(Dollar amounts in thousands)
NOTE 4 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank grants loans to certain officers, directors and companies with which it is associated. All such loans and commitments to lend were made under terms that are consistent with the Bank's normal lending policies.
The outstanding and gross available balances of such loans at December 31, 2010 and 2009, were as follow:
2010 2009
Balance, beginning of year $ 2,491 $ 2,314
New loans and advances 200 1,900
Principal payments 259 1,723
Balance, end of year $ 2,432 $ 2,491
Gross Available Balance $ - $
-As of December 31, 2010 and 2009, the Bank had $0.99 million and $1.14 million, respectively, in deposits from related parties.
NOTE 5 - PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following at December 31, 2010 and 2009:
2010 2009
Land and building owned $ 5,011 $ 3,288
Equipment and furniture 1,852 1,815
Leasehold improvements 1,058 1,064
7,921
6,167 Less accumulated depreciation and amortization (1,706) (1,357)
6,215
$ $ 4,810 Depreciation and amortization expense for the period ended December 31, 2010 and 2009, was $348 thousand and $398 thousand, respectively. Depreciation expense in 2009 includes $7 thousand associated with equipment under a capital lease as described in Note 8.
NOTE 6 - TIME DEPOSITS
As of December 31, 2010 and 2009, the schedule of maturities for time deposits was as follows:
2010 2009
Borrowings as of December 31, 2010 and 2009, consisted of amounts borrowed from various sources including the FHLB and FRB at various rates and for various terms, as described below.
Average
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(Dollar amounts in thousands)
NOTE 8 - CAPITAL LEASE
In 2004, the Bank acquired certain equipment under the provisions of a long-term capital lease. The Bank purchased these properties from the lessor during 2009 and, as a result, at December 31, 2010 and 2009, the Bank had no equipment or other assets acquired under the provisions of a capital lease.
NOTE 9 - INCOME TAXES
The Bank had essentially no income tax expense or benefit through December 31, 2007, as net operating losses were incurred and deferred tax assets remained unrecorded, since their realization is dependent on future taxable income. Based on the earnings recorded by the Bank during the last two quarters of 2007, and the years 2008, 2009 and 2010, management determined that the income tax benefits deferred during 2004 through 2007 were likely to be realized, and has therefore recorded such deferred income tax benefits in 2010 and 2009 by reducing its tax asset valuation allowance by $417 thousand and $550 thousand, respectively.
The components of the net deferred tax asset were as follows at December 31, 2010 and 2009:
2010 2009
Deferred Tax Assets:
Allowance for loan losses $ 676 $ 653
Donations 61 47
Deferred rent expense 81 89
Unrealized gain on AFS investments 167
-Non qualified stock options 56 59
Other 6 4
Unfunded commitment liability 13 7
Net operating loss carryforwards 576 728
Total Deferred Tax Assets 1,636 1,587 Valuation allowance - (417)
Deferred Tax Liabilities: Accumulated depreciation (82) (55)
Loan origination costs (135) (96)
FHLB dividends (16) (16)
Cash basis of reporting for tax purposes (135) (204)
Total Deferred Tax Liabilities (368) (371)
Net Deferred Tax Asset $ 1,268 $ 799
NOTE 9 - INCOME TAXES (Continued)
The tax valuation allowance was established because the Bank had not reported earnings sufficient enough to support the recognition of all of its deferred tax assets. The Bank has reversed the valuation allowance as it appears that it is more likely than not that the deferred tax asset will be realized, based upon an estimate of future taxable income.
