Item
2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Introduction
Our profitability, like most banks, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by us on interest bearing liabilities, such as deposits and other borrowings, and the interest rates received by us on our interest-earning assets, such as loans extended to our clients and securities held in our investment portfolio, comprises the major portion of our earnings. In addition, we may, from time to time, supplement our earnings by monetizing gains in our investment portfolio.
Proposed Merger with Midland Financial Co.
On March 10, 2016, Bancshares entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Midland Financial Co., an Oklahoma corporation (“Midland”), and MC 2016 Corp., a Delaware corporation and wholly-owned subsidiary of Midland (“Merger Sub”), pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will merge (the “Merger”) with and into Bancshares, with Bancshares surviving the Merger as a wholly-owned subsidiary of Midland. Simultaneously with the Merger, 1st Century Bank will merge (the “Bank Merger”) with and into MidFirst Bank, a federally-chartered savings association and a wholly-owned subsidiary of Midland (“MidFirst”), with MidFirst surviving the Bank Merger. Immediately after the Merger and Bank Merger described above, Bancshares, as the surviving corporation in the Merger, will merge with and into Midland, with Midland as the surviving corporation.
Subject to the terms and conditions set forth in the Merger Agreement, upon consummation of the Merger, each outstanding share of Bancshares common stock, par value $0.01 per share, excluding shares owned by Midland, Bancshares or either of their subsidiaries (subject to certain exceptions) or shares owned by stockholders who have validly made and not effectively withdrawn a demand for appraisal rights, will be converted into the right to receive $11.22 in cash.
In addition, each share of Bancshares common stock subject to vesting, repurchase, transfer or other lapse restrictions pursuant to any of our benefit plans that is outstanding immediately prior to the effective time of the Merger will vest in full and become free of such restrictions and any repurchase right will lapse, and the holder thereof will be entitled to receive $11.22 in cash with respect to each such restricted share.
Consummation of the Merger is subject to certain closing conditions, including: (i) the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Bancshares common stock as of the applicable record date; (ii) the receipt of certain regulatory approvals required from the Federal Reserve and the OCC without the imposition of a Burdensome Condition (as defined in the Merger Agreement); and (iii) the absence of any law or order prohibiting the Merger or the other transactions contemplated by the Merger Agreement. The obligation of each party to consummate the Merger is also conditioned upon the accuracy of the other party’s representations and warranties (subject to customary materiality qualifiers) and the other party’s performance in all material respects of its obligations contained in the Merger Agreement.
In addition, the obligation of Midland to consummate the Merger is further conditioned on (i) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) with respect to the Company and (ii) certain conditions regarding (A) the continued employment of our Chief Executive Officer and Chief Operating Officer and (B) such officers’ compliance with obligations under the employment agreements entered into with MidFirst concurrently with the execution and delivery of the Merger Agreement.
Midland and Bancshares have made customary representations, warranties and covenants in the Merger Agreement. Subject to certain exceptions, Bancshares and Midland have agreed to use their respective reasonable best efforts to obtain necessary regulatory approvals. In addition, Bancshares has agreed, among other things, to covenants relating to (i) the conduct of our business during the interim period between the execution of the Merger Agreement and the consummation of the Merger, (ii) facilitating our stockholders’ consideration of, and voting upon, the adoption of the Merger Agreement and certain related matters as applicable, (iii) the recommendation by the board of directors of Bancshares (the “Board”) in favor of the adoption by our stockholders of the Merger Agreement and certain related matters as applicable and (iv) non-solicitation obligations relating to alternative business combination transactions, subject to certain exceptions to allow the Board to exercise its fiduciary duties as set forth in the Merger Agreement.
The Merger Agreement contains certain termination rights for both Midland and Bancshares, including if (i) the necessary regulatory approvals are denied or the consummation of the Merger is legally prohibited or enjoined, (ii) the Merger is not consummated by March 10, 2017, (iii) there has been a breach by the other party that is not cured such that the applicable closing conditions are not satisfied, or (iv) the approval of our stockholders is not obtained. Subject to certain conditions, Bancshares may terminate the Merger Agreement prior to stockholder approval of the Merger to enter into a transaction which constitutes a superior proposal. Upon termination of the Merger Agreement under specified circumstances, Bancshares may be required to pay Midland a termination fee of $4,500,000 or reimburse certain of Midland’s expenses up to $1,000,000 (which reimbursement will reduce, on a dollar for dollar basis, any termination fee subsequently payable by Bancshares).
