UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
Commission file number 001-34226
1st Century Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
26-1169687 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1875 Century Park East, Suite 1400
Los Angeles, California 90067
(Address of principal executive offices)
(Zip Code)
(310) 270-9500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ |
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Smaller reporting company ☒ |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
9,278,403 shares of common stock of the registrant were outstanding as of November 1, 2013.
1st Century Bancshares, Inc.
Quarterly Report on Form 10-Q
September 30, 2013
Page | ||
PART I. FINANCIAL INFORMATION |
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Item 1. |
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Consolidated Balance Sheets — September 30, 2013 (unaudited) and December 31, 2012 |
4 | |
5 | ||
6 | ||
Unaudited Consolidated Statements of Cash Flows — Nine months ended September 30, 2013 and 2012 |
7 | |
8 | ||
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29 |
Item 3. |
43 | |
Item 4. |
43 | |
PART II. OTHER INFORMATION |
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Item 1. |
44 | |
Item 1A. |
44 | |
Item 2. |
44 | |
Item 3. |
44 | |
Item 4. |
44 | |
Item 5. |
44 | |
Item 6. |
45 | |
46 |
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” and other similar expressions in this Quarterly Report on Form 10-Q. With respect to any such forward-looking statements, the Company claims the protection of the safe harbor provided for in the Private Securities Litigation Reform Act of 1995, as amended. The Company cautions investors that any forward-looking statements presented in this Quarterly Report on Form 10-Q, or those that the Company may make orally or in writing from time to time, are based on the beliefs of, on assumptions made by, and information available to, management at the time such statements are first made. Actual outcomes will be affected by known and unknown risks, trends, uncertainties and factors that are beyond the Company’s control or ability to predict. Although the Company believes that management’s beliefs and assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, the Company’s actual future results can be expected to differ from management’s expectations, and those differences may be material and adverse to the Company’s business, results of operations and financial condition. Accordingly, investors should use caution in placing any reliance on forward-looking statements to anticipate future results or trends.
Some of the risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed include the following: the impact of changes in interest rates; political instability; changes in the monetary policies of the U.S. Government; a renewed decline in economic conditions; deterioration in the value of California real estate, both residential and commercial; an increase in the level of non-performing assets and charge-offs; further increased competition among financial institutions; the Company’s ability to continue to attract interest bearing deposits and quality loan customers; further government regulation and the implementation and costs associated with the same; internal and external fraud and cyber-security threats including the loss of bank or customer funds, loss of system functionality or the theft or loss of data; management’s ability to successfully manage the Company’s operations; the possibility that we will be unable to comply with the requirements set forth in the OCC’s Consent Order, which could result in restrictions on our operations; and the other risks set forth in the Company’s reports filed with the U.S. Securities and Exchange Commission. For further discussion of these and other factors, see “Item 1A. Risk Factors” in the Company’s 2012 Annual Report on Form 10-K.
Any forward-looking statements in this Quarterly Report on Form 10-Q and all subsequent written and oral forward-looking statements attributable to the Company or any person acting on behalf of the Company are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. The Company does not undertake any obligation to release publicly any revisions to forward-looking statements to reflect events or circumstances after the date such forward looking statements are made, and hereby specifically disclaims any intention to do so, unless required by law.
PART I. FINANCIAL INFORMATION
1st Century Bancshares, Inc.
(in thousands, except share and per share data)
September 30, 2013 (unaudited) |
December 31, 2012 |
|||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 7,739 | $ | 6,967 | ||||
Interest earning deposits at other financial institutions |
39,978 | 43,588 | ||||||
Total cash and cash equivalents |
47,717 | 50,555 | ||||||
Investment securities — Available for Sale (“AFS”), at estimated fair value |
124,055 | 181,225 | ||||||
Loans, net of allowance for loan losses of $6,835 and $6,015 at September 30, 2013 and December 31, 2012, respectively |
349,871 | 260,656 | ||||||
Premises and equipment, net |
1,318 | 1,020 | ||||||
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock |
4,502 | 3,778 | ||||||
Accrued interest and other assets |
4,864 | 1,939 | ||||||
Total Assets |
$ | 532,327 | $ | 499,173 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Non-interest bearing demand deposits |
$ | 225,001 | $ | 196,026 | ||||
Interest bearing deposits: |
||||||||
Interest bearing checking (“NOW”) |
19,323 | 23,233 | ||||||
Money market deposits and savings |
161,007 | 152,094 | ||||||
Certificates of deposit less than $100 |
895 | 1,341 | ||||||
Certificates of deposit of $100 or greater |
42,027 | 43,987 | ||||||
Total deposits |
448,253 | 416,681 | ||||||
Other borrowings |
27,500 | 29,475 | ||||||
Accrued interest and other liabilities |
2,139 | 3,844 | ||||||
Total Liabilities |
477,892 | 450,000 | ||||||
Commitments and contingencies (Note 9) |
||||||||
Stockholders’ Equity: |
||||||||
Preferred stock, $0.01 par value — 10,000,000 shares authorized, none issued and outstanding at September 30, 2013 and December 31, 2012, respectively |
— | — | ||||||
Common stock, $0.01 par value — 50,000,000 shares authorized, 11,118,310 and 10,965,560 issued at September 30, 2013 and December 31, 2012, respectively |
111 | 110 | ||||||
Additional paid-in capital |
65,729 | 65,038 | ||||||
Accumulated deficit |
(4,253 |
) |
(10,899 |
) | ||||
Accumulated other comprehensive income |
498 | 2,436 | ||||||
Treasury stock at cost — 1,851,807 and 1,828,432 shares at September 30, 2013 and December 31, 2012, respectively |
(7,650 |
) |
(7,512 |
) | ||||
Total Stockholders’ Equity |
54,435 | 49,173 | ||||||
Total Liabilities and Stockholders’ Equity |
$ | 532,327 | $ | 499,173 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
1st Century Bancshares, Inc.
Unaudited Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2013 |
2012 |
2013 |
2012 |
|||||||||||||
Interest and fee income on: |
||||||||||||||||
Loans |
$ | 3,507 | $ | 2,703 | $ | 10,072 | $ | 8,154 | ||||||||
Investments |
612 | 908 | 2,105 | 2,526 | ||||||||||||
Other |
89 | 55 | 194 | 165 | ||||||||||||
Total interest and fee income |
4,208 | 3,666 | 12,371 | 10,845 | ||||||||||||
Interest expense on: |
||||||||||||||||
Deposits |
115 | 164 | 369 | 512 | ||||||||||||
Borrowings |
84 | 76 | 241 | 225 | ||||||||||||
Total interest expense |
199 | 240 | 610 | 737 | ||||||||||||
Net interest income |
4,009 | 3,426 | 11,761 | 10,108 | ||||||||||||
Provision for (reduction of) loan losses |
200 | — | (300 |
) |
— | |||||||||||
Net interest income after provision for (reduction of) loan losses |
3,809 | 3,426 | 12,061 | 10,108 | ||||||||||||
Non-interest income |
405 | 424 | 1,601 | 1,260 | ||||||||||||
Non-interest expenses: |
||||||||||||||||
Compensation and benefits |
2,024 | 1,691 | 5,976 | 4,992 | ||||||||||||
Occupancy |
342 | 301 | 1,078 | 927 | ||||||||||||
Professional fees |
175 | 175 | 491 | 517 | ||||||||||||
Technology |
180 | 176 | 550 | 521 | ||||||||||||
Marketing |
62 | 72 | 204 | 204 | ||||||||||||
FDIC assessments |
55 | 82 | 198 | 241 | ||||||||||||
Other operating expenses |
573 | 641 | 1,697 | 1,876 | ||||||||||||
Total non-interest expenses |
3,411 | 3,138 | 10,194 | 9,278 | ||||||||||||
Income before income taxes |
803 | 712 | 3,468 | 2,090 | ||||||||||||
Income tax provision (benefit) |
- | 25 | (3,178 |
) |
60 | |||||||||||
Net income |
803 | 687 | 6,646 | 2,030 | ||||||||||||
Other Comprehensive Income: |
||||||||||||||||
Unrealized holding gain (loss) on AFS investments, net of taxes |
92 | 1,080 | (1,523 |
) |
1,365 | |||||||||||
Reclassification adjustment for net gains included in net income, net of taxes |
(100 |
) |
— | (415 |
) |
— | ||||||||||
Comprehensive Income |
$ | 795 | $ | 1,767 | $ | 4,708 | $ | 3,395 | ||||||||
Basic earnings per share |
$ | 0.09 | $ | 0.08 | $ | 0.77 | $ | 0.24 | ||||||||
Diluted earnings per share |
$ | 0.09 | $ | 0.08 | $ | 0.74 | $ | 0.23 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
1st Century Bancshares, Inc.
Unaudited Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share data)
Common Stock |
Accumulated Other |
Treasury Stock |
Total |
|||||||||||||||||||||||||||||
Issued |
Amount |
Additional Paid-in Capital |
Accumulated Deficit |
Comprehensive Income |
Number of Shares |
Amount |
Stockholders’ Equity |
|||||||||||||||||||||||||
Balance at December 31, 2011 |
10,841,033 | $ | 108 | $ | 64,488 | $ | (13,841 |
) |
$ | 1,567 | (1,769,248 |
) |
$ | (7,271 |
) |
$ | 45,051 | |||||||||||||||
Restricted stock issued |
145,000 | 2 | (2 |
) |
— | — | — | — | — | |||||||||||||||||||||||
Forfeiture of restricted stock |
(39,625 |
) |
(1 |
) |
(69 |
) |
— | — | — | — | (70 |
) | ||||||||||||||||||||
Compensation expense associated with restricted stock awards, net of estimated forfeitures |
— | — | 430 | — | — | — | — | 430 | ||||||||||||||||||||||||
Shares surrendered to pay taxes on vesting of restricted stock |
— | — | — | — | — | (15,337 |
) |
(75 |
) |
(75 |
) | |||||||||||||||||||||
Common stock repurchased |
— | — | — | — | — | (43,847 |
) |
(166 |
) |
(166 |
) | |||||||||||||||||||||
Net income |
— | — | — | 2,030 | — | — | — | 2,030 | ||||||||||||||||||||||||
Other comprehensive income |
— | — | — | — | 1,365 | — | — | 1,365 | ||||||||||||||||||||||||
Balance at September 30, 2012 |
10,946,408 | $ | 109 | $ | 64,847 | $ | (11,811 |
) |
$ | 2,932 | (1,828,432 |
) |
$ | (7,512 |
) |
$ | 48,565 | |||||||||||||||
Balance at December 31, 2012 |
10,965,560 | $ | 110 | $ | 65,038 | $ | (10,899 |
) |
$ | 2,436 | (1,828,432 |
) |
$ | (7,512 |
) |
$ | 49,173 | |||||||||||||||
Restricted stock issued |
138,500 | 1 | (1 |
) |
— | — | — | — | — | |||||||||||||||||||||||
Forfeiture of restricted stock |
(4,750 |
) |
— | (11 |
) |
— | — | — | — | (11 |
) | |||||||||||||||||||||
Exercise of stock options |
19,000 | — | 95 | — | — | — | — | 95 | ||||||||||||||||||||||||
Compensation expense associated with restricted stock awards, net of estimated forfeitures |
— | — | 608 | — | — | — | — | 608 | ||||||||||||||||||||||||
Shares surrendered to pay taxes on vesting of restricted stock |
— | — | — | — | — | (23,270 |
) |
(138 |
) |
(138 |
) | |||||||||||||||||||||
Common stock repurchased |
— | — | — | — | — | (105 |
) |
(0 |
) |
(0 |
) | |||||||||||||||||||||
Net income |
— | — | — | 6,646 | — | — | — | 6,646 | ||||||||||||||||||||||||
Other comprehensive loss |
— | — | — | — | (1,938 |
) |
— | — | (1,938 |
) | ||||||||||||||||||||||
Balance at September 30, 2013 |
11,118,310 | $ | 111 | $ | 65,729 | $ | (4,253 |
) |
$ | 498 | (1,851,807 |
) |
$ | (7,650 |
) |
$ | 54,435 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
1st Century Bancshares, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)
Nine Months Ended September 30, |
||||||||
2013 |
2012 |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 6,646 | $ | 2,030 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization of premises and equipment |
377 | 328 | ||||||
Amortization of premiums on investment securities, net |
1,348 | 1,069 | ||||||
Provision for (reduction of) loan losses |
(300 |
) |
— | |||||
Deferred income tax benefit |
(3,310 |
) |
— | |||||
Accretion of deferred loan fees, net of costs |
(14 |
) |
(40 |
) | ||||
Gain on sale of AFS investment securities |
(705 |
) |
— | |||||
Non-cash stock compensation, net of forfeitures |
597 | 360 | ||||||
Decrease (increase) in accrued interest and other assets |
36 | (172 |
) | |||||
(Decrease) increase in accrued interest and other liabilities |
(2 |
) |
191 | |||||
Net cash provided by operating activities |
4,673 | 3,766 | ||||||
Cash flows from investing activities: |
||||||||
Activities in AFS investment securities: |
||||||||
Purchases |
— | (90,778 |
) | |||||
Maturities and principal reductions |
33,788 | 27,277 | ||||||
Proceeds from sale of AFS investment securities |
19,447 | — | ||||||
Increase in loans, net |
(88,901 |
) |
(8,818 |
) | ||||
Purchase of premises and equipment |
(675 |
) |
(299 |
) | ||||
Purchase of FRB stock and FHLB stock |
(724 |
) |
(759 |
) | ||||
Net cash used in investing activities |
(37,065 |
) |
(73,377 |
) | ||||
Cash flows from financing activities: |
||||||||
Net increase in deposits |
31,572 | 64,428 | ||||||
Net repayment of short-term borrowings |
(4,475 |
) |
— | |||||
Proceeds from other long-term borrowings |
5,000 | — | ||||||
Repayment of other long-term borrowings |
(2,500 |
) |
— | |||||
Proceeds from exercise of stock options |
95 | — | ||||||
Purchase of treasury stock |
— | (166 |
) | |||||
Shares surrendered to pay taxes on vesting of restricted stock |
(138 |
) |
(75 |
) | ||||
Net cash provided by financing activities |
29,554 | 64,187 | ||||||
Decrease in cash and cash equivalents |
(2,838 |
) |
(5,424 |
) | ||||
Cash and cash equivalents, beginning of period |
50,555 | 41,926 | ||||||
Cash and cash equivalents, end of period |
$ | 47,717 | $ | 36,502 | ||||
Supplemental cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 733 | $ | 656 | ||||
Income taxes |
$ | 133 | $ | 124 | ||||
Supplemental disclosure of non-cash investing activity: |
||||||||
Transfer of commercial real estate loan to other real estate owned (“OREO”) |
$ | — | $ | 140 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
1st Century Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Nature of Operations
1st Century Bancshares, Inc., a Delaware corporation (“Bancshares”) is a bank holding company with one subsidiary, 1st Century Bank, National Association (the “Bank”). The Bank commenced operations on March 1, 2004 in the State of California operating under the laws of a National Association (“N.A.”) regulated by the Office of the Comptroller of the Currency (the “OCC”). The Bank is a commercial bank that focuses on closely held and family owned businesses and their employees, professional service firms, real estate professionals and investors, the legal, accounting and medical professions, and small and medium-sized businesses and individuals principally in Los Angeles County. The Bank provides a wide range of banking services to meet the financial needs of the local residential community, with an orientation primarily directed toward owners and employees of the Bank’s business client base. The Bank is subject to both the regulations of and periodic examinations by the OCC, which is the Bank’s federal regulatory agency. Bancshares and the Bank are collectively referred to herein as “the Company.”
