2010
Annual Report
1
Success In A Year Of Economic Challenge
Despite another year of economic volatility, the Company achieved several
encouraging highlights. We earned a profit each quarter throughout the
recession, improved our loan quality trends, and demonstrated growth in
both assets and deposits while expanding our presence in Modesto and
Merced. While the Bank did not fully achieve its financial goals, 2010
will be remembered as a year of growth and outperforming its peers by
most measures.
Most business owners felt 2010 was very much like 2009. Foreclosures and
bankruptcies continued at high levels, despite the stabilization of residential
real estate values. And due to lower rents, higher vacancies and cap rates,
commercial real estate values continued to decline.
The banking industry remained troubled in 2010, with bank closures rising
from 140 in 2009 to 157 in 2010 – an increase of 12%. Banks considered
to be “in trouble” more than doubled, rising from 400 in 2009 to 860 in
2010. Currently, there are 884 troubled banks – more than 10% of the
total banks in the U.S. Additionally, 60% of the banks in California are
under some form of regulatory order. Fortunately, our Bank is not a part
of these groups.
Due to continued strong performance versus other banks in California and
the Western U.S., our Bank is in much better shape than most others. Still,
the strength and soundness of our Company will be tested in 2011, as it
promises to be another challenging year.
Sound Earnings & Financial Performance
The Company has shown profits throughout the recession and we were
profitable for each quarter in 2010, ending the year with increased earnings
over 2009. However, the overall economy is still a challenge for many of
our clients and, coupled with the uncertain length of the current economic
cycle, the Bank has chosen to continue increasing reserves and capital.
We are encouraged that certain business sectors such as agriculture are
doing well, and that real estate values are stabilizing. And we remain
thankful that our loyal customers have seen the benefit of our 31 years of
financial advocacy, and have chosen not only to remain with our Bank but
also to provide new business referrals.
We remained diligent in reducing non-performing loans from the peak
of the recession and continued to build our reserves, liquidity and capital
in 2010. Our biggest challenge in 2010 was increasing quality loans, as
many customers were hesitant to increase their debt during continued
economic uncertainty. Additionally, as current loans were paid down,
it was challenging to replace them with new loans to help our earnings.
However, Central Valley Community Bank fared better in the quality of
our loans than many other banks. Our diversified loan portfolio and quality
borrowers helped our performance, as well as the fact that we are not as
concentrated in construction and investment real estate loans as other banks.
Non-performing assets, including OREO, improved in the year-over-year
comparison. And with the advocacy of our seasoned lending team, we have
helped many of our business customers make the best of these challenging
years. As more customers take a “flight to safety” in the current economic
cycle, deposits have grown and the costs of those deposits have decreased.
Shareholder Value Remains Strong
Maximizing shareholder value remains our top priority. While the
Company’s stock continues to trade below book value, and there appears to
be no single reason, we remain committed to raising this value so that we
can pursue new growth. We are pleased to report that Sandler O’Neill +
Partners, L.P. named our Company stock as one of their “Top Investment
Ideas” for both 2010 and 2011.
Our non-interest income was negatively impacted due to changes in
Regulation E, which affects overdraft services. To mitigate most of this
lost revenue, we made changes to our suite of checking accounts and are
planning additional services for 2011.
The Company has been approved by the U.S. Treasury to repay our preferred
shares of stock under TARP, subject to regulatory approval. However, we
want to be sure this additional capital is not needed immediately for future
expansion or bolstering our capital in the uncertain economy.
2
Shareholders can take heart in the fact that we have passed the 30-year
milestone in strong, stable banking. This stability descends largely from our
dedicated Board of Directors, which continues to provide value in terms of
length of service, guidance and prudent business decisions.
A Milestone Year For The Bank
Beyond the Bank’s 30th anniversary celebration, we marked 2010 with
two notable expansions. In September, the Bank expanded its presence
in Modesto, taking advantage of the closure of another community bank
office. We opened a new, full-service branch and hired six local banking
professionals, while consolidating the Bank’s existing Modesto loan
production office into the new larger facility. This expanded office marks
our 17th full-service branch in the Valley.
In November, the Merced region experienced its own community bank
office closure, and the Bank relocated its existing Merced office to the
larger facility vacated by the departing bank. The Bank hired four banking
professionals for the newly-expanded branch, providing employment to
experienced bankers who would have otherwise lost their jobs. Their strong
relationship skills have benefitted the Bank as they have successfully added
new customers to the Merced office.
We continue to support our communities not only with financial donations
to worthwhile nonprofit organizations, but also with the number of Bank
employees who willingly share their expertise, like team member Tom
Sommer who chairs the CASA Board of Directors in Fresno. As President
and CEO, I personally serve on many local nonprofit boards, and was
recently appointed to a three-year term on the Federal Reserve Bank of San
Francisco’s Twelfth District Community Depository Institutions Advisory
Council. I also serve as immediate Past Chairman of the Board for the
California Bankers Association.
Other 2010 highlights include the continuation of our popular document
shredding events. To demonstrate our commitment to customer privacy
and security, we offered free document shredding for customers and the
community at large. The events coincided with tax season at 14 of our
Central Valley offices, continuing a four-year tradition.
The year also found the Bank making a number of changes to products and
services; among them, the fourth quarter launch of a new suite of value-
added Personal Checking accounts that offer expanded convenience, savings
and identity protection.
We expanded our Cash Management department in 2010 with a seasoned
team member in the northern Valley, added Lock Box for business
customers, and prepared for a significant upgrade to our business online
banking platform in 2011, including enhanced security. To improve future
efficiency, we streamlined customer information files, and prepared our
personal online platform for a 2011 conversion, allowing customers to
“bank their way” in a robust system that provides added convenience and
E-Statement service.
financial institutions, and suggested banks were bailed out with TARP, even
though 75% of those dollars have been repaid to the U.S. Treasury with a
handsome profit. As an industry, we continue to support our communities
with products and services to help businesses grow and consumers meet their
financial goals.
Among the most notable changes affecting the industry in 2010 were overdraft
coverage amendments to Regulation E. As a result, the Bank’s customers were
required to opt-in by August 15, 2010 to authorize the payment of overdrafts
at ATMs and points-of-sale to continue using this valuable service.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was
enacted on July 21, 2010 bringing more regulations that impact our costs and
how we do business. Among its provisions is the creation of the Consumer
Financial Protection Bureau, which wields a great deal of power over banks.
The exact scope of the bureau’s role will be defined over the next few years,
and while we are concerned about the consequences that will likely impact
our customers, we are committed to following the changes carefully, as we
continue to provide the very best products and services to our customers.
Lastly, there were changes in FDIC insurance coverage. As of July 21, 2010
FDIC insurance for bank deposits was permanently increased from $100,000
to $250,000 for all insurable accounts, and its 100% guarantee on non-interest
bearing accounts and Interest on Lawyers Trust Accounts was extended to
December 31, 2012.
Looking Ahead To 2011 & Beyond
As we look to the future, we see big opportunities ahead for Central Valley
Community Bank. Among the most significant is our ability to help customers
expand their businesses and gain a competitive edge, since our Bank has the
capital to allow us to grow with our customers without being saddled by a large
number of problem loans. With our strong capital position and profitability,
we also see opportunities to expand the Bank with potential acquisitions.
All in all, we believe the Bank is solidly positioned for the challenging year
ahead. Much of that strength comes from our team of bankers, our dedicated
Board of Directors and our senior management team, all committed to
expanding our unique brand of strong, secure banking in the communities
we serve. We also appreciate the strong support of our customers and
shareholders, whose trust we strive to earn each day. We thank you for your
role in the Company’s continued success.
Daniel N. Cunningham
Chairman of the Board
Handling Change In The Banking Industry
Congress and the media continued painting the banking industry with a
broad and negative brush in 2010. They categorized all banks as Wall Street
Daniel J. Doyle
President and Chief Executive Officer
3
4
A 31-Year Tradition Of Strong & Secure Banking
Central Valley Community Bancorp (the “Company”) was established
on November 15, 2000, as the holding company for Central Valley
Community Bank (CVCB) and is registered as a bank holding
company with the Board of Governors of the Federal Reserve System.
The Company currently conducts no operations other than through its
ownership of the Bank. The common stock of the Company trades on
the NASDAQ stock exchange under the symbol CVCY.
December 31, 2012. This temporary unlimited coverage is in addition
to, and separate from, the coverage of at least $250,000 available to
depositors under the FDIC’s general deposit insurance rules.
For maximum convenience, Online Banking, Bill Pay and a full range of
Cash Management and Remote Deposit services are available at
www.cvcb.com. In addition, ATMs are available around the clock at
most CVCB offices, BankLine provides 24-hour telephone banking,
and extended days and banking hours are offered at select CVCB offices.
A Strong History Of Steady Growth
Success Built On “Relationship Banking”
Central Valley Community Bank, founded in 1979 as Clovis
Community Bank, is a California State chartered bank with deposit
accounts insured by the Federal Deposit Insurance Corporation
(FDIC). The Bank commenced operations on January 10, 1980,
in Clovis, California, with 12 professional bankers and beginning
assets of $2,000,000. Currently, CVCB operates 17 full-service
offices in Clovis, Fresno, Kerman, Lodi, Madera, Merced, Modesto,
Oakhurst, Prather, Sacramento, Stockton and Tracy, plus Commercial,
Real Estate, SBA and Agribusiness Lending Departments. Investment
services are provided by Investment Centers of America, and Central
Valley Community Insurance Services, LLC, provides financial and
insurance solutions for businesses. Now with over 200 employees and
assets of over $775,000,000 as of December 31, 2010, Central Valley
Community Bank has grown into a well-capitalized institution, with
a proven track record of financial strength, security and stability. Yet
despite the Bank’s growth, it has remained true to its original “roots” –
a commitment to its core values of integrity, trustworthiness, caring,
loyalty, leadership and teamwork.
Central Valley Community Bank distinguishes itself from other
financial institutions through its 31-year track record of strength,
security, client advocacy and the unchanged values that have
guided the Bank since its opening. The Bank’s unique brand of
personalized service has expanded as the operation has strategically
grown throughout the San Joaquin Valley. Guided by a hands-on
Board of Directors and a seasoned senior management team, CVCB
continues to focus on personalized service and customer and employee
satisfaction. The Bank has remained committed to the ongoing addition
and retention of high-quality employees, as evidenced by participating and
being honored twice by the Business Journal as one of the top four “Best
Companies To Work For” in Central California’s six-county region in the
large-sized business category.
Unparalleled Protection, Unbeatable Convenience
Central Valley Community Bank maintains state-of-the-art data
processing and information systems, and offers a complete line
of competitive business and personal deposit and loan products.
Through FDIC insurance, customer deposits for all insurable accounts
are protected up to $250,000. All funds in “noninterest-bearing
transaction accounts” and Interest on Lawyers Trust Accounts
are insured in full by the FDIC from December 31, 2010 through
Central Valley Community Bank has built a reputation for superior
banking service by offering personalized “relationship banking”
for businesses, professionals and individuals. Serving the business
community has always been a primary focus for CVCB, which continues
to expand its commercial banking team to serve even more customers.
The Bank’s experienced local banking professionals live and work in the
local community, and have a deep understanding of the marketplace. As
a result, CVCB has remained an active business lender and is proud to
be ranked number one SBA 504 Lender for Fresno, Kings and Madera
counties for 8 of the past 11 years. Offering a wide range of lending
products, CVCB is committed to helping businesses thrive even in the
toughest economic times.
The Bank is committed to increasing and enhancing its products and
services, while emphasizing needs-based consulting within the branch
environment. Serving both new and long-time customers continues
to be an important factor in the Bank’s growth, as demonstrated in
ongoing customer referrals. Dependable values and security have
always been important to America’s banking customers, and CVCB is
well-positioned to provide them, with an ongoing emphasis on privacy,
safety and convenience.
Leadership Fully Invested In The Community
The Bank is focused not only on individual customers, but also on
investing in the communities it serves. Each year, the Bank donates time,
expertise and financial support to a wide variety of local charities and
philanthropies. Additionally, the Bank’s management currently serves
in over 80 different civic and philanthropic organizations in the Valley.
This includes President and CEO, Dan Doyle, who currently serves on
the Federal Reserve Bank of San Francisco’s Twelfth District Community
Depository Institutions Advisory Council, and is the immediate Past
Chairman of the Board for the California Bankers Association, among
many other organizations.
A Proud Past, A Promising Future
Thanks to the vision of Central Valley Community Bancorp, as well
as the leadership of its Board of Directors, CVCB has grown steadily
and sensibly over the past 31 years, keeping pace with the needs of its
customers and the communities it serves. All while retaining the local
leadership and values that formed the Bank’s firm foundation. Central
Valley Community Bank. Strong. Solid. Unchanging Values.
5
Mission Statement
As A Full Service Bank, We Are Committed To:
Providing a full range of financial services desired
by our customers, while providing superior customer
service delivered in a highly professional and
personal manner
Maintaining a positive work environment and
investing in each individual to“be the best they can be”
Contributing to the quality of life in the communities we serve
Continuing to maximize shareholder value
Being the “Bank of Choice” for customers and employees!
Core Values
Leadership
Integrity
Loyalty
Caring
Teamwork
Trustworthiness
6
Exceptional Employees
Each year Central Valley Community Bank’s top-performing
employees are recognized in the Circle of Excellence, and from
that group, the best are designated to the Circle of Elite.
The 2010 Circle of Elite included:
Cathy Chatoian
Vice President, Cash Management Manager
Darren Ensign
Retail Administrative Officer
Pam Fisher
Consumer Loan Underwriter/Credit Analyst
Teresa Gilio
Vice President, Central Operations Manager
Crystal Grieco
Customer Service Manager
Donielle Kramer
Human Resources Benefits and Payroll Administrator
Corina Ramon
Financial Service Representative
John Zahorowski
Courier
Officers
Holding Company and Bank Officers:
Daniel J. Doyle
President and Chief Executive Officer
David A. Kinross
Senior Vice President,
Chief Financial Officer
Thomas L. Sommer
Senior Vice President,
Credit Administrator
Bank Officers:
Gary D. Quisenberry
Senior Vice President,
Commercial and Business Banking
Lydia E. Shaw
Senior Vice President,
Retail and Consumer Banking
Shelle Abbott
Vice President,
Branch Manager
Evey Amado
Vice President,
Cash Management Officer
Susan Armstrong
Vice President,
Branch Manager
Jacquie Ashjian
Vice President,
Credit Officer
Patrick Carman
Vice President
Senior Credit Officer
Cyndi Carmichael
Vice President,
Compliance Officer
Jason Carlson
Vice President,
Business Development Officer
Vicki Casares
Vice President,
Branch Manager
Cathy Chatoian
Vice President,
Cash Management Manager
Jenhi Ciapponi
Vice President,
Commercial Loan Officer
Terry Crawford
Vice President,
Agricultural Lending Group Manager
Tom Crawley
Vice President,
Commercial Loan Officer
Stan Davis
Vice President,
Small Business/Consumer Underwriting
Department Manager
Daniel Demmers
Vice President,
Information Services Manager
Ken Dodderer
Vice President,
Commercial Loan Officer
Bob Elledge
Vice President,
Commercial Loan Officer
Steve Freeland
Vice President,
Asset Credit Officer
Rod Geist
Vice President,
Branch Manager
Teresa Gilio
Vice President,
Central Operations Manager
Diane Hamp
Vice President,
Loan Servicing Manager
Tim Harris
Vice President,
Private Banking Manager
Charles Jones
Vice President,
Branch Manager
Bernie Kraus
Vice President,
Commercial Loan Officer
Mari Kroigaard
Vice President,
SBA Department Manager
Shawn Kruitbosch
Vice President,
Credit Review Officer
Marci Madsen
Vice President,
Human Resources Director
Brad Majors
Vice President,
Branch Manager
Gina Manley
Vice President,
Branch Manager
Rona Melkus
Vice President,
Controller
Don Mendenhall
Vice President,
Commercial Loan Officer
Sheryl Michael
Vice President,
Branch Manager
Heather Mills
Vice President,
Private Banking Officer
Autumn Muller-Carrillo
Vice President,
Branch Manager
Linda Ogata
Vice President,
Commercial Loan Officer
Frank Oliver
Vice President,
Commercial Loan Officer
Jean Ornelas
Vice President,
Real Estate Construction Loan Officer
Jeff Pace
Vice President,
Real Estate Department Manager
Shannon Reinard
Vice President,
Branch Manager
John Royal
Vice President,
Commercial Loan Officer
Elizabeth Salas
Vice President,
Branch Manager
Karen Smith
Vice President,
Branch Manager
Ryan Streeter
Vice President,
Commercial Loan Officer
Theodore Thome
Vice President,
Commercial Loan Officer
Ramina Ushana
Vice President,
Branch Manager
Doug Van den Enden
Vice President,
Commercial Loan Officer
Robert Walker
Vice President,
Commercial Loan Officer
Jeannine Welton
Vice President,
Branch Manager
Jennette Williams
Vice President,
Commercial Loan Officer
Carol Worstein
Vice President,
Branch Manager
Independent Auditors
Perry-Smith LLP, Sacramento, CA
Counsel
Downey Brand LLP, Sacramento, CA
7
8
Note: The stock price performance shown in the graphs above should not be indicative
of potential future stock price performance.
Source: SNL Financial LC
9
Consolidated Balance Sheets
December 31, 2010 and 2009 (In thousands, except per share amounts)
ASSETS
Cash and due from banks
Interest-earning deposits in other banks
Federal funds sold
Total cash and cash equivalents
Available-for-sale investment securities (Amortized cost of $189,682 at December 31, 2010 and $199,744 at
December 31, 2009)
Loans, less allowance for credit losses of $11,014 at December 31, 2010 and $10,200 at December 31, 2009
Bank premises and equipment, net
Other real estate owned
Bank owned life insurance
Federal Home Loan Bank stock
Goodwill
Core deposit intangibles
Accrued interest receivable and other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Short-term borrowings
Long-term debt
Junior subordinated deferrable interest debentures
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies (Note 12)
Shareholders’ equity:
Preferred stock, no par value, $1,000 per share liquidation preference; 10,000,000 shares authorized;
Series A, no par value, 7,000 shares issued and outstanding
Series B, no par value, issued and outstanding none at December 31, 2010 and 1,359 at December 31,
2009
Common stock, no par value; 80,000,000 authorized; issued and outstanding 9,109,154 at December 31,
2010 and 8,949,754 at December 31, 2009
Non-voting common stock, 1,000,000 authorized; issued and outstanding 258,862 at December 31, 2010
and none at December 31, 2009
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Total shareholders’ equity
$
$
$
2010
2009
$
11,357
89,042
600
100,999
191,325
420,583
5,843
1,325
11,390
3,050
23,577
1,198
18,304
13,857
34,544
279
48,680
197,319
449,007
6,525
2,832
10,998
3,140
23,577
1,612
21,798
777,594
$
765,488
$
173,867
476,628
650,495
10,000
4,000
5,155
10,553
680,203
6,864
-
38,428
1,317
49,815
967
97,391
159,630
480,537
640,167
5,000
14,000
5,155
9,943
674,265
6,819
1,317
37,611
-
46,931
(1,455)
91,223
Total liabilities and shareholders’ equity
$
777,594
$
765,488
The accompanying notes are an integral part of these consolidated financial statements.
8
10
Consolidated Statements
of Income
For the Years Ended December 31, 2010, 2009, and 2008 (In thousands, except per share amounts)
2010
2009
2008
INTEREST INCOME:
Interest and fees on loans
Interest on deposits in other banks
Interest on Federal funds sold
Interest and dividends on investment securities:
Taxable
Exempt from Federal income taxes
Total interest income
INTEREST EXPENSE:
Interest on deposits
Interest on junior subordinated deferrable interest debentures
Other
Total interest expense
Net interest income before provision for credit losses
PROVISION FOR CREDIT LOSSES
Net interest income after provision for credit losses
NON-INTEREST INCOME:
Service charges
Appreciation in cash surrender value of bank owned life insurance
Loan placement fees
Gain on disposal of other real estate owned
Net realized (losses) gains on sales and calls of investment securities
Total impairment on investment securities
Increase in fair value recognized in other comprehensive income
Net impairment loss recognized in earnings
Federal Home Loan Bank dividends
Other income
Total non-interest income
NON-INTEREST EXPENSES:
Salaries and employee benefits
Occupancy and equipment
Regulatory assessments
Data processing expense
Advertising
Audit and accounting fees
Legal fees
Other real estate owned
Amortization of core deposit intangibles
Loss on sale of assets
Other expense
Total non-interest expenses
Income before provision for income taxes
(BENEFIT FROM) PROVISION FOR INCOME TAXES
Net income
Net income
Preferred stock dividends and accretion
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Cash dividends per common share
$
$
$
$
$
$
$
27,390
110
2
5,472
3,039
36,013
3,713
102
468
4,283
31,730
3,800
27,930
3,225
392
300
176
(191)
(3,346)
1,759
(1,587)
11
1,395
3,721
14,871
3,867
1,191
1,197
669
496
495
1,071
414
10
4,460
28,741
2,910
(369)
3,279
3,279
395
2,884
0.31
0.31
-
$
$
$
$
$
$
$
29,920
8
48
7,701
3,057
40,734
5,867
129
631
6,627
34,107
10,514
23,593
3,509
391
231
-
466
-
-
-
7
1,246
5,850
13,926
3,812
1,604
1,316
722
503
330
479
414
55
4,370
27,531
1,912
(676)
2,588
2,588
365
2,223
0.29
0.28
-
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
25,631
39
251
4,806
1,118
31,845
6,340
46
892
7,278
24,567
1,290
23,277
3,350
268
111
-
165
-
-
-
118
1,178
5,190
11,578
2,890
330
848
500
390
141
-
231
-
4,068
20,976
7,491
2,352
5,139
5,139
-
5,139
0.83
0.79
0.10
9
11
Consolidated Statements
of Changes in Shareholders’ Equity
For the Years Ended December 31, 2010, 2009, and 2008 (In thousands, except share and per share amounts)
Preferred Stock
Common Stock
Series A
Series B
Shares
Amount
Shares
Amount
Shares
Amount
Accumulated
Other
Comprehensive
(Loss) Income
(Net of Taxes)
Retained
Earnings
Total
Total
Shareholders’ Comprehensive
Equity
Income
Balance, January 1, 2008
Comprehensive income:
Net income
Other comprehensive income, net
of tax:
Net change in unrealized gain
on available-for-sale
investment securities
Total comprehensive
income
Cash dividend - $.10 per share
Repurchase and retirement of
common stock
Stock issued for acquisition
Stock-based compensation
expense
Stock options exercised and
related tax benefit
Cumulative effect of adopting ASC
715-60 (previously EITF 06-04)
Balance, December 31, 2008
Comprehensive income:
Net income
Other comprehensive income, net
of tax:
Net change in unrealized gain
(loss) on available-for- sale
investment securities
Total comprehensive
income
Issuance of preferred stock
Series A, net of discount
Issuance of preferred stock
Series B, net of issuance cost
Issuance of common stock, net of
issuance costs
Issuance of common stock
warrants
Stock-based compensation
expense
Stock options exercised and
related tax benefit
Preferred stock dividends and
accretion of discount
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7,000
6,775
-
-
-
-
-
-
-
-
-
-
-
44
Comprehensive income:
Net income
Other comprehensive income, net
of tax:
Net change in unrealized gain
(loss) on available-for-sale
investment securities
Total comprehensive
income
Stock-based compensation
expense
Conversion of preferred stock
Series B, to common stock -
non-voting
Stock options exercised and
related tax benefit
Preferred stock dividends and
accretion
-
-
-
-
-
-
-
-
-
-
-
45
Balance, December 31, 2010
7,000 $
6,864
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,359
1,317
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,264,952
6,441
-
-
42,522
-
225
284
182
-
-
-
-
-
-
-
-
-
-
-
-
239
(1,359)
(1,317)
258,862
1,317
-
-
- $
-
-
-
159,400
-
578
-
The accompanying notes are an integral part of these consolidated financial statements.
10
12
5,975,316 $
13,571 $
40,483 $
140 $
54,194
-
-
-
-
-
-
(5,436)
1,628,397
(56)
16,600
-
44,003
-
100
264
-
5,139
-
5,139 $
5,139
-
48
48
48
$
5,187
(598)
-
-
-
-
(316)
-
-
-
-
-
-
(598)
(56)
16,600
100
264
(316)
7,642,280
30,479
44,708
188
75,375
2,588
-
2,588 $
2,588
-
-
-
-
-
-
-
-
(365)
(1,643)
(1,643)
(1,643)
-
-
-
-
-
-
-
-
- $
945
6,775
1,317
6,441
225
284
182
(321)
3,279
-
3,279 $
3,279
-
-
-
-
(395)
2,422
2,422
2,422
$
5,701
-
-
-
-
239
-
578
(350)
9,368,016 $
39,745 $
49,815 $
967 $
97,391
Balance, December 31, 2009
7,000
6,819
1,359
1,317
8,949,754
37,611
46,931
(1,455)
91,223
Consolidated Statements
of Cash Flows
For the Years Ended December 31, 2010, 2009, and 2008 (In thousands)
2010
2009
2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net increase (decrease) in deferred loan fees
Depreciation
Accretion
Amortization
Stock-based compensation
Tax benefit from exercise of stock options
Provision for credit losses
Net other than temporary impairment losses on investment securities
Net realized losses (gains) on sales and calls of available-for-sale investment securities
Net realized losses on sales of held-to-maturity investment securities
Net loss on sale and disposal of equipment
Net gain on sale of other real estate owned
Write down of other real estate owned and other property
Increase in bank owned life insurance, net of expenses
Federal Home Loan Bank stock dividends
Net decrease (increase) in accrued interest receivable and other assets
Net decrease (increase) in prepaid FDIC assessments
Net increase (decrease) in accrued interest payable and other liabilities
(Benefit) provision for deferred income taxes
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash and cash equivalents acquired in acquisition
Purchases of available-for-sale investment securities
Purchases of held-to-maturity investment securities
Proceeds from sales or calls of available-for-sale investment securities
Proceeds from calls of held-to-maturity investment securities
Proceeds from maturity of available-for-sale investment securities
Proceeds from principal repayments of available-for-sale investment securities
Proceeds from principal repayments of held-to-maturity investment securities
Net decrease (increase) in loans
Proceeds from sale of other real estate owned
Purchases of premises and equipment
Proceeds from sale of premises and equipment
Federal Home Loan Bank stock redeemed
Proceeds from bank owned life insurance
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, interest-bearing and savings deposits
Net (decrease) increase in time deposits
Proceeds from issuance of Series A preferred stock and warrants
Net proceeds from issuance of Series B preferred stock
Net proceeds from issuance of common stock
Proceeds from short-term borrowings from Federal Home Loan Bank
Proceeds from long-term borrowings from Federal Home Loan Bank
Repayments of short-term borrowings to Federal Home Loan Bank
Net increase in short-term borrowings
Repayments of borrowings from other financial institutions
Share repurchase and retirement
Proceeds from exercise of stock options
Tax benefit from exercise of stock options
Cash dividend payments on common stock
Cash dividend payments on preferred stock
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
NON-CASH INVESTING ACTIVITIES:
Net pre-tax change in unrealized gain (loss) on available-for-sale investment securities
Cumulative effect of adopting ASC 715-60 (previously EITF 06-04)
NON-CASH FINANCING ACTIVITIES:
Transfer of loans to other real estate owned
Accrued preferred stock dividends
SUPPLEMENTAL SCHEDULE RELATED TO ACQUISITIONS:
Acquisition of Service 1st Bancorp:
Deposits
Fed funds purchased
Short-term borrowings from Federal Home Loan Bank
Junior subordinated deferrable interest debentures
Other liabilities
Loans, net
Goodwill and intangibles
Premises and equipment
Federal Home Loan Bank stock
Investment securities
Other assets
Bank owned life insurance
Stock issued
Cash and cash equivalents acquired, net of cash paid
$
$
$
$
$
$
$
3,279
107
1,262
(983)
2,014
239
(28)
3,800
1,587
191
-
10
(66)
638
(392)
-
3,281
981
594
(2,337)
14,177
-
(39,985)
-
19,594
-
157
27,901
-
21,214
4,203
(595)
5
90
-
32,584
33,877
(23,548)
-
-
-
-
-
(5,000)
-
-
-
550
28
-
(349)
5,558
52,319
48,680
100,999
4,485
301
4,068
-
3,467
45
$
2,588
$
174
1,367
(1,796)
414
284
(7)
10,514
300
(942)
176
55
-
356
(190)
-
(1,106)
(3,740)
(2,259)
788
6,976
-
(82,178)
(410)
40,407
1,474
2,923
29,954
2,793
14,379
-
(991)
-
-
430
8,781
16,415
(11,306)
7,000
1,317
6,441
10,000
-
(10,000)
-
(6,367)
-
175
7
-
(277)
13,405
29,162
19,518
48,680
6,983
690
(2,738)
-
3,921
44
$
$
$
$
$
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
5,139
(370)
1,028
(445)
231
100
(57)
1,290
-
(165)
-
-
-
-
(269)
(118)
(426)
-
294
(556)
5,676
2,132
(57,484)
(7,466)
12,327
-
9,000
18,525
501
(24,666)
-
(1,092)
-
-
-
(48,223)
26,676
12,332
-
-
-
135,500
19,000
(165,500)
2,803
-
(56)
207
57
(598)
-
30,421
(12,126)
31,644
19,518
6,926
3,209
79
(316)
-
-
193,488
3,565
10,000
5,155
4,220
(116,028)
(16,239)
(1,070)
(1,000)
(83,099)
(9,644)
(3,816)
16,600
2,132
11
13
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - Central Valley Community Bancorp (the ‘‘Company’’) was incorporated
on February 7, 2000 and subsequently obtained approval from the Board of
Governors of the Federal Reserve System to be a bank holding company in
connection with its acquisition of Central Valley Community Bank (the ‘‘Bank’’).
