1st Century Bancshares 10Q 2014 Q3 Quarterly report

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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 endedSeptember 30, 2014

Commission FileNumber 001-34226

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☐	Smaller reporting company ☒
(Do not check if a smaller reporting company)

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

10,146,078 shares of common stock of the registrant were outstanding as of November 3, 2014.

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1^st Century Bancshares, Inc.

Quarterly Report onForm 10-Q

September 30, 2014

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		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets — September 30, 2014 (unaudited) and December 31, 2013	4

	Unaudited Consolidated Statements of Operations and Comprehensive Income — Three and nine months ended September 30, 2014 and 2013	5

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity — Nine months ended September 30, 2014 and 2013	6

	Unaudited Consolidated Statements of Cash Flows — Nine months ended September 30, 2014 and 2013	7

	Notes to 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	44

Item 4.	Controls and Procedures	45

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	46

Signatures		47

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Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” and other similar expressions in this Quarterly Report on Form 10-Q. With respect to any such forward-looking statements, the Company claims the protection of the safe harbor provided for in the Private Securities Litigation Reform Act of 1995, as amended. The Company cautions investors that any forward-looking statements presented in this Quarterly Report on Form 10-Q, or those that the Company may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information available to, management at the time such statements are first made. Actual outcomes will be affected by known and unknown risks, trends, uncertainties and factors that are beyond the Company’s control or ability to predict. Although the Company believes that management’s beliefs and assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, the Company’s actual future results can be expected to differ from management’s expectations, and those differences may be material and adverse to the Company’s business, results of operations and financial condition. Accordingly, investors should use caution in placing any reliance on forward-looking statements to anticipate future results or trends.

Some of the risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed include, but are not limited to, the following: the impact of changes in interest rates; political instability; changes in the monetary policies of the U.S. Government; a renewed decline in economic conditions; deterioration in the value of California real estate, both residential and commercial; an increase in the level of non-performing assets and charge-offs; further increased competition among financial institutions; the Company’s ability to continue to attract interest bearing deposits and quality loan customers; further government regulation and the implementation and costs associated with the same; internal and external fraud and cyber-security threats including the loss of bank or customer funds, loss of system functionality or the theft or loss of data; management’s ability to successfully manage the Company’s operations; the possibility that we will be unable to comply with the requirements set forth in the OCC’s Consent Order, which could result in restrictions on our operations;and the other risks set forth in the Company’s reports filed with the U.S. Securities and Exchange Commission. For further discussion of these and other factors, see “Item 1A. Risk Factors” in the Company’s 2013 Annual Report on Form 10-K.

Any forward-looking statements in this Quarterly Report on Form 10-Q and all subsequent written and oral forward-looking statements attributable to the Company or any person acting on behalf of the Company are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. The Company does not undertake any obligation to release publicly any revisions to forward-looking statements to reflect events or circumstances after the date such forward looking statements are made, and hereby specifically disclaims any intention to do so, unless required by law.

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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, 2014 (unaudited)			December 31,2013
ASSETS
Cash and due from banks	$	7,869		$	6,648
Interest earning deposits at other financial institutions		82,478			38,040
Total cash and cash equivalents		90,347			44,688
Investment securities — Available for Sale (“AFS”), at estimated fair value		71,378			106,272
Loans, net of allowance for loan losses of $7,577 and $7,236 at September 30, 2014 and December 31, 2013, respectively		411,150			376,312
Premises and equipment, net		1,197			1,285
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock		4,822			4,632
Accrued interest and other assets		5,092			4,956
Total Assets	$	583,986		$	538,145

LIABILITIES AND STOCKHOLDERS’ EQUITY
Non-interest bearing demand deposits	$	277,148		$	236,869
Interest bearing deposits:
Interest bearing checking (“NOW”)		21,258			21,005
Money market deposits and savings		155,678			151,879
Certificates of deposit less than $100		792			870
Certificates of deposit of $100 or greater		41,466			42,143
Total deposits		496,342			452,766
Other borrowings		25,000			27,500
Accrued interest and other liabilities		2,840			2,491
Total Liabilities		524,182			482,757

Commitments and contingencies (Note 9)

Stockholders’ Equity:
Preferred stock, $0.01 par value — 10,000,000 shares authorized, none issued and outstanding at September 30, 2014 and December 31, 2013, respectively		—			—
Common stock, $0.01 par value — 50,000,000 shares authorized, 12,129,310 and 11,378,710 issued at September 30, 2014 and December 31, 2013, respectively		121			114
Additional paid-in capital		70,515			67,231
Accumulated deficit		(2,229	)		(4,036	)
Accumulated other comprehensive income		8			52
Treasury stock at cost — 1,983,232 and 1,897,902 shares at September 30, 2014 and December 31, 2013, respectively		(8,611	)		(7,973	)
Total Stockholders’ Equity		59,804			55,388
Total Liabilities and Stockholders’ Equity	$	583,986		$	538,145

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 and Comprehensive Income

(in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Interest and fee income on:
Loans	$	4,382		$	3,507		$	12,332		$	10,072
Investments		325			612			1,394			2,105
Other		127			89			342			194
Total interest and fee income		4,834			4,208			14,068			12,371

Interest expense on:
Deposits		108			115			325			369
Borrowings		77			84			239			241
Total interest expense		185			199			564			610
Net interest income		4,649			4,009			13,504			11,761

Provision for(reduction of)loan losses		—			200			100			(300	)
Net interest income after provision for(reduction of)loan losses		4,649			3,809			13,404			12,061

Non-interest income
Gain on sale of AFS investment securities		196			170			982			705
Other operating income		92			235			394			896
Total non-interestincome		288			405			1,376			1,601
Non-interest expenses:
Compensation and benefits		2,184			2,024			6,861			5,976
Occupancy		458			342			1,234			1,078
Professional fees		200			175			512			491
Technology		231			180			625			550
Marketing		88			62			250			204
FDIC assessments		92			55			277			198
Other operating expenses		605			573			1,886			1,697
Total non-interest expenses		3,858			3,411			11,645			10,194
Income before income taxes		1,079			803			3,135			3,468
Income tax provision (benefit)		453			—			1,328			(3,178	)
Net income		626			803			1,807			6,646

Other Comprehensive Income:
Net change in unrealized losses on AFS investments, net of tax		(219	)		(8	)		(44	)		(1,938	)
Comprehensive Income	$	407		$	795		$	1,763		$	4,708

Basic earnings per share	$	0.07		$	0.09		$	0.19		$	0.77
Diluted earnings per share	$	0.06		$	0.09		$	0.19		$	0.74

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 of Changes in Stockholders’ Equity

(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, 2012		10,965,560		$	110	$	65,038		$	(10,899	)	$	2,436			(1,828,432	)	$	(7,512	)	$	49,173
Restricted stock issued		138,500			1		(1	)		—			—			—			—			—
Forfeiture of restricted stock		(4,750	)		—		(11	)		—			—			—			—			(11	)
Exercise of stock options		19,000			—		95			—			—			—			—			95
Compensation expense associated with restricted stock awards, net of estimated forfeitures		—			—		608			—			—			—			—			608
Shares surrendered to pay taxes on stock based compensation		—			—		—			—			—			(23,270	)		(138	)		(138	)
Common stock repurchased		—			—		—			—			—			(105	)		(0	)		(0	)
Net income		—			—		—			6,646			—			—			—			6,646
Other comprehensive loss		—			—		—			—			(1,938	)		—			—			(1,938	)
Balance atSeptember 30,2013		11,118,310		$	111	$	65,729		$	(4,253	)	$	498			(1,851,807	)	$	(7,650	)	$	54,435

Balance at December 31,2013		11,378,710		$	114	$	67,231		$	(4,036	)	$	52			(1,897,902	)	$	(7,973	)	$	55,388
Restricted stock issued		228,000			2		(2	)		—			—			—			—			—
Exercise of stock options		522,600			5		2,638			—			—			—			—			2,643
Compensation expense associated with restricted stock awards, net of estimated forfeitures		—			—		648			—			—			—			—			648
Shares surrendered to pay taxes on stock based compensation		—			—		—			—			—			(85,330	)		(638	)		(638	)
Net income		—			—		—			1,807			—			—			—			1,807
Other comprehensive loss		—			—		—			—			(44	)		—			—			(44	)
Balance at September 30, 2014		12,129,310		$	121	$	70,515		$	(2,229	)	$	8			(1,983,232	)	$	(8,611	)	$	59,804

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 of Cash Flows

(in thousands)

	Nine Months EndedSeptember 30,
	2014			2013
Cash flows from operating activities:
Net income	$	1,807		$	6,646
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		360			377
Amortization of premiums on investment securities, net		660			1,348
Provision for (reduction of) loan losses		100			(300	)
Deferred income tax expense (benefit)		290			(3,310	)
Amortization (accretion) of deferred loan cost and fees, net		44			(14	)
Gain on sale of AFS investment securities		(982	)		(705	)
Gain on sale of OREO		(47	)		—
Non-cash stock compensation, net of forfeitures		648			597
(Increase) decrease in accrued interest and other assets		(486	)		36
Increase (decrease) in accrued interest and other liabilities		349			(2	)
Net cash provided by operating activities		2,743			4,673
Cash flows from investing activities:
Activities in AFS investment securities:
Purchases		(34,114	)		—
Maturities and principal reductions		13,360			33,788
Proceeds from sale of securities		55,896			19,447
Increase in loans, net		(34,982	)		(88,901	)
Proceeds from sale of OREO		137			—
Purchase of premises and equipment		(272	)		(675	)
Purchase of FRB stock and FHLB stock		(190	)		(724	)
Net cashused in investing activities		(165	)		(37,065	)
Cash flows from financing activities:
Net increase in deposits		43,576			31,572
Net repayment of short-term borrowings		—			(4,475	)
Proceeds from other long-term borrowings		—			5,000
Repayment of other long-term borrowings		(2,500	)		(2,500	)
Proceeds from exercise of stock options		2,643			95
Shares surrendered to pay taxes on vesting of stock based compensation		(638	)		(138	)
Net cash provided by financing activities		43,081			29,554
Increase (decrease) in cash and cash equivalents		45,659			(2,838	)
Cash and cash equivalents, beginning of period		44,688			50,555
Cash and cash equivalents, end of period	$	90,347		$	47,717

Supplemental cash flow information:
Cash paid during the period for:
Interest	$	569		$	733
Income taxes	$	777		$	133

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

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1st 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 and comprehensive income, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim period 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, 2013, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 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, 2014 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, 2014.

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

Use of Estimates

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

Cash and Cash Equivalents

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

Cash Flows

Cash and cash equivalents include cash, deposits with other financial institutions with maturities fewer than 90 days, and federal funds sold. Net cash flows are reported for loan and deposit transactions, interest bearing deposits in other financial institutions and short-term borrowings.

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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 readily determinable fair values are classified as “Available for Sale” or “AFS” and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The Company uses estimates from third parties in arriving at fair value determinations which are derived in accordance with fair value measurement standards.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of investment securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income provided that management does not have the intent to sell the securities and it is more likely than not that management will not have to sell the security before recovery of its cost basis. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Federal Reserve Bank Stock and Federal Home Loan Bank Stock

The Bank is a member of the Federal Reserve System (“Fed” or “FRB”). FRB stock is carried at cost and is considered a nonmarketable equity security. Cash dividends from the FRB are reported as interest income on an accrual basis.

The Bank is a member and stockholder of the capital stock of the Federal Home Loan Bank of San Francisco (“FHLB of San Francisco” or “FHLB”). Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB of San Francisco stock is carried at cost and is considered a nonmarketable equity security. Both cash and stock dividends are reported as interest income.

Loans

Loans, net, are stated at the unpaid principal balances less the allowance for loan losses and unamortized deferred fees and costs. Loan origination fees, net of related direct costs, are deferred and accreted to interest income as an adjustment to yield over the respective maturities of the loans using the effective interest method.

Interest on loans is accrued as earned on a daily basis, except where reasonable doubt exists as to the collection of interest and principal, in which case the accrual of interest is discontinued and the loan is placed on non-accrual status. Loans are placed on non-accrual at the time principal or interest is 90 days delinquent unless well secured and in the process of collection. Interest on non-accrual loans is accounted for on a cash-basis or cost-recovery method, until qualifying for return to accrual status. In order for a loan to return to accrual status, all principal and interest amounts owed must be brought current and future payments must be reasonably assured.

A loan is charged-off at any time the loan is determined to be uncollectible. Collateral dependent loans, which generally include commercial real estate loans, residential loans, and construction and land loans, are typically charged down to their net realizable value when a loan is impaired or on non-accrual status. All other loans are typically charged-off when, based upon current available facts and circumstances, it’s determined that either: (1) a loan is uncollectible, (2) repayment is determined to be protracted beyond a reasonable time frame, or (3) the loan is classified as a loss determined by either the Bank’s internal review process or by external examiners.

Loans are considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect all principal and interest amounts due according to the original contractual terms of the loan agreement on a timely basis. The Company evaluates impairment on a loan-by-loan basis. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or by using the loan’s most recent market value or the fair value of the collateral if the loan is collateral dependent. Loans that experience insignificant payment delays or payment shortfalls are generally not considered to be impaired.

When the measurement of an impaired loan is less than the recorded amount of the loan, a valuation allowance is established by recording a charge to the provision for loan losses. Subsequent increases or decreases in the valuation allowance for impaired loans are recorded by adjusting the existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses. The Company’s policy for recognizing interest income on impaired loans is the same as that for non-accrual loans.

