.-
... ..
Strong . Sol id. U nc hanging .
Just Like Our Commitment
To The Community.
.. . .
Ag Lenders Society of California Alzheimer's Foundation of Central California
American Cancer Society American Heart Association American Red
Cross Arthritis Foundation Big Brothers / Big Sisters Boys & Girls Clubs
of Fresno County Buchanan High School Business Organization of Old Town
I t i ti era wlicrc bdnks rei tivciil thcrnsclvcs with
Clovis California Rangcland Trust California State University, Fresno Ag
every shift in the marlrct, cvcry trcrid in dir iridustry,
One Foundation California State University, Fresno Craig School of Business
California State University, Fresno Foundation California State University,
Central Valley Comtiiuniry l h n k stands rcfrcshingly
Fresno Maddy Institute Camp Sunshine Dreams Cen Cal Business Finance
apart. Oui ownership, leadership and v h c s h ~ v c
Group Center for Advanced Research &Technology (CART) Central California
Excellence in Business Awards Central California Small Business Development
r e m i n e d unchanged since o w foundrng in 1980.
Center Central Valley Business Incubator Children's Hospital Central California
SO we have 792
1,793
185
1,978
14.821
2,340
310
200
481
41
1
689
4,084
7,530
1.62 1
4 , l O h
- 13,2i&
5,6111
1,044
3,635
0.71
.
0 (74
9
Consolidated Statements
of Changes in Shareholders' Equity
For t h e Years Ended December 31, 2006, 2005 arid 2004 ( I n thousands, e x c e p l share and per share a m o u n t s )
Accutnul.11~i1
(1 IIIL t
(.omaielihairi~c
In( oinr (Loss)
( N C l (rf'lixr,)
I
I oral
Balance, January 1, 2004
C:omprr\icnsive income (Note 15):
Net incomc
Other comprehensive Iijss, net oftax:
Net chat1 ' c in unrealized gains on available--
foi--sabe itiveitmcnt securiiici
Total cornprehrrisivc income
(:ash dividend - $.05 prr share (Nore I O )
Stock options exercised atitl related tax hencfit
(Note 11)
Kelwrcliabc and retirenirnt of-common stuck
(Note 10)
5,1~w,n54 $
6,096
$
lL),501 $
1,123 $
26,720
3,695
3,095
$
3.695
(793)
(7'):s)
-~
(1 8,000)
(211)
(213) --
Rslaticc, Decemher 31, 2004
5,257,734
6,343
22.933
330
20,606
Coniprelirnsivc income (Note 15):
Net iticornc
Other comprchcnsive loss, net oftax:
'
.
I;)r-sa L invewiient uuiities
Net chaii e i n irtrrrdized gain5 n t i available-
, . - . :
p..
':
,
Total compi-ehetisivc income
Stock issurd for acquisiriori (Note 2)
Stock options rxcrciscd and related tax henelii
(Nutc 11)
Balance. Decerribcr 31. 2005
Comprehcnsivc income (Notc 15):
Net incotric
Other comprchcnsive incotrw, nut of tax:
Net chan e iii unrcdized low uti wailable-
for-sa L invewiient scumtics
'I
,
, - ': .
p..
Total comprehensivc income
Kepurchasc and retiremcnt of coiiiniott stock
(Note 10)
Stock basctl compensation expense
Stock options exercised and related tax heneh
(Note 11)
Balance, December 3 1 , 2006
6,044
6,044
$
6,044
(8.57)
(837)
522,106
6,079
6.079
I I I .980
5.891,820
( , 3 1 - ~ - - - -
631
13,051
28,977
(507)
41,523
6,911
6.911
$
6.311
390
390
390 --
sr
7,-IpI --
(26,200)
(395)
163
- ~
172,036
~
1,186
~
...
(395)
163
1,186
$
49,778
2 0 0 L
2005
2004
IXsclnsiirc of reclassification amount, net of lases (Note 15):
Unrealized hulding gains (losscs) arising during the ycar
I t s s rcclassiticatiori adjustmetit for net gains included i n rlct income
Net chsrigc in unrraliicd gains (losses) on available-for-sale
invesrmrnt securities
'Ihr accompanying notes are ail integral part of these consolidated financial srgrcmcnts.
10
' Consolidated Statements
1
1
of Cash Flows
For the Years Ended Dccernber 31, 2006. 2005 and 2004 ( I n thousands)
2000
2005
. ..
~
2004
(:AS11 I:l.(7WS FROM OPERATIN(; AC'TJVITIES:
Ne( iticonic
Adjustments IO reconcile net irtiorire In net cash
B
6,91 1
s
6,044
$
3,695
provided by operating activities:
Net increase (dcsils i n other banks
Net FHLU stock purchases
Net increasc in loans
I'urchasca o f bank owned life insurance
Net cash used i n investing activities
CASH FLOWS FROM 1'1 NANCINT, AC:TIVIl'IES:
Net (drcrrase) increase in demand, iritctcat-I>rsring and savings deposits
Net increase (decrease) i n titiie deposirs
1'1-occcds frtrrri Iwtrt.jwitig.s from Fedei-a1 1 lomc Loan Rank
Repayments to Federal llonic Loan Hank
Repayment of borrowings ftorrr vrlrer linancial institutions
Proceeds from borrowings frotri other financial institutions
Cash paid for dividends
S l i m rrpiirchase and rctircmcnt
Proceeds from exercise of stock optiona
TAX henefit froin exercise of stock options
Net cash pi-ovidcd by financing activities
(hcrease) increase in cash and caah cyivalrtiis
CAS11 ANI) CASH EQ1JIVAI.EN'I'S AI' ULGINNING O F Y E A R
cnsi I A N I ) C A S H EQLIIVALENI'S A I P N I ) (:)I, Yt..Art
S L J I ~ I ~ I
C h l
I ; M I ; , N ' I A I , rm(:i.osuitE OF CAS]
paid during the ycar for:
i
I 1 ' 1 ow I N ~ R M A T I O N :
lntercst expense
Ineotric iaxes
I;>r-sale investment securities
NON-CAS1 I I INANCIN(; A(:TIVITIES:
fi-om stock optioria cxcrcised
TAI. S(:HEI)ULL KLLAI'IL) ' 1 ' 0 A C Q ~ J l S l T l O N :
o f Hank uf Madera Counry:
De >(>si($
Ot!wi- liabilities
1. Odflb, flrl
Goodwill and intangibles
Premises and equipment
Federal llonic Loan Batik stock
Other assets
Stock issued
Cash and cash c q ~ ~ i ~ a l e r i t s
acquired, n e t of
cash > A i d IO Bank o f Madera County
sliarki>lders and option holders
The accompanying notes are an integral part of thcsc consolidatccl f;rlaricial sratemenrs.
100
1,617
163
(451)
8i)o
(123)
( I 92)
(248)
(89)
(398)
2,190
(838)
9,504
21
(30.657)
16,559
1,000
15,085
595
( 1 43)
(21,350)
(2,987)
488
1,332
(505)
(20,5h2)
( 5 3 5 1 )
15,589
!J,7HH
(11.788)
(1.250)
(395)
735
45 I
7,17!)
(3,879
51,995
48,116
6,362
3,4011
650
451
21
.
..
$
$
$
s
94
2 3 8
(1 73)
510
10,760
13,844
(50,046)
15,487
25,463
1,687
(47,458)
(781)
(440)
(42,244)
32,000
0,034
(2,000)
458
173
39,605
n , i H i
43,814
5 1,995
3,947
3.223
( I ,407)
(14.3)
(40.781)
4,775
4,500
26,488
(2,105)
(807)
(22,5 8 3)
(539)
5
- ...
( 3 1,047)
_.
$
$
B
$
$
38,466
(2,845)
6,000
(7,000)
2,500
(263)
(21 3)
317
143
37,105
8.481
35,334
43,81/r
-
2,000
2,409
(1,090)
143
11
5
$
s
B
.y;
Notes to
Consolidated Financial Statements
I .
SUMMARY O F S1C:NIFICAN'I' A(~:(~:OLIN'I'ING I'OLI(:IES
- General ~ Central Valley C;ommuniry Rarimrp (the Company) was incorporated on
Frhrirary 7, 2000 and subsequently obtained approvd t'rorri the board of Governors
nf ilrr Fctlcral Rcscrvc Systciii to be a bank holding C U I J I ~ I ~ Y
its acquisiiitrri nF(3cntral Vdcy Coiiimuiiity Bank (11ie Rank). Tlic Company
became tlie sole sliarclroltlct ofthc Bank on November 15, LO00 i t i a statutory
mergei-, pursiiiiiii I O wliicli cach outstanding share of t h e Hank's coiritnu~i >tuck was
exchanged for o t x s h r c uf rummon stock of the (:rrmpany.
in connection with
'lhe Rank npcratcs I 2 branches in ( h i s , Frestin. wrsi r i t i ~ l riorthcast I'rcsno
County, Madera (:trirniy, a r i d Sacramento, California. l
rcvcnuc is providing loatis ro ci1siotricra who arc prc.dominately striall and triidtllc-
markei Iuaiticsscs and individuals. l i e R a n k
ibsirliarics have nominal activiry.
tral Valley Cirriirriiinity Hancorp
les generally acccpicd i r i the LJnitcd
i e R a n k s ptiriiaty soitrcc of
'Ihe ~ c c o u n i i n g a r i d repor
and subsidiary conLmi wiili
Slaies of Atricrica and prevail
hiti tlic banlting industiy.
Managetiwrit 113s rlctcrniined that since all o f the banking prodLlCtS aiid services
' available in each hrancli of ttic Rank, all branches are
iriornic environment and matragrmrrir &a
not allocate
.rrtiia~icc ofdiffkmt lending or tratisaciivri activities, it
h e Rank tiratdies and report tlietii a s a single operating
x i t i t s for more than 10 perceni nfrcvc~~tics
for the
O r i Scptcnibcr 21, 2005, tlie Cnrripatiy's Kuard of LXrectors api>rnvrd a twu-tor--
one stock split for shareholders of record ;it i l i c < h e ofbusincss on October 5, 2005
and cffkctive on Octohcr -31, 2005. All share and per share h a in the consolidated
Lnancial statements have heetl rrttoaetivcly restated to give etfrci i o the stcick split.
(:er[aitr reclaasihrations have heeii made IC) prior years' balances to conform i n
classifications iised i n 2006.
Principles of (:onsolidatinn - Tlic Lunsolidated finaiicial stiiriiicnts include the
a i i u i i r i t s ofthc Coiiilmny and thr corisulidatcd accounts of its whnlly-owned
suhsidiary, the Hanlt. In addition, r l i r ~ i ~ c u i t r i t s ofthc Bank's wholly owned
sdxidiarica, Clovcst Corporation (C:lovvst) and Clovis Securities (hpcrratiori (an
inaciive cciriipany), arc included i n 11ir cot
nperaiiiig rcsiilts of-Clovest were m i signif
accounts and I rmiwtiona tuvc been eliminated i n c.oiiaolidatioti.
liilatcd financial stdteiiirnis. The
[ i t . AI significant intercotiipariy
Use o f Estimates - 'Ihc pi-eparatioti o f f ~ r i a ~ i c i : + l statcments in conl>)rrriiry with
accounting principles generally accepted i n the IJtiitcrl States of Aiiieric.1 reqLiirrs
management to make esiitiiatcs and assumptions. Tlicsr estimates and assumptions
ilic rcportcd amounts o f assrts and liabilities at tlie dale of ilic financial
arl;ci
statements and the reported anroiirits ofrcvciiues and exprtiscs during the reporting
prriwi. Attual rcsults could diffrr I t o t r i thcsc estimates.
.itid Cadi Eqitivakts - For rlie piirp(.isc of the statement o f cash Ilows, cash.
(:ash
due from hanks and I'cdcral funds s o l d are corisidcrcd to be cadi eqiiivalcrits.
(hierally, Fcilcral f h d s are sold for nrie-day periods.
Investment Securities
.-
- Tnveittiicnts arc classified into the fullowing categories:
. Available-for-ralc sci,iiritics, reported ai Liir v:duc, with unrealized gaitis a r i d
Ioascs cxcluded from e;irtiitiga and reported, ne1 of ~ i l x c s , as acciiniulated other
cnmprchcrrsivc income (loss) wiiliiti stiarcholders' equity.
.
~leld-to-mai~irity sccuritics, which niansgctricnt has the positive iiiirrit anrl
ahility ro lrold to maturity, reported ai atriortizcd cost, adjusted for tlic accretion
of discounts < i t ~ l artiortization of preniiiims.
Management deicrniirics the appropriAte classihtion of its iiivestnirnts at
the time of purchasc atid may only change llic rdassification in certain litnitcrl
iirciimstances. All rransfer~ bctwccn categories arc actountcrl for at fair V P I I ~ C . Aa of
Uecemher 31, 2006 and 2005, all nfthc Company's iliveslnlrtits wcrc classified as
available-for-sale a r i d there were t i n tratislicrs bctwccn categories.
(%iris or losses on ihe salr ofinvcstiiient seciititics arc computed nti ihc specific
identificaiivri method. Interesi carried on investmenr securities is reporiecl i n
interest inconw, w t of applicable adjirsiiricnts for accretinn ofrliscounts and
amurtimtion of premiutns.
12
lnvestmeiit securities are evaluaied I ; i r irripairrrictit on at least a quarterly
basis and more frequently when economic or markei cnnditiutis warrant surh a n
~v:duaiioti to dctcrminc whether a decline in their value is otlier iliati iriiiporary.
