August 31, 2005
Margaret Fitzgerald, Division of Corporation Finance
Securities and Exchange Commission
Washington, D.C. 20549
RE: Service 1st Bancorp
Form 10-ksb for Fiscal Year Ended December 21, 2004
Filed March 31, 2005
File No, 000-50323
Dear Ms. Fitzgerald,
This is in response to the fax that we received from you dated August 25, 2005.
In accordance with your recommendation we will be revising future filings for
Form 10-KSB to incorporate the disclosure requirements that you addressed in
your fax.
The following footnote disclosure is our proposed change to the information
contained on page 43 of the Company's 10-KSB filed on March 31, 2005.
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Loans
- -----
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs or specific valuation
accounts and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Deferred loan
origination fee income and direct loan origination costs are amortized to
interest income over the life of the loan using the interest method. Interest on
loans is accrued to income daily based upon the outstanding principal balances.
Loans for which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on such loans is discontinued when there
exists a reasonable doubt as to the full and timely collection of either
principal or interest or when principal or interest is past due 90 days, based
on the contractual terms of the loan. Income on such loans is then only
recognized to the extent that cash is received and where the future collection
of principal is probable. Accrual of interest is resumed only when principal and
interest are brought fully current and when such loans are considered to be
collectible as to both principal and interest.
For impairment recognized in accordance with Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118,
the entire change in the present value of expected cash flows is reported as
either provision for credit losses in the same manner in which impairment
initially was recognized, or as a reduction in the amount of provision for
credit losses that otherwise would be reported.
The Company has adopted SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". The Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. Under this Statement, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished.
To calculate the gain (loss) on sale of loans, the Company's investment in the
loan is allocated among the retained portion of the loan, the servicing
retained, the interest-only strip and the sold portion of the loan, based on the
relative fair market value of each portion. The gain (loss) on the sold portion
of the loan is recognized at the time of sale based on the difference between
the sale proceeds and the allocated investment. As a result of the relative fair
value allocation, the carrying value of the retained portion is discounted, with
the discount accreted to interest income over the life of the loan. That portion
of the excess servicing fees that represent contractually specified servicing
fees (contractual servicing) are reflected as a servicing asset. Servicing
assets are amortized over an estimated life using a method that is in proportion
to the estimated future servicing income; in the event future prepayments exceed
Management's estimates and future expected cash flows are inadequate to cover
the unamortized servicing asset, additional amortization would be recognized.
The portion of servicing fees in excess of the contractual servicing fees is
reflected as interest-only (I/O) strips receivable, which are classified as
available for sale and are carried at fair value.
Loans Held for Sale
- -------------------
Mortgage loans and SBA loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized through a valuation allowance by
charges to income.
The only loans originated by the Company for sale in the secondary market are
government guaranteed loans such as SBA loans. The Bank retains the unguaranteed
portion of the loan on its books and intends to hold that portion of the loan to
maturity. The guaranteed portion of the loan is immediately sold in the
secondary market for which the Company receives a premium and servicing revenue
that will be recognized on these sold loans. The Company doesn't inventory these
loans on its books for subsequent sales. There were no unsold guaranteed loans
available for sale at December 31, 2004 or 2003. The guaranteed portion of the
loans sold were sold without recourse.
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The following additional footnote disclosure will be added to the Company's Loan
footnote commencing on page 49 of the Company's Form 10-KSB filed on March 31,
2005.
The Bank also originated mortgage and SBA loans and under its Section 7a program
and sales the guaranteed portions of those loans to institutional investors.
Funding for the Section 7a program depends on annual appropriations by the U.S.
Congress.