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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.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to operations and represents an estimate of probable credit losses inherent in the Company’s loan portfolio that have been incurred as of the balance sheet date. Loan losses are charged against the allowance when management believes that principal is uncollectible. Subsequent repayments or recoveries, if any, are credited to the allowance. Management periodically assesses the adequacy of the allowance for loan losses by reference to many quantitative and qualitative factors that may be weighted differently at various times depending on prevailing conditions. The provisions reflect management’s evaluation of the adequacy of the allowance based, in part, upon the historical loss experience of the loan portfolio, as well as estimates from historical peer group loan loss data and the loss experience of other financial institutions, augmented by management judgment. During this process, loans are separated into the following portfolio segments: commercial loans, commercial real estate, residential, land and construction, and consumer and other loans. The relative significance of risk considerations vary by portfolio segment. For commercial loans, commercial real estate loans and land and construction, the primary risk consideration is a borrower’s ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for commercial real estate and land and construction loans. The primary risk consideration for residential loans and consumer loans are a borrower’s personal cash flow and liquidity, as well as collateral value.

Loss ratios for all portfolio segments are evaluated on a quarterly basis. Loss ratios associated with historical loss experience are determined based on a rolling migration analysis of each portfolio segment within the portfolio. This migration analysis estimates loss factors based on the performance of each portfolio segment over a four and a half year time period. These loss ratios are then adjusted, if determined necessary, based on other factors including, but not limited to, historical peer group loan loss data and the loss experience of other financial institutions. Management carefully monitors changing economic conditions, the concentrations of loan categories, values of collateral, the financial condition of the borrowers, the history of the loan portfolio, and historical peer group loan loss data to determine the adequacy of the allowance for loan losses. As a part of this process, management typically focuses on loan-to-value (“LTV”) percentages to assess the adequacy of loss ratios of collateral dependent loans within each portfolio segment discussed above, trends within each portfolio segment, as well as general economic and real estate market conditions where the collateral and borrower are located. For loans that are not collateral dependent, which generally consist of commercial and consumer and other loans, management typically focuses on general business conditions where the borrower operates, trends within the portfolio, and other external factors to evaluate the severity of loss factors. The allowance is based on estimates and actual losses may vary from the estimates.

Other Real Estate Owned

OREO represents real estate acquired through or in lieu of foreclosure. OREO is held for sale and is initially recorded at fair value less estimated costs of disposition at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or estimated fair value less costs of disposition. OREO is included in accrued interest and other assets within the Consolidated Balance Sheets and the net operating results, if any, from OREO are recognized as non-interest expense within the unaudited Consolidated Statements of Operations and Comprehensive Income.

Furniture, Fixtures and Equipment, net

Leasehold improvements and furniture, fixtures and equipment are carried at cost, less depreciation and amortization. Furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful life of the asset (three to ten years). Leasehold improvements are depreciated using the straight-line method over the terms of the related leases or the estimated lives of the improvements, whichever is shorter.

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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. During the year ended December 31, 2013, management reassessed the need for this valuation allowance and concluded that a valuation allowance was no longer appropriate and that it is more likely than not that these assets will be realized. As a result, management reversed the valuation allowance as an income tax benefit in the unaudited Consolidated Statements of Operations and Comprehensive Income. This reversal occurred during the nine months ended September 30, 2013. In making this determination, management analyzed, among other things, our recent history of earnings and cash flows, forecasts of future earnings, improvements in the credit quality of the Company’s loan portfolio, the nature and timing of future deductions and benefits represented by the deferred tax assets and our cumulative earnings for the 12 quarters preceding the reversal of this valuation allowance. At September 30, 2014 and December 31, 2013, we had a net deferred tax asset of approximately $2.9 million and $3.1 million, respectively.

At September 30, 2014 and December 31, 2013, the Company did not have any tax benefits disallowed under accounting standards for uncertainties in income taxes. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. If applicable, the Company has elected to record interest accrued and penalties related to unrecognized tax benefits in tax expense.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on Available for Sale securities, are reported as a separate component of the stockholders’ equity section of the Consolidated Balance Sheets and, along with net income, are components of comprehensive income.

Earnings per Share

The Company reports both basic and diluted earnings per share. Basic earnings per share is determined by dividing net income by the average number of shares of common stock outstanding, while diluted earnings per share is determined by dividing net income by the average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents. Potential dilutive common shares related to outstanding stock options and restricted stock are determined using the treasury stock method. For both the three and nine months ended September 30, 2014, there were 350,073 of weighted average stock options that were excluded from the diluted earnings per share calculation due to their antidilutive impact.For the three and nine months ended September 30, 2013, there were 350,073 and 370,073, respectively, of weighted average stock options that were excluded from the diluted earnings per share calculation due to their antidilutive impact. For the three and nine months ended September 30, 2014, there were none and 4,370, respectively, of weighted average restricted shares that were excluded from the diluted earnings per share calculation due to their antidilutive impact.For the three and nine months ended September 30, 2013, there were none and 78,128, respectively, of weighted average restricted shares that were excluded from the diluted earnings per share calculation due to their antidilutive impact.

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	Three Months EndedSeptember30,				Nine months EndedSeptember30,
(dollars in thousands)	2014		2013		2014		2013
Net income	$	626	$	803	$	1,807	$	6,646
Average number of common shares outstanding		9,481,072		8,666,447		9,408,312		8,619,670
Effect of dilution of stock options		812		243,673		18,415		139,944
Effect of dilution of restricted stock		266,704		274,383		303,491		268,855
Average number of common shares outstanding used to calculate diluted earnings per common share		9,748,588		9,184,503		9,730,218		9,028,469

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 Company’s 2005 Amended and Restated Equity Incentive Plan (the “Equity Incentive Plan”) and the 2013 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 2014, the Financial Accounting Standard Board (FASB) issued Accounting Standard Update (ASU) No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (ASU 2014-04). The amendments of ASU are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. This ASU is effective for annual periods beginning after December 15, 2014 and interim periods beginning after December 15, 2015. The Company is currently evaluating the effect of ASU 2014-04 on its financial statements and disclosures, if any.

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) – Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08). The amendments in ASU 2014-08 change the criteria for reporting discontinued operations and improve related disclosures. This ASU also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance. ASU 2014-08 will be effective for annual financial statements with fiscal years beginning on or after December 31, 2014 and interim periods thereafter. The Company is currently evaluating the effects ASU 2014-08 will have on its financial statements and disclosures, if any.

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In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). This update to the ASC is the culmination of efforts by the FASB and the International Accounting Standards Board (IASB) to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 supersedes Topic 605 – Revenue Recognition and most industry-specific guidance. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 describes a 5-step process entities can apply to achieve the core principle of revenue recognition and requires disclosures sufficient to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and the significant judgments used in determining that information. The amendments in ASU 2014-9 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and early application is not allowed. The Company is currently evaluating the effects of ASU 2014-04 on its financial statements and disclosures, if any.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40) (ASU 2014-15). The objective of ASU 2014-15 is to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and provide related disclosures. Currently, GAAP does not provide guidance to evaluate whether there is substantial doubt regarding an organization’s ability to continue as a going concern. This ASU provides guidance to an organization’s management, with principles and definitions to reduce diversity in the timing and content of financial statement disclosures commonly provided by organizations. ASU 2014-15 is effective for periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016.

(2) Investments

The following is a summary of the investments categorized as Available for Sale at September 30, 2014 and December 31, 2013:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(inthousands)	Cost		Gains		Losses			Value
At September 30, 2014:
Investments — Available for Sale
U.S. Treasuries and Government Agencies	$	9,796	$	15	$	—		$	9,811
Corporate Notes		2,540		18		—			2,558
Residential Mortgage-Backed Securities		59,028		340		(359	)		59,009
Total	$	71,364	$	373	$	(359	)	$	71,378
At December 31, 2013:
Investments — Available for Sale
Corporate Notes	$	3,074	$	34	$	—		$	3,108
Residential Mortgage-Backed Securities		103,109		959		(904	)		103,164
Total	$	106,183	$	993	$	(904	)	$	106,272

The Company did not have any investment securities categorized as “Held to Maturity” or “Trading” at September 30, 2014 or December 31, 2013. At September 30, 2014 and December 31, 2013, there were no holdings of securities of any one issuer other than the U.S. government or its agencies, in an amount greater than 10% of shareholders’ equity.

Additionally, at September 30, 2014 and December 31, 2013, the fair value of securities pledged to the State of California Treasurer’s Office to secure their deposits was $51.5 million and $45.4 million, respectively. Deposits from the State of California were $38.0 million at both September 30, 2014 and December 31, 2013.

The following table summarizes the fair value of AFS securities and the weighted average yield of investment securities by contractual maturity at September 30, 2014. Residential mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. The weighted average life of these securities was 3.85 years at September 30, 2014.

(dollarsinthousands)

AvailableforSale	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. Treasuries and Government Agencies	$	—		—	%	$	—		—	%	$	9,811		2.05	%	$	—		—	%	$	9,811		2.05	%
Corporate Notes		2,558		1.35			—		—			—		—			—		—			2,558		1.35
Residential Mortgage-Backed Securities		—		—			757		5.19			22,793		1.50			35,459		2.04			59,009		1.87
Total	$	2,558		1.35	%	$	757		5.19	%	$	32,604		1.66	%	$	35,459		2.04	%	$	71,378		1.88	%

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A total of 29 and 36 securities had unrealized losses at September 30, 2014 and December 31, 2013, respectively. Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less than Twelve Months					Twelve Months or More
	Gross					Gross
	Unrealized					Unrealized
(inthousands)	Losses			Fair Value		Losses			Fair Value
At September 30, 2014:
Investments-Available for Sale
Residential Mortgage-Backed Securities	$	(57	)	$	17,208	$	(302	)	$	22,011
At December 31, 2013:
Investments-Available for Sale
Residential Mortgage-Backed Securities	$	(904	)	$	51,847	$	—		$	—

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, 2014 and December 31, 2013 that the unrealized losses on its securities portfolio on which impairments had not been recognized are temporary.

During the three and nine months ended September 30, 2014, the Company sold available for sale investment securities with an amortized cost of $11.5 million and $54.9 million, respectively. These securities consisted entirely of residential mortgage-backed securities and resulted in realized gains of $196,000 and $982,000, respectively, which were recorded in non-interest income within the unaudited Consolidated Statement of Operations and Comprehensive Income. During the three and nine months ended September 30, 2013 the Company sold a total of $8.6 million and $19.4 million, respectively, of available for sale securities resulting in realized gains of $170,000 and $705,000, respectively.

(3) Loans, Allowance for Loan Losses, and Non-Performing Assets

Loans

The categories of loans listed below are grouped in accordance with the primary purpose of the loans, but in the aggregate 86.3% and 86.9% of all loans are secured by real estate at September 30, 2014 and December 31, 2013, respectively.

	September 30, 2014						December 31,2013
	Amount			Percent			Amount			Percent
(dollarsinthousands)	Outstanding			of Total			Outstanding			of Total
Commercial (1)	$	83,869			20.0	%	$	76,397			19.9	%
Commercial real estate		183,242			43.8	%		167,419			43.7	%
Residential		95,173			22.7	%		82,795			21.6	%
Land and construction		30,433			7.3	%		30,102			7.8	%
Consumer and other (2)		26,041			6.2	%		26,787			7.0	%
Loans, gross		418,758			100.0	%		383,500			100.0	%
Net (unearned fee income) deferred costs		(31	)					48
Less — allowance for loan losses		(7,577	)					(7,236	)
Loans, net	$	411,150					$	376,312

(1)

Unsecured commercial loan balances were $20.6 million and $13.2 million at September 30, 2014 and December 31, 2013, respectively.

(2)

Unsecured consumer and other loan balances were $2.6 million and $2.3 million at September 30, 2014 and December 31, 2013, respectively.

As of September 30, 2014 and December 31, 2013, substantially all of the Company’s loan customers were located in Southern California.