A comparison of the Federal statutory income tax rates to the Bank's effective income tax rate is as follows for the years indicated:
2010 2009
Federal tax rate 34.0% 34.0%
State taxes, net of Federal tax benefits -2.3% -36.0%
Decrease in valuation allowance -157.6% -944.2%
Other 12.9% -0.1%
Provision for Income Tax -113.0% -946.3%
The income tax benefit for the years ended December 31, 2010 and 2009, consisted of the following components:
2010 2009
Current Taxes:
Federal $ - $
-State -
-Deferred Taxes:
Federal 119 30
State (4) (31)
Decrease in valuation allowance (417) (550)
Net Income Tax Benefit $ (302) $ (551) As of December 31, 2010, the Bank had net operating loss carryforwards of approximately $1.28 million and
$1.98 million for Federal and State tax purposes, respectively, which are available to offset future taxable income.
The Federal and State net operating loss carryforwards expire through the year 2029.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(Dollar amounts in thousands)
NOTE 10 - OFF-BALANCE SHEET ACTIVITIES Credit-Related Financial Instruments
The Bank is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers in the normal course of business. These financial instruments generally include commitments to grant loans, unadvanced lines of credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.
The Bank's exposure to potential credit loss is represented by the contractual amount of these commitments. The Bank uses the same credit policies in making commitments as it does for other lending activities.
At December 31, 2010 and 2009, the following lending commitments were outstanding whose contract amounts represent potential credit risk:
2010 2009
Unadvanced lines of credit $ 11,805 $ 5,854
Standby letters of credit 985 1,135
Commitments to grant loans are agreements to lend to customers as long as there is no default of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit analysis. Collateral held varies but may include cash on deposit, accounts receivable, inventory, equipment, income-producing commercial properties, residential properties, and properties under construction.
Unadvanced lines of credit are commitments for possible future extensions of credit to existing borrowers. These lines of credit are sometimes unsecured and may not necessarily be drawn upon to the total extent to which the Bank is committed.
Standby and commercial letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. All letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is generally less than that involved in extending loans to existing Bank borrowers.
Requirements contained within accounting principles generally accepted in the United States of America ("GAAP") require a guarantor to recognize, at the inception of a guarantee, a liability equal to the fair value of the obligation undertaken in issuing the guarantee. Newly issued or modified guarantees that are not derivative contracts would be recorded on the Bank's balance sheet at their fair value at inception. The Bank considers standby letters of credit to be guarantees as defined within GAAP and, at December 31, 2010 and 2009, the amount of the liability related to guarantees was not considered to be material.
NOTE 11 - SHARE-BASED COMPENSATION
Under the October 2004 Stock Option Plan, the Bank may grant options to its directors, officers and employees for up to 30 percent of the number of shares of common stock outstanding at the time of grant. Both incentive stock options and non-qualified stock options may be granted under the plan. At December 31, 2010, 301,346 options were outstanding and 281,358 options were available for granting. The exercise price of these options may not be less than the fair market value of the common stock on the date granted. Options expire ten years after the date of grant and vest as determined by the Bank's Board of Directors; however, the options all carry provisions which provide that they become fully vested (exercisable) if a change in control of the Bank (as defined) were to occur.
The Bank recognized share-based compensation costs of $22 thousand and $32 thousand in 2010 and 2009, respectively.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.
There were no options granted in 2010 or 2009.
Based on the share-based compensation awards outstanding as of December 31, 2010, the Bank expects to recognize additional pre-tax compensation costs as follows:
Year Ending
December 31, Amount
2011 $ 15
2012 9
2013 4
2014 1
Total $ 29
The after-tax cost of these options cannot currently be predicted since the Bank's ability to record the related income tax benefits depends on the amount and timing of future taxable income.
Future expense recognized related to stock option awards may be impacted by new awards and/or modifications, repurchases and cancellations of existing awards after the adoption of this standard.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(Dollar amounts in thousands)
NOTE 11 - SHARE-BASED COMPENSATION (Continued)
A summary of the activity in the Bank's stock option plan for the years ended December 31 is as follows:
Weighted Weighted
Average Average
Exercise Aggregate Exercise Aggregate
Price Intrinsic Price Intrinsic
Options (in dollars) Value Options (in dollars) Value Outstanding at beginning of year 311,815 $ 8.32 311,815 $ 8.32
Granted - - - -Exercised - - -
-Forfeited (10,469) 8.00 -
-Outstanding at end of year 301,346 $ 8.33 $ - 311,815 $ 8.32 $ -Options exercisable at year-end 278,541 $ 8.26 $ - 285,110 $ 8.19 $
-2010 2009
The weighted average remaining contractual life of options outstanding at December 31, 2010 and 2009, were 4.2 years and 5.2 years, respectively, and the weighted average remaining contractual life of options currently exercisable at December 31, 2010 and 2009, was 4.0 years 4.9 years, respectively.