The Company became the sole shareholder of the Bank on November 15, 2000
in a statutory merger, pursuant to which each outstanding share of the Bank’s
common stock was exchanged for one share of common stock of the Company.
The Bank of Madera County (BMC) was merged with and into the Bank on
January 1, 2005. The transaction was a combination of cash and stock and was
accounted for under the purchase method of accounting. BMC had two branches
in Madera County which continue to be operated by the Bank.
Service 1st Bancorp (Service 1st) and Service 1st Bank (S1 Bank) were merged
with and into the Company and the Bank, respectively, on November 13, 2008.
The transaction was a combination of cash and stock and was accounted for
under the purchase method of accounting. Accordingly, the operating results of
the Company only include the operations of Service 1st subsequent to the
acquisition. Service 1st Bank had three branches in Tracy, Stockton and Lodi,
California, which continue to be operated by the Bank.
Service 1st Capital Trust I (the ‘‘Trust’’) is a business trust formed by Service
1st for the sole purpose of issuing trust preferred securities. The Company
succeeded to all the rights and obligations of Service 1st in connection with the
acquisition of Service 1st. The Trust is a wholly-owned subsidiary of the
Company.
The Bank operates 17 full service offices in Clovis, Fresno, west and northeast
Fresno County, Madera County, Tracy, Stockton, Lodi, Merced, Modesto, and
Sacramento, California. The Bank’s primary source of revenue is providing loans
to customers who are predominately small and middle-market businesses and
individuals.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation (FDIC) up to applicable legal limits. The FDIC implemented
unlimited deposit insurance coverage on non-interest bearing transaction accounts
beginning December 31, 2010, and ending December 31, 2012, as mandated by
the Dodd-Frank Act. This coverage replaces the unlimited coverage under the
Transaction Account Guarantee Program. Coverage under this program is
confined to non-interest bearing accounts and does not cover interest-bearing
NOW accounts but does include Interest on Lawyers Trust Accounts (IOLTAs).
Coverage on all other accounts including interest bearing NOW accounts is
limited to $250,000 beginning January 1, 2011.
The accounting and reporting policies of Central Valley Community Bancorp
and Subsidiary conform with accounting principles generally accepted in the
United States of America and prevailing practices within the banking industry.
Management has determined that because all of the banking products and
services offered by the Company are available in each branch of the Bank, all
branches are located within the same economic environment and management
does not allocate resources based on the performance of different lending or
transaction activities, it is appropriate to aggregate the Bank branches and report
them as a single operating segment. No customer accounts for more than
10 percent of revenues for the Company or the Bank.
Certain reclassifications have been made to prior years’ balances to conform to
classifications used in 2010.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and the consolidated accounts of its wholly-owned
subsidiary, the Bank.
For financial reporting purposes, Service 1st Capital Trust I, a wholly-owned
subsidiary acquired in the merger of Service 1st Bancorp (see Note 2) and formed
for the exclusive purpose of issuing trust preferred securities, is not consolidated
into the Company’s consolidated financial statements and, accordingly, is
accounted for under the equity method. The Company’s investment in the Trust
is included in accrued interest receivable and other assets on the consolidated
balance sheet. The junior subordinated deferrable interest debentures issued and
guaranteed by the Company and held by the Trust are reflected as debt in the
consolidated balance sheet.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents - For the purpose of the statement of cash flows,
cash, due from banks and Federal funds sold are considered to be cash
equivalents. Generally, Federal funds are sold for one-day periods.
Investment Securities - Investments are classified into the following categories:
• Available-for-sale securities, reported at fair value, with unrealized gains and
losses excluded from earnings and reported, net of taxes, as accumulated other
comprehensive income (loss) within shareholders’ equity.
• Held-to-maturity securities, which management has the positive intent and
ability to hold to maturity, reported at amortized cost, adjusted for the
accretion of discounts and amortization of premiums.
Management determines the appropriate classification of its investments at the
time of purchase and may only change the classification in certain limited
circumstances. All transfers between categories are accounted for at fair value. For
the year ended December 31, 2010, there were no transfers between categories.
During 2009, one security was transferred from held-to-maturity to
available-for-sale. At December 31, 2010, the Company had no held-to-maturity
securities.
Gains or losses on the sale of investment securities are computed on the
specific identification method. Interest earned on investment securities is reported
in interest income, net of applicable adjustments for accretion of discounts and
amortization of premiums.
An investment security is impaired when its carrying value is greater than its
fair value. Investment securities that are impaired are evaluated on at least a
quarterly basis and more frequently when economic or market conditions warrant
such an evaluation to determine whether such a decline in their fair value is
other than temporary. Management utilizes criteria such as the magnitude and
duration of the decline and the intent and ability of the Company to retain its
investment in the securities for a period of time sufficient to allow for an
anticipated recovery in fair value, in addition to the reasons underlying the
decline, to determine whether the loss in value is other than temporary. The
term ‘‘other than temporary’’ is not intended to indicate that the decline is
permanent, but indicates that the prospects for a near-term recovery of value is
not necessarily favorable, or that there is a lack of evidence to support a realizable
value equal to or greater than the carrying value of the investment. Once a
decline in value is determined to be other than temporary, and management does
not intend to sell the security or it is more likely than not that the Company
will not be required to sell the security before recovery, only the portion of the
impairment loss representing credit exposure is recognized as a charge to
earnings, with the balance recognized as a charge to other comprehensive income.
If management intends to sell the security or it is more likely than not that the
Company will be required to sell the security before recovering its forecasted cost,
the entire impairment loss is recognized as a charge to earnings.
Loans - Loans are stated at principal balances outstanding. Interest is accrued
daily based upon outstanding loan balances. However, when, in the opinion of
management, loans are considered impaired and the future collectibility of
interest and principal is in serious doubt, a loan is placed on nonaccrual status
and the accrual of interest income is suspended. Any interest accrued but unpaid
is charged against income. Payments received are applied to reduce principal to
ensure collection. Subsequent payments on these loans, or payments received on
nonaccrual loans for which the ultimate collectibility of principal is not in doubt,
are applied first to principal until fully collected and then to interest.
Substantially all loan origination fees, commitment fees, direct loan
origination costs and purchase premiums and discounts on loans are deferred and
recognized as an adjustment of yield, and amortized to interest income over the
contractual term of the loan. The unamortized balance of deferred fees and costs
is reported as a component of net loans.
The Company may acquire loans through a business combination or a
purchase for which differences may exist between the contractual cash flows and
the cash flows expected to be collected due, at least in part, to credit quality.
When the Company acquires such loans, the yield that may be accreted
(accretable yield) is limited to the excess of the Company’s estimate of
undiscounted cash flows expected to be collected over the Company’s initial
investment in the loan. The excess of contractual cash flows over cash flows
12
14
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
expected to be collected may not be recognized as an adjustment to yield, loss, or
a valuation allowance. Subsequent increases in cash flows expected to be collected
generally are recognized prospectively through adjustment of the loan’s yield over
its remaining life. Decreases in cash flows expected to be collected are recognized
as an impairment. The Company does not ‘‘carry over’’ or create a valuation
allowance in the initial accounting for loans acquired under these circumstances.
At December 31, 2010, the Company has loans that were acquired through
the merger with Service 1st for which there was, at acquisition, evidence of
deterioration of credit quality since origination and for which it was probable, at
acquisition, that all contractually required payments would not be collected.
Loans acquired for which it was probable at acquisition that all contractually
required payments would not be collected are as follows (in thousands):
Contractually required payments at acquisition:
Commercial
Real estate
Consumer
Outstanding balance at acquisition
Fair value at acquisition
$
$
$
1,582
10,650
149
12,381
8,927
Subsequent to the acquisition, all of these loans were placed on nonaccrual
status. In 2010, the Bank foreclosed on one loan and the current carrying value
is included in other real estate owned (OREO) at December 31, 2010. In 2009,
the Bank foreclosed on one loan and the carrying value was included in OREO
at December 31, 2009. The property was sold in 2010 and is not included in
OREO at December 31, 2010. The outstanding contractual balance and carrying
amount of loans and OREO acquired through the merger with Service 1st for
which the carrying value was adjusted due to credit quality are as follows at
December 31, 2010 and 2009 (in thousands):
Commercial
Real estate
Consumer
Outstanding contractual balance
Carrying amount at December 31 included in
loans
Carrying amount at December 31 included in
OREO
Total at December 31
2010
2009
$
$
$
$
$
$
$
1,479
2,455
147
4,081
1,385
745
1,479
5,185
147
6,811
3,620
2,464
2,130
$
6,084
Allowance for Credit Losses - The allowance for credit losses is an estimate of
credit losses inherent in the Company’s loan portfolio that have been incurred as
of the balance-sheet date. The allowance is established through a provision for
credit losses which is charged to expense. Additions to the allowance are expected
to maintain the adequacy of the total allowance after credit losses and loan
growth. Credit exposures determined to be uncollectible are charged against the
allowance. Cash received on previously charged off amounts is recorded as a
recovery to the allowance. The overall allowance consists of two primary
components, specific reserves related to impaired loans and general reserves for
inherent losses related to loans that are not impaired.
A loan is considered impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due,
including principal and interest, according to the contractual terms of the
original agreement. Loans determined to be impaired are individually evaluated
for impairment. When a loan is impaired, the Company measures impairment
based on the present value of expected future cash flows discounted at the loan’s
effective interest rate, except that as a practical expedient, it may measure
impairment based on a loan’s observable market price, or the fair value of the
collateral if the loan is collateral dependent. A loan is collateral dependent if the
repayment of the loan is expected to be provided solely by the underlying
collateral.
A restructuring of a debt constitutes a troubled debt restructuring (TDR) if
the Company for economic or legal reasons related to the debtor’s financial
difficulties grants a concession to the debtor that it would not otherwise consider.
Restructured workout loans typically present an elevated level of credit risk as the
borrowers are not able to perform according to the original contractual terms.
Loans that are reported as TDRs are considered impaired and measured for
impairment as described above.
The determination of the general reserve for loans that are not impaired is
based on estimates made by management, including but not limited to,
consideration of historical losses by portfolio segment, internal asset
classifications, and qualitative factors including economic trends in the
Company’s service areas, industry experience and trends, geographic
concentrations, estimated collateral values, the Company’s underwriting policies,
the character of the loan portfolio, and probable losses inherent in the portfolio
taken as a whole.
The Company maintains a separate allowance for each portfolio segment.
These portfolio segments include commercial and industrial, agricultural land and
production, owner occupied real estate, real estate construction (including land
and development loans), commercial real estate, equity loans and lines of credit,
consumer loans and financing leases. The allowance for credit losses attributable
to each portfolio segment, which includes both impaired loans and loans that are
not impaired, is combined to determine the Company’s overall allowance, which
is included on the consolidated balance sheet.
The Company assigns a risk rating to all loans, except pools of homogeneous
loans, and periodically performs detailed reviews of all such loans over a certain
threshold to identify credit risks and to assess the overall collectability of the
portfolio. These risk ratings are also subject to examination by independent
specialists engaged by the Company and the Company’s regulators. During these
internal reviews, management monitors and analyzes the financial condition of
borrowers and guarantors, trends in the industries in which borrowers operate
and the fair values of collateral securing these loans. These credit quality
indicators are used to assign a risk rating to each individual loan. The risk ratings
can be grouped into five major categories, defined as follows:
Pass - A pass loan is a strong credit with no existing or known potential
weaknesses deserving of management’s close attention.
Special Mention - A special mention loan has potential weaknesses that
deserve management’s close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan or
in the Company’s credit position at some future date. Special Mention loans are
not adversely classified and do not expose the Company to sufficient risk to
warrant adverse classification.
Substandard - A substandard loan is not adequately protected by the current
sound worth and paying capacity of the borrower or the value of the collateral
pledged, if any. Loans classified as substandard have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses
include a project’s lack of marketability, inadequate cash flow or collateral
support, failure to complete construction on time or the project’s failure to fulfill
economic expectations. They are characterized by the distinct possibility that the
Company will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified doubtful have all the weaknesses inherent in those
classified as substandard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently known facts, conditions
and values, highly questionable and improbable. The possibility of loss is
extremely high, but because of certain important and reasonably specific pending
factors, which may work to the advantage and strengthening of the asset, its
classification as an estimated loss is deferred until its more exact status may be
determined. Pending factors include proposed merger, acquisition, or liquidation
procedures, capital injection, perfecting liens on additional collateral, and
refinancing plans. Doubtful classification is considered temporary and short term.
Loss - Loans classified as loss are considered uncollectible and charged off
immediately.
The general reserve component of the allowance for loan losses also consists of
reserve factors that are based on management’s assessment of the following for
13
15
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Consumer and installment - An installment loan portfolio is usually
each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other
qualitative factors. Inherent credit risk and qualitative reserve factors are
inherently subjective and are driven by the repayment risk associated with each
class of loans described below.
Commercial:
Commercial and industrial - Commercial and industrial loans generally
possess a lower inherent risk of loss than real estate portfolio segments because
these loans are generally underwritten to existing cash flows of operating
businesses. Debt coverage is provided by business cash flows and economic trends
influenced by unemployment rates and other key economic indicators are closely
correlated to the credit quality of these loans.
Agricultural land and production - Loans secured by crop production and
livestock are especially vulnerable to two risk factors that are largely outside the
control of Company and borrowers: commodity prices and weather conditions.
Lease Financing Receivables - Participations either acquired in the Service
1st acquisition; principally funding airplanes or self transport of personal property.
Also funds provided to fund solar applications. Continued funding in this
category has significantly decreased and assessment of risk is found in increased
fuel costs. In addition unemployment, ‘‘Green’’ environmental influences and
other key economic indicators are closely tied to credit quality.
Real Estate:
Owner Occupied - Real estate collateral secured by commercial or professional
properties with repayment arising from the owner’s business cash flow. To meet
this classification, the owner’s operation must occupy no less than 50% of the
real estate held. Financial profitability and capacity to meet the cyclical nature of
the industry and related real estate market over a significant timeframe is
essential.
Real estate construction and other land loans - Land and construction loans
generally possess a higher inherent risk of loss than other real estate portfolio
segments. A major risk arises from the necessity to complete projects within
specified cost and time lines. Trends in the construction industry significantly
impact the credit quality of these loans, as demand drives construction activity.
In addition, trends in real estate values significantly impact the credit quality of
these loans, as property values determine the economic viability of construction
projects.
Commercial real estate - Commercial real estate loans generally possess a
higher inherent risk of loss than other real estate portfolio segments, except land
and construction loans. Adverse economic developments or an overbuilt market
impact commercial real estate projects and may result in troubled loans. Trends
in vacancy rates of commercial properties impact the credit quality of these loans.
High vacancy rates reduce operating revenues and the ability for properties to
produce sufficient cash flow to service debt obligations.
Other Real Estate - Primarily Loans secured by agricultural real estate for
development and production of permanent plantings have not reached maximum
yields. Also real estate loans where agricultural vertical integration exists in
packing and shipping of commodities. Risk is primarily based on liquidity of
borrower to sustain payment during the development period. In addition weather
conditions and commodity prices within obligor’s existing agricultural production
may affect repayment.
Consumer:
Equity loans and lines of credit - The degree of risk in residential real estate
lending depends primarily on the loan amount in relation to collateral value, the
interest rate and the borrower’s ability to repay in an orderly fashion. These loans
generally possess a lower inherent risk of loss than other real estate portfolio
segments. Economic trends determined by unemployment rates and other key
economic indicators are closely correlated to the credit quality of these loans.
Weak economic trends indicate that the borrowers’ capacity to repay their
obligations may be deteriorating.
comprised of a large number of small loans scheduled to be amortized over a
specific period. Most installment loans are made directly for consumer purchases,
but business loans granted for the purchase of heavy equipment or industrial
vehicles may also be included. Consumer loans included credit card and other
open ended unsecured consumer receivables. Credit card receivables and open
ended unsecured receivables generally have a higher rate of default than all other
portfolio segments and are also impacted by weak economic conditions and
trends. Credit card receivables and open ended unsecured receivables in
homogeneous loan portfolio segments are not evaluated for specific impairment.
Although management believes the allowance to be adequate, ultimate losses
may vary from its estimates. At least quarterly, the Board of Directors reviews the
adequacy of the allowance, including consideration of the relative risks in the
portfolio, current economic conditions and other factors. If the Board of
Directors and management determine that changes are warranted based on those
reviews, the allowance is adjusted. In addition, the Company’s primary regulators,
the FDIC and California Department of Financial Institutions, as an integral
part of their examination process, review the adequacy of the allowance. These
regulatory agencies may require additions to the allowance based on their
judgment about information available at the time of their examinations.
Bank Premises and Equipment - Bank premises and equipment are carried at cost.
Depreciation is determined using the straight-line method over the estimated
useful lives of the related assets. The useful lives of Bank premises are estimated
to be between twenty and forty years. The useful lives of improvements to Bank
premises, furniture, fixtures and equipment are estimated to be three to ten years.
Leasehold improvements are amortized over the life of the asset or the term of
the related lease, whichever is shorter. When assets are sold or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to expense as incurred.
The Bank evaluates premises and equipment for financial impairment as
events or changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable.
Other Real Estate Owned - Other real estate owned (OREO) is comprised of
property acquired through foreclosure proceedings or acceptance of deeds-in-lieu
of foreclosure. Losses recognized at the time of acquiring property in full or
partial satisfaction of debt are charged against the allowance for credit losses.
OREO is initially recorded at fair value less estimated disposition costs. Fair value
of OREO is generally based on an independent appraisal of the property.
Subsequent to initial measurement, OREO is carried at the lower of the recorded
investment or fair value less costs to sell. Revenues and expenses associated with
OREO, and subsequent adjustment to the fair value of the property and to the
estimated costs of disposal, are realized and reported as a component of
noninterest expense when incurred.
Goodwill - Business combinations involving the Bank’s acquisition of the equity
interests or net assets of another enterprise give rise to goodwill. Total goodwill at
December 31, 2010 was $23,577,000 consisting of $14,643,000 and $8,934,000
representing the excess of the cost of Service 1st Bank and Bank of Madera
County, respectively, over the net of the amounts assigned to assets acquired and
liabilities assumed in the transactions accounted for under the purchase method
of accounting. The value of goodwill is ultimately derived from the Bank’s ability
to generate net earnings after the acquisitions and is not deductible for tax
purposes. A decline in net earnings could be indicative of a decline in the fair
value of goodwill and result in impairment. For that reason, goodwill is assessed
at least annually for impairment.
In conjunction with the Company’s annual review during the third quarter of
2010, management engaged an independent valuation specialist to test goodwill
for impairment. Goodwill impairment testing is a two step process. The first step
compares the fair value of a reporting unit with its carrying amount, including
goodwill. If the carrying amount exceeds the fair value, the second step of the
goodwill impairment test is performed to measure the impairment loss, if any. If
the fair value of the reporting unit exceeds the carrying value, then goodwill is
not impaired and step two is unnecessary. Since the Company is considered to be
one reporting unit, the fair value of the Company was compared to the carrying
value. Based on the results of the testing performed, the fair value of the
Company exceeded the carrying value so step two was not required and goodwill
was not impaired. The fair value of the Company was determined based on an
14
16
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
analysis of three different valuation methods including the analysis of discounted
future cash flows, comparable whole bank transactions, and the Company’s
market capitalization plus a control premium.
Goodwill is also tested for impairment between annual tests if an event occurs
or circumstances change that would more likely than not reduce the fair value of
the Company below its carrying amount. No such events or circumstances arose
during the fourth quarter of 2010, so goodwill was not required to be retested.
Intangible Assets - The intangible assets at December 31, 2010 represent the
estimated fair value of the core deposit relationships acquired in the acquisition
of Service 1st Bank in 2008 of $1,400,000 and the 2005 acquisition of Bank of
Madera County of $1,500,000. Core deposit intangibles are being amortized
using the straight-line method over an estimated life of seven years from the date
of acquisition. The carrying value of intangible assets at December 31, 2010 was
$1,198,000, net of $1,702,000 in accumulated amortization expense. The
carrying value at December 31, 2009 was $1,612,000, net of $1,288,000
accumulated amortization expense. Management evaluates the remaining useful
lives quarterly to determine whether events or circumstances warrant a revision to
the remaining periods of amortization. Based on the evaluation, no changes to
the remaining useful lives was required. Management engaged an independent
valuation specialist to perform an annual impairment test on core deposit
intangibles as of September 30, 2010 and determined no impairment was
necessary. Amortization expense recognized was $414,000 for 2010 and 2009,
and $231,000 for 2008.
Income Taxes - The Company files its income taxes on a consolidated basis with
its Subsidiary. The allocation of income tax expense (benefit) represents each
entity’s proportionate share of the consolidated provision for (benefit from)
income taxes.
Deferred tax assets and liabilities are recognized for the tax consequences of
temporary differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. On the balance sheet,
net deferred tax assets are included in accrued interest receivable and other assets.
The determination of the amount of deferred income tax assets which are
more likely than not to be realized is primarily dependent on projections of
future earnings, which are subject to uncertainty and estimates that may change
given economic conditions and other factors. The realization of deferred income
tax assets is assessed and a valuation allowance is recorded if it is ‘‘more likely
than not’’ that all or a portion of the deferred tax assets will not be realized.
‘‘More likely than not’’ is defined as greater than a 50% chance. All available
evidence, both positive and negative is considered to determine whether, based on
the weight of that evidence, a valuation allowance is needed. Based upon our
analysis of available evidence, we have determined that it is ‘‘more likely than
not’’ that all of our deferred income tax assets as of December 31, 2010 and
2009 will be fully realized and therefore no valuation allowance was recorded.
Accounting for Uncertainty in Income Taxes - The Company uses a
comprehensive model for recognizing, measuring, presenting and disclosing in the
financial statements tax positions taken or expected to be taken on a tax return.
A tax position is recognized as a benefit only if it is more likely than not that the
tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For tax
positions not meeting the more likely than not test, no tax benefit is recorded.
Interest expense and penalties associated with unrecognized tax benefits, if any,
are classified as income tax expense in the consolidated statement of income.
Earnings Per Share - Basic earnings per share (EPS), which excludes dilution, is
computed by dividing income available to common shareholders (net income
after deducting dividends on preferred stock and accretion of discount) by the
weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other contracts
to issue common stock, such as stock options or warrants, result in the issuance
of common stock which shares in the earnings of the Company. All data with
respect to computing earnings per share is retroactively adjusted to reflect stock
dividends and splits and the treasury stock method is applied to determine the
dilutive effect of stock options in computing diluted EPS.
Share-Based Compensation - The Company has two share-based compensation
plans, the Central Valley Community Bancorp 2005 Omnibus Incentive Plan
and the 2000 Stock Option Plan, all of which were approved by the shareholders
of the Company. The Plans do not provide for the settlement of awards in cash
and new shares are issued upon option exercise or restricted share grants. These
plans are more fully described in Note 14. The 1992 Stock Option Plan no
longer has any options outstanding.
In 2010, the Company granted options to purchase 83,000 shares of common
stock. In 2009, the Company granted options to purchase 13,500 shares of
common stock. All options were granted with an exercise price equal to the fair
market value on the grant date.
In December 2008, the Company cancelled options to purchase 90,550 shares
of the Company’s common stock granted on October 17, 2007 and options to
purchase 15,000 shares of common stock granted on October 1, 2007, and on
December 17, 2008 granted options to purchase 105,550 shares of common
stock to the directors, senior managers and other employees. The modification
affected 57 employees and eight directors and the total incremental compensation
cost recognized for the modification in 2008 was $38,000. In addition, the
Company granted options to purchase 15,000 shares of common stock during
2008. All options were granted with an exercise price equal to the fair market
value on the grant date.
The cash flows from the tax benefits resulting from tax deductions in excess
of the compensation cost recognized for those options (excess tax benefits) are
classified as cash flows from financing activity in the statement of cash flows.
Excess tax benefits for the years ended December 31, 2010, 2009, and 2008 were
$28,000, $7,000, and $57,000, respectively.
The Company bases the fair value of the options previously granted on the
date of grant using a Black-Scholes-Merton option pricing model that uses
assumptions based on expected option life, the level of estimated forfeitures,
expected stock volatility and the risk-free interest rate. Stock volatility is based on
the historical volatility of the Company’s stock. The risk-free rate is based on the
U.S. Treasury yield curve and the expected term of the options. Historical data is
used to determine the expected term of its stock options.
The fair value of each option is estimated on the date of grant using the
following assumptions.
Dividend yield
Expected volatility
Risk-free interest rate
Expected option term
2010
2009
0.00%
40% - 44%
0.10%
31% - 38%
1.47% - 2.43% 1.52% - 1.87%
6.5 years
6.5 years
2008
0.10%
31%
2.29%
6.5 years
Adoption of New Financial Accounting Standards
Transfers of Financial Assets
In June 2009, the Financial Accounting Standards Board (‘‘FASB’’) issued
FASB Accounting Standards Update (‘‘ASU’’) 2009-16, Accounting for Transfers of
Financial Assets (Statement 166), which amends previously issued accounting
guidance to enhance accounting and reporting for transfers of financial assets,
including securitizations or continuing exposure to the risks related to transferred
financial assets. Prior to the issuance of Statement 166, transfers under
participation agreements and other partial loan sales fell under the general
guidance for transfers of financial assets. Statement 166 introduces a new
definition for a participating interest along with the requirement for partial loan
sales to meet the definition of a participating interest for sale treatment to occur.
If a participation or other partial loan sale does not meet the definition, the
portion sold should remain on the books and the proceeds recorded as a secured
borrowing until the definition is met. Additionally, existing provisions that
require the transferred assets to be isolated from the originating institution
(transferor), that the transferor does not maintain effective control through
certain agreements to repurchase or redeem the transferred assets and that the
purchasing institution (transferee) has the right to pledge or exchange the assets
acquired were retained. The new provisions became effective on January 1, 2010
and early adoption was not permitted. The impact of adoption was not material
to the Company’s financial position, results of operation or cash flows.
15
17
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Fair Value Measurements
In January 2010, the FASB issued FASB ASU 2010-06, Improving Disclosures
about Fair Value Measurements, which amends and clarifies existing standards to
require additional disclosures regarding fair value measurements. Specifically, the
standard requires disclosure of the amounts of significant transfers between
Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers,
the reasons for any transfers in or out of Level 3, and information in the
reconciliation of recurring Level 3 measurements about purchases, sales, issuances
and settlements on a gross basis. This standard clarifies that reporting entities are
required to provide fair value measurement disclosures for each class of assets and
liabilities - previously separate fair value disclosures were required for each major
category of assets and liabilities. This standard also clarifies the requirement to
disclose information about both the valuation techniques and inputs used in
estimating Level 2 and Level 3 fair value measurements. Except for the
requirement to disclose information about purchases, sales, issuances, and
settlements in the reconciliation of recurring Level 3 measurements on a gross
basis, these disclosures are effective for the year ended December 31, 2010. The
requirement to separately disclose purchases, sales, issuances, and settlements of
recurring Level 3 measurements becomes effective for the Company for the year
beginning on January 1, 2011. The Company adopted this new accounting
standard as of January 1, 2010 and the impact of adoption was not material to
the Company’s financial position, results of operation or cash flows.