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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, 2014 and 2013:

				Commercial					Land and			Consumer
(in thousands)	Commercial			Real Estate		Residential			Construction			and Other			Total
Three Months Ended September 30, 2014:
Allowance for loan losses:
Beginning balance	$	1,604		$	3,800	$	888		$	691		$	384		$	7,367
Provision for loan losses		125			100		(275	)		—			50			—
Charge-offs		—			—		—			—			—			—
Recoveries		1			—		209			—			—			210
Ending balance	$	1,730		$	3,900	$	822		$	691		$	434		$	7,577
Nine Months Ended September 30, 2014:
Allowance for loan losses:
Beginning balance	$	1,583		$	3,660	$	758		$	811		$	424		$	7,236
Provision for loan losses		115			240		(145	)		(120	)		10			100
Charge-offs		—			—		—			—			—			—
Recoveries		32			—		209			—			—			241
Ending balance	$	1,730		$	3,900	$	822		$	691		$	434		$	7,577
As of September 30, 2014:
Ending balance: individuallyevaluated for impairment	$	35		$	—	$	—		$	—		$	—		$	35
Ending balance: collectivelyevaluated for impairment		1,695			3,900		822			691			434			7,542
Total	$	1,730		$	3,900	$	822		$	691		$	434		$	7,577
Loans:
Ending balance: individuallyevaluated for impairment	$	655		$	—	$	—		$	—		$	50		$	705
Ending balance: collectivelyevaluated for impairment		83,214			183,242		95,173			30,433			25,991			418,053
Total	$	83,869		$	183,242	$	95,173		$	30,433		$	26,041		$	418,758
Three Months Ended September 30, 2013:
Allowance for loan losses:
Beginning balance	$	1,532		$	3,175	$	748		$	766		$	399		$	6,620
Provision for loan losses		(15	)		175		(75	)		100			15			200
Charge-offs		—			—		—			—			—			—
Recoveries		15			—		—			—			—			15
Ending balance	$	1,532		$	3,350	$	673		$	866		$	414		$	6,835
Nine Months Ended September 30, 2013:
Allowance for loan losses:
Beginning balance	$	2,277		$	2,450	$	508		$	411		$	369		$	6,015
Provision for (reduction of) loan losses		(1,815	)		900		165			455			(5	)		(300	)
Charge-offs		—			—		—			—			—			—
Recoveries		1,070			—		—			—			50			1,120
Ending balance	$	1,532		$	3,350	$	673		$	866		$	414		$	6,835
As of September 30, 2013:
Ending balance: individuallyevaluated for impairment	$	35		$	—	$	—		$	—		$	—		$	35
Ending balance: collectivelyevaluated for impairment		1,497			3,350		673			866			414			6,800
Total	$	1,532		$	3,350	$	673		$	866		$	414		$	6,835
Loans:
Ending balance: individuallyevaluated for impairment	$	950		$	—	$	—		$	—		$	29		$	979
Ending balance: collectivelyevaluated for impairment		69,568			150,610		76,906			33,675			24,967			355,726
Total	$	70,518		$	150,610	$	76,906		$	33,675		$	24,996		$	356,705

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The following is a summary of the allowance for loan losses and recorded investment in loans as of December 31, 2013:

			Commercial				Land and		Consumer
(in thousands)	Commercial		Real Estate		Residential		Construction		and Other		Total
Allowance for loan losses:
Ending balance: individuallyevaluated for impairment	$	35	$	—	$	—	$	—	$	—	$	35
Ending balance: collectivelyevaluated for impairment		1,548		3,660		758		811		424		7,201
Total	$	1,583	$	3,660	$	758	$	811	$	424	$	7,236
Loans:
Ending balance: individuallyevaluated for impairment	$	924	$	—	$	—	$	—	$	29	$	953
Ending balance: collectivelyevaluated for impairment		75,473		167,419		82,795		30,102		26,758		382,547
Total	$	76,397	$	167,419	$	82,795	$	30,102	$	26,787	$	383,500

In addition to the allowance for loan losses, the Company also estimates probable losses related to unfunded lending commitments. Unfunded lending commitments are subject to individual reviews and are analyzed and segregated by product type. These classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments. Provision for credit losses related to unfunded lending commitments is reported in other operating expenses in the unaudited Consolidated Statements of Operations and Comprehensive Income. The allowance held for unfunded lending commitments is reported in accrued interest and other liabilities within the accompanying Consolidated Balance Sheets, and not as part of the allowance for loan losses in the above tables.As of September 30, 2014 and December 31, 2013, the allowance for unfunded lending commitments was $320,000 and $270,000, respectively,and is primarily related to $147.3 million and $104.3 million in commitments to extend credit to customers and $2.7 million and $2.6 million in standby/commercial letters of credit at September 30, 2014 and December 31, 2013, respectively.

Non-Performing Assets

The following table presents an aging analysis of the recorded investment of past due loans as of September 30, 2014 and December 31, 2013. Payment activity is reviewed by management on a monthly basis to determine the performance of each loan. Loans are considered to be non-performing when a loan is greater than 90 days delinquent. Loans that are 90 days or more past due may still accrue interest if they are well-secured and in the process of collection. There were no additions to non-performing loans during the nine months ended September 30, 2014 and 2013. Non-performing loans represented 0.16% and 0.19% of total loans at September 30, 2014 and December 31, 2013, respectively. There were no accruing loans past due 90 days or more at September 30, 2014 and December 31, 2013.

	30-59		60-89
	Days Past		Days Past		> 90 Days		Total
(in thousands)	Due		Due		Past Due		Past Due		Current		Total
As of September 30, 2014:
Commercial	$	83	$	845	$	572	$	1,500	$	82,369	$	83,869
Commercial real estate		—		—		—		—		183,242		183,242
Residential		—		—		—		—		95,173		95,173
Land and construction		—		—		—		—		30,433		30,433
Consumer and other		—		—		—		—		26,041		26,041
Totals	$	83	$	845	$	572	$	1,500	$	417,258	$	418,758
As of December 31, 2013:
Commercial	$	187	$	—	$	706	$	893	$	75,504	$	76,397
Commercial real estate		—		—		—		—		167,419		167,419
Residential		—		—		—		—		82,795		82,795
Land and construction		—		—		—		—		30,102		30,102
Consumer and other		—		—		29		29		26,758		26,787
Totals	$	187	$	—	$	735	$	922	$	382,578	$	383,500

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The following table sets forth non-accrual loans and other real estate owned at September 30, 2014 and December 31, 2013:

(dollars in thousands)	September 30, 2014			December 31,2013
Non-accrual loans:
Commercial	$	655		$	706
Consumer and other		—			29
Total non-accrual loans		655			735
OREO		—			90
Total non-performing assets	$	655		$	825

Non-performing assets to gross loans and OREO		0.16	%		0.22	%
Non-performing assets to total assets		0.11	%		0.15	%

Credit Quality Indicators

The following table represents the credit exposure by internally assigned grades at September 30, 2014 and December 31, 2013. This grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements in accordance with the loan terms. The Company’s internal credit risk grading system is based on management’s experiences with similarly graded loans. Credit risk grades are reassessed each quarter based on any recent developments potentially impacting the creditworthiness of the borrower, as well as other external statistics and factors, which may affect the risk characteristics of the respective loan.

The Company’s internally assigned grades are as follows:

Pass – Strong credit with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention – Potential weaknesses that deserve management’s close attention. Borrower and guarantor’s capacity to meet all financial obligations is marginally adequate or deteriorating.

Substandard– Inadequately protected by the paying capacity of the Borrower and/or collateral pledged. The borrower or guarantor is unwilling or unable to meet loan terms or loan covenants for the foreseeable future.

Doubtful – All the weakness inherent in one classified as Substandard with the added characteristic that those weaknesses in place make the collection or liquidation in full, on the basis of current conditions, highly questionable and improbable.

Loss– Considered uncollectible or no longer a bankable asset. This classification does not mean that the asset has absolutely no recoverable value. In fact, a certain salvage value is inherent in these loans. Nevertheless, it is not practical or desirable to defer writing off a portion or whole of a perceived asset even though partial recovery may be collected in the future.

			Commercial				Land and		Consumer
(inthousands)	Commercial		Real Estate		Residential		Construction		and Other
As of September 30, 2014:
Grade:
Pass	$	82,412	$	182,683	$	95,173	$	30,433	$	25,991
Special Mention		155		—		—		—		—
Substandard		1,302		559		—		—		50
Total	$	83,869	$	183,242	$	95,173	$	30,433	$	26,041
As of December 31, 2013:
Grade:
Pass	$	73,824	$	166,828	$	82,795	$	26,801	$	26,503
Special Mention		1,149		—		—		3,301		206
Substandard		1,424		591		—		—		78
Total	$	76,397	$	167,419	$	82,795	$	30,102	$	26,787

There were no loans assigned to the Doubtful or Loss grade as of September 30, 2014 and December 31, 2013.

Impaired Loans

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Management determined the specific allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded. Also presented in the table below are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on non-accrual status, contractual interest is credited to interest income when received, under the cash basis method. The average balances are calculated based on the month-end balances of the loans of the period reported.

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			Unpaid				Average
	Recorded		Principal		Related		Recorded
(inthousands)	Investment		Balance		Allowance		Investment
As of and for the nine months ended September 30, 2014:
With no related allowance recorded:
Commercial	$	572	$	848	$	—	$	752
Commercial real estate		—		—		—		—
Residential		—		—		—		—
Land and construction		—		—		—		—
Consumer and other		50		50		—		31
With an allowance recorded:
Commercial	$	83	$	96	$	35	$	117
Commercial real estate		—		—		—		—
Residential		—		—		—		—
Land and construction		—		—		—		—
Consumer and other		—		—		—		—
Totals:
Commercial	$	655	$	944	$	35	$	869
Commercial real estate	$	—	$	—	$	—	$	—
Residential	$	—	$	—	$	—	$	—
Land and construction	$	—	$	—	$	—	$	—
Consumer and other	$	50	$	50	$	—	$	31
As of and for the year ended December 31, 2013:
With no related allowance recorded:
Commercial	$	789	$	1,065	$	—	$	841
Commercial real estate		—		—		—		—
Residential		—		—		—		—
Land and construction		—		—		—		—
Consumer and other		29		29		—		240
With an allowance recorded:
Commercial	$	135	$	142	$	35	$	155
Commercial real estate		—		—		—		—
Residential		—		—		—		—
Land and construction		—		—		—		—
Consumer and other		—		—		—		—
Totals:
Commercial	$	924	$	1,207	$	35	$	996
Commercial real estate	$	—	$	—	$	—	$	—
Residential	$	—	$	—	$	—	$	—
Land and construction	$	—	$	—	$	—	$	—
Consumer and other	$	29	$	29	$	—	$	240

During the three and nine months ended September 30, 2014, the average balance of impaired loans was $809,000 and $900,000, respectively, compared to $1.2 million and $1.3 million for the same periods last year. As of September 30, 2014 and December 31, 2013, there were $655,000 and $735,000, respectively, of impaired loans on non-accrual status. During the three and nine months ended September 30, 2014, interest income recognized on impaired loans subsequent to their classification as impaired was $2,000 and $8,000, respectively, compared to $2,000 and $7,000 for the same periods last year. The Company stops accruing interest on these loans on the date they are classified as non-accrual and reverses any uncollected interest that had been previously accrued as income. The Company may begin recognizing interest income on these loans as cash interest payments are received, if collection of principal is reasonably assured.

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Troubled Debt Restructurings

Troubled debt restructurings for the three and nine months ended September 30, 2014 are set forth in the following table. There were no troubled debt restructurings during the three and nine months ended September 30, 2013.

For the Three Months Ended September 30, 2014

For the Nine Months Ended September 30, 2014

Pre

Post

Pre

Modification

Number

Outstanding

Number

Outstanding

Recorded

(dollars in thousands)

Loans

Investment

Loans

Investment

Troubled Debt Restructurings:

Consumer

The modification in connection with the troubled debt restructurings during the three and nine months ended September 30, 2014 was primarily related to extending the amortization period of these loans. The impact on the Company’s determination of the allowance for loan losses related to these troubled debt restructurings was not material and resulted in no charge-offs during the three and nine months ended September 30, 2014 and 2013. During the three and nine months ended September 30, 2014, there had been no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months. During the three months ended September 30, 2013, there were no defaults recorded on any loans that were modified as troubled debt restructurings. During the nine months ended September 30, 2013, there was one commercial loan, with a recorded investment of $572,000 at September 30, 2013, that defaulted within twelve months of its modification date. A troubled debt restructuring is considered to be in default once it becomes 60 days or more past due following a modification.

(4) Derivative Financial Instruments

The fair value of derivative positions outstanding is included in accrued interest receivable and other assets and accrued interest payable and other liabilities in the accompanying Consolidated Balance Sheets and in the net change in each of these financial statement line items in the accompanying unaudited Consolidated Statements of Cash Flows.

Interest Rate Derivatives. The Company utilizes interest rate swaps to facilitate the needs of its customers. The Company has entered into interest rate swaps that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.

The notional amounts and estimated fair values of interest rate derivative contracts outstanding at September 30, 2014 and December 31, 2013 are presented in the following table. The Company obtains dealer quotations to value its interest rate derivative contracts.

	September 30, 2014						December 31, 2013
	Notional			Estimated			Notional			Estimated
(in thousands)	Amount			Fair Value			Amount			Fair Value
Non-hedging interest rate derivatives:
Commercial loan interest rate swaps	$	2,660		$	(1	)	$	2,706		$	15
Commercial loan interest rate swaps	$	(2,660	)	$	1		$	(2,706	)	$	(15	)

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The weighted-average rates paid and received for interest rate swaps outstanding at September 30, 2014 and December 31, 2013 were as follow:

	September 30, 2014						December 31, 2013
	Weighted-Average						Weighted-Average
				Interest						Interest
	Interest Rate			Rate			Interest Rate			Rate
	Paid			Received			Paid			Received
Non-hedging interest rate swaps		3.35	%		4.85	%		3.37	%		4.85	%
Non-hedging interest rate swaps		4.85	%		3.35	%		4.85	%		3.37	%

Gains, Losses and Derivative Cash Flows. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other non-interest income and other non-interest expense in the accompanying unaudited Consolidated Statements of Operations and Comprehensive Income.

As stated above, the Company enters into non-hedge related derivative positions primarily to accommodate the business needs of its customers. Upon the origination of a derivative contract with a customer, the Company simultaneously enters into an offsetting derivative contract with a third party. The Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third party. Because the Company acts only as an intermediary for its customer, subsequent changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.

(5) Comprehensive Income

Comprehensive income, which includes net income and the net change in unrealized gains on investment securities available for sale, is presented below:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2014			2013			2014			2013
Net income	$	626		$	803		$	1,807		$	6,646
Other comprehensive income:
(Decrease) increase in net unrealized gains on investment securities available for sale, net of tax benefit (expense) of $72 and ($373) for the three and nine months ended September 30, 2014, respectively, and ($65) and $1,064 for the three and nine months ended September 30, 2013, respectively		(104	)		92			534			(1,523	)
Reclassification for net gains included in earnings, net of tax expense of $81 and $404 for the three and nine months ended September 30, 2014, respectively, and $70 and $290 for the three and nine months ended September 30, 2013, respectively		(115	)		(100	)		(578	)		(415	)
Comprehensive income	$	407		$	795		$	1,763		$	4,708

Reclassification adjustments of $196,000 and $982,000 for the three and nine months ended September 30, 2014, respectively, and $170,000 and $705,000 for the three and nine months ended September 30, 2013, respectively, are included in non-interest income within the unaudited Consolidated Statements of Operations and Comprehensive Income. Income tax expense associated with these reclassification adjustments for the three and nine months ended September 30, 2014 was $81,000 and $404,000, respectively, and $70,000 and $290,000 for the three and nine months ended September 30, 2013, respectively, and is included in income tax provision within the unaudited Consolidated Statements of Operations and Comprehensive Income.

