
|
|
|
|
164,152
|
|
|
|
4.83
|
|
|
Vested
|
|
|
(160,237
|
)
|
|
|
4.28
|
|
|
|
(97,744
|
)
|
|
|
4.23
|
|
|
Forfeited and surrendered
|
|
|
(12,250
|
)
|
|
|
4.56
|
|
|
|
(39,625
|
)
|
|
|
4.05
|
|
|
Ending balance
|
|
|
529,529
|
|
|
$
|
4.62
|
|
|
|
563,516
|
|
|
$
|
4.23
|
|
The Company recognizes compensation expense for stock options by amortizing the fair value at the grant date over the service, or vesting period
.
During the year ended December 31, 2013 and 2012, there were 41,900 and none, respectively, options exercised under the 2004 Founder Stock Option Plan at a weighted average exercise price of $5.00 per share. There have been no options granted or cancelled under the 2004 Founder Stock Option Plan for the year ended December 31, 2013 or 2012. The remaining contractual life of the 2004 Founder Stock Options outstanding was 0.15 years and 1.15 years at December 31, 2013 and 2012, respectively. All options under the 2004 Founder Stock Option Plan were exercisable at Decemer 31, 2013 and 2012. There were 91,800 and 133,700 shares outstanding at December 31, 2013 and 2012, respectively, with a weighted average exercise price of $5.00.
There have been no options granted or cancelled under the Director and Employee Stock Option Plan for the years ended December 31, 2013 or 2012. During the years ended December 31, 2012 and 2013 there were 245,000 and none options exercised under this plan. The remaining contractual life of the Director and Employee Stock Options outstanding was 0.79 years and 1.64 years at December 31, 2013 and 2012, respectively. All options under the Directors and Employee Stock Option Plan were exercisable at December 31, 2013 and 2012. At December 31, 2013 and 2012, there were 800,673 and 1,045,673, respectively, of shares outstanding under the Director and Employee Stock Option Plan with weighted average exercise prices of $6.37 and $6.05, respectively.
The following tables detail the amount of shares authorized and available under all stock plans as of December 31, 2013:
|
|
|
Shares Reserved
|
|
|
Less Shares Previously
Exercised/Vested
|
|
|
Less Shares
Outstanding
|
|
|
Total Shares
Available for
Future Issuance
|
|
|
2004 Founder Stock Option Plan
|
|
|
150,000
|
|
|
|
49,900
|
|
|
|
91,800
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director and Employee Stock Option Plan
|
|
|
1,434,000
|
|
|
|
461,924
|
|
|
|
800,673
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Equity Incentive Plan
|
|
|
1,200,000
|
|
|
|
657,744
|
|
|
|
529,529
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Equity Incentive Plan
|
|
|
750,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
750,000
|
|
(16)
Income Taxes
The income tax (benefit) provision consists of the following for the years ended December 31, 2013 and 2012:
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
92
|
|
|
$
|
84
|
|
|
State
|
|
|
24
|
|
|
|
27
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,003
|
|
|
|
1,169
|
|
|
State
|
|
|
130
|
|
|
|
212
|
|
|
|
|
|
1,249
|
|
|
|
1,492
|
|
|
Valuation allowance
|
|
|
(4,308
|
)
|
|
|
(1,381
|
)
|
|
Income tax (benefit) provision
|
|
$
|
(3,059
|
)
|
|
$
|
111
|
|
A reconciliation of the amounts computed by applying the federal statutory rate of 34% for 2013 and 2012 to the loss before income tax provision and the effective tax rate are as follows:
|
|
|
2013
|
|
|
2012
|
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Percent of
Pretax
|
|
|
Amount
|
|
|
Percent of
Pretax
|
|
|
Federal income tax provision at statutory rate
|
|
$
|
1,293
|
|
|
|
34
|
%
|
|
$
|
1,038
|
|
|
|
34
|
%
|
|
Changes due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State franchise tax, net of federal income tax
|
|
|
272
|
|
|
|
7
|
%
|
|
|
218
|
|
|
|
7
|
%
|
|
Alternative minimum tax
|
|
|
(86
|
)
|
|
|
(2
|
)%
|
|
|
111
|
|
|
|
4
|
%
|
|
Valuation allowance
|
|
|
(4,308
|
)
|
|
|
(113
|