Disclosures about Credit Quality
In July 2010, the FASB issued FASB ASU 2010-20, Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU
2010-20 requires more robust and disaggregated disclosures about the credit
quality of loans and allowances for loan losses, including disclosure about credit
quality indicators, past due information and modifications of finance receivables.
The disclosures as of the end of a reporting period are effective for interim and
annual reporting periods ending on and after December 15, 2010. The
disclosures about activity that occurs during a reporting period are effective for
interim and annual reporting periods beginning on or after December 15, 2010.
The adoption of this guidance has significantly expanded disclosure requirements
related to accounting policies and disclosures related to the allowance for loan
losses but did not have an impact on the Company’s financial position, results of
operation or cash flows.
2. MERGER OF SERVICE 1ST BANCORP INTO CENTRAL VALLEY
COMMUNITY BANCORP
After the close of business on November 12, 2008, the Company and Service
1st completed their previously announced merger and Service 1st was merged into
the Company, and the Service 1st subsidiary, S1 Bank merged into the Bank. The
Company acquired 100% of the outstanding common shares of Service 1st and
the results of Service 1st’s operations have been included in the consolidated
financial statements beginning November 13, 2008.
As of the date of acquisition, Service 1st had total assets at fair value of
$221,283,000, comprised of $6,626,000 in cash and due from banks,
$83,099,000 in investment securities, $116,028,000 in loans (net of allowance
for credit losses of $2,786,000), $1,070,000 in premises and equipment,
$3,816,000 in bank owned life insurance and $10,644,000 in other assets. Total
liabilities acquired at fair value amounted to $216,428,000, including
$193,488,000 in deposits, $13,565,000 in short-term borrowings, and
$5,155,000 in long-term borrowings.
The accompanying consolidated financial statements include the accounts of
Service 1st since November 13, 2008. The following supplemental pro forma
information discloses selected financial information for the period indicated as
though the Service 1st merger had been completed as of the beginning of the
period reported. These results are not necessarily indicative of the results that
could have been achieved had the companies operated on a combined basis nor
does it include any synergies or cost savings that could have been implemented.
Dollars are in thousands except per share data. 2008 pro forma net income
includes non-recurring merger expenses for legal, accounting and other
professional fees, net of tax, totaling $595,000.
16
18
Revenue
Net income
Diluted earnings per share
Year Ended
December 31,
2008
$
$
$
49,666
1,689
0.22
3.
FAIR VALUE MEASUREMENTS
The estimated carrying and fair values of the Company’s financial instruments are
as follows:
December 31, 2010
December 31, 2009
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(In thousands)
$
11,357 $
11,357 $
13,857 $
13,857
89,042
600
191,325
420,583
11,390
3,050
3,467
89,042
600
191,325
405,876
11,390
3,050
3,467
34,544
279
197,319
449,007
10,998
3,140
3,608
34,544
279
197,319
460,238
10,998
3,140
3,608
$ 650,495 $ 651,668 $ 640,167 $ 641,279
5,000
14,487
10,000
4,000
10,000
4,256
5,000
14,000
5,155
475
2,320
475
5,155
416
2,616
416
Financial assets:
Cash and due from banks
Interest-earning deposits
in other banks
Federal funds sold
Available-for-sale
investment securities
Loans, net
Bank owned life insurance
Federal Home Loan Bank
stock
Accrued interest receivable
Financial liabilities:
Deposits
Short-term borrowings
Long-term debt
Junior subordinated
deferrable interest
debentures
Accrued interest payable
These estimates do not reflect any premium or discount that could result
from offering the Company’s entire holdings of a particular financial instrument
for sale at one time, nor do they attempt to estimate the value of anticipated
future business related to the instruments. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of these
estimates.
These estimates are made at a specific point in time based on relevant market
data and information about the financial instruments. Because no market exists
for a significant portion of the Company’s financial instruments, fair value
estimates are based on judgments regarding current economic conditions, risk
characteristics of various financial instruments and other factors. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the fair values presented.
The following methods and assumptions were used to estimate the fair value
of financial instruments. For cash and due from banks, interest-earning deposits
in other banks, Federal funds sold, variable-rate loans, bank owned life insurance,
accrued interest receivable and payable, Federal Home Loan Bank (FHLB) stock,
demand deposits and short-term borrowings, the carrying amount is estimated to
be fair value. For investment securities, fair values are based on quoted market
prices, quoted market prices for similar securities and indications of value
provided by brokers. The fair values for fixed-rate loans are estimated using
discounted cash flow analyses, using interest rates currently being offered at each
reporting date for loans with similar terms to borrowers of comparable
creditworthiness. Fair values for fixed-rate certificates of deposit are estimated
using discounted cash flow analyses using interest rates offered at each reporting
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
Assets Recorded at Fair Value
date by the Company for certificates with similar remaining maturities. The fair
value of long-term debt and subordinated debentures was determined based on
the current market for like-kind instruments of a similar maturity and structure.
The fair values of commitments are estimated using the fees currently charged to
enter into similar agreements and are not significant and, therefore, not included
in the above table.
Fair Value Hierarchy
In accordance with applicable accounting guidance, the Company groups its
assets and liabilities measured at fair value into three levels, based on the markets
in which the assets and liabilities are traded and the reliability of the assumptions
used to determine fair value. Valuations within these levels are based upon:
Level 1 - Quoted market prices for identical instruments traded in active
exchange markets.
Level 2 - Quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are
observable or can be corroborated by observable market data.
Level 3 - Model-based techniques that use at least one significant assumption
not observable in the market. These unobservable assumptions reflect the
Company’s estimates of assumptions that market participants would use on
pricing the asset or liability. Valuation techniques include management judgment
and estimation which may be significant.
Management monitors the availability of observable market data to assess the
appropriate classification of financial instruments within the fair value hierarchy.
Changes in economic conditions or model-based valuation techniques may
require the transfer of financial instruments from one fair value level to another.
In such instances, we report the transfer at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon
the nature of the financial instrument and size of the transfer relative to total
assets, total liabilities or total earnings. During the year ended December 31,
2010 management transferred one CMO security totaling $3,078,000 from
Level 3 to Level 2 and other equity securities totaling $7,588,000 from Level 3
to Level 1. The transfers occurred to correct misclassification errors in prior
periods.
The following tables present information about the Company’s assets and
liabilities measured at fair value on a recurring and nonrecurring basis as of
December 31, 2010:
Recurring Basis
The Company is required or permitted to record the following assets at fair
value on a recurring basis under other accounting pronouncements (in
thousands).
Description
Fair Value
Level 1
Level 2
Level 3
Available-for-sale securities
Debt Securities:
U.S. Government agencies $
Obligations of states and
political subdivisions
U.S. Government agencies
collateralized by
mortgage obligations
Other collateralized
mortgage obligations
Corporate debt securities
Other equity securities
Total assets and liabilities
measured at fair value
195 $
- $
195 $
75,050
90,077
17,838
504
7,661
-
-
-
-
7,661
75,050
90,077
17,838
504
-
$ 191,325 $
7,661 $ 183,664 $
Securities in Level 1 are mutual funds and fair values are based on quoted
market prices for identical instruments traded in active markets. Fair values for
available-for-sale investment securities in Level 2 are based on quoted market
prices for similar securities.
The changes in Level 3 assets and liabilities measured at fair value on a
recurring basis are summarized as follows for the year ended December 31, 2010
(in thousands).
Balance,
beginning
of year
Net
income
Other
comprehensive
income
Purchases,
sales, and
principal
payments
Transfers
into
Level 3
Transfers
out of
Level 3
Balance,
end of
year
Available-for-sale securities
Other collateralized mortgage obligations
Corporate debt securities
Other equity securities
Total assets and liabilities measured at fair value
$
$
5,724 $
785
7,588
14,097 $
13 $
235
-
248 $
93 $
-
-
93 $
(2,752) $
(1,020)
-
(3,772) $
- $
-
-
- $
(3,078) $
-
(7,588)
(10,666) $
-
-
-
-
-
-
-
-
-
-
-
17
19
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
Gains and losses (realized and unrealized) included in earnings (or changes in
net assets) for the year ended December 31, 2010 totaled $248,000 and were
included in non-interest income.
Non-recurring Basis
The Company may be required, from time to time, to measure certain assets
at fair value on a non-recurring basis. These include assets that are measured at
the lower of cost or fair value that were recognized at fair value which was below
cost at December 31, 2010 (in thousands).
Fair
Value
Level 1
Level 2
Level 3
Total
Losses in
the Year
$
980 $
- $
- $
980 $
(248)
1,016
4,773
679
1,865
9,313
1,325
98
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,773
679
1,865
9,313
1,325
98
(1,170)
(47)
(420)
(2,146)
(309)
-
Description
Impaired loans:
Commercial and
industrial
Real estate:
Owner occupied
Real estate-
construction and
other land loans
Commercial real estate
Other real estate
Total impaired loans
Other real estate owned
Other
Total assets and
liabilities
measured at fair
value on a
non-recurring
basis
allowance represents specific allocations for the allowance for credit losses for
impaired loans.
The fair value of real estate is based on property appraisals at the time of
transfer and as appropriate thereafter, less estimated costs to sell. Other real estate
owned is periodically reviewed to determine whether the property continues to be
carried at the lower of its recorded book value or estimated fair value, net of
estimated selling costs. In 2010, other real estate properties were written down
$309,000 to their estimated fair values of $1,325,000. In 2010, other repossessed
assets were recorded at their estimated realizable value of $98,000.
The following tables present information about the Company’s assets and
liabilities measured at fair value on a recurring and nonrecurring basis as of
December 31, 2009:
Recurring Basis
The Company is required or permitted to record the following assets at fair
value on a recurring basis under other accounting pronouncements as of
December 31, 2009 (in thousands).
Available-for-sale securities
Debt Securities:
U.S. Government agencies $
Obligations of states and
political subdivisions
U.S. Government agencies
collateralized by
mortgage obligations
Other collateralized
mortgage obligations
Corporate debt securities
Other equity securities
Total assets and liabilities
measured at fair value
363 $
- $
363 $
70,812
85,955
31,270
1,314
7,605
-
-
-
-
17
70,812
85,955
25,546
529
-
-
-
-
5,724
785
7,588
1,016
(261)
Description
Fair
Value
Level 1
Level 2
Level 3
$ 10,736 $
- $
- $ 10,736 $ (2,455)
$ 197,319 $
17 $ 183,205 $
14,097
The fair value of impaired loans and other real estate owned is based on the
fair value of the collateral for all collateral dependent loans and for other
impaired loans is estimated using a discounted cash flow model. Impaired loans
and other real estate owned were determined to be collateral dependent and
categorized as Level 3 due to ongoing real estate market conditions resulting in
inactive market data, which in turn required the use of unobservable inputs and
assumptions in fair value measurements. There were no changes in valuation
techniques used during the years ended December 31, 2010 and 2009.
In accordance with the provisions of ASC 360-10, impaired loans with a
carrying value of $11,436,000 were written down to their fair value of
$9,313,000, resulting in an impairment charge of $2,124,000. The valuation
Securities in Level 1 are mutual funds and fair values are based on quoted
market prices for identical instruments traded in active markets Fair values for
available-for-sale investment securities in Level 2, which include debt securities of
U.S. Governmental agencies, obligations of states and political subdivisions,
collateralized mortgage obligations and corporate debt securities are based on
quoted market prices for similar securities. The securities in Level 3 are not
actively traded and therefore the pricing is internally calculated using matrix
pricing.
The changes in Level 3 assets and liabilities measured at fair value on a
recurring basis are summarized as follows for the year ended December 31, 2009
(in thousands).
Balance,
beginning
of year
Net
income
Other
comprehensive
income
Purchases,
sales, and
principal
payments
Transfers
into
Level 3
Transfers
out of
Level 3
Balance,
end of
year
Available-for-sale securities
Obligations of states and political subdivisions
U.S. Government agencies collateralized by mortgage
$
obligations
Other collateralized mortgage obligations
Corporate debt securities
Other equity securities
1,045 $
- $
- $
- $
- $
(1,045) $
5,685
7,062
785
1,587
192
91
-
641
168
(2,317)
(4,400)
-
5,833
2,646
-
(3,560)
(316)
-
-
-
5,724
785
7,588
Total assets and liabilities measured at fair value
$
16,164 $
283 $
809 $
(884) $
2,646 $
(4,921) $
14,097
18
20
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
4.
INVESTMENT SECURITIES
Gains and losses (realized and unrealized) included in earnings (or changes in
net assets) for the year ended December 31, 2009 totaled $283,000 and were
included in non-interest income.
Non-recurring Basis
The Company may be required, from time to time, to measure certain assets
at fair value on a non-recurring basis. These include assets that are measured at
the lower of cost or fair value that were recognized at fair value which was below
cost at December 31, 2009 (in thousands).
The investment portfolio consists primarily of agency securities, mortgage backed
securities, and municipal securities all of which are classified as available-for-sale.
As of December 31, 2010, $129,968,000 was held as collateral for borrowing
arrangements, public funds, and for other purposes.
The fair value of the available-for-sale investment portfolio reflected an
unrealized gain of $1,643,000 at December 31, 2010 compared to an unrealized
loss of $2,425,000 at December 31, 2009.
The following table sets forth the carrying values and estimated fair values of
our investment securities portfolio at the dates indicated (in thousands):
Description
Impaired loans
Commercial and
industrial
Other Real estate
Real estate
construction and
other land loans
Consumer
Total impaired loans
Other real estate owned
Other
Total assets and
liabilities measured
at fair value on a
non-recurring basis
Fair
Value
Level 1
Level 2
Level 3
Total
Losses in
the year
$
582 $
2,506
- $
-
- $
-
582 $
2,506
(702)
(960)
1,605
58
4,751
2,832
47
-
-
-
-
-
-
-
-
-
-
1,605
58
4,751
2,832
47
-
(1,591)
(3,253)
(356)
(50)
$
7,630 $
- $
- $
7,630 $ (3,659)
The fair value of impaired loans and other real estate owned is based on the
fair value of the collateral for all collateral dependent loans and for other
impaired loans is estimated using a discounted cash flow model. Impaired loans
and other real estate owned were determined to be collateral dependent and
categorized as Level 3 due to ongoing real estate market conditions resulting in
inactive market data, which in turn required the use of unobservable inputs and
assumptions in fair value measurements.
Impaired loans with a carrying value of $9,112,000 were written down to
their fair value of $4,751,000 at December 31, 2009. For the period ended
December 31, 2009 impairment charges were $3,253,000, which included
$2,501,000 in charge offs and specific reserves of $752,000. The valuation
allowance represents specific allocations of the allowance for credit losses for
impaired loans.
Other real estate properties with carrying amounts totaling $3,189,000 at
foreclosure were subsequently written down to their fair values of $2,832,000,
resulting in a loss of $356,000 which was included in other expense for the
period. Other repossessed assets with carrying amounts totaling $97,000 were
written down to their fair values of $47,000, resulting in a loss of $50,000 which
was included in other expense for the period ended December 31, 2009. In
2010, these other repossessed assets were disposed of and the Company realized
losses of $47,000 which was included in other expense for the year ended
December 31, 2010.
December 31, 2010
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale Securities
Debt Securities:
U.S. Government
agencies
Obligations of states
and political
subdivisions
U.S. Government
agencies
collateralized by
mortgage
obligations
Other collateralized
mortgage
obligations
Corporate debt
securities
Other equity securities
$
190 $
5 $
- $
195
74,598
1,884
(1,432)
75,050
88,105
2,092
(120)
90,077
18,661
500
7,628
506
4
33
(1,329)
17,838
-
-
504
7,661
$
189,682 $
4,524 $
(2,881) $
191,325
December 31, 2009
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale Securities
Debt Securities:
U.S. Government
agencies
Obligations of states
and political
subdivisions
U.S. Government
agencies
collateralized by
mortgage
obligations
Other collateralized
mortgage
obligations
Corporate debt
securities
Other equity securities
$
353 $
10 $
- $
363
68,708
3,050
(946)
70,812
85,530
1,283
(858)
85,955
36,280
1,228
7,645
403
86
-
(5,413)
31,270
-
(40)
1,314
7,605
$
199,744 $
4,832 $
(7,257) $
197,319
19
21
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES
(Continued)
Investment securities with unrealized losses at December 31, 2010 and 2009
are summarized and classified according to the duration of the loss period as
follows (in thousands):
December 31, 2010
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Available-for-Sale Securities
Debt Securities:
Obligations of states
and political
subdivisions
U.S. Government
agencies
collateralized by
mortgage
obligations
Other collateralized
mortgage
obligations
$ 24,782 $
(904) $
3,168 $
(528) $ 27,950 $
(1,432)
9,131
(120)
-
-
9,131
(120)
286
(2)
10,136
(1,327)
10,422
(1,329)
$ 34,199 $
(1,026) $ 13,304 $
(1,855) $ 47,503 $
(2,881)
December 31, 2009
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Available-for-Sale Securities
Debt Securities:
Obligations of states
and political
subdivisions
U.S. Government
agencies
collateralized by
mortgage
obligations
Other collateralized
mortgage
obligations
Other securities
$
9,001 $
(295) $
4,911 $
(651) $ 13,912 $
(946)
40,691
(856)
331
(2)
41,022
(858)
3,474
7,605
(446)
(40)
19,878
-
(4,967)
-
23,352
7,605
(5,413)
(40)
$ 60,771 $
(1,637) $ 25,120 $
(5,620) $ 85,891 $
(7,257)
As of November 30, 2010, the Company performed an analysis of the
investment portfolio to determine whether any of the investments held in the
portfolio had an other-than-temporary impairment (OTTI). Under ASC 320-10,
the portion of the impairment that is attributable to a shortage in the present
value of expected future cash flows relative to the amortized cost should be
recorded as a current period charge to earnings. The discount rate in this analysis
is the expected yield at purchase.
In accordance with the Company’s OTTI policy, management evaluated all
available-for-sale investment securities with an unrealized loss at November 30,
2010 and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at November 30, 2010 greater
than 10% of the recorded book value on that date, or which had an unrealized
loss of more than $10,000. Management also analyzed any securities that may
have been down graded by credit rating agencies. Management retained the
services of a third party in December 2010 to provide independent valuation and
OTTI analysis of private label residential mortgage-backed securities (PLRMBS).
For those bonds that met the evaluation criteria, management obtained and
reviewed the most recently published national credit ratings for those bonds. For
those bonds that were municipal debt securities with an investment grade rating
by the rating agencies, management also evaluated the financial condition of the
municipality and any applicable municipal bond insurance provider and
concluded that no credit related impairment existed.
The evaluation for PLRMBS also includes estimating projected cash flows that
the Company is likely to collect based on an assessment of all available
information about the applicable security on an individual basis, the structure of
the security, and certain assumptions, such as the remaining payment terms for
the security, prepayment speeds, default rates, loss severity on the collateral
supporting the security based on underlying loan-level borrower and loan
characteristics, expected housing price changes, and interest rate assumptions, to
determine whether the Company will recover the entire amortized cost basis of
the security. In performing a detailed cash flow analysis, the Company identified
the best estimate of the cash flows expected to be collected. If this estimate
results in a present value of expected cash flows (discounted at the security’s
effective yield) that is less than the amortized cost basis of the security, an OTTI
is considered to have occurred.
To assess whether it expects to recover the entire amortized cost basis of its
PLRMBS, the Company performed a cash flow analysis for all of its PLRMBS as
of November 30, 2010. In performing the cash flow analysis for each security,
the Company uses a third-party model. The model considers borrower
characteristics and the particular attributes of the loans underlying the Company’s
securities, in conjunction with assumptions about future changes in home prices
and other assumptions, to project prepayments, default rates, and loss severities.
The month-by-month projections of future loan performance are allocated to
the various security classes in each securitization structure in accordance with the
structure’s prescribed cash flow and loss allocation rules. When the credit
enhancement for the senior securities in a securitization is derived from the
presence of subordinated securities, losses are allocated first to the subordinated
securities until their principal balance is reduced to zero. The projected cash
flows are based on a number of assumptions and expectations, and the results of
these models can vary significantly with changes in assumptions and expectations.
The scenario of cash flows determined based on the model approach described
above reflects a best-estimate scenario.
At each quarter end, the Company compares the present value of the cash
flows expected to be collected on its PLRMBS to the amortized cost basis of the
securities to determine whether a credit loss exists.
The unrealized losses associated with PLRMBS are primarily driven by higher
projected collateral losses, wider credit spreads, and changes in interest rates.
Based upon management’s assessment of the expected credit losses of the security
given the performance of the underlying collateral compared with our credit
enhancement (which occurs as a result of credit loss protection provided by
subordinated tranches), the Company expects to recover the entire amortized cost
basis of these securities, with the exception of certain securities for which OTTI
was recorded.
U.S. Government Agencies - At December 31, 2010, the Company held one U.S.
Government agency security and it was not in a loss position.
Obligations of States and Political Subdivisions - At December 31, 2010, the
Company held 163 obligations of states and political subdivision securities of
which 47 were in a loss position for less than 12 months and seven were in a
loss position and have been in a loss position for 12 months or more. The
unrealized losses on the Company’s investments in obligations of states and
political subdivision securities were primarily caused by interest rate changes.
Because the decline in market value is primarily attributable to changes in
interest rates, and because the Company does not intend to sell, and it is more
likely than not that it will not be required to sell those investments until a
recovery of fair value, which may be maturity, the Company does not consider
those investments to be other-than-temporarily impaired at December 31, 2010.
U.S. Government Agencies Collateralized by Mortgage Obligations - At
December 31, 2010, the Company held 135 U.S. Government agency securities
collateralized by mortgage obligation securities of which ten were in a loss
position for less than 12 months and none were in a loss position for 12 months
or more. The unrealized losses on the Company’s investments in U.S.
government agencies collateralized by mortgage obligations were primarily caused
by interest rate changes. The contractual cash flows of those investments are
guaranteed by an agency of the U.S. government. Accordingly, it is expected that
the securities would not be settled at a price less than the amortized cost of the
Company’s investment. Because the decline in market value is attributable to
changes in interest rates and not credit quality, and because the Company does
not intend to sell, and it is more likely than not that it will not be required to
sell those investments until a recovery of fair value, which may be maturity, the
Company does not consider those investments to be other-than-temporarily
impaired at December 31, 2010.
20
22
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES
(Continued)
Other Collateralized Mortgage Obligations - At December 31, 2010, the
Company had a total of 36 PLRMBS with a remaining principal balance of
$18,661,000 and a net unrealized loss of approximately $823,000. 12 of these
securities account for $1,329,000 of the unrealized loss at December 31, 2010
offset by 24 of these securities with gains totaling $506,000. The Company
continues to perform extensive analyses on all PLRMBS. Several of these
investment securities continue to demonstrate cash flows and credit support as
expected and the expected cash flows of the security discounted at the security’s
effective yield are greater than the book value of the security, therefore
management does not consider these securities to be other than temporarily
impaired. 11 of these PLRMBS with a remaining principal balance of
$11,785,000 had credit ratings below investment grade. The table below lists
those securities with below investment grade credit ratings at December 31,
2010. Based on the analyses performed, 9 of the PLRMBS with credit ratings
below investment grade, with a remaining principal balance of $11,460,000, were
considered to be other-than-temporarily impaired at December 31, 2010. An
OTTI charge to earnings of $1,587,000 was recorded during the year ended
December 31, 2010. This charge was taken to reflect ongoing and increasing
deterioration of credit quality and increasing loss severities of the underlying
mortgages. The cumulative unrealized loss on these securities decreased during
the year ended December 31, 2010 primarily due to a declining interest rate
environment. This change in unrealized loss was recognized in other
comprehensive income and is also presented in the income statement as a
component of non-interest income in the presentation of other-than-temporary
impairment losses.
Investment securities as of December 31, 2010 with credit ratings below investment grade are summarized in the table below (dollars in thousands):
Description
PHHAM
RAST
CWALT 1
CWALT 2
CWALT 3
CWHL
CHASE
FHAMS
ABFS
CONHE
BOAA
$
Book
Value
Market
Value
Unrealized
Loss
2,936 $
2,192
876
394
1,950
73
252
2,499
345
87
181
2,494 $
2,014
710
378
1,803
75
250
2,162
329
81
162
(442)
(178)
(166)
(16)
(147)
2
(2)
(337)
(16)
(6)
(19)
Rating
C
D
C
C
CCC
BB-
CC
C
D
B3
Ca
TOTALS
$
11,785 $
10,458 $
(1,327)
12 Month
Historical
Prepayment
Rates %
Projected
CDR
Rates %
Projected
Severity
Rates %
Original
Purchase
Price %
Current
Credit
Enhancement
%
13.44
13.32
10.75
9.60
9.51
18.10
19.69
12.47
6.70
2.90
7.33
6.5
7.4
5.8
4.3
5.2
1.2
4.7
4.0
7.8
1.0
2.0
50.00
70.00
60.00
50.00
60.00
39.00
49.00
55.00
75.00
60.00
70.00
97.25
98.50
100.73
101.38
100.25
97.42
93.25
95.00
97.46
86.39
97.25
3.75
(0.26)
7.04
5.63
10.00
7.16
4.40
1.97
0.00
0.064
5.28
Agency
Fitch
Fitch
Fitch
Fitch
S&P
S&P
Fitch
Fitch
S&P
Moody’s
Moody’s
All securities in the above table are private label residential collateralized
In 2009, one security was transferred from held-to-maturity to
mortgage obligations.
Corporate Debt and Other Securities - At December 31, 2010 the Company’s
corporate debt and other securities consisted of one investment in corporate debt
securities and equity investments in a CRA qualified mutual fund that invests in
government agency issued mortgaged backed securities and collateralized
mortgage obligations. None of the investments were in a loss position at
December 31, 2010.
Net unrealized gains (losses) on available-for-sale investment securities totaling
$1,643,000 and $(2,425,000) are recorded net of $(676,000) and $970,000 in
tax (liabilities) benefits as accumulated other comprehensive income within
shareholders’ equity at December 31, 2010 and 2009, respectively.
Proceeds and gross realized gains (losses) on investment securities for the years
ended December 31, 2010, 2009 and 2008 are shown below.
Years Ended December 31,
2010
2009
2008
(In thousands)
Available-for-Sale Securities
Proceeds from sales or calls
Net realized (losses) gains from sales
$
$
19,594
(191)
$
$
40,407
942
$
$
12,327
165
Years Ended December 31,
2010
2009
2008
(In thousands)
Held-to-Maturity
Proceeds from sales or calls
Net realized losses from sales or calls
$
$
-
-
$
$
1,474
(176)
$
$
-
-
available-for-sale at its fair value based on management’s intent to sell, and
subsequent to the transfer, a $300,000 charge to earnings was recorded as OTTI
expense. There were no sales or transfers of held-to-maturity investment securities
for the years ended December 31, 2010 or 2008. The Company did not have
any held-to-maturity securities at December 31, 2010 or 2009.
The following table provides a roll forward for the year ended December 31,
2010 of investment securities credit losses recorded in earnings. The beginning
balance represents the credit loss component for which OTTI occurred on debt
securities in prior periods. Additions represent the first time a debt security was
credit impaired or when subsequent credit impairments have occurred on
securities for which OTTI credit losses have been previously recognized.
(In thousands)
Beginning balance
Amounts related to credit loss for which an
OTTI charge was not previously recognized
Increases to the amount related to credit loss
for which OTTI was previously recognized
Realized losses for securities sold
For the years ended
December 31, December 31,
2010
2009
$
300
$
1,587
-
(500)
-
300
-
-
Ending balance
$
1,387
$
300
21
23
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES (Continued)
5.
LOANS
23.5%
7.8%
31.3%
24.1%
10.3%
15.7%
8.4%
58.5%
7.8%
2.4%
10.2%
Outstanding loans are summarized as follows:
Loan Type
December 31, % of Total December 31, % of Total
2010
loans
2009
loans
(Dollars in thousands)
Commercial:
Commercial and
industrial
Agricultural land and
production
$
104,387
24.1%$
107,726
38,787
9.0%
35,796
Total commercial
143,174
33.1%
143,522
Real estate:
Owner occupied
Real estate -
construction and
other land loans
Commercial real
estate
Other
111,888
25.9%
111,006
32,039
63,627
38,354
7.4%
47,233
14.7%
8.9%
71,977
38,532
Total real estate
245,908
56.9%
268,748
Consumer:
Equity loans and
lines of credit
Consumer and
installment
Total consumer
Deferred loan fees, net
Total gross loans
Allowance for credit
losses
34,521
8,493
43,014
(499)
8.0%
2.0%
10.0%
36,110
11,219
47,329
(392)
431,597
100.0%
459,207
100.0%
(11,014)
(10,200)
Total loans
$
420,583
$
449,007
At December 31, 2010 and 2009, loans originated under Small Business
Administration (SBA) programs totaling $30,775,000 and $29,698,000,
respectively, were included in the real estate and commercial categories.