Matiagemrni u t i l i m rritcria such :is the magnitude and duration of die decline
and die itrtcfit arid ability ofthc ( h i p a n y to retain its investment in tlie seciirilies
for a period o f iiiiir srrflicirnt 10 allow for an anticipated recovery in fair value, in
addition to the rrasntis iitidrrlyitrg tlic allowancc for credit
losses quarterly, to include coiisidcration of-the relative risks i t i the portfolio. currelit
economic cotrdiiions anrl other factors. T i c allowance is adjusied Iraacrl on that
rcvicw if, in the judgtncnt ofthe Audit (:nmmittcc and nianagemrtii, changes arc
warran red.
~ Notesto
Con so I i dat ed Fi nanc i a I Statements
1 ,
SllMMARY O F SI(;Nltl(:AN’I‘ A(X:OLIN H N G I’C)LICILS (Cotiiitiued)
Efeclive January 1, 2000, the ( h i i p a n y adopted Statement ofl5nancial
T t i i h allowance is esiahlished through a provision for credit losses which is
charged to expense. Addicions to the allowance are expected to maintain the
adequacy of the total allowance after credit losscs and loan growth. ‘Ihc allowance
for credit losses at L)cccmLcr 3 1,2006 anrl 2005, respectively, reflects rnanagcmcrit’s
estimate of-potential losses in the poi-tfolio.
Ratik Prctriisca arid Equipriictit - Ratik ptctniacu” a t i d cyiptncrit arc carried at cost.
Depreciation is rlctcrmincll using the straight line mcthorl over the estimated uscfd
lives ofthc related assets. 7tic uscfid lives of Rank premises arc estimated to be
lrctwccti twctity a r i d furry ycars. Ttic uscfiil lives of improvemerits to Rank premises,
furniiiire, fixiures and equilmieiir are esiimaied IO h e iliree I O i e t i y r a r h . I
iniproveiiicnts art‘ amortized over the life of tlie m e t or the term of tlie related IeLqe,
whichcvcr is shorter. Whcti assets arc sold or otherwise disposed of, the cost and
relaird accirmirlaicd dcptcciaiioti :arc rctiwvcd ftotii the accounts, and any resulting
gain or loss is recognized in income for the period. l i e cos1 oftiiaitiirtiatiCr a t i d
repairs is charged to expense as incurred.
‘Ihe Hank evalilaies prrmises and rqiiipiiiriii for fitiaticial itiipairnwtt as events or
changes i n circiiiiisiances indicale i l i a i ilir carrying atriwtit o f s w l r assets may not
he fully recoverable.
_ _ Goodwill - Business combinations involving the Bank’s acqu
interests or net assets of another enterprise give rise to goodwill. (hodwill of
$8,‘W,OOO represents thc cxccss of the Cost ofthc Hank of Madera County over
the net of tlie aiiioutits assigned [to asscis acquiretl atid linliilirics aasumcd in the
transaction accounted for undcr the purchase method o f accouniing. Tlir value
~rfgixidwill i s ultimately derived from the Bank’s ability to generate net eiriiitigs
after the acquisition and is tioi cleduciiblr fur tax purposes. A rlcclinc in net
earnings could he indic.itive o f decline i n ilir lair vaIuc ofgoudwill and result in
impairment. For that reason. goodwill is assessed A I lrasi atiriiially for irripairmcnt.
‘Ihere was no impairment resulting from maiiagrtnrtit’s aasCssrlicilt during 2006 or
2005.
Tiitarigiblc Assets - ‘Ihc intangible assets I-epresent the estimated Liir vdue vf tlic
cone rlcposit relationships acquired in the acquisition o f I h n k of Madrra C h r l t y
itigil>lc is being atiiimiicd by the straight-line method over an esiiiiiaied
life of seven years. Managemenr evaliiaies tlir rciovcrability and remaining useful
dcterniine whether events or circiiiiisiaticca warratit a revision to the
iir tlic remaining period of amortization. l i e r e were nil such r v c t i t s
s i n 2006. Aiiioriii.:iii~rti cxpcrisc recognized in 2006 and 2005 was
6L15.000 and $214.000, respectively.
1tici:itrrc Taxes r l i e Company files its income taxes on a cotisolidalrd lrasis with its
suhsidi.iry. l i r jlllucation id’iiiconie tax expense (benefit) represenis each rtiiity’a
proportionate share c ~ f l l i e conscrlidatctl provision for income tries.
1)eferred tax assets and liahilities arr rccogtiiicd for the tLw consequences o f
temporary differences herween ilir rrpmcd atiiounts of assets and liahilities a n d
their tax bayis. Ileferred fax asws a t i d liabilities arc adjusted for the effects of
changcs in tax laws and rates on the date ofetiacitrirtit. On the balance sheet. net
sliarcs outstanding for tlie period. Diluicd ET’S
Earnings Per Share - Basic earnings per slrare (ET‘S), which excludes dilution. is
cnmirrrirtl by dividing inconic available to c(omiiinii sharrtiolrlcrs by the wciglited-
average niiiiiher (rf~~)iritri(:iti
reflects the potential dilution [ h a t y [lie
shareholders of the Coiiipny. Ttic I’lans do not provide I& ihc scttlcmcnt of
awarrla i t i cash and new sliares are issllcd upon option exercise or rcstrirtcd share
gratits. These plans are more fully dcarribcd in Note 11.
Accounting Standards No. 123(K). JjJarp-HRSr~~f’ayrnrnt (SFAS 123(R)), using the
modified prospective application transition mctliod, which rcquirca rcci.igtiii,itig
cxpcnsc for options grantcrl prior tu tlic adopiion d a i c rqiial t o lair valur of ilir
unvcstcd amounts over thcir rctriaitiitig vcstitig prriiid, I
fair v d u c cstitilatcd iri acr.otdaticr with thr original prnv
A c ~ u m r i n g f i r Stork. Bawl C 7 u w p r n s h ~ n , arid cutrrpctlaatiorr cost fur all share-based
p:aymcnts grantcrl subscqucrit to Jariuary 1, 2006, based oti the grarit rlatc Fair valiirs
cstirrratcJ i n arrrd Comnpcnsarion arid f'osrrrtirrmmr Ilrnefir Asprrts ?f
Liidursrmmr Splii-Ddhr L!fi Insuwlnrc Arrurr,pnrrrts
t + l j t - T h r h 1,iJ Ir~~mriiwt, Arrrrr)~rrnrnt~
In September 2000, the FASB ratified the consensuses reached hy tlie 'Ihsk
Force o r i Issue No. 06-4 (EJTF 06-1), A(c-ountirigfir l j r f i w r d Currprrp~nsntiun arrd
Pnnrrerrr~nrnt R r 9 4 t Ayrr,ts /! f Erido~,st~mrnt
A question arose when an employer enters into an endorsement split-dollar life
insurance arrangement related to whether the employer should recognize a liability
for the fiiturc benefits or premiums to he
indicates that ari cmpluycr shoold rccogn
liahility Ibr the heirefir nbligaiintr has tioi
endorsement type plicy. An entiiy should apply ilir provisiotrs o f ETTF 06-4 riiher
thrnitgh a changr i n accounting principlr ihrougli a cutriiilativc-cfct adjustrnrtrt
IC) retained rartriiigs as ofrhr begirinitlg of tlrc ycar o f adoption cir a change in
accounting principle ihrougli rrirospeciive application 1 0 all prior prriorls. Tir
irlcd to the employee. EI'I'F 06-4
liability for fittitre benefits and that a
I srttlccl tliroiigli ttic pirLliasc ofati
live L>r fiscal yrars brginning after
nt has not yet completed its e v h a t i o n of the
Acroruitiricy.fir ~ h 2 r F V t d I q irr rr1yltart)r GxrJ
C,brdrrrriion ?f i h ~ F1fici.r ?f Prior Kwr Mjssccrtrrwrit~~
In July 2006, the bASB issued Financial Accoiitiritrg Staticlards Interpretation No.
48 (FIN 48j, Awuiinrkgfir Urirrrrrllinry in Imam, 7;rxr.i - (191 i~rtrr,tmwtion oj'FASH
Stmrmrne No. I W FTN 4X clarif;cs the accounting for uncertainty in income taxes
recognized i n a n enterprise's fitiariLial statements in accordance with FASB Statemeni
No. 109, Accounting for Incomr Taxes. FIN 48 prescribes a recognition threshold
and tiieasuretiieiil sratidard for tlic 6riancial statcmcnt recognition and ~iieasureiiieiii
of a tax position taken o r expectrd to be taken in a tax return. Fin 48 also provides
giiidancc on derecognition, classificarion, iiitrrrst atid pcndtics, accounting in
itirrritii periods, rlisclosurcs and transition.
The ( h i p i n y prcsetitly recognizes income tax positions based on matragenirtitb
estimate of whether it is r e m m h l y possiblr that a liability has been incurred for
urirccognizcd income tax benefits hy applying FASR Sr:atcrrictit No. 5 , Accounting
for Coni i tigcnr ics.
'lhe provisintrs of FIN 48 will be cffkctivc for the Company on Jattilary 1, 2007
and arc to be applied to all tax p(sitims r p t
Only tax positions that meet the more-likely-than-nclr rcl'tlie (:ompay's invcatrrient. necause the dcdinc i t i tnarker valuc
is attributable ro changes in intcrcat pales and not credit quality, and hecause the
Cornpatry has the ahility anrl intctlt ( 0 hold those investments t i t i i i l a recovery ot'hir
valuc, which may he maturity, the C h i p a n y does not consider rhose investments to
ljr rrilier-than-temporarily irnpaired at llecembcr 31, 2006.
Olher Securities - At Dccctnbrr 31, 2006, the Company's other securities conaists
of investment of$1,500,00(1 i n marketable cqiiity sccuritirs and $2,203,000 in
equity securities carried at cost. 'Ihe equity sccuritirs carried at cost arc invcsttiirnis
in two diffcrctlt triotiey market funds. Nu rvalualioii of impirmcnt is curlsidered
iry L>r these securities. TIC Cmipiy's investnients in rnarkrtahle equity
ies consist primarily ufati investment in a C M Qiidifird Investment hind.
The Company has cvaluaied r h i s investment for irripairtiirnr. 7he unrealizcrl losses
on thc Cornparlyb ilivestnient in niarltctabk rc]~ily securities werc caused by ilitet'eSt
rate iriirrascs. Rased on the Compariy's rvaltiatioti and the Compny's abiliiy and
interit i o hold the investment for a tcasonahle period of time suftkicrit f n r a recovery
crfljit. villue, the ( h i p a n y docs 1101 corisider those investnicnts to br oiher-than-
wmporarily impaired at nccetiiher 31, 2006.
Net unrcalizcd l o w s on availahle-for-sale invcstrricrit srciirities totaling
$lCl5,000 and $845,000 are recnrded net of$78,000 anrl $138,000 i n tax hencfit as
accumulated other comprclrrrisivr iticotiie within shareholders' equily at
December 31, 2006 a r i d 2005, respectively.
I'rocccrls arirl grvss realized gains from salca u t cdls nf avvailahle-for-sale
investment sc9
50,177
60,183
43,987
24,381)
1 08,024
50,991
48,670
39,9 I 1
$
290,445
$
. . _
277,985
. ..
~
Notes to
Consolidated Financial Statements
.3,
AVAI I.ARI.E-FOR-SALli INVBS'I'M IIN I ' S t C l JRlTIES (Continued)
5.
RANK PREMISES ANL) IIQUII'MENT
Irivrslmcnt securities with amortized costs toralitig $35,624,000 and
$27.877,000 a n d Lair values totaling $35.612.000 arid $27,800,000 were pledged
to acciirr pihlic deposits, other contractual obligatiotrs, shori-rerni horl-owings and
long-term deht at Lkcenibcr 3 I ,
2006 and 2005, respectively.
4. I.OANS AND ALLOWANCE 1:OK C:KIIT)I'l' I.OSSES
Outstanding loans arc aunitrlarimi a s Ihllows:
Lkcembcr 3 I,
20%
2005
(In r h t w i ~ . i i i d S )
Land
Ruildings a r d itriprovrtnetits
Furriirrrre, fixiures and equipment
I .casehold i in provemen ts
Less accumulated depreciation
and amortization
Coni mercial
Real estate
Ked estate - constrii~ti~)ri,
laird developtirelit
$
78,441 $
149,586
82,978
124,043
Rank premises and equipment consistcrl ofthr following:
Decemher31,
. -
and d i e r l a t i d loans
Equity lines of ci-edit
Agricul turd
Installmerit
Othcr
Deferred loan fees, net
Allowance for credit losses
48,424
21,858
17,102
7.549
454
.~
46,523
23,604
17,547
7.539
I60
Dcprr<.ciai ioti stad ;amortization included in occupancy and cquipmcnt cxpcnac
totaled $948,000, $982,000 and $796,000 fur the yrars cridcd Drcrtrilier 31, 2006,
2005 and 2004. respectively.
(7.
T)EPOSITS
323,414
302,394
Interest-bcaritig drposiis consisted of the following:
$
318,853
$
298,463
AI Decemher 31, 2006 and 2005, loans originated under Small Business
Administration (SBA) programs totaling $30.745.000 and $27,760,000,
respectively, were iticludctl i t ) ~ h r
rral csiaic and ctiiiit~rer~ial caiegories.
Salarica a t l d ctrlploycc hetref~is inialing $:388,0i)0, $495,000 gild $354,000 have
heen deferred zs loan origination costs for the years ended
Decrmbrr 31, 2006, 2005 and 2004, respectively.