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2012, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC, under the Securities and Exchange Act of 1934, (the “Exchange Act”). The unaudited consolidated financial statements include the accounts of Bancshares and the Bank. All intercompany accounts and transactions have been eliminated.
The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2013.
The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry. A summary of the significant accounting and reporting policies consistently applied in the preparation of the accompanying unaudited consolidated financial statements follows:
Use of Estimates
Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant assumptions and estimates used by management in preparation of the consolidated financial statements include assumptions and assessments made in connection with calculating the allowance for loan losses and determining the realizability of the Company’s deferred tax assets. It is at least reasonably possible that certain assumptions and estimates could prove to be incorrect and cause actual results to differ materially and adversely from the amounts reported in the consolidated financial statements included herewith.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest earning deposits at other financial institutions with original maturities less than 90 days and all highly liquid investments with original maturities of less than 90 days.
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 net realizable value when a loan is impaired or on non-accrual status. All other loans are typically charged-off when, based upon current available facts and circumstances, it’s determined that either: (1) a loan is uncollectible, (2) repayment is determined to be protracted beyond a reasonable time frame, or (3) the loan is classified as a loss determined by either the Bank’s internal review process or by external examiners.
Loans are considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect all principal and interest amounts due according to the original contractual terms of the loan agreement on a timely basis. The Company evaluates impairment on a loan-by-loan basis. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or by using the loan’s most recent market value or the fair value of the collateral if the loan is collateral dependent. Loans that experience insignificant payment delays or payment shortfalls are generally not considered to be impaired.
When the measurement of an impaired loan is less than the recorded amount of the loan, a valuation allowance is established by recording a charge to the provision for loan losses. Subsequent increases or decreases in the valuation allowance for impaired loans are recorded by adjusting the existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses. The Company’s policy for recognizing interest income on impaired loans is the same as that for non-accrual loans.
Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a troubled debt restructuring (“TDR”). Management strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before their loan reaches nonaccrual status. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.
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.
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 unaudited Consolidated Statements of Operations and Comprehensive Income.
Furniture, Fixtures and Equipment, net
Leasehold improvements and furniture, fixtures and equipment are carried at cost, less depreciation and amortization. Furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful life of the asset (three to five years). Leasehold improvements are depreciated using the straight-line method over the terms of the related leases or the estimated lives of the improvements, whichever is shorter.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
The Company files consolidated federal and combined state income tax returns. Income tax expense or benefit is the total of the current year income tax payable or refundable and the change in the deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates.
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in the rates and laws. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Company records a valuation allowance if it believes, based on all available evidence, that it is “more likely than not” that the future tax assets will not be realized. This assessment requires management to evaluate the Company’s ability to generate sufficient future taxable income or use eligible tax carrybacks, if any, to determine the need for a valuation allowance.
During the year ended December 31, 2009, the Company established a full valuation allowance against the deferred tax assets due to the uncertainty regarding its realizability. During the nine months ended September 30, 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 unaudited Consolidated Statements of Operations and Comprehensive Income. In making this determination, management analyzed, among other things, our 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 September 30, 2013, we had a net deferred tax asset of approximately $3.0 million, compared to net deferred tax liability for net unrealized gains on investment securities of $1.7 million at December 31, 2012. Our net deferred tax asset at September 30, 2013, primarily consists of deferred tax assets related to federal and state net operating loss carryforwards and the allowance for loan losses.
At September 30, 2013 and December 31, 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.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on Available for Sale securities, are reported as a separate component of the stockholders’ equity section of the Consolidated Balance Sheets and, along with net income, are components of comprehensive income.
Earnings per Share
The Company reports both basic and diluted earnings per share. Basic earnings per share is determined by dividing net income by the average number of shares of common stock outstanding, while diluted earnings per share is determined by dividing net income by the average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents. Potential dilutive common shares related to outstanding stock options and restricted stock are determined using the treasury stock method. For the three and nine months ended September 30, 2013, there were 350,073 and 370,073, respectively, of weighted average stock options that were excluded from the diluted earnings per share calculation due to their antidilutive impact. For the three and nine months ended September 30, 2012, there were 1,179,373 weighted average stock options that were excluded from the diluted earnings per share calculation due to their antidilutive impact. For the three and nine months ended September 30, 2013, there were none and 78,128, respectively, of weighted average restricted shares that were excluded from the diluted earnings per share calculation due to their antidilutive impact. For the three and nine months ended September 30, 2012, there were none and 145,000, respectively, of weighted average restricted shares that were excluded from the diluted earnings per share calculation due to their antidilutive impact.
Three Months Ended September 30, |
Nine months Ended September 30, |
|||||||||||||||
(dollars in thousands) |
2013 |
2012 |
2013 |
2012 |
||||||||||||
Net income |
$ | 803 | $ | 687 | $ | 6,646 | $ | 2,030 | ||||||||
Average number of common shares outstanding |
8,666,447 | 8,531,823 | 8,619,670 | 8,552,857 | ||||||||||||
Effect of dilution of stock options |
243,673 | — | 139,944 | — | ||||||||||||
Effect of dilution of restricted stock |
274,383 | 286,754 | 268,855 | 269,015 | ||||||||||||
Average number of common shares outstanding used to calculate diluted earnings per common share |
9,184,503 | 8,818,577 | 9,028,469 | 8,821,872 |
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 is 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 is effective prospectively for annual and interim periods beginning after December 15, 2012. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations, or cash flows.
(2) Investments
The following is a summary of the investments categorized as Available for Sale at September 30, 2013 and December 31, 2012:
(in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
At September 30, 2013: |
||||||||||||||||
Investments — Available for Sale |
||||||||||||||||
U.S. Gov’t Treasuries |
$ | 2,147 | $ | 27 | $ | — | $ | 2,174 | ||||||||
Corporate Notes |
18,293 | 164 | — | 18,457 | ||||||||||||
Residential Mortgage-Backed Securities |
102,768 | 1,344 | (688 |
) |
103,424 | |||||||||||
Total |
$ | 123,208 | $ | 1,535 | $ | (688 |
) |
$ | 124,055 | |||||||
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 September 30, 2013 or December 31, 2012. At September 30, 2013 and December 31, 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 September 30, 2013 and December 31, 2012, the fair value of securities pledged to the State of California Treasurer’s Office to secure their deposits was $48.3 million and $47.7 million, respectively. Deposits from the State of California were $38.0 million and $34.0 million at September 30, 2013 and December 31, 2012, respectively.
The following table summarizes the fair value of AFS securities and the weighted average yield of investment securities by contractual maturity at September 30, 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 2.98 years at September 30, 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 |
||||||||||||||||||||||||||||||
U.S. Government Treasuries |
$ | — | — |
% |
$ | 2,174 | 0.13 |
% |
$ | — | — |
% |
$ | — | — |
% |
$ | 2,174 | 0.13 |
% | ||||||||||||||||||||
Corporate Notes |
9,520 | 2.68 | 8,937 | 1.63 | — | — | — | — | 18,457 | 2.17 | ||||||||||||||||||||||||||||||
Residential Mortgage-Backed Securities |
— | — | — | — | 58,123 | 1.62 | 45,301 | 2.10 | 103,424 | 1.83 | ||||||||||||||||||||||||||||||
Total |
$ | 9,520 | 2.68 |
% |
$ | 11,111 | 1.33 |
% |
$ | 58,123 | 1.62 |
% |
$ | 45,301 | 2.10 |
% |
$ | 124,055 | 1.85 |
% |
A total of thirty-two and four securities had unrealized losses at September 30, 2013 and December 31, 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 Gross (in thousands) Losses Fair Value Losses Fair Value At September 30, 2013: Investments-Available for Sale Residential Mortgage-Backed Securities At December 31, 2012: Investments-Available for Sale Residential Mortgage-Backed Securities
Gross
Unrealized
Unrealized
$
(678
)
$
46035
$
(10
)
$
1057
$
(18
)
$
7584
$
—
$
—
The Company’s assessment that it has the ability to continue to hold impaired investment securities along with its evaluation of their future performance provide the basis for it to conclude that its impaired securities are not other-than-temporarily impaired. In assessing whether it is more likely than not that the Company will be required to sell any impaired security before its anticipated recovery, which may be at their maturity, it considers the significance of each investment, the amount of impairment, as well as the Company’s liquidity position and the impact on the Company’s capital position. As a result of its analyses, the Company determined at September 30, 2013 and December 31, 2012 that the unrealized losses on its securities portfolio on which impairments had not been recognized are temporary.
During the three and nine months ended September 30, 2013, the Company sold a total of $8.6 million and $19.4 million, respectively, of available for sale securities, consisting of residential mortgage-backed securities and corporate notes. The sales resulted in realized gains of $170,000 and $705,000, respectively, which were recorded in non-interest income within the unaudited Consolidated Statement of Operations and Comprehensive Income. The Company did not sell any available for sale securities during the three and nine months ended September 30, 2012.
(3) Loans, Allowance for Loan Losses, and Non-Performing Assets
Loans
The categories of loans listed below are grouped in accordance with the primary purpose of the loans, but in the aggregate 85.9% and 84.5% of all loans are secured by real estate at September 30, 2013 and December 31, 2012, respectively.