Salaries and employee benefits totaling $305,000, $229,000, and $285,000
have been deferred as loan origination costs for the years ended December 31,
2010, 2009, and 2008, respectively.
6. ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
Balance, beginning of year
Provision charged to operations
Losses charged to allowance
Recoveries
Allowance from merger with
Service 1st
Years Ended December 31,
2010
2009
2008
(In thousands)
$
$
10,200
3,800
(4,122)
1,136
7,223
10,514
(7,926)
389
$
-
-
3,887
1,290
(851)
111
2,786
Balance, end of year
$
11,014
$
10,200
$
7,223
The amortized cost and estimated fair value of investment securities at
December 31, 2010 and 2009 by contractual maturity are shown below (in
thousands). Expected maturities will differ from contractual maturities because
the issuers of the securities may have the right to call or prepay obligations with
or without call or prepayment penalties.
December 31, 2010
Within one year
After one year through five years
After five years through ten years
After ten years
Investment securities not due at a single
maturity date:
U.S. Government agencies collateralized by
mortgage obligations
Other collateralized mortgage obligations
Other equity securities
December 31, 2009
After one year through five years
After five years through ten years
After ten years
Investment securities not due at a single
maturity date:
U.S. Government agencies collateralized by
mortgage obligations
Other collateralized mortgage obligations
Other equity securities
Amortized
Cost
Estimated
Fair
Value
$
500
6,350
18,274
50,164
75,288
88,105
18,661
7,628
$
504
6,819
18,664
49,762
75,749
90,077
17,838
7,661
$ 189,682
$ 191,325
Amortized
Cost
$
1,522
18,573
50,194
70,289
Estimated
Fair
Value
$
1,571
19,365
51,553
72,489
85,530
36,280
7,645
85,955
31,270
7,605
Total
$ 199,744
$ 197,319
Investment securities with amortized costs totaling $127,293,000 and
$124,512,000 and fair values totaling $129,968,000 and $126,585,000 were
pledged to secure public deposits, other contractual obligations and short-term
borrowings at December 31, 2010 and 2009, respectively.
22
24
Notes to
Consolidated Financial Statements
6. ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows the allocation of the allowance for loan losses at December 31, 2010 by class of loan and by impairment methodology (in thousands):
Commercial
Real Estate
Consumer
Unallocated
Total
Allowance for credit losses:
Ending balance
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
$
$
$
$
$
$
2,830
226
2,604
143,174
2,356
140,818
$
$
$
$
$
$
6,767
1,898
4,869
245,908
15,717
230,191
$
$
$
$
$
$
1,179
-
1,179
43,014
488
42,526
$
$
$
$
$
$
238
-
238
-
-
-
The following tables show the loan portfolio allocated by management’s internal risk ratings at December 31, 2010 (in thousands):
Commercial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Commercial
and
Industrial
Agricultural
Land and
Production
Owner
Occupied
Real Estate
Construction
and Other
Land Loans
Commercial
Real Estate
Other Real
Estate
$
84,438
4,305
7,735
-
$
37,181
502
1,104
-
100,278
6,336
5,274
-
$
$
10,287
6,330
15,422
-
$
49,294
3,118
11,215
-
30,408
2,713
5,233
-
96,478
$
38,787
$
111,888
$
32,039
$
63,627
$
38,354
$
Grade:
Pass
Special Mention
Substandard
Doubtful
Total
$
$
Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Grade:
Pass
Special mention
Substandard
Doubtful
Total
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
Grade:
Performing
Non-Performing
Total
Equity
Loans and
Lines of
Credit
Consumer
and
Installment
$
33,228
-
1,293
-
34,521
$
7,269
-
135
-
7,404
Credit
Cards
1,089
-
1,089
$
$
$
$
$
$
$
$
$
$
$
11,014
2,124
8,890
432,096
18,561
413,535
Lease
Financing
Receivables
7,799
-
110
-
7,909
23
25
Notes to
Consolidated Financial Statements
6. ALLOWANCE FOR CREDIT LOSSES
(Continued)
The following table shows an ageing analysis of the loan portfolio by the time past due at December 31, 2010 (amounts in thousands):
30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days
(nonaccrual)
Total Past
Due
Commercial
Commercial and industrial
Agricultural land and production
$
Real estate
Owner occupied
Real estate construction and other land
loans
Commercial real estate
Other
Consumer
Equity loans and lines of credit
Consumer and installment
$
164
-
863
-
2,316
-
-
78
Total
$
3,421
$
-
-
-
-
-
-
-
-
-
$
$
180
-
-
5,634
726
-
-
-
344
-
863
5,634
3,042
-
-
78
Recorded
Investment
> 90 Days
Accruing
Current
Total Loans
$
104,043
38,787
$
104,387
38,787
$
111,025
111,888
26,405
60,585
38,354
34,521
8,415
32,039
63,627
38,354
34,521
8,493
$
6,540
$
9,961
$
422,135
$
432,096
$
The following table shows information related to impaired loans at and for the year ended December 31, 2010 (amounts in thousands):
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance recorded:
Commercial
Commercial and industrial
Agricultural land and production
Total commercial
Real estate
Owner occupied
Real estate construction and other land loans
Commercial real estate
Other
Total real estate
Consumer
Equity loans and lines of credit
Consumer and installment
Total consumer
$
$
1,150
-
1,150
1,775
1,885
1,828
-
5,487
488
-
488
$
1,174
-
1,174
2,147
2,056
1,834
-
6,037
506
-
506
Total with no related allowance recorded
7,126
7,717
$
-
-
-
-
-
-
-
-
-
-
-
-
With an allowance recorded:
Commercial
Commercial and industrial
Agricultural land and production
Total commercial
Real estate
Owner occupied
Real estate construction and other land loans
Commercial real estate
Other
Total real estate
Consumer
Equity loans and lines of credit
Consumer and installment
Total consumer
Total with an allowance recorded
Total
24
26
1,206
-
1,206
1,276
5,942
726
2,285
1,299
-
1,299
1,284
6,290
824
2,300
10,230
10,698
-
-
-
-
-
-
227
-
227
260
1,170
47
420
1,897
-
-
-
11,435
11,997
2,124
11,204
$
18,561
$
19,714
$
2,124
$
17,651
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
865
-
865
1,125
2,653
1,520
-
5,298
284
-
284
6,447
1,664
-
1,664
1,672
5,995
243
1,165
9,075
214
251
465
Notes to
Consolidated Financial Statements
6. ALLOWANCE FOR CREDIT LOSSES
(Continued)
At December 31, 2009, the recorded investment in impaired loans was
$18,959,000. The Company had $752,000 of specific allowance for loan losses
on impaired loans at December 31, 2009. The average outstanding balance of
impaired loans for the years ended December 31, 2009 and 2008 was
$13,117,000 and $2,724,000, respectively, and no income was recognized as
interest income on a cash basis in any year.
Nonaccrual loans totaled $18,561,000 and $18,959,000 at December 31,
2010 and 2009, respectively. Foregone interest on nonaccrual loans totaled
$1,153,000, $371,000, and $8,000 for the years ended December 31, 2010,
2009, and 2008, respectively. There were no accruing loans past due 90 days or
more at December 31, 2010 or 2009.
Included in the impaired and nonaccrual loans above are seven loans in the
amount of $6,180,000 that were considered to be troubled debt restructurings at
December 31, 2010. There are no outstanding commitments to lend additional
funds to any of these borrowers.
7. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
December 31,
2010
2009
(In thousands)
$
$
580
3,091
7,263
3,569
580
3,091
6,958
3,571
14,503
14,200
Land
Buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
Less accumulated depreciation and
amortization
As of December 31, 2010, OREO consisted of two properties. The Bank was
a participant with an independent bank in a loan collateralized by 24 units of a
medical office condominium project. On April 30, 2010, the lead bank
foreclosed on the loan and the Bank recorded the property as OREO at a net
realizable value of $1,656,000 for their portion of the loan. Net realizable value
was based on a third-party appraisal using a discounted as-is bulk value of the 24
units. As of December 31, 2010, 12 of the 24 units were sold. Sales proceeds
totaled $911,000. At December 31, 2010 the recorded investment in this
property was $745,000. On May 28, 2010, the Bank foreclosed on a loan
collateralized by a property containing a gas station, convenience store and
restaurant. The Company recorded the property at a net realizable value of
$889,000 based on a third-party appraisal. Subsequent to foreclosure, the
Company recorded a valuation allowance of $309,000 to reduce the value to an
estimated realizable value of $580,000.
In 2010, the Bank foreclosed on three other loans collateralized by real estate
with net realizable values totaling $923,000. The properties were all sold in
2010. The Company realized a loss on sale of one of the properties totaling
$14,000 and realized a $176,000 net recovery from the sale of another. The
Company sold the third property for its carrying value.
At December 31, 2009, OREO consisted of two properties. The Bank
participated with an independent bank in a loan collateralized by an RV Park. In
2009, the Bank foreclosed on the loan and recorded the property as OREO at a
net realizable value of $2,550,000 based on a third-party appraisal. Subsequent to
foreclosure, the Company recorded an additional valuation allowance of $86,000
to reduce the value to an estimated realizable value of $2,464,000 at
December 31, 2009. In April 2010, the RV Park was sold. Prior to the sale in
April 2010, the Company recorded a valuation allowance of $283,000. In July
2009, the Company foreclosed on a construction loan for a commercial building
and recorded the property at net realizable value of $638,000 based on a third-
party appraisal. Subsequent to foreclosure and based on an updated appraisal, the
Company recorded an additional impairment charge of $270,000 to reduce the
estimated realizable value to $368,000. This property was sold in October 2010
for an additional loss of $95,000.
(8,660)
(7,675)
9. DEPOSITS
$
5,843
$
6,525
Interest-bearing deposits consisted of the following:
Depreciation and amortization included in occupancy and equipment expense
totaled $1,262,000. $1,367,000 and $1,028,000 for the years ended
December 31, 2010, 2009 and 2008, respectively.
8. OTHER REAL ESTATE OWNED
At December 31, 2010 and 2009 the Company had $1,325,000 and $2,832,000,
respectively invested in properties acquired through foreclosure. The properties
are described in the following paragraph. These properties are carried at their fair
value. Fair value is based on recently obtained third-party appraisals or recent
offers on like properties. The table below provides a summary of the change in
other real estate owned (OREO) balances for the years ended December 31,
2010 and 2009.
Savings
Money market
NOW accounts
Time, $100,000 or more
Time, under $100,000
December 31,
2010
2009
(In thousands)
$
$
27,678
157,345
114,473
119,503
57,629
24,446
142,917
112,493
134,964
65,717
$
476,628
$
480,537
Balance, December 31, 2009
Additions
Dispositions
Write-downs
Gain on disposition
Loss on disposition
Year Ended
Year Ended
December 31, December 31,
2010
2009
(In thousands)
$
2,832 $
3,467
(4,450)
(591)
176
(109)
-
3,188
-
(356)
-
-
Balance, December 31, 2010
$
1,325 $
2,832
Aggregate annual maturities of time deposits are as follows (in thousands):
Years Ending December 31,
2011
2012
2013
2014
2015
$
145,146
23,698
1,711
271
6,306
$
177,132
25
27
Notes to
Consolidated Financial Statements
9. DEPOSITS
(Continued)
Interest expense recognized on interest-bearing deposits consisted of the
following:
Savings
Money market
NOW accounts
Time certificates of deposit
Years Ended December 31,
2010
2009
2008
(In thousands)
$
$
$
52
1,035
447
2,179
$
49
1,262
722
3,834
65
2,098
214
3,963
3,713
$
5,867
$
6,340
10. BORROWING ARRANGEMENTS
Federal Home Loan Bank Advances - Advances from the Federal Home Loan
Bank (FHLB) of San Francisco at December 31, 2010 and 2009 consisted of the
following:
2010
2009
Amount
Rate
Maturity Date
Amount
Rate
Maturity Date
(Dollars in thousands)
(Dollars in thousands)
$ 5,000
5,000
4,000
3.00% February 7, 2011
3.10% February 14, 2011
3.59% February 12, 2013
$ 5,000
5,000
5,000
4,000
2.73% February 5, 2010
3.00% February 7, 2011
3.10% February 14, 2011
3.59% February 12, 2013
14,000
(10,000) Less short-term portion
19,000
(5,000) Less short-term portion
$ 4,000
Long-term debt
$ 14,000
Long-term debt
FHLB advances are secured by investment securities with amortized costs
totaling $31,918,000 and $45,239,000 and market values totaling $33,214,000
and $44,808,000 at December 31, 2010 and 2009, respectively. The Bank’s
credit limit varies according to the amount and composition of the investment
and loan portfolios pledged as collateral.
Lines of Credit - The Bank had unsecured lines of credit with its correspondent
banks which, in the aggregate, amounted to $39,000,000 at December 31, 2010
and 2009, at interest rates which vary with market conditions. The Bank also
had a line of credit in the amount of $1,321,000 and $917,000 with the Federal
Reserve Bank of San Francisco at December 31, 2010 and 2009, respectively
which bears interest at the prevailing discount rate collateralized by investment
securities with amortized costs totaling $1,322,000 and $922,000 and market
values totaling $1,354,000 and $956,000, respectively. At December 31, 2010
and 2009, the Bank had no outstanding short-term borrowings under these lines
of credit.
11.
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
Service 1st Capital Trust I is a Delaware business trust formed by Service 1st. The
Company succeeded to all of the rights and obligations of Service 1st in
connection with the merger with Service 1st as of November 12, 2008. The Trust
was formed on August 17, 2006 for the sole purpose of issuing trust preferred
securities fully and unconditionally guaranteed by Service 1st. Under applicable
regulatory guidance, the amount of trust preferred securities that is eligible as
Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma
basis. At December 31, 2010, all of the trust preferred securities that have been
issued qualify as Tier 1 capital. The trust preferred securities mature on
26
28
October 7, 2036, are redeemable at the Company’s option beginning after five
years, and require quarterly distributions by the Trust to the holder of the trust
preferred securities at a variable interest rate which will adjust quarterly to equal
the three month LIBOR plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to
purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s
junior subordinated notes (the Notes). The Notes bear interest at the same
variable interest rate during the same quarterly periods as the trust preferred
securities. The Notes are redeemable by the Company on any January 7, April 7,
July 7, or October 7 on or after October 7, 2011 or at any time within 90 days
following the occurrence of certain events, such as: (i) a change in the regulatory
capital treatment of the Notes (ii) in the event the Trust is deemed an investment
company or (iii) upon the occurrence of certain adverse tax events. In each such
case, the Company may redeem the Notes for their aggregate principal amount,
plus any accrued but unpaid interest.
The Notes may be declared immediately due and payable at the election of
the trustee or holders of 25% of the aggregate principal amount of outstanding
Notes in the event that the Company defaults in the payment of any interest
following the nonpayment of any such interest for 20 or more consecutive
quarterly periods.
Holders of the trust preferred securities are entitled to a cumulative cash
distribution on the liquidation amount of $1,000 per security. For each
January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to
equal the three month LIBOR plus 1.60%. As of December 31, 2010, the rate
was 1.89%. Interest expense recognized by the Company for the years ended
December 31, 2010, 2009 and 2008 was $102,000, $129,000 and $46,000,
respectively.
12.
INCOME TAXES
The provision for (benefit from) income taxes for the years ended December 31,
2010, 2009, and 2008 consisted of the following:
2010
Current
Deferred
Benefit from income taxes
2009
Current
Deferred
Benefit from income taxes
2008
Current
Deferred
Provision for income taxes
Federal
State
Total
(In thousands)
$
$
$
$
$
$
1,472
(1,677)
(205)
(1,374)
804
(570)
1,851
108
1,959
$
$
$
$
$
$
496
(660)
(164)
(90)
(16)
(106)
556
(163)
393
$
$
$
$
$
$
1,968
(2,337)
(369)
(1,464)
788
(676)
2,407
(55)
2,352
The determination of the amount of deferred income tax assets which are
more likely than not to be realized is primarily dependent on projections of
future earnings, which are subject to uncertainty and estimates that may change
given economic conditions and other factors. The realization of deferred income
tax assets is assessed and a valuation allowance is recorded if it is more likely
than not that all or a portion of the deferred tax asset will not be realized. More
likely than not is defined as greater than a 50% chance. All available evidence,
both positive and negative is considered to determine whether, based on the
weight of the evidence, a valuation allowance is needed. Based upon our analysis
of available evidence, we have determined that it is more likely than not that all
of our deferred income tax assets as of December 31, 2010 and 2009 will be
fully realized and therefore no valuation allowance was recorded.
Notes to
Consolidated Financial Statements
12.
INCOME TAXES
(Continued)
Deferred tax assets (liabilities) consisted of the following:
$
Deferred tax assets:
Allowance for credit losses
Deferred compensation
Net operating loss carryover from acquisition
Bank premises and equipment
Mark to market adjustment
Other deferred taxes
Other than temporary impairment
Other real estate
Loan and investment impairment
State Enterprise Zone credit carry-forward
State capital loss carry-forward
Alternative minimum tax credit
State taxes
Other reserves
Partnership income
Unrealized loss on available-for-sale
investment securities
December 31,
2010
2009
(In thousands)
$
4,370
3,445
1,959
907
551
682
653
566
383
343
120
138
144
10
39
-
3,913
2,975
2,706
681
674
147
124
197
311
149
100
51
1
-
-
970
Total deferred tax assets
14,310
12,999
Deferred tax liabilities:
Finance leases
Unrealized gain on available-for-sale
investment securities
Core deposit intangible
FHLB stock
Loan origination costs
Other deferred taxes
State tax refunds
(2,581)
(2,372)
(676)
(493)
(254)
(189)
-
-
-
(663)
(262)
(192)
(25)
(59)
Total deferred tax liabilities
(4,193)
(3,573)
Net deferred tax assets
$
10,117
$
9,426
The provision for income taxes differs from amounts computed by applying
the statutory Federal income tax rates to operating income before income taxes.
The significant items comprising these differences for the years ended
December 31, 2010, 2009 and 2008 consisted of the following:
Federal income tax, at statutory rate
State taxes, net of Federal tax
benefit
Tax exempt investment security
income, net
Bank owned life insurance, net
Solar credits
Change in uncertain tax positions
Other
2010
2009
2008
34.0 %
34.0 %
34.0 %
(3.7)%
(3.7)%
3.4 %
(34.7)%
(4.6)%
(5.4)%
(1.3)%
3.0 %
(52.4)%
(6.9)%
(15.7)%
7.7 %
1.7 %
(4.7)%
(1.4)%
-
-
0.1 %
Effective tax rate
(12.7)%
(35.3)%
31.4 %
At December 31, 2010, the Company had Federal and California net
operating loss (NOLs) carry-forward of approximately $4,509,000 and
$5,949,000, respectively from the Service 1st acquisition, subject to an Internal
Revenue Code (IRC) Sec. 382 annual limitation of $1,133,000. Management
expects to fully utilize the Service 1st Federal and California NOL carry-forward.
Federal NOL will begin to expire in 2028. California suspended utilization of
NOLs for 2008, 2009 and 2010 tax years for taxpayers with business income in
excess of $500,000. The California NOL will begin to expire in 2019.
The Company and its Subsidiary file income tax returns in the U.S. federal
and California jurisdictions. The Company conducts all of its business activities
in the State of California. As of December 31, 2010, there are currently no
pending U.S. federal, state or local income tax examinations by those taxing
authorities. The Company is no longer subject to the examination by U.S.
federal taxing authorities for the years ended before December 31, 2007 and by
the state and local taxing authorities for the years ended before December 31,
2006.
A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows (in thousands):
Balance at January 1, 2010
Additions based on tax positions related to the current year
Reductions for tax positions of prior years
Balance at December 31, 2010
$
$
310
52
(151)
211
During the years ended December 31, 2010 and 2008, the Company did not
recognize any interest and penalties related to uncertain tax positions. In 2009,
the Company recognized $32,000 of interest related to the pending state tax
examination and no penalties related to uncertain tax positions.
13. COMMITMENTS AND CONTINGENCIES
Leases - The Bank leases certain of its branch facilities and administrative offices
under noncancelable operating leases. Rental expense included in occupancy and
equipment and other expenses totaled $1,922,000, $1,796,000 and $1,244,000
for the years ended December 31, 2010, 2009 and 2008, respectively.
Future minimum lease payments on noncancelable operating leases are as
follows (in thousands):
Years Ending December 31,
2011
2012
2013
2014
2015
Thereafter
$
1,893
1,774
1,708
1,722
1,643
6,070
$
14,810
Federal Reserve Requirements - Banks are required to maintain reserves with the
Federal Reserve Bank equal to a percentage of their reservable deposits. The
amount of such reserve balances required at December 31, 2010 and 2009 was
$25,000.
Correspondent Banking Agreements - The Bank maintains funds on deposit with
other federally insured financial institutions under correspondent banking
agreements. Uninsured deposits totaled $7,411,000 at December 31, 2010.
Financial Instruments With Off-Balance-Sheet Risk - The Bank is a party to
financial instruments with off-balance-sheet risk in the normal course of business
in order to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial instruments consist of
commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of
the amount recognized on the balance sheet.
The Bank’s exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and standby letters of credit as it
does for loans included on the balance sheet.
27
29
Notes to
Consolidated Financial Statements
13. COMMITMENTS AND CONTINGENCIES
(Continued)
The following financial instruments represent off-balance-sheet credit risk:
December 31,
2010
2009
(In thousands)
Commitments to extend credit
Standby letters of credit
$
$
123,311
369
$
$
130,899
240
Commitments to extend credit consist primarily of unfunded commercial loan
commitments and revolving lines of credit, single-family residential equity lines of
credit and commercial real estate construction loans. Construction loans are
established under standard underwriting guidelines and policies and are secured
by deeds of trust, with disbursements made over the course of construction.
Commercial revolving lines of credit have a high degree of industry
diversification. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are generally secured and are issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that involved
in extending loans to customers. The fair value of the liability related to these
standby letters of credit, which represents the fees received for issuing the
guarantees, was not significant at December 31, 2010 and 2009. The Company
recognizes these fees as revenue over the term of the commitment or when the
commitment is used.
At December 31, 2010, commercial loan commitments represent
approximately 56% of total commitments and are generally secured by collateral
other than real estate or unsecured. Real estate loan commitments represent 28%
of total commitments and are generally secured by property with a loan-to-value
ratio not to exceed 80%. Consumer loan commitments represent the remaining
16% of total commitments and are generally unsecured. In addition, the majority
of the Bank’s loan commitments have variable interest rates.
Concentrations of Credit Risk - At December 31, 2010, in management’s
judgment, a concentration of loans existed in commercial loans and real-estate-
related loans, representing approximately 96.3% of total loans of which 31.3%
were commercial and 65.0% were real-estate-related.
At December 31, 2009, in management’s judgment, a concentration of loans
existed in commercial loans and real-estate-related loans, representing
approximately 96.3% of total loans of which 30.0% were commercial and 66.4%
were real-estate-related.
Management believes the loans within these concentrations have no more than
the typical risks of collectibility. However, in light of the current economic
environment, additional declines in the performance of the economy in general
or a continued decline in real estate values in the Company’s primary market
area, in particular, could have an adverse impact on collectibility, increase the
level of real-estate-related nonperforming loans, or have other adverse effects
which alone or in the aggregate could have a material adverse effect on the
financial condition, results of operations and cash flows of the Company.
Contingencies - The Company is subject to legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to such actions will not materially affect
the consolidated financial position or consolidated results of operations of the
Company.
14. SHAREHOLDERS’ EQUITY
Regulatory Capital - The Company and the Bank are subject to certain regulatory
capital requirements administered by the Board of Governors of the Federal
Reserve System and the FDIC. Failure to meet these 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 Company’s consolidated financial statements.
28
30
Under capital adequacy guidelines, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. These quantitative measures are established by regulation
and require that minimum amounts and ratios of total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to average assets be maintained. Capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
The Bank is also subject to additional capital guidelines under the regulatory
framework for prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the following table. The most recent notification
from the FDIC categorized the Bank as well capitalized under these guidelines.
There are no conditions or events since that notification that management
believes have changed the Bank’s category.
Management believes that the Company and the Bank met all their capital
adequacy requirements as of December 31, 2010 and 2009. There are no
conditions or events since those notifications that management believes have
changed those categories.
Tier 1 Leverage Ratio
Central Valley Community
Bancorp and Subsidiary
Minimum regulatory requirement
Central Valley Community Bank
Minimum requirement for
‘‘Well-Capitalized’’ institution
Minimum regulatory requirement
Tier 1 Risk-Based Capital Ratio
Central Valley Community
Bancorp and Subsidiary
Minimum regulatory requirement
Central Valley Community Bank
Minimum requirement for
‘‘Well-Capitalized’’ institution
Minimum regulatory requirement
Total Risk-Based Capital Ratio
Central Valley Community
Bancorp and Subsidiary
Minimum regulatory requirement
Central Valley Community Bank
Minimum requirement for
‘‘Well-Capitalized’’ institution
Minimum regulatory requirement
December 31, 2010
December 31, 2009
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 70,669
$ 29,832
$ 69,457
9.48% $ 67,547
4.00% $ 29,056
9.32% $ 66,624
$ 37,264
$ 29,811
5.00% $ 36,210
4.00% $ 28,968
9.30%
4.00%
9.20%
5.00%
4.00%
$ 70,669
$ 19,965
$ 69,457
14.16% $ 67,547
4.00% $ 21,998
13.92% $ 66,624
12.28%
4.00%
12.12%
$ 29,929
$ 19,953
6.00% $ 32,977
4.00% $ 21,985
6.00%
4.00%
$ 76,982
$ 39,931
$ 75,766
15.42% $ 74,463
8.00% $ 43,996
15.19% $ 73,535
13.54%
8.00%
13.38%
$ 49,881
$ 39,905
10.00% $ 54,962
8.00% $ 43,970
10.00%
8.00%
Dividends - No dividends on common shares were declared in 2010 or 2009. On
February 20, 2008, the Board of Directors declared a $0.10 per share cash
dividend for shareholders of record as of March 11, 2008, payable on March 31,
2008.
The Company’s primary source of income with which to pay cash dividends
are dividends from the Bank. The California Financial Code restricts the total
amount of dividends payable by a bank at any time without obtaining the prior
approval of the California Department of Financial Institutions to the lesser of
(1) the bank’s retained earnings or (2) the bank’s net income for its last three
fiscal years, less distributions made to shareholders during the same three-year
period. At December 31, 2010, retained earnings of $5,836,000 were free of
such restrictions. Dividends on common stock in 2011 will also be limited
without the prior approval of the United States Treasury due to the Company’s
participation in the Capital Purchase Program.
Share Repurchase Plan - No shares were repurchased under a repurchase plan
during 2010, 2009 or 2008. In 2008, the Company repurchased 5,436 shares of
Notes to
Consolidated Financial Statements
14. SHAREHOLDERS’ EQUITY
(Continued)
common stock from shareholders who perfected their dissenters’ rights related to
the acquisition of Service 1st at an average price of $10.30 for a total cost of
$56,000.
Stock Purchase Agreements - On December 23, 2009, the Company entered into
Stock Purchase Agreements (Agreements) with a limited number of accredited
investors (collectively, the ‘‘Purchasers’’) to sell to the Purchasers a total of
1,264,952 shares of common stock, (Common Stock) at $5.25 per share and
1,359 shares of non-voting Series B Convertible Adjustable Rate Non-Cumulative
Perpetual Preferred Stock (Series B Preferred Stock) at $1,000 per share, for an
aggregate gross purchase price of $8,000,000 (the ‘‘Offering’’) offset by issuance
costs totaling $242,000. The Offering closed on December 23, 2009, and the
Company issued an aggregate of 1,264,952 shares of its Common Stock and an
aggregate of 1,359 shares of its Preferred Stock upon its receipt of consideration
in cash.
The Series B Preferred Stock was eligible to receive a semi-annual
non-cumulative preferred dividend with an initial annualized coupon of 10%,
payable at the end of the first six months the shares are outstanding. The annual
dividend rate would have increased to 15% for the second six month period and
20% for each six month period thereafter. Dividends may not be paid on any
other class or series of the Company’s stock unless dividends are currently paid
on the Preferred Stock in any period.