Savings
Money market
NOW ar 1'011 t~ t 5
Time, $100,000 or inore
'l'inie, under $100,000
(:hanges i n the allowance for credit losses were as follows:
Aggregate annual maturitica of time rlcposita arc ab follows
Ycar Ended December 3 1,
2001;- -.2005 2004
( I l l I l l , , l l E . l l l d E )
Balance, beginning of year
Provision clrargrd 11:) opcraiinns
1,osses charged to the allowaiice
Kecoveries
Allowance acquired in mcrgcr of
Bank of Madcra County
$
39 9
HOO
(721)
39 1
2,697 0
5 1 0
(787)
1 68
751
2.425
(24)
296
.
Ralaticc, crid of year
$
3,809
$
3,739
$
2,697
lrrrr wrrr no loans cotrsiderrd (1) br itnpairrd a i Drcctnbrr 31, 2006 or 2004.
l i e r e were I W O lmatis considered to he inipaired ai Decemker 31, 2005 toralitig
$616,000. 'Ihei-e w s no requii-ed valuation allowance for these impaired loans. l i e
avenge invcbttricrit in impaired h t i s during 2006, 2005 and 2004 was 5155,000,
$776,000 and $36,000, respectively. No iiiieresI iticmie was recogtrizctl I h itripaired
loans in 2006, 2005 or 2004.
l r e r e wrrr 1 1 0 I O ~ I I S u r i tivtiaccrual at December 31, 2006 or 2004 or interest
foi-egone on nonaccrual loans for the p a r s ilien ended. AI Dccetribrr 3 1 , 2005,
nonaccrual loans totaled $610,000 and interest foregone on nonaccriial loans malrd
$76,000 for the year then ended.
(in thousantls):
Year Ending December 3 I ,
2007
2008
2009
2010
201 1
$
-
rh
93,946
5,208
2,97X
1,488
... 55!
104,170
.
-
lntcrcst expense recognized on interest-bearing rlcposits consisted of the following:
Year Etrdrd Drcrtrrlxr .3 1 ,
2006
2005
(In rhoiiwiidE)
2004
Savings
Moricy rrlarkct
NOW accounts
'I'ime certificates of deposit
$
106 $
89 $
2,467
56
3,581
1,500
60
2,237
67
660
51
1 8 1 5
$
6,210 $
3,880 $
1,773
17
~ Notesto
Consolidated Financial Statements
Federal Hrr!rlc Loan Hank Advances
'Ihe provision for i i i ~ ~ i t r i c
2004 coiisisicd of the followirig:
taxes for ( h e years ended Deccnibcr 31. 21)06, 2005 and
Advaticr., From the Feclcral Ilome I . i w i Hank (FH1.K) of Sail Fraricisco at Drtcmhcr
3 J , 2006 atid 2005 consisted of the M o w i n g :
1 'cdcral
~
Srate- - ' h a 1
.- -
(In IhoI1sdI1lls)
8.
INLOME TAXFS
- ~
Amount
2006
~ - - _____ ~.
K x e . W t y 11%
-Ai?ioiitii
2005
~
K l Maturily Date
(T)oll.ils i n thuusands)
(thIl,m in tIioiis.iilrls)
2,000 2.66%
$
- -
t'eh. 12, 2007 $
2,000
2.10%1
2,000
2,6(iOAi
~-
Fcb. 13, 20oh
Fcb. 12, 2007
2,000
4,oiio
--
(2,0(1(1) Ixss s l h - i c r m portion
.-
- -
(2,000) Less short-tcri porlion
$
-
-
- Long-lcrm debt
5
2.000 I.orlg-tcim del,!
FH1,R advancca arc secured by investmrtit securities with :unorti,,rd costs
toralitrg $16,848,000 and $O,hHO,OOO and tiiarlr i h c ycara cridcd
Dcccmhcr 3 I , 2006, 2005 and 2004, respectively.
Future rriiriirnurn lcasc payrncnts on noncancelable operatinp, leases are as foll(>ws
(in ili~~usaiids):
Yrar E i i d i r i g Dcwrlbcr 3 I ,
2007
2008
2009
2010
201 1
'1 hereafter
9 3 3
,01 1
,080
957
913
~.
!.,506
1:ederal Keserve Reauirenienls - R a n k ~ arc rcquircd t o maintain 1-csci-ves with the
Fctlcral Kcscrvc Hank equal to a percentage o f their rrsrrvalrlc rlcpcisits.
i i f w i t i reserve balances required at L)cccmher 31, 2006 and 2005 WSI $ Z , h 9 s , o O O
and $1,385,()()(), tcapcctivcly.
'Ihc amoiiiit
Corrcspondciit Banking Agreemenrs - The Rank riiaintaitis fitnrls on deposit with
other tcdcrally insured financial institutions under c(.irr~~~j)(iridctit banking agrccmcnts.
IJtiirisurcd deposits totaled $2,075,000 at I)ecemher 31, 21106.
Fitiatitriimcnts consist ofcotiitiiitiiietits
1 i i rxlcrid wdit a n d standby letters of credir. l i e s e i t i s t tiitricriti involve, tu varying
degrees. elemenrs of credir atid iiiicrcst rate risk in excess of the aiiiniiiii rrn-rgrii/ctl o r i
the balance sheet.
T i c Rank's exposure to credit loss i n tlie eveiii
tii.iripcrfornxincc by the other
party for cornmitmciits to extend credii a t i d statitlby Icttcrs of credit is represented hy
i.otilTiiitiial amoiint ofthosc instruments. The R:irik iiscs the s m i c credit policies
~ h r
i n niakitig ctitntiiittticrits a r i d standby lettei-s n f c r e d i i a s ii duca rbr lvans included on
t lir bal:iiicc street.
Cotiiriiitrrictits tu cxtciid ircrlit cotraiat pritriarily o f ittifiinrlcrl sitiglc-kmily
rcsillctitial a r i d l o a r i a wcrc commercial and real-estcire-
related, representing 24.2%) and h X . o % i c)fioi>il I o a t i a , respectively.
At 1)ecemher 31, 2005, i n iiiatiagriiirnt's judgmctit, a coriccritration of loans
existed i n conitiierci;il l o a t i s a t i d rc:~l-cstatc~rcl~itc~l
r)l.7%1 of the hink's Ic)gns wcrc w t i i t i i m i a l atitl rcal--estate-related. representing
27.5%) and ii4.2%) of toid Ioiiiis, respct iivcly.
loans. At that date, approximately
Although management believes tlie limns wiiliiti ilirac iinI ing
Iirarticcs. The Company's ,uid the 13ank's capital atTiCiiints and classification are also
suhjeci 10 qu;ilii:riivc jiirlgmcnts by the regulators diniii cotripiricnts, risk wcighrings
and other facrnrs.
fi-amewot-k for prompt cnrrr~iivc aition. the Bank must
19
1 Notesto
l
Consolidated Financial Statements
10. 51 IAREHOI.I>EKX' I~,Ql.lI'rY ((:ontinid)
Qiiantitacive measul-es established by regulation to cnsiitc iapi~al adequacy rcqiiirc
the Company and the Hank IO tnaintain minimum arTiotinIs and ratios of total arid Tier
1 capital to risLwcigli~rd assets and of'ricr 1 cayical to average assets. Each 01' these
components i s r1cf;ried i n the 1-egulations. Management believes that the Cotnpany and
the Batik tireri all their capital arlcqiiacy requirements as of Dcccnibrr 31, 2006.
In addiiinn, the most rcccnt nutilicaiion from the IiDIC categnrized the Bank as
wcll capiialized under the rcgiilatory frlmework for prompt correcrive action. To be
categorized a s wcll capitalized, the Rank rillis( mainrain minimum total risk-hised,
'l'ier 1 risk-based atid Tier 1 leverage ratios as ser forth below. 'Ihcrc arc r l n conditions
or cvcrits sitice that notification that rrlatiagenient believes have clranged the Bank's
i l i e period from October 23, 2006 toJune 30, 2007. hs ofDecember 31, 2006, the
Company had repurchased 26,200 shares at an avcragr price of $15.08 fur jl r o d
cust or $395,000.
Earninas Per Sharg - A reconciliation uf tlir tiuiiieratoi-s and dcriotninators of the
basic and &luted earnings pcr shatc computations is as f d o w s :
2006
Yrar Ended Ilecembcr 3 1,
2005
(hi rlianiiwiids, c x q t allarr
,ind per qharc ilrnouiils)
2004
Basic Eartiitigs Per Share:
Nci iticonie
$
~
6,9l 1
$
~.
~
0,044 $
.
3,095
zmi1
__
2005
Weighted average
shares oiitstatiditig
5,978,314
5,844,l 10
.~
-.5,253,658
~ -
Aniounr
-
Kxiu Amounr
( I h l l a r s i n thounndr)
Katiu
Net income prr slim.
$
-~
I 16
$
~
1.03
$
0.71
Tier 1 Levcrarc h t i u
Central Vallry Community Bancorp
3rd Siihsidiary
Minimum rrgolatory requirement
Central Valley C:ommunity Hank
Mini iri i t t i i requirement for
" Well-Capitaliwd" ins1 i t uiioii
Minimum regulatory requirement
Tier 1 Kisk-Based Capiral Ralio
Central Val1 cy Co 111 ni 11 n ity Bancorp
and Sobsidiary
Mi 11 i iiiuin regulatory requirctricti t
$ 39,864
$ 18,907
8.41% $ 31,767
4.00% $ 18,572
(1.84%
4.00%
$ 39,045
8.24% $ 32,493
7.00%
$ 23,703
9; 18,965
5.OO%i $ 23.204
4.00% $ 18,563
5.00%
4.00%
$ :39,X64
$ 14,530
10.97% $ 31.767
l:3,719
4.00% $
9.26%1
4.000h
~.htril Valley (:ommunity Rarik
Minitirum requirement for
"Well-(:apitalized institution
Minimum rcgiilatury rcquireriient
6 39,045
$ 21,852
$ 14,568
10.72% $ 32,493
9.4 8%)
20,572
6.00%
4.00% $ 13,715
6.00%)
4.00%
Twal Risk-Based (:spital Ratio
Central Valley Community Bancorp
and Siihsidiary
Mi t i i tniiiii regulatory rcquircmcnt
Central Valley Cornrriutiiiy Rank
Minimum ruquircrnrtii for
Well-Capitalized" institution
Mininium regulatory rcqiri retiirti I
$ 43,673
s 29,073
12.02% $ 35,106
8.0094~ $ 27,437
10.24%)
8.00%
$ 42.854
11.77% $ 35,832
10.45%
$ 30,419
$ 29.135
10.00% 9 34,287
8.00% $ 27,429
10.00%
8.00%)
Dividends ~ 7 h c ( h i p a n y did not pay any cash divirlcnrls iti ZOO6 nr 2005.
O n May 19, 2004, the Hoard ofL)ircctors rlrclared a $05 per share cash dividend
L>r shareholders of record a s ofJune 'I, 2004, Id on or about June 30, 2004.
'Ihe Company's prinrary snurce of income with which to pay cash dividrnds is
divitlrrlds Crcrtn r h e Rank. 'Ihe California I'inancial Cudc resiricts the total aniount of
dividends payable by a bank at any time withoiit nhaining the prior approval of the
(hlifornia Department of Firlatlcial ltis~iiutions to the lesser of (I) the bank's rrLained
earnings or ( 2 ) the hank's net iiicniiie for its last three fiscal years, lcss distribuiions
made t o slrarchnlders during the same three-year period. A t Drcetiiher 31, 2006,
rctainctl cartrings o f $16,199,000 were free of such rcstrictiuris.
Share Repurchase Plan - During 2004, the (:ompany approved a stock rcpurchasr
plan authori>.itig t h e purchase of shares of thc Company's ciirnri1im s~irck t i p to a total
cost of approximately $500,000, or approxitiiatrly 2% of its outstanding shares of
common stock. As of- r)rcrrd>rr 3 1 , 2004, the (:onqmiy repurchased 18,000 shares
ai an average price of $11.83 for a total cost of 5213,000. On Ortobrr 20, 2004, the
Company's Board of Directors suspcntlcrl the stuck rrpurchase program.
h r i t i g 2006, rhe Company approved a stock repurchase p h i authorizing the
purchase of shares of thr Company's coninion srock up to a total cost of approximately
$ l , o o O , ~ or approximately 1% of its outsranding sliarta nf cntiiiiron srock during
20
IMuted Earnings Prr Share:
Net incorric
$
~.
6,911 $
~
. .~
6,044 L.
3,695
Wciglrwd average
shares outstatiditig
5,978,314
5344,l 10
5,253.658
hffcrt ofdilr~iive stock options
500,595
571,298
585,252 - ~
Weighted averagc shares
of comrnun wick and comnioii
stuck equivalents
Net income per diluted Sh.lle
6 . 4 7 8 . m
~.
6,415,408
5,838,910
~-
1 07
$
-~
0.94
$
~
~
0.64
I I. SHARE-LIASLL) (.:OM PENSATION
The 1992 Stock C)ptiori Plan reserved shares for issuaticc m employees and rlitcctnrs
titicier incentive and nonstatuiory agreements. The Curnpatiy assumed all obligatiotis
iinder this plan as of Novemher 15, 2000, and optbris (1:) piirchase shares ofthc
Company's coriitiioii siock were substituted Lw nprinns to pui-chase shares i:~fcc)iiiiiion
stock o f t h e Rank. Outstanding optiuris r i d e r this plan are cxcrcisd)lr m t i l their
rxpiration, however, no new uptintis will he granted iinrlcr this plan.