September 30, 2013 |
December 31, 2012 |
|||||||||||||||
Amount |
Percent |
Amount |
Percent |
|||||||||||||
(dollars in thousands) |
Outstanding |
of Total |
Outstanding |
of Total |
||||||||||||
Commercial (1) |
$ | 70,518 | 19.8 |
% |
$ | 58,769 | 22.0 |
% | ||||||||
Commercial real estate |
150,610 | 42.2 |
% |
110,031 | 41.3 |
% | ||||||||||
Residential |
76,906 | 21.6 |
% |
53,162 | 19.9 |
% | ||||||||||
Land and construction |
33,675 | 9.4 |
% |
19,080 | 7.2 |
% | ||||||||||
Consumer and other (2) |
24,996 | 7.0 |
% |
25,584 | 9.6 |
% | ||||||||||
Loans, gross |
356,705 | 100.0 |
% |
266,626 | 100.0 |
% | ||||||||||
Net deferred costs |
1 | 45 | ||||||||||||||
Less — allowance for loan losses |
(6,835 |
) |
(6,015 |
) |
||||||||||||
Loans, net |
$ | 349,871 | $ | 260,656 |
(1) |
Unsecured commercial loan balances were $14.9 million and $10.0 million at September 30, 2013 and December 31, 2012, respectively. | |
(2) |
Unsecured consumer and other loan balances were $3.9 million and $901,000 at September 30, 2013 and December 31, 2012, respectively. |
As of September 30, 2013 and December 31, 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 and for the three and nine months ended September 30, 2013 and 2012:
Commercial |
Land and |
Consumer |
||||||||||||||||||||||
(in thousands) |
Commercial |
Real Estate |
Residential |
Construction |
and Other |
Total |
||||||||||||||||||
Three Months Ended September 30, 2013: |
||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 1,532 | $ | 3,175 | $ | 748 | $ | 766 | $ | 399 | $ | 6,620 | ||||||||||||
Provision for (reduction of) loan losses |
(15 |
) |
175 | (75 |
) |
100 | 15 | 200 | ||||||||||||||||
Charge-offs |
— | — | — | — | — | — | ||||||||||||||||||
Recoveries |
15 | — | — | — | — | 15 | ||||||||||||||||||
Ending balance |
$ | 1,532 | $ | 3,350 | $ | 673 | $ | 866 | $ | 414 | $ | 6,835 | ||||||||||||
Nine Months Ended September 30, 2013: |
||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 2,277 | $ | 2,450 | $ | 508 | $ | 411 | $ | 369 | $ | 6,015 | ||||||||||||
Provision for (reduction of) loan losses |
(1,815 |
) |
900 | 165 | 455 | (5 |
) |
(300 |
) | |||||||||||||||
Charge-offs |
— | — | — | — | — | — | ||||||||||||||||||
Recoveries |
1,070 | — | — | — | 50 | 1,120 | ||||||||||||||||||
Ending balance |
$ | 1,532 | $ | 3,350 | $ | 673 | $ | 866 | $ | 414 | $ | 6,835 | ||||||||||||
As of September 30, 2013: |
||||||||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 35 | $ | — | $ | — | $ | — | $ | — | $ | 35 | ||||||||||||
Ending balance: collectively evaluated for impairment |
1,497 | 3,350 | 673 | 866 | 414 | 6,800 | ||||||||||||||||||
Total |
$ | 1,532 | $ | 3,350 | $ | 673 | $ | 866 | $ | 414 | $ | 6,835 | ||||||||||||
Loans: |
||||||||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 950 | $ | — | $ | — | $ | — | $ | 29 | $ | 979 | ||||||||||||
Ending balance: collectively evaluated for impairment |
69,568 | 150,610 | 76,906 | 33,675 | 24,967 | 355,726 | ||||||||||||||||||
Total |
$ | 70,518 | $ | 150,610 | $ | 76,906 | $ | 33,675 | $ | 24,996 | $ | 356,705 | ||||||||||||
Three Months Ended September 30, 2012: |
||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 1,943 | $ | 1,680 | $ | 463 | $ | 461 | $ | 319 | $ | 4,866 | ||||||||||||
Provision for loan losses |
(180 |
) |
220 | (25 |
) |
— | (15 |
) |
— | |||||||||||||||
Charge-offs |
— | — | — | — | — | — | ||||||||||||||||||
Recoveries |
15 | — | — | — | — | 15 | ||||||||||||||||||
Ending balance |
$ | 1,778 | $ | 1,900 | $ | 438 | $ | 461 | $ | 304 | $ | 4,881 | ||||||||||||
Nine Months Ended September 30, 2012: |
||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 2,584 | $ | 1,252 | $ | 583 | $ | 516 | $ | 349 | $ | 5,284 | ||||||||||||
Provision for loan losses |
(805 |
) |
1,045 | (145 |
) |
(50 |
) |
(45 |
) |
— | ||||||||||||||
Charge-offs |
(25 |
) |
(400 |
) |
— | (5 |
) |
— | (430 |
) | ||||||||||||||
Recoveries |
24 | 3 | — | — | — | 27 | ||||||||||||||||||
Ending balance |
$ | 1,778 | $ | 1,900 | $ | 438 | $ | 461 | $ | 304 | $ | 4,881 | ||||||||||||
As of September 30, 2012: |
||||||||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 500 | $ | — | $ | — | $ | — | $ | — | $ | 500 | ||||||||||||
Ending balance: collectively evaluated for impairment |
1,278 | 1,900 | 438 | 461 | 304 | 4,381 | ||||||||||||||||||
Total |
$ | 1,778 | $ | 1,900 | $ | 438 | $ | 461 | $ | 304 | $ | 4,881 | ||||||||||||
Loans: |
||||||||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 2,120 | $ | 3,117 | $ | — | $ | 1,085 | $ | 345 | $ | 6,667 | ||||||||||||
Ending balance: collectively evaluated for impairment |
56,844 | 90,472 | 45,688 | 20,644 | 20,933 | 234,581 | ||||||||||||||||||
Total |
$ | 58,964 | $ | 93,589 | $ | 45,688 | $ | 21,729 | $ | 21,278 | $ | 241,248 |
The following is a summary of the allowance for loan losses and recorded investment in loans as of December 31, 2012:
Commercial |
Land and |
Consumer |
||||||||||||||||||||||
(in thousands) |
Commercial |
Real Estate |
Residential |
Construction |
and Other |
Total |
||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
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 September 30, 2013 and December 31, 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 unaudited Consolidated Statements of Operations and Comprehensive Income. The allowance held for unfunded lending commitments is reported in accrued interest and other liabilities within the accompanying Consolidated Balance Sheets, and not as part of the allowance for loan losses in the above tables. As of September 30, 2013 and December 31, 2012, the allowance for unfunded lending commitments was $250,000 and $203,000, respectively, and is primarily related to $97.3 million and $74.2 million in commitments to extend credit to customers and $2.3 million and $1.9 million in standby/commercial letters of credit at September 30, 2013 and December 31, 2012, respectively.
Non-Performing Assets
The following table presents an aging analysis of the recorded investment of past due loans as of September 30, 2013 and December 31, 2012. Payment activity is reviewed by management on a monthly basis to determine the performance of each loan. Loans are considered to be non-performing when a loan is greater than 90 days delinquent. Loans that are 90 days or more past due may still accrue interest if they are well-secured and in the process of collection. There were no additions to non-performing loans during the nine months ended September 30, 2013 and 2012. Non-performing loans represented 0.2% and 0.7% of total loans at September 30, 2013 and December 31, 2012, respectively. There were no accruing loans past due 90 days or more at September 30, 2013. At December 31, 2012, there was one accruing commercial real estate 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.
30-59 |
60-89 |
|||||||||||||||||||||||
Days Past |
Days Past |
> 90 Days |
Total |
|||||||||||||||||||||
(in thousands) |
Due |
Due |
Past Due |
Past Due |
Current |
Total |
||||||||||||||||||
As of September 30, 2013: |
||||||||||||||||||||||||
Commercial |
$ | — | $ | — | $ | 714 | $ | 714 | $ | 69,804 | $ | 70,518 | ||||||||||||
Commercial real estate |
— | — | — | — | 150,610 | 150,610 | ||||||||||||||||||
Residential |
— | — | — | — | 76,906 | 76,906 | ||||||||||||||||||
Land and construction |
— | — | — | — | 33,675 | 33,675 | ||||||||||||||||||
Consumer and other |
— | — | 29 | 29 | 24,967 | 24,996 | ||||||||||||||||||
Totals |
$ | — | $ | — | $ | 743 | $ | 743 | $ | 355,962 | $ | 356,705 | ||||||||||||
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 September 30, 2013 and December 31, 2012:
(dollars in thousands) |
September 30, 2013 |
December 31, 2012 |
||||||
Non-accrual loans: |
||||||||
Commercial |
$ | 714 | $ | 1,509 | ||||
Consumer and other |
29 | 345 | ||||||
Total non-accrual loans |
743 | 1,854 | ||||||
OREO |
90 | 90 | ||||||
Total non-performing assets |
$ | 833 | $ | 1,944 | ||||
Non-performing assets to gross loans and OREO |
0.23 |
% |
0.73 |
% | ||||
Non-performing assets to total assets |
0.16 |
% |
0.39 |
% |
Credit Quality Indicators
The following table represents the credit exposure by internally assigned grades at September 30, 2013 and December 31, 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.
Commercial |
Land and |
Consumer |
||||||||||||||||||
(in thousands) |
Commercial |
Real Estate |
Residential |
Construction |
and Other |
|||||||||||||||
As of September 30, 2013: |
||||||||||||||||||||
Grade: |
||||||||||||||||||||
Pass |
$ | 68,506 | $ | 150,008 | $ | 76,906 | $ | 31,201 | $ | 24,918 | ||||||||||
Special Mention |
669 | — | — | 2,474 | — | |||||||||||||||
Substandard |
1,343 | 602 | — | — | 78 | |||||||||||||||
Total |
$ | 70,518 | $ | 150,610 | $ | 76,906 | $ | 33,675 | $ | 24,996 | ||||||||||
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 September 30, 2013 and December 31, 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 nine months ended September 30, 2013: |
||||||||||||||||
With no related allowance recorded: |
||||||||||||||||
Commercial |
$ | 807 | $ | 1,083 | $ | — | $ | 857 | ||||||||
Commercial real estate |
— | — | — | — | ||||||||||||
Residential |
— | — | — | — | ||||||||||||
Land and construction |
— | — | — | — | ||||||||||||
Consumer and other |
29 | 29 | — | 310 | ||||||||||||
With an allowance recorded: |
||||||||||||||||
Commercial |
$ | 143 | $ | 147 | $ | 35 | $ | 160 | ||||||||
Commercial real estate |
— | — | — | — | ||||||||||||
Residential |
— | — | — | — | ||||||||||||
Land and construction |
— | — | — | — | ||||||||||||
Consumer and other |
— | — | — | — | ||||||||||||
Totals: |
||||||||||||||||
Commercial |
$ | 950 | $ | 1,230 | $ | 35 | $ | 1,017 | ||||||||
Commercial real estate |
$ | — | $ | — | $ | — | $ | — | ||||||||
Residential |
$ | — | $ | — | $ | — | $ | — | ||||||||
Land and construction |
$ | — | $ | — | $ | — | $ | — | ||||||||
Consumer and other |
$ | 29 | $ | 29 | $ | — | $ | 310 | ||||||||
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 three and nine months ended September 30, 2012, the average balance of impaired loans was $6.9 million and $7.3 million, respectively. As of September 30, 2013 and December 31, 2012, there was $743,000 and $1.9 million, respectively, of impaired loans on non-accrual status. During the three and nine months ended September 30, 2013, interest income recognized on impaired loans subsequent to their classification as impaired was $2,000 and $7,000, respectively. During the three and nine months ended September 30, 2012, interest income recognized on impaired loans subsequent to their classification as impaired was $3,000 and $9,000, respectively. 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
There were no troubled debt restructurings during the three and nine months ended September 30, 2013. Troubled debt restructurings for the three and nine months ended September 30, 2012 are set forth in the following table.
For the Three Months Ended September 30, 2012 |
For the Nine Months Ended September 30, 2012 |
|||||||||||||||||||||||
(dollars in thousands) |
Number of Loans |
Pre Modification Outstanding Recorded Investment |
Post Modification Outstanding Recorded Investment |
Number of Loans |
Pre Modification Outstanding Recorded Investment |
Post Modification Outstanding Recorded Investment |
||||||||||||||||||
Troubled Debt Restructurings: |
||||||||||||||||||||||||
Commercial |
— | $ | — | $ | — | 3 | $ | 1,034 | $ | 1,034 |
The modifications in connection with the troubled debt restructurings during the nine months ended September 30, 2012 were primarily related to extending the amortization period of these loans. The impact on the Company’s determination of the allowance for loan losses related to these troubled debt restructurings was not material and resulted in no charge-offs during the three and nine months ended September 30, 2013 and 2012. During the three months ended September 30, 2013, there were no defaults recorded on any loans that were modified as troubled debt restructurings. During the nine months ended September 30, 2013, there was one commercial loan, with a recorded investment of $572,000 at September 30, 2013, that defaulted within twelve months of its modification date. As of September 30, 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 unaudited Consolidated Statements of Cash Flows.
Interest Rate Derivatives. The Company utilizes interest rate swaps to facilitate the needs of its customers. The Company has entered into interest rate swaps that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.
The notional amounts and estimated fair values of interest rate derivative contracts outstanding at September 30, 2013 and December 31, 2012 are presented in the following table. The Company obtains dealer quotations to value its interest rate derivative contracts.
September 30, 2013 |
December 31, 2012 |
|||||||||||||||
(in thousands) |
Notional |
Estimated |
Notional |
Estimated |
||||||||||||
Non-hedging interest rate derivatives: |
||||||||||||||||
Commercial loan interest rate swaps |
$ | 2,728 | $ | 10 | $ | 2,800 | $ | 107 | ||||||||
Commercial loan interest rate swaps |
$ | (2,728 |
) |
$ | 10 | $ | (2,800 |
) |
$ | (107 |
) |
The weighted-average rates paid and received for interest rate swaps outstanding at September 30, 2013 and December 31, 2012 were as follows:
September 30, 2013 Weighted-Average |
December 31, 2012 Weighted-Average |
|||||||||||||||
Interest |
Interest |
Interest |
Interest |
|||||||||||||
Non-hedging interest rate swaps |
3.24 |
% |
4.85 |
% |
3.41 |
% |
4.85 |
% | ||||||||
Non-hedging interest rate swaps |
4.85 |
% |
3.24 |
% |
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 unaudited Consolidated Statements of Operations and Comprehensive Income.
As stated above, the Company enters into non-hedge related derivative positions primarily to accommodate the business needs of its customers. Upon the origination of a derivative contract with a customer, the Company simultaneously enters into an offsetting derivative contract with a third party. The Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third party. Because the Company acts only as an intermediary for its customer, subsequent changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.
Amounts included in the unaudited Consolidated Statements of Operations and Comprehensive Income related to non-hedging interest rate derivative instruments are presented in the table below.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
(in thousands) |
2013 |
2012 |
2013 |
2012 |
||||||||||||
Non-hedging interest rate derivatives: |
||||||||||||||||
Other non-interest income |
$ | 10 | $ | 26 | $ | (97 |
) |
$ | 158 | |||||||
Other non-interest expense |
$ | 10 | $ | 27 | $ | (97 |
) |
$ | 114 |
(5) Comprehensive Income
Comprehensive income, which includes net income and the net change in unrealized gains on investment securities available for sale, is presented below:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
(in thousands) |
2013 |
2012 |
2013 |
|||||||||||||
Net income |
$ | 803 | $ | 687 | $ | 6,646 | $ | 2,030 | ||||||||
Other comprehensive income (loss): |
||||||||||||||||
Increase (decrease) in net unrealized gains on investment securities available for sale, net of tax (expense) benefit of ($65) and $1,064 for the three and nine months ended September 30, 2013, respectively, and ($755) and ($956) for the three and nine months ended September 30, 2012, respectively |
92 | 1,080 | (1,523 |
) |
1,365 | |||||||||||
Reclassification for net gains included in earnings, net of tax expense of $70 and $290 for the three and nine months ended September 30, 2013, respectively |
(100 |
) |
— | (415 |
) |
— | ||||||||||
Comprehensive income |
$ | 795 | $ | 1,767 | $ | 4,708 | $ | 3,395 |
(6) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Premises and equipment at September 30, 2013 and December 31, 2012 are comprised of the following:
(in thousands) |
September 30, 2013 |
December 31, 2012 |
||||||
Leasehold improvements |
$ | 1,316 | $ | 973 | ||||
Furniture & equipment |
2,423 | 2,191 | ||||||
Software |
761 | 661 | ||||||
Total |
4,500 | 3,825 | ||||||
Accumulated depreciation |
(3,182 |
) |
(2,805 |
) | ||||
Premises and equipment, net |
$ | 1,318 | $ | 1,020 |
Depreciation and amortization included in occupancy expense was $124,000 and $377,000 for the three and nine months ended September 30, 2013, respectively, and $113,000 and $328,000 for the three and nine months ended September 30, 2012, respectively.