In May 2010, the shareholders of the Company approved an amendment to
the Company’s governing instruments to create a series of non-voting common
stock. In June 2010, the Company exercised its option to require the Purchasers
to exchange 1,359 shares of Series B Preferred Stock for 258,862 shares of
non-voting common stock.
Capital Purchase Program - Troubled Asset Relief Program - On January 30,
2009, the Company entered into a Letter Agreement (the Purchase Agreement)
with the United States Department of the Treasury (the Treasury), pursuant to
which the Company issued and sold (i) 7,000 shares of the Company’s Series A
Fixed Rate Cumulative Perpetual Preferred Stock (the Series A Preferred Stock)
and (ii) a warrant (the Warrant) to purchase 158,133 shares of the Company’s
common stock, no par value, (the Common Stock) for an aggregate purchase
price of $7,000,000 in cash.
The Series A Preferred Stock will qualify as Tier 1 capital and will pay
cumulative dividends quarterly at a rate of 5% per annum for the first five years,
and 9% per annum thereafter. The Series A Preferred Stock may be redeemed by
the Company after three years. Prior to the end of three years, the Series A
Preferred Stock may be redeemed by the Company only with proceeds from the
sale of qualifying equity securities of the Company (a Qualified Equity Offering).
Preferred stock dividends paid in 2010 totaled $349,000.
The Warrant has a 10-year term and is immediately exercisable upon its
issuance, with an exercise price, subject to anti-dilution adjustments, equal to
$6.64 per share of the Common Stock.
According to the agreement, if the Company received aggregate gross cash
proceeds of not less than $7,000,000 from Qualified Equity Offerings on or
prior to December 31, 2009, the number of shares of Common Stock issuable
pursuant to the Treasury’s exercise of the Warrant could be reduced by one half
of the original number of shares, taking into account all adjustments, underlying
the Warrant. On December 23, 2009, the Company received $8,000,000, as a
result of entering into Stock Purchase Agreements to sell a total of 1,264,952
shares of common stock, without par value at $5.25 per share and 1,359 shares
of non-voting Series B Convertible Adjustable Rate Non-Cumulative Perpetual
Preferred Stock at $1,000 per share, for an aggregate gross purchase price of
$8,000,000. The Company submitted a request to the Treasury to cancel one
half of the outstanding Warrants and received confirmation from the Treasury
that the number of warrants was reduced to 79,067. Pursuant to the Purchase
Agreement, the Treasury has agreed not to exercise voting power with respect to
any shares of Common Stock issued upon exercise of the Warrant.
The Series A Preferred Stock and the Warrant were issued in a private
placement exempt from registration pursuant to Section 4(2) of the Securities Act
of 1933, as amended. Upon the request of the Treasury at any time, the
Company has agreed to promptly enter into a deposit arrangement pursuant to
which the Preferred Stock may be deposited and depositary shares (the
Depositary Shares) representing fractional shares of the Preferred Stock, may be
issued. The Company has agreed to register the Series A Preferred Stock, the
Warrant, the shares of Common Stock underlying the Warrant (the Warrant
Shares), and Depository Shares, as soon as practicable after the date of the
issuance of the Series A Preferred Stock and the Warrant in accordance with the
terms of the Purchase Agreement. Neither the Series A Preferred Stock nor the
Warrant will be subject to any contractual restrictions on transfer, except that the
Treasury may only transfer or exercise an aggregate of one-half of the Warrant
Shares.
The Series A Preferred Stock is non-voting, other than class voting rights on
(i) any authorization or issuance of shares ranking senior to the Series A Preferred
Stock, (ii) any amendment to the rights of the Series A Preferred Stock, or
(iii) any merger, exchange or similar transaction which would adversely affect the
rights of the Series A Preferred Stock.
If dividends on the Series A Preferred Stock are not paid in full for six
dividend periods, whether or not consecutive, the holders of the Series A
Preferred Stock will have the right to elect 2 directors. The right to elect
directors will end when full dividends have been paid for four consecutive
dividend periods. The Company has paid all scheduled dividend payments as of
December 31, 2010.
In the Purchase Agreement, the Company agreed that, until such time as the
Treasury ceases to own any debt or equity securities of the Company acquired
pursuant to the Purchase Agreement, the Company will take all necessary action
to ensure that its benefit plans with respect to its senior executive officers comply
with Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the
EESA) as implemented by any guidance or regulation under the EESA that has
been issued and is in effect as of the date of issuance of the Series A Preferred
Stock and the Warrant, and has agreed to not adopt any benefit plans with
respect to, or which cover, its senior executive officers that do not comply with
the EESA, and the applicable executives have consented to the foregoing.
Furthermore, the Purchase Agreement allows the Treasury to unilaterally amend
the terms of the agreement.
With respect to dividends on the Company’s common stock, the Treasury’s
consent shall be required for any increase in common dividends per share until
the third anniversary of the date of its investment unless prior to such third
anniversary the Series A Preferred Stock is redeemed in whole or the Treasury has
transferred all of the Series A Preferred Stock to third parties. Furthermore, for as
long as any Series A Preferred Stock is outstanding, no dividends may be
declared or paid on junior preferred shares, preferred shares ranking pari passu
with the Series A Preferred Stock, or common shares (other than in the case of
pari passu preferred shares, dividends on a pro rata basis with the Series A
Preferred Stock), nor may the Company repurchase or redeem any junior
preferred shares, preferred shares ranking pari passu with the Series A Preferred
Stock or common shares, unless all accrued and unpaid dividends for all past
dividend periods on the Series A Preferred Stock are fully paid.
The Company allocated the proceeds received from the U.S. Treasury between
the Series A Preferred Stock and the Warrant issued based on the estimated
relative fair values of each. The fair value of the Series A Preferred Stock was
determined using a net present value calculation for preferred stock. The fair
value of the Warrant was estimated based on a Black-Scholes-Merton model. The
recorded investment in Series A Preferred Stock initially was $6,775,000 and the
fair value allocated to the Warrant was $225,000. The discount recorded on the
Series A Preferred Stock was equal to the fair value of the imbedded Warrant and
is amortized using the level-yield method over five years.
The following table identifies the amount of the proceeds allocated to the
Series A Preferred Stock and the Warrant based on their relative fair values.
Series A
Preferred
Stock
Warrant
Total
Fair
Value
$
820.86
7,000
$ 5,746,000
$
$
1.21
158,133
191,000
96.78%
3.22%
$
-
-
$ 5,937,000
-
$ 6,775,000
$
225,000
$ 7,000,000
Fair value per share
Number of shares
Fair value
Percent of total fair value
Allocation of $7,000,000
proceeds based on percent
of total fair value
The Company calculated the fair value of the Series A Preferred Stock using a
net present value calculation for preferred stock with a five year call option, with
29
31
Notes to
Consolidated Financial Statements
14. SHAREHOLDERS’ EQUITY
(Continued)
15. SHARE-BASED COMPENSATION
On December 31, 2010, the Company had two share-based compensation plans,
which are described below.
On November 15, 2000, the Company adopted, and subsequently amended
on December 20, 2000, the Central Valley Community Bancorp 2000 Stock
Option Plan (2000 Plan) for which 599,229 shares remain reserved for issuance
for options already granted to employees and directors under incentive and
nonstatutory agreements. The plan expired on November 15, 2010. Outstanding
options under this plan are exercisable until their expiration, however, no new
options will be granted under this plan. The plan required that the option price
may not be less than the fair market value of the stock at the date the option
was granted, and that the option price must be paid in full at the time it is
exercised. The options under the plan expire on dates determined by the Board
of Directors, but not later than 10 years from the date of grant. The vesting
period was determined by the Board of Directors and was generally over five
years.
In May 2005, the Company adopted the Central Valley Community Bancorp
2005 Omnibus Incentive Plan (2005 Plan). The plan provides for awards in the
form of incentive stock options, non-statutory stock options, stock appreciation
rights, and restricted stock. The plan also allows for performance awards that
may be in the form of cash or shares of the Company, including restricted stock.
The maximum number of shares that can be issued with respect to all awards
under the plan is 476,000. Currently under the 2005 Plan, there are 107,900
shares reserved for issuance for options already granted to employees and 368,100
remain reserved for future grants as of December 31, 2010. The 2005 plan
requires that the exercise price may not be less than the fair market value of the
stock at the date the option is granted, and that the option price must be paid in
full at the time it is exercised. The options and awards under the plan expire on
dates determined by the Board of Directors, but not later than 10 years from the
date of grant. The vesting period for the options and option related stock
appreciation rights is determined by the Board of Directors and is generally over
five years.
In 2010, options to purchase 15,200 shares of the Company’s common stock
were granted from the 2000 Plan at an exercise price of $5.76 and options to
purchase 67,800 shares of common stock were granted from the 2005 Plan at
exercise prices between $5.30 and $5.76. In 2009, options to purchase 13,500
shares of the Company’s common stock were granted at exercise prices of
between $5.06 and $6.40 from the 2005 Plan. All options were granted with an
exercise price equal to the market value on the grant date.
In December 2008, the Company cancelled options to purchase 90,550 shares
of the Company’s common stock previously granted from the 2000 Plan on
October 17, 2007 and options to purchase 15,000 shares of the Company’s
common stock previously granted from the 2005 Plan on October 1, 2007 and,
on December 17, 2008, granted options to purchase 90,550 shares of the
Company’s common stock from the 2000 Plan and options to purchase 15,000
shares of the Company’s common stock from the 2005 Plan at an exercise price
of $6.70, the fair market value on the grant date. Also, from the 2005 Plan, new
options to purchase 15,000 shares of the Company’s common stock were granted
in 2008 at an exercise price of $6.70.
For the years ended December 31, 2010, 2009, and 2008, the compensation
cost recognized for share based compensation was $239,000, $284,000, and
$100,000, respectively. The recognized tax benefit for share based compensation
expense was $42,000, $44,000, and $50,000 for 2010, 2009, and 2008,
respectively.
an annual dividend rate of 5.0% and a 10.0% discount rate. Management
determined the discount rate of 10.0% was appropriate based on the Company’s
risk profile using a Capital Asset Pricing model (CAPM).
The Company based the fair value of the Warrant granted using a Black-
Scholes-Merton pricing model that uses assumptions based on estimated expected
life, expected stock volatility and a discount rate based on the risk-free interest
rate. Stock volatility is based on the historical volatility of the Company’s stock.
The risk-free rate is based on the U.S. Treasury yield curve for the periods within
the contractual life of the Warrant in effect at the time of grant. The fair value
of the Warrant was estimated on the date of grant using: i) dividend yield of
0.10%; ii) expected volatility of 32.13%; iii) 1.52% risk-free interest rate;
iv) expected term of six and one half years and v) expected vesting of the
contingently exercisable portion of the Warrant of 85%.
Earnings Per Share - A reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations is as follows:
For the Years Ended December 31,
2010
2009
(In thousands, except share and
per share amounts)
2008
Basic Earnings Per Share:
Net income
Less: Preferred stock dividends
and accretion
Income available to common
shareholders
Weighted average shares
outstanding
Net income per share
Diluted Earnings Per Share:
Net income
Less: Preferred stock dividends
and accretion
Income available to common
shareholders
Weighted average shares
outstanding
Effect of dilutive stock options
and warrants
Weighted average shares of
common stock and common
stock equivalents
$
3,279
$
2,588
$
5,139
(395)
(365)
-
$
2,884
$
2,223
$
5,139
9,209,858
7,685,789
6,212,199
$
$
$
$
0.31
3,279
(395)
$
$
0.29
2,588
(365)
0.83
5,139
-
$
2,884
$
2,223
$
5,139
9,209,858
7,685,789
6,212,199
80,813
117,975
257,037
9,290,671
7,803,764
6,469,236
Net income per diluted share
$
0.31
$
0.28
$
0.79
Outstanding options and warrants of 531,996 were not factored into the
calculation of dilutive stock options because they were anti-dilutive.
30
32
Notes to
Consolidated Financial Statements
15. SHARE-BASED COMPENSATION
(Continued)
A summary of the combined activity of the Plans for the years ended
December 31, 2010, 2009 and 2008 follows:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Number of
Stock Options
Outstanding
(Dollars in thousands, except per share amounts)
861,834
120,550 $
(44,003) $
(114,500) $
6.70
4.71
12.10
823,881 $
6.60
4.03 $
990
799,710 $
6.50
4.95 $
990
673,381 $
6.03
3.18 $
990
823,881
13,500 $
(42,522) $
(4,925) $
5.21
4.11
8.10
789,934 $
6.70
3.29 $
668
757,726 $
6.60
4.46 $
668
679,507 $
6.46
2.65 $
668
789,934
83,000 $
(159,400) $
(6,405) $
5.75
3.45
8.59
707,129 $
7.31
3.78 $
350
687,832 $
7.34
6.04 $
350
568,891 $
7.62
4.34 $
350
Options outstanding at
January 1, 2008
Options granted
Options exercised
Options canceled
Options outstanding at
December 31, 2008
Options vested or
expected to vest at
December 31, 2008
Options exercisable at
December 31, 2008
Options outstanding at
January 1, 2009
Options granted
Options exercised
Options canceled
Options outstanding at
December 31, 2009
Options vested or
expected to vest at
December 31, 2009
Options exercisable at
December 31, 2009
Options outstanding at
January 1, 2010
Options granted
Options exercised
Options canceled
Options outstanding at
December 31, 2010
Options vested or
expected to vest at
December 31, 2010
Options exercisable at
December 31, 2010
The weighted-average grant-date fair value of options granted during 2010,
2009, and 2008 was $2.58, $1.33, and $2.00, respectively.
The total intrinsic value of options exercised in the years ended December 31,
2010, 2009, and 2008 was $349,000, $51,000, and $142,000, respectively.
Cash received from options exercised for the years ended December 31, 2010,
2009, and 2008 was $550,000, $175,000, and $207,000, respectively. The tax
benefit realized for the tax deductions from options exercised totaled $28,000,
$7,000, and $57,000 for the years ended December 31, 2010, 2009, and 2008,
respectively.
As of December 31, 2010, there was $413,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under the 2000 and 2005 Plans. The cost is expected to be recognized
over a weighted average period of 3.0 years. The total fair value of options vested
was $260,000 and $252,000 for the years ended December 31, 2010 and 2009,
respectively.
16. EMPLOYEE BENEFITS
401(k) and Profit Sharing Plan - The Bank has established a 401(k) and profit
sharing plan. The 401(k) plan covers substantially all employees who have
completed a six-month period in which they are credited with at least
1,000 hours of service. Participants in the profit sharing plan are eligible to
receive employer contributions after completion of two years of service. Bank
contributions to the profit sharing plan are determined at the discretion of the
Board of Directors. Participants are automatically vested 100% in all employer
contributions. The Bank did not contribute to the profit sharing plan in 2010 or
2009 and contributed $157,000 to the profit sharing plan in 2008.
Additionally, the Bank may elect to make a matching contribution to the
participants’ 401(k) plan accounts. The amount to be contributed is announced
by the Bank at the beginning of the plan year. For the years ended December 31,
2010, 2009, and 2008, the Bank made a 100% matching contribution on all
deferred amounts up to 3% of eligible compensation and a 50% matching
contribution on all deferred amounts above 3% to a maximum of 5%. For the
years ended December 31, 2010, 2009, and 2008, the Bank made matching
contributions totaling $336,000, $301,000, and $254,000, respectively.
Deferred Compensation Plan - The Bank has a nonqualified Deferred
Compensation Plan which provides directors with an unfunded, deferred
compensation program. Under the plan, eligible participants may elect to defer
some or all of their current compensation or director fees. Deferred amounts earn
interest at an annual rate determined by the Board of Directors (5.25% at
December 31, 2010). At December 31, 2010, and 2009, the total net deferrals
included in accrued interest payable and other liabilities were $2,038,000 and
$1,992,000, respectively.
In connection with the implementation of the above plan, single premium
universal life insurance policies on the life of each participant were purchased by
the Bank, which is beneficiary and owner of the policies. The cash surrender
value of the policies totaled $3,106,000, $3,006,000 and $2,909,000 at
December 31, 2010, 2009, and 2008, respectively. Income recognized on these
policies, net of related expenses, for the years ended December 31, 2010, 2009,
and 2008 was $100,000, $97,000, and $99,000, respectively.
Salary Continuation Plans - The Board of Directors approved salary continuation
plans for certain key executives during 2002 and subsequently amended the plans
in 2006. Under these plans, the Bank is obligated to provide the executives with
annual benefits for fifteen years after retirement. These benefits are substantially
equivalent to those available under split-dollar life insurance policies purchased by
the Bank on the life of the executives. In addition, the estimated present value of
these future benefits are accrued from the effective date of the plans until the
executives’ expected retirement date based on a discount rate of 6.00%. The
expense recognized under these plans for the years ended December 31, 2010,
2009, and 2008 totaled $450,000, $407,000, and $389,000, respectively.
Accrued compensation payable under the salary continuation plan totaled
$3,574,000, $3,201,000 and $2,865,000 at December 31, 2010, 2009 and 2008,
respectively
In connection with these plans, the Bank purchased single premium life
insurance policies with cash surrender values totaling $4,366,000, $4,214,000
and $4,064,000 at December 31, 2010, 2009 and 2008, respectively. Income
recognized on these policies, net of related expense, for the years ended
December 31, 2010, 2009, and 2008 totaled $152,000, $155,000, and
$157,000, respectively.
In connection with the acquisition of Service 1st Bank, the Bank assumed a
liability for the estimated present value of future benefits payable to former key
executives of Service 1st. The liability relates to change in control benefits
associated with Service 1st’s salary continuation plans. The benefits are payable to
the individuals when they reach retirement age. At December 31, 2010 and
2009, the total amount of the liability was $1,636,000 and $1,581,000,
respectively. Expense recognized by the Bank in 2010, 2009 and 2008 associated
with these plans was $95,000, $22,000 and $5,000, respectively. These benefits
31
33
Notes to
Consolidated Financial Statements
16. EMPLOYEE BENEFITS
(Continued)
are substantially equivalent to those available under split-dollar life insurance
policies acquired. These single premium life insurance policies had cash surrender
values totaling $3,918,000, $3,778,000 and $3,835,000 at December 31, 2010,
2009 and 2008, respectively. Income recognized on these policies, net of related
expenses, for the year ended December 31, 2010, 2009 and 2008 was $140,000,
$139,000 and $12,000, respectively.
The current annual tax-free interest rate on all life insurance policies is
5.48%.
17. LOANS TO RELATED PARTIES
During the normal course of business, the Bank enters into loans with related
parties, including executive officers and directors. These loans are made with
substantially the same terms, including rates and collateral, as loans to unrelated
parties. The following is a summary of the aggregate activity involving related
party borrowers (in thousands):
Balance, January 1, 2010
Disbursements
Amounts repaid
Balance, December 31, 2010
Undisbursed commitments to related parties, December 31,
2010
$
$
$
837
180
(208)
809
1,407
18. COMPREHENSIVE INCOME
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of other comprehensive income (loss) that historically has not
been recognized in the calculation of net income. The Company’s only source of
other comprehensive income (loss) is unrealized gains and losses on the
Company’s available-for-sale investment securities. Total comprehensive income
and the components of accumulated other comprehensive income (loss) are
presented in the consolidated statement of changes in shareholders’ equity.
At December 31, 2010, 2009 and 2008, the Company held securities
classified as available-for-sale which had net unrealized gains or losses as follows:
Before
Tax
Tax
Expense
(In thousands)
After
Tax
For the Year Ended December 31, 2010
Other comprehensive income:
Unrealized holding gains
Less reclassification adjustment
for net losses included in net
income
Total other comprehensive
income
$
2,290 $
(927) $
1,363
(1,778)
719
(1,059)
$
4,068 $
(1,646) $
2,422
For the Year Ended December 31, 2009
Other comprehensive loss:
Unrealized holding losses
Less reclassification adjustment
for net gains included in net
income
$
(1,971) $
788 $
(1,183)
767
(307)
460
Total other comprehensive loss
$
(2,738) $
1,095 $
(1,643)
For the Year Ended December 31, 2008
Other comprehensive income:
Unrealized holding gains
Less reclassification adjustment
for net gains included in net
income
Total other comprehensive
income
$
$
244 $
(97) $
147
165
(66)
79 $
(31) $
99
48
32
34
Notes to
Consolidated Financial Statements
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2010 and 2009
(In thousands)
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31, 2010, 2009 and 2008
(In thousands)
2010
2009
2010
2009
2008
$
$
1,071
101,346
305
859
95,370
301
$
102,722
$
96,530
Income:
Dividends declared by
Subsidiary - eliminated in
consolidation
$
Other income
Total income
ASSETS
Cash and cash equivalents
Investment in Subsidiary
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’
EQUITY
Liabilities:
Junior subordinated debentures due to
subsidiary grantor trust
Other liabilities
Total liabilities
Shareholders’ equity:
Preferred stock, Series A
Preferred stock, Series B
Common stock
Retained earnings
Accumulated other comprehensive income
(loss), net of taxes
$
$
5,155
175
5,330
6,864
-
39,745
49,815
5,155
152
5,307
6,819
1,317
37,611
46,931
967
(1,455)
Expenses:
Interest on junior
subordinated deferrable
interest debentures
Professional fees
Other expenses
Total expenses
(Loss) income before
equity in
undistributed net
income of Subsidiary
Equity in undistributed net
income of Subsidiary, net of
distributions
Income before income
tax benefit
Benefit from income taxes
Net income
Preferred stock dividend and
accretion of discount
Income available to common
shareholders
Total shareholders’ equity
97,391
91,223
Total liabilities and shareholders’ equity
$
102,722
$
96,530
$
-
3
3
$
-
13
13
6,100
2
6,102
102
147
329
578
129
30
295
454
46
104
231
381
(575)
(441)
5,721
3,657
2,871
(692)
3,082
197
3,279
395
2,430
158
2,588
365
5,029
110
5,139
-
$
2,884
$
2,223
$
5,139
33
35
Notes to
Consolidated Financial Statements
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010, 2009 and 2008
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Undistributed net income of subsidiary, net of distributions
Stock-based compensation
Tax benefit from exercise of stock options
Decrease in other assets
Net decrease (increase) in other liabilities
(Benefit) provision for deferred income taxes
Net cash (used in) provided by operating activities
Cash flows used in investing activities:
Investment in subsidiary
Cash flows from financing activities:
Net proceeds from issuance of common stock
Proceeds from issuance of Series A preferred stock and warrants
Proceeds from issuance of Series B preferred stock
Cash dividend payments on preferred stock
Cash dividend payments on common stock
Share repurchase and retirement
Proceeds from exercise of stock options
Tax benefit from exercise of stock options
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash paid during the year for interest
Non-Cash Investing Activities:
Net pre-tax change in unrealized gain (loss) on available-for-sale investment securities
Fair market value of common stock issued in acquisition of subsidiary
Non-Cash Financing Activities:
Accrued Preferred Stock Dividend
2010
2009
2008
$
3,279
$
2,588
$
5,139
(3,657)
239
(28)
170
23
(43)
(17)
(2,871)
284
(7)
1,765
(140)
68
1,687
692
100
(57)
265
116
-
6,255
-
(16,578)
(6,233)
-
-
-
(349)
-
-
550
28
229
212
859
1,071
101
4,068
-
45
6,441
7,000
1,317
(277)
-
-
175
7
14,663
(228)
1,087
859
182
(2,738)
-
44
$
$
$
$
$
-
-
-
-
(598)
(56)
207
57
(390)
(368)
1,455
1,087
-
79
16,600
-
$
$
$
$
$
$
$
$
$
$
34
36
Report of
Independent Registered Public Accounting Firm
The Shareholders and Board of Directors
Central Valley Community Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheets of Central Valley Community Bancorp and subsidiary (the
‘‘Company’’) as of December 31, 2010 and 2009 and the related consolidated statements of income, changes in shareholders’ equity
and cash flows for each of the three years in the period ended December 31, 2010. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Central Valley Community Bancorp and subsidiary as of December 31, 2010 and 2009 and the consolidated
results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with
U.S. generally accepted accounting principles.
Sacramento, California
March 16, 2011
35
37
Selected
Consolidated Financial Data
Statements of Income
Total interest income
Total interest expense
Net interest income before provision for credit losses
Provision for credit losses
Net interest income after provision for credit losses
Non-interest income
Non-interest expenses
Income before (benefit from) provision for income taxes
(Benefit from) provision for income taxes
Net income
Preferred stock dividends and accretion of discount
Net income available to common shareholders
Basic earnings per share
Diluted earnings per share
Cash dividends declared per common share
Balances at end of year:
Investment securities, Federal funds
sold and deposits in other banks
Net loans
Total deposits
Total assets
Shareholders’ equity
Earning assets
Average balances:
Investment securities, Federal funds
sold and deposits in other banks
Net loans
Total deposits
Total assets
Shareholders’ equity
Earning assets
Years Ended December 31,
(In thousands, except per share amounts)
2010
2009
2008
2007
2006
$
36,013 $
4,283
40,734 $
6,627
31,845 $
7,278
32,566 $
8,058
31,730
3,800
27,930
3,721
31,651
28,741
2,910
(369)
3,279
395
34,107
10,514
23,593
5,850
29,443
27,531
1,912
(676)
2,588
365
24,567
1,290
23,277
5,190
28,467
20,976
7,491
2,352
5,139
—
24,508
480
24,028
4,518
28,546
19,099
9,447
3,167
6,280
—
2,884 $
2,223 $
5,139 $
6,280 $
0.31 $
0.29 $
0.83 $
1.05 $
0.31 $
0.28 $
0.79 $
0.99 $
— $
— $
0.10 $
0.10 $
December 31,
(In thousands)
30,932
6,559
24,373
800
23,573
5,177
28,750
18,541
10,209
3,298
6,911
—
6,911
1.16
1.07
—
2010
2009
2008
2007
2006
280,967 $
420,583
650,495
777,594
97,392
713,971
232,142 $
449,007
640,167
765,488
91,223
696,914
194,215 $
477,015
635,058
752,713
75,375
681,280
98,909 $
337,241
402,562
483,685
54,194
441,825
128,463
318,853
440,627
500,059
49,778
453,211
231,761 $
444,418
636,166
758,852
96,174
672,804
199,425 $
473,850
632,263
752,509
83,400
671,906
125,932 $
362,333
445,285
541,789
58,251
492,414
103,253 $
327,665
417,691
477,321
51,754
436,564
125,702
300,591
414,310
470,221
45,564
431,368
$
$
$
$
$
$
Data from 2008 reflects the partial year impact of the acquisition of Service 1st Bancorp and its subsidiary, Service 1st Bank.
Unaudited Quarterly Statement of Operations Data
(Dollars in thousands, except per share data)
Q4 2010
Q3 2010
Q2 2010
Q1 2010
Q4 2009
Q3 2009
Q2 2009
Q1 2009
$
7,641
900
$
8,173
1,300
6,741
347
6,986
(517)
619
520
0.06
0.06
6,873
1,293
7,409
(107)
864
766
0.08
0.08
$
$
$
$
$
$
$
$
$
$
$
$
$
7,930
1,000
6,930
747
7,142
31
504
405
0.04
0.04
$
$
$
$
$
7,986
600
7,386
1,334
7,204
224
1,292
1,193
0.13
0.13
$
8,220
2,864
$
8,654
3,233
5,356
1,103
6,616
(643)
486
416
0.05
0.05
5,421
1,608
6,946
(296)
379
268
0.04
0.03
$
$
$
$
$
$
$
$
$
$
$
$
$
8,748
2,500
6,248
1,401
7,129
56
464
329
0.04
0.04
$
$
$
$
$
8,485
1,917
6,568
1,738
6,840
207
1,259
1,210
0.16
0.16
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Total non-interest income
Total non-interest expense
(Benefit from) Provision for income taxes
Net income
Net income available to common shareholders
Basic earnings per share
Diluted earnings per share
36
38
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
Management’s discussion and analysis should be read in conjunction with the
Company’s audited Consolidated Financial Statements, including the Notes
thereto, in Item 8 of this Annual Report.