The Ccntrd W c y (3omniunity Bancorp 2000 Stock Option l'lm has 899,834
shares rcriiaitiitig ~s resewed for issuance ILr options already granted to criiplnyees and
rlircctcrrs under incentive and nonstatulory agreements and 73,416 rrniaiii reserved
for Ciriiire grants. 'Ihe plan requires thai the option price may r
market value of the stock at the date the option is granted arid lliat the option price
must be paid in f ~ d l at the iitiie it is exercised. %e optii:)trs under the plan urpitc otl
dates determined by die Roard of Directors, but not later tlwn ten years from t h date
nfgrant. 'Ihe vesting period is drterniined by the Ruard or Directors and is gCncrAlly
over five years.
be less than the fiir
~
~
t
'Ihe Central Valley Community I h c o r p 2005 OtIinibus Incentive I'lm provides
for awa& in thc form o f inceniive stock options, nun-statrrtcrry stock options, stur-k
apprcciatiiiri righis, and restricted stock. Tic plan illso allows for performance awards
that I T U ~ bc i t ) the form of wsh or shares of i h e C:ompany, including restricted siock.
l i e m;lximum numbcr ofsh:rrc:s thal can he issued with respect to all awlrds under the
plan is 476.000. l i e plan requires that thc exercise pir-c rnay tior he less than 100% uf
the fiir market valrie of the stock at the date tlic option is gcinted. and that the upinti
price rriiist br paid i n full at the time it is currcised. l i e options and a w d s under the
plati expire nii dates determined by the Roard of Directoi-s, but not later tlrarr 10 years
from the date of grant. The vesting period for the options and o p h n related stock
appreciation rights is detctmiricd by rhe Roard of Directors and is g c r d l y over five
years. There have been no grants nlailc d e r this plan.
I Notes to
1
Consolidated Financial Statements
I I .
SHAKE-DASLL) COMI’I*.NSA I’ION (Cutititilied)
12. OTHER EXPENSES
A surrltnary d i h e comhined activity of die Plans for the years cntlcrl
Olher expenses consisted of thc following:
Deceniber 31, 2004,2005 aid 2006 fbllows:
Weighted
Avenge
Numher of
Exercise
Stock Options
..-. Price
Outmnd&
.
(dollars in thousandi, cxccyi ycr allarc amuui1ls)
Weighred
Avei-age
Kemaining
Contractual
. ‘lerni (Years)
~
Options outstanding
d l jaliuary 1, 2004
1,131580 $
4.64
Options granted
Optiiiii~ cxercised
Options cancelled
1.000 $
(77,880) $
(1,840) $
11.30
4.04
6.34
Options outstanding
at k c t n l x r 31, 2004
1,052,860 $
4-69
Opiirrtis granted
Options exercised
Options cancelled
156,300 $
( 1 11,980) $
(11,890) $
13.50
4.08
8.86
Options outstanding
at December 31.2005
1,085,290 $
5.97
Options granied
Options cxcrciscd
Options cancelled
i5,oon $
(172.036) $
(28,420) rh
15-50
4.27
6.15
Options outstanding
a t 1)ecemher 31,2006
Options vested or
cxpccrcd to vest at
at December 3 1,2006
Options exercisable
atDcccrribcr 31,2006
879,834 $
6.45
5.00 $
7,561
867,767 $
~ 3 7
6.33 6
7,368
724,734 $
5.13
6.01 $
7,054
. . ..
The wcightcrl-:ivcrage grant-date fiir value of options graited during 2000, 2005 and
2004 was $4.34, $3.28 and $4.80, rcspcctivcly.
‘Ihe total intrinsic valiie o f optintis exercised i n rhc years ctidcd 1)crcrnlcr 31, 2006,
2005 a i d 2004 WJS $1,700,000, $742,000 and $518,000, respeciively.
Caqh received horn options exercised for the years ended Drcember 3 1 , 2006,2005
a i d 2004 wil( $735,000, $458,000 and $31 7,000, rrap<.r tlic years ended I>ecetribcr 31, 2000, 2005 ilnd 2001
tolaled $ 1 17,000, $90,000 and $8'5,000. respectively.
14.
I . O A N S '1'0 RELATED I'AKI'ILS
Lhi-ing (he tiormal course of hiisiticaa, the Hank enters ititu loans with relared
parties, incluiling cxccutive ntficers arid directors. l i r s r loans are made wiih
siibstantially i l i c aamc terms, includitig rates and collateral, a s loans to uiirel;ited
parties. 'Ihe following is a summary i:iftlrc aggregate aciivity involving related p r r i y
Iwrrowci-s (in thouSatidi):
Ralaticc, January 1, 2006
Uis hursrtricrits
Amounts reps id
LJnrlisbursed commitments to relared parties,
Dcwmber 31, 2006
15. <:OM I'KCI ILNSIVE I N W M L
$
447
565
( 5 IO)
$
- -
2,042
Comprehensive iiicotac is a more inclusive financial reporting methodology that
inclurlcs disclnsiirc- ofvthcr comprelrrtisivc income (loss) that historically h a s r i l l t
I>CCII recognized i n i h c ialculation o f tiri income. 'Ihe ( h i p a n y ' s only soiircr of
oihrr romprehensive iticc)inc (loss) is unreali;.cd gains and Iosars on the C:ompitiy'a
availahle-f~r~sale
componenls uf accumulated ot Ircr roniprehensive itlcomc (loss) are prraentcd in the
consolidated siairtricnt of changes i t r shareholders' equiiy.
investmeni accurities. Toral cornprchensive iiicotrir- and the
22
I3 e fo 1-e
'I&
- - -
FdX
(F.xpciisc)
Rrnrlit
(In rhoiimihls)
After
'l'k
- -
For the Yrar Fmlcd L)ccember 31. 2006
Other cnmprehetisivc incomc:
Clnrealized hirldi tig gains:
Less reclassi fica I io t i
adiustment h r trei gaitla
itrcludcd in net income
Total other
comprehensive income
$
773 $
(303) $
464
(1 23)
49 --
(74)
.- -
$
~-
650 $
(260) -. $
. 390
.-
Por-th Year Lnded Decetrihvr. '31, 2005
Other cntrrprchcnsive loss:
1hirc.ilizrd lrolrling losses
I.ess rcr-lassification
adjust iiirtit for net gains
included in tirt income
$
(1,315) $
5 1 3 $
(782)
92 -
(37)
55
r ,
Iota1 other
comprehensive loas
$ ...
For the Year Enrlcd Ueceiuher 31 ..20o/l
(1,407) $
- .~
5 7 j $
(817)
Other comprehensive loss:
LJrirca1izr.d holding lassrs
Its% reclassification
adjiisrrricnt for net gains
included i t 1 net income
'Ibtal other
r vmprchensive loss
$
(607) rh
133 $
(474)
483
( 1 6 4 )
31?
-_ $
(i,oso) $
-.
297 $
.~
(7'13)
IO. DlSCl C)SCIKES A B O I I T FAlK VALUE O F FINAN(:'IAL
INSTRIIM UN'I'S
r)isclosurcs include cstitriatcd fair values for Ltiancial instruments for which it is
Imtiitablc to cstimare h i r value. 'Ihese estimaies arc made at a specific pvirit it1
time hased cin relevant markei (lata and inforniation about the financial iiisiruiiirrits.
'Ihese estitiiaics do not reflect any premium or discoiini tliat could I-esult from
offiring the Cotripany's cntire holdinga of a particular financial instrument for
sale at one time, t i u t do they attempt 11.1 rstirnatr the value ofatiticip:d future
husitics, related to the ins1 rumcnts. I n addition, the txx ramificaiiotis rrlatcd to the
rcalizaiicm of unrealized gains and losses can liavr a significant effect (>ti fair valuc
estittiaLcs and have not heen considered in any of rticsc estimates.
Recause no market exisis fur a significant poriiori ofthe Company's liriancial
instriimrtits, fair value estiiiiaica arc based on judgtricnts regarding ciirretit economic
conditions, risk characteristics o f Yariws financial itisirirtrlciits and other faciors.
Thcsc cstim.iies arc subjective in tiaiiirc arid involve uncertaintics and matters o f
sigtriLc-ant jiidgineni a r i d tlictcfore ciinnot he determined with pr
in assiltii pt ions could sign i firs ti tly affect the hi r values presented.
'Ihe followiiig rwthods and assumptions were used by the Company 11.1 rsirnatc
rhc fair value o f its firlancial instrumrtits at L)ecemher 313 2006 and 2005:
Gj$i atid cash equivalcta - l'or cash a n d cadi cquivalenis, rhc carrying atrioiiiii i s
estitriatcrl to he fair vduc.
...
-.
. .-
I Notesto
I
Consolidated Financial Statements
.
.. ..
16. L)ISC:I.OSIJRES AKC)Il'f FAIR VALClI, O F FINANCIAI.
I NSTRIIMEN'I'S (Continued)
r
bjy&
- For availablr-l?rr-sale iiivcstrncrrl securities and intcred>earing
Availablc-furrs~le investment securities and intencar-braline~~ri~ig deposita
U
dcpnsits i n other banka, fair values arc baacrl on quoted market prices, wherc
;iv;aiJakle. If quoted marker pi-ices arc not available, fair values :Ire estimated using
quoted market prices for similar sccuriiies and deposits arid itiiiications of value
providcd b y brokers.
l.nalls - For variable-late loans that reprice frequently with no significant changc
i n credit risk, Lair valires are based on carrying values. Fair valuca for other loans
arc cstirriatrd using discounted u s l i llow andyscs. using ititrrest rates being offkrcd
at cach rrpnrring date fbr h r l s wiih similar tcrms tu burrowers of co1iipar:iblc
credicworthincss adiostrtl Tor die allowancc for uctlii losses. 'lhe carrying a r r i o w l of
accrued interchi receivahle a p p x i m a t c s iis fair value.
Rank owned life insur:rtir:c - l i e fair value ofbarik i:rwneii life insurance policies is
hased on cash siirrcridc-r values at each rcpurtirig dale a s provided by the insurers.
-. Fc~lcral Home Loan Bank stork - Tic carrying aiiiount of-lkrlcral Home I m n Uank
(FH1.R) stock approximatrs fiiir value. 'Ihis investment is i a r r i e i l ar cost and is
redeemable at par with ccrrain restrictions.
u g s i f i - The fair values fur h i a t i d deposits are. by definition, c q d to i l i e aiiiount
payablr on demand at the reporting dale represented by thcir carryitig amount. Fair
values for fixed-ratc ccrtiticales oT deposit x e cstinxitcrl iiairig a discounted cash
flow analysis using itiierest rates being offkrcrl at c:iclr reporling date by the Bank
for trriilicates with similar remaining triatiirilies. Tne carrying amount i.)fau:rurd
interest payable approximates iis Fair value.
Drceiiiher 3 I , 2006
Fair
Milue - Arrrount .
Drceiiiher 31, 2(1(15
Fair
Vdiie
Carrying
C a r ryi iig
A tiiount
(In Ihorls.lnds)
$
25,898 $
24,21 H
23.898 $
24,218
22,165
29.830
$
22,165
29,830
32'
323
!I 1 8
918
103.922
318,853
103.922
319.248
105,592
298,463
105,592
298,261
0,146
1,891
6,146
1,891
6,725
1365'1
2,508
2,508
6,725
1,059
2,232
$
440,627 $
438,848 $
430,989 $
429,153
3,250
3,250
59 1
59 1
3,250
3,250
394
3,250
3,144
as4
~
Financial asseta:
Cash and due
frombanks
Fcrlcral I.iitids sold
Intctcs~-hearing
dcpusits in
othct batiks
Available-fur-sale
iiivcstrricri t
sccu tit irs
Loans
Rank owned life
i iisurancc
F1 ILK StC)Ck
Accrued in tcrcw
rcccivahle
Deposits
Short-tertii
borrnwings
Lung-term deht
Acr riled interest
payahle
17.
I'A2RF.NT ONLY (:ONL)IINSI:,I) I:[NANCIAL SIAI'BMI'N'I'S
Shurt-tcrt!i knrrnwines and dcbt ~ The Lit w111es o f fixed-rate borrowings arc
cstitriaied by discounting thcir fiiturv cash llows using rates at each reporting dale for
similar instrumcnta.
CONDENSEL) Uhl .ANCF, SHEETS
r>eceiiiher .3 I 2006 and 2005
(111 111011E.llldE)
(:ommitmcnts tu f;mrl luanslstandby letters of credit - OH;-lralance-sheer
cnniiiiitnients to extend u c d i t are priinarily for adjustable rate luatls atid Ieliers of
credii. l i e fair values ufcuniniirtiieir(s are estimated using the fees Iurretrily charged
I O enter into similar agrccrrictiis, iakiiig into account the remaining tcrtns o f ~ h e
agreements and the ~ J V S ~ I I I credinvorthiness of the countcrpariirs. l i e diferetices
bcrwccri thr carrying value of commitments tu firrid Iiralrs or standby letters of credit
and [heir fair value arc nut >igriilk:atii and, therefore. not includcd in the fiillowiiig
table.
ASSETS
Cash and rash equivalents
liivcsrmcnt i t ) subsidiary
Other a s s r t s
'Ibtal assets
2 0 0 6
2005
$
1,477 $
48,959
~. - 794
1,205
42,240
h 3 9
1.IARTI.ITIES ANL)
SHAKE1 1OLL)CKS' EOUIT_Y
Liabilitica:
Sliurt-term d e b
Long-term i I i I ies
Shareholders' equity:
Cunimun S ~ C K k
Kctaitlrd cartiings
Acclimulated other comprchcnsivc irimrile,
net of raves
14,007
35,888
13,053
28,977
(117)
(507)
'Ib tal sharchol iI c rbl eq ui t y
411,778
41,523
'1 ntal liahilities and sharchulrlcrs' eqriiiy
23
~ Notesto
Consolidated Financ
~
al Statements
I'AHEN'I'ONLY CONI)ENSI*.r) FlNAl
17.