There were no options exercised during the years ended December 31, 2010 or 2009. As of December 31, 2010, there was $29 thousand of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted average period of 3.2 years.
NOTE 12 - OTHER COMMITMENTS AND CONTINGENCIES Operating Lease Commitments
The Bank leases its main office facilities under an operating lease through 2014, with an option to extend the lease term for two five-year periods. This lease provides for predetermined rent increases during the term of the lease, and also provides for an early cancellation of the lease during 2011 at a stated termination cost of $254,635.
The Bank leases its corporate headquarters facility under an operating lease through 2011, with an option to extend the lease term for two five-year periods. The Bank leases its Valley Center Drive branch office under an operating lease through 2011 with an option to extend the lease term for two five-year periods. The Bank also leases its Golden Valley branch office under an operating lease through 2019, with an option to extend the lease term for two five-year periods.
NOTE 12 - OTHER COMMITMENTS AND CONTINGENCIES (Continued)
At December 31, 2010, future minimum rental payments under the leases described above were as follow:
Year Ending
December 31, Amount
2011 $ 584
2012 516
2013 525
2014 498
2015 217
Thereafter 670
Total $ 3,010
For the years ended December 31, 2010 and 2009, total rental expense was $648 thousand and $636 thousand, respectively.
NOTE 13 - CONCENTRATION RISK
The Bank grants commercial, real estate, construction and installment loans to businesses and individuals primarily in Santa Clarita and surrounding communities. Most loans are secured by business assets, commercial real estate, and/or residential real estate. At December 31, 2010 and 2009, loans secured by real estate represented 73 percent and 67 percent, respectively, of the Bank's total gross loan balances.
At December 31, 2010 and 2009, the Bank had $24.4 million and $12.7 million, respectively, of MMDAs and Federal funds sold balances at commercial banks. It also had $230 thousand and $29 thousand on deposit with correspondent commercial banks at those respective dates, which balances were FDIC insured.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(Dollar amounts in thousands)
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Bank has established a Section 401(k) Plan for the benefit of eligible employees, whereby each employee who is at least 18 years of age may become a participant at specified intervals. Employees may contribute up to 50 percent of their annual compensation into the 401(k) Plan each year, subject to certain limits as established in Federal tax laws. The Bank matches employee contributions to the plan at a level determined from time to time, which level as of December 31, 2010, was one percent of eligible annual compensation as defined. Matching contributions for the years ended December 31, 2010 and 2009, totaled $29 thousand and $11 thousand, respectively.
The Bank established an Employee Stock Ownership Plan (the "ESOP"), a defined contribution plan, effective January 1, 2006. All employees completing an eligibility computation period are eligible to participate in the ESOP. Contributions shall be determined by the Bank's Board of Directors (the "Board") not to exceed the amounts allowable under law. Contributions may be paid in cash or shares of Bank stock as determined by the Board. Contributions totaling $17 thousand and $31 thousand were made into the ESOP during the years ended December 31, 2010 and 2009, respectively.
NOTE 15 - MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by the Federal banking regulators.
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 Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital requirements that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum capital ratios as set forth in the following table. Management believes that the Bank met all capital adequacy requirements to which it is subject as of December 31, 2010 and 2009.
As of December 31, 2010, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum capital ratios as set forth in the following table and must not be operating under a Cease and Desist Order.
