1st Century Bancshares (FCTY) 10-Q 2011 Q3 Quarterly report

 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, 2011

Commission file number 333-148302

1^st Century Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Delaware	26-1169687
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1875 Century Park East, Suite 1400

Los Angeles, California  90067

(Address of principal executive offices)

(Zip Code)

(310) 270-9500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filero	Accelerated filero
Non-accelerated filero	Smaller reporting companyx
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

9,043,322 shares of common stock of the registrant were outstanding as of November 4, 2011.

1^st Century Bancshares, Inc.

Quarterly Report on Form 10-Q

September 30, 2011

Table of Contents

		Page
PART I.FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets — September 30, 2011 (unaudited) and December 31, 2010	4
	Unaudited Consolidated Statements of Operations — Three and nine months ended September 30, 2011 and 2010	5
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income  — Nine months ended September 30, 2011 and 2010	6
	Unaudited Consolidated Statements of Cash Flows — Nine months ended September 30, 2011 and 2010	7
	Notesto Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Removed and Reserved	44
Item 5.	Other Information	44
Item 6.	Exhibits	47
Signatures		48

2

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.  The Company claims the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995.  The Company cautions investors that any forward-looking statements presented in this Quarterly Report on Form 10-Q, or those that the Company may make orally or in writing from time to time, are based on the Company’s beliefs, and on assumptions made by, and information available to management at the time such statements are first made.  The actual outcome 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 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 relying on forward-looking statements to anticipate future results or trends.

Some of the risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed include the following: the impact of changes in interest rates; a continuing decline in economic conditions; increased competition among financial institutions; the Company’s ability to attract deposit and loan customers; the quality of the Company’s earning assets; government regulation; management’s ability to manage the Company’s operations; and the other risks set forth in the Company’s reports filed with the U.S. Securities and Exchange Commission. For further discussion of these and other factors, see “Item 1A. Risk Factors” in the Company’s 2010 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 in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.

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PART I. FINANCIAL INFORMATION

Item 1 —Financial Statements

1^st Century Bancshares, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)

	September 30, 2011 (unaudited)			December 31, 2010
ASSETS
Cash and due from banks	$	11,032		$	6,673
Interest earning deposits at other financial institutions	84,114			62,339
Total cash and cash equivalents	95,146			69,012
Investment securities — Available for Sale (“AFS”), at estimated fair value	103,298			58,474
Loans, net of allowance for loan losses of $5,246 and $5,283 at September 30, 2011 and December 31, 2010, respectively	179,636			174,010
Premises and equipment, net	1,037			988
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock	3,013			3,327
Accrued interest and other assets	2,245			2,553
Total Assets	$	384,375		$	308,364
LIABILITIES AND STOCKHOLDERS’ EQUITY
Non-interest bearing demand deposits	$	120,895		$	91,501
Interest bearing deposits:
Interest bearing checking (“NOW”)	24,770			33,632
Money market deposits and savings	133,349			72,757
Certificates of deposit less than $100	1,981			2,522
Certificates of deposit of $100 or greater	44,912			57,577
Total deposits	325,907			257,989
Other borrowings	10,000			2,000
Accrued interest and other liabilities	3,137			4,037
Total Liabilities	339,044			264,026
Commitments and contingencies (Note 8)
Stockholders’ Equity:
Preferred stock, $0.01 par value — 10,000,000 shares authorized, none issued and outstanding at September 30, 2011 and December 31, 2010, respectively	—			—
Common stock, $0.01 par value — 50,000,000 shares authorized, 10,743,676 and 10,672,676 issued at September 30, 2011 and December 31, 2010, respectively	107			107
Additional paid-in capital	64,359			64,069
Accumulated deficit	(14,273		)	(14,866		)
Accumulated other comprehensive income	1,995			838
Treasury stock at cost — 1,653,411 and 1,370,385 shares at September 30, 2011 and December 31, 2010, respectively	(6,857		)	(5,810		)
Total Stockholders’ Equity	45,331			44,338
Total Liabilities and Stockholders’ Equity	$	384,375		$	308,364

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

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1^st Century Bancshares, Inc.

Unaudited Consolidated Statements ofOperations

(in thousands, except per share data)

	Three Months Ended September 30,				Nine months Ended September 30,
	2011		2010		2011		2010
Interest and fee income on:
Loans	$	2,365	$	2,185	$	7,003	$	6,601
Investments	640		405		1,737		1,327
Other	73		73		198		157
Total interest and fee income	3,078		2,663		8,938		8,085
Interest expense on:
Deposits	228		189		634		560
Borrowings	35		41		59		197
Total interest expense	263		230		693		757
Net interest income	2,815		2,433		8,245		7,328
Provision for loan losses	—		100		275		200
Net interest income after provision for loan losses	2,815		2,333		7,970		7,128
Non-interest income	222		223		618		662
Non-interest expenses:
Compensation and benefits	1,478		1,230		4,348		3,905
Occupancy	268		232		770		688
Professional fees	158		155		554		510
Technology	165		172		475		482
Marketing	100		51		207		140
FDIC assessments	41		107		266		283
Other operating expenses	473		454		1,375		1,384
Total non-interest expenses	2,683		2,401		7,995		7,392
Income before income taxes	354		155		593		398
Income tax provision	—		—		—		—
Net income	$	354	$	155	$	593	$	398
Basic earnings per share	$	0.04	$	0.02	$	0.07	$	0.04
Diluted earnings per share	$	0.04	$	0.02	$	0.07	$	0.04

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

5

1^st Century Bancshares, Inc.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income

(in thousands, except share data)

	Common Stock											Accumulated Other		Treasury Stock					Total
	Issued					Additional			Accumulated			Comprehensive		Number of					Stockholders’
	Shares		Amount			Paid-in Capital			Deficit			Income		Shares		Amount			Equity
Balance at December 31, 2009	10,446,580		$	104		$	63,562		$	(12,903	)	$	817	(1,227,181	)	$	(5,260	)	$	46,320
Restricted stock issued	190,000		2			—			—			—		—		—			2
Forfeiture of restricted stock	(2,000	)	—			—			—			—		—		—			—
Compensation expense associated with restricted stock awards, net of estimated forfeitures	—		—			389			—			—		—		—			389
Shares surrendered to pay taxes on vesting of restricted stock	—		—			—			—			—		(35,512	)	(142		)	(142		)
Common stock repurchases	—		—			—			—			—		(35,480	)	(125		)	(125
Comprehensive income:
Net income	—		—			—			398			—		—		—			398
Net change in unrealized gains on AFS investments, net of tax	—		—			—			—			321		—		—			321
Total comprehensive income	—		—			—			398			321		—		—			719
Balance at September 30, 2010	10,634,580		$	106		$	63,951		$	(12,505	)	$	1,138	(1,298,173	)	$	(5,527	)	$	47,163
Balance at December 31, 2010	10,672,676		$	107		$	64,069		$	(14,866	)	$	838	(1,370,385	)	$	(5,810	)	$	44,338
Restricted stock issued	104,500		1			—			—			—		—		—			1
Forfeiture of restricted stock	(33,500	)	(1		)	(65		)	—			—		—		—			(66		)
Compensation expense associated with restricted stock awards, net of estimated forfeitures	—		—			355			—			—		—		—			355
Shares surrendered to pay taxes on vesting of restricted stock	—		—			—			—			—		(15,681	)	(62		)	(62		)
Common stock repurchased	—		—			—			—			—		(267,345	)	(985		)	(985		)
Comprehensive income:
Net income	—		—			—			593			—		—		—			593
Net change in unrealized gains on AFS investments, net of tax	—		—			—			—			1,157		—		—			1,157
Total comprehensive income	—		—			—			593			1,157		—		—			1,750
Balance at September 30, 2011	10,743,676		$	107		$	64,359		$	(14,273	)	$	1,995	(1,653,411	)	$	(6,857	)	$	45,331

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

6

1^st Century Bancshares, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

	Nine months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net income	$	593		$	398
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment	266			263
Provision for loan losses	275			200
Amortization of deferred loan costs, net of fees	31			109
Non-cash stock compensation, net of forfeitures	290			389
Other, net	282			(39		)
(Increase) decrease in accrued interest and other assets	(5		)	244
Decrease in accrued interest and other liabilities	(1,708		)	(39		)
Net cash provided by operating activities	24			1,525
Cash flows from investing activities:
Activities in AFS investment securities:
Purchases	(56,995		)	(8,773		)
Maturities, calls and principal reductions	13,759			10,247
Proceeds from the sale of securities	140			3,887
(Increase) decrease in loans, net	(5,932		)	11,095
Proceeds from sale of other real estate owned (“OREO”)	268			—
Purchase of premises and equipment	(315		)	(207		)
Redemption of FRB stock and FHLB stock	314			392
Net cash (used in) provided by investing activities	(48,761		)	16,641
Cash flows from financing activities:
Net increase in deposits	67,918			38,253
Proceeds from long-term FHLB borrowings	10,000			—
Repayment of long-term FHLB borrowings	(2,000		)	(12,500		)
Purchase of treasury stock	(985		)	(125		)
Shares surrendered to pay taxes on vesting of restricted stock	(62		)	(142		)
Net cash provided by financing activities	74,871			25,486
Increase in cash and cash equivalents	26,134			43,652
Cash and cash equivalents, beginning of period	69,012			45,935
Cash and cash equivalents, end of period	$	95,146		$	89,587
Supplemental cash flow information:
Cash paid during the period for interest	$	669		$	778
Supplemental disclosure of non-cash investing activity:
Transfer of residential mortgage loan to OREO	$	—		$	313

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

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1^st Century Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

(1)

Summary of Significant Accounting Policies

Nature of Operations

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

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations, changes in stockholders’ equity and comprehensive income 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, changes in stockholders’ equity and comprehensive income 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, 2010, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 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, 2011 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, 2011.

The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry. A summary of the significant accounting and reporting policies consistently applied in the preparation of the accompanying unaudited consolidated financial statements follows:

Use of Estimates

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant assumptions and estimates used by management in preparation of the consolidated financial statements include assumptions and assessments made in connection with calculating the allowance for loan losses and determining the realizability of the Company’s deferred tax assets.  It is at least reasonably possible that certain assumptions and estimates could prove to be incorrect and cause actual results to differ materially and adversely from the amounts reported in the consolidated financial statements included herewith.

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, interest earning deposits at other financial institutions with original maturities less than 90 days and all highly liquid investments with original maturities of less than 90 days.

Investment Securities

Investmentsecurities 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

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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 on a cash basis.

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. 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, or the loan must be well secured and in the process of collection.

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.

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Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a troubled debt restructuring (“TDR”).  Management strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before their loan reaches nonaccrual status.  Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.  Effective July 1, 2011, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2011-02,Receivables (“Topic 310”) -A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring(“ASU 11-02”).  As such, the Company reassessed all loan modifications occurring since January 1, 2011 for identification as troubled debt restructurings.  In cases where borrowers are granted a concession, management measures any impairment on the restructuring as noted above for impaired loans.  There were no troubled debt restructurings during the nine months ended September 30, 2011 and 2010.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. 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 estimates from historical peer group loan loss data, the loss experience of other financial institutions, as well as the historical loss experience of the loan portfolio, augmented by the experience of management with similar assets and the Company’s independent loan review process.  During this process, loans are segmented into the following categories: commercial loans, commercial real estate, residential, land and construction, and consumer and other loans. Loss ratios for all categories of loans are evaluated on a quarterly basis.  Loss ratios associated with historical loss experience are determined based on a rolling migration analysis of each loan category within the portfolio.  This migration analysis estimates loss factors based on the performance of each loan category over a three-year time period.  These loss factors are then adjusted, if necessary, for other identifiable risks specifically related to each loan category or risk grade.  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 loan category discussed above, trends within each loan category, as well as general economic and real estate market conditions where the collateral and borrower are located.  For loans that are not collateral dependent, which generally consist of commercial and consumer and other loans, management typically focuses on general business conditions where the borrower operates, trends within the portfolio, and other external factors to evaluate the severity of loss factors.  The allowance is based on estimates and actual losses may vary from the estimates.