(7) Deposits
The following table reflects the summary of deposit categories by dollar and percentage at September 30, 2013 and December 31, 2012:
September 30, 2013 |
December 31, 2012 |
|||||||||||||||
(dollars in thousands) |
Amount |
% of Total |
Amount |
% of Total |
||||||||||||
Non-interest bearing demand deposits |
$ | 225,001 | 50.2 |
% |
$ | 196,026 | 47.0 |
% | ||||||||
Interest bearing checking |
19,323 | 4.3 |
% |
23,233 | 5.6 |
% | ||||||||||
Money market deposits and savings |
161,007 | 35.9 |
% |
152,094 | 36.5 |
% | ||||||||||
Certificates of deposit |
42,922 | 9.6 |
% |
45,328 | 10.9 |
% | ||||||||||
Total |
$ | 448,253 | 100.0 |
% |
$ | 416,681 | 100.0 |
% |
At September 30, 2013, the Company had four certificates of deposit with the State of California Treasurer’s Office for a total of $38.0 million, which represented 8.5% of total deposits. The deposits outstanding at September 30, 2013 are scheduled to mature in the fourth quarter of 2013. 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 certificates of deposit with the State of California Treasurer’s Office for a total of $34.0 million, which 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 September 30, 2013 and December 31, 2012, respectively, in connection with these certificates of deposit.
The aggregate amount of certificates of deposit of $100,000 or greater at September 30, 2013 and December 31, 2012 was $42.0 million and $44.0 million, respectively. At September 30, 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: $41.7 million maturing in six months or less, $366,000 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 September 30, 2013.
(in thousands) |
Six months and less |
Greater than six months through one year |
Greater than one year |
|||||||||||||
0.00% | to | 0.99% | $ | 42,334 | $ | 528 | $ | — | ||||||||
1.00% | to | 1.99% | 20 | — | 40 | |||||||||||
Total |
$ | 42,354 | $ | 528 | $ | 40 |
(8) Other Borrowings
At September 30, 2013 and December 31, 2012, the Company had a borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB of $148.9 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 September 30, 2013 and December 31, 2012, respectively. The Company had no overnight borrowings outstanding under this borrowing/credit facility at September 30, 2013 and December 31, 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 September 30, 2013 and December 31, 2012 (dollars in thousands):
Maturity Date |
Interest Rate |
September 30, 2013 |
December 31, 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 September 30, 2013 and December 31, 2012, 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. 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. As of September 30, 2013 and December 31, 2012, the Company had pledged $2.0 million and $6.2 million, respectively, of corporate notes related to these lines of credit.
(9) Commitments and Contingencies
Commitments to Extend Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby/commercial letters of credit and guarantees on revolving credit card limits. These instruments involve various levels and elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated financial statements. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company had $97.3 million and $74.2 million in commitments to extend credit to customers and $2.3 million and $1.9 million in standby/commercial letters of credit at September 30, 2013 and December 31, 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 $232,000 and $67,000 as of September 30, 2013 and December 31, 2012, respectively.
Lease Commitments
The Company leases office premises under two operating leases that will expire in November 2013 and June 2024, respectively. Rental expense, which is included in occupancy expense and is reduced for any sublease income earned during the period was $191,000 and $549,000 for the three and nine months ended September 30, 2013, respectively, and $135,000 and $417,000 for the three and nine months ended September 30, 2012, respectively. Sublease income earned was none and $19,000 during the three and nine months ended September 30, 2013, respectively, and $28,000 and $81,000 during the three and nine months ended September 30, 2012, respectively. On April 1, 2013, the Company ended its sublease agreement.
The projected minimum rental payments under the term of the leases at September 30, 2013 are as follows (in thousands):
Years ending December 31, |
||||
2013 (October – December) |
$ | 173 | ||
2014 |
644 | |||
2015 |
655 | |||
2016 |
675 | |||
2017 |
696 | |||
Thereafter |
5,057 | |||
Total |
$ | 7,900 |
Litigation
The Company from time to time is party to lawsuits, which arise out of the normal course of business. At September 30, 2013 and December 31, 2012, the Company did not have any litigation that management believes will have a material impact on the Consolidated Balance Sheets or unaudited Consolidated Statements of Operations 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, |
||||
2013 (October – December) |
$ | 179 | ||
2014 |
499 | |||
2015 |
327 | |||
2016 |
155 | |||
2017 |
50 | |||
Thereafter |
9 | |||
Total |
$ | 1,219 |
(10) Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2013 and December 31, 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 September 30, 2013: |
||||||||||||||||
Investments-Available for Sale |
||||||||||||||||
U.S. Gov’t treasuries |
$ | 2,174 | $ | 2,174 | $ | — | $ | — | ||||||||
Corporate Notes |
18,457 | — | 18,457 | — | ||||||||||||
Residential Mortgage-Backed Securities |
103,424 | — | 103,424 | — | ||||||||||||
Derivative Assets – Interest Rate Swaps |
10 | — | 10 | — | ||||||||||||
Derivative Liabilities – Interest Rate Swaps |
10 | — | 10 | — | ||||||||||||
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 September 30, 2013 and December 31, 2012, the Level 2 fair value of the Company’s residential mortgage-backed securities was $103.4 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 September 30, 2013 and December 31, 2012, the weighted average yield and weighed average life of these securities were 1.83% and 1.95%, respectively, and 2.98 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 or 2 measurements during the three and nine months ended September 30, 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 |
||||||||||||||||
Quoted Prices in Active Markets for Identical Assets |
Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||
(in thousands) |
Fair Value |
(Level 1) |
(Level 2) |
(Level 3) | ||||||||||||
At September 30, 2013: |
||||||||||||||||
Impaired loans |
||||||||||||||||
Commercial |
$ | 679 | $ | — | $ | — | $ | 679 | ||||||||
OREO |
||||||||||||||||
Land and construction |
90 | — | — | 90 | ||||||||||||
Total |
$ | 769 | $ | — | $ | — | $ | 769 | ||||||||
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.
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.
(11) Estimated Fair Value Information
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many cases, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize in a current market exchange.
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value are explained below.
Cash and cash equivalents
The carrying amounts are considered to be their estimated fair values and are classified as Level 1 because of the short-term maturity of these instruments which includes Federal funds sold and interest-earning deposits at other financial institutions.
Investment securities
AFS investment securities are carried at fair value, which are based on quoted prices of exact or similar securities, or on inputs that are observable, either directly or indirectly. The Company obtains quoted prices through third party brokers. Investment securities are classified as Level 1 to the extent that they are based on quoted prices for identical instrument traded in active markets. Investment securities are classified as Level 2 for valuations based on quotes prices for similar securities or inputs that are observable, either directly or indirectly.
FRB and FHLB stock
It is not practical to determine the fair value of FRB and FHLB stock due to restrictions placed on its transferability.
Loans, net
For loans, the fair value is estimated using market quotes for similar assets or the present value of future cash flows, discounted using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same maturities and giving consideration to estimated prepayment risk and credit risk. The fair value of loans is determined utilizing estimates resulting in a Level 3 classification.
Impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company may measure impairment based on a loan’s observable market price, or the fair value of the collateral (net of estimated costs to sell) if the loan is collateral dependent. The fair value of impaired loans is determined utilizing estimates resulting in a Level 3 classification.
Off-balance sheet credit-related instruments
The fair values of commitments, which include standby letters of credit and commercial letters of credit, are based upon fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The related fees are not considered material to the Company’s financial statements as a whole and the fair market value of the Company’s off-balance sheet credit-related instruments cannot be readily determined. The fair value of these items is determined utilizing estimates resulting in a Level 3 classification.
Derivatives
The fair value of derivatives is based on valuation models using observable market data as of the measurement date and is classified as Level 2.
Deposits
For demand deposits, the carrying amount approximates fair value. The fair values of interest bearing checking, savings, and money market deposits are estimated by discounting future cash flows using the interest rates currently offered for deposits of similar products. Because of the short-term maturity of these deposits, the carrying amounts are considered to be their estimated fair values and are classified as Level 1.
The fair values of the certificates of deposit are estimated by discounting future cash flows based on the rates currently offered for certificates of deposit with similar interest rates and remaining maturities. The fair value of certificates of deposit is determined utilizing estimates resulting in a Level 2 classification.
Other borrowings
The fair values of long term FHLB advances are estimated based on the rates currently offered by the FHLB for advances with similar interest rates and remaining maturities. The fair value of other borrowings is determined utilizing estimates resulting in a Level 2 classification.
Accrued interest
The estimated fair value for both accrued interest receivable and accrued interest payable are considered to be equivalent to the carrying amounts, resulting in a Level 1 classification.
The estimated fair value and carrying amounts of the financial instruments at September 30, 2013 and December 31, 2012 are as follows:
Carrying |
Fair Value Measurements Using: | |||||||||||||||||||
(dollars in thousands) |
Amount |
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||||
As of September 30, 2013 |
||||||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 47,717 | $ | 47,717 | $ | — | $ | — | $ | 47,717 | ||||||||||
Investment securities |
124,055 | 2,174 | 121,881 | — | 124,055 | |||||||||||||||
FRB and FHLB stock |
4,502 | — | — | — |
N/A |
|||||||||||||||
Loans, net |
349,871 | — | — | 350,151 | 350,151 | |||||||||||||||
Non-hedging interest rate swaps |
10 | — | 10 | — | 10 | |||||||||||||||
Accrued interest receivable |
1,382 | 1,382 | — | — | 1,382 | |||||||||||||||
Liabilities |
||||||||||||||||||||
Non-interest bearing deposits |
$ | 225,001 | $ | 225,001 | $ | — | $ | — | $ | 225,001 | ||||||||||
Interest bearing deposits |
223,252 | 180,330 | 42,922 | — | 223,252 | |||||||||||||||
Other borrowings |
27,500 | — | 27,637 | — | 27,637 | |||||||||||||||
Non-hedging interest rate swaps |
10 | — | 10 | — | 10 | |||||||||||||||
Accrued interest payable |
33 | 33 | — | — | 33 | |||||||||||||||
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 and FHLB stock |
3,778 | — | — | — |
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 |
(12) Non-Interest Income
The following table summarizes the information regarding non-interest income for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
(in thousands) |
2013 |
2012 |
2013 |
2012 |
||||||||||||
Loan arrangement fees |
$ | 121 | $ | 328 | 665 | $ | 895 | |||||||||
Gain on sale of AFS investment securities |
170 | — | 705 | — | ||||||||||||
Interest rate swap items |
10 | 26 | (97 |
) |
158 | |||||||||||
Service charges and other operating income |
104 | 70 | 328 | 207 | ||||||||||||
Total non-interest income |
$ | 405 | $ | 424 | $ | 1,601 | $ | 1,260 |
Non-interest income primarily consists of loan arrangement fees earned in connection with our college loan funding program. During the first quarter of 2013, the Company terminated this program.
(13) 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 September 30, 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 unaudited Consolidated Statements of Operations and Comprehensive Income related to the restricted stock awards, net of estimated forfeitures, was $204,000 and $597,000 for the three and nine months ended September 30, 2013 and $150,000 and $360,000 for the three and nine months ended September 30, 2012, respectively. The fair value of restricted stock awards that vested during the three and nine months ended September 30, 2013 was $23,000 and $557,000, respectively, and $32,200 and $346,900, for the three and nine months ended September 30, 2012, respectively.
The following table reflects the activities related to restricted stock awards outstanding for the nine months ended September 30, 2013 and 2012, respectively.
Nine Months Ended September 30, |
||||||||||||||||
2013 |
2012 |
|||||||||||||||
Restricted Shares |
Number |
Weighted Avg Fair Value at |
Number |
Weighted Avg Fair Value at |
||||||||||||
Beginning balance |
563,516 | $ | 4.23 | 536,733 | $ | 4.03 | ||||||||||
Granted |
138,500 | 5.82 | 145,000 | 4.85 | ||||||||||||
Vested |
(130,344 |
) |
4.27 | (79,413 |
) |
4.37 | ||||||||||
Forfeited and surrendered |
(4,750 |
) |
4.03 | (39,625 |
) |
4.05 | ||||||||||
Ending balance |
566,922 | $ | 4.61 | 562,695 | $ | 4.19 |
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 nine months ended September 30, 2013 and 2012, there were 19,000 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 three and nine months ended September 30, 2013 or 2012. The remaining contractual life of the 2004 Founder Stock Options outstanding was 0.40 and 1.41 years at September 30, 2013 and 2012, respectively. All options under the 2004 Founder Stock Option Plan were exercisable at September 30, 2013 and 2012. At September 30, 2013 and 2012, the weighted average exercise price of the 114,700 shares outstanding under the 2004 Founder Stock Option Plan was $5.00.