(Cutit inucd)
C I A L S J ATLMbN 1 S
lncutne:
nividcrids declared by
sulsidiary - eliiniriated
iii consolidation
$
1,000 $
-
$
593
Other income
1
1
fix penses:
Professional fcrs
Other expctises
7 2
516
106
500
378 ~- -- --
96
Total cxpenscs
474 ~- -- --
600
588
413
(605)
1 10
--
6,342
6,438
3,419
6,755
5.8.3.3
3,538
--
156 -- __-
21 1
157
$
6,!)11
6,044
$
-- --
!h
3,695
Income (lois) bcfure
equity in undistrihuted
iticoinc or subsidiary
Equity i n undislrihutctl net
iticoinc or subsidiary
Incomc heforc iticonic
tax benefit
h c n m e tax hencfit
Net incorne
24
1 Notesto
Consolidated Financial Statements
17.
I'AkFNT ONIY C0NI)ENSEL) FINANCIAL,
M t . N 1'5 (Continued)
CONL)I:NSI'O S'IXI'tMENTS (OF C A S H FLOWS
1
(In thousands)
rhr Vc;irh F.~~(lc(l D c c e m h e r 31. 2006. 2005 and 2004
~
,
(:ash flows fi-om operating activities:
Net income
Adjustments to reconcile net income to net cash provided by oprraLing activiiies:
IJndisrrihuted net income of suhsidiary
Stock-hased compensation
'h bcncfit from cxcrcisc o f brock optiotia
D c u r a s c (iticrrase) i n other assets
Incrmse (decrease) in other liabilities
Provision for rlcfcrrcd inrornc taxes
Net cash provided by financing activities
Cash flows provided by (uscd in) investing activities:
Investment in subsidiary
Cash flows from financing activ
I'rocccrls from borrowings
Rcpaymctm o f borrowitrgs frotri oilrcr f;rratrcial itisiitutioti
Share repurch~se and rerirement
Proceeds from exercise of stock options
'lix bcncfit from cxcrcisc of stock options
Cash piid for dividends
Net cash (used in) provided by financing activities
Increase in cash and cash cquivalcnts
C . M and clsh eqtj i va I en t s a I hrgi t i ir in g n f year
(:ash and cash rquivalrnts at end of yrar
Cash paid during the year for interest cxpcnsc
Nowcash invesring activities:
Net change in unrealized loss on available-for-sale investment securities
Fait matkct value of currirrion stock issued in acquisition of subsidiary
Nntr-cash li tiairci rig activit its:
T a x b r t i r h frotri btork optiotra cxctcibcd
2006
2005
~.
2004
-
$
6,911
$
6,044
$
3,005
(6,342)
163
(451)
4.30
132
(134)
709
22
(1,250)
(3%)
735
1 5 1
(459) -
272
1,205
1,477
161
650
-
451
$
$
$
$
$
(6,438)
(3,419)
(173)
792
(51)
174
( I 43)
(310)
47
(136)
(309)
(2,000)
2,500
(213)
317
143
(263)
2,484
36 1
458
173
63 I
496
709
1,205
153
( I ,407)
6,079
173
$
$
( I ,090)
143
$
$
$
$
$
25
.
Report of
Independent Registered Public Accounting Firm
~
‘Ihe Shareholders and Hoard of Directors
Ccn tral Valley Cornmimiry Hancorp and Subsidiary
We llavc audited the accompanying consolidated halance sheels of‘ Central Vnlley Chrirniinity h n c o r p and subsidiary as of
I)ecemt)er 3 1, 2001; and 2005 and the rclatcd consolidated stxtetnenis of income, changes in shareholders’ equity and cash flows for each
of the years in ihc three-year pel-iod ended Dcccmbcr 3 1 , 2006. %est. consolidated financial statrrnciits arc the responsibility of the
Company’s management. O u r responsibility is to express an opinion on lhcse consolidated finaricid statcmenrs based on our audirs.
We conducted our audits in accordance with the staridards of the I’uhlic Company Accounting Oversight Board (United States).
lhose standards require tllat we plan and perform the audits to obtain reasonat)le ;issLirmcc about whether the corisolidarcd fi nancial
slatciiients are free of rnaierial misstatement. An audit includcs examining, on a test \)asis, cvidcricc s u p p m i n g the arriounts and
disclosures in the consoliclatcd fi nancinl statements. An audit also includes assessing the accounting principles used arid significant
estimates niade by nianagemcnt, as well as evaluating the overall financial statement presentxion. We believe that our audits provided a
reasonable basis for our opinion.
In our opinion, the consolidated financial siaicnicnts referred to ahove present fairly, in all material respects, tlir consolidated
financial position of‘ Central V;dley Community Baricorp and subsidiary as of December 31, 2006 and 2005 and the corisolidarcd results
oftlieir operations and theit- cash flows for each of rhc years i n the three-year period cridcd Decemhet- 31, 2006, in confortniry with
accouriiing principles generally accepted in the United States of America.
Sacrarncnro, California
March 14, 2007
26
~-
I
Selected
Financial Data
‘l‘otal interest iiicoiiie
‘Intal interest expense
Net interest iricurnc bcfurc ptuvisiuri fi,r credit losses
I’rovision for credit losses
Net interest iiicoiiie after provision for credit losses
Nun-interest inconic
s
$
30,932
0.559
24,373
800
23,573
5,177
........
28,750
18,511
10,209
3,298 ~-~
26.070
4.1 30
21,931
510
21,421
4,009
25,430
16,0&
9.388
. _ 3,344
Nrt iticotiir
Basic earnings per shat-e
1)iluted earnings per share
G s h dividends rlcclarcrl per common share
$
-().“I
I
$
rr
1.16
_- ...
$
1.07
$
$
9;
.R
16,799
I ,078
$
14,970
2,200
12,680
14,516
2,728
1 1,808
-
- . .
14,821
4.084
18,905
_ .- . 13,266
5,639
1,044
. - __ ._ _
6,044 s
1.011
rr
3,005
0.71
$
rc
_
12,680
_ - 4,559
17.239
12.368 ._ -.
4.871
1,4‘)L!
11,808
4,226
16,034
12.002
4,032
.. ._ I .24g
3,372 $
2,784
$
0.65
.- _ .
0.54
0.94
$
0.64
-
9; 0.00
$
0.51
rt
0.05
$
0.03
1)ecemher 3 1,
(111 I I 1 C ) U S i l t l d S )
Investment seciiriiies, FrJeral I ~ ~ i i i t l a
sold and deposirs in oilier hanks
Nct loans
Tutal clcposits
‘lbtal assets
Sliarchuldcrs’ equity
Earning assets
Avci-age halaiices:
Tnvrit t n r t i i ac~~iritics,
I’cdcral fiunck
sold atid deposits in uthcr banlts
Net lams
‘ l i d deposits
‘Ibtal assets
Sharcholders’ equity
L‘e 1-11 i iig nsserc
s
$
128,463 $
318.853
440,027
500.05?
43.778
453,21 1
$
1:5(;,.54o
208,463
430,980
483,677
41,523
440,646
1 2 7 , ~ 5 B
206,582
326,l 86
368, 147
29,hOh
3an.032
107,atiti $
I x3,n/iL)
290.565
327,930
26,720
292,494
95.901
156.293
246.337
283,006
24.099
251,895
L O O b
2005
2004
200.3
2002
$
125.702
300,591
414,310
470,221
4 5 ~ 564
43 1,308
$
135,670
274,348
407,188
455,680
38,i)91
414,257
$
1 I5,OW
192,658
307,455
346,117
28,203
51 1,456
101,222 $
I72,3 I O
270. I59
m,wi
25,484
275,846
74,111
146.264
212,029
148,948
22.604
222,067
27
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
. . ..
. ..
, ..
Unaudited Qixiricrly Statcmcnt of Operations Daia
(Ihllars i n thousands, cxccpt per share data)
Nri iriicrcbt income
I’rovision for loan arid lrasc losscs
Ncrti-intcrcst income
Nori-iritcrcst expenses
Income heforc provision for income [axes
I’rovision for iticonic taws
Net income
Per share:
Rasic carnings per share
I3iluted earnings per share
$
$
$
$
0 4
~ 0 0 6
(2.3
2l)l)h
Q2
2000
(21
tOOh
Q1
2005
(2.3
2005
_ . _ l -
Q 2
2005
0 1
2005,-..
6,259 $
200
1,679
5,067
2,671
528
2,143 $
6,104 $
I00
1,295
4,631
2.668
999
1,669 $
6,045 $
100
1.146
1.446
2,645
976
1,669 $
5,965 $
400
1,057
4,397
2.225
795
1,430 $
5,945 $
500
1,002
3,880
2,567
899
1,668 $
5.592 $
10
1 ,ozn
4,021
2.58‘)
940
1,649 $
5,357 $
5,037
1,074
4,040
2,191
x5x
1,533 $
90s
4,101
1,841
647
1,194
0.36 $
0.33 $
0.28 $
0.26 $
0.28 $
0.26 $
0.24 $
(1.22 $
0.28 $
0.25 $
0.2n $
0.26 $
0.20 $
0.24 $
0.2 1
0.19
M A N A G F , M ~ . N 1”s i)isCussIoN A N T ) ANALYSIS
Managemcni’s diarrrsaion and analysis shndtl be rcad in conjuiic[ioti with the
Corripany’s audited Consolidated Financial Statemrnis, including the Notes ihrreto.
Certain matters discussed in this report constitute fonvnrd-looking stateiiients
within the meaning o f t h e Private Securities Litigation Reform Act of 1005.
All statements contained herein that arc not historical facts, such as statements
regarding the Company’s current business strategy and the Company3: plans
for hiture developnietit and operations, are hascd lipon current expeceations.
Thcsc statements are forward-looking in nature and involve a number of risks
arid uncertainties. Such risks arid uncertainties includc, but are not limited to
(1) significant iticrcascs in conipetitive prcssiire in the banking industry; (2)
the impact of changes in interest rates, a declinc in economic conditions at the
intcrwational, national or local level on the Cottipmy’s results of operations,
the Company’s ability to continue its internal growth at historical rates, thc
Company’s ability to maintain its net interest margin, and the quality of the
Company’s earning assets; ( 3 ) changes in the regulatory environment; ( 4 )
fluctuations in the rcd cstate market: (5) changes in business conditions and
inflation; (6) changes in securities markets (7) risks associated with acquisitions,
relating to difficulty in inlegrating combined operations and related negative
impact on earnings, and incurrence of substantial expenses. ‘Ihereforc, the
information set forth in such forward-looking statements should be carefully
considered whcn evaluating the business prospects of the Company.
When the Company uses in this Annual Repott the words “anticipate,”
“estiniate,” “cxpect,” “project,” “intend,” “commit,” “belicve” and similar
expressions, I he Company intends to identifj. fonunrd looking statements.
Such statenleiits arc not guarantees o f pcrformance and arc subject to certain
risks, uncertainties and assumptions, including those described in this Annual
Report. Shorild one or more o f these risks or unccrtainties materialiw, or should
underlying assumptions prove incorrect, actual results may vary niaterially
from those anticipated, estimated, expected, projectcd. intended, committed or
believed. l i e fiitrire results arid shareholder values o f t h c Company may differ
materially from those expressed in these fonvard looking statements. Many o f
the hctors that will rlctermine these rcsults and values are bcyond the Company’s
aliility to control or predict. For those statetncnts, the Conipatiy claims the
protection of the safe harbor for forward looking statements contained in the
I’rivate Securities Litigation Reform Act o f 1335.
Central Valley Community Raticorp (NASIIAQ CVCY) (the Cotripany)
was incorporated i:iu February 7, 2000. The formarinn of the holding c-oinpany
o f f k d the (hrnpany more flexibility in meeting ihr long-term nerds ofciistomers,
shareholders, a i i d the conimutiiiirs it scrvcs. ‘Ihr Cvrnpany cunenily has one bank
subsidiary, ( h t r a l Valley C:ommrrtiity Bank (the Rank). The Coml~ariy’s market
28
a r r a iricludcs the Central Villcy arc:* from Sacramento, California to Bakersfield,
(:aliTornia.
Afier i l i c close of business on nrcrrribcr 31. 2004, the (hiipatiy cornplctcrl the
merger with Rank of Marlcra County (RMC). The Madera and Oakhtrrst branchcs
of UMC were merged into the Bank. For deiails ofrhc mergei-, refer to Nntc 2 to
the Company’s audiied Consolidated Financial Staierncnts.
During 2006, thr C h i p a n y focused on assuritig competitive products a r i d
acrviccs to OUT clienis werr tiiarlc available while adjrrsting to the many new laws
and rrgulations that affect ihr Gariking industry The Rank opened full service rerail
offices i t i the I’rcsno downtown area on February 1 3 , 2006 arid in thc Sunnyside
area of Frrsriu on November 13, 2006. h i r i n g October 2006, rhc Company
consolidared iis administrative offices inio a single location on Finaricial h i v e in
Prcsno and opened a litiiircrl service branch tlierr, bringing the total niiinbrr vf
hrarlcllcs to 12.