At December 31, 2004 and 2003, the Bank was servicing approximately $6,737,837
and $4,547,574, respectively, in loans previously sold. A summary of the changes
in the related servicing assets and interest-only strips receivable are as
follows:
Servicing Assets
----------------------------
2004 2003
------------ ------------
Balance at beginning of year $ 93,185 $ 46,836
Increase from loan sales 74,922 57,925
Amortization charged to income (30,147) (11,576)
Change in valuation allowance -- --
------------ ------------
Balance at end of year $ 137,960 $ 93,185
============ ============
Interest-Only
Strips
Receivable
----------------------------
2004 2004
------------ ------------
Balance at beginning of year $ 70,946 $ 20,946
Increase from loan sales 135,150 56,744
Amortization charged to income (25,834) (6,744)
Writedowns -- --
------------ ------------
Balance at end of year $ 180,262 $ 70,946
============ ============
The estimated fair value of the servicing assets approximated the carrying
amount at December 31, 2004 and 2003 Fair value is estimated by discounting
estimated future cash flows from the servicing assets using discount rates that
approximate current market rates over the expected lives of the loans being
serviced. Management has estimated the expected life of these loans to be
approximately 25% to 30% of the remaining life at the time of sale. For purposes
of measuring impairment, the Bank has identified each servicing asset with the
underlying loan being serviced. A valuation allowance is recorded where the fair
value is below the carrying amount of the asset. At December 31, 2004 and 2003,
the Bank had no valuation allowances.
The Bank may also receive a portion of subsequent interest collections on loans
sold that exceed the contractual servicing fee. In that case the Bank records an
interest-only strip based on the relative fair market value of it and the other
components of the loan. At December 31, 2004 and 2003, the Bank had
interest-only strips of $180,262 and $70,946, respectively, which approximates
fair value. Fair value is estimated by discounting estimated future cash flows
from the interest-only strips using assumptions similar to those used in valuing
servicing assets.
The Consolidated Statement of Cash Flows shown on the next page will reflect the
new format and replace the Consolidated Statements of Cash Flows on page 41 of
the Company's Form 10-KSB filed on March 31, 2005.
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SERVICE 1ST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004 and 2003
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 1,413,978 $ 373,242
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for loan losses 125,000 250,000
Depreciation and amortization 186,937 172,319
Gain on sale of securities (9,774) (20,141)
Gain on sale of loans (316,032) (238,160)
Loans originated for sale (3,025,797) (2,650,899)
Proceeds from loans sales 3,341,830 2,901,471
Amortization and accretion on securities 431,095 566,713
Earnings on cash surrender value life insurance, net (98,262) (39,046)
Decrease (increase) in accrued interest 32,393 (214,488)
Increase in other assets (869,697) (252,144)
Increase in accrued interest and other liabilities 586,516 (164,714)
------------ ------------
Net cash provided by operating activities
1,798,187 684,153
Cash flows from investing activities:
Purchases of securities available for sale (41,530,276) (56,851,387)
Proceeds from sales of securities available for sale 995,156 4,087,407
Proceeds from maturities and calls of securities available for sale 33,687,830 31,201,766
Purchases of securities held to maturity -- (605,119)
Proceeds from maturities and calls of securities held to maturity 1,092,744 1,659,233
Increase in loans (15,946,941) (11,120,111)
Proceeds from sales of loans 3,341,830 2,901,471
Purchase of certificates of deposit at other banks (345,000) --
Purchase of bank owned life insurance -- (2,194,000)
Purchases of premises and equipment (96,204) (105,718)
------------ ------------
Net cash used by investing activities (22,142,691) (31,026,458)
Cash flows from financing activities:
Net increase in demand, interest-bearing deposits, and savings 21,507,920 20,299,521
Net increase in time deposits (1,020,415) 6,600,132
Cash paid for fractional shares (2,085) --
Proceeds from sale of common stock, net of costs 4,412,480 --
Stock options exercised 97,493 --
Net change in other borrowings (248,061) 248,061
------------ ------------
Net cash from financing activities 24,747,332 27,147,714
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,402,828 (3,445,163)
Cash and cash equivalents at beginning of year 6,639,537 10,084,700
------------ ------------
Cash and cash equivalents at end of year $ 11,042,365 $ 6,639,537
============ ============
Supplemental disclosures of cash flow information:
Interest $ 1,849,330 $ 1,550,306
Income taxes $ -- $ 33,594
The accompanying notes are an integral part of these consolidated statements.
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The Company acknowledges the following items:
The Company is responsible for the adequacy and accuracy of the disclosure
in the filing;
Staff comments or changes to disclosure in response to staff comments do
not foreclose the Commission from taking any action with respect to the
filing; and
The Company may not assert staff comments as a defense in any proceedings
initiated by the Commission or any person under the federal securities laws
of the United States.
Please contact me if you have any questions.
By: /s/ ROBERT E. BLOCH
---------------------------------------
Robert E. Bloch
Executive Vice President and
Chief Financial Officer
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