In addition, regulatory agencies, as a part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.  No assurance can be given that adverse future economic conditions will not lead to increased delinquent loans, and increases in the provision for loan losses and/or charge-offs. Management believes that the allowance as of September 30, 2011 and December 31, 2010 was adequate to absorb known and inherent risks in the loan portfolio.

Other Real Estate Owned

OREO represents real estate acquired through or in lieu of foreclosure.  OREO is held for sale and is initially recorded at fair value less estimated costs of disposition at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or estimated fair value less costs of disposition.  OREO are 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.

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.

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Advertising Costs

Advertising costs are expensed as incurred.

Income Taxes

The Company files consolidated federal and combined state income tax returns. Income tax expense or benefit is the total of the current year income tax payable or refundable and the change in the deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates.

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in the rates and laws.  A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Company records a valuation allowance if it believes, based on all available evidence, that it is “more likely than not” that the future tax assets will not be realized. This assessment requires management to evaluate the Company’s ability to generate sufficient future taxable income or use eligible tax carrybacks, if any, to determine the need for a valuation allowance.

During the year ended December 31, 2009, the Company established a full valuation allowance against the deferred tax assets due to the uncertainty regarding its realizability.  At September 30, 2011 and December 31, 2010, management reassessed the need for this valuation allowance and concluded that a full valuation allowance remained appropriate.  Management reached this conclusion as a result of the Company’s cumulative losses since inception, and the anticipated near term economic climate in which the Company will operate.  Management will continue to evaluate the potential realizability of the deferred tax assets and will continue to maintain a valuation allowance to the extent it is determined that it is more likely than not that these assets will not be realized. At September 30, 2011 and December 31, 2010, the Company maintained a deferred tax liability of $1.4 million and $586,000, respectively, in connection with net unrealized gains on investment securities, which is included in Accrued Interest and Other Liabilities within the accompanying Consolidated Balance Sheets.  The Company did not utilize this deferred tax liability to reduce its tax valuation allowance due to the fact that management does not currently intend to dispose of these investments and realize the associated gains.

At September 30, 2011 and December 31, 2010, 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.

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 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.

	Three Months Ended September 30,				Nine months Ended September 30,
(dollars in thousands)	2011		2010		2011		2010
Net income	$	354	$	155	$	593	$	398
Average number of common shares outstanding		8,763,972		8,921,861		8,831,843		8,899,752
Effect of dilution of restricted stock		159,193		95,882		168,583		108,820
Average number of common shares outstanding used to calculate diluted earnings per common share		8,923,165		9,017,743		9,000,426		9,008,572

11

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 1^st 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 January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-06,Fair Value Measurements and Disclosures(“Topic 820”): Improving Disclosures about Fair Value Measurements(“ASU 10-06”).  ASU 10-06 revises two disclosure requirements concerning assets and liabilities that are measured at fair value on a recurring basis and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It requires the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The Company’s disclosures about fair value measurements are presented in Note 10: Fair Value Measurements. These new disclosure requirements were adopted by the Company during the three months ended March 31, 2010, with the exception of the requirement concerning gross presentation of Level 3 activity, which was adopted during the three months ended March 31, 2011.  The adoption of this standard did not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures.

In July 2010, the FASB issued ASU 2010-20,Receivables (“Topic 310”) -Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 10-20”).  ASU 10-20 requires a company to disaggregate new and existing disclosures based on how it develops its allowance for credit losses and how it manages credit exposures.  Short-term accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from the ASU 10-20.  For public companies, the amendments that require disclosures as of the end of a reporting period were effective for periods ending on or after December 15, 2010. The adoption of this portion of ASU 10-20 did not have a material impact on the Company’s financial position, results of operations, or cash flows.  The amendments that require disclosures about activity that occurs during a reporting period were effective for periods beginning on or after December 15, 2010.  The adoption of this portion of the ASU did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In January 2011, the FASB issued ASU 2011-01,Receivables(“Topic 310”) -Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20(“ASU 11-01”).  ASU 11-01 temporarily deferred the effective date for disclosures related to troubled debt restructurings (“TDRs”) to coincide with the effective date of the ASU, discussed below, related to troubled debt restructurings.

12

In April 2011, the FASB issued ASU 2011-02.  ASU 11-02 amends the content in ASC 310 related to identifying TDRs and effectively nullifies ASU 2011-01.  This ASU removes the deferral of the TDR disclosure requirements of ASU 2010-20 for public entities and thus establishes the effective date for those disclosures.  ASU 11-02 is effective for the first interim or annual period beginning on or after June 15, 2011, and is to be applied retrospectively to modifications occurring on or after the beginning of the fiscal year of adoption. Early adoption is permitted.  The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In May 2011, the FASB issued ASU 2011-04,Fair Value Measurement(“Topic 820”) –Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs(“ASU 11-04”).  This ASU amends Topic 820, "Fair Value Measurements and Disclosures," to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards.  ASU 11-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 11-04 is effective for annual periods beginning after December 15, 2011.  Management does not believe that the adoption of this ASU will have a material impact on the Company’s financial position, results of operations, or cash flows.

In June 2011, the FASB issued ASU 2011-05,Comprehensive Income(“Topic 220”) –Presentation of Comprehensive Income(“ASU 11-05”).  This ASU amends Topic 220, "Comprehensive Income," to require that all nonowner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 11-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders' equity was eliminated. ASU 11-05 is effective for annual periods beginning after December 15, 2011.  Management does not believe that the adoption of this ASU will 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, 2011 and December 31, 2010:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(in thousands)	Cost		Gains		Losses			Value
At September 30, 2011:
Investments — Available for Sale
U.S. Gov’t Treasuries	$	2,100	$	26	$	—		$	2,126
Corporate Notes	4,136		36		(9		)	4,163
Residential Mortgage-Backed Securities	92,672		3,337		—			96,009
Residential Collateralized Mortgage Obligations (“CMOs”)	1,000		1		(1		)	1,000
Total	$	99,908	$	3,400	$	(10	)	$	103,298
At December 31, 2010:
Investments — Available for Sale
U.S. Gov’t Treasuries	$	150	$	—	$	—		$	150
Debt issued by the States of the United States		2,012		3		—			2,015
Residential Mortgage-Backed Securities	53,105		1,588		(174		)	54,519
Residential CMOs	1,783		7		—			1,790
Total	$	57,050	$	1,598	$	(174	)	$	58,474

The Company did not have any investment securities categorized as “Held to Maturity” or “Trading” at September 30, 2011 or December 31, 2010.

Additionally, at September 30, 2011 and December 31, 2010, the carrying amount of securities pledged to the State of California Treasurer’s Office to secure their deposits was $59.0 million and $56.3 million, respectively.  Deposits from the State of California were $34.0 million at both September 30, 2011 and December 31, 2010.

13

The fair value of AFS securities and the weighted average yield of investment securities by contractual maturity at September 30, 2011 are as follows:

(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	$	—	—	%	$	2,126	0.64	%	$	—	—	%	$	—	—	%	$	2,126	0.64	%
Corporate Notes	—		—		4,163		1.16		—		—		—		—		4,163		1.16
Residential Mortgage-Backed Securities	15		4.22		1,202		4.36		58,493		2.78		36,299		3.30		96,009		3.00
Residential CMOs	—		—		—		—		399		1.26		601		0.31		1,000		0.69
Total	$	15	4.22	%	$	7,491	1.53	%	$	58,892	2.77	%	$	36,900	3.26	%	$	103,298	2.85	%

A total of three and nine securities had unrealized losses at September 30, 2011 and December 31, 2010, respectively.  Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

		Less than Twelve Months								Twelve Months or More
(in thousands)		Gross Unrealized Losses				Fair Value				Gross Unrealized Losses			Fair Value
At September 30, 2011:
Investments-Available for Sale
Corporate Notes	$		(9	)	$		1,573	$	—		$	—
Residential CMOs			(1	)			601		—			—
Total	$		(10	)	$		2,174	$	—		$	—
At December 31, 2010:
Investments-Available for Sale
Residential Mortgage-Backed Securities	$		(174	)	$		18,146	$	—		$	—

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, 2011 and December 31, 2010 that the unrealized losses on its securities portfolio on which impairments had not been recognized are temporary.

(3)

Loans, Allowance for Loan Losses, and Non-Performing Assets

Loans

As of September 30, 2011 and December 31, 2010, gross loans outstanding totaled $184.8 million and $179.3 million, respectively, within the following loan categories:

	September 30, 2011					December 31, 2010
	Amount			Percent		Amount			Percent
(dollars in thousands)	Outstanding			of Total		Outstanding			of Total
Commercial (1)	$	62,155		33.6	%	$	67,411		37.6	%
Commercial real estate	52,116			28.2	%	54,456			30.4	%
Residential	32,110			17.4	%	21,707			12.1	%
Land and construction	20,674			11.2	%	15,462			8.6	%
Consumer and other (2)	17,762			9.6	%	20,235			11.3	%
Loans, gross	184,817			100.0	%	179,271			100.0	%
Net deferred costs	65					22
Less — allowance for loan losses	(5,246		)			(5,283		)
Loans, net	$	179,636				$	174,010

(1)

Unsecured commercial loan balances were $10.8 million and $11.0 million at September 30, 2011 and December 31, 2010, respectively.

14

(2)

Unsecured consumer and other loan balances were $845,000 and $1.9 million at September 30, 2011 and December 31, 2010, respectively.

As of September 30, 2011 and December 31, 2010, 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, 2011:

(in thousands)		Commercial					Commercial Real Estate						Residential					Land and Construction						Consumer and Other						Total
Three Months Ended September 30, 2011:
Allowance for loan losses:
Beginning balance		$		2,671					$		902				$		296			$		886				$		329			$	5,084
Provision for loan losses				(162		)					—						62					100						—				—
Charge-offs				—							—						—					—						—				—
Recoveries				162							—						—					—						—				162
Ending balance		$		2,671					$		902				$		358			$		986				$		329			$	5,246
Nine Months Ended September 30, 2011:
Allowance for loan losses:
Beginning balance	$		2,812					$		888				$		213			$		995				$		375				$	5,283
Provision for loan losses			(99		)					294						145					(9		)				(56		)			275
Charge-offs			(222		)					(280		)				—					—						—					(502	)
Recoveries			180							—						—					—						10					190
Ending balance	$		2,671					$		902				$		358			$		986				$		329				$	5,246
As of September 30, 2011:
Ending balance: individually evaluated for impairment	$		1,000					$		—				$		—			$		—				$		—				$	1,000
Ending balance: collectively evaluated for impairment			1,671							902						358					986						329					4,246
Total	$		2,671					$		902				$		358			$		986				$		329				$	5,246
Loans:
Ending balance: individually evaluated for impairment	$		2,252					$		4,041				$		—			$		—				$		345				$	6,638
Ending balance: collectively evaluated for impairment			59,903							48,075						32,110					20,674						17,417					178,179
Total	$		62,155					$		52,116				$		32,110			$		20,674				$		17,762				$	184,817

The following is a summary of the allowance for loan losses and recorded investment in loans as of December 31, 2010:

(in thousands)	Commercial		Commercial Real Estate					Residential					Land and Construction					Consumer and Other					Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	1,121			$		20			$		—			$		—			$		40			$		1,181
Ending balance: collectively evaluated for impairment		1,691					868					213					995					335					4,102
Total	$	2,812			$		888			$		213			$		995			$		375			$		5,283
Loans:
Ending balance: individually evaluated for impairment	$	1,693		$		5,080			$		—			$		—			$		345			$		7,118
Ending balance: collectively evaluated for impairment		65,718					49,376					21,707					15,462					19,890					172,153
Total	$	67,411			$		54,456			$		21,707			$		15,462			$		20,235			$		179,271

15

The following is a summary of activities for the allowance for loan losses for the three and nine months ended September 30, 2010:

(in thousands)	Three Months Ended September 30, 2010			Nine Months Ended September 30, 2010
Beginning balance	$	4,947			$	5,478
Provision for loan losses		100				200
Charge-offs:
Commercial		(659	)			(889	)
Commercial real estate		(250	)			(650	)
Consumer and other		—				(52	)
Total charge-offs		(909	)			(1,591	)
Recoveries:
Commercial		381				386
Commercial real estate		—				22
Residential		—				20
Consumer and other		—				4
Total recoveries		381				432
Ending balance	$	4,519			$	4,519

There were no loans acquired with deteriorated credit quality as of September 30, 2011 and December 31, 2010.