ECONOM IC CONL>ITIONS
h s n o County’s rcoriomy has been relativrly stable for the p x t rhrrr to four
years, but during 2006, the local ecannmy has shown signs of slowing. Most
iridustrics i n the Cnirtiiy arc cithcr stable or contracting very modesily. Frcsno
Coiitity’s iincmployment ratc has historically heen otic of-the highest recember 31, 2006 were $500,051J,000
compared to $483,677,000 ar Drccriibcr 31, 2005.
k t i i r n on average equity for 2006 w a s I 5.17% compared to 15.63%1 and
15.10% h r 2005 anrl 2004. respectively. Return on average assets for 2006 w x
1.47% coiiip"red r i ) 1.33% a t d I . W % for 2005 and 2004, resprc[ivcly. Total
cquity was $49,778,000 ai Decrnibct 31, 2006 compared to $41,523,000 at
Lkcemher 31, 2005.
'Ibtal loans continued ro grow dtlritig 2006. Average total loans increased
$26,219,000 01- 9.44%) in 2006 cotiipilrd r o 2005. Assct quality continues IC) he
of $800,000 compared
strong. In 2006, we recorded a provision for credit
Iiad tiri t i o n - : ~ ~ r ~ i a i
to $510,00iI Ihr ZOO5 and nunc in 2004. ' h e (:om
loans
at 1)ecemher 31, 2006 cotripatcrl to two noii-accrual 10atis rcrtalitig $616.000
at Uecemher 31, 2005. Ner charge-uffi for 200(1 were $330,000 cotnp"rcd to
$619.000 for 2005 and tiet rec(.~vrrics of$272,000 for 2004. Refer I I I "Asset
(&ality" below for further information. We hat1 ric) other I-cal estate owned at
either Decrtirbcr 31 2006 or 2005.
Kry l~actors iii Lvnltixing Finatici;il Coridilion
;ind Operating l'erforiiiaticc
As a priblicly traded community hank holding c.orrlpany, we focus on severil key
factors including:
- Return to our stockholdrrs;
- Return on average assrrs;
-
Lkvelopment of core revctiiic streams, including net ititerrst
inwnic and non-interest iticotiie;
Asset quality:
Assei gr~.rwtti; and
O p e r ~ r i rig c&cicri< y.
Return to Our Stockholders
O u r rrturil to our stockholders is measurrd i t i the form of I-eturn on avrragu
equity ("ROE"). (Our net incomc for the year ended Dcccmbcr 31, 2006 increased
$867,000 compared to increases ol'$2,349,000 and $323,000 for LO05 and 2004,
rcspcctivcly. Net income i n c r r d triainly rluc to an increase in tirt intucbt income
provided by the increase in inreresl ratcs atid the additional loan volurnc from the
2005 RMC merger and our own organic growth, and increases i t i riori-interest
iiicc)nic. This incrcasc was partially oflie1 b y ari in<-rcasc in interest expetihi:s,
addition to the provision for rtcrlit losses, and operaiitig cx rnscs. Basic EI'S
9'
incrcascd to $1.16 for 2006 cornpared to $1.03 and $0.71 tur ycars ended 2005
d to $1.07 for the year endctl 2006
and 2004, rcspcctivcly. L)iluted EPS iiicr
$0.94 and $0.64 for years ended 2005 anrl 2004, respectively. Tlic
compared ~ i
r
increase in EPS w;is dire prirriarily to the increase i n tier iticomc, partially otket hy
the increase i n ~veragr shares outstanding
a result of the mcrgcr and the exercise
of stock options. Our ROE w a s I5.17'Yu for the year endrd 2006 compared to
15.63% anrl 13.10%) for rhe yrsrs ctirlcd 2005 and 2004, respectively. I h c decrease
i n RC)E I& 2006 is priniarily due [o tlir irilrcasc in capital from rlie exrrcisc of
stock opioiis and current year earnings.
Keturn on Avcravc Assets
O r i r rrturri on avcrage assets ("ROA") is a measure we use io coriiparc our
performance wirli (-ittier banlu. and hank holdirig wrnpanies. O u r ROA for the year
eticlcrl 2006 increased to 1.47% wrnparcd to 1.33%) a t i d I ,07% fur the years endctl
Uecemher 31, 2005 and 2004, respeciivcly. The 2006 incrrase i t r R(3A is due to
the increase in tiel iricornc relative to our increase in average assets. ROA for our
peer group was 1 .I 1% at Scptcmbcr 30, 2006. Prrr group informarion liorn SNL
Firrancial data includes all batik holding coiiipaiiirs irl California wirli w r r s from
$W0M to $500M and mii d d i a p t c r S.
Over the past several years. we have focused on not only iiiiprovitig tier iricomc,
hut improving ilie curlsistericy ofour revenue streams in order to create iiiore
pi-edicdle hitiire earnings atid rctlucc the cffkt of changes in our operating
environment on cwr tict iricornc. Specifically, we have focused on net interest
iticonie throiiglr a variety ofprorcsscs, including increases in average iiireresi rarning
assets as a i-esuI[ of i h e 2005 riirrgcr, loan generation and retention and improved
net interest margin hy focusing on core drposit growth anrl managing the cost
offiincls. hs a rcsult, our net interest itrcmie hel;rrc p v i s i o n for credit losses
iircrrascd $2,442,000 or 11.13% to $24,373,000 for t h e year etitlcd 2006 compared
to $21,931 ,0i)O and $14,821,000 fc)r the ycars ended 2005 and 2004, resprcrivrly-
Chi- net interest margin also improved 33 basis points to 5.79%) For the yrar
ended 2006 compared IC) 5.46% atid 4.91% for thc ycars ended 2005 and 2004,
respectively.
O u r nun-interest income is generally triadc i r p ofscrvicc charges and fees
oiiiits, fcc income fi-om loan placemenrs, a r i d Fair1 on sale from
uritica. Nun-interest income in 2006 incrrasrd $1,168,000 01
29.1 3% IC) $5,177,000 compared to $4,009,000 and $4,084,000 in 2005 and 2004,
respectively. Crrstotiicr service charges inci-eased slightly rn $2,512,000 in 2006
compared to $2,414,000 arirl $2,.310,000 in 2005 and 2004, respeclively, triaitily
due to an increaye in the numher of tratibactiori accounts. Noii-interest incorne i n
mpt prclceeds li.otii a lifc iiisutancc policy of $025,000,
2006 a h include
'state of $205,00i). rraliwd gaitis from the sale of
gains li.om the sal
r i d loan placement fees of $350,000. Drrririg 2005, non-
investments of $1
aitis from the sale of investments of $92,000 c~:itriparcd
intei-est income i t
t o $483,000 in 2004 and loan plarcrr!crir fccs of~$390,000 in 2005 coiirpirrd to
$330,000 for 2004. Further derail oti rioti-intctcbt income is pi-ovided helow.
Asset Oualirx
For all hanks a d bank holding companies, m e r qtiality llas a significant
inipact on the (.)vcraII financial condition and results of oprratiuris. h s c t quality is
measured in terms of pmrritagc of total loans and total ;isseis, a n d is a ltcy clcmcnt
in estimating the fiiirire earnitigs o f a company. We had no i i o i i - ~ ~ e r l ~ r r t r i i t ~ ~
loanb a s
of Dcicmbcr 3 I. 2000, compared to two nori-accrual loans totaling $61 6,OOO as caritig li
' l l i e tahle on the following page set
1111 tiia ry o i neragc ha la nrrs w i i 11
corrcsponding interest inconic and intci-est cxpcnsc as well as merage yield and
cust irifLrrriatiori tLr the periods prcscritcd. Average balances arc rlcrivcd fi-om
daily Lalariics, a r i d riori -:ic~rual loaris arc not inrludcd as interest earning assets for
piirposcs ofthis table.
rning assets and the volume of and
;iti(l i l i c
Interest anrl fcc incornc from loans increased 20.00% in 2006 compai-ed to 2005.
(I 50.04% in 20115 wrnp:ircd to 2004. As stated
Tiiicrrhi and I;.r i m o t r i r iiic
I lir cotii hi n:i i i o n rr r
;iOi)vr,
organic g r r r w ~ h Trow lie I~>CII.; i
increases rliat li,ive occurred siiit-r ]unr 30, 2004, were tlic iii:ijor cvtriporictrta o f t l i e
$4.4 12,000 and $71.888,000 incwases in 2000 and 2005, respeciively. Avrfiige ioial
Ioiiti\ Lrr 2000 were $.304,074,000 corriparcrl to $277,855,000 and $195,223,000
for the same periiids irf2005 and 1004. l i t : yield O I I l o w \ fi,r 2006 was 8.40%
L iirripircd ti.) 7.(i.3iYu and 6.78% for 2005 and 2004. respeclivcly.
I volume d I ~ x + i i s I w t n ttic 2,005 riicrpx our
i n g r r L i i i o t d i i p , :iid tlic 17 iritcrcst rate
I iiic(.riiic lioin ioial itivc>trricnts, (total investments include investment
1:cdcral funds, interest Ixiring deliirsiii w i t t i (ittivr baiiks, and othcr
securities) not on a fiilly tax equivalent hasis, iiicreisrd $450,000 iii 2006 compared
t u 2005 mainly clue to the 100 hasis point iiiieresi R I I ~ i n
2000 w t i i c l i wxs prtially offkt by a 7.35%1 decrese i n ilir avct:lgc h l ; i i i ~ c s otthcsc
invcstmcnts. In 2005, total iiive~inieiii i i i i m i c iiiI'
the investment portfolio w a 4.2 years :iti(l i l i c triarkri YgIuc rrflrcirti a pre-tax loss
o f $ 105,000.
A coiiipotieiii ol'ilie (:onipany's strategic plan has heen to usc its invcstincnt
portfolio to otket, in p x t , its interest 1-arc risk relating to variable rate loans.
A t I3ecember 31, 2006. an imniccliatc rate incrcasc of200 basis points wciuld
result in an estimated dcci-case in the marlcct value of the investment pur
cly, w i i h a i i iriitrictliaic rate ilrt r .
i n ilir tiiarkri wilire n l ' i l i e iiivesi
eiivirc)iiiiieiii assiiiiies management wmld
take iic :ictiuti rluririg a i l itiitircdiair shock of Loi) hasis Iicriiits. 'lhe likelihood of
iiriiri(vii:iic di:iiigch vf 200 hasis poitiis is conirary to expect'irinii, ,is evidenced
hy i l i e changes i n iiiierest rates i n [he past yeat-, which were in 25 basis point
increments. I Iowevei-, the Company uses those inci-cmcnts to measure its interest
rate rib]( in accordance with regulatory rcqiiircrricrita a r i d to nic+aiirc t l i r p h i k l r
fiiiurc tihk iii the invcattnrni pitiI~ili(r. Firr I.iiriIirr discirssiirn irl'ilie (hilxitiy's
tiiarket risk, relir i o ( ~ ~ l a n i i i a i i v e and Qualitative 13isclosures ahout Market Risk.
Management's review of all investments hcforc purchase includes an analysis
of how the security will perforiii under several interest rate scenarios to monitor
whcthcr invcstmcnts ai-c consistent with our invcstmcnt policy. 'Ihc pdicy
atlilrcascs issues o f average life, diinltion, aritl coriccritration giiitlclirics, prutiibilctl
itivchi i i i r t i i h , i m p i t t n c t i i , a t i d pr(
Tirial inictcat iti~otiir i n 20116
i o $26,070,000 i n 2005 :iiid $16
2Oi)O w.is due I O ilie 4.13% i i i c r e ~ s e i n the average
assets. combined wid1 the 85 basis point increase i n die yield on those assets.
ning assets increased to $4.3 I,168,000 for 2006 coiiiparcd
t 2005, aiitl $.uantitativc and
For a discuasion of the repricing of our asbi
Qualitative Disclosure a b c i t i t Market Risk.
in
1)RC)VISION FOK CREI311' LOSSF3
We providr fni- possible credit l o
s by a charge to operating income b a d iqmn
the composition or i l i e loan pottf~d past dclirlqurncy levels. lossrs and tion-
pcdhrtiiing assets, ecnnomic a r i d environmental cntiditions a r i d (:it her factors wliich,
i n managcmcnt's j i i d p e n t , deserve recognition i n estimating Lrcdii losses. Loatis
are chargrd o f w h e n they are considered iiticollectiblc or iifsuch littlc valuc Ihat
ContitllJalice L? an active earning bank asset is not warranled.
l i e establishmerit of an adcquatr credit allowance is hilsed on both an accurate
risk rating system and loan porifolio managcriirnr tools. 'Ihc Rmrd has established
initial rrqnoiisihiliry for tlie accuracy ofcretii[ risk grades wiili [lie indivirliial credit
off;crr. Ilie grading is then submittrd to the Chief Credit Administratiit ('V:C;A"),
wlitr reviews the grades for accuracy and makes rccomtnendationa to Credit Kcvicw
who givca I;n;il appi-ov:~l. The risk grading arid reservc alloc-atioti is analyzcd
annually Iny a third party credit 1-evicwcr arid by varioiia rcg~latory agencies,
Quartrrly, tlie CCA sets the specific rrsrrve for all arlvcrsrly risk-graded d i t s .
'Ihis prcicess includes the tiiilization of loan delinquency rcporrs, classified assrt
reports. and portfolio corisses considering a number uf6ac1ors 3s discussed i n the "Allownice for Crrdir
Losscs" section hclow. We did not havr any non-pcrLnrniing luans ils of
rkcetilbel- 31, 2006. Non-pcrtLrming loana a h of December 3 I ,
$(i16,000 and were comprisrd of one rcal w a r e secured loan for $591,000 and one
comnicrcial lnaii for $25,000. I h e Company did not haw any other rcal esrate
owned at December 3 I ,
2000 or 2005.