)%
|
|
|
(1,381
|
)
|
|
|
(45
|
)%
|
|
Other, net
|
|
|
(230
|
)
|
|
|
(6
|
)%
|
|
|
125
|
|
|
|
4
|
%
|
|
Total income tax (benefit) provision
|
|
$
|
(3,059
|
)
|
|
|
(80
|
)%
|
|
$
|
111
|
|
|
|
4
|
%
|
The major components of the net deferred tax assets and liabilities at December 31, 2013 and 2012 are as follows:
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
399
|
|
|
$
|
1,883
|
|
|
Allowance for loan losses
|
|
|
1,295
|
|
|
|
1,254
|
|
|
Equity compensation
|
|
|
594
|
|
|
|
562
|
|
|
Depreciation
|
|
|
118
|
|
|
|
180
|
|
|
Accrued compensation
|
|
|
394
|
|
|
|
278
|
|
|
Other
|
|
|
471
|
|
|
|
269
|
|
|
Valuation allowance
|
|
|
—
|
|
|
|
(4,308
|
)
|
|
Total deferred tax assets
|
|
|
3,271
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
39
|
|
|
|
61
|
|
|
Federal Home Loan Bank stock dividends
|
|
|
57
|
|
|
|
57
|
|
|
Net unrealized gains on investment securities
|
|
|
88
|
|
|
|
1,704
|
|
|
Total deferred tax liabilities
|
|
|
184
|
|
|
|
1,822
|
|
|
Net deferred tax liabilities
|
|
$
|
3,087
|
|
|
$
|
(1,704
|
)
|
A valuation allowance is required if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including historic financial performance, the forecasts of future income, existence of feasible tax planning strategies, length of statutory carryforward periods, and assessments of the current and future economic and business conditions. Management evaluates the positive and negative evidence and determines the realizability of the deferred tax asset on a quarterly basis.
During the year ended December 31, 2009, management established a full valuation allowance against the Company’s deferred tax assets after it was determined that it was “more likely than not” that the Company would not be able to realize the benefit of the deferred tax asset. During the year ended December 31, 2013, management reassessed the need for this valuation allowance and concluded that a valuation allowance was no longer appropriate and that it is more likely than not that these assets will be realized. As a result, management reversed the valuation allowance as an income tax benefit in the Consolidated Statements of Operations and Comprehensive Income. In making this determination, management analyzed, among other things, the Company’s recent history of earnings and cash flows, forecasts of future earnings, improvements in the credit quality of the Company’s loan portfolio, the nature and timing of future deductions and benefits represented by the deferred tax assets and our cumulative earnings for the 12 quarters preceding the reversal of this valuation allowance.
At December 31, 2013, the Company had a net deferred tax asset of approximately $3.1 million, compared to net deferred tax liability for net unrealized gains on investment securities of $1.7 million at December 31, 2012. The net deferred tax asset at December 31, 2013, primarily consists of deferred tax assets related to federal and state net operating loss carryforwards and the allowance for loan losses.
As of December 31, 2013, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $378,000 and $2.5 million, respectively. As of December 31, 2012, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $4.1 million and $6.8 million, respectively. For federal and California tax purposes, the Company’s NOL carryforwards expire beginning in 2029.
No uncertain tax positions were identified as of December 31, 2013 and 2012, and the Company had no tax reserve for uncertain tax positions at December 31, 2013 and 2012. The Company does not anticipate providing a reserve for uncertain tax positions in the next twelve months. Furthermore, the Company has elected to record interest accrued and penalties related to unrecognized tax benefits in tax expense. At December 31, 2013 and 2012, the Company did not have an accrual for interest and/or penalties associated with uncertain tax positions.