There have been no options granted, exercised or cancelled under the Director and Employee Stock Option Plan for the nine months ended September 30, 2013 or 2012. The remaining contractual life of the Director and Employee Stock Options outstanding was 0.89 and 1.89 years at September 30, 2013 and 2012, respectively. All options under the Directors and Employee Stock Option Plan were exercisable at September 30, 2013 and 2012. At September 30, 2013 and 2012, the weighted average exercise price of the 1,045,673 shares outstanding under the Director and Employee Stock Option Plan was $6.05.
The following tables detail the amount of shares authorized and available under all stock plans as of September 30, 2013:
Shares Reserved Less Shares Previously Less Shares Total Shares 2004 Founder Stock Option Plan Director and Employee Stock Option Plan 2005 Equity Incentive Plan 2013 Equity Incentive Plan
Exercised/Vested
Outstanding
Available for
Future Issuance
150,000
27,000
114,700
—
1,434,000
216,924
1,045,673
—
1,200,000
627,851
566,922
—
750,000
—
—
750,000
(14) Regulatory Matters
Capital
Bancshares and the Bank are subject to the various regulatory capital requirements administered by federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bancshares and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Company.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that as of September 30, 2013 and December 31, 2012, the Company and the Bank met all capital adequacy requirements to which they are subject.
At December 31, 2012, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since the notification that management believes have changed the Bank’s category.
The Company’s and the Bank’s capital ratios as of September 30, 2013 and December 31, 2012 are presented in the table below:
Company |
Bank |
For Capital |
For the Bank to be Well Capitalized Under Prompt Corrective Measures |
|||||||||||||||||||||||||||||
(dollars in thousands) |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||||||||||||||
September 30, 2013: |
||||||||||||||||||||||||||||||||
Total Risk-Based Capital Ratio |
$ | 56,976 | 14.32 |
% |
$ | 55,902 | 14.05 |
% |
$ | 31,823 | 8.00 |
% |
$ | 39,779 | 10.00 |
% | ||||||||||||||||
Tier 1 Risk-Based Capital Ratio |
$ | 51,977 | 13.07 |
% |
$ | 50,904 | 12.80 |
% |
$ | 15,912 | 4.00 |
% |
$ | 23,867 | 6.00 |
% | ||||||||||||||||
Tier 1 Leverage Ratio |
$ | 51,977 | 9.99 |
% |
$ | 50,904 | 9.78 |
% |
$ | 20,824 | 4.00 |
% |
$ | 26,030 | 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 stockholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Currently, the Bank is prohibited from paying dividends to Bancshares until such time as the accumulated deficit is eliminated.
To date, Bancshares has not paid any cash dividends. Payment of stock or cash dividends in the future will depend upon earnings and financial condition and other factors deemed relevant by Bancshares’ Board of Directors, as well as Bancshares’ legal ability to pay dividends. Accordingly, no assurance can be given that any cash dividends will be declared in the foreseeable future.
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”).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates
The accounting and reporting policies followed by us conform, in all material respects, to accounting principles generally accepted in the United States, or GAAP, and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base our estimates on historical experience, current information and other factors deemed by us to be relevant, actual results could differ materially and adversely from those estimates.
We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting polices related to the allowance for loan losses (“ALL”) and income taxes are considered to be critical, as these policies involve considerable subjective judgment and estimation by management. Critical accounting policies, and our procedures related to these policies, are summarized below. There have been no changes to our critical accounting policies and estimates during the three months ended September 30, 2013.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to operations and represents an estimate of probable incurred losses inherent in the Company’s loan portfolio that have been incurred as of the balance sheet date. Loan losses are charged against the allowance when management believes that principal is uncollectible. Subsequent repayments or recoveries, if any, are credited to the allowance. Management periodically assesses the adequacy of the allowance for loan losses by reference to many quantitative and qualitative factors that may be weighted differently at various times depending on prevailing conditions. The provisions reflect management’s evaluation of the adequacy of the allowance based, in part, upon the historical loss experience of the loan portfolio, as well as estimates from historical peer group loan loss data and the loss experience of other financial institutions, augmented by management judgment. During this process, loans are separated into the following portfolio segments: commercial, commercial real estate, residential, land and construction, and consumer and other loans. The relative significance of risk considerations vary by portfolio segment. For commercial loans, commercial real estate loans and land and construction loans, the primary risk consideration is a borrower’s ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for commercial real estate and land and construction loans. The primary risk consideration for residential loans and consumer loans are a borrower’s personal cash flow and liquidity, as well as collateral value.
Loss ratios for all portfolio segments are evaluated on a quarterly basis. Loss ratios associated with historical loss experience are determined based on a rolling migration analysis of each portfolio segment within the portfolio. This migration analysis estimates loss factors based on the performance of each portfolio segment over a four and a half year time period. These loss ratios are then adjusted, if determined necessary by management, 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 materially and adversely from the estimates.
In addition, regulatory agencies, as a part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance through provisioning based on their judgment about information available to them at the time of their examinations. 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. See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Allowance for Loan Losses” for further details considered by management in estimating the necessary level of the allowance for loan losses.
Income Taxes. Provision for income taxes is the amount of estimated tax due reported on our tax returns and the change in the amount of deferred tax assets and liabilities. Deferred income taxes represent the estimated net income tax expense payable (or benefits receivable) for temporary differences between the carrying amounts for financial reporting purposes and the amounts used for tax purposes. A valuation allowance is required if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of deferred tax assets is highly subjective and dependent upon management’s evaluation of both positive and negative evidence, including historic financial performance, forecasts of future income, existence of feasible tax planning strategies, length of statutory carryforward periods, and assessments of current and future economic and business conditions. Management evaluates the positive and negative evidence and determines the realizability of the deferred tax asset on a quarterly basis. See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Deferred Tax Asset” for further discussion of our deferred tax asset and management’s evaluation of the same.
Summary of Financial Condition and Results of Operations
For the three months ended September 30, 2013 and 2012, the Company recorded net income of $803,000, or $0.09 per diluted share, and $687,000, or $0.08 per diluted share, respectively. The increase in net income for the three months ended September 30, 2013, as compared to the same period last year, is primarily related to an increase in net interest income of $583,000, partially offset by increases in non-interest expenses of $273,000 and provision for loan losses of $200,000.
For the nine months ended September 30, 2013 and 2012, the Company recorded net income of $6.6 million, or $0.74 per diluted share, and $2.0 million, or $0.23 per diluted share, respectively. The increase in net income for the nine months ended September 30, 2013, as compared to the same period last year, is primarily related to increases in net interest income and non-interest income of $1.7 million and $340,000, respectively, as well as a reduction of provision for loan losses of $300,000 and the reversal of our deferred tax valuation allowance, which resulted in an income tax benefit of approximately $3.2 million. These increases were partially offset by an increase in non-interest expenses of $916,000.
Total assets at September 30, 2013 were $532.3 million, representing an increase of approximately $33.2 million, or 6.6%, from $499.2 million at December 31, 2012. Cash and cash equivalents at September 30, 2013 were $47.7 million, representing a decrease of $2.8 million, or 5.6%, from $50.6 million at December 31, 2012. Loans increased by $90.0 million, from $266.7 million at December 31, 2012 to $356.7 million at September 30, 2013. The majority of growth within our loan portfolio related to increases of $40.6 million in commercial real estate loans, $23.7 million in single-family loans, and $14.6 million in construction and land development loans. Loan originations were $74.8 million and $182.2 million during the three and nine months ended September 30, 2013, compared to $23.7 million and $70.6 million during the same periods last year. Prepayment speeds for the three and nine months ended September 30, 2013 were 5.6% and 13.0%, respectively, compared to 19.4% and 21.9% for the same periods last year. Investment securities were $124.1 million at September 30, 2013, compared to $181.2 million at December 31, 2012, representing a decrease of $57.2 million, or 31.6%. The weighted average life of our investment securities was 2.66 years and 2.80 years at September 30, 2013 and December 31, 2012, respectively.
Total liabilities at September 30, 2013 increased by $27.9 million, or 6.2%, to $477.9 million compared to $450.0 million at December 31, 2012. This increase is primarily due to a $31.6 million increase in deposits. Total core deposits, which includes non-interest bearing demand deposits, interest bearing demand deposits and money market deposits and savings, were $405.3 million and $371.4 million at September 30, 2013 and December 31, 2012, respectively, representing an increase of $33.9 million, or 9.1%.
Average interest earning assets increased $53.1 million, from $462.8 million for the three months ended September 30, 2012 to $515.9 million for the three months ended September 30, 2013. The weighted average interest rate on interest earning assets was 3.24% and 3.16% for the three months ended September 30, 2013 and 2012, respectively. Declines in loan yield during the current quarter were offset by an increase in the average balance of loans relative to total earning assets as compared to the same period last year. The decrease in loan yield is primarily attributable to a general decline in interest rates, as well as competitive loan pricing conditions in our market, which have continued to intensify and compress loan yields.
Average interest earning assets increased $56.2 million, from $439.3 million for the nine months ended September 30, 2012 to $495.5 million for the nine months ended September 30, 2013. The weighted average interest rate on interest earning assets was 3.34% and 3.30% for the nine months ended September 30, 2013 and 2012, respectively. This improvement in weighted average interest rate was primarily attributable to $294,000 of interest income recognized during the nine months ended September 30, 2013 in connection with the pay-off of non-accrual and previously charged-off loans. Excluding the impact of these pay-offs, our net interest margin would have declined, as compared to the same period last year. This decline was primarily due to a decrease in loan yield, partially offset by an increase in the average balance of loans relative to total earning assets as compared to the same period last year. As discussed above, the decline in loan yield was caused by a general downward trend in interest rates, as well as competitive loan pricing conditions in our market, which have continued to compress loan yields.
Average interest bearing deposits and borrowings increased $2.1 million, from $253.8 million for the three months ended September 30, 2012 to $256.0 million for the three months ended September 30, 2013. The average cost of interest bearing deposits and borrowings was 0.31% during the three months ended September 30, 2013 compared to 0.38% for the same period last year. The decline in our cost of interest bearing deposits and borrowings is primarily attributable to a decrease in interest rates paid on these accounts.
Average interest bearing deposits and borrowings increased $1.5 million, from $250.6 million for the nine months ended September 30, 2012 to $252.2 million for the nine months ended September 30, 2013. The average cost of interest bearing deposits and borrowings was 0.32% during the nine months ended September 30, 2013 compared to 0.39% for the same period last year. As discussed above, the decline in our cost of interest bearing deposits and borrowings is primarily attributable to a decrease in interest rates paid on these accounts.
At September 30, 2013, stockholders’ equity totaled $54.4 million, or 10.2% of total assets, as compared to $49.2 million, or 9.9% at December 31, 2012. The Company’s book value per share of common stock was $5.87 as of September 30, 2013, compared to $5.33 and $5.38 per share as of September 30 and December 31, 2012, respectively.
Set forth below are certain key financial performance ratios and other financial data for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2013 |
2012 |
2013 |
2012 |
|||||||||||||
Annualized return on average assets |
0.61 | % | 0.58 | % | 1.77 | % | 0.61 | % | ||||||||
Annualized return on average stockholders’ equity |
5.94 | % | 5.75 | % | 17.22 | % | 5.84 | % | ||||||||
Average stockholders’ equity to average assets |
10.26 | % | 10.07 | % | 10.28 | % | 10.36 | % | ||||||||
Net interest margin |
3.08 | % | 2.95 | % | 3.17 | % | 3.07 | % |
Results of Operations
Net Interest Income
The management of interest income and interest expense is fundamental to the performance of the Company. Net interest income, which is the difference between interest income on interest earning assets, such as loans and investment securities, and interest expense on interest bearing liabilities, such as deposits and other borrowings, is the largest component of the Company’s total revenue. Management closely monitors both net interest income and net interest margin (net interest income divided by average earning assets).
Net interest income and net interest margin are affected by several factors including (1) the level of, and the relationship between the dollar amount of interest earning assets and interest bearing liabilities; and (2) the relationship between re-pricing or maturity of our variable-rate and fixed-rate loans, securities, deposits and borrowings.
The majority of the Company’s loans are indexed to the national prime rate. Movements in the national prime rate have a direct impact on the Company’s loan yield and interest income. The national prime rate, which generally follows the targeted federal funds rate, was 3.25% at September 30, 2013 and 2012. There was no change in the targeted federal funds rate during the three and nine months ended September 30, 2013 and 2012, remaining at 0.00%-0.25%.
The Company, through its asset and liability management policies and practices, seeks to maximize net interest income without exposing the Company to a level of interest rate risk deemed excessive by management. Interest rate risk is managed by monitoring the pricing, maturity and re-pricing characteristics of all classes of interest bearing assets and liabilities. This is discussed in more detail in Item 2- “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Asset/Liability Management.”
During the three months ended September 30, 2013, net interest income increased by $583,000 to $4.0 million, compared to $3.4 million for the same period last year. The increase was primarily attributable to additional interest earned in connection with our loan portfolio as compared to the same period last year. During the three months ended September 30, 2013, the average balances of our loan portfolio increased to $330.5 million compared to $229.7 million during the same period last year. The additional interest earned related to the increase in the average balance of loans was partially offset by a decline in loan yield, which decreased to 4.21% during the three months ended September 30, 2013, compared to 4.68% during the same period last year. The decrease in loan yield is primarily attributable to a general decline in interest rates, as well as competitive loan pricing conditions in our market, which have continued to intensify and compress loan yields.
The Company’s net interest spread was 2.93% for the three months ended September 30, 2013 compared to 2.78% for the same period last year.
The Company’s net interest margin was 3.08% for the three months ended September 30, 2013, compared to 2.95% for the same period last year. This 13 basis point improvement in net interest margin is primarily due to an increase in the average balance of loans relative to total earning assets as compared to the same period last year and a decline in the cost of our interest bearing liabilities as compared to the same period last year. The improvement in net interest margin was partially offset by a general decline in the loan yields. The decline in the cost of interest bearing deposits and borrowings is primarily attributable to a decrease in interest rates paid on these accounts. The average cost of interest bearing deposits and borrowings was 0.31% and 0.38% during the three months ended September 30, 2013 and 2012, respectively. As discussed above, the decline in loan yield was caused by a general downward trend in interest rates, as well as competitive loan pricing conditions in our market, which have continued to compress loan yields.