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Activity of investment securities available for sale included in accumulated other comprehensive income, net of tax, is as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2014			2013			2014			2013
Beginning balance	$	227		$	506		$	52		$	2,436
Other comprehensive income (loss) before reclassifications		(104	)		92			534			(1,523	)
Amounts reclassified from accumulated other comprehensive income		(115	)		(100	)		(578	)		(415	)
Net other comprehensive loss		(219	)		(8	)		(44	)		(1,938	)
Ending balance	$	8		$	498		$	8		$	498

(6) Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Premises and equipment at September 30, 2014 and December 31, 2013 are comprised of the following:

(in thousands)	September 30, 2014			December 31,2013
Leasehold improvements	$	1,377		$	1,316
Furniture & equipment		2,625			2,515
Software		792			767
Total		4,794			4,598
Accumulated depreciation		(3,597	)		(3,313	)
Premises and equipment, net	$	1,197		$	1,285

Depreciation and amortization included in occupancy expense was $117,000 and $360,000 for the three and nine months ended September 30, 2014, respectively, and $124,000 and $377,000 for the three and nine months ended September 30, 2013, respectively.

(7) Deposits

The following table reflects the summary of deposit categories by dollar and percentage at September 30, 2014 and December 31, 2013:

	September 30, 2014					December 31,2013
(dollars in thousands)	Amount		%of Total			Amount		% of Total
Non-interest bearing demand deposits	$	277,148		55.8	%	$	236,869		52.3	%
Interest bearing checking		21,258		4.3	%		21,005		4.6	%
Money market deposits and savings		155,678		31.4	%		151,879		33.6	%
Certificates of deposit		42,258		8.5	%		43,013		9.5	%
Total	$	496,342		100.0	%	$	452,766		100.0	%

At September 30, 2014, the Company had two certificates of deposit with the State of California Treasurer’s Office for a total of $38.0 million, which represented 7.7% of total deposits. The deposits outstanding at September 30, 2014 are scheduled to mature in the fourth quarter of 2014. The Company intends to renew each of these deposits at maturity. However, there can be no assurance that the State of California Treasurer’s Office will continue to maintain deposit accounts with the Company. At December 31, 2013, the Company had four certificates of deposit with the State of California Treasurer’s Office for a total of $38.0 million, which represented 8.4% of total deposits. The Company was required to pledge $41.8 million of agency mortgage-backed securities at both September 30, 2014 and December 31, 2013, in connection with these certificates of deposit.

The aggregate amount of certificates of deposit of $100,000 or greater at September 30, 2014 and December 31, 2013 was $41.5 million and $42.1 million, respectively. At September 30, 2014, the maturity distribution of certificates of deposit of $100,000 or greater, including deposit accounts with the State of California Treasurer’s Office and CDARS, was as follows: $41.2 million maturing in six months or less, $257,000 maturing in six months to one year and none maturing in more than one year.

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The table below sets forth the range of interest rates, amount and remaining maturities of the certificates of deposit at September 30, 2014.

					Greater thansix
			Six months		months through		Greater than
(in thousands)			and less		one year		one year
0.00%	to	0.99%	$	41,663	$	457	$	98
1.00%	to	1.99%		—		—		40
	Total		$	41,663	$	457	$	138

(8) Other Borrowings

At September 30, 2014 and December 31, 2013, the Company had a borrowing/credit facility secured by a blanket lien on eligible loans at the FHLB of $138.6 million and $169.9 million, respectively. The Company had $25.0 million and $27.5 million of long-term borrowings outstanding under this borrowing/credit facility with the FHLB at September 30, 2014 and December 31, 2013, respectively. The Company had no overnight borrowings outstanding under this borrowing/credit facility at September 30, 2014 and December 31, 2013.

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, 2014 and December 31, 2013 (dollars in thousands):

Maturity Date	Interest Rate			September 30, 2014		December 31,2013
May 23, 2014		1.14	%	$	—	$	2,500
December 29, 2014		0.83	%		5,000		5,000
December 30, 2014		0.74	%		2,500		2,500
May 26, 2015		1.65	%		2,500		2,500
May 23, 2016		2.07	%		2,500		2,500
December 29, 2016		1.38	%		5,000		5,000
December 30, 2016		1.25	%		2,500		2,500
May 2, 2018		0.93	%		5,000		5,000
	Total			$	25,000	$	27,500

At September 30, 2014 and December 31, 2013, the Company also had $27.0 million in Federal fund lines of credit available with other correspondent banks that could be used to disburse loan commitments and to satisfy demands for deposit withdrawals. Each of these lines of credit is subject to conditions that the Company may not be able to meet at the time when additional liquidity is needed. As of September 30, 2014 and December 31, 2013, the Company had pledged $2.6 million and $3.1 million, respectively, of corporate notes related to these lines of credit.

(9) Commitments and Contingencies

Commitments to Extend Credit

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby/commercial letters of credit and guarantees on revolving credit card limits. These instruments involve various levels and elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated financial statements. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company had $147.3 million and $104.3 million in commitments to extend credit to customers and $2.7 million and $2.6 million in standby/commercial letters of credit at September 30, 2014 and December 31, 2013, 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 $62,000 and $73,000 as of September 30, 2014 and December 31, 2013, respectively.

Lease Commitments

The Company leases office premises under three operating leases that will expire in December 2018, May 2019 and June 2024, respectively. Rental expense, which is included in occupancy expense and is reduced for any sublease income earned during the period, was $267,000 and $684,000 for the three and nine months ended September 30, 2014, respectively, and $191,000 and $549,000 for the three and nine months ended September 30, 2013, respectively. On April 1, 2013, the Company ended its sublease agreement.

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The projected minimum rental payments under the term of the leases at September 30, 2014 are as follows (in thousands):

Years ending December 31,
2014 (October-December)	$	235
2015		956
2016		985
2017		1,015
2018		1,047
Thereafter		4,433
Total	$	8,671

Litigation

The Company from time to time is party to lawsuits, which arise out of the normal course of business. At September 30, 2014 and December 31, 2013, the Company did not have any litigation that management believes will have a material impact on the Consolidated Balance Sheets or unaudited Consolidated Statements of Operations and Comprehensive Income.

Restricted Stock

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

Years ending December 31,
2014 (October-December)	$	230
2015		554
2016		359
2017		202
2018		129
Thereafter		227
Total	$	1,701

(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, 2014 and December 31, 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Assetsand LiabilitiesMeasured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements Using
			Quoted Prices in
			Active Markets for				Significant
			Identical Assets		Other Observable		Unobservable
(in thousands)	Fair Value		(Level 1)		Inputs (Level 2)		Inputs (Level 3)
At September 30, 2014:
Investments-Available for Sale
U.S. Treasuries and Government Agencies	$	9,811	$	3,835	$	5,976	$	—
Corporate Notes		2,558		—		2,558		—
Residential Mortgage-Backed Securities		59,009		—		59,009		—
Derivative Assets–Interest Rate Swaps		1		—		1		—
Derivative Liabilities– Interest Rate Swaps		1		—		1		—
At December 31, 2013:
Investments-Available for Sale
Corporate Notes	$	3,108	$	—	$	3,108	$	—
Residential Mortgage-Backed Securities		103,164		—		103,164		—
Derivative Assets –Interest Rate Swaps		15		—		15		—
Derivative Liabilities – Interest Rate Swaps		15		—		15		—

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AFS securities— As of September 30, 2014 and December 31, 2013, the Level 2 fair value of the Company’s residential mortgage-backed securities was $59.0 million and $103.2 million, respectively. These securities consist primarily of agency mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). The underlying loans for these securities are residential mortgages that were primarily originated beginning in the year of 2003 through the current period. These loans are geographically dispersed throughout the United States. At September 30, 2014 and December 31, 2013, the weighted average yield and weighed average life of these securities were 1.87% and 2.12%, respectively, and 3.70 years and 3.85 years, respectively.

The valuation for investment securities utilizing Level 2 inputs were primarily determined by quotes received from an independent pricing service using matrix pricing, which is a mathematical technique widely used in the industry to value securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. There were no transfers into or out of Level 1 or 2 measurements during the three and nine months ended September 30, 2014 and 2013.

Assets Measured on a Non-Recurring Basis

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

			Fair Value Measurements Using
			Quoted Prices in
			Active Markets for		Other Observable		Significant
			Identical Assets		Inputs		Unobservable Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
At September 30, 2014:
Impaired loans
Commercial	$	620	$	—	$	—	$	620
At December 31, 2013:
Impaired loans
Commercial	$	672	$	—	$	—	$	672
OREO
Land and construction		90		—		—		90
Total	$	762	$	—	$	—	$	762

Impaired loans — At the time a loan is considered impaired, it is valued at the lower of cost or fair value. The fair value of impaired loans that are collateral dependent is determined using various valuation techniques which are not readily observable in the market place, including consideration of appraised values and other pertinent real estate market data. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other real estate owned — OREO represents real estate acquired through or in lieu of foreclosure. OREO is held for sale and is initially recorded at fair value less estimated costs of disposition at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or estimated fair value less costs of disposition. The fair value of OREO is determined using various valuation techniques which are not readily observable in the market place, including consideration of appraised values and other pertinent real estate market data.

(11) Estimated Fair Value Information

The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many cases, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize in a current market exchange.

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value are explained below.

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Cash and cash equivalents

The carrying amounts are considered to be their estimated fair values and are classified as Level 1 because of the short-term maturity of these instruments which includes Federal funds sold and interest-earning deposits at other financial institutions.

Investment securities

AFS investment securities are carried at fair value, which are based on quoted prices of exact or similar securities, or on inputs that are observable, either directly or indirectly. The Company obtains quoted prices through third party brokers. Investment securities are classified as Level 1 to the extent that they are based on quoted prices for identical instrument traded in active markets. Investment securities are classified as Level 2 for valuations based on quotes prices for similar securities or inputs that are observable, either directly or indirectly.

FRB and FHLB stock

It is not practical to determine the fair value of FRB and FHLB stock due to restrictions placed on its transferability.

Loans, net

For loans, the fair value is estimated using market quotes for similar assets or the present value of future cash flows, discounted using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same maturities and giving consideration to estimated prepayment risk and credit risk. The fair value of loans is determined utilizing estimates resulting in a Level 3 classification.

Impaired 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. The fair value of impaired loans is determined utilizing estimates resulting in a Level 3 classification.

Off-balance sheet credit-related instruments

The fair values of commitments, which include standby letters of credit and commercial letters of credit, are based upon fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The related fees are not considered material to the Company’s financial statements as a whole and the fair market value of the Company’s off-balance sheet credit-related instruments cannot be readily determined. The fair value of these items is determined utilizing estimates resulting in a Level 3 classification.

Derivatives

The fair value of derivatives is based on valuation models using observable market data as of the measurement date and is classified as Level 2.

Deposits

For demand deposits, the carrying amount approximates fair value. The fair values of interest bearing checking, savings, and money market deposits are estimated by discounting future cash flows using the interest rates currently offered for deposits of similar products. Because of the short-term maturity of these deposits, the carrying amounts are considered to be their estimated fair values and are classified as Level 1.

The fair values of the certificates of deposit are estimated by discounting future cash flows based on the rates currently offered for certificates of deposit with similar interest rates and remaining maturities. The fair value of certificates of deposit is determined utilizing estimates resulting in a Level 2 classification.

Other borrowings

The fair values of long term FHLB advances are estimated based on the rates currently offered by the FHLB for advances with similar interest rates and remaining maturities. The fair value of other borrowings is determined utilizing estimates resulting in a Level 2 classification.

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Accrued interest

The estimated fair value for both accrued interest receivable and accrued interest payable are considered to be equivalent to the carrying amounts, resulting in a Level 1 classification.

The estimated fair value and carrying amounts of the financial instruments at September 30, 2014 and December 31, 2013 are as follows:

	Carrying		Fair Value Measurements Using:
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
As ofSeptember 30, 2014
Assets
Cash and cash equivalents	$	90,347	$	90,347	$	—	$	—	$	90,347
Investment securities		71,378		3,835		67,543		—		71,378
FRB stock		1,655		—		—		—		N/A
FHLB stock		3,167		—		—		—		N/A
Loans, net		411,150		—		—		409,079		409,079
Non-hedging interest rate swaps		1		—		1		—		1
Accrued interest receivable		1,259		1,259		—		—		1,259
Liabilities
Non-interest bearing deposits	$	277,148	$	277,148	$	—	$	—	$	277,148
Interest bearing deposits		219,194		176,936		42,258		—		219,194
Other borrowings		25,000		—		25,026		—		25,026
Non-hedging interest rate swaps		1		—		1		—		1
Accrued interest payable		24		24		—		—		24
As of December 31,2013
Assets
Cash and cash equivalents	$	44,688	$	44,688	$	—	$	—	$	44,688
Investment securities		106,272		—		106,272		—		106,272
FRB stock		1,570		—		—		—		N/A
FHLB stock		3,062		—		—		—		N/A
Loans, net		376,312		—		—		376,249		376,249
Non-hedging interest rate swaps		15		—		15		—		15
Accrued interest receivable		1,132		1,132		—		—		1,132
Liabilities
Non-interest bearing deposits	$	236,869	$	236,869	$	—	$	—	$	236,869
Interest bearing deposits		215,897		172,884		43,013		—		215,897
Other borrowings		27,500		—		27,562		—		27,562
Non-hedging interest rate swaps		15		—		15		—		15
Accrued interest payable		29		29		—		—		29

(12)	Non-Interest Income

The following table summarizes the information regarding non-interest income for the three and nine months ended September 30, 2014 and 2013, respectively:

	Three Months Ended				Nine months Ended
	September 30,				September 30,
(in thousands)	2014		2013		2014		2013
Loan arrangement fees	$	—	$	121	$	—	$	665
Gain on sale of AFS investment securities		196		170		982		705
Service charges and other operating income		92		114		394		231
Total non-interest income	$	288	$	405	$	1,376	$	1,601

(13)	Stock-Based Compensation

On May 8, 2013, the shareholders of the Company approved the Company’s 2013 Equity Incentive Plan (the “Plan”), which provides for the grant of up to 750,000 shares of Common Stock to employees, including officers and directors, non-employee directors and consultants. Stock options, stock appreciation rights, restricted stock and other stock awards, and restricted stock units are all available for grant pursuant to the terms and conditions of the Plan. The Plan was established to consolidate and replace all other previous stock plans and the remaining shares available for grant under these previous plans were cancelled.