The Company files income tax returns in the U.S. federal and California jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2010 and 2009, respectively.
(17)
Employee Benefit Plan
The Company has a 401(k) plan for all employees and permits voluntary contributions of their salaries on a pre-tax basis, subject to statutory and Internal Revenue Service guidelines. The contributions to the 401(k) plan are invested at the directions of the participants. The Company matches 100% of the employee’s contribution up to the first 3% of the employee’s salary and 50% of the employee’s contribution up to the next 2% of the employee’s salary. The Company’s expense relating to the contributions made to the 401(k) plan for the benefit of the employees for the years ended December 31, 2013 and 2012 was $182,000 and $151,000, respectively.
(18)
Regulatory Matters
Capital
Bancshares and the Bank are subject to the various regulatory capital requirements administered by federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bancshares and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Company.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that as of December 31, 2013 and 2012, the Company and the Bank met all capital adequacy requirements to which they are subject.
At December 31, 2013, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since the notification that management believes have changed the Bank’s category.
The Company’s and the Bank’s capital ratios as of December 31, 2013 and 2012 are presented in the table below:
|
|
|
Company
|
|
|
Bank
|
|
|
For Capital Adequacy
Purposes
|
|
|
For the Bank to be Well
Capitalized Under
Prompt Corrective
Measures
|
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital Ratio
|
|
$
|
58,620
|
|
|
|
14.18
|
%
|
|
$
|
56,555
|
|
|
|
13.69
|
%
|
|
$
|
33,062
|
|
|
|
8.00
|
%
|
|
$
|
41,326
|
|
|
|
10.00
|
%
|
|
Tier 1 Risk-Based Capital Ratio
|
|
$
|
53,425
|
|
|
|
12.93
|
%
|
|
$
|
51,361
|
|
|
|
12.43
|
%
|
|
$
|
16,531
|
|
|
|
4.00
|
%
|
|
$
|
24,796
|
|
|
|
6.00
|
%
|
|
Tier 1 Leverage Ratio
|
|
$
|
53,425
|
|
|
|
9.70
|
%
|
|
$
|
51,361
|
|
|
|
9.32
|
%
|
|
$
|
22,025
|
|
|
|
4.00
|
%
|
|
$
|
27,541
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital Ratio
|
|
$
|
50,823
|
|
|
|
15.65
|
%
|
|
$
|
49,635
|
|
|
|
15.29
|
%
|
|
$
|
25,977
|
|
|
|
8.00
|
%
|
|
$
|
32,470
|
|
|
|
10.00
|
%
|
|
Tier 1 Risk-Based Capital Ratio
|
|
$
|
46,738
|
|
|
|
14.39
|
%
|
|
$
|
45,549
|
|
|
|
14.03
|
%
|
|
$
|
12,988
|
|
|
|
4.00
|
%
|
|
$
|
19,482
|
|
|
|
6.00
|
%
|
|
Tier 1 Leverage Ratio
|
|
$
|
46,738
|
|
|
|
9.47
|
%
|
|
$
|
45,549
|
|
|
|
9.22
|
%
|
|
$
|
19,748
|
|
|
|
4.00
|
%
|
|
$
|
24,696
|
|
|
|
5.00
|
%
|
On July 2, 2013, the Federal Reserve approved the final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. On July 9, 2013, the FDIC and OCC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC and OCC's rules are identical in substance to the final rules issued by the FRB.
The phase-in period for the final rules will begin for the Company and the Bank on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule. Management is currently evaluating the provisions of the final rules and their expected impact.
Dividends
In the ordinary course of business, Bancshares is dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Currently, the Bank is prohibited from paying dividends to Bancshares until such time as the accumulated deficit is eliminated.