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 risk according to the Company’s internal risk rating scale. These risk 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.  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, 2011 and December 31, 2010, the allowance for unfunded lending commitments was $203,000 and is primarily related to commercial and home equity lines of credit and letters of credit which amounted to $67.3 million and $62.7 million at September 30, 2011 and December 31, 2010, respectively.

Non-Performing Assets

The following table presents an aging analysis of the recorded investment of past due loans as of September 30, 2011. Payment activity is reviewed by management on a monthly basis to determine the performance of each loan.  Loans are considered to be non-performing when a loan is greater than 90 days delinquent.  Loans that are 90 days or more past due may still accrue interest if they are well-secured and in the process of collection.  Total additions to non-performing loans during the nine months ended September 30, 2011 and 2010 were $891,000 and $1.4 million, respectively.  Non-performing loans represented 3.6% and 4.0% of total loans at September 30, 2011 and December 31, 2010, respectively.  There were no accruing loans past due 90 days or more at September 30, 2011 and December 31, 2010.

16

(in thousands)	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total
As of September 30, 2011:
Commercial	$	—	$	—	$	1,878	$	1,878	$	60,277	$	62,155
Commercial real estate		—		—		790		790		51,326		52,116
Residential		—		—		—		—		32,110		32,110
Land and construction		—		—		—		—		20,674		20,674
Consumer and other		—		—		345		345		17,417		17,762
Totals	$	—	$	—	$	3,013	$	3,013	$	181,804	$	184,817
As of December 31, 2010:
Commercial	$	437	$	—	$	—	$	437	$	66,974	$	67,411
Commercial real estate		—		—		1,695		1,695		52,761		54,456
Residential		—		—		—		—		21,707		21,707
Land and construction		—		—		—		—		15,462		15,462
Consumer and other		50		—		345		395		19,840		20,235
Totals	$	487	$	—	$	2,040	$	2,527	$	176,744	$	179,271

The following table sets forth non-accrual loans and other real estate owned at September 30, 2011 and December 31, 2010:

(dollars in thousands)	September 30, 2011			December 31, 2010
Non-accrual loans:
Commercial	$	2,252		$	1,693
Commercial real estate	4,041			5,080
Consumer and other	345			345
Total non-accrual loans	6,638			7,118
OREO	532			845
Total non-performing assets	$	7,170		$	7,963
Non-performing assets to gross loans and OREO	3.87		%	4.42		%
Non-performing assets to total assets	1.87		%	2.58		%

Credit Quality Indicators

The following table represents the credit exposure by internally assigned grades at September 30, 2011 and December 31, 2010.  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.

17

(in thousands)	Commercial		Commercial Real Estate		Residential		Land and Construction		Consumer and Other
As of September 30, 2011:
Grade:
Pass	$	55,624	$	47,386	$	32,110	$	14,295	$	17,368
Special Mention		2,000		—		—		4,779		—
Substandard		3,631		4,730		—		1,600		394
Doubtful		900		—		—		—		—
Total	$	62,155	$	52,116	$	32,110	$	20,674	$	17,762
As of December 31, 2010:
Grade:
Pass	$	57,315	$	49,376	$	21,707	$	7,861	$	18,724
Special Mention		3,053		—		—		2,137		938
Substandard		5,922		5,080		—		5,464		573
Doubtful		1,121		—		—		—		—
Total	$	67,411	$	54,456	$	21,707	$	15,462	$	20,235

There were no loans assigned to the Loss grade as of September 30, 2011 and December 31, 2010.

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 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 financing receivables of the period reported.

18

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
As of and for the nine months ended September 30, 2011:
With no related allowance recorded:
Commercial	$	1,060	$	1,317	$	—	$	586
Commercial real estate		4,041		7,985		—		3,878
Residential		—		—		—		—
Land and construction		—		—		—		—
Consumer and other		345		345		—		115
With an allowance recorded:
Commercial	$	1,192	$	2,225	$	1,000	$	1,329
Commercial real estate		—		—		—		638
Residential		—		—		—		—
Land and construction		—		—		—		—
Consumer and other		—		—		—		230
Totals:
Commercial	$	2,252	$	3,542	$	1,000	$	1,915
Commercial real estate	$	4,041	$	7,985	$	—	$	4,516
Residential	$	—	$	—	$	—	$	—
Land and construction	$	—	$	—	$	—	$	—
Consumer and other	$	345	$	345	$	—	$	345
As of and for the year ended December 31, 2010:
With no related allowance recorded:
Commercial	$	247	$	262	$	—	$	1,380
Commercial real estate		4,425		8,276		—		5,300
Residential		—		—		—		707
Land and construction		—		—		—		—
Consumer and other		—		—		—		—
With an allowance recorded:
Commercial	$	1,446	$	2,462	$	1,121	$	733
Commercial real estate		655		705		20		202
Residential		—		—		—		—
Land and construction		—		—		—		—
Consumer and other		345		345		40		106
Totals:
Commercial	$	1,693	$	2,724	$	1,121	$	2,113
Commercial real estate	$	5,080	$	8,981	$	20	$	5,502
Residential	$	—	$	—	$	—	$	707
Land and construction	$	—	$	—	$	—	$	—
Consumer and other	$	345	$	345	$	40	$	106

During the three months ended September 30, 2011 and 2010, no interest income was recognized on these loans subsequent to their classification as impaired.  Furthermore, the Company stopped accruing interest on these loans on the date they were classified as non-accrual and reversed 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.

19

(4)

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)	2011		2010				2011		2010
Net income	$	354	$	155			$	593		$	398
Other comprehensive income:
Increase (decrease) in net unrealized gains on investment securities available for sale, net of tax expense (benefit) of $484 and $809 for the three and nine months ended September 30, 2011, respectively, and ($82) and $242 for the three and nine months ended September 30, 2010, respectively		692		(117	)			1,158			347
Reclassification for net gains included in earnings, net of tax expense of $1 and $18 for the nine months ended September 30, 2011 and 2010, respectively		—		—				(1	)		(26	)
Comprehensive income	$	1,046	$	38			$	1,750		$	719

The Company did not sell any available for sale securities during the three months ended September 30, 2011.  The Company sold one available for sale security totaling $140,000 during the nine months ended September 30, 2011, resulting in a realized gain of $2,000.  The Company did not sell any available for sale securities during the three months ended September 30, 2010.  The Company sold two available for sale securities totaling $3.8 million during the nine months ended September 30, 2010, resulting in a realized gain of $44,000. The realized gain was reported in non-interest income within the accompanying unaudited Consolidated Statements of Operations.

(5)

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. The depreciation and amortization are computed on a straight line basis over the lesser of the lease term, or the estimated useful lives of the assets, generally three to ten years.

Premises and equipment at September 30, 2011 and December 31, 2010 are comprised of the following:

(in thousands)	September 30, 2011			December 31, 2010
Leasehold improvements	$	946		$	906
Furniture & equipment	1,788			1,530
Software	544			527
Total	3,278			2,963
Accumulated depreciation	(2,241		)	(1,975		)
Premises and equipment, net	$	1,037		$	988

Depreciation and amortization included in occupancy expense was $94,000 and $266,000 for the three and nine months ended September 30, 2011, respectively, and $91,000 and $263,000 for the three and nine months ended September 30, 2010, respectively.

(6)

Deposits

The following table reflects the summary of deposit categories by dollar and percentage at September 30, 2011 and December 31, 2010:

	September 30, 2011				December 31, 2010
(dollars in thousands)	Amount		Percent of Total		Amount		Percent of Total
Non-interest bearing demand deposits	$	120,895	37.1	%	$	91,501	35.5	%
Interest bearing checking	24,770		7.6	%	33,632		13.0	%
Money market deposits and savings	133,349		40.9	%	72,757		28.2	%
Certificates of deposit	46,893		14.4	%	60,099		23.3	%
Total	$	325,907	100.0	%	$	257,989	100.0	%

20

At September 30, 2011, the Company had three certificate of deposit accounts with the State of California Treasurer’s Office for a total of $34.0 million that represented 10.4% of total deposits.  Each of these deposits is scheduled to mature in the fourth quarter of 2011. The Company intends to renew each of these deposits at maturity.  However, given the current economic climate in the State of California, 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, 2010, the Company had three certificate of deposit accounts with the State of California Treasurer’s Office for a total of $34.0 million that represented 13.2% of total deposits.

At September 30, 2011, the Company had $2.9 million of Certificate of Deposit Accounts Registry Service (“CDARS”) reciprocal deposits, which represented 0.9% of total deposits.  At December 31, 2010, the Company had $12.8 million of CDARS reciprocal deposits, which represented 5.0% of total deposits.

The aggregate amount of certificates of deposit of $100,000 or greater at September 30, 2011 and December 31, 2010 was $44.9 million and $57.6 million, respectively.  At September 30, 2011, 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: $38.4 million maturing in six months or less, $3.4 million maturing in six months to one year and $3.1 million 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, 2011.

(in thousands)	Six months and less		Greater than six months through one year		Greater than one year
0.00% to 0.99%	$	39,299	$	3,738	$	—
1.00% to 1.99%	670		—		3,186
Total	$	39,969	$	3,738	$	3,186

(7)

Other Borrowings

At September 30, 2011, the Company had a $54.9 million borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB. The Company had $10.0 million of long-term borrowings and no overnight borrowings outstanding under this borrowing/credit facility with the FHLB at September 30, 2011.  At December 31, 2010, the Company had a $45.8 million borrowing/credit facility secured by a blanket lien of eligible loans at the FHLB.  The Company had $2.0 million of long-term borrowings and no overnight borrowings outstanding under this borrowing/credit facility with the FHLB at December 31, 2010.

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, 2011 and December 31, 2010 (dollars in thousands):

Maturity Date	Interest Rate		September 30, 2011				December 31, 2010
April 15, 2011	1.59	%		$	—	$		2,000
May 23, 2013	0.63	%			2,500			—
May 23, 2014	1.14	%			2,500			—
May 26, 2015	1.65	%			2,500			—
May 23, 2016	2.07	%			2,500			—
	Total			$	10,000	$		2,000

At September 30, 2011, the Company also had $27.0 million in Federal fund lines of credit available with other correspondent banks that could be used to disburse loan commitments and to satisfy demands for deposit withdrawals. Each of these lines of credit is subject to conditions that the Company may not be able to meet at the time when additional liquidity is needed.  The Company did not have any borrowings outstanding under these lines of credit at September 30, 2011 or December 31, 2010.