Midland and Bancshares currently expect that the Merger will be completed during the second half of 2016 or sooner. However, it is possible that factors outside the control of both companies, including whether or when the required regulatory approvals will be received, could result in the Merger being completed at a different time or not at all. The Company recorded $861,000 in merger-related expenses during the three months ended March 31, 2016.
For additional information related to the Merger and the Merger Agreement, please refer to our Current Report on Form 8-K filed with the Securities and Exchange Commission on March 11, 2016 and our preliminary proxy statement filed with the Commission on April 8, 2016. The description of the Merger Agreement and the Merger herein does not purport to be complete and is subject to, and qualified in its entirety by the full text of the Merger Agreement attached as Exhibit 2.1 to the Current Report filed on March 11, 2016.
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 March 31, 2016.
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 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 period, 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, and the corresponding need for or adequacy of a valuation allowance 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 quarter ended March 31, 2016, the Company recorded net income of $273,000, or $0.03 per diluted share, compared to $315,000, or $0.03 per diluted share, for the same period last year. The decrease in net income during the three months ended March 31, 2016 as compared to the same period last year was primarily due to a $1.8 million increase in non-interest expenses, caused primarily by expenses of $861,000 and $268,000 incurred in connection with the proposed merger with Midland Financial Co. and the pre-effective registration statement that was filed with the U.S. Securities and Exchange Commission on September 25, 2015, respectively. The decrease in net income was partially offset by an increase in net interest income of $1.8 million, primarily resulting from an increase in the average balance of loans during the current quarter as compared to the same period last year.
Total assets at March 31, 2016 were $739.5 million, representing an increase of $7.5 million, or 1.0%, from $732.0 million at December 31, 2015. Cash and cash equivalents at March 31, 2016 were $52.4 million, representing a decrease of $2.2 million, or 4.0%, from $54.6 million at December 31, 2015. Loans increased by $10.7 million, from $598.4 million at December 31, 2015 to $609.2 million at March 31, 2016. Loan originations were $61.7 million during the quarter ended March 31, 2016, compared to $61.4 million during the same period last year. Prepayment speeds for the quarter ended March 31, 2016 were 15.9%, compared to 11.0% for the same period last year. Investment securities were $72.5 million at March 31, 2016, compared to $74.0 million at December 31, 2015, representing a decline of $1.5 million, or 2.0%. The weighted average life of our investment securities was 3.70 years and 3.85 years at March 31, 2016 and December 31, 2015, respectively.
Total liabilities at March 31, 2016 increased by $6.5 million, or 1.0%, to $673.5 million compared to $667.0 million at December 31, 2015. This increase is primarily due to a $56.8 million increase in deposits, partially offset by the repayment of a $50.0 million in overnight borrowing with the FHLB that was outstanding at December 31, 2015. Total core deposits, which includes non-interest bearing demand deposits, interest bearing demand deposits and money market deposits and savings, were $607.3 million and $550.4 million at March 31, 2016 and December 31, 2015, respectively, representing an increase of $56.9 million, or 10.3%.
Average interest earning assets increased $113.1 million, from $587.9 million for the three months ended March 31, 2015 to $701.0 million for the three months ended March 31, 2016. The increase in average interest earning assets was primarily due to a $149.1 million increase in average loans during the three months ended March 31, 2016 as compared to the same period last year. The weighted average interest rate on interest earning assets was 4.00% and 3.57% for the three months ended March 31, 2016 and 2015, respectively. The improvement in this rate was primarily attributable to an increase in the average balance of loans relative to total average earning assets as compared to the same period last year, as well as a 14 basis point increase in our loan yield.
Average interest bearing deposits and borrowings increased $40.5 million, from $234.0 million for the three months ended March 31, 2015 to $274.6 million for the three months ended March 31, 2016. The increase in average interest bearing deposits and borrowings was primarily due to a $35.9 million increase in average interest bearing deposits during the three months ended March 31, 2016 as compared to the same period last year. The average cost of interest bearing deposits and borrowings was 0.29% during the three months ended March 31, 2016 compared to 0.27% for the same period last year.
At March 31, 2016, stockholders’ equity totaled $66.0 million, or 8.9% of total assets, as compared to $64.9 million, or 8.9% of total assets at December 31, 2015. The Company’s book value per share of common stock was $6.38 as of March 31, 2016, compared to $6.15 and $6.29 per share as of March 31, 2015 and December 31, 2015, respectively.