The following table sets forth the average balances of certain assets, interest income/expense, average yields on interest earning assets, average rates paid on interest bearing liabilities, net interest margins and net interest income/spread for the three months ended September 30, 2013 and 2012, respectively.
Three Months Ended September 30, |
||||||||||||||||||||||||
2013 |
2012 |
|||||||||||||||||||||||
Average |
Interest |
Average |
Interest |
|||||||||||||||||||||
(dollars in thousands) |
Balance |
Inc/Exp |
Yield |
Balance |
Inc/Exp |
Yield |
||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest earning deposits at other financial institutions |
$ | 47,739 | $ | 30 | 0.25 |
% |
$ | 50,433 | $ | 32 | 0.26 |
% | ||||||||||||
U.S. Gov’t Treasuries |
2,166 | 8 | 1.36 |
% |
2,183 | (11 |
) |
(2.09 |
)% | |||||||||||||||
Corporate notes |
23,832 | 124 | 2.09 |
% |
34,944 | 196 | 2.24 |
% | ||||||||||||||||
Residential mortgage-backed securities |
107,195 | 480 | 1.79 |
% |
141,777 | 723 | 2.04 |
% | ||||||||||||||||
Federal Reserve Bank stock |
1,440 | 22 | 6.00 |
% |
1,306 | 20 | 6.00 |
% | ||||||||||||||||
Federal Home Loan Bank stock |
3,061 | 37 | 4.79 |
% |
2,415 | 3 | 0.42 |
% | ||||||||||||||||
Loans (1) (2) |
330,452 | 3,507 | 4.21 |
% |
229,748 | 2,703 | 4.68 |
% | ||||||||||||||||
Earning assets |
515,885 | 4,208 | 3.24 |
% |
462,806 | 3,666 | 3.16 |
% | ||||||||||||||||
Other assets |
6,849 | 9,335 | ||||||||||||||||||||||
Total assets |
$ | 522,734 | $ | 472,141 | ||||||||||||||||||||
Liabilities & Equity |
||||||||||||||||||||||||
Interest checking (NOW) |
$ | 19,265 | 7 | 0.14 |
% |
$ | 23,159 | 9 | 0.16 |
% | ||||||||||||||
Money market deposits and savings |
164,704 | 95 | 0.23 |
% |
160,026 | 121 | 0.30 |
% | ||||||||||||||||
CDs |
44,506 | 13 | 0.11 |
% |
45,651 | 34 | 0.30 |
% | ||||||||||||||||
Borrowings |
27,500 | 84 | 1.21 |
% |
25,000 | 76 | 1.21 |
% | ||||||||||||||||
Total interest bearing deposits and borrowings |
255,975 | 199 | 0.31 |
% |
253,836 | 240 | 0.38 |
% | ||||||||||||||||
Demand deposits |
211,239 | 167,214 | ||||||||||||||||||||||
Other liabilities |
1,905 | 3,545 | ||||||||||||||||||||||
Total liabilities |
469,119 | 424,595 | ||||||||||||||||||||||
Equity |
53,615 | 47,546 | ||||||||||||||||||||||
Total liabilities & equity |
$ | 522,734 | $ | 472,141 | ||||||||||||||||||||
Net interest income / spread |
$ | 4,009 | 2.93 |
% |
$ | 3,426 | 2.78 |
% | ||||||||||||||||
Net interest margin |
3.08 |
% |
2.95 |
% |
(1) |
Before allowance for loan losses and net deferred loan fees and costs. Included in net interest income was net loan origination fee accretion of $15,000 and $30,000 for the three months ended September 30, 2013 and 2012, respectively. | |
(2) |
Includes average non-accrual loans of $955,000 and $6.5 million for the three months ended September 30, 2013 and 2012, respectively. |
The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest earning assets and interest bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in the average balance times the prior period rate and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column.
Three Months Ended September 30, 2013 Compared to 2012 Increase (Decrease) Due to Changes in: |
||||||||||||
(in thousands) |
Volume |
Rate |
Total |
|||||||||
Interest income: |
||||||||||||
Interest earning deposits at other financial institutions |
$ | (2 |
) |
$ | — | $ | (2 |
) | ||||
U.S. Gov’t Treasuries |
— | 19 | 19 | |||||||||
Corporate notes |
(59 |
) |
(13 |
) |
(72 |
) | ||||||
Residential mortgage-backed securities |
(162 |
) |
(81 |
) |
(243 |
) | ||||||
Federal Reserve Bank stock |
2 | — | 2 | |||||||||
Federal Home Loan Bank stock |
1 | 33 | 34 | |||||||||
Loans |
1,098 | (294 |
) |
804 | ||||||||
Total increase (decrease) in interest income |
878 | (336 |
) |
542 | ||||||||
Interest expense: |
||||||||||||
Interest checking (NOW) |
(1 |
) |
(1 |
) |
(2 |
) | ||||||
Money market deposits and savings |
4 | (30 |
) |
(26 |
) | |||||||
CDs |
(1 |
) |
(20 |
) |
(21 |
) | ||||||
Borrowings |
8 | — | 8 | |||||||||
Total increase (decrease) in interest expense |
10 | (51 |
) |
(41 |
) | |||||||
Net increase (decrease) in net interest income |
$ | 868 | $ | (285 |
) |
$ | 583 |
During the nine months ended September 30, 2013, net interest income was $11.8 million, compared to $10.1 million for the same period last year. The increase was primarily attributable to additional interest earned in connection with our loan portfolio as compared to the same period last year. During the nine months ended September 30, 2013, the average balances of our loan portfolio increased to $304.2 million compared to $230.9 million during the same period last year. The additional interest earned related to the increase in the average balance of loans was partially offset by a decline in loan yield, which decreased to 4.43% during the nine months ended September 30, 2013, compared to 4.72% during the same period last year. The decrease in loan yield is primarily attributable to a general decline in interest rates, as well as competitive loan pricing conditions in our market, which have continued to intensify and compress loan yields. In addition, during the nine months ended September 30, 2013, the Company recognized $294,000 of interest income in connection with the pay-off of non-accrual and previously charged off loans.
The Company’s net interest spread was 3.02% for the nine months ended September 30, 2013 compared to 2.91% for the same period last year.
The Company’s net interest margin was 3.17% for the nine months ended September 30, 2013, compared to 3.07% for the same period last year. This 10 basis point improvement in net interest margin is primarily due to the interest income recognized as a part of the pay-offs discussed above. Excluding the impact of these pay-offs, our net interest margin would have declined, as compared to the same period last year. This decline was primarily due to a decrease in loan yield, partially offset by an increase in the average balance of loans relative to total earning assets as compared to the same period last year and a decline in the cost of our interest bearing liabilities. As discussed above, the decline in loan yield was caused by a general downward trend in interest rates, as well as competitive loan pricing conditions in our market, which have continued to compress loan yields. The decline in the cost of interest bearing deposits and borrowings is primarily attributable to a decrease in interest rates paid on these accounts. The average cost of interest bearing deposits and borrowings was 0.32% and 0.39% during the nine months ended September 30, 2013 and 2012, respectively.
The following table sets forth the average balances of certain assets, interest income/expense, average yields on interest earning assets, average rates paid on interest bearing liabilities, net interest margins and net interest income/spread for the nine months ended September 30, 2013 and 2012, respectively.
Nine Months Ended September 30, |
||||||||||||||||||||||||
2013 |
2012 |
|||||||||||||||||||||||
Average |
Interest |
Average |
Interest |
|||||||||||||||||||||
(dollars in thousands) |
Balance |
Inc/Exp |
Yield |
Balance |
Inc/Exp |
Yield |
||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest earning deposits at other financial institutions |
$ | 31,427 | $ | 60 | 0.25 |
% |
$ | 53,287 | $ | 100 | 0.25 |
% | ||||||||||||
U.S. Gov’t Treasuries |
2,191 | 14 | 0.85 |
% |
2,171 | 18 | 1.10 |
% | ||||||||||||||||
Corporate notes |
30,842 | 493 | 2.13 |
% |
22,989 | 364 | 2.11 |
% | ||||||||||||||||
Residential mortgage-backed securities |
122,676 | 1,598 | 1.74 |
% |
126,516 | 2,144 | 2.26 |
% | ||||||||||||||||
Federal Reserve Bank stock |
1,410 | 63 | 6.00 |
% |
1,290 | 58 | 6.00 |
% | ||||||||||||||||
Federal Home Loan Bank stock |
2,789 | 71 | 3.41 |
% |
2,096 | 7 | 0.43 |
% | ||||||||||||||||
Loans (1) (2) |
304,180 | 10,072 | 4.43 |
% |
230,931 | 8,154 | 4.72 |
% | ||||||||||||||||
Earning assets |
495,515 | 12,371 | 3.34 |
% |
439,280 | 10,845 | 3.30 |
% | ||||||||||||||||
Other assets |
6,693 | 8,632 | ||||||||||||||||||||||
Total assets |
$ | 502,208 | $ | 447,912 | ||||||||||||||||||||
Liabilities & Equity |
||||||||||||||||||||||||
Interest checking (NOW) |
$ | 21,394 | 25 | 0.15 |
% |
$ | 21,576 | 28 | 0.17 |
% | ||||||||||||||
Money market deposits and savings |
157,587 | 273 | 0.23 |
% |
157,955 | 383 | 0.32 |
% | ||||||||||||||||
CDs |
45,452 | 71 | 0.21 |
% |
46,115 | 101 | 0.29 |
% | ||||||||||||||||
Borrowings |
27,756 | 241 | 1.16 |
% |
25,001 | 225 | 1.20 |
% | ||||||||||||||||
Total interest bearing deposits and borrowings |
252,189 | 610 | 0.32 |
% |
250,647 | 737 | 0.39 |
% | ||||||||||||||||
Demand deposits |
195,518 | 147,661 | ||||||||||||||||||||||
Other liabilities |
2,894 | 3,184 | ||||||||||||||||||||||
Total liabilities |
450,601 | 401,492 | ||||||||||||||||||||||
Equity |
51,607 | 46,420 | ||||||||||||||||||||||
Total liabilities & equity |
$ | 502,208 | $ | 447,912 | ||||||||||||||||||||
Net interest income / spread |
$ | 11,761 | 3.02 |
% |
$ | 10,108 | 2.91 |
% | ||||||||||||||||
Net interest margin |
3.17 |
% |
3.07 |
% |
(1) |
Before allowance for loan losses and net deferred loan fees and costs. Included in net interest income was net loan origination fee accretion of $14,000 and $40,000 for the nine months ended September 30, 2013 and 2012, respectively. |
(2) |
Includes average non-accrual loans of $1.1 million and $7.0 million for the nine months ended September 30, 2013 and 2012, respectively. |
The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest earning assets and interest bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in the average balance times the prior period rate and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column.
Nine Months Ended September 30, 2013 Compared to 2012 Increase (Decrease) Due to Changes in: |
||||||||||||
(in thousands) |
Volume |
Rate |
Total |
|||||||||
Interest income: |
||||||||||||
Interest earning deposits at other financial institutions |
$ | (40 |
) |
$ | — | $ | (40 |
) | ||||
U.S. Gov’t Treasuries |
— | (4 |
) |
(4 |
) | |||||||
Corporate notes |
125 | 4 | 129 | |||||||||
Residential mortgage-backed securities |
(63 |
) |
(483 |
) |
(546 |
) | ||||||
Federal Reserve Bank stock |
5 | — | 5 | |||||||||
Federal Home Loan Bank stock |
3 | 61 | 64 | |||||||||
Loans |
2,446 | (528 |
) |
1,918 | ||||||||
Total increase (decrease) in interest income |
2,476 | (950 |
) |
1,526 | ||||||||
Interest expense: |
||||||||||||
Interest checking (NOW) |
— | (3 |
) |
(3 |
) | |||||||
Money market deposits and savings |
(1 |
) |
(109 |
) |
(110 |
) | ||||||
CDs |
(1 |
) |
(29 |
) |
(30 |
) | ||||||
Borrowings |
24 | (8 |
) |
16 | ||||||||
Total increase (decrease) in interest expense |
22 | (149 |
) |
(127 |
) | |||||||
Net increase (decrease) in net interest income |
$ | 2,454 | $ | (801 |
) |
$ | 1,653 |
Provision for Loan Losses
During the three months ended September 30, 2013, we recorded provision for loan losses of $200,000. During the nine months ended September 30, 2013, we reversed $300,000 of provision for loan losses. There was no provision for loan losses recorded during the three and nine months ended September 30, 2012. The provision for loan losses recorded during the three months ended September 30, 2013 was primarily recorded to supplement the Bank’s ALL as a result of loan growth experienced during the current quarter. During the three months ended September 30, 2013, total loans increased by $44.4 million, compared to June 30, 2013. The reversal in provision for loan losses during the nine months ended September 30, 2013, is primarily due to the loan recoveries received during the first quarter of this year, as well as the continued improvement in the level of our criticized and classified loans. These declines were partially offset by additional provisions required for the $90.0 million increase in our loan portfolio during the nine months ended September 30, 2013. Criticized and classified loans generally consist of special mention, substandard and doubtful loans. Special mention, substandard and doubtful loans were $3.1 million, $2.0 million and none, respectively, at September 30, 2013, compared to $888,000, $8.1 million and none, respectively, at September 30, 2012. We had net recoveries of $16,000 and $1.1 million during the three and nine months ended September 30, 2013, respectively, compared to net recoveries of $15,000 during the three months ended September 30, 2012 and net charge-offs of $403,000 during the nine months ended September 30, 2012. At September 30, 2013, the ALL to total loans was 1.92% compared to 2.26% at December 31, 2012. The decline in this ratio is primarily due to the $90.0 million increase in loans during the nine months ended September 31, 2013, as well as the favorable loan trends discussed above. The risks associated with the adequacy of our ALL and the decline in this ratio may have increased as a result of our loan growth. Management will continue to closely monitor the adequacy of the ALL and will make adjustments as warranted. Management believes that the ALL as of September 30, 2013 and December 31, 2012 was adequate to absorb probable incurred losses in the loan portfolio. The provision for loan losses was recorded based on an analysis of the factors discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Allowance for Loan Losses.