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Prior to the approval of the Plan, the Company granted restricted stock awards to directors and employees under the 2005 Equity Incentive Plan. Restricted stock awards are considered fixed awards as the number of shares and fair value is known at the date of grant and the fair value at the grant date is amortized over the requisite service period.

Non-cash stock compensation expense recognized in the unaudited Consolidated Statements of Operations and Comprehensive Income related to the restricted stock awards, net of estimated forfeitures, was $227,000 and $648,000 for the three and nine months ended September 30, 2014, respectively, and $204,000 and $597,000 for the three and nine months ended September 30, 2013, respectively. The fair value of restricted stock awards that vested was $12,000 and $412,000 for the three and nine months ended September 30, 2014, respectively, and $23,000 and $557,000 for the three and nine months ended September 30, 2013, respectively.

The following table reflects a combined summary of the activities related to restricted stock awards outstanding for the nine months ended September 30, 2014 and 2013, respectively.

	NineMonths EndedSeptember 30,
	2014					2013
	Number			Weighted Avg		Number			WeightedAvg
	of			FairValue at		of			Fair Value at
Restricted Shares	Shares			Grant Date		Shares			Grant Date
Beginning balance		529,529		$	4.62		563,516		$	4.23
Granted		228,000			7.63		138,500			5.82
Vested		(93,750	)		4.01		(130,344	)		4.27
Forfeited and surrendered		—			—		(4,750	)		4.03
Ending balance		663,779		$	5.74		566,922		$	4.61

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

During the nine months ended September 30, 2014 and 2013, there were 72,000 and 19,000, respectively, options exercised under the 2004 Founder Stock Option Plan at a weighted average exercise price of $5.00 per share. During the nine months ended September 30, 2014, the remaining 19,800 of unexercised options under the plan expired and were automatically cancelled. The weighted average exercise price of the cancelled options was $5.00 per share. There were no options cancelled under the plan for the nine months ended September 30, 2013. As of September 30, 2014, there was no remaining options outstanding related to the plan. The remaining contractual life of the 2004 Founder Stock Options outstanding was 0.40 years at September 30, 2013. All options under the 2004 Founder Stock Option Plan were exercisable at September 30 2013. At September 30, 2013, the weighted average exercise price of the 114,700 shares outstanding under the 2004 Founder Stock Option Plan was $5.00.

There have been no options granted, or cancelled under the Director and Employee Stock Option Plan for the nine months ended September 30, 2014 or 2013. There have been 450,600 and none options exercised during the nine months ended September 30, 2014 and 2013, respectively, at a weighted average price of $5.07 per share. The remaining contractual life of the Director and Employee Stock Options outstanding was 0.84 years and 0.89 years at September 30, 2014 and 2013, respectively. All options under the Directors and Employee Stock Option Plan were exercisable at September 30, 2014 and 2013. At September 30, 2014 and 2013, the weighted average exercise price of the 350,073 and 1,045,673 shares, respectively, outstanding under the Director and Employee Stock Option Plan was $8.06 and $6.05, respectively.

The following tables detail the amount of shares authorized and available under all stock plans as of September 30, 2014:

							Total Shares
			Less Shares Previously		Less Shares		Available for
	Shares Reserved		Exercised/Vested		Outstanding		Future Issuance
2004 Founder Stock Option Plan		150,000		121,900		—		—

Director and Employee Stock Option Plan		1,434,000		912,524		350,073		—

2005Equity Incentive Plan		1,200,000		751,494		435,779		—

2013 Equity Incentive Plan		750,000		—		228,000		522,000

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(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, 2014 and December 31, 2013, the Company and the Bank met all capital adequacy requirements to which they are subject.

At December 31, 2013, the most recent notification from the OCC categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To generally be categorized as a “well-capitalized” financial institution, 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 categorization.

The Company’s and the Bank’s capital ratios as of September 30, 2014 and December 31, 2013 are presented in the table below:

																For the Bank to be
																“Well-Capitalized” Under
											For Capital					Prompt Corrective
	Company					Bank					Adequacy Purposes					Measures
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2014:
Total Risk-Based Capital Ratio	$	64,536		14.12	%	$	60,542		13.25	%	$	36,556		8.00	%	$	45,694		10.00	%
Tier 1 Risk-Based Capital Ratio	$	58,797		12.87	%	$	54,804		11.99	%	$	18,278		4.00	%	$	27,416		6.00	%
Tier 1 Leverage Ratio	$	58,797		10.31	%	$	54,804		9.60	%	$	22,818		4.00	%	$	28,531		5.00	%
December 31,2013:
Total Risk-Based Capital Ratio	$	58,620		14.18	%	$	56,555		13.69	%	$	33,062		8.00	%	$	41,326		10.00	%
Tier 1 Risk-Based Capital Ratio	$	53,425		12.93	%	$	51,361		12.43	%	$	16,531		4.00	%	$	24,796		6.00	%
Tier 1 Leverage Ratio	$	53,425		9.70	%	$	51,361		9.32	%	$	22,025		4.00	%	$	27,541		5.00	%

On July 2, 2013, the Federal Reserve approved the final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5%. The new rules also require a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets over each of the required capital ratios that will be phased in from 2016 to 2019 and must be met to avoid limitations the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments, excluding trust preferred securities, mortgage servicing rights and certain deferred tax assets, and including unrealized gains and losses on available for sale debt and equity securities. On July 9, 2013, the FDIC and OCC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC and OCC's rules are identical in substance to the final rules issued by the FRB.

The phase-in period for the final rules will begin for the Company and the Bank on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule. Management is currently evaluating the provisions of the final rules and their expected impact.

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.

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

Consent Order

On September 11, 2013, the Board of Directors of the Bank entered into a stipulation and consent to the issuance of a consent order with the OCC consenting to the issuance of a consent order (the “Consent Order”) by the OCC, effective as of that date. The Consent Order requires the Bank to take corrective action to enhance its program and procedures for compliance with the Bank Secrecy Act and other anti-money laundering regulations. Failure to comply with the Consent Order may result in additional regulatory action, including restrictions on our operations, civil money penalties against the Bank and its officers and directors or enforcement of the Consent Order through court proceedings.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Our profitability, like most banks, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by us on interest bearing liabilities, such as deposits and other borrowings, and the interest rates received by us on our interest-earning assets, such as loans extended to our clients and securities held in our investment portfolio, comprises the major portion of our earnings. In addition, we may, from time to time, supplement our earnings by monetizing gains in our investment portfolio.

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by us conform, in all material respects, to accounting principles generally accepted in the United States, or GAAP, and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base our estimates on historical experience, current information and other factors deemed by us to be relevant, actual results could differ materially and adversely from those estimates.

We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting polices related to the allowance for loan losses (“ALL”) and income taxes are considered to be critical, as these policies involve considerable subjective judgment and estimation by management. Critical accounting policies, and our procedures related to these policies, are summarized below. There have been no changes to our critical accounting policies and estimates during the three months ended September 30, 2014.

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to operations and represents an estimate of probable incurred losses inherent in the Company’s loan portfolio that have been incurred as of the balance sheet date. Loan losses are charged against the allowance when management believes that principal is uncollectible. Subsequent repayments or recoveries, if any, are credited to the allowance. Management periodically assesses the adequacy of the allowance for loan losses by reference to many quantitative and qualitative factors that may be weighted differently at various times depending on prevailing conditions. The provisions reflect management’s evaluation of the adequacy of the allowance based, in part, upon the historical loss experience of the loan portfolio, as well as estimates from historical peer group loan loss data and the loss experience of other financial institutions, augmented by management judgment. During this process, loans are separated into the following portfolio segments: commercial, commercial real estate, residential, land and construction, and consumer and other loans. The relative significance of risk considerations vary by portfolio segment. For commercial loans, commercial real estate loans and land and construction loans, the primary risk consideration is a borrower’s ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for commercial real estate and land andconstruction loans. The primary risk consideration for residential loans and consumer loans are a borrower’s personal cash flow and liquidity, as well as collateral value.

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Loss ratios for all portfolio segments are evaluated on a quarterly basis. Loss ratios associated with historical loss experience are determined based on a rolling migration analysis of each portfolio segment within the portfolio. This migration analysis estimates loss factors based on the performance of each portfolio segment over a four and a half year time period. These loss ratios are then adjusted, if determined necessary by management, based on other factors including, but not limited to, historical peer group loan loss data and the loss experience of other financial institutions. Management carefully monitors changing economic conditions, the concentrations of loan categories, values of collateral, the financial condition of the borrowers, the history of the loan portfolio, and historical peer group loan loss data to determine the adequacy of the allowance for loan losses. As a part of this process, management typically focuses on loan-to-value (“LTV”) percentages to assess the adequacy of loss ratios of collateral dependent loans within each portfolio segment discussed above, trends within each portfolio segment, as well as general economic and real estate market conditions where the collateral and borrower are located. For loans that are not collateral dependent, which generally consist of commercial and consumer and other loans, management typically focuses on general business conditions where the borrower operates, trends within the portfolio, and other external factors to evaluate the severity of loss factors. The allowance is based on estimates and actual losses may vary materially and adversely from the estimates.

In addition, regulatory agencies, as a part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance through provisioning based on their judgment about information available to them at the time of their examinations. No assurance can be given that adverse future economic conditions will not lead to increased delinquent loans, and increases in the provision for loan losses and/or charge-offs. See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Allowance for Loan Losses” for further details considered by management in estimating the necessary level of the allowance for loan losses.

Income Taxes. Provision for income taxes is the amount of estimated tax due reported on our tax returns and the change in the amount of deferred tax assets and liabilities. Deferred income taxes represent the estimated net income tax expense payable (or benefits receivable) for temporary differences between the carrying amounts for financial reporting purposes and the amounts used for tax purposes. A valuation allowance is required if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of deferred tax assets is highly subjective and dependent upon management’s evaluation of both positive and negative evidence, including historic financial performance, forecasts of future income, existence of feasible tax planning strategies, length of statutory carryforward period, and assessments of current and future economic and business conditions. Management evaluates the positive and negative evidence and determines the realizability of the deferred tax asset, and the corresponding need for or adequacy of a valuation allowance on a quarterly basis. See Part I, Item 2.“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Deferred Tax Asset” for further discussion of our deferred tax asset and management’s evaluation of the same.

Summary of Financial ConditionandResults of Operations

For the three and nine months ended September 30, 2014, the Company recorded net income of $626,000, or $0.06 per diluted share, and $1.8 million, or $0.19 per diluted share, respectively. During the same periods last year, the Company reported net income of $803,000, or $0.09 per diluted share, and $6.6 million, or $0.74 per diluted share, respectively. The decline in net income during the three months ended September 30, 2014 as compared to the same period last year was primarily due to a $453,000 increase in income tax provisions and a $447,000 increase in non-interest expenses. These items were partially offset by a $640,000 increase in net interest income and a $200,000 decline in provision for loan losses during the current quarter as compared to the same period last year. The decline in net income during the nine months ended September 30, 2014 as compared to the same period last year was primarily due to a $4.5 million increase in income tax provision, a $1.5 million increase in non-interest expenses and a $400,000 increase in provisions for loan losses. The increase in income tax provision was primarily attributable to the $3.2 million income tax benefit recorded in connection with the reversal of our deferred tax valuation allowance during the nine months ended September 30, 2013. These items were partially offset by a $1.7 million increase in net interest income during the nine months ended September 30, 2014 as compared to the same period last year.

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Total assets at September 30, 2014 were $584.0 million, representing an increase of $45.9 million, or 8.5%, from $538.1 million at December 31, 2013. Cash and cash equivalents at September 30, 2014 were $90.3 million, representing an increase of $45.7 million, or 102.2%, from $44.7 million at December 31, 2013. The increase in cash and cash equivalents is primarily due to a $43.6 million increase in deposits during the nine months ended September 30, 2014. Loans increased by $35.2 million, from $383.5 million at December 31, 2013 to $418.7 million at September 30, 2014. Loan originations were $68.4 million and $170.8 million during the three and nine months ended September 30, 2014, respectively, compared to $74.8 million and $182.2 million during the same periods last year. Prepayment speeds for the three and nine months ended September 30, 2014 were 26.0% and 17.5%, compared to 5.6% and 13.0% for the same periods last year. Investment securities were $71.4 million at September 30, 2014, compared to $106.3 million at December 31, 2013, representing a decline of $34.9 million, or 32.8%. During the quarter and nine months ended September 30, 2014, the Company sold investment securities with an amortized cost of $11.5 million and $54.9 million, respectively, recognizing gains of $196,000 and $982,000, respectively. During the quarter and nine months ended September 30, 2013, the Company sold $8.6 million and $19.4 million, respectively, of investment securities, recognizing gains of $170,000 and $705,000, respectively. In addition, the unrealized gain on investment securities decreased to $14,000 at September 30, 2014 compared to $89,000 at December 31, 2013. The weighted average life of our investment securities was 3.85 years and 3.78 years at September 30, 2014 and December 31, 2013, respectively.