Set forth below are certain key financial performance ratios and other financial data for the period indicated:
|
|
Three
M
onths
E
nded
March 31
,
|
|
|
|
201
6
|
|
|
2015
|
|
Annualized return on average assets
|
|
|
0.15
|
%
|
|
|
0.22
|
%
|
|
|
|
|
|
|
|
|
|
Annualized return on average stockholders’ equity
|
|
|
1.67
|
%
|
|
|
2.06
|
%
|
|
|
|
|
|
|
|
|
|
Average stockholders’ equity to average assets
|
|
|
9.25
|
%
|
|
|
10.44
|
%
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
3.89
|
%
|
|
|
3.46
|
%
|
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 3.50% and 3.25% at March 31, 2016 and 2015, respectively. In December 2015, the targeted federal funds rate was increased from 0.00%-0.25% to 0.25%-0.50%. During the quarters ended March 31, 2016 and 2015, the targeted federal funds rate were 0.25%-0.50% and 0.00%-0.25%, respectively.
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.
During the quarter ended March 31, 2016, net interest income was $6.8 million compared to $5.0 million for the same period last year. The increase in net interest income was primarily attributable to a 41 basis point improvement in our net interest spread. This increase in net interest spread was due to increases in the average balances of our loan portfolio during the quarter ended March 31, 2016 as compared to the same period last year, as well as a 14 basis point increase in our loan yield. The average balance of our loan portfolio was $603.8 million during the quarter ended March 31, 2016, compared to $454.7 million for the same period last year.
The Company’s net interest spread was 3.71% for the three months ended March 31, 2016 compared to 3.30% for the same period last year.
The Company’s net interest margin was 3.89% for the quarter ended March 31, 2016, compared to 3.46% for the same period last year. The 43 basis point increase in net interest margin is primarily due to an increase in the average balance of loans relative to total average earning assets as compared to the same period last year, as well as a 14 basis point increase in our loan yield. The percentage of average loans to total average earning assets increased to 86.1% during the quarter ended March 31, 2016, compared to 77.3% during the same period last year.
The following table sets forth the average balances of certain assets, interest income/expense, average yields on interest earning assets, average rates paid on interest bearing liabilities, net interest margins and net interest income/spread for the three months ended March 31, 2016 and 2015, respectively.
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
(dollars in thousands)
|
|
Balance
|
|
|
Inc/Exp
|
|
|
Yield
|
|
|
Balance
|
|
|
Inc/Exp
|
|
|
Yield
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning deposits at other financial institutions
|
|
$
|
18,626
|
|
|
$
|
23
|
|
|
|
0.50
|
%
|
|
$
|
49,792
|
|
|
$
|
32
|
|
|
|
0.26
|
%
|
U.S. Treasuries and Gov’t agencies
|
|
|
35,004
|
|
|
|
162
|
|
|
|
1.86
|
%
|
|
|
26,365
|
|
|
|
123
|
|
|
|
1.89
|
%
|
Corporate notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,295
|
|
|
|
8
|
|
|
|
1.33
|
%
|
Residential mortgage-backed securities
|
|
|
38,624
|
|
|
|
169
|
|
|
|
1.75
|
%
|
|
|
49,917
|
|
|
|
216
|
|
|
|
1.73
|
%
|
Federal Reserve Bank stock
|
|
|
1,753
|
|
|
|
26
|
|
|
|
5.98
|
%
|
|
|
1,655
|
|
|
|
25
|
|
|
|
6.00
|
%
|
Federal Home Loan Bank stock
|
|
|
3,167
|
|
|
|
64
|
|
|
|
8.10
|
%
|
|
|
3,167
|
|
|
|
57
|
|
|
|
7.27
|
%
|
Loans (1) (2)
|
|
|
603,795
|
|
|
|
6,534
|
|
|
|
4.35
|
%
|
|
|
454,663
|
|
|
|
4,717
|
|
|
|
4.21
|
%
|
Earning assets
|
|
|
700,969
|
|
|
|
6,978
|
|
|
|
4.00
|
%
|
|
|
587,854
|
|
|
|
5,178
|
|
|
|
3.57
|
%
|
Other assets
|
|
|
9,773
|
|
|
|
|
|
|
|
|
|
|
|
7,303
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
710,742
|
|
|
|
|
|
|
|
|
|
|
$
|
595,157
|
|
|
|
|
|
|
|
|
|
Liabilities & Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking (NOW)
|
|
$
|
35,248
|
|
|
|
10
|
|
|
|
0.12
|
%
|
|
$
|
25,798
|
|
|
|
10
|
|
|
|
0.16
|
%
|