2005 totaled
Fur 2oi)6 and 2005 we had a net charge off ratio to average loans i)f0.109"/0
and 0.223Y0, respectively. I'or 2004, we had a tiel recovery ratio ofO.139'Yo. The
potcniial for- a future tier recovery position is not likrly as wt'havc been very
succc,diil in collcctiori of those loarls charged off-iri p r i o r years.
Basrd on information currently available, nianagemrnt helicvcs d i : ~ the allowaticr
k i t credit losscs s h i l d he adcquatr I O ahsorb cstirriaied probable liisses in the
portfolio. However, no assuratice can be given ihat we may r i o t sustain chargc-nfk
wliich arc i t 1 rxcess of thc allowance in any given period. Ref& IO "AllowanLc for
Crcdir I .c)sses" below h r fiirther infortrialion.
N E T IN.1 LKI~.S'I' IN(:OMI A I T E R I'KOVISION FOR C:HkJ)IT LOSSI,.S
Nct interest incomr, after the p r o v i h n for credit Iossrs of $800.000 i n 2006
and $510.000 in 2005, WLS $23,573,D00 for 2006 compared to $21,421,000 anrl
$14,821,000 for 2 0 0 5 and 2004, rrspectivcly.
N O N INTERFXI' I N C O M E
Noli-interest iticotiie is comprised of customer service charges, Inan placemcrit
fees, gain on sales of invcstnicriis and other ititi ihr date of the grant. As a 1-esult of adopting SFAS
I2,3(K), the Company's income before provision for itiwrilc taxes and net income
the year cnrlcd 1)cccmbcr 31. 2006 are $103,000 and $142,000, respectively,
I;ir
lower t1i.m if it liar1 continiictl to account for share-baed coiiipeii~aiiirti uridcr AFR
25. h i c and diluied rartiings pcr aharc for the year cndcd December 31, 2006
would hme been $1.1 8 and $1 .O!J,
rrspeuivcly, without the adoption of SFAS 123(R)
compared to $1.16 aiid $1.07, respectively, a s reprtcd. Results for prior periods have
riot bccn restated.
In Fehrwiry 2005 ttic Comp;wy a<
rated the vesting of 18h,000 optiwis
pi-evinusly granird io ccrtaiti dircctots and executive oficei-s. No stock-basrd
coiiipeiiwiitiii is rcRcctcrl iri net income for the year ended I k c e m h r r ? I , 2005,
as a result of the acceleruioii ofihc vcstirig as it is expected that generally all o f ~ l i c
directors aiid executive tiianagetiient wliosc options wcrc accelei-ated will remain wiili
I he (2iriipny through the original vesting period.
l i e Cotrip:viy bases the b i r value of the options previously gratiicrl or1 the date
of grant using .I Rlack-Sclr(rlrs {rption pricing model that uses assutnpiiotis Ijssctl u r i
cxpccted option life, die lrvd ofrvitiiatcd forfeitures, expected stock vnlariliiy and
ttic risk-frcc interest rate. Stock volatility is hasrd i i t i the historical volatility o f the
(:ompatiy's stock. The risk-frcc m e is haqed on the IJ.S. Treasury yield curve and
the exprctrd tcrrii ofthc options. 'Ihe "simplified" nieiliod tlcaf$250,i)oO o f t h e
original $500,000 investment. 'Ihe (:ompany has received $225,000 from the mle
and anticipates fidl rccovcry ofthc remaining balance of $25.000.
i t i t u a
a
T h e folluwirig table describes significant components of other non-interest expense
a s a pcrcctiiagc ufavcragc assets.
For rlie vear ended Drcemher 31.
20oi;
2005
.
Other
L ~ ~ L S .
941 Avg
&sets
(Dollars in thousands)
Other
%I Avg
!ixxpense Assets
Advcrtisiiig
hudit/accounting
Datditcni processing
ATM/tlcbii card cxpcnscs
Director lrrs & related c ~ p c ~ i ~ s
Ilonai intis
~~tLication/traiiiing
(;cncrd Insurance
Legal fees
I'ostagc
Regulatory assessnients
Sratioticry/sii~plics
'Telephntie
Operating losses
Other
Total other nun-interest
$ 452
317
810
296
265
I I9
68
124
3 i) o
164
112
247
144
49
1,776
TXpetlaC
$ 5,249
PROVISION FOR 1NCC)MF. T A X b S
O,I)9(Yo
0.117%
0.18%)
0.06%
0.05%
0.03%)
0.02%
0.03%
0.04%
0.03%
0.04%
0.04Y"
0.03%
0.0 1 %I
0 3 3 %
$ 412
3 34
81 1
255
218
114
n i
120
192
I56
164
207
123
44
1,500
$4,731
~
Our effective income lax rair was :52..5~0 for 2006 cumpared to 35.i;%1 for 2005
arid .34,5'Yo for 2004. 'Ihe 171-ovisinn for iiic~liiie i a x r s iotaled $3,298,000. 53,344,000,
arid $ 1 ,944,000 in 2006, 2005, and 2004 respectively. l i c (Iceccrnbcr 31, 2006 a r i d
2005. blanqcnicrit is not aware ofany potcritial problem loatis, which were current
ani1 accruing at I)cccctnher 17, 2004, !lie C h i p a n y ctiret-ed into a noti-revolving loan
agrccinent with a inajor hank tinder which the (:nmpatiy borrowed $2,500,000 and
contributed $2,000.000 of additional capital to rlie Hank. ‘Ihc loan brats intcrest
indexed to prime or LIROK. a t the Company’s election. llie utits~andirig balancr at
L)cc:rmbcr . < I , 2006 was $1,250,000.
l i e purpose ofilie borrowing was to cnsure
36
1 Management’s Discussion and Analysis
I
of Financial Condition and Results of Operations
1.iquidity rrianagement irivnlves our abiliry to mcct cash flow rcqiiiremeots
arising from fluiuuations in rlrposit levels and demands of daily opcrilions, which
irirlrde funding of securities ptirclizws, providing for cusinmers’ crcclit needs ancl
ongoing rcpaytneiit of borrowings. C)ur liquidiv is actively managed c)n a daily
hasis ant1 rrviewed periodically by uiir rr~anagerncrit arid Diwctorb AssetlLiabiliiy
(:ommittccs. ‘ihis process i s intender1 to ensure the maintenance ofsuficicnt funds
I O meet o u r iireds, including adequate cash flow for ofl~balance sheet commitnicnts.
Our pritiiary sources d l i i p i d i t y ate derived from financin~ artivilies which
include tlie acceptance of‘customcr and, I O a lcsscr cxient, h1-okcr tlrposits. fctlcrd
futids facilities a n d advances frvtn [he Federal Home Loan Ratlk of San I’raticisco.
Tlirse funding sources are augmented hy payrrients of principal and intctcst
o n loans, the routine niatriri~ies and p:iydowns of securities from the sccilrities
portfolio, die stability ofoiii- core clcposits and the abiliry to sell irivr,wnenr
scciititirs. Primary MC’I nf funds inclrde withdrawal of atid intcrcsi p”yments ut1
deposits, origination atid purchases o f loans, purchases o f invcsttnrnt securities, and
payment of operating cxprnses.
As :I tiieans ofaugriirnring our l i q d i t y , wc have esrahlishctl k d e t a l funds lines
with correspondent banks. At Dccctnher 31, 2006 o m available 0i:irrnwing capacity
includes approxirrrairly $1 8,000,000 i n Federal funds lines with our correspontlrnr
hanks a t i d $14,334,000 i n unused PH1.R advances. We helieve our liquidity
~oiirces to be stable and adequate. A t Decembct 3 I , 2006, we wcre not aware uf
any inforriiatinn that was rcasonahly likcly to have a inaterial rlfrct on our liquidity
positioti.
l i e following table reflects the Ccrmpany’s credit lines, halanccs oulsranding. and
pledged collaterill a1 December 31, 2006 and 2005:
Balance
Outstanding at
Dccmibrr 3 1 , Dcrcriiber 31, Dc nher 3 1, 1)ccemher- 3 1,
Balance
Outstanding at
ZOOC,
2oi)o
005
2005
$
18,000 $
. $
14,100 $
Collateral pledged
5
16.848
Collateral pledged
(1,080
$
Fair Value of Collateral
$
16.758 $
Pair Value id Collateral
2,000 $
6.598 $
4,000
(:ollatcral plcdged
5
2.271
(:nllateral plcrlgrd
5,350
$
Fair l’alue of Collaieral
$
2,200 $
F i r Value of Co1latrr;d
$
3,252 $
-
Crcdii Lines
(In thousands)
I Jnsecured
(:redit Lines
(intrrcsl rate
varies with
market)
1,cdcral Home
1.oa1i Rank
(irrtrrrsr rate
;II prevding
interest Iatc)
F e d d
Kcscrvc Rank
(intrres[ rate
a r prevailing
discount
intcrcst raw)
L>LW:)S ITS AN 1) K O RROW I N G S (Co t i i i nued)
the Banlys capital ratios remain at or above wcll rapitalized after the effective clair
of the merger with HMC. Refer to Note 7 to the audited Consolidared Finanrial
Statemcrits.
CAI’ I ’ rA I , R ESO CI RC ES
(hpital sctvcs as a source of funds and helps protect dcpusiilors a n d sharchtrlders
against potctiiial losses. l i e primary source of capital for the (:ompany 1i;x heen
iiitcrti;illy generated rspital through rrtained earnings.
l i e Company 1i.u historically maintaincrl suhstantial lcvcls of capital. ’Jtir
assessment ofr,apiral adeqi1ac.y is dependent oti several factors including asset q t i d i t j ~
earning trends, liqiiitli~y and cconotiiic conditions. Maintenance uf adequate
capital levels is integral to providing s ~ d ~ i l i t y
i e (.:oiiilmiy nccds
t o tiiaintain substantial levels o f regulatory capital IC) give it niaxiriillni flexibility in
the changing rcgiilatory environrrwir and to respond to changes in the market arld
economic conditiorir.
to thc I:omlmiy. l
OUT stockliolders’ equity i t i i u e m d to $49,778,000 zq o f l k w m h ~ r 31,2006 compared
to $41,523,000 as of 1)ccciriher 31. 2005. The increase in stockholders’ cqiiity
is primarily a resiilt of net income of$6,911,000 for 2006 and proceeds from i h e
exercise of atock options.
lhritig October 200h, h e Bank dcrlared and paid a ~
~
dividend tu t h e
h
s
C h i p a n y of $ 1 ,OOO,000 in corltirciinn with a stock repurchase agrecmenr appi-ovcd
by the ( h i p a n y ’ s Board or Directors. Lhiriiig the period the Conilmiy’s borrowings
remilitis outstanding, which is expected IO he until Dcirtrihcr 2007, the Rank
does not anticipaie paying any atldiiional dividcritlh IC) [he C o m p a n y except for
dividends i h a t are necessary ro meet the ordinary and ~ i s ~ i a l q>et.ariiig, expenses o f t he
Company. l i e l h k would tint pay any dividend that would cause it to he dccriicd
not “well capitalized“ under applicable bariking laws and rcgrila~inns.
Management considers capital requirctrictils as p i - t of its stralegic planning
process. ‘lhc stratcgic plan calls for cirtiiinuing increases i t i assets and liabililies, and
ilie capital required may thcrcfotc be i n excess of retained earnings. 1s ability to
vbrain capital is rlcprtident upon the capital markcts as well zs our perfortilance.
Management rcgiilarly evaluates soiirces of capital a t i d the timing rcyired [o meet
its strategic okjectives. ‘Ihc IJIowing rablc prcsrnls the Company’s a n d the Bank‘s
capital ratios as ufrkcemher 3 1 , 2006 and 2005.
2000
-.
.
Amount
.~
2005
Ratio ‘ A r n ~ i i t i ~ K&
(Dollors in rhoiisands)
Tirr 1 Leveraec Ratio
Ccniral Valley Corririiuniry Bancorp
and Subsidiary
Minimutrr regulatory rcquirement
Ccritral Valley Cornmutiity Bank
Miriitntim requircmcrrt Tor
9 39,864
$ 18,967
$ 39,045
8.41°% $ .31,767
4.00% $
8.24% $
6.849’~
“Well-Capitaliictl” institution
$ 23,703
Minimum regulatory requircriicr~~ $ 18,961
5.00% $ 23,204
4.00%) $ 18,563
5.00%
4.00Yu
Tier 1 Risk-Based Q)ii;iI Katio
Central Vallcy Community Rarirorp
and Subsidiaiy
Minimum regulatory rcquirctiient
Central Valley (:ominunity Rank
Minirniitn requirement for
“Well-(:apitalizcrl” itisticution
Minimum regulatory rrquirement
Total Risk-Based C:q>i.ral Ratio
Cetiiral Valley Comrnuriily Rancorp
and SLI hsidi a ty
Minirriim regulatory rcquirciiicrii
Central Valley Conirnunily Rank
Minimum rcquirement for
$ 41,673
$ 29.073
$ 42,854
12.02% $ .35,106
8.00% $ 27.437
11.77%) $ 35,832
10.24%
8.00%
10.45%
“Wcll-Capirali7,cd institution
Minimum rcgiilarory requirement
$ 36,419
$ 29,135
10.00Yo $ 34,287
8.00% $ 27,420
10.00%
8.00%)
$ 39,864
$ 14,536
$ 39,045
10.77%) $ 31,767
4.00%) $ 13,719
10.72%~ $ 32.49.3
9.20%
4.00%
9.48%)
The liquidity of the pirent compariy, Central Vallcy Cotiiiiiuiiity Bancorp is
primarily depcndcrit on the payment of cash dividends by i i s siibsidiary, Ccritrsl
Valley (:ommunity Batik, subject to litriiratioiis imposer1 by i l i e regulations.