(8)

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 $64.8

21

million and $60.6 million in commitments to extend credit to customers and $2.5 million and $2.1 million in standby/commercial letters of credit at September 30, 2011 and December 31, 2010, 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 $49,000 at both September 30, 2011 and December 31, 2010.

Lease Commitments

The Company leases office premises under three operating leases that will expire in May 2012, June 2014 and November 2017, respectively.  Rental expense included in occupancy expense was $143,000 and $400,000 for the three and nine months ended September 30, 2011 and $113,000 and $343,000 for the three and nine months ended September 30, 2010, respectively. Sublease income earned was $27,000 and $79,000 during the three months and nine months ended September 30, 2011, and $25,000 and $71,000 during the three and nine months ended September 30, 2010, respectively.

The projected minimum rental payments under the term of the leases at September 30, 2011 are as follows (in thousands):

Years ending December 31,
2011 (October – December)	$	169
2012	662
2013	639
2014	374
2015	107
Thereafter	215
	$	2,166

Litigation

The Company from time to time is party to lawsuits, which arise out of the normal course of business. At September 30, 2011 and December 31, 2010, the Company did not have any litigation that management believes will have a material impact on the Consolidated Balance Sheets or unaudited Consolidated Statements of Operations.

Restricted Stock

The following table sets forth the Company’s future restricted stock expense, net of estimated forfeitures (in thousands).

Years ending December 31,
2011 (October – December)	$	103
2012	342
2013	211
2014	97
2015	32
Thereafter	5
	$	790

(9)

Stock Repurchase Program

In August 2010, the Company’s Board of Directors (the “Board”) authorized the purchase of up to $2.0 million of the Company’s common stock, which was announced by press release and Current Report on Form 8-K on August 16, 2010.  Under this stock repurchase program, the Company has been acquiring its common stock in the open market from time to time beginning in August 2010.  The shares repurchased by the Company under this stock repurchase program are held as treasury stock.  During the nine months ended September 30, 2011, the Company repurchased 267,345 shares in the open market at a cost ranging from $3.52 to $4.02 per share in connection with this program.  This stock repurchase program may be modified, suspended or terminated by the Board at any time without notice.

(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, 2011 and December 31, 2010, and indicate the fair value hierarchy of the valuation techniques

22

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 Measured on a Recurring Basis

Assets 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, 2011:
Investments-Available for Sale
U.S. Gov’t treasuries	$	2,126	$	2,126	$	—	$	—
Corporate Notes		4,163		—		4,163		—
Residential Mortgage-Backed Securities		96,009		—		96,009		—
Residential CMOs		1,000		—		1,000		—
Total	$	103,298	$	2,126	$	101,172	$	—
At December 31, 2010:
Investments-Available for Sale
U.S. Gov’t treasuries	$	150	$	150	$	—	$	—
Debt issued by the States of the United States		2,015		—		2,015		—
Residential Mortgage-Backed Securities		54,519		—		54,519		—
Residential CMOs		1,790		—		1,790		—
Total	$	58,474	$	150	$	58,324	$	—

AFS securities— Level 2 fair values for investment securities are based on inputs other than quoted prices that are observable, either directly or indirectly.  The Company obtains quoted prices through third party brokers.  There were no transfers into or out of Level 2 measurements during the three and nine months ended September 30, 2011 and 2010.

As of September 30, 2011 and December 31, 2010, the Level 2 fair value of the Company’s residential mortgage-backed securities and collateralized mortgage obligations was $97.0 million and $56.3 million, respectively.  These securities consist entirely 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, 2011 and December 31, 2010, the weighted average rate and weighed average life of these securities were 3.00% and 3.64%, respectively, and 4.08 years and 3.43 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.

23

Assets Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements Using
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
At September 30, 2011:
Impaired loans
Commercial	$	1,252	$	—		$	—		$	1,252
Commercial real estate		4,041		—			—			4,041
Residential		—		—			—			—
Land and construction		—		—			—			—
Consumer and other		345		—			—			345
Other real estate owned - residential		532		—			—			532
Total	$	6,170	$	—		$	—		$	6,170
At December 31, 2010:
Impaired loans
Commercial	$	572	$	—		$	—		$	572
Commercial real estate		5,060		—			—			5,060
Residential		—		—			—			—
Land and construction		—		—			—			—
Consumer and other		305		—			—			305
Other real estate owned - residential		845		—			—			845
Total	$	6,782	$	—		$	—		$	6,782

Impaired loans — 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.  The fair value of impaired loans using discounted cash flows is determined using estimates of expected future cash flows which requires significant judgment from management that could not be corroborated by observable market data.  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.  The Company recorded net recoveries of $162,000 on impaired loans during the three months ended September 30, 2011 and net charge-offs of $312,000 during the nine months ended September 30, 2011, compared to net charge-offs of $528,000 and $1.2 million during the same periods last year.

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.

24

Cash and cash equivalents

The carrying amounts are considered to be their estimated fair values 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.

FRB and FHLB stock

For FRB and FHLB stock, the carrying amount is equal to the par value at which the stock may be sold back to FRB or FHLB, which approximates fair value.

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.

Impaired loansare 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.

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.

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.  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.

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.

Accrued interest

The estimated fair value for both accrued interest receivable and accrued interest payable are considered to be equivalent to the carrying amounts.

25

The estimated fair value and carrying amounts of the financial instruments at September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
(dollars in thousands)	Amount		Fair Value		Amount		Fair Value
Assets
Cash and cash equivalents	$	95,146	$	95,146	$	69,012	$	69,012
Investment securities	103,298		103,298		58,474		58,474
FRB stock	1,233		1,233		1,301		1,301
FHLB stock	1,780		1,780		2,026		2,026
Loans, net	179,636		179,188		174,010		170,595
Accrued interest receivable	718		718		658		658
Liabilities
Non-interest bearing deposits	$	120,895	$	120,895	$	91,501	$	91,501
Interest bearing deposits	205,012		205,012		166,488		166,489
Other borrowings	10,000		10,145		2,000		2,009
Accrued interest payable	116		116		91		91

(12)

Non-Interest Income

The following table summarizes the information regarding non-interest income for the three and nine months ended September 30, 2011 and 2010, respectively:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011	2010
Loan arrangement fees	$	170	$	163	$            421	$               413
Service charges and other operating income	52		60		195	205
Net gain on sale of AFS securities	—		—		2	44
Total non-interest income	$	222	$	223	$            618	$               662

(13)

Stock-Based Compensation

The Company grants restricted stock awards to directors and employees under the Equity Incentive Plan.  Restricted stock awards are considered fixed awards as the number of shares and fair value is known at the date of grant and the fair value at the grant date is amortized over the requisite service period.  On May 15, 2011, the Company granted 104,500 restricted stock awards to employees with various vesting periods as follows:  50% or 52,250 awards that vest in three years, 25% or 26,125 awards that vest in four years, and 25% or 26,125 awards that vest in five years.

Non-cash stock compensation expense recognized in the unaudited Consolidated Statements of Operations related to the restricted stock awards, net of estimated forfeitures, was $52,000 and $290,000 for the three and nine months ended September 30, 2011, respectively, and $109,000 and $389,000 for the three and nine months ended September 30, 2010, respectively.

The following table reflects the activities related to restricted stock awards outstanding for the nine months ended September 30, 2011 and 2010, respectively.

	Nine Months Ended September 30,
	2011				2010
Restricted Shares	Number of Shares		Weighted Avg Fair Value at Grant Date		Number of Shares		Weighted Avg  Fair Value at Grant Date
Beginning balance	449,768		$	4.40	359,710		$	5.58
Granted	104,500		4.00		190,000		4.05
Vested	(72,478	)	5.30		(112,795	)	7.11
Forfeited and surrendered	(33,500	)	4.33		(2,000	)	4.71
Ending balance	448,290		$	4.16	434,915		$	5.88

The Company recognizes compensation expense for stock options by amortizing the fair value at the grant date over the service, or vesting period.

26

There have been no options granted, exercised or cancelled under the 2004 Founder Stock Option Plan for the nine months ended September 30, 2011 or 2010.

The remaining contractual life of the 2004 Founder Stock Options outstanding was 2.41 and 3.41 years at September 30, 2011 and 2010, respectively. All options under the 2004 Founder Stock Option Plan were exercisable at September 30, 2011 and 2010.  At September 30, 2011 and 2010, the weighted average exercise price of the 133,700 shares outstanding under the 2004 Founder Stock Option Plan was $5.00.

There have been no options granted, exercised or cancelled under the Director and Employee Stock Option Plan for the nine months ended September 30, 2011 or 2010.

The remaining contractual life of the Director and Employee Stock Options outstanding was 2.89 and 3.89 years at September 30, 2011 and 2010, respectively. All options under the Directors and Employee Stock Option Plan were exercisable at September 30, 2011 and 2010.  At September 30, 2011 and 2010, 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, 2011:

	Shares Reserved	Less Shares Previously  Exercised/Vested	Less Shares  Outstanding	Total Shares  Available for  Future Issuance
2004 Founder Stock Option Plan	150,000	8,000	133,700	8,300
Director and Employee Stock Option Plan	1,434,000	216,924	1,045,673	171,403
Equity Incentive Plan	1,200,000	390,849	448,290	360,861

(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, 2011 and December 31, 2010, the Company and the Bank met all capital adequacy requirements to which they are subject.

At December 31, 2010, 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.

27

The Company’s and the Bank’s capital ratios as of September 30, 2011 and December 31, 2010 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, 2011:
Total Risk-Based Capital Ratio	$	46,105	21.07	%	$	44,104	20.15	%	$	17,507	8.00	%		$	21,885	10.00	%
Tier 1 Risk-Based Capital Ratio	$	43,336	19.80	%	$	41,335	18.89	%	$	8,753	4.00	%		$	13,131	6.00	%
Tier 1 Leverage Ratio	$	43,336	11.65	%	$	41,335	11.10	%	$	14,884	4.00	%		$	18,612	5.00	%
December 31, 2010:
Total Risk-Based Capital Ratio	$	46,197	21.69	%	$	42,959	20.16	%	$	17,039	8.00	%		$	21,307	10.00	%
Tier 1 Risk-Based Capital Ratio	$	43,500	20.42	%	$	40,260	18.90	%	$	8,519	4.00	%		$	12,784	6.00	%
Tier 1 Leverage Ratio	$	43,500	13.93	%	$	40,260	12.88	%	$	12,488	4.00	%		$	15,634	5.00	%

Dividends

In the ordinary course of business, Bancshares is dependent upon dividends from the Bank to provide funds for the payment of dividends to stockholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years.  Currently, the Bank is prohibited from paying dividends to Bancshares until such time as the accumulated deficit is eliminated.

To date, Bancshares has not paid any cash dividends.  Payment of stock or cash dividends in the future will depend upon earnings and financial condition and other factors deemed relevant by Bancshares’ Board of Directors, as well as Bancshares’ legal ability to pay dividends.  Accordingly, no assurance can be given that any cash dividends will be declared in the foreseeable future.

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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 our financial statements and accompanying notes. While we base our estimates on historical experience, current information and other factors deemed 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 estimates require management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimates in the current period, or changes in the accounting estimates that are reasonably likely to occur from period to period, could have a material impact on our financial statements.  We consider accounting polices related to the allowance for loan losses and income taxes 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 described in detail below.  There have been no changes to our critical accounting policies and estimates during the three months ended September 30, 2011.