Money market deposits and savings
|
|
|
169,410
|
|
|
|
102
|
|
|
|
0.24
|
%
|
|
|
150,034
|
|
|
|
93
|
|
|
|
0.25
|
%
|
CDs
|
|
|
47,760
|
|
|
|
27
|
|
|
|
0.23
|
%
|
|
|
40,689
|
|
|
|
7
|
|
|
|
0.06
|
%
|
Borrowings
|
|
|
22,144
|
|
|
|
57
|
|
|
|
1.04
|
%
|
|
|
17,503
|
|
|
|
48
|
|
|
|
1.12
|
%
|
Total interest bearing deposits and borrowings
|
|
|
274,562
|
|
|
|
196
|
|
|
|
0.29
|
%
|
|
|
234,024
|
|
|
|
158
|
|
|
|
0.27
|
%
|
Demand deposits
|
|
|
366,468
|
|
|
|
|
|
|
|
|
|
|
|
296,098
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
3,990
|
|
|
|
|
|
|
|
|
|
|
|
2,901
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
645,020
|
|
|
|
|
|
|
|
|
|
|
|
533,023
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
65,722
|
|
|
|
|
|
|
|
|
|
|
|
62,134
|
|
|
|
|
|
|
|
|
|
Total liabilities & equity
|
|
$
|
710,742
|
|
|
|
|
|
|
|
|
|
|
$
|
595,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income / spread
|
|
|
|
|
|
$
|
6,782
|
|
|
|
3.71
|
%
|
|
|
|
|
|
$
|
5,020
|
|
|
|
3.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.89
|
%
|
|
|
|
|
|
|
|
|
|
|
3.46
|
%
|
|
(1)
|
Before allowance for loan losses and net deferred loan fees and costs. Included in net interest income was net loan origination cost amortization of $17,000 and $6,000 for the three months ended March 31, 2016 and 2015, respectively.
|
|
(2)
|
Includes average non-accrual loans of $712,000 and $632,000 for the three months ended March 31, 2016 and 2015, 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 period, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in the average balance times the prior period rate and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column.
|
|
Three Months Ended
March 31, 2016
Compared to
2015
Increase (Decrease) Due to Changes in:
|
|
(in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning deposits at other financial institutions
|
|
$
|
(27
|
)
|
|
$
|
18
|
|
|
$
|
(9
|
)
|
U.S. Treasuries and Gov’t agencies
|
|
|
41
|
|
|
|
(2
|
)
|
|
|
39
|
|
Corporate notes
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
Residential mortgage-backed securities
|
|
|
(49
|
)
|
|
|
2
|
|
|
|
(47
|
)
|
Federal Reserve Bank stock
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Federal Home Loan Bank stock
|
|
|
—
|
|
|
|
7
|
|
|
|
7
|
|
Loans
|
|
|
1,644
|
|
|
|
173
|
|
|
|
1,817
|
|
Total increase in interest income
|
|
|
1,606
|
|
|
|
194
|
|
|
|
1,800
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking (NOW)
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
—
|
|
Money market deposits and savings
|
|
|
12
|
|
|
|
(3
|
)
|
|
|
9
|
|
CDs
|
|
|
1
|
|
|
|
19
|
|
|
|
20
|
|
Borrowings
|
|
|
12
|
|
|
|
(3
|
)
|
|
|
9
|
|
Total increase in interest expense
|
|
|
28
|
|
|
|
10
|
|
|
|
38
|
|
Net increase in net interest income
|
|
$
|
1,578
|
|
|
$
|
184
|
|
|
$
|
1,762
|
|
Provision for Loan Losses
During the three months ended March 31, 2016, we recorded a provision for loan losses of $200,000, compared to $150,000 for the same period last year. Criticized and classified loans generally consist of special mention, substandard and doubtful loans. Special mention, substandard and doubtful loans were $172,000, $758,000 and none, respectively, at March 31, 2016, compared to $180,000, $1.3 million and none, respectively, at March 31, 2015. There were no loan charge-offs or recoveries during the quarter ended March 31, 2016, compared to $16,000 of net loan recoveries during the same period last year. At both March 31, 2016 and December 31, 2015, the ALL to total loans was 1.50%. Management will continue to closely monitor the adequacy of the ALL and will make adjustments as warranted. Management believes that the ALL as of March 31, 2016 and December 31, 2015 was adequate to absorb probable and inherent risks 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 0.12% at both March 31, 2016 and December 31, 2015, respectively. As a percentage of our total assets, the amount of non-performing assets was 0.10% at both March 31, 2016 and December 31, 2015, respectively.