$ 21,852
$ 14,568
Ir.OOO/o $ 20,572
4.00% $ 11,71 5
h.00Yo
4.00%
O I ~ I ~ - L ~ A I ANCE StlElyl’ l’l’b,MS
In the ordiriary c o w s e ofbusincss, ihe C h i p a n y is a pariy to financial
iiistrunicnts with of-halancc sheet risk. lhese financial iiistriinients includr
comrnitrncrils i i r extend credit arid standhy letters of credit. Such financial
insttiitiieiits ai-e recortlctl ill i h e financial st:mmeiir,s when they arc firtided or relatcd
fces are incurred or received. ‘Ihe balance ofcniiimittiieiits to cxtcrid credit on
undisbursed coristtIiciioii and other l o a t i h and letters of credit was $1 34,549,000 as
ofL)cccmGcr 3 1 , 2006 compared to $1:33,950,000 as of Dccctiiher 31.2005. For 2
more driailed discussion of tticse linancial instrtrrncrita, see Note 10 to the alrdired
Cotisolidated Financial Starrtiwnts.
37
.-
.. .
... ..
.. .
I Management's Discussion and Analysis
I
of Financ al Condition and Results of Operations
(OFF-UALANTF SHLL
I
I I*MC (Continurrl)
Tti i h e ordinary cwtrse of business, the Company is party to various operating
h s e s . For a mote rle~ailed discussion oflliese financial iristrwiients, see Note 1 0 in
the audited Consolidaled Financial Statrtiients.
l i e following s ~ ~ ~ i i t i i a r i ~ e s
the Comp.atry's long-term contractual obligations at
Deceniher 3 I , 2006:
(Til [housaids)
'Jirric deposits
FHLU Adv.ulc-cs
Other lung-tcrtri drht
Llefcrred Cotripetisarion
Liability (1 j
Salary Continuation Liability (1 j
Obligtiotts reflected
on Curisirlidaied
Ralaiice Sheet
Operating I c w ubligatiotis
Obli@ma i i y t rellected
uti Cotisohdated
R h c e Sheet
k 7 S than
1 year
$ '13,946
2,001)
1,250
1,355
566
~.
1-3 years
3-5 ycars
lierafter
'lord
5 8,186 $ 2.038
$
-
-
-
$ 104,170
2.000
1,250
61
292
275
~
1.152
1,416
2,285
$W,l17
~
$ 8,539 $ 2,313 $..Q
$111,121
-
~ $
933
~ $ 2,091
.. $ .~ 1,870 - $ 8,506 $13,400
specified time periods, net interest intome will generally br positively impacted hy
a n increasing ititcresr r x e enviroritnrnt and negatively impacted by a dccrrasing
interest rate rtiviroiinient. 3 i c speed and velocity of the 1-epricing vf assets and
liabilitics will also contribute l o die effects o r i our N11, as will tlrc presence or
absence of periodic and lifetime interest rate cq>s and Hoors.
Sirriitlaiion of earnings is the primary tool used to measure t h sensitivity of
carrlitigs io interest rate cliangcs. Larnings sitnulatioiis arc prorlucrd using a
software triode1 that is based on actual cash flows and repricing Lharacreristics for :ill
of our financial instruments and incorporate market-basrd assumptions rrgarding
the impact of changing interest rates on current volutrics of applicable firraricial
instrutrirrirs.
Ttilerest rate simulations provide us witli a n estimate of both the dollar miount
and percentage charige i n N11 under various rate scenarios. All assets and liabilities
arc norrnally suhjected to up to 301) hasis point incrcascs and decreases in irrierest
ratrs i n 101) hayis point iticretiieiits. Under cadi interest rate sccnario, we project
our net interest incotne. From these rcsiills, we can then develop alternatives in
dealing with the tolerance thresholds.
Apptoxirnatrly 88% of our h t
portfolio is tied tu adjustable rate inrliccs and
53% ofour Ic)aii pitfolio rcpriLw wirliiii 90 days. It o f h x m h e r 31,2006, we had 95
comtiirrcial and real csfate l ~ a i i s totaling $44,481 ,W with floors ranging from 1%)
to 8% and ceilings I-mging from 9% to 25% In thc ctirreiit rate environrnent, t h e
number of loans alfected by floors and ceilings is minimal.
r
The following tahle shows t h u elfects of changes in projected net interest iticotiie
for tlic iwelve months ending December 31, 2007 iiridcr the interest rate slinck
scrtiarins stated. 'Ihc table was prepared as of Dccrtnher 31, 2006. at which time
prime intei-t-st rate was 8.25%.
$
133
rh 2,091
Is_ 1,870 %8,506 $,400 --
Sctihilivity Analysi\ 111. ~ r r i ~ i w ~
on Intel-cst Incoriic 01'R~ite Change\
(I)IlANTI'I'AI'IVL ANT) (.)~JAI,I~I'A'I'IV~ 1)ISCI OSIIRES AUOCI 1
MARK ET I< IS l i
Interest rate risk ("IRR") and credit risk constitiiir i l i e two grearcst sources or
financial exposure for insured financial iri,tirrrtions. IRK represents the inrpic~ [hat
changes iri ahsolute and relative Icvclh (>I' market interest rates rriay have upon OUT
rirt interest inconic ("NIT"). Chatiges in the N l l :ire tlic result of changes in the rict
interest spread between interest-earning as
s t i d inierest-bearing liabiliticc (iitiiitig
risk), thr relationship bctwccri varioiis rates (basis risk), a r i d ~ h a n g e s i n the shape of
the yicld curve.
We realize inconic priticipally from the difhcrential or spread between the intcrcsi
rained on loans, invcsttnrnls, other interest-earning asscis and the interest inciirrcd (>ti
deposits and borrowings. l i e volumcs ant1 yields i i t i loans, deposits anrl borrowings
are affictcd by rnarkrt interest 1-ates. hs ofDcccmber 31, 2006, 8 W o ofour loan
portfolio was tied to adjusrahle-rate indices. The majority of these adjustable-rate
loans arc tied to pritiie and reprice within 90 rlayh. l i e tiiajoi-ity of our tirric drpnsiis
have a &xed r u e of interest. As of [)cr-ctnher 31, 200G. 90.20/0 ofciur titiie deposits
triaiure within one year or I c ~ s . As of Ilecembcr 31, 2006, $2,01)0,000 of our short
term debt was fixed rate which niatiircs uti Fcliriiary 12, 2007, and $1,250,000 id'
shiri-ierni deht which reprices i i t i a quar[erly basis.
Changes in the tnarkei level of interest raws rlircitly and imniediately a f f k t our
interest s p r c d , and therefore profitability. Sharp and significant changes ti., tiiarker
rates i'an cause the intcrcst spread to shrink or expand significantly i t i thr nrar term,
priticipdly because ofthc tirriirig dillrrences between the arljustablc raie loans and the
rna~iirities (and therefore repricing) of th
O u r management a t d Board of 1)irec
arr responsible for managirig our assets a
prdit;ihiIit~ IKK and various otlicr risks including liquidity. l i e A I C O operates
utrdrr policies and within risk lirriits prcscrihed, reviewed, anrl approved Iiy the Hoard
of Directors.
'The AI.CC) seeks to stabilize our N11 by rnatcliitrg ra~e-sensitive assets and
1isl)iliiies ihrough maintaining the maturity a r i d repricing of these assets and liabilities
'it appropriate lcvcls giveti i h e itiieres1 rate environment. When thc atriolttii of
rate-scrisitivr liahilities exceeds rate-sensitive assets within apecilied time periods, N11
generally will he negatively impacted by aii incrnsing interest rate environment and
positively impacted by a dccrcasitig interest rate riivirotiiiieiit. Conversely, when the
atliounr o f rate-sensitive asscts cxcccrls the anrotmi o f ratr-sensitive liabilities within
38
Hypothetical
Change Irr Raies
(L)ollars iri thousands)
UP 300 bp
U P 200 bp
U P 100 bp
CINCHANC ED
TIOWN 100 hp
DOWN 200 bp
UOWN 300 1,p
I'rujcctcd
NCI Iriiereit
Iticome
$ Chmgc lrurri
K7tch At
L k L . 31 , 2OOh
128,982
27,477
26,240
26,001
25.542
24,441J
23.042
I
$ 2 , ~
1.476
239
(459)
(1.561)
(2,059)
Assumptions arc irilicrrtiily iincertain, anrl, coriavquently, the model catirioi
pi-eciscly mcasiirc trci interest income ot prc<:isrly predict the impact of changes in
interest rates on rict i n rerest income. Actual results will diffir from sirriulaled results
due to timing, rriagtiitude and frequency of itlierest rate changes, as well a s changes
in marltct cciridirions and managcmcrit sttaregies which might nlotlrrare rhe negative
consequences of iiitrrrsr rate deviations. Ttr tlir model above. the siniiilation shows
that the Company i E neutral over the one-ycar horiznn. If interest rates iricrrase or
dccliric, tlicrr will he similar positive and negative impact to net ititerrsi income.
l i e r e is no material ctiarigc i n our current market risk c x p o s i ~ r e from the market
risk exposure we cxyerienced i n 2005. 'Ihc oiltoitlie ol'the sensitivity Analysis
coritlrrc.tetl Ihr 2005 was essentially thc ~ a i i i e u 2000.
Tlic Srcurities and Lxchangc Corrirriiwinn ('%E(:")
issued disclosiirc guidance
for "criiical accounting policies". The SF,(: defines "critical accourrtitig policies" as
thosr ~ h a r require application of trlariagement's tilost difficult, subjective or complex
jutlgrrictirs, o f l e n as a result ofthc need i o tnake estimates about the cffkcr of tiiattei-s
that arc irllicrrtitly uncertain and may chatrgr i n future periods.
Our accoiiritirig policies are integral to utidersiatiding the results reported. O u r
signi6c:arit accwnting policies arc described it! deiail it1 Note 1 in the audited
Cnnsolidated Financial Statements. Nor all of the significant accounting policies
presented in Note 1 o f the autlitcd wnsnlidated financial statements require
management to mike cJilLculi, suhjeccive or coiiiplcx jurlgr~icrits or eslimates.
1
Management's Discussion and Analysis
of Financial Condition and Results of Operations
. ...
- --
CRITICAI. ACCOIINI'ING POI,ICICS (Ci:rtiriti~~cd)
Use of Bstimates
'Ihe pi-eparation of these financial stdeiiurc.;, rxpcttctl stocI< volatility and the risLfrcc interest ratc..
'Ihe calculation of tlie Fair value ofshare based paytrierits is by natiirc inexact, and
represents management's hest esrimale of lire gl.atil datr f i i t valw o f t h c aharc bascrl
paytrierits. Scc Nutc I to the audited Consolidated Financial Slaremetits.
1NFI.ATIC)N
'Ihc impact ofinflation on a financial itisiituiiciii difIicrs sigriiGcantly from that
cxcrtccl on other industries primarily because tlie ;isseis and liabilirics of financial
itisiitiitiwis consist largely ofmanetary items. However, litiaticial i n s t i r i i t i o t i s arc
affkrtcd by inflation in part through noti-interest expenses, such as salaries and
urcupmcy cxpcnscs. and to some extent by changes i n ititrrrst rates.
Ai h c t r i b c r 31. 2006, we do not helieve that inflation will have a material
imlxict ( . i n o i i t rotisolitlatcd financial position or results of operatiotis. However, if
inflation concerns cause sliori irriii rates tu rise in the near future, we may benefit
by immediate repriciiia of a majrrriiy d n u r l o a t r portfulio. Kcfcr to Market Risk for
futllier d i s c u>sion.
iiicrcase, prcp:~ymcnts would be expected 10 dccliric arid
We invest i 11 < :ol I a I c ra I i ~ c d Mu rtgagc Ohligations (" ( : M (1") and Mo rtgagc
Racltcd Securities, ("MUS") as p i r i o ~ t l i c uvcrdl strateby to increase oiir net interest
margin. CMOS and MBS hy their nature react t i ) r:liatigcs in interest rates. 111 a
declining rate eiiviri.iritricnt, prepayments fi-om MDS a n d C:MT)a would he expected
to increase and the expected life of the investment would he e x p e c i r d 10 shorten.
Convcrscly. if interest r ~ e s
I
(
the average lifc ofthe MUS and (:MOs ~
atiiori i/,;iiioti (I(' thcsc investments affects our tiel itiirrcst itiromc. C)ur m,uiagement
iiioiiirors tlir prcpaytricnt spccd of these iiivesrtiieiiiq aid a d j u s t s premium
aiiiorii/.~itiiti based on scvcral factors. 'lhese fmirr.; i t d d c the type ofinvestmeni,
the iiivesttiieiil s [ r w t i i r c , ititcrest rates, interest rares on tirw mortgage loans,
expectation of ititeresi rate rliatigcs, current economic cotiditiirti~, lcvcl of principal
remaining on the bond, d i e hond ioiipori rate, the bond originalion d a i c , atid
~ ~ I U I I I C ~rf'availablc bonds in market. The calLiilation ufprcmiutii miortix.Aiioti is
Iiy nature inexact, and repiwetits trianagcmcnt's best estiiiiair of pritiripal paydowiis
inlierent in thc total invesimetri potthlio,
I
~
I.ic expected to extend. Pretiiiuni
I
I
Goodwill
Business coiiihitiaii(.itis involving the (:ompan
or net m e t s of