To date, Bancshares has not paid any cash dividends. Payment of stock or cash dividends in the future will depend upon earnings and financial condition and other factors deemed relevant by Bancshares’ Board of Directors, as well as Bancshares’ legal ability to pay dividends. Accordingly, no assurance can be given that any cash dividends will be declared in the foreseeable future.
Consent Order
On September 11, 2013, the Board of Directors of the Bank entered into a stipulation and consent to the issuance of a consent order with the OCC consenting to the issuance of a consent order (the “Consent Order”) by the OCC, effective as of that date. The Consent Order requires the Bank to take corrective action to enhance its program and procedures for compliance with the Bank Secrecy Act (“BSA”) and other anti-money laundering regulations (“AML”).
(19)
Parent Company Only Condensed Financial Information
The condensed financial statements of 1
st
Century Bancshares, Inc. as of and for the years ended December 31, 2013 and 2012 are presented below:
Condensed Balance Sheets
|
(in thousands)
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
2,082
|
|
|
$
|
1,206
|
|
|
Investment in subsidiary bank
|
|
|
53,324
|
|
|
|
47,985
|
|
|
Total Assets
|
|
$
|
55,406
|
|
|
$
|
49,191
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
18
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
114
|
|
|
|
110
|
|
|
Additional paid-in capital
|
|
|
67,231
|
|
|
|
65,038
|
|
|
Accumulated deficit
|
|
|
(4,036
|
)
|
|
|
(10,899
|
)
|
|
Accumulated other comprehensive income
|
|
|
52
|
|
|
|
2,436
|
|
|
Treasury stock at cost
|
|
|
(7,973
|
)
|
|
|
(7,512
|
)
|
|
Total Stockholders’ Equity
|
|
|
55,388
|
|
|
|
49,173
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
55,406
|
|
|
$
|
49,191
|
|
Condensed Statements of Operations and Comprehensive Income
|
|
|
Years ended December 31,
|
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
Interest income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest expense
|
|
|
—
|
|
|
|
—
|
|
|
Net interest income
|
|
|
—
|
|
|
|
—
|
|
|
Compensation and benefits
|
|
|
(35
|
)
|
|
|
(32
|
)
|
|
Other operating expenses
|
|
|
(63
|
)
|
|
|
(58
|
)
|
|
Loss before taxes
|
|
|
(98
|
)
|
|
|
(90
|
)
|
|
Income tax provision
|
|
|
—
|
|
|
|
—
|
|
|
Loss before equity in undistributed income of subsidiary bank
|
|
|
(98
|
)
|
|
|
(90
|
)
|
|
Equity in undistributed income of subsidiary bank
|
|
|
6,961
|
|
|
|
3,032
|
|
|
Net income
|
|
$
|
6,863
|
|
|
$
|
2,942
|
|
|
Comprehensive income
|
|
$
|
4,479
|
|
|
$
|
3,811
|
|
Condensed Statements of Cash Flows
|
|
|
Years ended December 31,
|
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,863
|
|
|
$
|
2,942
|
|
|
Adjustments to reconcile net income to net cash used in operations:
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of subsidiary bank
|
|
|
(6,961
|
)
|
|
|
(3,032
|
)
|
|
Decrease in other liabilities
|
|
|
—
|
|
|
|
(40
|
)
|
|
Net cash used in operating activities
|
|
|
(98
|
)
|
|
|
(130
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,435
|
|
|
|
—
|
|
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
(166
|
)
|
|
Shares surrendered to pay taxes on vesting of restricted stock
|
|
|
(461
|
)
|
|
|
(75
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
974
|
|
|
|
(241
|
)
|
|
Net change in cash and cash equivalents
|
|
|
876
|
|
|
|
(371
|
)
|
|
Cash and cash equivalents, beginning of year
|
|
|
1,206
|
|
|
|
1,577
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
2,082
|
|
|
$
|
1,206
|
|