The allowance for loan losses is established, as losses are estimated to have occurred, through provisions for loan losses charged to operations. 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 estimates from historical peer group loan loss data, the loss experience of other financial institutions, as well as the historical loss experience of the loan portfolio, augmented by the experience of management with similar assets and the Company’s independent loan review process.  Loss ratios for all categories of loans are evaluated on a quarterly basis.  Loss ratios associated with historical loss experience are determined based on a rolling migration analysis of each loan category within the portfolio.  This migration analysis estimates loss factors based on the performance of each loan category over a three-year time period.  These loss factors are then adjusted, if necessary, for other identifiable risks specifically related to each loan category or risk grade.  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.  The allowance is based on estimates and actual losses may vary materially from the estimates.  No assurance can be given that adverse future economic conditions will not lead to increased delinquent loans, further increases in the provision for loan losses and/or additional charge-offs of loans.  See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations -Allowance for Loan Losses” for further factors considered by management in estimating the necessary level of the allowance for loan losses.

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.

Summary of the Results of Operations and Financial Condition

For the three months ended September 30, 2011 and 2010, the Company recorded net income of $354,000, or $0.04 per diluted share, and $155,000, or $0.02 per diluted share, respectively.  The increase in net income during the current quarter, as compared to the same period last year, was primarily related to an increase in net interest income earned of $382,000 and a decline in provision for loan losses of $100,000, partially offset by an increase in non-interest expenses of $282,000.

For the nine months ended September 30, 2011 and 2010, the Company recorded net income of $593,000, or $0.07 per diluted share, and $398,000, or $0.04 per diluted share, respectively.  The increase in net income during the nine months ended September 30, 2011, as compared to the same period last year, is primarily related to an increase in net interest income of $917,000, partially offset by an increase in non-interest expenses of $603,000, as well as an increase in provision for loan losses of $75,000.

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Total assets at September 30, 2011 were $384.4 million, representing an increase of approximately $76.0 million, or 24.6%, from $308.4 million at December 31, 2010.  The increase in total assets is primarily attributable to increases in cash and cash equivalents, investment securities and gross loans.  Cash and cash equivalents at September 30, 2011 were $95.1 million, representing an increase of $26.1 million, or 37.9%, from $69.0 million at December 31, 2010.  Investment securities at September 30, 2011 were $103.3 million, representing an increase of $44.8 million, or 76.7%, from $58.5 million at December 31, 2010.  The increase in investment securities is primarily within agency mortgage-backed securities, which had an average life of 4.08 years at September 30, 2011.  Gross loans at September 30, 2011 were $184.8 million, representing an increase of $5.5 million, or 3.1%, from $179.3 million at December 31, 2010.

Total liabilities at September 30, 2011 increased by $75.0 million, or 28.4%, to $339.0 million, as compared to $264.0 million at December 31, 2010.  This increase is primarily due to growth within our non-interest bearing deposits and money market deposits and savings of $29.4 million and $60.6 million, respectively, due to continued core deposit gathering efforts, partially offset by decreases in certificates of deposit and interest bearing demand deposits of $13.2 million and $8.9 million, respectively.  Total core deposits, which include non-interest bearing demand deposits, interest bearing demand deposits and money market deposits and savings, were $279.0 million and $197.9 million at September 30, 2011 and December 31, 2010, respectively, representing an increase of $81.1 million, or 41.0%.  The increase in total liabilities was also partially due to an $8.0 million increase in other borrowings, which were primarily utilized to fund additional loan production during the period.

Average interest earning assets increased $87.4 million, from $278.6 million for the three months ended September 30, 2010 to $365.9 million for the three months ended September 30, 2011.  The weighted average interest rate on interest earning assets decreased to 3.34% for the three months ended September 30, 2011 from 3.80% for the same period last year.  This decrease is primarily attributable to a general decline in yields earned on interest earning assets during the three months ended September 30, 2011, as compared to the same period last year, as well as an increase in the average balance of interest earning deposits at other financial institutions.  The increase in interest earning deposits at other financial institutions has been primarily caused by an increase in our core deposits, as well as a lack of quality loan demand.

Average interest earning assets increased $74.5 million from $262.7 million for the nine months ended September 30, 2010 to $337.2 million for the nine months ended September 30, 2011.  The weighted average interest rate on interest earning assets decreased to 3.54% for the nine months ended September 30, 2011 from 4.11% for the same period last year.  As discussed above, this decrease is primarily attributable to a general decline in yields earned on interest earning assets during the nine months ended September 30, 2011, as compared to the same period last year, as well as an increase in the average balance of interest earning deposits at other financial institutions.

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,
	2011		2010		2011		2010
Annualized return on average assets	0.37	%	0.22	%	0.23	%	0.20	%
Annualized return on average stockholders’ equity	3.12	%	1.31	%	1.78	%	1.14	%
Average stockholders’ equity to average assets	11.99	%	16.45	%	12.93	%	17.30	%
Net interest margin	3.05	%	3.46	%	3.27	%	3.73	%

At September 30, 2011, stockholders’ equity totaled $45.3 million, or 11.8% of total assets, as compared to $44.3 million, or 14.4% of total assets at December 31, 2010.  The Company’s book value per share of common stock was $4.99 as of September 30, 2011, compared to $4.77 per share as of December 31, 2010.

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).

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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 repricing 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, 2011 and 2010.  There was no change in the targeted federal funds rate during the nine months ended September 30, 2011 and 2010, remaining at 0.00%-0.25%.  

The Company, through its asset and liability policies and practices, seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk. Interest rate risk is managed by monitoring the pricing, maturity and repricing options 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, 2011, net interest income was $2.8 million compared to $2.4 million for the same period last year.  This increase is primarily related to an increase of $234,000 in interest earned on our investment securities, and an increase of $180,000 in interest earned in connection with our loan portfolio.  The increase in interest earned on our investment portfolio was primarily due to a $43.9 million increase in the average balance of residential mortgage-backed securities and CMOs, partially offset by a 114 basis point decline in the yield earned on these securities.  The fluctuation in our loan interest income was primarily related to a $22.4 million increase in the average balance of loans, partially offset by a 24 basis point decline in our loan yield.  

The Company’s net interest spread (yield on interest earning assets less the rate paid on interest bearing liabilities) was 2.85% for the three months ended September 30, 2011 compared to 3.20% for the same period last year.

The Company’s net interest margin (net interest income divided by average interest earning assets) was 3.05% for the three months ended September 30, 2011, compared to 3.46% for the same period last year.  This decline is primarily attributable to a decrease in the yield on earning assets of 46 basis points, partially offset by a decline of 9 basis points in the cost of interest bearing deposits and borrowings.  The decrease in yield on earning assets is primarily attributable to a general decline in interest rates earned on these assets during the three months ended September 30, 2011, as compared to the same period last year, as well as an increase in the average balance of interest earning deposits at other financial institutions.  These deposits yielded approximately 25 basis points during the current period.  The decline in our net interest margin was partially offset by a decline in our cost of interest bearing deposits and borrowings, which is primarily attributable to a general decrease in interest rates paid on these accounts.  The average cost of interest bearing deposits was 0.44% during the three months ended September 30, 2011 compared to 0.50% for the same period last year.  The average balance of borrowings was $10.0 million and $6.8 million, respectively, during the three months ended September 30, 2011 and 2010.  The average cost of borrowings was 1.39% during the three months ended September 30, 2011 compared to 2.37% for the same period last year.

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The following table sets forth the average balances of certain assets, interest income/expense, average yields on earning assets, average rates paid on interest bearing liabilities, net interest margins and net interest income/spread for the three months ended September 30, 2011 and 2010, respectively.

	Three Months Ended September 30,
	2011						2010
	Average		Interest				Average		Interest
(dollars in thousands)	Balance		Inc/Exp		Yield		Balance		Inc/Exp		Yield
Assets
Interest earning deposits at other financial institutions	$	84,696	$	53	0.25	%	$	69,403	$	50	0.29	%
U.S. Gov’t and Federal agency securities	2,246		7		1.33	%	124		—		0.13	%
Corporate notes	4,091		12		1.15	%	—		—		—	%
Residential mortgage-backed securities and CMOs	83,248		621		2.98	%	39,393		405		4.12	%
Federal Reserve Bank stock	1,233		19		6.00	%	1,289		20		6.00	%
Federal Home Loan Bank stock	1,820		1		0.27	%	2,150		3		0.45	%
Loans (1) (2)	188,608		2,365		4.98	%	166,210		2,185		5.22	%
Earning assets	365,942		3,078		3.34	%	278,569		2,663		3.80	%
Other assets	8,459						8,558
Total assets	$	374,401					$	287,127
Liabilities & Equity
Interest checking (NOW)	$	28,332	20		0.28	%	$	27,555	15		0.22	%
Money market deposits and savings	128,910		169		0.52	%	61,554		98		0.63	%
CDs	47,574		39		0.33	%	60,251		76		0.50	%
Borrowings	10,000		35		1.39	%	6,827		41		2.37	%
Total interest bearing deposits and borrowings	214,816		263		0.49	%	156,187		230		0.58	%
Demand deposits	112,149						81,604
Other liabilities	2,537						2,102
Total liabilities	329,502						239,893
Equity	44,899						47,234
Total liabilities & equity	$	374,401					$	287,127
Net interest income / spread			$	2,815	2.85	%			$	2.433	3.22	%
Net interest margin					3.05	%					3.46	%

(1)

Average balance of loans excludes the allowance for loan losses and net deferred loan origination fees and costs.  Included in interest income from loans is net loan fee income accretion of $8,000 for the three months ended September 30, 2011 and net loan origination cost amortization of $39,000 for the three months ended September 30, 2010.

(2)

Includes average non-accrual loans of $6.6 million and $8.4 million for the three months ended September 30, 2011 and 2010, respectively.

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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, 2011  Compared to 2010 Increase (Decrease) Due to Changes in:
(in thousands)		Volume				Rate				Total
Interest income:
Interest earning deposits at other financial institutions	$	10			$	(7		)	$	3
U.S. Gov’t and Federal agency securities		5				2				7
Corporate notes		12				—				12
Residential mortgage-backed securities and CMOs		354				(138		)		216
Federal Reserve Bank stock		(1		)		—				(1		)
Federal Home Loan Bank stock		(1		)		(1		)		(2		)
Loans		284				(104		)		180
Total increase (decrease) in interest income		663				(248		)		415
Interest expense:
Interest checking (NOW)		1				4				5
Money market deposits and savings		90				(19		)		71
CDs		(14		)		(23		)		(37		)
Borrowings		15				(21		)		(6		)
Total increase (decrease) in interest expense		92				(59		)		33
Net increase (decrease) in net interest income	$		571		$		(189	)	$		382

During the nine months ended September 30, 2011, net interest income was $8.2 million compared to $7.3 million for the same period last year.  The increase is primarily related to an increase of $409,000 in interest earned on our investment securities, an increase of $402,000 in interest earned in connection with our loan portfolio, and a $138,000 decline in interest expense incurred on borrowings. The increase in interest earned on our investment portfolio is primarily due to a $27.6 million increase in the average balance of residential mortgage-backed securities and CMOs, partially offset by a 98 basis points decline in the yield earned on these securities.  The fluctuation in our loan interest income was primarily related to an increase of $16.5 million in the average balance of loans, partially offset by a 17 basis point decline in our loan yield.  The decline in interest expense incurred on borrowings was primarily due to a $4.4 million decrease in the average balance of borrowings and a 122 basis point decrease in the cost of borrowings.