Certain matters discussed in this report constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements contained herein that are not historical facts, such as statements
regarding the Company’s current business strategy and the Company’s plans for
future development and operations, are based upon current expectations. These
statements are forward-looking in nature and involve a number of risks and
uncertainties. Such risks and uncertainties include, but are not limited to
(1) significant increases in competitive pressure in the banking industry; (2) the
impact of changes in interest rates, a decline in economic conditions at the
international, national or local level on the Company’s results of operations, the
Company’s ability to continue its internal growth at historical rates, the
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 real estate market; (5) changes in business conditions and
inflation; (6) changes in securities markets (7) risks associated with acquisitions,
relating to difficulty in integrating combined operations and related negative
impact on earnings, and incurrence of substantial expenses. Therefore, the
information set forth in such forward-looking statements should be carefully
considered when evaluating the business prospects of the Company.
When the Company uses in this Annual Report the words ‘‘anticipate,’’
‘‘estimate,’’ ‘‘expect,’’ ‘‘project,’’ ‘‘intend,’’ ‘‘commit,’’ ‘‘believe’’ and similar
expressions, the Company intends to identify forward-looking statements. Such
statements are not guarantees of performance and are subject to certain risks,
uncertainties and assumptions, including those described in this Annual Report.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated, expected, projected, intended, committed or
believed. The future results and shareholder values of the Company may differ
materially from those expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond the Company’s
ability to control or predict. For those statements, the Company claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. See also risk factors discussed in
Item 1A Risk Factors in the Company’s December 31, 2010 Form 10-K.
INTRODUCTION
Central Valley Community Bancorp (NASDAQ: CVCY) (the Company) was
incorporated on February 7, 2000. The formation of the holding company
offered the Company more flexibility in meeting the long-term needs of
customers, shareholders, and the communities it serves. The Company currently
has one bank subsidiary, Central Valley Community Bank (the Bank) and one
business trust subsidiary, Service 1st Capital Trust 1. The Bank of Madera
County (BMC) was merged with and into the Bank on January 1, 2005. BMC
had two branches in Madera County which continue to be operated by the
Bank. After the close of business on November 12, 2008, Service 1st Bancorp
(Service 1st) was merged with and into the Company, and Service 1st Bank was
merged with and into the Bank. Service 1st Bank had three branches in
Stockton, Tracy, and Lodi which continue to be operated by the Bank. Service
1st Capital Trust 1 (the Trust) is a business trust formed for the purpose of
issuing trust preferred securities. The Company succeeded to all the rights and
obligations of Service 1st in connection with the acquisition of Service 1st. The
Trust is a subsidiary of the Company. The Company’s market area includes the
central valley area from Sacramento, California to Bakersfield, California.
During 2010, we focused on asset quality and capital adequacy due to the
uncertainty created by the economy. We also focused on assuring that
competitive products and services were made available to our clients while
adjusting to the many new laws and regulations that affect the banking industry.
In 2010, the Company expanded the existing Modesto loan production office
opened in 2007, into a larger full-service branch. In 2009, we opened a new full
service office in Merced, California and relocated our Oakhurst office to a new
smaller facility in a more desirable location. During 2008 the Company acquired
Service 1st Bancorp and its banking subsidiary adding three strategically located
branches and we relocated our Herndon and Fowler branch from an in-store
location to a new larger facility. During 2007, we relocated our Kerman branch
to a new larger facility. During 2006, the Bank opened two full service retail
offices in Fresno, one in the downtown area and one in the Sunnyside area of
Fresno. In 2006, the Company consolidated its administrative offices into a
single location in Fresno. The Bank now operates 17 full-service offices. The
Bank has a Real Estate Division, an Agribusiness Center and an SBA Lending
Division in Fresno. All real estate related transactions are conducted and
processed through the Real Estate Division, including interim construction loans
for single family residences and commercial buildings. We offer permanent single
family residential loans through our mortgage broker services.
ECONOMIC CONDITIONS
The economy in California’s Central Valley has been negatively impacted by
the recession that began in 2007 and the related real estate market and the
slowdown in residential construction. The recession has impacted most industries
in our market area. During the past three years, housing values throughout the
nation and especially in the Central Valley have decreased dramatically, which in
turn has negatively affected the personal net worth of much of the population in
our service area. Housing in the Central Valley continues to be relatively more
affordable than the major metropolitan areas in California.
Agriculture and agricultural related businesses remain a critical part of the
Central Valley’s economy. The Valley’s agricultural production is widely
diversified, producing nuts, vegetables, fruit, cattle, dairy products, and cotton.
The continued future success of agriculture related businesses is highly dependant
on the availability of water and is subject to fluctuation in worldwide commodity
prices and demand.
OVERVIEW
Diluted earnings per share (EPS) for the year ended December 31, 2010 was
$0.31compared to $0.28 and $0.79 for the years ended December 31, 2010,
2009 and 2008, respectively. Net income for 2010 was $3,279,000 compared to
$2,588,000 and $5,139,000 for the years ended December 31, 2010, 2009 and
2008, respectively. The increase in net income and EPS was primarily driven by
lower provision for credit losses, partially offset by decreases in net interest
income and non-interest income, and an increase in non-interest expenses in
2010 compared to 2009. Total assets at December 31, 2010 were $777,594,000
compared to $765,488,000 at December 31, 2009.
Return on average equity for 2010 was 3.41% compared to 3.10% and
8.82% for 2010, 2009 and 2008, respectively. Return on average assets for 2010
was 0.43% compared to 0.34% and 0.95% for 2010, 2009 and 2008,
respectively. Total equity was $97,391,000 at December 31, 2010 compared to
$91,223,000 at December 31, 2009. The increase in assets and equity in 2010
compared to 2009 is due to an increase in deposits and increases in other
comprehensive income and retained earnings and the exercise of stock options.
The increase in 2009 assets and equity compared to 2008 was mainly due to
capital raising activities including our participation in the Treasury Capital
Purchase Program under the Emergency Economic Stabilization Act under which
the Company issued preferred stock and a Warrant to issue common stock in
consideration of $7,000,000 and the private sale of equity to certain accredited
investors who purchased preferred and common shares for a total of $8,000,000.
Average total loans decreased $27,118,000 or 5.62% to $455,340,000 in 2010
compared to $482,458,000 in 2009. In 2010, we recorded a provision for credit
losses of $3,800,000 compared to $10,514,000 in 2009 and $1,290,000 in 2008.
The Company had nonperforming assets totaling $19,984,000 at December 31,
2010. Nonperforming assets included nonaccrual loans totaling $18,561,000,
other real estate owned of $1,325,000 and $98,000 in other assets. At
December 31, 2009 nonperforming assets totaled $21,838,000 consisting of
$18,959,000 in nonaccrual loans, other real estate owned of $2,832,000 and
$47,000 in other assets. Net charge-offs for 2010 were $2,986,000 compared to
$7,537,000 for 2009 and $740,000 for 2008. Refer to ‘‘Asset Quality’’ below for
further information.
37
39
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
OVERVIEW
(Continued)
Key Factors in Evaluating Financial Condition
and Operating Performance
As a publicly traded community bank holding company, we focus on several
key factors including:
• Return to our stockholders;
• Return on average assets;
• Development of core earnings, including net interest income and
non-interest income;
• Asset quality;
• Asset growth;
• Capital adequacy;
• Operating efficiency; and
• Liquidity
Return to Our Stockholders
Our return to our stockholders is measured in a ratio that measures the return
on average equity (ROE). Our ROE was 3.41% for the year ended 2010
compared to 3.10% and 8.82% for the years ended 2009 and 2008, respectively.
In 2010, compared to 2009 we experienced an increase in net income and an
increase in capital due to increases in other comprehensive income and retained
earnings, and the exercise of stock options. During 2009, compared to 2008 we
experienced a decrease in our net income and an overall increase in the level of
capital due to the issuance of preferred stock in connection with the U. S.
Treasury Capital Purchase Program, and a private placement of our common and
preferred stock.
Our net income for the year ended December 31, 2010 increased $691,000
compared to 2009. Net income decreased $2,551,000 for 2009 compared to
2008 and decreased $1,141,000 for 2008 compared to 2007. During 2010 net
income increased primarily due to a decrease in the provision for credit losses
partially offset by decreases in net interest income and non-interest income, and
an increase in non-interest expenses in 2010 compared to 2009. Net interest
income decreased because interest income decreased more relative to the decrease
in interest expense. Non-interest income decreased due to an increase in
Other-Than-Temporary-Impairment (OTTI) charges of $1,587,000, a decrease in
net realized gains on sales and calls of investment securities of $657,000 and a
decrease in customer service charges of $284,000.
Non-interest expenses increased in 2010 compared to 2009 primarily due to
increases in OREO expenses of $592,000, legal fees of $165,000, and salaries
and employee benefits of $945,000, partially offset by decreases in regulatory
assessments of $413,000 and data processing expenses of $119,000. The 2009
period included a $353,000 FDIC one-time special assessment in addition to the
recurring regulatory assessments. During 2010, our net interest margin (NIM)
decreased 36 basis points compared to 2009. Basic EPS was $0.31 for 2010
compared to $0.29 and $0.83 for 2009 and 2008, respectively. Diluted EPS was
$0.31 for 2010 compared to $0.28 and $0.79 for 2009 and 2008, respectively.
The increase in EPS in 2010 was due primarily to the increase in net income.
Return on Average Assets
Our return on average assets (ROA) is a ratio that measures our performance
compared with other banks and bank holding companies. Our ROA for the year
ended 2010 was 0.43% compared to 0.34% and 0.95% for the years ended
December 31, 2009 and 2008, respectively. The 2010 increase in ROA is due to
the increase in net income partially offset by an increase in average assets.
Annualized ROA for our peer group was (cid:31)0.26% at September 30, 2010. Peer
group information from SNL Financial data includes bank holding companies in
central California with assets from $300M to $950M that are not subchapter S
corporations.
Development of Core Earnings
Over the past several years, we have focused on not only our net income, but
improving the consistency of our core earnings in order to create more
predictable future earnings and reduce the effect of changes in our operating
environment on our net income. Specifically, we have focused on net interest
income through a variety of processes, including increases in average interest-
earning assets through loan generation and retention. We minimized the effects
of the recent interest rate decline on our net interest margin by focusing on core
deposits and managing the cost of funds. Our net interest margin (fully tax
equivalent basis) was 4.95% for the year ended December 31, 2010, compared to
5.31% and 5.13% for the years ended December 31, 2009 and 2008,
respectively. The decrease in net interest margin compared to 2009 is principally
due to a decrease in our yield on earning assets which was greater than the
decrease in our cost of funds. In comparing the two periods, the effective yield
on total earning assets decreased 71 basis points, while the cost of total interest-
bearing liabilities decreased 45 basis points and the cost of total deposits
decreased 35 basis points. Our cost of total deposits in 2010 was 0.58%
compared to 0.93% for the same period in 2009 and 1.42% for the year ended
December 31, 2008. Our net interest income before provision for credit losses
decreased $2,377,000 or 6.97% to $31,730,000 for the year ended 2010
compared to $34,107,000 and $24,567,000 for the years ended 2009 and 2008,
respectively.
Our non-interest income is generally made up of service charges and fees on
deposit accounts, fee income from loan placements, appreciation in cash
surrender value of bank owned life insurance, and net gains from sales and calls
of investment securities. Non-interest income in 2010 decreased 2,129,000 or
36.39% to $3,721,000 compared to $5,850,000 in 2009 and $5,190,000 in
2008. Customer service charges decreased $284,000 or 8.09% to $3,225,000 in
2010 compared to $3,509,000 and $3,350,000 in 2009 and 2008, respectively.
Further detail on non-interest income is provided below.
Asset Quality
For all banks and bank holding companies, asset quality has a significant
impact on the overall financial condition and results of operations. Asset quality
is measured in terms of percentage of total loans and total assets, and is a key
element in estimating the future earnings of a company. Total nonperforming
assets were $19,984,000 and $21,838,000 at December 31, 2010 and 2009,
respectively. Nonperforming assets included nonaccrual loans totaling
$18,561,000 or 4.30% of gross loans as of December 31, 2010 and $18,959,000
or 4.13% of gross loans as of December 31, 2009. At December 31, 2010, other
nonperforming assets included other real estate owned totaling $1,325,000 and
other assets of $98,000 compared to $2,832,000 and $47,000 on December 31,
2009, respectively. Management maintains certain loans that have been brought
current by the borrower (less than 30 days delinquent) on nonaccrual status until
such time as management has determined that the loans are likely to remain
current in future periods.
Asset Growth
As revenues from both net interest income and non-interest income are a
function of asset size, the continued growth in assets has a direct impact in
increasing net income and therefore ROE and ROA. The majority of our assets
are loans and investment securities, and the majority of our liabilities are
deposits, and therefore the ability to generate deposits as a funding source for
loans and investments is fundamental to our asset growth. Total assets increased
1.58% during 2010 to $777,594,000 as of December 31, 2010 from
$765,488,000 as of December 31, 2009. Total gross loans decreased 6.01% to
$431,597,000 as of December 31, 2010, compared to $459,207,000 at
December 31, 2009. Total investment securities and Federal funds sold decreased
2.87% to $191,925,000 as of December 31, 2010 compared to $197,598,000 as
of December 31, 2009. Total deposits increased 1.61% to $650,495,000 as of
December 31, 2010 compared to $640,167,000 as of December 31, 2009. Our
loan to deposit ratio at December 31, 2010 was 66.35% compared to 71.73% at
December 31, 2009. The loan to deposit ratio of our peers was 82.47% at
September 30, 2010.
Capital Adequacy
At December 31, 2010, we had a total capital to risk-weighted assets ratio of
15.42%, a Tier 1 risk-based capital ratio of 14.16% and a leverage ratio of
9.48%. At December 31, 2009, we had a total capital to risk-weighted assets
ratio of 13.54%, a Tier 1 risk-based capital ratio of 12.28% and a leverage ratio
of 9.30%. At December 31, 2010, on a stand-alone basis, the Bank had a total
38
40
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
OVERVIEW
(Continued)
risk-based capital ratio of 15.19%, a Tier 1 risk based capital ratio of 13.92%
and a leverage ratio of 9.32%. At December 31, 2009, the Bank had a total
risk-based capital ratio of 13.38%, Tier 1 risk-based capital of 12.12% and a
leverage ratio of 9.20%. The improvement in 2010 is due to an increase in risk
adjusted capital while risk weighted assets decreased. Note 12 of the audited
Consolidated Financial Statements provides more detailed information concerning
the Company’s capital amounts and ratios.
Operating Efficiency
Operating efficiency is the measure of how efficiently earnings before taxes are
generated as a percentage of revenue. A lower ration is better. The Company’s
efficiency ratio (operating expenses, excluding amortization of intangibles and
foreclosed property expense, divided by net interest income plus non-interest
income, excluding net gains and losses from sale of securities) was 73.18% for
2010 compared to 67.31% for 2009 and 70.10% for 2008. The decline in the
efficiency ratio in 2010 is due to an increase in operating expenses and a decrease
in net interest income. The efficiency ratio in 2009 improved due to an increase
in net interest income and non-interest income. The deterioration in the
efficiency ratio in 2008 was due to the increase in operating expenses due to our
acquisition and expansion in 2008. The Company’s net interest income before
provision for credit losses plus non-interest income decreased 11.2% to
$35,451,000 in 2010 compared to $39,957,000 in 2009 and $29,757,000 in
2008, while operating expenses increased 4.40% in 2010, 31.25% in 2009, and
9.8% in 2008.
Liquidity
Liquidity management involves our ability to meet cash flow requirements
arising from fluctuations in deposit levels and demands of daily operations, which
include providing for customers’ credit needs, funding of securities purchases, and
ongoing repayment of borrowings. Our liquidity is actively managed on a daily
basis and reviewed periodically by our management and Directors’ Asset/Liability
Committee. This process is intended to ensure the maintenance of sufficient
funds to meet our needs, including adequate cash flow for off-balance sheet
commitments. Our primary sources of liquidity are derived from financing
activities which include the acceptance of customer and, to a lesser extent, broker
deposits, Federal funds facilities and advances from the Federal Home Loan Bank
of San Francisco. We have available unsecured lines of credit with correspondent
banks totaling approximately $39,000,000 and secured borrowing lines of
approximately $114,659,000 with the Federal Home Loan Bank. These funding
sources are augmented by collection of principal and interest on loans, the
routine maturities and pay downs of securities from our investment securities
portfolio, the stability of our core deposits, and the ability to sell investment
securities. Primary uses of funds include origination and purchases of loans,
withdrawals of and interest payments on deposits, purchases of investment
securities, and payment of operating expenses.
We had liquid assets (cash and due from banks, interest-earning deposits in
other banks, Federal funds sold and available-for-sale securities) totaling
$292,324,000 or 37.59% of total assets at December 31, 2010 and
$245,999,000 or 32.14% of total assets as of December 31, 2009.
RESULTS OF OPERATIONS
NET INCOME
Net income was $3,279,000 in 2010 compared to $2,588,000 and
$5,139,000 in 2009 and 2008, respectively. Basic earnings per share was $0.31,
$0.29, and $0.83 for 2010, 2009, and 2008, respectively. Diluted earnings per
share was $0.31, $0.28, and $0.79 for 2010, 2009 and 2008, respectively. ROE
was 3.41% for 2010 compared to 3.10% for 2009 and 8.82% for 2008. ROA
for 2010 was 0.43% compared to 0.34% for 2009 and 0.95% for 2008.
The increase in net income for 2010 compared to 2009 can be attributed to
the decrease in the provision for credit losses, partially offset by decreases in net
interest income and non-interest income, and an increase non-interest expenses
and a decrease in the benefit from income taxes. The decrease in net interest
income for 2010 compared to 2009 was due primarily to the 36 basis point
reduction in the net interest margin. The decrease in net income for 2009
compared to 2008 was due mainly to increases in the provision for credit losses
and non-interest expenses, partially offset by increases in net interest income and
non-interest income, and a decrease in the provision for income taxes.
INTEREST INCOME AND EXPENSE
Net interest income is the most significant component of our income from
operations. Net interest income (the interest rate spread) is the difference between
the gross interest and fees earned on the loan and investment portfolios and the
interest paid on deposits and other borrowings. Net interest income depends on
the volume of and interest rate earned on interest-earning assets and the volume
of and interest rate paid on interest-bearing liabilities.
39
41
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
INTEREST INCOME AND EXPENSE
(Continued)
The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information
for the periods presented. Average balances are derived from daily balances, and nonaccrual loans are not included as interest-earning assets for purposes of this table.
SCHEDULE OF AVERAGE BALANCES
AND AVERAGE YIELDS AND RATES
(Dollars in thousands)
Year Ended December 31, 2010
Year Ended December 31, 2009
Average
Balance
Interest
Income/Expense
Average
Interest
Rate
Average
Balance
Interest
Income/Expense
Average
Interest
Rate
ASSETS
Interest-earning deposits in other banks
$
42,047 $
Securities
Taxable securities
Non-taxable securities (1)
Total investment securities
Federal funds sold
Total securities
Loans (2) (3)
Federal Home Loan Bank stock
Total interest-earning assets
Allowance for credit losses
Nonaccrual loans
Other real estate owned
Cash and due from banks
Bank premises and equipment
Other non-earning assets
Total average assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings and NOW accounts
Money market accounts
Time certificates of deposit, under $100,000
Time certificates of deposit, $100,000 and over
Total interest-bearing deposits
Other borrowed funds
Total interest-bearing liabilities
Non-interest bearing demand deposits
Other liabilities
Shareholders’ equity
$
$
Total average liabilities and shareholder’s equity
$
Interest income and rate
earned on average earning assets
Interest expense and interest cost
related to average interest-bearing liabilities
Net interest income and net interest margin (4)
110
5,472
4,605
10,077
2
10,189
27,390
11
37,590
498
1,036
866
1,313
3,713
570
4,283
124,163
64,838
189,001
713
231,761
437,959
3,084
672,804 $
(10,922)
17,381
2,972
16,479
6,089
54,049
758,852
142,350 $
157,761
69,066
114,043
483,220
19,634
502,854 $
152,946
6,878
96,174
758,852
8
7,701
4,632
12,333
48
12,389
29,920
7
42,316
771
1,262
1,922
1,912
5,867
760
6,627
0.26% $
3,008 $
4.41%
7.10%
5.33%
0.28%
4.40%
6.25%
0.36%
5.59%
114,465
64,325
178,790
17,627
199,425
469,341
3,140
671,906 $
(8,608)
13,117
2,553
17,401
6,629
49,511
$
752,509
131,818 $
136,104
90,614
120,579
479,115
29,987
509,102 $
153,148
6,859
83,400
752,509
0.35% $
0.66%
1.25%
1.15%
0.77%
2.90%
0.85%
$
5.59%
0.85%
4.95%
0.27%
6.73%
7.20%
6.90%
0.27%
6.21%
6.37%
0.22%
6.30%
0.58%
0.93%
2.12%
1.59%
1.22%
2.53%
1.30%
6.30%
1.30%
5.31%
$
$
37,590
4,283
33,307
$
$
42,316
6,627
35,689
(1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $1,566 and $1,575 in 2010 and 2009, respectively.
(2) Loan interest income includes loan fees of $460 in 2010 and $544 in 2009.
(3) Average loans do not include nonaccrual loans.
(4) Net interest margin is computed by dividing net interest income by total average interest-earning assets.
Interest and fee income from loans decreased $2,530,000 or 8.46% in 2010
compared to 2009. Interest and fee income increased $4,289,000 or 16.73% in
2009 compared to 2008. The decrease in 2010 is attributable to a decrease in
average total loans outstanding and a 12 basis point decrease in the yield on
loans. The increase in 2009 is attributable to an increase in average total loans
outstanding combined with a 69 basis point decrease in yield on loans in 2009
compared to 2008. Average total loans for 2010 decreased $27,118,000 to
$455,340,000 compared to $482,458,000 for 2009 and $367,009,000 for 2008.
The yield on loans for 2010 was 6.25% compared to 6.37% and 7.06% for
2009 and 2008, respectively.
Interest income from total investments, (total investments include investment
securities, Federal funds sold, interest-bearing deposits in other banks, and other
securities) not on a fully tax equivalent basis, decreased $2,191,000 or 20.26% in
2010 compared to 2009 primarily due to a $32,336,000 increase in the average
balance to $231,761,000 in 2010 compared to $199,425,000 in 2009, coupled
with a decrease in yield on investments of 181 basis points. In 2009, total
investment income increased $4,600,000 or 74.02% from 2008 primarily due to
a 58.36% increase in the average balances of these investments and a 82 basis
point increase in the yields earned. Average total investments for 2009 were
$199,425,000 compared to $125,932,000, for 2008. The increase in the
investment portfolio in 2009 was due primarily to the acquisition of Service 1st.
40
42
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
INTEREST INCOME AND EXPENSE
(Continued)
A significant portion of the investment portfolio is mortgage-backed securities
(MBS) and collateralized mortgage obligations (CMOs). At December 31, 2010,
we held $107,915,000 or 56.40% of the total market value of the investment
portfolio in MBS and CMOs with an average yield of 4.42%. We invest in
Collateralized Mortgage Obligations (CMO) and Mortgage Backed Securities,
(MBS) as part of the overall strategy to increase our net interest margin. CMOs
and MBS by their nature react to changes in interest rates. In a normal declining
rate environment, prepayments from MBS and CMOs would be expected to
increase and the expected life of the investment would be expected to shorten.
Conversely, if interest rates increase, prepayments normally would be expected to
decline and the average life of the MBS and CMOs would be expected to
extend. However, in the current economic environment, prepayments may not
behave according to historical norms. Premium amortization and discount
accretion of these investments affects our net interest income. Our management
monitors the prepayment speed of these investments and adjusts premium
amortization and discount accretion based on several factors. These factors
include the type of investment, the investment structure, interest rates, interest
rates on new mortgage loans, expectation of interest rate changes, current
economic conditions, the level of principal remaining on the bond, the bond
coupon rate, the bond origination date, and volume of available bonds in market.
The calculation of premium amortization and discount accretion is by nature
inexact, and represents management’s best estimate of principal pay downs
inherent in the total investment portfolio.
The net of tax effect value of the change in market value of the
available-for-sale investment portfolio was a gain of $967,000 and is reflected in
the Company’s equity. At December 31, 2010, the average life of the investment
portfolio was 7.4 years and the market value reflected a pre-tax gain of
$1,643,000. Management reviews market value declines on individual investment
securities to determine whether they represent other-than-temporary impairment
(OTTI) and recorded a $1,587,000 OTTI loss for the year ended December 31,
2010. Future deterioration in the market values of our investment securities may
require the Company to recognize additional OTTI losses.
A component of the Company’s strategic plan has been to use its investment
portfolio to offset, in part, its interest rate risk relating to variable rate loans. At
December 31, 2010, an immediate rate increase of 200 basis points would result
in an estimated decrease in the market value of the investment portfolio by
approximately $14,516,000. Conversely, with an immediate rate decrease of 200
basis points, the estimated increase in the market value of the investment
portfolio is $10,284,000. The modeling environment assumes management
would take no action during an immediate shock of 200 basis points. The
likelihood of immediate changes of 200 basis points is contrary to expectation, as
evidenced by the historical changes in interest rates that occurred in 2007 and
2008, which were in 25, 50 and 75 basis point increments. However, the
Company uses those increments to measure its interest rate risk in accordance
with regulatory requirements and to measure the possible future risk in the
investment portfolio. For further discussion of the Company’s market risk, refer
to Quantitative and Qualitative Disclosures about Market Risk.
Management’s review of all investments before purchase includes an analysis of
how the security will perform under several interest rate scenarios to monitor
whether investments are consistent with our investment policy. The policy
addresses issues of average life, duration, and concentration guidelines, prohibited
investments, impairment, and prohibited practices.
Total interest income in 2010 decreased $4,721,000 to $36,013,000 compared
to $40,734,000 in 2009 and $31,845,000 in 2008. The decrease was due to the
71 basis point decrease in the tax equivalent yield on average interest earning
assets and a change in the mix of interest earning assets. The yield on interest
earning assets decreased to 5.59% for the year ended December 31, 2010 from
6.30% for the year ended December 31, 2009. Average interest earning assets
increased slightly to $672,804,000 for the year ended December 31, 2010
compared to $671,906,000 for the year ended December 31, 2009. Average
interest-earning deposits in other banks increased $39,039,000 comparing 2010
to 2009. Average yield on these deposits was 0.26%. Average Investments
increased $10,211,000 but the tax equivalent yield on average investments
decreased 181 basis points. Average loans decreased $27,118,000 and the yield on
average loans decreased 12 basis points.
The increase in total interest income in 2009 was due to the 36.5% increase
in the average balance of interest-earning assets partially offset by the 31 basis
point decrease in the yield on those assets. The yield on interest-earning assets
decreased to 6.30% for the year ended December 31, 2009 from 6.61% for the
year ended December 31, 2008. Average interest-earning assets increased to
$671,906,000 for the year ended December 31, 2009 compared to $492,414,000
for the year ended December 31, 2008. The $179,492,000 increase in average
earning assets in 2009 can be attributed to the Service 1st acquisition.
Interest expense on deposits in 2010 decreased $2,154,000 or 36.71% to
$3,713,000 compared to $5,867,000 in 2009 and $6,340,000 in 2008. The
decrease in interest expense in 2010 compared to 2009 was primarily due to the
repricing of interest-bearing deposits which decreased 45 basis points to 0.77% in
2010 from 1.22% in 2009. This decrease was partially offset by a $4,105,000 or
0.86% increase in average interest-bearing deposits. The decrease in interest
expense in 2009 compared to 2008 was due to repricing of interest-bearing
deposits, which decreased 81 basis points to 1.22% in 2009 from 2.03% in
2008, as a result of the decreases in the Federal funds interest rate. Average
interest-bearing deposits were $483,220,000 for 2010 compared to $479,115,000
and $313,541,000 for 2009 and 2008, respectively. The increases in average
interest-bearing deposits in 2009 and 2008 were the result of our own organic
growth and the acquisition of Service 1st in November 2008.
Average other borrowings decreased to $19,634,000 with an effective rate of
2.90% for 2010 compared to $29,987,000 with an effective rate of 2.53% for
2009. In 2008, the average other borrowings were $32,526,000 with an effective
rate of 2.89%. Included in other borrowings are the junior subordinated
deferrable interest debentures acquired from Service 1st, advances on lines of
credit and advances from the Federal Home Loan Bank (FHLB). The FHLB
advances are fixed rate short-term and long-term borrowings. Advances were
utilized as part of a leveraged strategy in the first quarter of 2008 to purchase
investment securities. The effective rate of the FHLB advances was 3.20% for
2010 and 3.08% for 2009 and 2008.