Non-Interest Income
Non-interest income was $198,000 for the quarter ended March 31, 2016, compared to $230,000 for the same period last year. There were no investment securities sold during the quarter ended March 31, 2016. During the quarter ended March 31, 2015, the Company sold $5.9 million of investment securities, recognizing gains of $75,000. With the exception of such gains, non-interest income primarily consists of customer related fee income.
Non-Interest Expense
Non-interest expense was $6.3 million for the quarter ended March 31, 2016, compared to $4.5 million for the same period last year. The increase in non-interest expense during the quarter ended March 31, 2016 as compared to the same period last year is primarily due to expenses of $861,000 and $268,000 incurred in connection with the proposed Merger with Midland and the registration statement on Form S-1 that was filed with the U.S. Securities and Exchange Commission on September 25, 2015, respectively.
Income Tax
Provision
During the quarters ended March 31, 2016 and 2015, we recorded tax provisions of $209,000 and $246,000, respectively.
Financial Condition
A
ssets
Total assets at March 31, 2016 were $739.5 million, representing an increase of $7.5 million, or 1.0%, from $732.0 million at December 31, 2015. Cash and cash equivalents at March 31, 2016 were $52.4 million, representing a decrease of $2.2 million, or 4.0%, from $54.6 million at December 31, 2015. Loans increased by $10.7 million, from $598.4 million at December 31, 2015 to $609.2 million at March 31, 2016. Loan originations were $61.7 million during the quarter ended March 31, 2016, compared to $61.4 million during the same period last year. Prepayment speeds for the quarter ended March 31, 2016 were 15.9%, compared to 11.0% for the same period last year. Investment securities were $72.5 million at March 31, 2016, compared to $74.0 million at December 31, 2015, representing a decline of $1.5 million, or 2.0%. The weighted average life of our investment securities was 3.70 years and 3.85 years at March 31, 2016 and December 31, 2015, respectively.
Cash and Cash Equivalents
Cash and cash equivalents totaled $52.4 million and $54.6 million at March 31, 2016 and December 31, 2015, 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 March 31, 2016, investment securities totaled $72.5 million compared to $74.0 million at December 31, 2015. 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 and debt securities issued by Government Sponsored Agencies. The underlying loans for the mortgage-backed securities are residential mortgages that were primarily originated beginning in 2005 through the current period. These loans are geographically dispersed throughout the United States. At March 31, 2016 and December 31, 2015, the weighted average yield and weighted average life of these residential mortgage-backed securities were 1.78% and 1.79%, respectively, and 3.26 years and 3.36 years, respectively. At March 31, 2016 and December 31, 2015, the weighted average rate and weighted average life of debt securities issued by Government Sponsored Agencies were 1.88% and 1.88%, respectively, and 4.18 years and 4.43 years, respectively.
There were no securities sold during the three months ended March 31, 2016. During the quarter ended March 31, 2015, the Company sold $5.9 million, of investment securities, recognizing gains of $75,000. These gains were recorded in non-interest income within the unaudited Consolidated Statement of Operations and Comprehensive Income. In addition, the unrealized gain on investment securities increased to $875,000 at March 31, 2016, compared to $18,000 at December 31, 2015. 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 1.8%, or $10.5 million, from $589.5 million at December 31, 2015 to $600.0 million at March 31, 2016. As of March 31, 2016 and December 31, 2015, total loans outstanding totaled $609.2 million and $598.4 million, respectively. Loan originations were $61.7 million during the three months ended March 31, 2016, compared to $61.4 million during the same period last year. Prepayment speeds for the three months ended March 31, 2016 were 15.9%, compared to 11.0% for the same period last year.
As of March 31, 2016 and December 31, 2015, substantially all of the Company’s loan customers were located in Southern California.