The Company’s net interest spread (yield on interest earning assets less the rate paid on interest bearing liabilities) was 3.06% for the nine months ended September 30, 2011 compared to 3.43% for the same period last year.

The Company’s net interest margin was 3.27% for the nine months ended September 30, 2011, compared to 3.73% for the same period last year.  This decline is primarily attributable to a decrease in the yield on earning assets of 57 basis points, partially offset by a decline of 20 basis points in the cost of interest bearing deposits and borrowings.  The decrease in yield on earning assets is primarily attributable to a general decline in interest rates earned on these assets during the nine months ended September 30, 2011, as compared to the same period last year, as well as an increase in the average balance of interest earning deposits at other financial institutions.  These deposits yielded approximately 25 basis points during the current period.  The decline in our net interest margin was partially offset by a decline in our cost of interest bearing deposits and borrowings, which was primarily attributable to a general decrease in interest rates paid on these accounts.  The average cost of interest bearing deposits was 0.45% during the nine months ended September 30, 2011 compared to 0.50% for the same period last year.  The average balance of borrowings was $5.6 million and $9.9 million, respectively, during the nine months ended September 30, 2011 and 2010.  The average cost of borrowings was 1.42% during the nine months ended September 30, 2011 compared to 2.64% for the same period last year.

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The following table sets forth the average balances of certain assets, interest income/expense, average yields on earning assets, average rates paid on interest bearing liabilities, net interest margins and net interest income/spread for the nine months ended September 30, 2011 and 2010, respectively.

	Nine Months Ended September 30,
	2011						2010
	Average		Interest				Average		Interest
(dollars in thousands)	Balance		Inc/Exp		Yield		Balance		Inc/Exp		Yield
Assets
Interest earning deposits at other financial institutions	$	73,457	$	138	0.25	%	$	46,133	$	88	0.26	%
U.S. Gov’t and Federal agency securities	923		11		1.60	%	559		8		2.07	%
Debt securities issued by the States of the United States	1,311		17		1.76	%	—		—		—	%
Corporate notes	1,857		16		1.14	%	—		—		—	%
Residential mortgage-backed securities and CMOs	68,983		1,693		3.27	%	41,344		1,319		4.25	%
Federal Reserve Bank stock	1,256		56		6.00	%	1,401		64		6.01	%
Federal Home Loan Bank stock	1,913		4		0.30	%	2,221		5		0.33	%
Loans (1) (2)	187,497		7,003		4.99	%	171,018		6,601		5.16	%
Earning assets	337,197		8,938		3.54	%	262,676		8,085		4.11	%
Other assets	8,407						8,595
Total assets	$	345,604					$	271,271
Liabilities & Equity
Interest checking (NOW)	$	30,879	67		0.29	%	$	23,230	39		0.23	%
Money market deposits and savings	105,106		420		0.53	%	53,252		271		0.68	%
CDs	52,032		147		0.38	%	61,337		250		0.55	%
Borrowings	5,561		59		1.42	%	9,975		197		2.64	%
Total interest bearing deposits and borrowings	193,578		693		0.48	%	147,794		757		0.68	%
Demand deposits	104,978						74,633
Other liabilities	2,364						1,907
Total liabilities	300,920						224,334
Equity	44,684						46,937
Total liabilities & equity	$	345,604					$	271,271
Net interest income / spread			$	8,245	3.06	%			$	7,328	3.43	%
Net interest margin					3.27	%					3.73	%

(1)

Average balance of loans excludes the allowance for loan losses and net deferred loan origination fees and costs.  Included in interest income from loans are net loan origination cost amortization of $31,000 and $102,000 for the nine months ended September 30, 2011 and 2010, respectively.

(2)

Includes average non-accrual loans of $6.8 million and $8.9 million for the nine months ended September 30, 2011 and 2010, respectively.

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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.

	Nine Months Ended September 30, 2011  Compared to 2010 Increase (Decrease) Due to Changes in:
(in thousands)		Volume				Rate				Total
Interest income:
Interest earning deposits at other financial institutions	$	51			$	(1		)	$	50
U.S. Gov’t and Federal agency securities		5				(2		)		3
Debt securities issued by the States of the United States		17				—				17
Corporate notes		16				—				16
Residential mortgage-backed securities and CMOs		730				(356		)		374
Federal Reserve Bank stock		(8		)		—				(8		)
Federal Home Loan Bank stock		(1		)		—				(1		)
Loans		621				(219		)		402
Total increase (decrease) in interest income		1,431				(578		)		853
Interest expense:
Interest checking (NOW)		15				13				28
Money market deposits and savings		217				(68		)		149
CDs		(34		)		(69		)		(103		)
Borrowings		(68		)		(70		)		(138		)
Total increase (decrease) in interest expense		130				(194		)		(64		)
Net increase (decrease) in net interest income	$		1,301		$		(384	)	$		917

Provision for Loan Losses

There was no provision for loan losses for the three months ended September 30, 2011 and $275,000 for the nine months ended September 30, 2011, compared to $100,000 and $200,000 for the same periods last year.  The decline in provision for loan losses recorded during the three months ended September 30, 2011, as compared to the same period last year, is primarily due to the general improvement in the level of our criticized and classified loans, which generally consist of special mention, substandard and doubtful loans.  Special mention, substandard and doubtful loans were $6.8 million, $10.4 million and $900,000, respectively, at September 30, 2011, compared to $14.9 million, $16.7 million, and none at September 30, 2010.  We had net recoveries of $162,000 during the three months ended September 30, 2011, and net charge-offs of $312,000 during the nine months ended September 30, 2011, compared to net charge-offs of $528,000 and $1.2 million during the same periods last year.  The provision for loan losses is 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 3.59% and 3.97% at September 30, 2011 and December 31, 2010, respectively.  As a percentage of our total loan portfolio and OREO, the amount of non-performing assets was 3.87% and 4.42% at September 30, 2011 and December 31, 2010, respectively.

Non-Interest Income

Non-interest income was $222,000 and $618,000 for the three and nine months ended September 30, 2011, respectively, compared to $223,000 and $662,000 for the same periods last year.  The decrease in non-interest income during the nine months ended September 30, 2011, as compared to the same periods last year, is primarily due to a $44,000 gain recognized during the previous year in connection with the sale of securities.

Non-interest income primarily consists of loan arrangement fees, service charges and fees on deposit accounts, as well as other operating income, which mainly consists of wire transfer and other consumer related fees.  Loan arrangement fees are related to a college loan funding program the Company established with a student loan provider.  The Company initially funds student loans originated by the student loan provider in exchange for non-interest income.  All loans are purchased by the student loan provider within 30 days of origination.  All purchase commitments are supported by collateralized deposit accounts.  Service charges and other operating income includes service charges and fees on deposit accounts, as well as other operating income, which mainly consists of outgoing funds transfer wire fees. See Note 12 “Non-Interest Income” in Part I, Item 1.“Financial Statements”for more information regarding non-interest income for the three and nine months ended September 30, 2011 and 2010.

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Non-Interest Expense

Non-interest expense was $2.7 million and $8.0 million for the three and nine months ended September 30, 2011, respectively, compared to $2.4 million and $7.4 million for the same periods last year.  Compensation and benefits was $1.5 million and $4.3 million for the three and nine months ended September 30, 2011, respectively, compared to $1.2 million and $3.9 million for the same periods last year.  Occupancy expense was $268,000 and $770,000 for the three and nine months ended September 30, 2011, compared to $232,000 and $688,000 for the three and nine months ended September 30, 2010.  These increases were primarily caused by additional costs incurred in connection with expanding the Bank’s business development team and the opening of our Santa Monica relationship office during the previous quarter.  The increase in non-interest expense is partially offset by a reduction in the Bank’s FDIC assessments, which declined as a result of a change in the FDIC’s methodology regarding calculating a bank’s quarterly insurance assessments.  The FDIC assessment was $41,000 and $266,000 for the three and nine months ended September 30, 2011, respectively, compared to $107,000 and $283,000 for the same periods last year.

Income Tax Provision

During the three and nine months ended September 30, 2011 and 2010, we did not record an income tax provision related to our pre-tax earnings. Tax expense that would normally arise, because of the Company’s earnings during the three and nine months ended September 30, 2011 and 2010, was not recorded because it was offset by a reduction in the valuation allowance on the Company’s deferred tax asset.

Financial Condition

Assets

Total assets at September 30, 2011 were $384.4 million, representing an increase of approximately $76.0 million, or 24.6%, from $308.4 million at December 31, 2010.  The increase in total assets is primarily attributable to increases in cash and cash equivalents, investment securities and gross loans.  Cash and cash equivalents at September 30, 2011 were $95.1 million, representing an increase of $26.1 million, or 37.9%, from $69.0 million at December 31, 2010.  Investment securities at September 30, 2011 were $103.3 million, representing an increase of $44.8 million, or 76.7%, from $58.5 million at December 31, 2010.  Gross loans at September 30, 2011 were $184.8 million, representing an increase of $5.5 million, or 3.1%, from $179.3 million at December 31, 2010.

Cash and Cash Equivalents

Cash and cash equivalents totaled $95.1 million at September 30, 2011 and $69.0 million at December 31, 2010. We continued to maintain an elevated amount of cash and cash equivalents during the three and nine months ended September 30, 2011.  Cash and cash equivalents are managed based upon liquidity needs by investing excess liquidity in higher yielding assets such as loans and investment securities.  The increase in cash and cash equivalents has been primarily caused by the growth within our deposit portfolio.  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, 2011, investment securities totaled $103.3 million compared to $58.5 million at December 31, 2010.  The Company’s investment portfolio is primarily composed of residential 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 2003 through the current period.  These loans are geographically dispersed throughout the United States.  At September 30, 2011 and December 31, 2010, the weighted average rate and weighed average life of these securities were 3.00% and 3.64%, respectively, and 4.08 years and 3.43 years, respectively.  During the nine months ended September 30, 2011, the Company increased the level of investment security purchases as a result of excess liquidity generated by deposit growth and a lack of quality loan demand that meets our underwriting criteria.  We will continue to evaluate the Company’s investments and liquidity needs and will adjust the amount of investment securities accordingly.  

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Loans

Loans, net of the allowance for loan losses and deferred loan origination costs/unearned fees, increased 3.2%, or $5.6 million, from $174.0 million at December 31, 2010 to $179.6 million at September 30, 2011.  This increase in the loan portfolio is primarily within our residential real estate portfolio, which increased by $10.4 million, or 47.9%.  As of September 30, 2011 and December 31, 2010, gross loans outstanding totaled $184.8 million and $179.3 million, respectively.  Loan originations were $18.0 million and $58.4 million during the three and nine months ended September 30, 2011, respectively, as compared to $14.8 million and $32.7 million during the same periods last year.

As of September 30, 2011, substantially all of the Company’s loan customers were located in Southern California.  Additionally, the Company did not have any subprime mortgages.

Non-Performing Assets

The following table sets forth non-accrual loans and other real estate owned at September 30, 2011 and December 31, 2010:

(dollars in thousands)	September 30, 2011			December 31, 2010
Non-accrual loans:
Commercial	$	2,252		$	1,693
Commercial real estate	4,041			5,080
Consumer and other	345			345
Total non-accrual loans	6,638			7,118
Other real estate owned (“OREO”)	532			845
Total non-performing assets	$	7,170		$	7,963
Non-performing assets to gross loans and OREO	3.87		%	4.42		%
Non-performing assets to total assets	1.87		%	2.58		%

Non-accrual loans totaled $6.6 million and $7.1 million at September 30, 2011 and December 31, 2010, respectively.   There were no accruing loans past due 90 days or more at September 30, 2011 and December 31, 2010.  Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms was $68,000 and $214,000 for the three and nine months ended September 30, 2011, respectively, and $125,000 and $350,000 for the same periods last year.  As a percentage of total assets, the amount of non-performing assets was 1.87% and 2.58% at September 30, 2011 and December 31, 2010, respectively.