Total liabilities at September 30, 2014 increased by $41.4 million, or 8.6%, to $524.2 million compared to $482.8 million at December 31, 2013. This increase is primarily due to a $43.6 million increase in deposits. Total core deposits, which includes non-interest bearing demand deposits, interest bearing demand deposits and money market deposits and savings, were $454.1 million and $409.8 million at September 30, 2014 and December 31, 2013, respectively, representing an increase of $44.3 million, or 10.8%.

Average interest earning assets increased $49.2 million, from $515.9 million for the three months ended September 30, 2013 to $565.1 million for the three months ended September 30, 2014. The weighted average interest rate on interest earning assets was 3.40% and 3.24% for the three months ended September 30, 2014 and 2013, respectively. The improvement in this rate was primarily attributable to an increase in the average balance of loans relative to total average earning assets as compared to the same period last year, partially offset by a decline in loan yield during the current quarter as compared to the same period last year. The decrease in loan yield is primarily attributable to a general decline in interest rates, as well as competitive loan pricing conditions in our market, which continues to intensify and compress loan yields.

Average interest earning assets increased $54.5 million, from $495.5 million for the nine months ended September 30, 2013 to $550.0 million for the nine months ended September 30, 2014. The weighted average interest rate on interest earning assets was 3.42% and 3.34% for the nine months ended September 30, 2014 and 2013, respectively. This improvement in weighted average interest rate was primarily due to an increase in the average balance of loans relative to total earning assets as compared to the same period last year, partially offset by a decline in loan yield as compared to the same period last year and a recovery of $294,000 in deferred interest income from the repayment of non-accrual and previously charged off loan balances during the nine months ended September 30, 2013. The decline in loan yield was caused by a general downward trend in interest rates, as well as competitive loan pricing conditions in our market, which continues to compress loan yields.

Average interest bearing deposits and borrowings decreased $15.2 million, from $256.0 million for the three months ended September 30, 2013 to $240.8 million for the three months ended September 30, 2014. The average cost of interest bearing deposits and borrowings was 0.30% during the three months ended September 30, 2014 compared to 0.31% for the same period last year. The decline in our cost of interest bearing deposits and borrowings is primarily attributable to a decrease in interest rates paid on these accounts.

Average interest bearing deposits and borrowings decreased $9.2 million, from $252.2 million for the nine months ended September 30, 2013 to $243.0 million for the nine months ended September 30, 2014. The average cost of interest bearing deposits and borrowings was 0.31% during the nine months ended September 30, 2014 compared to 0.32% for the same period last year. The decline in our cost of interest bearing deposits and borrowings is primarily attributable to a decrease in interest rates paid on these accounts.

At September 30, 2014, stockholders’ equity totaled $59.8 million, or 10.2% of total assets, as compared to $55.4 million, or 10.3% of total assets at December 31, 2013. The Company’s book value per share of common stock was $5.89 as of September 30, 2014, compared to $5.87 and $5.84 per share as of September 30, 2013 and December 31, 2013, respectively.

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Set forth below are certain key financial performance ratios and other financial data for the period indicated:

	Three months endedSeptember 30,						Nine months endedSeptember 30,
	2014			2013			2014			2013
Annualized return on average assets		0.43	%		0.61	%		0.43	%		1.77	%

Annualized return on average stockholders’ equity		4.17	%		5.94	%		4.12	%		17.22	%

Average stockholders’ equity to average assets		10.41	%		10.26	%		10.53	%		10.28	%

Net interest margin		3.26	%		3.08	%		3.28	%		3.17	%

Results of Operations

Net Interest Income

The management of interest income and interest expense is fundamental to the performance of the Company. Net interest income, which is the difference between interest income on interest earning assets, such as loans and investment securities, and interest expense on interest bearing liabilities, such as deposits and other borrowings, is the largest component of the Company’s total revenue. Management closely monitors both net interest income and net interest margin (net interest income divided by average earning assets).

Net interest income and net interest margin are affected by several factors including (1) the level of, and the relationship between the dollar amount of interest earning assets and interest bearing liabilities; and (2) the relationship between re-pricing or maturity of our variable-rate and fixed-rate loans, securities, deposits and borrowings.

The majority of the Company’s loans are indexed to the national prime rate. Movements in the national prime rate have a direct impact on the Company’s loan yield and interest income. The national prime rate, which generally follows the targeted federal funds rate, was 3.25% at September 30, 2014 and 2013. There was no change in the targeted federal funds rate during the three and nine months ended September 30, 2014 and 2013, remaining at 0.00%-0.25%.

The Company, through its asset and liability management policies and practices, seeks to maximize net interest income without exposing the Company to a level of interest rate risk deemed excessive by management. Interest rate risk is managed by monitoring the pricing, maturity and re-pricing characteristics of all classes of interest bearing assets and liabilities. This is discussed in more detail inItem 2- “Management’s Discussion and Analysis of Financial Condition and Results of Operations– Liquidity and Asset/Liability Management.”

During the quarter ended September 30, 2014, net interest income was $4.6 million compared to $4.0 million for the same period last year. The improvement in net interest income was primarily attributable to increases in the average balances of our loan portfolio during the quarter ended September 30, 2014 as compared to the same period last year. The average balances of our loan portfolio were $416.3 million during the quarter ended September 30, 2014, compared to $330.5 million for the same period last year. The additional interest earned related to the increase in the average balance of loans was partially offset by a decline in loan yield, which decreased to 4.18% during the three months ended September 30, 2014, compared to 4.21% during the same period last year. The decrease in loan yield is primarily attributable to a general decline in interest rates, as well as competitive loan pricing conditions in our market, which continues to intensify and compress loan yields.

The Company’s net interest spread was 3.09% for the three months ended September 30, 2014 compared to 2.93% for the same period last year.

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The Company’s net interest margin (net interest income divided by average interest earning assets) was 3.26% for the three months ended September 30, 2014, compared to 3.08% for the same period last year. The 18 basis point increase in net interest margin is primarily due to an increase in the average balance of loans relative to total average earning assets as compared to the same period last year, and, to a lesser extent, a decline in the cost of our interest bearing liabilities. The percentage of average loans to total average earning assets increased to 73.7% during the quarter ended September 30, 2014, compared to 64.1% during the same period last year. The average cost of interest bearing deposits and borrowings was 0.30% during the quarter ended September 30, 2014 compared to 0.31% for the same period last year. These factors were partially offset by a general decline in the loan yields. The decline in loan yield was primarily caused by a general downward trend in interest rates, as well as competitive loan pricing conditions in our market, which continues to compress loan yields.

The following table sets forth the average balances of certain assets, interest income/expense, average yields on interest earning assets, average rates paid on interest bearing liabilities, net interest margins and net interest income/spread for the three months ended September 30, 2014 and 2013, respectively.

	Three Months EndedSeptember 30,
	2014							2013
	Average		Interest					Average		Interest
(dollars in thousands)	Balance		Inc/Exp		Yield			Balance		Inc/Exp		Yield
Assets
Interest earning deposits at other financial institutions	$	70,174	$	46		0.26	%	$	47,739	$	30		0.25	%
U.S. Treasuries and Gov’t agencies		6,755		36		2.09	%		2,166		8		1.36	%
Corporate notes		2,569		9		1.35	%		23,832		124		2.09	%
Residential mortgage-backed securities		64,506		280		1.74	%		107,195		480		1.79	%
Federal Reserve Bank stock		1,600		24		6.00	%		1,440		22		6.00	%
Federal Home Loan Bank stock		3,167		57		7.21	%		3,061		37		4.79	%
Loans (1) (2)		416,320		4,382		4.18	%		330,452		3,507		4.21	%
Earning assets		565,091		4,834		3.40	%		515,885		4,208		3.24	%
Other assets		6,581							6,849
Total assets	$	571,672						$	522,734
Liabilities & Equity
Interest checking (NOW)	$	22,145		7		0.13	%	$	19,265		7		0.14	%
Money market deposits and savings		152,495		93		0.24	%		164,704		95		0.23	%
CDs		41,169		8		0.08	%		44,506		13		0.11	%
Borrowings		25,000		77		1.22	%		27,500		84		1.21	%
Total interest bearing deposits and borrowings		240,809		185		0.30	%		255,975		199		0.31	%
Demand deposits		268,435							211,239
Other liabilities		2,910							1,905
Total liabilities		512,154							469,119
Equity		59,518							53,615
Total liabilities & equity	$	571,672						$	522,734

Net interest income / spread			$	4,649		3.09	%			$	4,009		2.93	%

Net interest margin						3.26	%						3.08	%

(1)

Before allowance for loan losses and net deferred loan fees and costs. Included in net interest income was net loan origination (cost amortization) and fee accretion of ($40,000) and $15,000 for the three months ended September 30, 2014 and 2013, respectively.

(2)

Includes average non-accrual loans of $674,000 and $955,000 for the three months ended September 30, 2014 and 2013, respectively.

The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest earning assets and interest bearing liabilities for the noted period, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in the average balance times the prior period rate and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column.

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	Three Months EndedSeptember 30, 2014Compared to2013
	Increase (Decrease) Due to Changes in:
(in thousands)	Volume			Rate			Total
Interest income:
Interest earning deposits at other financial institutions	$	15		$	1		$	16
U.S. Treasuries and Gov’t agencies		22			6			28
Corporate notes		(82	)		(33	)		(115	)
Residential mortgage-backed securities		(186	)		(14	)		(200	)
Federal Reserve Bank stock		2			—			2
Federal Home Loan Bank stock		1			19			20
Loans		902			(27	)		875
Total increase (decrease) in interest income		674			(48	)		626
Interest expense:
Interest checking (NOW)		1			(1	)		—
Money market deposits and savings		(8	)		6			(2	)
CDs		(1	)		(4	)		(5	)
Borrowings		(7	)		—			(7	)
Total increase (decrease) in interest expense		(15	)		1			(14	)
Net increase (decrease) in net interest income	$	689		$	(49	)	$	640

During the nine months ended September 30, 2014, net interest income was $13.5 million, compared to $11.8 million for the same period last year. The increase was primarily attributable to additional interest earned in connection with our loan portfolio as compared to the same period last year. The average balances of our loan portfolio were $395.1 million and $304.2 million during the nine months ended September 30, 2014 and 2013, respectively. This increase was partially offset by a decline in loan yield, which decreased to 4.17% during the nine months ended September 30, 2014, compared to 4.43% during the same period last year, as well as $294,000 of additional interest income recognized during the nine months ended September 30, 2013 in connection with the pay-off of non-accrual and previously charged off loans. The decrease in loan yield is primarily attributable to a general decline in interest rates, as well as competitive loan pricing conditions in our market, which continues to intensify and compress loan yields.

The Company’s net interest spread was 3.11% for the nine months ended September 30, 2014 compared to 3.02% for the same period last year.

The Company’s net interest margin was 3.28% for the nine months ended September 30, 2014, compared to 3.17% for the same period last year. As discussed above, the improvement in our net interest margin is primarily due to an increase in the average balance of loans relative to total earning assets as compared to the same period last year, and, to a lesser extent, a decline in the cost of our interest bearing liabilities. The percentage of average loans to total average earning assets increased to 71.8% during the nine months ended September 30, 2014, compared to 61.4% during the same period last year. The decline in the cost of interest bearing deposits and borrowings is primarily attributable to a decrease in interest rates paid on these accounts. The average cost of interest bearing deposits and borrowings was 0.31% during the nine months ended September 30, 2014 compared to 0.32% during the same period last year. These factors were partially offset by a general decline in the loan yields and a recovery of $294,000 in deferred interest income from the repayment of non-accrual and previously charged off loan balances during the nine months ended September 30, 2013. The decline in loan yield was caused by a general downward trend in interest rates, as well as competitive loan pricing conditions in our market, which continues to compress loan yields.

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The following table sets forth the average balances of certain assets, interest income/expense, average yields on interest earning assets, average rates paid on interest bearing liabilities, net interest margins and net interest income/spread for the nine months ended September 30, 2014 and 2013, respectively.

	Nine Months EndedSeptember 30,
	2014							2013
	Average		Interest					Average		Interest
(dollars in thousands)	Balance		Inc/Exp		Yield			Balance		Inc/Exp		Yield
Assets
Interest earning deposits at other financial institutions	$	57,705	$	110		0.26	%	$	31,427	$	60		0.25	%
U.S. Treasuries and Gov’t agencies		4,414		70		2.12	%		2,191		14		0.85	%
Corporate notes		2,777		28		1.33	%		30,842		493		2.13	%
Residential mortgage-backed securities		85,298		1,296		2.03	%		122,676		1,598		1.74	%
Federal Reserve Bank stock		1,590		72		6.00	%		1,410		63		6.00	%
Federal Home Loan Bank stock		3,123		160		6.86	%		2,789		71		3.41	%
Loans (1) (2)		395,084		12,332		4.17	%		304,180		10,072		4.43	%
Earning assets		549,991		14,068		3.42	%		495,515		12,371		3.34	%
Other assets		6,618							6,693
Total assets	$	556,609						$	502,208
Liabilities & Equity
Interest checking (NOW)	$	21,925		22		0.14	%	$	21,394		25		0.15	%
Money market deposits and savings		152,923		277		0.24	%		157,587		273		0.23	%
CDs		41,853		26		0.08	%		45,452		71		0.21	%
Borrowings		26,301		239		1.21	%		27,756		241		1.16	%
Total interest bearing deposits and borrowings		243,002		564		0.31	%		252,189		610		0.32	%
Demand deposits		252,456							195,518
Other liabilities		2,534							2,894
Total liabilities		497,992							450,601
Equity		58,617							51,607
Total liabilities & equity	$	556,609						$	502,208

Net interest income / spread			$	13,504		3.11	%			$	11,761		3.02	%

Net interest margin						3.28	%						3.17	%

(1)

Before allowance for loan losses and net deferred loan fees and costs. Included in net interest income was net loan origination (cost amortization) and fee accretion of ($44,000) and $14,000 for the nine months ended September 30, 2014 and 2013, respectively.