As a percentage of our total loan portfolio, the amount of non-performing loans was 0.21% and 0.70% at September 30, 2013 and December 31, 2012, respectively. As a percentage of our total assets, the amount of non-performing assets was 0.16% and 0.39% at September 30, 2013 and December 31, 2012, respectively.
Non-Interest Income
Non-interest income was $405,000 and $1.6 million for the three and nine months ended September 30, 2013, compared to $424,000 and $1.3 million for the same periods last year. During the three and nine months ended September 30, 2013, the Company recognized gains of $170,000 and $705,000, respectively, in connection with the sale of $8.6 million and $19.4 million, respectively, of investment securities. With the exception of such gain, non-interest income primarily consists of loan arrangement fees earned in connection with our college loan funding program and customer related fee income. During the first quarter of 2013, the Company terminated this program. See Note 12 “Non-Interest Income” in Part I, Item 1. “Financial Statements” for additional information regarding non-interest income for the three and nine months ended September 30, 2013 and 2012.
Non-Interest Expense
Non-interest expense was $3.4 million and $10.2 million for the three and nine months ended September 30, 2013, respectively, compared to $3.1 million and $9.3 million for the same periods last year. Compensation and benefits was $2.0 million and $6.0 million for the three and nine months ended September 30, 2013, respectively, compared to $1.7 million and $5.0 million for the same periods last year. Occupancy expense was $342,000 and $1.1 million for the three and nine months ended September 30, 2013, respectively, compared to $301,000 and $927,000 for the same periods last year. The increases in non-interest expense during the three and nine months ended September 30, 2013 as compared to the same periods last year is primarily due to the costs incurred to expand the Bank’s business development and related operational support teams, as well as the additional costs incurred to address regulatory compliance matters.
Income Tax Provision
During the nine months ended September 30, 2013, we recorded a tax benefit of approximately $3.2 million. The tax benefit recognized was related to reversal of the Company’s deferred tax valuation allowance that had been previously established during the year ended December 31, 2009. In making this determination, management analyzed, among other things, our 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. No tax provision was recorded during the three months ended September 30, 2013. Beginning in January 2014, the Company will begin recording tax provisions at its estimated effective tax rate of approximately 42%. During the three and nine months ended September 30, 2012, we recorded a tax expense of $25,000 and $60,000, respectively.
Financial Condition
Assets
Total assets at September 30, 2013 were $532.3 million, representing an increase of $33.2 million, or 6.6%, from $499.2 million at December 31, 2012. Cash and cash equivalents at September 30, 2013 were $47.7 million, representing a decrease of $2.8 million, or 5.6%, from $50.6 million at December 31, 2012. Loans increased by $90.0 million, from $266.7 million at December 31, 2012 to $356.7 million at September 30, 2013. The majority of growth within our loan portfolio related to increases of $40.6 million in commercial real estate loans, $23.7 million in single-family loans, and $14.6 million in construction and land development loans. Loan originations were $74.8 million and $182.2 million during the three and nine months ended September 30, 2013, compared to $23.7 million and $70.6 million during the same periods last year. Prepayment speeds for the three and nine months ended September 30, 2013 were 5.6% and 13.0%, respectively, compared to 19.4% and 21.9% for the same periods last year. Investment securities were $124.1 million at September 30, 2013, compared to $181.2 million at December 31, 2012, representing a decrease of $57.2 million, or 31.6%. The weighted average life of our investment securities was 2.66 years and 2.80 years at September 30, 2013 and December 31, 2012, respectively.
Cash and Cash Equivalents
Cash and cash equivalents totaled $47.7 million and $50.6 million at September 30, 2013 and December 31, 2012, respectively. Cash and cash equivalents are managed based upon liquidity needs by investing excess liquidity in higher yielding assets such as loans and investment securities. See the section “Liquidity and Asset/Liability Management” below.
Investment Securities
The investment securities portfolio is generally the second largest component of the Company’s interest earning assets, and the structure and composition of this portfolio is important to any analysis of the financial condition of the Company. The investment portfolio serves the following purposes: (i) it can be readily reduced in size to provide liquidity for loan balance increases or deposit balance decreases; (ii) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.
At September 30, 2013, investment securities totaled $124.1 million compared to $181.2 million at December 31, 2012. The Company’s investment portfolio is primarily composed of residential mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. The underlying loans for these securities are residential mortgages that were primarily originated beginning in 2003 through the current period. These loans are geographically dispersed throughout the United States. At September 30, 2013 and December 31, 2012, the weighted average yield and weighed average life of these residential-mortgage backed securities were 1.83% and 1.95%, respectively, and 2.98 years and 2.92 years, respectively. In addition, the Company’s investment portfolio consisted of $18.5 million and $35.3 million of investment grade corporate notes at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013 and December 31, 2012, the weighted average yield and weighed average life of these corporate notes were 2.17% and 2.19%, respectively, and 0.90 years and 2.26 years, respectively.
During the three and nine months ended September 30, 2013, the Company sold a total of $8.6 million and $19.4 million, respectively, of available for sale securities, consisting of residential mortgage-backed securities and corporate notes. These sales resulted in realized gains of $170, 000 and $705,000, respectively. These gains were recorded in non-interest income within the unaudited Consolidated Statement of Operations and Comprehensive Income. The Company did not sell any available for sale securities during the three and nine months ended September 30, 2012. We will continue to evaluate the Company’s investments and liquidity needs and will adjust the amount of investment securities accordingly.
Loans
Loans, net of the ALL and deferred loan origination costs/unearned fees, increased 34.2%, or $89.2 million, from $260.7 million at December 31, 2012 to $349.9 million at September 30, 2013. As of September 30, 2013 and December 31, 2012, total loans outstanding totaled $356.7 million and $266.7 million, respectively. The majority of growth within our loan portfolio related to increases of $40.6 million in commercial real estate loans, $23.7 million in single-family loans, and $14.6 million in construction and land development loans. Loan originations were $74.8 million and $182.2 million during the three and nine months ended September 30, 2013, compared to $23.7 million and $70.6 million during the same periods last year. Prepayment speeds for the three and nine months ended September 30, 2013 were 5.6% and 13.0%, respectively, compared to 19.4% and 21.9% for the same periods last year.
As of September 30, 2013 and December 31, 2012, substantially all of the Company’s loan customers were located in Southern California.
Non-Performing Assets
The following table sets forth non-accrual loans and other real estate owned at September 30, 2013 and December 31, 2012:
(dollars in thousands) |
September 30, 2013 |
December 31, 2012 |
||||||
Non-accrual loans: |
||||||||
Commercial |
$ | 714 | $ | 1,509 | ||||
Consumer and other |
29 | 345 | ||||||
Total non-accrual loans |
743 | 1,854 | ||||||
Other real estate owned (“OREO”) |
90 | 90 | ||||||
Total non-performing assets |
$ | 833 | $ | 1,944 | ||||
Non-performing assets to gross loans and OREO |
0.23 |
% |
0.73 |
% | ||||
Non-performing assets to total assets |
0.16 |
% |
0.39 |
% |
Non-accrual loans totaled $743,000 and $1.9 million at September 30, 2013 and December 31, 2012, respectively. The decline in non-performing loans during the nine months ended September 30, 2013 was primarily related to the full repayment of two loans that had been classified as non-performing at December 31, 2012. At September 30, 2013, there were no loans that were over 90 days past due and accruing interest. At December 31, 2012, there was one loan with a balance of $2.3 million that was over 90 days past due and accruing interest. This loan continued to accrue interest because it was well secured and in the process of collection. Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms was $12,000 and $37,000 for the three and nine months ended September 30, 2013, respectively, compared to $71,000 and $224,000 for the same periods last year.
At September 30, 2013, non-accrual loans consisted of two commercial loans totaling $714,000 and one consumer and other loan totaling $29,000. At December 31, 2012, non-accrual loans consisted of three commercial loans totaling $1.5 million and one consumer and other loan totaling $345,000.
At September 30, 2013 and December 31, 2012, OREO consisted of one undeveloped land property totaling $90,000. This property is located in Southern California.
At September 30, 2013 and December 31, 2012, the recorded investment in impaired loans was $979,000 and $2.1 million, respectively. At September 30, 2013 and December 31, 2012, the Company had a specific allowance for loan losses of $35,000 and $500,000, respectively, on impaired loans of $143,000 and $811,000, respectively. There were $836,000 and $1.3 million, respectively, of impaired loans with no specific allowance for loan losses at September 30, 2013 and December 31, 2012, respectively. The average outstanding balance of impaired loans for the nine months ended September 30, 2013 was $ 1.3 million compared to $7.3 million for the same period last year. As of September 30, 2013 and December 31, 2012, there was $743,000 and $1.9 million, respectively, of impaired loans on non-accrual status. During the three and nine months ended September 30, 2013, interest income recognized on impaired loans subsequent to their classification as impaired was $2,000 and $7,000, respectively, compared to $3,000 and $9,000 for the same periods last year. The Company stops accruing interest on these loans on the date they are classified as non-accrual and reverses any uncollected interest that had been previously accrued as income. The Company may begin recognizing interest income on these loans as cash interest payments are received, if collection of principal is reasonably assured.
Allowance for Loan Losses
The ALL is established through provisions for loan losses charged to operations and represents an estimate of credit losses inherent in the Company’s loan portfolio that have been incurred as of the balance sheet date. Loan losses are charged against the ALL when management believes that principal is uncollectible. Subsequent repayments or recoveries, if any, are credited to the ALL. Management periodically assesses the adequacy of the ALL by reference to many quantitative and qualitative factors that may be weighted differently at various times depending on prevailing conditions. These factors include, among others:
• |
the risk characteristics of various classifications of loans; |
• |
general portfolio trends relative to asset and portfolio size; |
• |
asset categories; |
• |
potential credit concentrations; |
• |
delinquency trends within the loan portfolio; |
• |
changes in the volume and severity of past due and other classified loans; |
• |
historical loss experience and risks associated with changes in economic, social and business conditions; and |
• |
the underwriting standards in effect when the loan was made. |
Accordingly, the calculation of the adequacy of the ALL is not based solely on the level of non-performing assets. The quantitative factors, included above, are utilized by our management to identify two different risk groups (1) individual loans (loans with specifically identifiable risks); and (2) homogeneous loans (groups of loan with similar characteristics). We base the allocation for individual loans on the results of our impairment analysis, which is typically based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or by using the loan’s most recent market value or the fair value of the collateral, if the loan is collateral dependent. Homogenous groups of loans are allocated reserves based on the loss ratio assigned to the pool based on its risk grade. The loss ratio is determined based primarily on the historical loss experience of our loan portfolio. These loss ratios are then adjusted, if determined necessary by management, based on other factors including, but not limited to, historical peer group loan loss data and the loss experience of other financial institutions. Loss ratios for all categories of loans are evaluated by management on a quarterly basis. Historical loss experience is determined based on a rolling migration analysis of each loan category within our portfolio. This migration analysis estimates loss factors based on the performance of each loan category over a four and a half year time period. These quantitative calculations are based on estimates and actual losses may vary materially and adversely from the estimates.
The qualitative factors, included above, are also utilized to identify other risks inherent in the portfolio and to determine whether the estimated credit losses associated with the current portfolio might differ from historical loss trends or the loss ratios discussed above. We estimate a range of exposure for each applicable qualitative factor and evaluate the current condition and trend of each factor. Because of the subjective nature of these factors, the actual losses incurred may vary materially and adversely from the estimated amounts.
In addition, regulatory agencies, as a part of their examination process, periodically review the Bank’s ALL, and may require the Bank to take additional provisions to increase the ALL based on their judgment about information available to them at the time of their examinations. No assurance can be given that adverse future economic conditions or other factors will not lead to increased delinquent loans, further provisions for loan losses and/or charge-offs. Management believes that the ALL as of September 30, 2013 and December 31, 2012 was adequate to absorb probable incurred credit losses inherent in the loan portfolio.
The following is a summary of the activity for the ALL for the three and nine months ended September 30, 2013 and 2012:
(in thousands) Commercial Commercial Real Estate Residential Land and Construction Consumer and Other Total Three Months Ended September 30, 2013: Allowance for loan losses: Beginning balance Provision for loan losses ) Charge-offs Recoveries Ending balance Nine Months Ended September 30, 2013: Allowance for loan losses: Beginning balance Provision for loan losses ) ) Charge-offs Recoveries Ending balance Three Months Ended September 30, 2012: Allowance for loan losses: Beginning balance Provision for loan losses ) ) ) Charge-offs Recoveries Ending balance Nine Months Ended September 30, 2012: Allowance for loan losses: Beginning balance Provision for loan losses Charge-offs Recoveries Ending balance
$
1,532
$
3,175
$
748
$
766
$
399
$
6,620
(15
175
(75
)
100
15
200
—
—
—
—
—
—
15
—
—
—
—
15
$
1,532
$
3,350
$
673
$
866
$
414
$
6,835
$
2,277
$
2,450
$
508
$
411
$
369
$
6,015
(1,815
900
165
455
(5
(300
—
—
—
—
—
—
1,070
—
—
—
50
1,120
$
1,532
$
3,350
$
673
$
866
$
414
$
6,835
$
1,943
$
1,680
$
463
$
461
$
319
$
4,866
(180
220
(25
—
(15
—
—
—
—
—
—
—
15
—
—
—
—
15
$
1,778
$
1,900
$
438
$
461
$
304
$
4,881
$
2584
$
1252
$
583
$
516
$
349
$
5284
(805
)
1045
(145
)
(50
)
(45
)
—
(25
)
(400
)
—
(5
)
—
(430
)
24
3
—
—
—
27
$
1778
$
1900
$
438
$
461
$
304
4881
There were no loans acquired with deteriorated credit quality during the three and nine months ended September 30, 2013 and 2012.