At September 30, 2011, non-accrual loans consisted of four commercial loans totaling $2.3 million, two commercial real estate loans totaling $4.0 million and one consumer and other loan totaling $345,000.  At December 31, 2010, non-accrual loans consisted of four commercial loans totaling $1.7 million, three commercial real estate loans totaling $5.1 million and one consumer and other loan totaling $345,000.  At September 30, 2011, OREO consisted of one single-family residential property, compared to two properties at December 31, 2010.  

At September 30, 2011 and December 31, 2010, the recorded investment in impaired loans was $6.6 million and $7.1 million, respectively.  At September 30, 2011 and December 31, 2010, the Company had a $1.0 million and $1.2 million, respectively, specific allowance for loan losses on $1.2 million and $2.4 million, respectively, of impaired loans.  There were $5.4 million and $4.7 million of impaired loans with no specific allowance for loan losses at September 30, 2011 and December 31, 2010, respectively.  The average outstanding balance of impaired loans for the nine months ended September 30, 2011 was $6.8 million, compared to $8.9 million for the same period last year.  No interest income was recognized on these loans subsequent to their classification as impaired.  Furthermore, the Company stopped accruing interest on these loans on the date they were classified as non-accrual and reversed 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.  There was no interest income recognized on these loans on a cash basis for the three and nine months ended September 30, 2011 and 2010.

Allowance for Loan Losses

The allowance for loan losses (“ALL”) is established as losses are estimated to have occurred through provisions for loan losses charged to operations.  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

37

many quantitative and qualitative factors that may be weighted differently at various times depending on prevailing conditions. These factors include, among other elements:

•

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, augmented by the experience of management with similar assets and our independent loan review process.  Loss ratios for all categories of loans are evaluated 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 three-year time period.  These loss factors are then adjusted, if necessary, for other identifiable risks specifically related to each loan category or risk grade.  Loss ratios are also compared to historical peer group loan loss data, as well as the loss experience of other financial institutions to further assess the reasonableness of these ratios.  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 and the judgments required to determine the estimated ranges, 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 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, 2011 and December 31, 2010 was adequate to absorb known and inherent risks in the loan portfolio.

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The following is a summary of the activity for the ALL for the three and nine months ended September 30, 2011:

(in thousands)	Commercial			Commercial Real Estate				Residential			Land and Construction				Consumer and Other				Total
Three Months Ended September 30, 2011:
Allowance for loan losses:
Beginning balance	$	2,671			$	902			$	296		$	886			$	329			$	5,084
Provision for loan losses		(162	)			—				62			100				—				—
Charge-offs		—				—				—			—				—				—
Recoveries		162				—				—			—				—				162
Ending balance	$	2,671			$	902			$	358		$	986			$	329			$	5,246
Nine Months Ended September 30, 2011:
Allowance for loan losses:
Beginning balance	$	2,812			$	888			$	213		$	995			$	375			$	5,283
Provision for loan losses		(99	)			294				145			(9	)			(56	)			275
Charge-offs		(222	)			(280	)			—			—				—				(502	)
Recoveries		180				—				—			—				10				190
Ending balance	$	2,671			$	902			$	358		$	986			$	329			$	5,246

The following is a summary of activities for the ALL for the three and nine months ended September 30, 2010:

(in thousands)	Three Months Ended September 30, 2010			Nine Months Ended September 30, 2010
Beginning balance	$	4,947			$	5,478
Provision for loan losses		100				200
Charge-offs:
Commercial		(659	)			(889	)
Commercial real estate		(250	)			(650	)
Consumer and other		—				(52	)
Total charge-offs		(909	)			(1,591	)
Recoveries:
Commercial		381				386
Commercial real estate		—				20
Residential		—				22
Consumer and other		—				4
Total recoveries		381				432
Ending balance	$	4,519			$	4,519

There were no loans acquired with deteriorated credit quality during the nine months ended September 30, 2011 and 2010.

The ALL was $5.2 million, or 2.84% of our total loan portfolio, at September 30, 2011, compared to $5.3 million, or 2.95%, at December 31, 2010.  The decline in our ratio of ALL to total loans was primarily a function of improving credit quality related trends within our loan portfolio.  During the nine months ended September 30, 2011, our non-performing loans declined to $6.7 million from $7.1 million at December 31, 2010, and the ratio of our ALL to total non-performing loans improved to 79.03% at September 30, 2011 compared to 74.21% at December 31, 2010.  In addition, our ratio of non-performing loans to total loans was 3.59% and 3.97% at September 30, 2011 and December 31, 2010, respectively, and has declined for eight consecutive quarters, or 46.09% since the third quarter of 2009.  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, we established a full valuation allowance against the Company’s deferred tax assets due to uncertainty regarding their realizability.  At September 30, 2011 and December 31, 2010, we reassessed the need for this valuation allowance and concluded that a full valuation allowance remained appropriate.  Management reached this conclusion as a result of the Company’s cumulative losses since inception, and the anticipated near term economic climate in which the Company will operate. Management will continue to evaluate the potential realizability of the deferred tax assets and will continue to maintain a valuation allowance to the extent it is determined that it is more likely than not that these assets will not be realized.

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At September 30, 2011 and December 31, 2010, the Company maintained a deferred tax liability of $1.4 million and $586,000, respectively, in connection with net unrealized gains on investment securities, which is included in Accrued Interest and Other Liabilities within the accompanying Consolidated Balance Sheets.  We did not utilize this deferred tax liability to reduce our tax valuation allowance due to the fact that we do not currently intend to dispose of these investments and realize the associated gains.

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, 2011, total deposits were $325.9 million compared to $258.0 million at December 31, 2010, representing an increase of 26.3%, or $67.9 million.  This increase is primarily due to growth within our non-interest bearing deposits and money market deposits and savings of $29.4 million and $60.6 million, respectively, due to continued core deposit gathering efforts, partially offset by decreases in certificates of deposit and interest bearing deposits of $13.2 million and $8.9 million, respectively.  Total core deposits, which include non-interest bearing demand deposits, interest bearing demand deposits and money market deposits and savings, were $279.0 million and $197.9 million at September 30, 2011 and December 31, 2010, respectively, representing an increase of $81.1 million, or 41.0%.

The following table reflects a summary of deposit categories by dollar and percentage at September 30, 2011 and December 31, 2010:

	September 30, 2011				December 31, 2010
(dollars in thousands)	Amount		Percent of Total		Amount		Percent of Total
Non-interest bearing demand deposits	$	120,895	37.1	%	$	91,501	35.5	%
Interest bearing checking	24,770		7.6	%	33,632		13.0	%
Money market deposits and savings	133,349		40.9	%	72,757		28.2	%
Certificates of deposit	46,893		14.4	%	60,099		23.3	%
Total	$	325,907	100.0	%	$	257,989	100.0	%

At September 30, 2011 and December 31, 2010, the Company had three certificates of deposit with the State of California Treasurer’s Office for a total of $34.0 million, which represented 10.4% and 13.2%, respectively, of total deposits.  Each of these deposits outstanding at September 30, 2011 is scheduled to mature in the fourth quarter of 2011. The Company intends to renew each of these deposits at maturity.  However, given the current economic climate in the State of California, there can be no assurance that the State of California Treasurer’s Office will continue to maintain deposit accounts with the Company.  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 6 “Deposits.”

At September 30, 2011, the Company had $2.9 million of Certificate of Deposit Accounts Registry Service (“CDARS”) reciprocal deposits, which represented 0.9% of total deposits.  At December 31, 2010, the Company had $12.8 million of CDARS deposits, which represented 5.0% of total deposits.

The aggregate amount of certificates of deposit of $100,000 or more at September 30, 2011 and December 31, 2010 was $44.9 million and $57.6 million, respectively.

Scheduled maturities of certificates of deposit in amounts of $100,000 or more at September 30, 2011, including deposit accounts with the State of California Treasurer’s Office and CDARS were as follows:

(in thousands)
Due within 3 months or less	$	37,190
Due after 3 months and within 6 months	1,210
Due after 6 months and within 12 months	3,392
Due after 12 months	3,120
Total	$	44,912

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

40

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 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 under borrowings and State of California deposit relationships and operating requirements, divided by total assets) was 40.05% at September 30, 2011 and 28.8% at December 31, 2010.

At September 30, 2011, the Company had a $54.9 million borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB.  The Company had $10.0 million of long-term borrowings and no overnight borrowings outstanding under this borrowing/credit facility with the FHLB at September 30, 2011.  At December 31, 2010, the Company had a $45.8 million borrowing/credit facility secured by a blanket lien of eligible loans at the FHLB.  The Company had $2.0 million of long-term borrowings and no overnight borrowings outstanding under this borrowing/credit facility with the FHLB at December 31, 2010.

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, 2011 and December 31, 2010 (dollars in thousands):

Maturity Date	Interest Rate		September 30, 2011				December 31, 2010
April 15, 2011	1.59	%		$	—	$		2,000
May 23, 2013	0.63	%			2,500			—
May 23, 2014	1.14	%			2,500			—
May 26, 2015	1.65	%			2,500			—
May 23, 2016	2.07	%			2,500			—
	Total			$	10,000	$		2,000

At September 30, 2011, the Company also had $27.0 million in Federal fund lines of credit available with other correspondent banks that could be used to disburse loan commitments and to satisfy demands for deposit withdrawals.  Each of these lines of credit is subject to conditions that the Company may not be able to meet at the time when additional liquidity is needed.  The Company did not have any borrowings outstanding under these lines of credit at September 30, 2011 or December 31, 2010.

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, 2011, the Company was not subject to any material commitments for capital expenditures.

Capital Resources

At September 30, 2011 , the Company had total stockholders’ equity of $45.3 million, which included $107,000 in common stock, $64.4 million in additional paid-in capital, $14.3 million accumulated deficit, $2.0 million in accumulated other comprehensive income, and $6.9 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 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, 2011 and December 31, 2010, the Company and the Bank met all capital adequacy requirements to which they are subject.

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At December 31, 2010, 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, 2011 and December 31, 2010 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, 2011:
Total Risk-Based Capital Ratio	$	46,105	21.07	%	$	44,104	20.15	%	$	17,507	8.00	%		$	21,885	10.00	%
Tier 1 Risk-Based Capital Ratio	$	43,336	19.80	%	$	41,335	18.89	%	$	8,753	4.00	%		$	13,131	6.00	%
Tier 1 Leverage Ratio	$	43,336	11.65	%	$	41,335	11.10	%	$	14,884	4.00	%		$	18,612	5.00	%
December 31, 2010:
Total Risk-Based Capital Ratio	$	46,197	21.69	%	$	42,959	20.16	%	$	17,039	8.00	%		$	21,307	10.00	%
Tier 1 Risk-Based Capital Ratio	$	43,500	20.42	%	$	40,260	18.90	%	$	8,519	4.00	%		$	12,784	6.00	%
Tier 1 Leverage Ratio	$	43,500	13.93	%	$	40,260	12.88	%	$	12,488	4.00	%		$	15,634	5.00	%

Dividends

In the ordinary course of business, Bancshares is dependent upon dividends from the Bank to provide funds for the payment of dividends to 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, 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 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)	September 30, 2011		December 31, 2010
Commitments to extend credit	$	64,789	$	60,616
Commitments to extend credit to directors and officers (undisbursed amount)	$	733	$	1,841
Standby/commercial letters of credit	$	2,480	$	2,054
Guarantees on revolving credit card limits	$	219	$	261
Outstanding credit card balances	$	49	$	49

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, 2011 and December 31, 2010, the allowance for unfunded commitments was unchanged at $203,000, which represented 0.30% and 0.33% 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 8 “Commitments and Contingencies.”