The cost of all of our interest-bearing liabilities decreased 45 basis points to
0.85% for 2010 compared to 1.30% for 2009 and 2.11% for 2008. The cost of
total deposits decreased to 0.58% for the year ended December 31, 2010
compared to 0.93% and 1.42% for the years ended December 31, 2009 and
2008, respectively. Average demand deposits decreased 0.13% to $152,946,000 in
2010 compared to $153,148,000 for 2009 and $131,744,000 for 2008. The
ratio of non-interest demand deposits to total deposits decreased to 24.04% for
2010 compared to 24.22% and 29.59% for 2009 and 2008, respectively.
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Net interest income before provision for credit losses for 2010 decreased
$2,377,000 or 6.97% to $31,730,000 compared to $34,107,000 for 2009 and
$24,567,000 for 2008. The decrease in 2010 was due to the 36 basis point
decrease in our net interest margin (NIM). Yield on interest earning assets
decreased 71 basis points while the effective rate on interest bearing liabilities
only decreased 45 basis points. The change in the mix of average interest earning
assets also affected NIM. Interest-earning deposits in other banks and investment
securities, which tend to have lower effective yields, increased while higher
yielding loans decreased as previously discussed. Net interest income before
provision for credit losses increased $9,540,000 in 2009 compared to 2008
mainly due to an increase in average total interest-earning assets of 36.5% along
with an 18 basis point increase in our NIM partially offset by an increase in
interest-bearing liabilities of 47.1%. Average interest-earning assets were
$672,804,000 for the year ended December 31, 2010 with a net interest margin
(NIM) of 4.95% compared to $671,906,000 with a NIM of 5.31% in 2009,
and $492,414,000 with a NIM of 5.13% in 2008. For a discussion of the
repricing of our assets and liabilities, refer to Quantitative and Qualitative
Disclosure about Market Risk.
PROVISION FOR CREDIT LOSSES
We provide for probable credit losses by a charge to operating income based
upon the composition of the loan portfolio, delinquency levels, losses and
nonperforming assets, economic and environmental conditions and other factors
which, in management’s judgment, deserve recognition in estimating credit losses.
Loans are charged off when they are considered uncollectible or of such little
value that continuance as an active earning bank asset is not warranted.
The establishment of an adequate credit allowance is based on both an
accurate risk rating system and loan portfolio management tools. The Board has
established initial responsibility for the accuracy of credit risk grades with the
individual credit officer. The grading is then submitted to the Chief Credit
41
43
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
PROVISION FOR CREDIT LOSSES
(Continued)
Administrator (CCA), who reviews the grades for accuracy and gives final
approval. The CCA is not involved in loan originations. The risk grading and
reserve allocation is analyzed quarterly by the CCA and the Board and at least
annually by a third party credit reviewer and by various regulatory agencies.
Quarterly, the CCA sets the specific reserve for all adversely risk-graded
credits. This process includes the utilization of loan delinquency reports, classified
asset reports, and portfolio concentration reports to assist in accurately assessing
credit risk and establishing appropriate reserves. Reserves are also allocated to
credits that are not impaired.
The allowance for credit losses is reviewed at least quarterly by the Board’s
Audit/Compliance Committee and by the Board of Directors. Reserves are
allocated to loan portfolio categories using percentages which are based on both
historical risk elements such as delinquencies and losses and predictive risk
elements such as economic, competitive and environmental factors. We have
adopted the specific reserve approach to allocate reserves to each impaired asset
for the purpose of estimating potential loss exposure. Although the allowance for
credit losses is allocated to various portfolio categories, it is general in nature and
available for the loan portfolio in its entirety. Additions may be required based
on the results of independent loan portfolio examinations, regulatory agency
examinations, or our own internal review process. Additions are also required
when, in management’s judgment, the allowance does not properly reflect the
portfolio’s potential loss exposure.
The allocation of the allowance for credit losses is set forth below:
Loan Type
(Dollars in Thousands)
Commercial & industrial
Agricultural land and production
Real estate:
Owner occupied
Real estate - construction and
other land loans
Commercial real estate
Other
Total real estate
Equity loans and lines of credit
Consumer & installment
Unallocated reserves
December 31, % of Total December 31, % of Total
2010
Loans
2009
Loans
$
2,425
405
24.1% $
9.0%
2,909
708
23.5%
7.8%
1,978
25.9%
1,382
24.1%
1,808
1,387
1,594
6,767
797
382
238
7.4%
14.7%
8.9%
56.9%
8.0%
2.0%
836
1,131
1,300
4,649
334
423
1,177
10.3%
15.7%
8.4%
58.5%
7.8%
2.4%
Total allowance for credit losses
$
11,014
$
10,200
Loans are charged to the allowance for credit losses when the loans are
deemed uncollectible. It is the policy of management to make additions to the
allowance so that it remains adequate to cover all probable loan charge-offs that
exist in the portfolio at that time. In 2010 enhanced methodology enabled us to
assign qualitative and quantitative factors (Q factors) to each loan category
resulting in a decrease in unallocated reserves. Q factors include reserves held for
the effects of lending policies, economic trends, and portfolio trends along with
other dynamics which may cause additional stress to the portfolio. The
unallocated reserves as of December 31, 2009 were higher because Q factors were
applied to the portfolio as a whole.
Managing credits identified through the risk evaluation methodology includes
developing a business strategy with the customer to mitigate our potential losses.
Management continues to monitor these credits with a view to identifying as
early as possible when, and to what extent, additional provisions may be
necessary.
The provisions for credit losses in 2010, 2009 and 2008 were $3,800,000,
$10,514,000, and $1,290,000, respectively. These provisions are primarily the
result of our assessment of the overall adequacy of the allowance for credit losses
considering a number of factors as discussed in the ‘‘Allowance for Credit Losses’’
section below. During the year ended December 31, 2010, the Company had net
charge offs totaling $2,986,000 compared to $7,537,000 and $740,000 for the
same periods in 2009 and 2008, respectively. The decrease in provision for credit
losses in 2010 compared to 2009 resulted from a decrease in the level of
outstanding loans and a decrease in net charge offs. The net charge off ratio,
which reflects net charge-offs to average loans, was 0.66%, 1.56% and 0.20% for
2010, 2009, and 2008, respectively.
Nonperforming loans were $18,561,000 and $18,959,000 at December 31,
2010 and 2009, respectively. Nonperforming loans as a percentage of total loans
were 4.30% at December 31, 2010 compared to 4.13% at December 31, 2009.
Other real estate owned at December 31, 2010 was $1,325,000 net of a
valuation allowance of $309,000 compared to $2,832,000 net of a valuation
allowance of $356,000 in 2009.
Losses in the commercial and industrial and real estate segments of the loan
portfolio in 2010 decreased compared to 2009. We had loans past due, not
including non accrual loans, totaling $3,421,000 at December 31, 2010
compared to $3,522,000 at December 31, 2009. Losses in the loan portfolio and
non-accruing balances remain elevated relative to historical periods and an
increase in the level of charge-offs and the number and dollar volume of past due
and nonperforming loans may result in further provisions to the allowance for
credit losses.
We believe the significant economic downturn that has continued throughout
2010 has had a considerable impact on the ability of certain borrowers to satisfy
their obligations, resulting in loan downgrades and corresponding increases in
credit loss provisions. Additionally, we estimate the impact certain economic
factors will have on various credits within the portfolio. Negative economic
trends contributed substantially to increases in the required allowance to cover
potential losses in the loan portfolio resulting in additional provisions.
We anticipate weakness in economic conditions on national, state and local
levels to continue. Continued economic pressures may negatively impact the
financial condition of borrowers to whom the Company has extended credit and
as a result we may be required to make further significant provisions to the
allowance for credit losses in the future. We have been and will continue to be
proactive in looking for signs of deterioration within the loan portfolio in an
effort to manage credit quality and work with borrowers where possible to
mitigate any further losses.
As of December 31, 2010, we believe, based on all current and available
information, the allowance for credit losses is adequate to absorb current
estimable losses within the loan portfolio. However, no assurance can be given
that we may not sustain charge-offs which are in excess of the allowance in any
given period. Refer to ‘‘Allowance for Credit Losses’’ below for further
information.
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
Net interest income, after the provision for credit losses of $3,800,000 in
2010, $10,514,000 in 2009, and $1,290,000 in 2008, was $27,930,000 for 2010
compared to $23,593,000 and $23,277,000 for 2009 and 2008, respectively.
NON-INTEREST INCOME
Non-interest income is comprised of customer service charges, gains on sales
and calls of investment securities, income from appreciation in cash surrender
value of bank owned life insurance, loan placement fees, Federal Home Loan
Bank dividends, and other income. Non-interest income was $3,721,000 in 2010
compared to $5,850,000 and $5,190,000 in 2009 and 2008, respectively. The
$2,129,000 or 36.39% decrease in non-interest income was due to decreases in
gains on sales and calls of investment securities, an other-than-temporary
impairment write down on certain investment securities, and a decrease in
customer service charges. The $660,000 increase in non-interest income
comparing 2009 to 2008 was due to increases in customer service charges, gains
on sales and calls of investment securities, appreciation in cash surrender value of
bank owned life insurance, loan placement fees, and other income.
Customer service charges decreased $284,000 to $3,225,000 in 2010
compared to $3,509,000 in 2009 and $3,350,000 in 2008. The decrease in 2010
is mainly due to a decrease in overdraft fee income. The increase in 2009
compared to 2008 is mainly due to an increase in the activity level as the average
number of transaction accounts increased organically and as a result of the
Service 1st acquisition, as have the fees generated by the overdraft protection
program.
During the year ended December 31, 2010, we realized net losses on sales
and calls of investment securities of $191,000 from net losses from sales and calls
of securities. Net gains on sales and calls of securities were $466,000 and
$165,000 for the same periods in 2009 and 2008, respectively. In 2009,
investment securities that had been marked to market when we acquired Service
42
44
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
NON-INTEREST INCOME
(Continued)
1st were subsequently called at par value resulting in gains. For the year ended
December 31, 2010, we realized a $1,587,000 other-than-temporary impairment
write down on certain investment securities. See Footnote 4 to the audited
Consolidated Financial Statements for more detail.
Income from the appreciation in cash surrender value of bank owned life
insurance (BOLI) totaled $392,000 in 2010 compared to $391,000 and
$268,000 in 2009 and 2008, respectively. The $123,000 or 45.9% increase
comparing the year ended December 31, 2009 with the same period in 2008 is
due to an increase in the average balance in this portfolio as a result of the
Service 1st acquisition. The Bank’s salary continuation and deferred
compensation plans and the related BOLI are used as a retention tool for
directors and key executives of the Bank.
We earn loan placement fees from the brokerage of single-family residential
mortgage loans provided for the convenience of our customers. Loan placement
fees increased $69,000 in 2010 to $300,000 compared to $231,000 in 2009 and
$111,000 in 2008. In 2010 and 2009, refinancing and new mortgage activity
increased due to the historically low mortgage rates, a decline in housing values
and first time home buyer tax incentives.
The Bank holds stock from the Federal Home Loan Bank in relationship with
its borrowing capacity and generally receives quarterly dividends. As of
December 31, 2010 we held $3,050,000 in FHLB stock compared to
$3,140,000 at December 31, 2009. Dividends in 2010 increased to $11,000
compared to $7,000 in 2009 and $118,000 in 2008.
Other income increased to $1,395,000 in 2010 compared to $1,246,000 and
$1,178,000 in 2009 and 2008, respectively. The period-to-period increases in
2010 compared to 2009 and 2008 were due to an increases in electronic funds
transfer fee income.
NON-INTEREST EXPENSES
Salaries and employee benefits, occupancy, regulatory assessments, data
processing expenses, and professional services are the major categories of
non-interest expenses. Non-interest expenses increased $1,210,000 or 4.40% to
$28,741,000 in 2010 compared to $27,531,000 in 2009, which was an increase
of $6,555,000 in 2009 compared to $20,976,000 in 2008.
Our efficiency ratio, measured as the percentage of non-interest expenses
(exclusive of amortization of core deposit intangibles and other real estate owned
expenses) to net interest income before provision for credit losses plus
non-interest income (exclusive of realized gains or losses on sale and calls of
investments) was 73.18% for 2010 compared to 67.31% for 2009 and 70.10%
for 2008. The decline in the efficiency ratio in 2010 resulted from decreases in
net interest income and non-interest income as well as an increase in operating
expenses. Our efficiency ratio improved in 2009 compared to 2008 due to a
35.31% increase in net interest income plus non-interest income.
Salaries and employee benefits increased $945,000 or 6.79% to $14,871,000
in 2010 compared to $13,926,000 in 2009 and $11,578,000 in 2008. The
increase in salaries and employee benefits for the 2010 period can be attributed
to the addition of personnel in connection with the expansion of offices in
Modesto and Merced and other new positions along with normal cost increases.
Full time equivalents were 217 at December 31, 2010 compared to 194 at
December 31, 2009. The increase in 2009 compared to 2008 can be attributed
to the addition of personnel in connection with the Service 1st acquisition and
the opening of the new Merced office along with normal cost increases for
salaries and employee benefits.
At December 31, 2010 we had two share based compensation plans under
which compensation expense is recognized based on the estimated fair value of
the awards at the date of the grant. The Central Valley Community Bancorp
2000 Stock Option Plan (2000 Plan) for which 599,229 shares remain reserved
for issuance for options already granted under incentive and nonstatutory
agreements. This plan expired in November 2010 and no new options will be
granted under this plan. The Central Valley Community Bancorp 2005 Omnibus
Incentive Plan (2005 Plan) provides for awards in the form of incentive stock
options, non-statutory stock options, stock appreciation rights, and restricted
stock. Currently under the 2005 Plan, there are 107,900 shares reserved for
issuance for options already granted to employees and directors.
The Company bases the fair value of the options previously granted on the
date of grant using a Black-Scholes Merton option pricing model that uses
assumptions based on expected option life, the level of estimated forfeitures,
expected stock volatility and the risk-free interest rate. Stock volatility is based on
the historical volatility of the Company’s stock. The risk-free rate is based on the
U.S. Treasury yield curve and the expected term of the options. The expected
term of the options represents the period that the Company’s options are
expected to be outstanding.
For the years ended December 31, 2010, 2009 and 2008, the compensation
cost recognized for share based compensation was $239,000, $284,000 and
$100,000, respectively.
As of December 31, 2010, there was $413,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under the two plans. The cost is expected to be recognized over a
weighted average period of 3.0 years. See Notes 1 and 14 to the audited
Consolidated Financial Statements for more detail.
In 2010, options to purchase 15,200 shares of the Company’s common stock
were granted from the 2000 Plan at an exercise price of $5.76 and options to
purchase 67,800 shares of common stock were granted from the 2005 Plan at
exercise prices between $5.30 and $5.76. In 2009, options to purchase 13,500
shares of the Company’s common stock were granted at exercise prices of
between $5.06 and $6.40 from the 2005 Plan. All options were granted with an
exercise price equal to the market value on the grant date.
In December 2008, the Company cancelled options to purchase 90,550 shares
of common stock granted on October 17, 2007 and options to purchase 15,000
shares of common stock granted on October 1, 2007, and on December 17,
2008 the Company granted new options to purchase 105,550 shares of common
stock to the directors, senior managers and other employees. The modification
affected 57 employees and eight directors and the total incremental compensation
cost recognized for the modification in 2008 was $38,000. The grant date of the
new options was December 17, 2008 and the options were granted with an
exercise price equal to the fair market value on the grant date of $6.70 per share.
The Board of Directors of the Company also granted new options to purchase
15,000 shares of common stock during 2008 at an exercise price of $6.70, the
fair market value on the grant date.
The Board considered the general decline in stocks of financial institutions as
a whole in reaching their decision to cancel and reissue options in 2008. The
cancellation of previously issued options reflects the Board’s desire to ensure that
options continue to provide proper incentive to key personnel.
Occupancy and equipment expense increased $55,000 or 1.44% to
$3,867,000 in 2010 compared to $3,812,000 in 2009 and $2,890,000 in 2008.
The increase in 2010 can be principally attributed to the expansion of our
Modesto loan production office to a full service office and the relocation of our
Merced and Oakhurst offices to larger facilities. The increase in 2009 was
primarily due to the addition of three new branch locations in Tracy, Stockton
and Lodi California as a result of the Service 1st acquisition in the fourth quarter
of 2008 and the new Merced office opened in 2009.
Regulatory assessments decreased $413,000 or 25.75% to $1,191,000 in 2010
compared to $1,604,000 and $330,000 in 2009 and 2008, respectively. There
was no special assessment in 2010 which is the main reason for the decrease
comparing 2010 to 2009. The increase in 2009 was due to the increase in FDIC
insurance premiums as a result of an increase in deposit balances due to the
Service 1st acquisition, an increase in the assessment rates enacted by the FDIC,
and an FDIC imposed Special Assessment of $343,000 that was effective during
the second quarter of 2009. With the three year prepayment of FDIC premiums
in the fourth quarter of 2009, we expect that regulatory assessments will remain
at historically high levels for the foreseeable future.
Data processing expenses were $1,197,000 in 2010 compared to $1,316,000
in 2009 and $848,000 in 2008. The $119,000 or 9.04% decrease in 2010 is a
result of a reduction in terms of our core processing contract. The $468,000
increase in 2009 compared to 2008 was due to the Service 1st acquisition and
the addition of new branch locations.
Legal fees increased $165,000 or 50.00% to $495,000 for the year ended
December 31, 2010 compared to $330,000 and $141,000 in 2009 and 2008,
respectively. The increases in 2010 and 2009 are primarily due to issues related
to nonperforming assets and other loan related legal expenses.
Total other real estate owned (OREO) expenses increased $592,000 or
123.59% to $1,071,000 for the year ended December 31, 2010 compared to
$479,000 for the same period in 2009. The increase in 2010 is primarily the
result of the write downs of several OREO properties to their estimated fair value
resulting in a valuation expense totaling $591,000. Carrying costs and property
taxes totaled $371,000 related to the OREO portfolio and we realized a
43
45
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
NON-INTEREST EXPENSES
(Continued)
$109,000 loss on disposition of OREO property for the year ended
December 31, 2010. We had no OREO expenses in 2008.
Amortization of cored deposit intangibles was $414,000 for the years ended
December 31, 2010 and 2009 and $231,000 in 2008. The $183,000 increase in
amortization of core deposit intangibles (CDI) in 2009 compared to 2008 was
due to the CDI associated with the acquisition of Service 1st.
Other non-interest expenses increased $90,000 or 2.06% to $4,460,000 in
2010 compared to $4,370,000in 2009 and $4,068,000 in 2008.
The following table describes significant components of other non-interest
expense as a percentage of average assets.
Cumulative Perpetual Preferred Stock (Preferred Stock) and a Warrant to
purchase 158,133 shares at $6.64 per share of the Company’s common stock, no
par value, for an aggregate purchase price of $7,000,000 in cash. According to
the agreement, if we received aggregate gross cash proceeds of not less than
$7 million from a Qualified Equity Offering (QEO) on or prior to
December 31, 2009, the number of shares issuable under the Warrant could be
reduced by one half. On December 23, 2009, we received $8,000,000 in gross
proceeds from a QEO and subsequently the Treasury agreed to reduce the
number of common shares issuable under the Warrant to 79,067. We accrued
preferred stock dividends to the Treasury and accretion of the issuance discount
in the amount of $395,000 and $365,000 during the years ended December 31,
2010 and 2009, respectively.
For the years ended December 31,
FINANCIAL CONDITION
2010
2009
2008
Other
Expense
%
Average
Assets
Other
Expense
%
Average
Assets
Other
Expense
%
Average
Assets
(Dollars in thousands)
354
305
275
271
218
212
209
195
165
148
139
130
44
-
1,795
0.05% $
0.04%
0.04%
0.04%
0.03%
0.03%
0.03%
0.03%
0.02%
0.02%
0.02%
0.02%
0.01%
-
0.24%
419
272
251
271
233
454
205
194
125
99
85
144
47
2
1,569
0.06% $
0.04%
0.03%
0.04%
0.03%
0.06%
0.03%
0.03%
0.02%
0.01%
0.01%
0.02%
0.01%
-
0.21%
308
205
170
226
178
192
173
101
4
90
96
136
90
447
1,652
0.06%
0.04%
0.03%
0.04%
0.03%
0.04%
0.03%
0.02%
-
0.02%
0.02%
0.03%
0.02%
0.08%
0.30%
$
4,460
0.59% $
4,370
0.58% $
4,068
0.75%
ATM/debit card expenses
Telephone
License and maintenance
$
contracts
Stationery and supplies
Postage
Consulting
Director fees and related
expenses
Amortization of software
Appraisal fees
Donations
Education and training
General insurance
Operating losses
Merger expenses
Other
Total other non-interest
expense
For the year ended December 31, 2010, the $40,000 increase in appraisal fees
was related to nonperforming assets and updating appraisals for certain loans
collateralized by real estate. Education and training expenses increased $54,000
mainly due to the implementation of a management training program. In 2009
the $262,000 increase in consulting expenses was related to assistance with
renegotiating our core processor contracts. The $120,000 increase in appraisal
fees is primarily due to issues related to nonperforming assets and other loan
related expenses. The increase in various other expenses was principally due to
the addition of the Service 1st offices and the new Oakhurst and Merced offices.
PROVISION FOR INCOME TAXES
Our effective income tax rate was (12.68%) for 2010 compared to (35.35%)
for 2009 and 31.39% for 2008. The Company reported an income tax benefit of
$369,000 for the year ended December 31, 2010, compared to a benefit totaling
$676,000 and provision totaling $2,352,000 for the years ended December 31,
2009 and 2008, respectively. The increase in the effective tax rate in 2010
compared to 2009 was a result of an increase in net income before tax. The
decrease in the effective tax rate for the year ended December 31, 2009
compared to 2008 is due primarily to increases, as a percentage of pretax income,
in the Federal tax deduction for tax free municipal bonds, solar tax credits, the
state tax deduction for loans in designated enterprise zones in California, and
state hiring tax credits.
PREFERRED STOCK DIVIDENDS AND ACCRETION
On January 30, 2009, the Company entered into a Letter Agreement with the
United States Department of the Treasury (Treasury) under the Capital Purchase
Program, and issued and sold 7,000 shares of the Company’s Series A Fixed Rate
44
46
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
December 31, 2010 compared to December 31, 2009
As of December 31, 2010, total assets were $777,594,000 an increase of
1.58%, or $12,106,000 compared to $765,488,000 as of December 31, 2009.
Total gross loans decreased 6.01%, or $27,610,000 to $431,597,000 as of
December 31, 2010 compared to $459,207,000 as of December 31, 2009. Total
investment portfolio decreased 2.87% to $191,925,000. Total deposits increased
1.61%, or $10,328,000 to $650,495,000 as of December 31, 2010 compared to
$640,167,000 as of December 31, 2009. Shareholders’ equity increased 6.76%,
or $6,169,000, to $97,391,000 as of December 31, 2010 compared to
$91,223,000 as of December 31, 2009.
FAIR VALUE
The Company measures the fair values of its financial instruments utilizing a
hierarchical disclosure framework associated with the level of observable pricing
scenarios utilized in measuring financial instruments at fair value. The degree of
judgment utilized in measuring the fair value of financial instruments generally
correlates to the level of the observable pricing scenario. Financial instruments
with readily available active quoted prices or for which fair value can be
measured from actively quoted prices generally will have a higher degree of
observable pricing and a lesser degree of judgment utilized in measuring fair
value. Conversely, financial instruments rarely traded or not quoted will generally
have little or no observable pricing and a higher degree of judgment utilized in
measuring fair value. Observable pricing scenarios are impacted by a number of
factors, including the type of financial instrument, whether the financial
instrument is new to the market and not yet established and the characteristics
specific to the transaction.
See Note 3 of the audited Consolidated Financial Statements for additional
information about the level of pricing transparency associated with financial
instruments carried at fair value.
INVESTMENTS
Our investment portfolio consists primarily of agency securities, mortgage
backed securities, municipal securities, collateralized mortgage obligations,
corporate debt securities, and overnight investments in the Federal funds market
and are classified at the date of acquisition as available for sale or held to
maturity. As of December 31, 2010, investment securities with a fair value of
$129,968,000, or 67.93% of our investment securities portfolio, were held as
collateral for public funds, short and long-term borrowings, treasury, tax, and for
other purposes. Our investment policies are established by the Board of Directors
and implemented by our Investment/Asset Liability Committee. They are
designed primarily to provide and maintain liquidity, to enable us to meet our
pledging requirements for public money and borrowing arrangements, to generate
a favorable return on investments without incurring undue interest rate and
credit risk, and to complement our lending activities.
The level of our investment portfolio is generally considered higher than our
peers due primarily to a comparatively low loan to deposit ratio. Our loan to
deposit ratio at December 31, 2010 was 66.35% compared to 71.73% at
December 31, 2009. The loan to deposit ratio of our peers was 82.47% at
September 30, 2010. The total investment portfolio, including Federal funds
sold, decreased 2.87% or $5,673,000 to $191,925,000 at December 31, 2010
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
INVESTMENTS
(Continued)
from $197,598,000 at December 31, 2009 primarily due to sales and calls of
securities and principal pay downs. The market value of the portfolio reflected an
unrealized gain of $1,643,000 at December 31, 2010 compared to a $2,425,000
loss at December 31, 2009.
We periodically evaluate each investment security for other-than-temporary
impairment, relying primarily on industry analyst reports, observation of market
conditions and interest rate fluctuations.
As of November 30, 2010, the Company performed an analysis of the
investment portfolio to determine whether any of the investments held in the
portfolio had an other-than-temporary impairment (OTTI). Under ASC 320-10,
the portion of the impairment that is attributable to a shortage in the present
value of expected future cash flows relative to the amortized cost should be
recorded as a current period charge to earnings. The discount rate in this analysis
is the expected yield at purchase.
In accordance with the Company’s OTTI policy, we evaluated all
available-for-sale investment securities with an unrealized loss at November 30,
2010 and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at November 30, 2010 greater
than 10% of the recorded book value on that date, or which had an unrealized
loss of more than $10,000. We also analyzed any securities that may have been
down graded by credit rating agencies. We retained the services of a third party
in December 2010 to provide independent valuation and OTTI analysis of
private label residential mortgage-backed securities (PLRMBS).
For those bonds that met the evaluation criteria, we obtained and reviewed
the most recently published national credit ratings for those bonds. For those
bonds that were municipal debt securities with an investment grade rating by the
rating agencies, we also evaluated the financial condition of the municipality and
any applicable municipal bond insurance provider and concluded that no credit
related impairment existed.
The evaluation for PLRMBS also includes estimating projected cash flows that
the Company is likely to collect based on an assessment of all available
information about the applicable security on an individual basis, the structure of
the security, and certain assumptions, such as the remaining payment terms for
the security, prepayment speeds, default rates, loss severity on the collateral
supporting the security based on underlying loan-level borrower and loan
characteristics, expected housing price changes, and interest rate assumptions, to
determine whether the Company will recover the entire amortized cost basis of
the security. In performing a detailed cash flow analysis, the Company identified
the best estimate of the cash flows expected to be collected. If this estimate
results in a present value of expected cash flows (discounted at the security’s
effective yield) that is less than the amortized cost basis of the security, an OTTI
is considered to have occurred.
To assess whether it expects to recover the entire amortized cost basis of its
PLRMBS, the Company performed a cash flow analysis for all of its PLRMBS as
of November 30, 2010. In performing the cash flow analysis for each security,
the Company uses a third-party model. The model considers borrower
characteristics and the particular attributes of the loans underlying the Company’s
securities, in conjunction with assumptions about future changes in home prices
and other assumptions, to project prepayments, default rates, and loss severities.
The month-by-month projections of future loan performance are allocated to
the various security classes in each securitization structure in accordance with the
structure’s prescribed cash flow and loss allocation rules. When the credit
enhancement for the senior securities in a securitization is derived from the
presence of subordinated securities, losses are allocated first to the subordinated
securities until their principal balance is reduced to zero. The projected cash
flows are based on a number of assumptions and expectations, and the results of
these models can vary significantly with changes in assumptions and expectations.
The scenario of cash flows determined based on the model approach described
above reflects a best-estimate scenario.
At each quarter end, the Company compares the present value of the cash
flows expected to be collected on its PLRMBS to the amortized cost basis of the
securities to determine whether a credit loss exists.
The unrealized losses associated with PLRMBS are primarily driven by higher
projected collateral losses, wider credit spreads, and changes in interest rates.
Based upon our assessment of the expected credit losses of the security given the
performance of the underlying collateral compared with our credit enhancement
(which occurs as a result of credit loss protection provided by subordinated
tranches), the Company expects to recover the entire amortized cost basis of
these securities, with the exception of certain securities for which OTTI was
recorded. As of December 31, 2010 management reviewed the data and there
were no significant changes.