(2)

Includes average non-accrual loans of $714,000 and $1.1 million for the nine months ended September 30, 2014 and 2013, respectively.

The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest earning assets and interest bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in the average balance times the prior period rate and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column.

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	Nine Months EndedSeptember 30, 2014Compared to2013
	Increase (Decrease) Due to Changes in:
(in thousands)	Volume			Rate			Total
Interest income:
Interest earning deposits at other financial institutions	$	50		$	—		$	50
U.S. Treasuries and Gov’t agencies		23			33			56
Corporate notes		(329	)		(136	)		(465	)
Residential mortgage-backed securities		(654	)		352			(302	)
Federal Reserve Bank stock		9			—			9
Federal Home Loan Bank stock		9			80			89
Loans		3,191			(931	)		2,260
Total increase (decrease) in interest income		2,299			(602	)		1,697
Interest expense:
Interest checking (NOW)		—			(3	)		(3	)
Money market deposits and savings		(11	)		15			4
CDs		(5	)		(40	)		(45	)
Borrowings		(16	)		14			(2	)
Total increase (decrease) in interest expense		(32	)		(14	)		(46	)
Net increase (decrease) in net interest income	$	2,331		$	(588	)	$	1,743

Provision for Loan Losses

During the three and nine months ended September 30, 2014, we recorded a provision for loan losses of none and $100,000, respectively. During the same periods last year, we recorded/(reversed) provision for loan losses of $200,000 and ($300,000), respectively. The reversal in provision for loan losses during the nine months ended September 30, 2013 was primarily due to $1.1 million of net loan recoveries during that period, as well as the continued improvement in the level of our criticized and classified loans. These declines were partially offset by additional provisions required for the $90.0 million increase in our loan portfolio during that same period. Criticized and classified loans generally consist of special mention, substandard and doubtful loans. Special mention, substandard and doubtful loans were $155,000, $1.9 million and none, respectively, at September 30, 2014, compared to $3.1 million, $2.0 million and none, respectively, at September 30, 2013. We had net recoveries of $210,000 and $241,000 during the three and nine months ended September 30, 2014, respectively, compared to $16,000 and $1.1 million for the same periods last year. At September 30, 2014, the ALL to total loans was 1.81% compared to 1.89% at December 31, 2013. The risks associated with the adequacy of our ALL and the decline in this ratio may have increased as a result of our loan growth. Management will continue to closely monitor the adequacy of the ALL and will make adjustments as warranted. Management believes that the ALL as of September 30, 2014 and December 31, 2013 was adequate to absorb probable and inherent risks in the loan portfolio. The provision for loan losses was recorded based on an analysis of the factors discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Allowance for Loan Losses.

As a percentage of our total loan portfolio, the amount of non-performing loans was 0.16% and 0.19% at September 30, 2014 and December 31, 2013, respectively. As a percentage of our total assets, the amount of non-performing assets was 0.11% and 0.15% at September 30, 2014 and December 31, 2013, respectively.

Non-Interest Income

Non-interest income was $288,000 and $1.4 million for the three and nine months ended September 30, 2014, compared to $405,000 and $1.6 million for the same periods last year. During the quarter and nine months ended September 30, 2014, the Company sold investment securities with an amortized cost of $11.5 million and $54.9 million, respectively, recognizing gains of $196,000 and $982,000, respectively. In addition, the Company recognized a gain of $47,000 in connection with the disposition of its OREO during the nine months ended September 30, 2014. With the exception of these gains, non-interest income during the three and nine months ended September 30, 2014 primarily consists of customer related fee income. During the quarter and nine months ended September 30, 2013, the Company sold $8.6 million and $19.4 million, respectively, of investment securities, recognizing gains of $170,000 and $705,000, respectively. With the exception of such gains, non-interest income for the three and nine months ended September 30, 2013, primarily consists of loan arrangement fees earned in connection with our college loan funding program. During 2013, the Company terminated this program and did not report any material loan arrangement fee earnings subsequent to the second quarter of 2013.

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Non-Interest Expense

Non-interest expense was $3.9 million and $11.6 million for the three and nine months ended September 30, 2014, compared to $3.4 million and $10.2 million for the same periods last year. The increases in non-interest expense during the three and nine months ended September 30, 2014 as compared to the same periods last year is primarily due to the costs incurred to expand the Bank’s business development and related operational support teams, the additional costs incurred to address regulatory compliance matters, as well as the supplemental costs associated with the Bank’s Beverly Hills expansion.

Income TaxProvision

During the three and nine months ended September 30, 2014, we recorded a tax provision of $453,000 and $1.3 million, respectively, compared to no tax provision during the three months ended September 30, 2013, and a tax benefit of $3.2 million during the nine months ended September 30, 2013. The tax benefit recognized during the nine months ended September 30, 2013 was related to the full reversal of the Company’s deferred tax valuation allowance that had been previously established during the year ended December 31, 2009. In making this determination, management analyzed, among other things, our recent history of earnings and cash flows, forecasts of future earnings, improvements in the credit quality of the Company’s loan portfolio, the nature and timing of future deductions and benefits represented by the deferred tax assets and our cumulative earnings for the 12 quarters preceding the reversal of this valuation allowance. At September 30, 2013, no further deferred tax valuation allowance remained. Beginning in January 2014, the Company began recording tax provisions at an estimated effective tax rate of approximately 42%.

Financial Condition

Assets

Total assets at September 30, 2014 were $584.0 million, representing an increase of $45.9 million, or 8.5%, from $538.1 million at December 31, 2013. Cash and cash equivalents at September 30, 2014 were $90.3 million, representing an increase of $45.7 million, or 102.2%, from $44.7 million at December 31, 2013. The increase in cash and cash equivalents is primarily due to a $43.6 million increase in deposits during the nine months ended September 30, 2014. Loans increased by $35.2 million, from $383.5 million at December 31, 2013 to $418.7 million at September 30, 2014. Loan originations were $68.4 million and $170.8 million during the three and nine months ended September 30, 2014, respectively, compared to $74.8 million and $182.2 million during the same periods last year. Prepayment speeds for the three and nine months ended September 30, 2014 were 26.0% and 17.5%, compared to 5.6% and 13.0% for the same periods last year. Investment securities were $71.4 million at September 30, 2014, compared to $106.3 million at December 31, 2013, representing a decline of $34.9 million, or 32.8%. During the quarter and nine months ended September 30, 2014, the Company sold investment securities with an amortized cost of $11.5 million and $54.9 million, respectively, recognizing gains of $196,000 and $982,000, respectively. During the quarter and nine months ended September 30, 2013, the Company sold $8.6 million and $19.4 million, respectively, of investment securities, recognizing gains of $170,000 and $705,000, respectively. In addition, the unrealized gain on investment securities decreased to $14,000 at September 30, 2014, compared to $89,000 at December 31, 2013. The weighted average life of our investment securities was 3.85 years and 3.78 years at September 30, 2014 and December 31, 2013, respectively.

Cash and Cash Equivalents

Cash and cash equivalents totaled $90.3 million and $44.7 million at September 30, 2014 and December 31, 2013, respectively. The $45.7 million increase in cash and cash equivalents during the nine months ended September 30, 2014 was primarily from a $43.6 million increase in deposits during the nine months ended September 30, 2014. Cash and cash equivalents are managed based upon liquidity needs by investing excess liquidity in higher yielding assets such as loans and investment securities. See the section “Liquidity and Asset/Liability Management” below.

Investment Securities

The investment securities portfolio is generally the second largest component of the Company’s interest earning assets, and the structure and composition of this portfolio is important to any analysis of the financial condition of the Company. The investment portfolio serves the following purposes: (i) it can be readily reduced in size to provide liquidity for loan balance increases or deposit balance decreases; (ii) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.

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At September 30, 2014, investment securities totaled $71.4 million compared to $106.3 million at December 31, 2013. The Company’s investment portfolio is primarily composed of residential mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. The underlying loans for these securities are residential mortgages that were primarily originated beginning in 2003 through the current period. These loans are geographically dispersed throughout the United States. At September 30, 2014 and December 31, 2013, the weighted average yield and weighed average life of these residential mortgage-backed securities were 1.87% and 2.12%, respectively, and 3.70 years and 3.85 years, respectively.

During the quarter and nine months ended September 30, 2014, the Company sold investment securities with an amortized cost of $11.5 million and $54.9 million, respectively, recognizing gains of $196,000 and $982,000, respectively. During the quarter and nine months ended September 30, 2013, the Company sold $8.6 million and $19.4 million, respectively, of investment securities, recognizing gains of $170,000 and $705,000, respectively. These gains were recorded in non-interest income within the unaudited Consolidated Statement of Operations and Comprehensive Income. In addition, the unrealized gain on investment securities decreased to $14,000 at September 30, 2014, compared to $89,000 at December 31, 2013. We will continue to evaluate the Company’s investments and liquidity needs and will adjust the amount of investment securities accordingly.

Loans

Loans, net of the ALL and deferred loan origination costs/unearned fees, increased 9.3%, or $34.8 million, from $376.3 million at December 31, 2013 to $411.2 million at September 30, 2014. As of September 30, 2014 and December 31, 2013, total loans outstanding totaled $418.7 million and $383.5 million, respectively. Loan originations were $68.4 million and $170.8 million during the three and nine months ended September 30, 2014, respectively, compared to $74.8 million and $182.2 million during the same periods last year. Prepayment speeds for the three and nine months ended September 30, 2014 were 26.0% and 17.5%, respectively, compared to 5.6% and 13.0% for the same periods last year.

As of September 30, 2014 and December 31, 2013, substantially all of the Company’s loan customers were located in Southern California.

Non-Performing Assets

The following table sets forth non-accrual loans and other real estate owned at September 30, 2014 and December 31, 2013:

(dollars in thousands)	September 30, 2014			December 31, 2013
Non-accrual loans:
Commercial	$	655		$	706
Consumer and other		—			29
Total non-accrual loans		655			735
Other real estate owned (“OREO”)		—			90
Total non-performing assets	$	655		$	825

Non-performing assets to gross loans and OREO		0.16	%		0.22	%
Non-performing assets to total assets		0.11	%		0.15	%

Non-accrual loans totaled $655,000 and $735,000 at September 30, 2014 and December 31, 2013, respectively. There were no accruing loans past due 90 days or more at September 30, 2014 and December 31, 2013.Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms was $9,000 and $29,000 for the three and nine months ended September 30, 2014, respectively, compared to $12,000 and $37,000 for the same periods last year.

At September 30, 2014, non-accrual loans consisted of two commercial loans totaling $655,000. At December 31, 2013, non-accrual loans consisted of two commercial loans totaling $706,000 and one consumer and other loan totaling $29,000.

During the nine months ended September 30, 2014, the Bank disposed of its OREO for approximately $137,000, recognizing a gain of $47,000 in connection with this disposition. At December 31, 2013, OREO consisted of one undeveloped land property totaling $90,000. This property is located in Southern California.

At September 30, 2014 and December 31, 2013, the recorded investment in impaired loans was $705,000 and $953,000, respectively. At September 30, 2014 and December 31, 2013, the Company had a specific allowance for loan losses of $35,000 on impaired loans of $83,000 and $135,000, respectively. There were $621,000 and $818,000, respectively, of impaired loans with no specific allowance for loan losses at September 30, 2014 and December 31, 2013, respectively. The average outstanding balance of impaired loans for the nine months ended September 30, 2014 was $900,000 compared to $1.3 million for the same period last year. As of September 30, 2014 and December 31, 2013, there was $655,000 and $735,000, respectively, of impaired loans on non-accrual status. During the three and nine months ended September 30, 2014, interest income recognized on impaired loans subsequent to their classification as impaired was $2,000 and $8,000, respectively, compared to $2,000 and $7,000 for the same periods last year. The Company stops accruing interest on these loans on the date they are classified as non-accrual and reverses any uncollected interest that had been previously accrued as income. The Company may begin recognizing interest income on these loans as cash interest payments are received, if collection of principal is reasonably assured.

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Allowance for Loan Losses

The ALL is established through provisions for loan losses charged to operations and represents probable incurred credit losses in the Company’s loan portfolio that have been incurred as of the balance sheet date. Loan losses are charged against the ALL when management believes that principal is uncollectible. Subsequent repayments or recoveries, if any, are credited to the ALL. Management periodically assesses the adequacy of the ALL by reference to many quantitative and qualitative factors that may be weighted differently at various times depending on prevailing conditions. These factors include, among others:

•

the risk characteristics of various classifications of loans;

•

general portfolio trends relative to asset and portfolio size;

•

asset categories;

•

potential credit concentrations;

•

delinquency trends within the loan portfolio;

•

changes in the volume and severity of past due and other classified loans;

•

historical loss experience and risks associated with changes in economic, social and business conditions; and

•

the underwriting standards in effect when the loan was made.