Non-
P
erforming Assets
The following table sets forth non-accrual loans and other real estate owned at March 31, 2016 and December 31, 2015:
(dollars in thousands)
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
712
|
|
|
$
|
712
|
|
Total non-accrual loans
|
|
|
712
|
|
|
|
712
|
|
Total non-performing assets
|
|
$
|
712
|
|
|
$
|
712
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to gross loans and OREO
|
|
|
0.12
|
%
|
|
|
0.12
|
%
|
Non-performing assets to total assets
|
|
|
0.10
|
%
|
|
|
0.10
|
%
|
Non-accrual loans totaled $712,000 at both March 31, 2016 and December 31, 2015. There were no accruing loans past due 90 days or more at March 31, 2016 and December 31, 2015.
Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms was $9,000 and $8,000 for the three months ended March 31, 2016 and 2015, respectively.
At both March 31, 2016 and December 31, 2015, non-accrual loans consisted of three commercial loans totaling $712,000.
At March 31, 2016 and December 31, 2015, the recorded investment in impaired loans was $758,000 and $759,000, respectively. At both March 31, 2016 and December 31, 2015, the Company had a specific allowance for loan losses of $35,000 on impaired loans of $140,000. There were $618,000 and $619,000 of impaired loans with no specific allowance for loan losses at March 31, 2016 and December 31, 2015, respectively. The average outstanding balance of impaired loans for the three months ended March 31, 2016 was $759,000, compared to $681,000 for the same period last year. At both March 31, 2016 and December 31, 2015, there were $712,000 of impaired loans on non-accrual status. During both the three months ended March 31, 2016 and 2015, interest income recognized on impaired loans subsequent to their classification as impaired was to $1,000. 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 probable incurred credit losses 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;
|
|
•
|
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. Alternatively, no assurance can be given that future economic conditions or other factors will not lead to a decline in delinquent loans, which could result in a reversal of provision for loan losses and/or loan recoveries. Management believes that the ALL as of March 31, 2016 and December 31, 2015 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 months ended March 31, 2016 and 2015:
(in thousands)
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
|
|
|
Land and Construction
|
|
|
Consumer
and Other
|
|
|
Total
|
|
Three Months Ended
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,807
|
|
|
$
|
4,580
|
|
|
$
|
907
|
|
|
$
|
1,146
|
|
|
$
|
521
|
|
|
$
|
8,961
|
|
Provision for loan losses
|
|
|
—
|
|
|
|
115
|
|
|
|
(15
|
)
|
|
|
100
|
|
|
|
—
|
|
|
|
200
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ending balance
|
|
$
|
1,807
|
|
|
$
|
4,695
|
|
|
$
|
892
|
|
|
$
|
1,246
|
|
|
$
|
521
|
|
|
$
|
9,161
|
|
Three Months Ended March 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,752
|
|
|
$
|
3,825
|
|
|
$
|
747
|
|
|
$
|
816
|
|
|
$
|
459
|
|
|
$
|
7,599
|
|
Provision for loan losses
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
100
|
|
|
|
40
|
|
|
|
150
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recoveries
|
|
|
16
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
Ending balance
|
|
$
|
1,768
|
|
|
$
|
3,825
|
|
|
$
|
757
|
|
|
$
|
916
|
|
|
$
|
499
|
|
|
$
|
7,765
|
|
There were no loans acquired with deteriorated credit quality during the three months ended March 31, 2016 and 2015.
The ALL was $9.2 million, or 1.50% of our total loan portfolio, at March 31, 2016, compared to $9.0 million, or 1.50% of our total loan portfolio, at December 31, 2015. At both March 31, 2016 and December 31, 2015, our non-performing loans were $712,000, respectively. The ratio of our ALL to non-performing loans was 1,287.28% and 1,259.18% at March 31, 2016 and December 31, 2015, respectively. In addition, our ratio of non-performing loans to total loans was 0.12% at both March 31, 2016 and December 31, 2015, 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
At March 31, 2016 and December 31, 2015, we had a net deferred tax asset of $4.2 million and $4.6 million, respectively. Our net deferred tax asset primarily consists of deferred tax assets related to the allowance for loan losses and equity compensation.
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 period, 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 March 31, 2016, total deposits were $655.0 million compared to $598.2 million at December 31, 2015, representing an increase of 9.5%, or $56.8 million. Total core deposits, which include non-interest bearing demand deposits, interest bearing demand deposits, and money market deposits and savings, were $607.3 million and $550.4 million at March 31, 2016 and December 31, 2015, respectively. Non-interest bearing deposits represent 58.6% of total deposits at March 31, 2016, compared to 60.6% at December 31, 2015.