The ALL was $6.8 million, or 1.92% of our total loan portfolio, at September 30, 2013, compared to $6.0 million, or 2.26%, at December 31, 2012. During the nine months ended September 30, 2013, our non-performing loans decreased to $743,000 from $1.9 million at December 31, 2012. The ratio of our ALL to non-performing loans was 919.98% at September 30, 2013 compared to 324.36% at December 31, 2012. In addition, our ratio of non-performing loans to total loans was 0.21% and 0.70% at September 30, 2013 and December 31, 2012, respectively. The ALL is impacted by inherent risk in the loan portfolio, including the level of our non-performing loans, as well as specific reserves and charge-off activities. The remaining portion of our ALL is allocated to our performing loans based on the quantitative and qualitative factors discussed above.
Deferred Tax Asset
During the year ended December 31, 2009, the Company established a full valuation allowance against the deferred tax assets due to the uncertainty regarding its realizability. During the nine months ended September 30, 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 unaudited Consolidated Statements of Operations and Comprehensive Income. In making this determination, management analyzed, among other things, our 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 September 30, 2013, we had a net deferred tax asset of approximately $3.0 million, compared to net deferred tax liability for net unrealized gains on investment securities of $1.7 million at December 31, 2012. Our net deferred tax asset at September 30, 2013, primarily consists of deferred tax assets related to federal and state net operating loss carryforwards and the allowance for loan losses.
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 historical 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. Management may reestablish a valuation allowances in the future to the extent that it is determined that it is more likely than not that these assets will not be realized.
Deposits
The Company’s activities are largely based in the Los Angeles metropolitan area. The Company’s deposit base is also primarily generated from this area.
At September 30, 2013, total deposits were $448.3 million compared to $416.7 million at December 31, 2012, representing an increase of 7.6%, or $31.6 million. Total core deposits, which include non-interest bearing demand deposits, interest bearing demand deposits and money market deposits and savings, were $405.3 million and $371.4 million at September 30, 2013 and December 31, 2012, respectively, representing an increase of $33.9 million, or 9.1%.
The following table reflects a summary of deposit categories by dollar and percentage at September 30, 2013 and December 31, 2012:
September 30, 2013 |
December 31, 2012 |
|||||||||||||||
(dollars in thousands) |
Amount |
Percent of |
Amount |
Percent of |
||||||||||||
Non-interest bearing demand deposits |
$ | 225,001 | 50.2 |
% |
$ | 196,026 | 47.0 |
% | ||||||||
Interest bearing checking |
19,323 | 4.3 |
% |
23,233 | 5.6 |
% | ||||||||||
Money market deposits and savings |
161,007 | 35.9 |
% |
152,094 | 36.5 |
% | ||||||||||
Certificates of deposit |
42,922 | 9.6 |
% |
45,328 | 10.9 |
% | ||||||||||
Total |
$ | 448,253 | 100.0 |
% |
$ | 416,681 | 100.0 |
% |
At September 30, 2013, the Company had four certificates of deposit with the State of California Treasurer’s Office for a total of $38.0 million, which represented 8.5% of total deposits. The deposits outstanding at September 30, 2013 are scheduled to mature in the fourth quarter of 2013. 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 certificates of deposit with the State of California Treasurer’s Office for a total of $34.0 million, which 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 September 30, 2013 and December 31, 2012, respectively, in connection with these certificates of deposit. For further information on the Company’s certificates of deposit with the State of California Treasurer’s Office, see Part I, Item 1. Financial Statements - Note 7 “Deposits.”
The aggregate amount of certificates of deposit of $100,000 or more at September 30, 2013 and December 31, 2012 was $42.0 million and $44.0 million, respectively.
Scheduled maturities of certificates of deposit in amounts of $100,000 or more at September 30, 2013, including deposit accounts with the State of California Treasurer’s Office and CDARS were as follows:
(in thousands) |
||||
Due within 3 months or less |
$ | 37,040 | ||
Due after 3 months and within 6 months |
4,621 | |||
Due after 6 months and within 12 months |
366 | |||
Due after 12 months |
— | |||
Total |
$ | 42,027 |
Liquidity and Asset/Liability Management
Liquidity, as it relates to banking, is the ability to meet loan commitments and to honor deposit withdrawals through either the sale or maturity of existing assets or the acquisition of additional funds through deposits or borrowing. The Company’s main sources of funds to provide liquidity are its cash and cash equivalents, paydowns and maturities of investments, loan repayments, and increases in deposits and borrowings. The Company also maintains lines of credit with the Federal Home Loan Bank (“FHLB”), and other correspondent financial institutions.
The liquidity ratio (the sum of cash and cash equivalents and available for sale investments, excluding amounts required to be pledged and operating requirements, divided by total assets) was 23.4% at September 30, 2013 and 37.1% at December 31, 2012.
At September 30, 2013 and December 31, 2012, the Company had a borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB of $148.9 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 September 30, 2013 and December 31, 2012, respectively. The Company had no overnight borrowings outstanding under this borrowing/credit facility at September 30, 2013 and December 31, 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 September 30, 2013 and December 31, 2012 (dollars in thousands):
Maturity Date |
Interest Rate |
September 30, 2013 |
December 31, 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 September 30, 2013 and December 31, 2012, 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. 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. As of September 30, 2013 and December 31, 2012, the Company had pledged $2.0 million and $6.2 million, respectively, of corporate notes related to these lines of credit.
Management believes the level of liquid assets and available credit facilities are sufficient to meet current and anticipated funding needs. In addition, the Bank’s Asset/Liability Management Committee oversees the Company’s liquidity position by reviewing a monthly liquidity report. Management is not aware of any trends, demands, commitments, events or uncertainties that will result or are reasonably likely to result in a material change in the Company’s liquidity.
Capital Expenditures
As of September 30, 2013, the Company was not subject to any material commitments for capital expenditures.
Capital Resources
At September 30, 2013, the Company had total stockholders’ equity of $54.4 million, which included $111,000 in common stock, $65.7 million in additional paid-in capital, $4.3 million in accumulated deficit, $498,000 in accumulated other comprehensive income, and $7.7 million in treasury stock.
Capital
The Company 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, the Company 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 and adverse effect on the business, results of operations and financial condition of the Company.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that as of September 30, 2013 and December 31, 2012, the Company and the Bank met all capital adequacy requirements to which they are subject.
At December 31, 2012, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since the notification that management believes have changed the Bank’s category.
The Company’s and the Bank’s capital ratios as of September 30, 2013 and December 31, 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 |
||||||||||||||||||||||||
September 30, 2013: |
||||||||||||||||||||||||||||||||
Total Risk-Based Capital Ratio |
$ | 56,976 | 14.32 |
% |
$ | 55,902 | 14.05 |
% |
$ | 31,823 | 8.00 |
% |
$ | 39,779 | 10.00 |
% | ||||||||||||||||
Tier 1 Risk-Based Capital Ratio |
$ | 51,977 | 13.07 |
% |
$ | 50,904 | 12.80 |
% |
$ | 15,912 | 4.00 |
% |
$ | 23,867 | 6.00 |
% | ||||||||||||||||
Tier 1 Leverage Ratio |
$ | 51,977 | 9.99 |
% |
$ | 50,904 | 9.78 |
% |
$ | 20,824 | 4.00 |
% |
$ | 26,030 | 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, the Company 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 the Company until such time as the accumulated deficit is eliminated.
To date, the Company 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 the Company’s Board of Directors, as well as the Company’s 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”).
Off-Balance Sheet Arrangements
In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and letters of credit. To varying degrees, these instruments involve elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position.
(in thousands) |
September 30, 2013 |
December 31, 2012 |
||||||
Commitments to extend credit |
$ | 97,299 | $ | 74,230 | ||||
Commitments to extend credit to directors and officers (undisbursed amount) |
$ | 975 | $ | 561 | ||||
Standby/commercial letters of credit |
$ | 2,265 | $ | 1,900 | ||||
Guarantees on revolving credit card limits |
$ | 549 | $ | 217 | ||||
Outstanding credit card balances |
$ | 232 | $ | 67 |
The Company maintains an allowance for unfunded commitments, based on the level and quality of the Company’s undisbursed loan funds, which comprises the majority of the Company’s off-balance sheet risk. As of September 30, 2013 and December 31, 2012, the allowance for unfunded commitments was $250,000 and $203,000, respectively, which represented 0.25% and 0.26% of the undisbursed commitments and letters of credit, respectively.
Management is not aware of any other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, and results of operations, liquidity, capital expenditures or capital resources that is material to investors.
For further information on commitments and contingencies, see Part I, Item 1. Financial Statements - Note 9 “Commitments and Contingencies.”
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company’s management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Changes in Internal Controls
There have not been any changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
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 legal proceedings.
Management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2012. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2012, which could materially and adversely affect the Company’s business, financial condition and results of operations. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not presently known to management or that management currently believes to be immaterial may also materially and adversely affect the Company’s business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Purchases of Equity Securities
The table below summarizes the Company’s monthly repurchases of equity securities during the three months ended September 30, 2013.
(dollars in thousands, except per share data)
Period |
Total Number of Shares |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans of Program (1) |
||||||||||||
July 1-31, 2013 |
— | $ | — | — | $ | 29 | ||||||||||
August 1-31, 2013 |
— | — | — | 29 | ||||||||||||
September 1-30, 2013 |
— | — | — | 29 | ||||||||||||
Total |
— | $ | — | — | $ | 29 |
(1) In August 2010, the Company’s Board of Directors authorized the purchase of up to $2.0 million of the Company’s common stock, which was announced by press release and Current Report on Form 8-K on August 16, 2010. Under the Company’s stock repurchase program, the Company has been acquiring its common stock in the open market from time to time beginning in August 2010. The Company’s stock repurchase program may be modified, suspended or terminated by the Board of Directors at any time without notice.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
None.
(a) Additional Disclosures. None.
(b) Stockholder Nominations. There have been no material changes in the procedures by which stockholders may recommend nominees to the Board of Directors during the three months ended September 30, 2013. Please see the discussion of these procedures in the most recent proxy statement on Schedule 14A filed with the SEC.
31.1 |
Principal Executive Officer Certification required under Section 302 of the Sarbanes—Oxley Act of 2002. |
31.2 |
Principal Financial Officer Certification required under Section 302 of the Sarbanes—Oxley Act of 2002. |
32 |
Principal Executive Officer and Principal Financial Officer Certification required under Section 906 of the Sarbanes—Oxley Act of 2002. |
101.INS |
XBRL Instance Document. |
101.SCH |
XBRL Taxonomy Extension Schema Document. |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
1ST CENTURY BANCSHARES, INC. | |||
By: |
/s/ Alan I. Rothenberg. |
||
Alan I. Rothenberg |
|||
Chairman and Chief Executive Officer |
|||
By: |
/s/ Bradley S. Satenberg. |
||
Bradley S. Satenberg |
|||
Executive Vice President and Chief Financial Officer |
Exhibit 31.1
Rule 13a-14(a) Certification
of the Chairman of the Board and Chief Executive Officer
I, Alan I. Rothenberg, certify, that:
1. I have reviewed this Quarterly Report on Form 10-Q of 1st Century Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 6, 2013 |
/s/ Alan I. Rothenberg |
Alan I. Rothenberg | |
Chairman of the Board, Chief Executive Officer and Principal Executive Officer |
Exhibit 31.2
Rule 13a-14(a) Certification
of the Chief Financial Officer
I, Bradley S. Satenberg, certify, that:
1. I have reviewed this Quarterly Report on Form 10-Q of 1st Century Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 6, 2013 |
/s/ Bradley S. Satenberg |
Bradley S. Satenberg | |
Executive Vice President, Chief Financial Officer and Principal Financial Officer |
Exhibit 32
CERTIFICATION*
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of 1st Century Bancshares, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigneds hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of the undersigneds’ knowledge that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 6, 2013 |
/s/ Alan I. Rothenberg |
Alan I. Rothenberg | |
Chairman of the Board, Chief Executive Officer and Principal Executive Officer | |
Date: November 6, 2013 |
/s/ Bradley S. Satenberg |
Bradley S. Satenberg | |
Executive Vice President, Chief Financial Officer and Principal Financial Officer |
* A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that Section.
Note 12 - Non-Interest Income
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2013
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Income and Expenses [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Income and Other Expense Disclosure [Text Block] | (12) Non-Interest Income The following table summarizes the information regarding non-interest income for the three and nine months ended September 30, 2013 and 2012, respectively:
Non-interest income primarily consists of loan arrangement fees earned in connection with our college loan funding program. During the first quarter of 2013, the Company terminated this program. |
Note 6 - Premises and Equipment (Details) (USD $)
|
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2013
|
Sep. 30, 2012
|
Sep. 30, 2013
|
Sep. 30, 2012
|
|
Property, Plant and Equipment [Abstract] | ||||
Depreciation, Depletion and Amortization | $ 124,000 | $ 113,000 | $ 377,000 | $ 328,000 |
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