Accordingly, the calculation of the adequacy of the ALL is not based solely on the level of non-performing assets. The quantitative factors, included above, are utilized by our management to identify two different risk groups (1) individual loans (loans with specifically identifiable risks); and (2) homogeneous loans (groups of loan with similar characteristics). We base the allocation for individual loans on the results of our impairment analysis, which is typically based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or by using the loan’s most recent market value or the fair value of the collateral, if the loan is collateral dependent. Homogenous groups of loans are allocated reserves based on the loss ratio assigned to the pool based on its risk grade. The loss ratio is determined based primarily on the historical loss experience of our loan portfolio. These loss ratios are then adjusted, if determined necessary by management, based on other factors including, but not limited to, historical peer group loan loss data and the loss experience of other financial institutions. Loss ratios for all categories of loans are evaluated by management on a quarterly basis. Historical loss experience is determined based on a rolling migration analysis of each loan category within our portfolio. This migration analysis estimates loss factors based on the performance of each loan category over a four and a half year time period. These quantitative calculations are based on estimates and actual losses may vary materially and adversely from the estimates.

The qualitative factors, included above, are also utilized to identify other risks inherent in the portfolio and to determine whether the estimated credit losses associated with the current portfolio might differ from historical loss trends or the loss ratios discussed above. We estimate a range of exposure for each applicable qualitative factor and evaluate the current condition and trend of each factor. Because of the subjective nature of these factors, the actual losses incurred may vary materially and adversely from the estimated amounts.

In addition, regulatory agencies, as a part of their examination process, periodically review the Bank’s ALL, and may require the Bank to take additional provisions to increase the ALL based on their judgment about information available to them at the time of their examinations. No assurance can be given that adverse future economic conditions or other factors will not lead to increased delinquent loans, further provisions for loan losses and/or charge-offs. Management believes that the ALL as of September 30, 2014 and December 31, 2013 was adequate to absorb probable incurred credit losses inherent 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, 2014 and 2013:

				Commercial					Land and			Consumer
(in thousands)	Commercial			Real Estate		Residential			Construction			and Other			Total
Three Months EndedSeptember 30, 2014:
Allowance for loan losses:
Beginning balance	$	1,604		$	3,800	$	888		$	691		$	384		$	7,367
Provision for loan losses		125			100		(275	)		—			50			—
Charge-offs		—			—		—			—			—			—
Recoveries		1			—		209			—			—			210
Ending balance	$	1,730		$	3,900	$	822		$	691		$	434		$	7,577
Nine Months Ended September 30, 2014:
Allowance for loan losses:
Beginning balance	$	1,583		$	3,660	$	758		$	811		$	424		$	7,236
Provision for loan losses		115			240		(145	)		(120	)		10			100
Charge-offs		—			—		—			—			—			—
Recoveries		32			—		209			—			—			241
Ending balance	$	1,730		$	3,900	$	822		$	691		$	434		$	7,577
Three Months Ended September 30, 2013:
Allowance for loan losses:
Beginning balance	$	1,532		$	3,175	$	748		$	766		$	399		$	6,620
Provision for loan losses		(15	)		175		(75	)		100			15			200
Charge-offs		—			—		—			—			—			—
Recoveries		15			—		—			—			—			15
Ending balance	$	1,532		$	3,350	$	673		$	866		$	414		$	6,835
NineMonths Ended September 30, 2013:
Allowance for loan losses:
Beginning balance	$	2,277		$	2,450	$	508		$	411		$	369		$	6,015
Provision for (reduction of) loan losses		(1,815	)		900		165			455			(5	)		(300	)
Charge-offs		—			—		—			—			—			—
Recoveries		1,070			—		—			—			50			1,120
Ending balance	$	1,532		$	3,350	$	673		$	866		$	414		$	6,835

There were no loans acquired with deteriorated credit quality during the three and nine months ended September 30, 2014 and 2013.

The ALL was $7.6 million, or 1.81% of our total loan portfolio, at September 30, 2014, compared to $7.2 million, or 1.89% of our total loan portfolio, at December 31, 2013. At September 30, 2014 and December 31, 2013, our non-performing loans were $655,000 and $735,000, respectively. The ratio of our ALL to non-performing loans was 1,156.52% and 984.26% at September 30, 2014 and December 31, 2013, respectively. In addition, our ratio of non-performing loans to total loans was 0.16% and 0.19% at September 30, 2014 and December 31, 2013, respectively. The ALL is impacted by inherent risk in the loan portfolio, including the level of our non-performing loans, as well as specific reserves and charge-off activities. The remaining portion of our ALL is allocated to our performing loans based on the quantitative and qualitative factors discussed above.

Deferred Tax Asset

During the year ended December 31, 2009, the Company established a full valuation allowance against the deferred tax assets due to the uncertainty regarding its realizability. During the nine months ended September 30, 2013, management reassessed the need for this valuation allowance and concluded that a valuation allowance was no longer appropriate and that it is “more likely than not” that these assets will be realized. As a result, management reversed the valuation allowance as an income tax benefit in the unaudited Consolidated Statements of Operations and Comprehensive Income during the nine months ended September 30, 2013. In making this determination, management analyzed, among other things, our recent history of earnings and cash flows, forecasts of future earnings, improvements in the credit quality of the Company’s loan portfolio, the nature and timing of future deductions and benefits represented by the deferred tax assets and our cumulative earnings for the 12 quarters preceding the reversal of this valuation allowance.

At September 30, 2014 and December 31, 2013, we had a net deferred tax asset of $2.9 million and $3.1 million, respectively. Our net deferred tax asset primarily consists of deferred tax assets related to federal and state net operating loss carryforwards and the allowance for loan losses.

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A valuation allowance is required if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including historical financial performance, the forecasts of future income, existence of feasible tax planning strategies, length of statutory carryforward period, and assessments of the current and future economic and business conditions. Management evaluates the positive and negative evidence and determines the realizability of the deferred tax asset on a quarterly basis. Management may reestablish a valuation allowances in the future to the extent that it is determined that it is more likely than not that these assets will not be realized.

Deposits

The Company’s activities are largely based in the Los Angeles metropolitan area. The Company’s deposit base is also primarily generated from this area.

At September 30, 2014, total deposits were $496.3 million compared to $452.8 million at December 31, 2013, representing an increase of 9.6%, or $43.6 million. Total core deposits, which include non-interest bearing demand deposits, interest bearing demand deposits, and money market deposits and savings, were $454.1 million and $409.8 million at September 30, 2014 and December 31, 2013, respectively. Non-interest bearing deposits represent 55.8% of total deposits at September 30, 2014, compared to 52.3% at December 31, 2013.

The following table reflects a summary of deposit categories by dollar and percentage at September 30, 2014 and December 31, 2013:

	September 30, 2014					December 31, 2013
			Percent of					Percent of
(dollars in thousands)	Amount		Total			Amount		Total
Non-interest bearing demand deposits	$	277,148		55.8	%	$	236,869		52.3	%
Interest bearing checking		21,258		4.3	%		21,005		4.6	%
Money market deposits and savings		155,678		31.4	%		151,879		33.6	%
Certificates of deposit		42,258		8.5	%		43,013		9.5	%
Total	$	496,342		100.0	%	$	452,766		100.0	%

The aggregate amount of certificates of deposit of $100,000 or more at September 30, 2014 and December 31, 2013 was $41.5 million and $42.1 million, respectively.

Scheduled maturities of certificates of deposit in amounts of $100,000 or more at September 30, 2014, including deposit accounts with the State of California Treasurer’s Office and CDARS were as follows:

(in thousands)
Due within 3 months or less	$	41,062
Due after 3 months and within 6 months		147
Due after 6 months and within 12 months		257
Due after 12 months		—
Total	$	41,466

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Liquidity andAsset/Liability Management

Liquidity, as it relates to banking, is the ability to meet loan commitments and to honor deposit withdrawals through either the sale or maturity of existing assets or the acquisition of additional funds through deposits or borrowing. The Company’s main sources of funds to provide liquidity are its cash and cash equivalents, paydowns and maturities of investments, loan repayments, and increases in deposits and borrowings. The Company also maintains lines of credit with the Federal Home Loan Bank (“FHLB”), and other correspondent financial institutions.

The liquidity ratio (the sum of cash and cash equivalents and available for sale investments, excluding amounts required to be pledged and operating requirements, divided by total assets) was 19.9% at September 30, 2014 and 19.4% at December 31, 2013.

Maturity Date	Interest Rate			September 30, 2014		December 31,2013
May 23, 2014		1.14	%	$	—	$	2,500
December 29, 2014		0.83	%		5,000		5,000
December 30, 2014		0.74	%		2,500		2,500
May 26, 2015		1.65	%		2,500		2,500
May 23, 2016		2.07	%		2,500		2,500
December 29, 2016		1.38	%		5,000		5,000
December 30, 2016		1.25	%		2,500		2,500
May 2, 2018		0.93	%		5,000		5,000
		Total		$	25,000	$	27,500

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, 2014, the Company was not subject to any material commitments for capital expenditures.

Capital Resources

At September 30, 2014, the Company had total stockholders’ equity of $59.8 million, which included $121,000 in common stock, $70.5 million in additional paid-in capital, $2.2 million in accumulated deficit, $8,000 in accumulated other comprehensive income, and $8.6 million in treasury stock.

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Capital

The Company and the Bank are subject to the various regulatory capital requirements administered by federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a material and adverse effect on the business, results of operations and financial condition of the Company.

The Company’s and the Bank’s capital ratios as of September 30, 2014 and December 31, 2013 are presented in the table below:

																For theBankto be“Well-
																Capitalized” Under
											ForCapitalAdequacy					Prompt Corrective
	Company					Bank					Purposes					Measures
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2014:
Total Risk-Based Capital Ratio	$	64,536		14.12	%	$	60,542		13.25	%	$	36,556		8.00	%	$	45,694		10.00	%
Tier 1 Risk-Based Capital Ratio	$	58,797		12.87	%	$	54,804		11.99	%	$	18,278		4.00	%	$	27,416		6.00	%
Tier 1 Leverage Ratio	$	58,797		10.31	%	$	54,804		9.60	%	$	22,818		4.00	%	$	28,531		5.00	%

December 31, 2013:
Total Risk-Based Capital Ratio	$	58,620		14.18	%	$	56,555		13.69	%	$	33,062		8.00	%	$	41,326		10.00	%
Tier 1 Risk-Based Capital Ratio	$	53,425		12.93	%	$	51,361		12.43	%	$	16,531		4.00	%	$	24,796		6.00	%
Tier 1 Leverage Ratio	$	53,425		9.70	%	$	51,361		9.32	%	$	22,025		4.00	%	$	27,541		5.00	%

On July 2, 2013, the Federal Reserve approved the final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5%. The new rules also require a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets over each of the required capital ratios that will be phased in from 2016 to 2019 and must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments, excluding trust preferred securities, mortgage servicing rights and certain deferred tax assets, and including unrealized gains and losses on available for sale debt and equity securities. On July 9, 2013, the FDIC and OCC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC and OCC's rules are identical in substance to the final rules issued by the FRB.

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Dividends

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

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

Consent Order

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, 2014		December 31, 2013
Commitments to extend credit	$	147,344	$	104,330
Commitments to extend credit to directors and officers (undisbursed amount)	$	997	$	1,604
Standby/commercial letters of credit	$	2,740	$	2,616
Guarantees on revolving credit card limits	$	572	$	574
Outstanding credit card balances	$	62	$	73

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, 2014 and December 31, 2013, the allowance for unfunded commitments was $320,000 and $270,000, respectively, which represented 0.21% and 0.25% of the undisbursed commitments and letters of credit, respectively.

Management is not aware of any other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, and results of operations, liquidity, capital expenditures or capital resources that is material to investors.

For further information on commitments and contingencies, see Part I, Item 1. Financial Statements- Note 9 “Commitments and Contingencies.”

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

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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 period 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 period specified in the U.S. Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Changes in Internal Controls

There have not been any changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2014, 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, 2013. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2013, which could materially and adversely affect the Company’s business, financial condition and results of operations. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not presently known to management or that management currently believes to be immaterial may also materially and adversely affect the Company’s business, financial condition or results of operations.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

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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, 2014.

(dollars in thousands, except per share data)

	Total Numberof Shares		AveragePrice Paid		Total Number of Shares Purchased as Part of Publicly Announced		Approximate Dollar Value of Shares that May Yet bePurchased Under the
Period	Purchased		Per Share		Plans or Programs (1)		Plans of Program (1)
July 1-31, 2014		—	$	—		—	$	29
August 1-31, 2014		—		—		—		29
September 1-30, 2014		—		—		—		29
Total		—	$	—		—	$	29

(1) In August 2010, the Company’s Board of Directors authorized the purchase of up to $2.0 million of the Company’s common stock, which was announced by press release and Current Report on Form 8-K on August 16, 2010. Under the Company’s stock repurchase program, the Company has been acquiring its common stock in the open market from time to time beginning in August 2010. The Company’s stock repurchase program may be modified, suspended or terminated by the Board of Directors at any time without notice.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures.

None.

Item 5.

Other Information

(a) Additional Disclosures.None.

(b) Stockholder Nominations. There have been no material changes in the procedures by which stockholders may recommend nominees to the Board of Directors during the three months ended September 30, 2014. Please see the discussion of these procedures in the most recent proxy statement on Schedule 14A filed with the SEC.

Item 6.

Exhibits

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

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

Principal Executive 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

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	1ST CENTURY BANCSHARES, INC.


	By:	/s/ Alan I. Rothenberg.
		Alan I. Rothenberg
		Chairman and Chief Executive Officer

	By:	/s/ Bradley S. Satenberg.
		Bradley S. Satenberg
		Executive Vice President and Chief Financial Officer

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1st Century Bancshares (FCTY) Inactive 10-Q2014 Q3 Quarterly report

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