NOTE 15 - MINIMUM REGULATORY CAPITAL REQUIREMENTS (Continued)
The Bank's actual capital amounts and ratios as of December 31, 2010 and 2009, are presented in the table below:
December 31, 2010 Amount Ratio Amount Ratio Amount Ratio Total capital to risk-weighted assets $ 21,838 15.23% $ 11,471 8.00% $ 14,339 10.00%
Tier 1 capital to risk-weighted assets 20,104 14.02% 5,736 4.00% 8,604 6.00%
Tier 1 capital to average assets 20,104 10.04% 8,010 4.00% 10,012 5.00%
December 31, 2009 Amount Ratio Amount Ratio Amount Ratio Total capital to risk-weighted assets $ 21,117 15.78% $ 10,706 8.00% $ 13,382 10.00%
Tier 1 capital to risk-weighted assets 19,460 14.54% 5,354 4.00% 8,030 6.00%
Tier 1 capital to average assets 19,460 10.57% 7,364 4.00% 9,205 5.00%
Actual Requirement Capitalized
Minimum Capital
Minimum
To Be Well To Be Well
Actual Requirement Capitalized
Minimum Minimum
Capital
NOTE 16 - RESTRICTIONS ON DIVIDENDS
Federal and state banking regulations place certain restrictions on dividends paid to shareholders. The total amount of dividends that may be paid at any date is generally limited to the lesser of the Bank's retained earnings or net income for the last three years, subject to minimum capital requirements. As of December 31, 2010 and 2009, the Bank was restricted from paying dividends.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009
(Dollar amounts in thousands)
NOTE 17 - FAIR VALUE OF MEASUREMENT FINANCIAL INSTRUMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Fair Value Measurements
The Bank used the following methods and significant assumptions to estimate fair value:
• Securities
The fair value of securities available for sale are determined by obtaining quoted prices on nationally recognized exchanges or matrix pricing which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather relying on the security's relationship to other benchmark quoted securities. At December 31, 2010, the fair value of AFS investment securities were determined based on Level 2 inputs.
• Impaired Loans
A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted expected future cash flows. The Bank measures impairment on all nonaccrual loans for which it has established specific reserves as part of the specific allocated allowance component of the ALL. As such, the Bank records impaired loans as non-recurring Level 2 when the fair value of the underlying collateral is based on an observable market price or current appraised value. When current market prices are not available or the Bank determines that the fair value of the underlying collateral is further impaired below appraised values, the Bank records impaired loans as non-recurring Level 3. At December 31, 2010 and 2009, the fair value of impaired loans was determined based on Level 3 inputs.
The following table presents information about the Bank's financial instruments measured at fair value on a recurring basis as of December 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Bank has the ability to access. Fair values determined by Level 2 inputs utilize information other than the quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the fair value hierarchy within which the fair value measurement, in its entirety, falls has been determined based on the lowest level input that is significant to the fair value measurement. The Bank'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.
NOTE 17 - FAIR VALUE OF MEASUREMENT FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used by the Bank in estimating fair values of financial instruments:
Cash and Cash Equivalents and Interest-Bearing Deposits at Other Financial Institutions: The carrying values reported in the balances sheets approximate fair values due to the short-term nature of the assets.
Investment Securities: The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges.
Loans: Fair value is estimated by discounting expected future cash flows at a market rate of interest for loans of similar credit risk and maturity.
FHLB and TIB Stock: The carrying amount approximates fair market value, as the stock may be sold back to the FHLB and TIB at carrying value and no other market exists for the sale of this stock.
Accrued Interest Receivable and Payable: The recorded carrying value approximates the estimated fair value due to the short-term nature of these assets and liabilities.
Deposits: The fair values of time deposits are estimated by discounting the expected cash flows at current rates for instruments with similar maturities. The carrying values of demand, money market and savings deposits are assumed to be fair value since they are have no stated maturities.
Borrowings: The fair values of FHLB advances with maturities greater than one week are estimated by
Borrowings: The fair values of FHLB advances with maturities greater than one week are estimated by