The following table reflects a summary of deposit categories by dollar and percentage at March 31, 2016 and December 31, 2015:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Percent of
Total
|
|
|
Amount
|
|
|
Percent of
Total
|
|
Non-interest bearing demand deposits
|
|
$
|
383,486
|
|
|
|
58.6
|
%
|
|
$
|
362,451
|
|
|
|
60.6
|
%
|
Interest bearing checking
|
|
|
36,385
|
|
|
|
5.5
|
%
|
|
|
32,406
|
|
|
|
5.4
|
%
|
Money market deposits and savings
|
|
|
187,381
|
|
|
|
28.6
|
%
|
|
|
155,572
|
|
|
|
26.0
|
%
|
Certificates of deposit
|
|
|
47,705
|
|
|
|
7.3
|
%
|
|
|
47,748
|
|
|
|
8.0
|
%
|
Total
|
|
$
|
654,957
|
|
|
|
100.0
|
%
|
|
$
|
598,177
|
|
|
|
100.0
|
%
|
At March 31, 2016, the Company had two certificates of deposit with the State of California Treasurer’s Office for a total of $46.0 million, which represented 7.0% of total deposits. The deposits outstanding at March 31, 2016 are scheduled to mature in the second quarter of 2016. 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, 2015, the Company had two certificates of deposit with the State of California Treasurer’s Office for a total of $46.0 million, which represented 7.7% of total deposits. The Company was required to pledge $50.6 million of investment securities at both March 31, 2016
and December 31, 2015, 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 was $47.1 million at both March 31, 2016 and December 31, 2015.
Scheduled maturities of certificates of deposit in amounts of $100,000 or more at March 31, 2016, including deposit accounts with the State of California Treasurer’s Office and CDARS were as follows:
(in thousands)
|
|
|
|
|
Due within 3 months or less
|
|
$
|
47,013
|
|
Due after 3 months and within 6 months
|
|
|
—
|
|
Due after 6 months and within 12 months
|
|
|
125
|
|
Due after 12 months
|
|
|
—
|
|
Total
|
|
$
|
47,138
|
|
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 10.1% at both March 31, 2016 and December 31, 2015.
At March 31, 2016 and December 31, 2015, the Company had a borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB of $183.0 million and $180.0 million, respectively. The Company had $15.0 million of long-term borrowings outstanding under this borrowing/credit facility with the FHLB at both March 31, 2016 and December 31, 2015. The Company had no overnight borrowings outstanding under this borrowing/credit facility at March 31, 2016. During the three months ended March 31, 2016, the Company had an average short-term borrowing balance of $4.0 million under this credit facility, incurring $6,000 in interest expense during this period. At December 31, 2015, the Company had a $50.0 million overnight borrowing outstanding under this borrowing/credit facility at an interest rate of 0.27%. The Company did not incur any material interest expense in connection with this borrowing and it was repaid in January 2016.
The following table summarizes the outstanding long-term borrowings under the borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB at March 31, 2016 and December 31, 2015 (dollars in thousands):
Maturity Date
|
|
Interest Rate
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
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
|
|
|
|
5,000
|
|
|
|
Total
|
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
At March 31, 2016 and December 31, 2015, 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. As of both March 31, 2016 and December 31, 2015, the Company had pledged $2.3 million, of investments 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 March 31, 2016, the Company was not subject to any material commitments for capital expenditures.
Capital Resources
At March 31, 2016, the Company had total stockholders’ equity of $66.0 million, which included $127,000 in common stock, $75.7 million in additional paid-in capital, $1.2 million in retained earnings, $515,000 in accumulated other comprehensive income, and $11.5 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 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 Tier 1 and common equity Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that as of March 31, 2016 and December 31, 2015, the Company and the Bank met all capital adequacy requirements to which they are subject.
At December 31, 2015, the most recent notification from the OCC categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To generally be categorized as a “well-capitalized” financial institution, the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 capital and Tier 1 leverage ratios. There are no conditions or events since the notification that management believes have changed the Bank’s categorization.