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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 controls over financial reporting that occurred during the fiscal quarter ended September 30, 2011, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.

Legal Proceedings

At present, there are no pending or threatened proceedings against the Company which, if determined adversely, would have a material effect on the Company’s business, financial position, results of operations, cash flows or stock price. In the ordinary course of operations, the Company may be party to various legal proceedings.

Item 1A.

Risk Factors

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, 2010.  In addition to the other information set forth in this report, 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, 2010, 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

Not applicable.

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Purchases of Equity Securities

The table below summarizes the Company’s monthly repurchases of equity securities during the three months ended September 30, 2011.

(dollars in thousands, except per share data)

Period	Total Number of Shares Purchased		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, 2011	41,867	$		3.72	41,867	$		1,362
August 1-31, 2011	159,340		3.64		159,340		782
September 1-30, 2011	46,620		3.72		46,620		609
Total	247,827	$	3.67		247,827	$	609

(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 at any time without notice.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Removed and Reserved.

Item 5.

Other Information

(a)

Additional Disclosures.  On November 4, 2011, 1^st Century Bancshares, Inc. (“Bancshares”) entered into employment agreements with its Chairman of the Board of Directors and Chief Executive Officer, Alan I. Rothenberg, and its President and Chief Operating Officer, Jason P. DiNapoli.  These employment agreements were approved by the Board of Directors of Bancshares (the “Board”).  

Alan I. Rothenberg Employment Agreement

Mr. Rothenberg’s employment agreement has an initial term of three years, which automatically extends for additional one-year terms, unless and until either party gives notice of its desire that the term not be extended at least 60 days prior to the expiration of the then current term.  Pursuant to his employment agreement, Mr. Rothenberg will receive an annual base salary of $292,500 and is eligible to receive an annual bonus. The Board will determine if Mr. Rothenberg should receive an annual bonus and, if so, the amount of such bonus in its sole discretion.  In addition, Mr. Rothenberg is entitled to receive certain other benefits that Bancshares extends to all of its executive employees, such as life insurance, disability insurance, health, dental, vision and other insurance benefits and 401(k) plan participation.

Under the employment agreement, Bancshares may grant from time to time to Mr. Rothenberg shares of restricted stock under and subject to the terms and conditions of Bancshares’ Amended 2005 Equity Incentive Plan or such other plan that Bancshares is then regularly granting shares of restricted stock to its executive officers.

In the event the employment of Mr. Rothenberg is terminated by Bancshares for Cause, Mr. Rothenberg is only entitled to base salary earned, paid time off accrued and unreimbursed business expenses, each through the date of termination.

In addition to what Mr. Rothenberg is entitled to in the event of termination for Cause, if he is terminated without Cause or he terminates his employment for Good Reason, Mr. Rothenberg will receive: (i) a lump sum payment equal to two times the amount of his highest base salary and annual bonus within the three-year period preceding the termination, (ii) a prorated bonus for the number of months worked during the year of termination, and (iii) medical, disability and life insurance benefits (the “Continuation Benefits”) until the earlier of one year from the date of separation and the date he receives comparable coverage from another employer (or a lump sum cash payment equal to the value of the Continuation Benefits in the event final regulations are issued by the U.S. Treasury Department, which prohibit the discriminatory payment of medical coverage).

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In addition to what Mr. Rothenberg is entitled to in the event of termination for Cause, if his employment is terminated on account of permanent disability he will continue to receive his base salary then in effect for a period of one year in accordance with Bancshares regular payroll practices and will also receive Continuation Benefits for a period of six months following the separation date.  If Mr. Rothenberg’s employment terminates due to his death, his estate shall be entitled to payment of any benefits pursuant to any life insurance policy, and any unvested shares of restricted stock shall immediately vest.

As a condition to the receipt of any of the foregoing post-termination payments and benefits (except in the case of termination of employment due to death), Mr. Rothenberg is required to provide Bancshares with a general release from any and all claims, known and unknown, that Mr. Rothenberg may have against Bancshares.

The employment agreement contains standard confidentiality and other business protection covenants, including a covenant not to compete.  Generally speaking, Mr. Rothenberg agrees not to compete with, induce any employees to leave or otherwise interfere with or disrupt the relationships between Bancshares and its employees, or divert or attempt to divert from Bancshares any of its customers, during the term of his employment and for a period of one year following his separation from Bancshares.  The employment agreement also contains a standard indemnification provision.  In addition, Mr. Rothenberg may be entitled to a gross-up payment in the event he is subject to an excise tax under Section 4999 of the Internal Revenue Code as a result of payments made by Bancshares to or for his benefit.

The foregoing description of Mr. Rothenberg’s employment agreement is not complete and is qualified in its entirety by reference to the full text of the agreement, a copy of which is filed as Exhibit 10.1 to this Form 10-Q and is incorporated herein by reference.

Jason P. DiNapoli Employment Agreement

Jason P. DiNapoli’s employment agreement has an initial term of three years, which automatically extends for additional one-year terms, unless and until either party gives notice of its desire that the term not be extended at least 60 days prior to the expiration of the then current term.  Pursuant to his employment agreement, Mr. DiNapoli will receive an annual base salary of $325,000.  The Board will determine if Mr. DiNapoli should receive an annual bonus and, if so, the amount of such bonus in its sole discretion.  In addition, Mr. DiNapoli is entitled to receive certain other benefits that Bancshares extends to all of its executive employees, such as life insurance, disability insurance, health, dental, vision and other insurance benefits and 401(k) plan participation.

Under the employment agreement, Bancshares may grant from time to time to Mr. DiNapoli shares of restricted stock under and subject to the terms and conditions of Bancshares’ Amended 2005 Equity Incentive Plan or such other plan that Bancshares is then regularly granting shares of restricted stock to its executive officers.

In the event the employment of Mr. DiNapoli is terminated by Bancshares for Cause, Mr. DiNapoli is only entitled to base salary earned, paid time off accrued and unreimbursed business expenses, each through the date of termination.

In addition to what Mr. DiNapoli is entitled to in the event of termination for Cause, if he is terminated without Cause or he terminates his employment for Good Reason, Mr. DiNapoli will receive: (i) a lump sum payment equal to two times the amount of his highest base salary and annual bonus within the three-year period preceding the termination, (ii) a prorated bonus for the number of months worked during the year of termination, and (iii) Continuation Benefits until the earlier of one year from the separation date or the date he receives comparable coverage from another employer (or a lump sum cash payment equal to the value of the Continuation Benefits in the event final regulations are issued by the U.S. Treasury Department, which prohibit the discriminatory payment of medical coverage).

In addition to what Mr. DiNapoli is entitled to in the event of termination for Cause, if his employment is terminated on account of permanent disability he will continue to receive his base salary then in effect for a period of one year in accordance with Bancshares regular payroll practices and will also receive Continuation Benefits for a period of six months following the separation date.  If Mr. DiNapoli’s employment terminates due to his death, his estate shall be entitled to payment of any benefits pursuant to any life insurance policy, and any unvested shares of restricted stock shall immediately vest.

As a condition to the receipt of any of the foregoing post-termination payments and benefits (except in the case of termination of employment due to death), Mr. DiNapoli is required to provide Bancshares with a general release from any and all claims, known and unknown, that Mr. DiNapoli may have against Bancshares.

The employment agreement contains standard confidentiality and other business protection covenants, including a covenant not to compete.  Generally speaking, Mr. DiNapoli agrees not to compete with, induce any employees to leave or otherwise interfere with or disrupt the relationships between Bancshares and its employees, or divert or attempt to divert from Bancshares any of its customers, during the term of his employment and for a period of one year following his separation from Bancshares.  The employment agreement

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also contains a standard indemnification provision.  In addition, Mr. DiNapoli may be entitled to a gross-up payment in the event he is subject to an excise tax under Section 4999 of the Internal Revenue Code as a result of payments made by Bancshares to or for his benefit.

The foregoing description of Mr. DiNapoli’s employment agreement is not complete and is qualified in its entirety by reference to the full text of the agreement, a copy of which is filed as Exhibit 10.2 to this Form 10-Q and is incorporated herein by reference.

Bradley S. Satenberg Severance Agreement

Pursuant to his severance agreement, in the event that Mr. Satenberg is terminated by Bancshares for Cause, Mr. Satenberg is only entitled to base salary earned, paid time off accrued and unreimbursed business expenses, each through the date of termination.  In addition to what Mr. Satenberg is entitled to in the event of termination for Cause, if he is terminated without Cause or he terminates his employment for Good Reasonwithin twelve (12) months of a Change in Control, Mr. Satenberg will receive: (i) a lump sum payment equal to fifteen (15) months of his highest base salary and annual bonus within the three-year period preceding the termination, (ii) a prorated bonus for the number of months worked during the year of termination, (iii)immediate vesting in any of the remaining unvested shares of restricted stock and/or options granted to him under any award agreements existing as of the effective date of the agreement or awarded thereafter, and (iv) Continuation Benefits until the earlier of one year from the date of separation and the date he receives comparable coverage from another employer (or a lump sum cash payment equal to the value of the Continuation Benefits in the event final regulations are issued by the U.S. Treasury Department, which prohibit the discriminatory payment of medical coverage).

As a condition to the receipt of any of the foregoing post-termination payments and benefits (except in the case of termination for Cause), Mr. Satenberg is required to provide Bancshares with a general release from any and all claims, known and unknown, that Mr. Satenberg may have against Bancshares.

The foregoing description of Mr. Satenberg’s severance agreement is not complete and is qualified in its entirety by reference to the full text of the agreement, a copy of which is filed as Exhibit 10.3 to this Form 10-Q and is incorporated herein by reference.

(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, 2011.  Please see the discussion of these procedures in the most recent proxy statement on Schedule 14A filed with the SEC.

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Item 6.

Exhibits

10.1

Employment Agreement between Alan I. Rothenberg and 1^st Century Bancshares, Inc. dated November 4, 2011.

10.2

Employment Agreement between Jason P. DiNapoli and 1^st Century Bancshares, Inc. dated November 4, 2011.

10.3

Severance Agreement between Bradley S. Satenberg and 1^st Century Bancshares, Inc. dated November 4, 2011.

10.4

Severance Agreement between J. Kevin Sampson and 1^st Century Bancshares, Inc. dated November 4, 2011.

31.1

Chief Executive Officer Certification required under Section 302 of the Sarbanes—Oxley Act of 2002.

31.2

Chief Operating Officer Certification required under Section 302 of the Sarbanes—Oxley Act of 2002.

31.3

Principal Financial Officer Certification required under Section 302 of the Sarbanes—Oxley Act of 2002.

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Chief Executive Officer, Chief Operating Officer andPrincipal 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.

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SIGNATURES

In accordance with section 13 or 15(d) of the Securities Exchange Act, as adopted by the Comptroller, the registrant caused this report to be signed on its behalf by the undersigned, thereunto authorized, on the 8th day of November, 2011.

1ST CENTURY BANCSHARES, INC.
By:	/s/ Alan I. Rothenberg.
	Alan I. Rothenberg
	Chairman and Chief Executive Officer
By:	/s/ Jason P. DiNapoli.
	Jason P. DiNapoli
	President and Chief Operating Officer
By:	/s/ Bradley S. Satenberg.
	Bradley S. Satenberg
	Executive Vice President and Chief Financial Officer

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