The Company’s and the Bank’s capital ratios as of March 31, 2016 and December 31, 2015 are presented in the table below:
|
|
Company
|
|
|
Bank
|
|
|
For
Capital
Adequacy
Purposes
|
|
|
For the Bank to be “Well-
Capitalized” Under
Prompt Corrective
Measures
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital Ratio
|
|
$
|
73,675
|
|
|
|
11.20
|
%
|
|
$
|
73,173
|
|
|
|
11.13
|
%
|
|
$
|
52,618
|
|
|
|
8.00
|
%
|
|
$
|
65,772
|
|
|
|
10.00
|
%
|
Tier 1 Risk-Based Capital Ratio
|
|
$
|
65,437
|
|
|
|
9.95
|
%
|
|
$
|
64,935
|
|
|
|
9.87
|
%
|
|
$
|
39,464
|
|
|
|
6.00
|
%
|
|
$
|
52,618
|
|
|
|
8.00
|
%
|
Common Equity Tier 1 Capital Ratio
|
|
$
|
65,437
|
|
|
|
9.95
|
%
|
|
$
|
64,935
|
|
|
|
9.87
|
%
|
|
$
|
29,598
|
|
|
|
4.50
|
%
|
|
$
|
42,752
|
|
|
|
6.50
|
%
|
Tier 1 Leverage Ratio
|
|
$
|
65,437
|
|
|
|
9.22
|
%
|
|
$
|
64,935
|
|
|
|
9.14
|
%
|
|
$
|
28,401
|
|
|
|
4.00
|
%
|
|
$
|
35,523
|
|
|
|
5.00
|
%
|
December 31, 201
5
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital Ratio
|
|
$
|
73,029
|
|
|
|
11.24
|
%
|
|
$
|
72,520
|
|
|
|
11.16
|
%
|
|
$
|
51,992
|
|
|
|
8.00
|
%
|
|
$
|
64,989
|
|
|
|
10.00
|
%
|
Tier 1 Risk-Based Capital Ratio
|
|
$
|
64,891
|
|
|
|
9.98
|
%
|
|
$
|
64,381
|
|
|
|
9.91
|
%
|
|
$
|
38,994
|
|
|
|
6.00
|
%
|
|
$
|
51,991
|
|
|
|
8.00
|
%
|
Common Equity Tier 1 Capital Ratio
|
|
$
|
64,891
|
|
|
|
9.98
|
%
|
|
$
|
64,381
|
|
|
|
9.91
|
%
|
|
$
|
29,245
|
|
|
|
4.50
|
%
|
|
$
|
42,243
|
|
|
|
6.50
|
%
|
Tier 1 Leverage Ratio
|
|
$
|
64,891
|
|
|
|
9.00
|
%
|
|
$
|
64,381
|
|
|
|
8.92
|
%
|
|
$
|
28,852
|
|
|
|
4.00
|
%
|
|
$
|
36,078
|
|
|
|
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%. The new rules also require a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets over each of the required capital ratios that will be phased in from 2016 to 2019 and must be met to avoid limitations the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. During 2016, the phased-in portion of the capital conservation buffer is 0.625%. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments, excluding trust preferred securities, mortgage servicing rights and certain deferred tax assets, and including unrealized gains and losses on available for sale debt and equity securities. On July 9, 2013, the FDIC and OCC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC and OCC's rules are identical in substance to the final rules issued by the FRB.
The phase-in period for the final rules commenced 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. For capital adequacy purposes, the capital ratios of the Company and the Bank would currently be in compliance with the capital conservation buffer discussed above assuming the 2.5% capital conservation buffer was fully phased in as of March 31, 2016. Management will continue to closely monitor these ratios throughout the phase in period and beyond, and intends to take appropriate action, if necessary, to ensure that as the additional requirements are phased in that the BCBS capital guidelines are satisfied. Appropriate actions may include accessing capital markets, the disposition of assets, as well as other actions deemed necessary at that time.
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.
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)
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Commitments to extend credit
|
|
$
|
160,674
|
|
|
$
|
159,855
|
|
Commitments to extend credit to directors and officers (undisbursed amount)
|
|
$
|
662
|
|
|
$
|
380
|
|
Standby/commercial letters of credit
|
|
$
|
3,090
|
|
|
$
|
3,245
|
|
Guarantees on revolving credit card limits
|
|
$
|
731
|
|
|
$
|
671
|
|
Outstanding credit card balances
|
|
$
|
105
|
|
|
$
|
82
|
|
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 March 31, 2016 and December 31, 2015, the allowance for unfunded commitments was $395,000 and $345,000, respectively, which represented 0.24% and 0.21% 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
.”