At December 31, 2010, the Company had a total of 36 PLRMBS with a
remaining principal balance of $18,661,000 and a net unrealized loss of
approximately $823,000. 12 of these securities account for $1,329,000 of the
unrealized loss at December 31, 2010 offset by 24 of these securities with gains
totaling $506,000. The Company continues to perform extensive analyses on
these securities as well as all PLRMBS. Several of these investment securities
continue to demonstrate cash flows and credit support as expected and the
expected cash flows of the security discounted at the security’s effective yield are
greater than the book value of the security, therefore management does not
consider these securities to be other than temporarily impaired. 11 of these
PLRMBS with a remaining principal balance of $11,785,000 had credit ratings
below investment grade. Based on the analyses performed, 9 of the PLRMBS wi
credit ratings below investment grade, with a remaining principal balance of
$11,460,000 were considered to be other-than-temporarily impaired at
December 31, 2010. An OTTI charge to earnings of $1,587,000 was recorded
during the year ended December 31, 2010. This charge was taken to reflect
ongoing and increasing deterioration of credit quality and increasing loss
severities of the underlying mortgages. The cumulative unrealized loss on these
securities decreased during the year ended December 31, 2010 primarily due to a
declining interest rate environment. This change in unrealized loss was recognized
in other comprehensive income and is also presented in the income statement as
a component of non-interest income in the presentation of other-than-temporary
impairment losses.
See Note 4 to the audited Consolidated Financial Statements for carrying
values and estimated fair values of our investment securities portfolio.
LOANS
Total gross loans have decreased to $431,597,000 as of December 31, 2010
compared to $459,207,000 as of December 31, 2009.
The following table sets forth information concerning the composition of our
loan portfolio as of December 31, 2010 and 2009:
Loan Type
(Dollars in thousands)
Commercial:
December 31, % of Total December 31, % of Total
2010
loans
2009
loans
Commercial and industrial
Agricultural land and production
$
104,387
38,787
24.1% $
9.0%
Total commercial
143,174
33.1%
107,726
35,796
143,522
23.5%
7.8%
31.3%
Real estate:
Owner occupied
Real estate - construction and other
land loans
Commercial real estate
Other
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Deferred loan fees, net
Total gross loans
111,888
25.9%
111,006
24.1%
7.4%
14.7%
8.9%
56.9%
8.0%
2.0%
10.0%
32,039
63,627
38,354
245,908
34,521
8,493
43,014
(499)
10.3%
15.7%
8.4%
58.5%
7.8%
2.4%
10.2%
47,233
71,977
38,532
268,748
36,110
11,219
47,329
(392)
431,597
100.0%
459,207
100.0%
Allowance for credit losses
(11,014)
(10,200)
Total loans
$
420,583
$
449,007
At December 31, 2010, in management’s judgment, a concentration of loans
existed in commercial loans and real-estate-related loans, representing
approximately 98.0% of total loans of which 33.1% were commercial and 64.9%
were real-estate-related. This level of concentration is consistent with the 97.6%
at December 31, 2009. Although we believe the loans within this concentration
have no more than the normal risk of collectibility, a substantial further decline
in the performance of the economy in general or a further decline in real estate
45
47
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LOANS
(Continued)
Composition of Nonaccrual, Past Due and Restructured Loans
December 31,
2010
December 31,
2009
(Dollars in thousands)
Nonaccrual Loans
Commercial and industrial
Real Estate
Real estate construction and land
development
Consumer
Equity loans and lines of credit
Other
Restructured loans (non-accruing)
Commercial and industrial
Real Estate
Real estate construction and land
development
Total nonaccrual
Accruing loans past due 90 days or more
Total nonperforming loans
Nonperforming loans to total loans
Ratio of nonperforming loans to allowance
for credit losses
Loans considered to be impaired
Related allowance for credit losses on
impaired loans
$
$
$
$
$
1,487
4,772
5,634
-
488
-
869
3,118
2,193
18,561
-
18,561
$
3,169
3,183
7,690
349
-
-
28
2,326
2,214
18,959
-
18,959
4.13%
4.30%
168.52%
18,561
2,124
185.87%
18,959
752
$
$
We measure our impaired loans by using the fair value of the collateral if the
loan is collateral dependent and the present value of the expected future cash
flows discounted at the loan’s effective interest rate if the loan is not collateral
dependent. As of December 31, 2010 and 2009, we had impaired loans totaling
$18,561,000 and $18,959,000, respectively. For collateral dependent loans
secured by real estate, we obtain external appraisals which are updated at least
annually to determine the fair value of the collateral, and we record an
immediate charge off for the difference between the book value of the loan and
the appraised value of collateral. We perform quarterly internal reviews on
substandard loans. We place loans on nonaccrual status and classify them as
impaired when it becomes probable that we will not receive interest and principal
under the original contractual terms, or when loans are delinquent 90 days or
more unless the loan is both well secured and in the process of collection.
Management maintains certain loans that have been brought current by the
borrower (less than 30 days delinquent) on nonaccrual status until such time as
management has determined that the loans are likely to remain current in future
periods. Foregone interest on nonaccrual loans totaled $1,228,000 for the year
ended December 31, 2010 of which $376,000 was attributable to troubled debt
restructurings. Foregone interest on nonaccrual loans totaled $852,000 and
$371,000 for the years ended December 31, 2009 and 2008, respectively of
which $404,000 and $139,000 was attributable to troubled debt restructurings,
respectively.
values in our primary market areas, in particular, could have an adverse impact
on collectibility, increase the level of real estate-related nonperforming loans, or
have other adverse effects which alone or in the aggregate could have a material
adverse effect on our business, financial condition, results of operations and cash
flows. The Company was not involved in any sub-prime mortgage lending
activities at December 31, 2010 or December 31, 2009.
We believe that our commercial real estate loan underwriting policies and
practices result in prudent extensions of credit, but recognize that our lending
activities result in relatively high reported commercial real estate lending levels.
Commercial real estate loans include certain loans which represent low to
moderate risk and certain loans with higher risks.
Nonperforming assets - Nonperforming assets consist of nonperforming loans,
other real estate owned (OREO), and repossessed assets. Nonperforming loans are
those loans which have (i) been placed on nonaccrual status, (ii) been subject to
troubled debt restructuring, (iii) been classified as doubtful under our asset
classification system, or (iv) become contractually past due 90 days or more with
respect to principal or interest and have not been restructured or otherwise
placed on nonaccrual status. A loan is classified as nonaccrual when 1) it is
maintained on a cash basis because of deterioration in the financial condition of
the borrower, 2) payment in full of principal or interest under the original
contractual terms is not expected, or 3) principal or interest has been in default
for a period of 90 days or more unless the asset is both well secured and in the
process of collection.
At December 31, 2010, nonperforming assets totaled $19,984,000 compared
to $21,838,000 at December 31, 2009. In 2010, nonperforming assets included
nonaccrual loans totaling $18,561,000, OREO of $1,325,000, and repossessed
assets of $98,000. Nonperforming assets in 2009 consisted of $18,959,000 in
nonaccrual loans, OREO of $2,832,000 and repossessed assets of $47,000. At
December 31, 2010, we had seven loans considered troubled debt restructurings
totaling $6,180,000, which are included in nonaccrual loans. We had seven
restructured loans totaling $4,568,000 at December 31, 2009. We have no
outstanding commitments to lend additional funds to any of these borrowers.
A summary of nonaccrual, restructured, and past due loans at December 31,
2010 and 2009 is set forth below. The Company had no loans past due more
than 90 days and still accruing interest at December 31, 2010 or 2009.
Management is not aware of any potential problem loans, which were current
and accruing at December 31, 2010, where serious doubt exists as to the ability
of the borrower to comply with the present repayment terms. Management can
give no assurance that nonaccrual and other nonperforming loans will not
increase in the future.
46
48
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LOANS
(Continued)
The following table provides a reconciliation of the change in non-accrual loans for the year ended December 31, 2010.
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial
Real estate
Real estate construction and land
development
Consumer
Equity loans and lines of credit
Restructured loans (non-accruing):
Commercial and industrial
Real estate
Real estate construction and land
development
Total non-accrual
Balances
December 31,
2009
Additions to
Nonaccrual
Loans
Net Pay
Downs
Transfer to
Foreclosed
Collateral -
OREO
Returns to
Accrual
Status
Balances
December 31,
2010
Charge Offs
$
3,169
3,183
7,690
349
-
28
2,326
2,214
$
1,450
5,724
$
(1,402)
(1,954)
$
-
(1,812)
$
51
177
509
900
1,834
1,250
(238)
-
(21)
(59)
(1,042)
(519)
(1,655)
-
-
-
-
(223)
(126)
(214)
-
-
-
-
$
(1,507)
(243)
$
-
(526)
-
-
(752)
$
18,959
$
11,895
$
(5,235)
$
(3,467)
$
(563)
$
(3,028)
$
1,487
4,772
5,634
-
488
869
3,118
2,193
18,561
The following table provides a summary of the change in the OREO balance:
(Dollars in thousands)
Balance, December 31, 2009
Additions
Dispositions
Write-downs
Gain on disposition
Loss on disposition
Balance, December 31, 2010
Years Ended
December 31,
2010
2009
$
2,832
3,467
(4,450)
(592)
176
(108)
-
3,188
-
(356)
-
-
$
1,325
$
2,832
OREO represents real property taken either through foreclosure or through a
deed in lieu thereof from the borrower. OREO is carried at the lesser of cost or
fair market value, less selling costs. OREO holdings represented two properties
with a fair value totaling $1,325,000 at December 31, 2010 and two properties
totaling $2,832,000 at December 31, 2009.
The Bank was party to a lawsuit filed by Regent Hotel, LLC against First
Bank (Lead Bank), as the lead bank in a loan participation, and East West Bank
and Service 1st Bank, which was acquired by the Bank on November 13, 2008,
were participating in the loan. In 2009, the Lead Bank purchased the Bank’s
participating interest in the Regent Hotel loan at a discount and indemnified the
Bank against any further actions pursuant to the lawsuit. Included in the merger
consideration paid by the Company to acquire Service 1st was $3,500,000 which
was placed into an escrow fund to protect the Company and the Bank from all
losses and liabilities that related to the loan participation and/or the Regent
Litigation. Consequent to the Lead Bank buying the Bank’s position, in 2009 the
Bank collected $1,046,000 from the escrow fund to cover the portion of the loan
that was not recovered, accrued and unpaid interest and other costs. In 2010,
settlement agreements between all parties were signed and the bankruptcy court
approved the settlement. The appeal period is in effect until April 1, 2011. If no
party objects during the appeal period, the settlement will be finalized on
April 1, 2011. In accordance with the escrow agreement, once the litigation is
completely satisfied the remaining balance in the escrow fund will be disbursed
to former Service 1st shareholders after reimbursement to the Bank for any legal
and escrow costs.
Allowance for Credit Losses - We have established a methodology for the
determination of the allowance for credit losses. The methodology is set forth in
a formal policy and takes into consideration the need for an overall allowance for
credit losses as well as specific allowances that are tied to individual loans. Our
methodology for assessing the appropriateness of the allowance consists of several
key elements, which include the formula allowance and a specific allowance for
identified problem loans.
In originating loans, we recognize that losses will be experienced and that the
risk of loss will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the collateral
securing the loan. The allowance is increased by provisions charged against
earnings and reduced by net loan charge offs. Loans are charged off when they
are deemed to be uncollectible, or partially charged off when portions of a loan
are deemed to be uncollectible. Recoveries are recorded only when cash payments
are received.
The allowance for credit losses is maintained to cover probable losses inherent
in the loan portfolio. The responsibility for the review of our assets and the
determination of the adequacy lies with management and our Audit Committee.
They delegate the authority to the Chief Credit Administrator (CCA) to
determine the loss reserve ratio for each type of asset and review, at least
quarterly, the adequacy of the allowance based on an evaluation of the portfolio,
past experience, prevailing market conditions, amount of government guarantees,
concentration in loan types, and other relevant factors.
The allowance for credit losses is an estimate of the losses that may be
sustained in our loan and lease portfolio. The allowance is based on principles of
accounting: (1) ASC 310-10 which requires that losses be accrued when they are
probable of occurring and can be reasonably estimated and (2) ASC 450-20
which requires that losses be accrued based on the differences between the value
of collateral, present value of future cash flows or values that are observable in
the secondary market and the loan balance.
Credit Administration adheres to an internal asset review system and loss
allowance methodology designed to provide for timely recognition of problem
assets and adequate valuation allowances to cover expected asset losses. The
Bank’s asset monitoring process includes the use of asset classifications to
segregate the assets, largely loans and real estate, into various risk categories. The
Bank uses the various asset classifications as a means of measuring risk and
determining the adequacy of valuation allowances by using a nine-grade system
to classify assets. All credit facilities exceeding 90 days of delinquency require
classification.
47
49
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LOANS
(Continued)
The following table sets forth information regarding our allowance for credit
losses at the dates and for the periods indicated:
(Dollars in thousands)
Balance, beginning of the year
Provision charged to operations
Losses charged to allowance
Recoveries
Balance, end of year
Years Ended
December 31,
2010
2009
$
$
10,200
3,800
(4,122)
1,136
7,223
10,514
(7,926)
389
$
11,014
$
10,200
Allowance for credit losses to total loans
2.55%
2.22%
As of December 31, 2010 the balance in the allowance for credit losses was
$11,014,000 compared to $10,200,000 as of December 31, 2009. The increase
was due to net charge offs during 2010 being less than the amount of the
provision for credit losses. Net charge offs totaled $2,986,000 while the provision
for credit losses was $3,800,000. The balance of commitments to extend credit
on undisbursed construction and other loans and letters of credit was
$123,676,000 as of December 31, 2010 compared to $131,139,000 as of
December 31, 2009. Risks and uncertainties exist in all lending transactions, and
our management and Directors’ Loan Committee have established reserve levels
based on economic uncertainties and other risks that exist as of each reporting
period.
As of December 31, 2010 the allowance for credit losses was 2.55% of total
gross loans compared to 2.22% as of December 31, 2009. During 2010 there
were no major changes in loan concentrations that significantly affected the
allowance for credit losses. During the year ended December 31, 2010 the
Company enhanced the process for estimating the allowance for credit losses.
The modification did not have a significant impact on the amount of the
allowance for credit losses in total nor did it have a material impact on the
allocation of the allowance within loan categories. In 2010 enhanced
methodology enabled us to assign qualitative and quantitative factors (Q factors)
to each loan category resulting in a decrease in unallocated reserves. Q factors
include reserves held for the effects of lending policies, economic trends, and
portfolio trends along with other dynamics which may cause additional stress to
the portfolio. Assumptions regarding the collateral value of various under
performing loans may affect the level and allocation of the allowance for credit
losses in future periods. The allowance may also be affected by trends in the
amount of charge offs experienced or expected trends within different loan
portfolios. Of the losses charged to the allowance in 2010 and 2009 of
$4,122,000 and 7,926,000, the portion related to overdraft losses on transaction
deposit accounts totaled $96,000 and $126,000, respectively.
Nonperforming loans totaled $18,561,000 as of December 31, 2010, and
$18,959,000 as of December 31, 2009. The allowance for credit losses as a
percentage of nonperforming loans was 59.34% and 53.80% as of December 31,
2010 and 2009, respectively. Management believes the allowance at
December 31, 2010 is adequate based upon its ongoing analysis of the loan
portfolio, historical loss trends and other factors. However, no assurance can be
given that the Company may not sustain charge-offs which are in excess of the
allowance in any given period.
GOODWILL AND INTANGIBLE ASSETS
Business combinations involving the Bank’s acquisition of the equity interests
or net assets of another enterprise give rise to goodwill. Total goodwill at
December 31, 2010 was $23,577,000 consisting of $14,643,000 and $8,934,000
representing the excess of the cost of Service 1st Bank and Bank of Madera
County, respectively, over the net of the amounts assigned to assets acquired and
liabilities assumed in the transactions accounted for under the purchase method
of accounting. The value of goodwill is ultimately derived from the Bank’s ability
to generate net earnings after the acquisitions and is not deductible for tax
purposes. A decline in net earnings could be indicative of a decline in the fair
value of goodwill and result in impairment. For that reason, goodwill is assessed
at least annually for impairment.
In conjunction with the Company’s annual review during the third quarter of
2010, management engaged an independent valuation specialist to test goodwill
for impairment. Goodwill impairment testing is a two step process. The first step
compares the fair value of a reporting unit with its carrying amount, including
goodwill. If the carrying amount exceeds the fair value, the second step of the
goodwill impairment test is performed to measure the impairment loss, if any. If
the fair value of the reporting unit exceeds the carrying value, then goodwill is
not impaired and step two is unnecessary. Since the Company is considered to be
one reporting unit, the fair value of the Company was compared to the carrying
value. Based on the results of the testing performed, the fair value of the
Company exceeded the carrying value so step two was not required and goodwill
was not impaired. The fair value of the Company was determined based on an
analysis of three different valuation methods including the analysis of discounted
future cash flows, comparable whole bank transactions, and the Company’s
market capitalization plus a control premium.
Goodwill is also tested for impairment between annual tests if an event occurs
or circumstances change that would more likely than not reduce the fair value of
the Company below its carrying amount. No such events or circumstances arose
during the fourth quarter of 2010, so goodwill was not required to be retested.
The intangible assets at December 31, 2010 represent the estimated fair value
of the core deposit relationships acquired in the acquisition of Service 1st Bank
in 2008 of $1,400,000 and the 2005 acquisition of Bank of Madera County of
$1,500,000. Core deposit intangibles are being amortized using the straight-line
method over an estimated life of seven years from the date of acquisition. The
carrying value of intangible assets at December 31, 2010 was $1,198,000, net of
$1,702,000 in accumulated amortization expense. The carrying value at
December 31, 2009 was $1,612,000, net of $1,288,000 accumulated
amortization expense. Management evaluates the remaining useful lives quarterly
to determine whether events or circumstances warrant a revision to the remaining
periods of amortization. Based on the evaluation, no changes to the remaining
useful lives was required. Management engaged an independent valuation
specialist to perform an annual impairment test on core deposit intangibles as of
September 30, 2010 and determined no impairment was necessary. Amortization
expense recognized was $414,000 for 2010 and 2009, and for 2008 was
$231,000.
DEPOSITS AND BORROWINGS
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation
(FDIC) up to applicable legal limits. The FDIC implemented unlimited deposit
insurance coverage on non-interest bearing transaction accounts beginning
December 31, 2010, and ending December 31, 2012, as mandated by the
Dodd-Frank Act. Coverage under this program is confined to non-interest
bearing accounts and does not cover interest-bearing NOW accounts but does
include Interest on Lawyers Trust Accounts (IOLTAs). Coverage on all other
accounts including interest bearing NOW accounts is limited to $250,000
beginning January 1, 2011. This coverage replaces the unlimited coverage under
the Transaction Account Guarantee Program (TAGP).
Total deposits increased $10,328,000 or 1.61% to $650,495,000 as of
December 31, 2010 compared to $640,167,000 as of December 31, 2009.
Interest-bearing deposits decreased $3,909,000 or 0.81% to $476,628,000 as of
December 31, 2010 compared to $480,537,000 as of December 31, 2009.
Non-interest bearing deposits increased $14,237,000 or 8.92% to $173,867,000
as of December 31, 2010 compared to $159,630,000 as of December 31, 2009.
Our total market share of deposits in Fresno, Madera, and San Joaquin counties
was 3.38% in 2010 compared to 3.50% in 2009 based on FDIC deposit market
share information published as of June 30, 2010.
48
50
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
DEPOSITS AND BORROWINGS
(Continued)
The composition of the deposits and average interest rates paid at
December 31, 2010 and 2009 is summarized in the table below.
2010, the rate was 1.89%. Interest expense recognized by the Company for the
year ended December 31, 2010, 2009 and 2008 was $102,000, $129,000 and
$46,000, respectively.
(Dollars in thousands)
NOW accounts
MMA accounts
Time deposits
Savings deposits
Total interest-bearing
Non-interest bearing
% of
% of
December 31, Total Effective December 31, Total Effective
2010
Deposits Rate
2009
Deposits Rate
$
114,473
157,345
177,132
27,678
476,628
173,867
17.6% 0.38% $
24.2% 0.66%
27.2% 1.19%
4.3% 0.20%
73.3% 0.77%
26.7%
112,493
142,917
200,681
24,446
480,537
159,630
17.6% 0.66%
22.3% 0.93%
31.4% 1.82%
3.8% 0.22%
75.1% 1.22%
24.9%
Total deposits
$
650,495 100.0%
$
640,167 100.0%
Short-term borrowings totaled $10,000,000 as of December 31, 2010
compared to $5,000,000 as of December 31, 2009. Short-term borrowings
consist of FHLB advances maturing within one month. The maximum amount
of short-term borrowings at any month-end during 2010, 2009 and 2008, was
$10,000,000, $5,000,000, and $24,600,000, respectively. We maintain a line of
credit with the FHLB collateralized by government securities and loans. Refer to
Liquidity section below for further discussion of FHLB advances.
Total long-term debt as of December 31, 2010 was $4,000,000 and consisted
of FHLB advances with interest rate of 3.59% maturing in 2013. Long-term
debt was $14,000,000 as of December 31, 2009 with rates ranging from 3.00%
to 3.59% and a weighted average rate of 3.20%.
The Company succeeded to all of the rights and obligations of Service
1st Capital Trust I, a Delaware business trust, in connection with the acquisition
of Service 1st as of November 12, 2008. The Trust was formed on August 17,
2006 for the sole purpose of issuing trust preferred securities fully and
unconditionally guaranteed by Service 1st. Under applicable regulatory guidance,
the amount of trust preferred securities that is eligible as Tier 1 capital is limited
to 25% of the Company’s Tier 1 capital on a pro forma basis. At December 31,
2010, all of the trust preferred securities that have been issued qualify as Tier 1
capital. The trust preferred securities mature on October 7, 2036, are redeemable
at the Company’s option beginning after five years, and require quarterly
distributions by the Trust to the holder of the trust preferred securities at a
variable interest rate which will adjust quarterly to equal the three month LIBOR
plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to
purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s
junior subordinated notes (the Notes). The Notes bear interest at the same
variable interest rate during the same quarterly periods as the trust preferred
securities. The Notes are redeemable by the Company on any January 7, April 7,
July 7, or October 7 on or after October 7, 2011 or at any time within 90 days
following the occurrence of certain events, such as: (i) a change in the regulatory
capital treatment of the Notes (ii) in the event the Trust is deemed an investment
company or (iii) upon the occurrence of certain adverse tax events. In each such
case, the Company may redeem the Notes for their aggregate principal amount,
plus any accrued but unpaid interest.
The Notes may be declared immediately due and payable at the election of
the trustee or holders of 25% of the aggregate principal amount of outstanding
Notes in the event that the Company defaults in the payment of any interest
following the nonpayment of any such interest for 20 or more consecutive
quarterly periods. Holders of the trust preferred securities are entitled to a
cumulative cash distribution on the liquidation amount of $1,000 per security.
For each January 7, April 7, July 7 or October 7 of each year, the rate will be
adjusted to equal the three month LIBOR plus 1.60%. As of December 31,
CAPITAL RESOURCES
Capital serves as a source of funds and helps protect depositors and
shareholders against potential losses. Historically, the primary source of capital for
the Company has been internally generated capital through retained earnings. In
addition to net income, capital increased in 2009 from the issuance of preferred
stock and warrants under the Treasury Capital Purchase Program and preferred
stock and common stock issued to accredited investors. In 2008, in addition to
net income, capital increased from common stock issued for the acquisition of
Service 1st Bancorp.
The Company has historically maintained substantial levels of capital. The
assessment of capital adequacy is dependent on several factors including asset
quality, earnings trends, liquidity and economic conditions. Maintenance of
adequate capital levels is integral to providing stability to the Company. The
Company needs to maintain substantial levels of regulatory capital to give it
maximum flexibility in the changing regulatory environment and to respond to
changes in the market and economic conditions.
Our stockholders’ equity increased to $97,391,000 as of December 31, 2010
compared to $91,223,000 as of December 31, 2009. The increase in
stockholder’s equity is a result of increase in retained earnings from net income
of $3,279,000, increase in unrealized gain on the available-for-sale investment
securities of $2,422,000, exercise of stock options and related tax benefits, and
the effect of share based compensation expense of $239,000, offset by preferred
stock dividends and accretion of discount of $349,000.
We participated in the Treasury Capital Purchase Program under the
Emergency Economic Stabilization Act. The Company issued preferred stock and
a Warrant to issue common stock and received $7,000,000 in cash under this
program. The Company agreed to restrict dividend payments on common stock
to no more than historic levels while our preferred stock is owned by the
Treasury. See Note 13 to the audited Consolidated Financial Statements in this
report for a more detailed discussion.
On December 23, 2009, the Company entered into Stock Purchase
Agreements with a limited number of accredited investors to sell a total of
1,264,952 shares of common stock, without par value at $5.25 per share, and
1,359 shares of non-voting Series B Convertible Adjustable Rate Non-Cumulative
Perpetual Preferred Stock (Series B Preferred Stock) at $1,000 per share, for an
aggregate gross purchase price of $8,000,000, offset by issuance expenses totaling
$242,000. In May 2010, the shareholders of the Company approved an
amendment to the Company’s governing instruments to create a series of
non-voting common stock. In June 2010, the Company exercised its option to
require the Purchasers to exchange 1,359 shares of Series B Preferred Stock for
258,862 shares of non-voting common stock. See Note 13 to the audited
Consolidated Financial Statements in this report for a more detailed discussion.
During 2010 and 2009, the Bank did not pay any dividends to the Company.
In 2008, the Bank declared and paid cash dividends to the Company of
$6,100,000, in connection with the acquisition of Service 1st and stock
repurchase agreements approved by the Company’s Board of Directors. The Bank
would not pay any dividend that would cause it to be deemed not ‘‘well
capitalized’’ under applicable banking laws and regulations.
Management considers capital requirements as part of its strategic planning
process. The strategic plan calls for continuing increases in assets and liabilities,
and the capital required may therefore be in excess of retained earnings. The
ability to obtain capital is dependent upon the capital markets as well as our
performance. Management regularly evaluates sources of capital and the timing
required to meet its strategic objectives.
49
51
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
CAPITAL RESOURCES
(Continued)
The following table presents the Company’s and the Bank’s capital ratios as of
December 31, 2010 and 2009:
Tier 1 Leverage Ratio
Central Valley Community Bancorp and
Subsidiary
Minimum regulatory requirement
Central Valley Community Bank
Minimum requirement for
‘‘Well-Capitalized’’ institution
Minimum regulatory requirement
Tier 1 Risk-Based Capital Ratio
Central Valley Community Bancorp and
Subsidiary
Minimum regulatory requirement
Central Valley Community Bank
Minimum requirement for
‘‘Well-Capitalized’’ institution
Minimum regulatory requirement
Total Risk-Based Capital Ratio
Central Valley Community Bancorp and
Subsidiary
Minimum regulatory requirement
Central Valley Community Bank
Minimum requirement for
‘‘Well-Capitalized’’ institution
Minimum regulatory requirement
December 31, 2010
December 31, 2009
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
70,669
29,832
69,457
37,264
29,811
70,669
19,965
69,457
29,929
19,953
76,982
39,931
75,766
49,881
39,905
9.48% $
4.00% $
9.32% $
67,547
29,056
66,624
5.00% $
4.00% $
36,210
28,968
14.16% $
4.00% $
13.92% $
67,547
21,998
66,624
6.00% $
4.00% $
32,977
21,985
15.42% $
8.00% $
15.19% $
74,463
43,996
73,535
10.00% $
8.00% $
54,962
43,970
9.30%
4.00%
9.20%
5.00%
4.00%
12.28%
4.00%
12.12%
6.00%
4.00%
13.54%
8.00%
13.38%
10.00%
8.00%
We are required to deduct the disallowed portion of net deferred tax assets
from Tier 1 capital in calculating our capital ratios. Generally, disallowed deferred
tax assets that are dependent upon future taxable income are limited to the lesser
of the amount of deferred tax assets that we expect to realize within one year,
based on projected future taxable income, or 10% of the amount of our Tier 1
capital. Disallowed deferred tax assets deducted from Tier 1 capital were
$5,981,000 and $4,918,000 at December 31, 2010 and 2009, respectively.
LIQUIDITY
Liquidity management involves our ability to meet cash flow requirements
arising from fluctuations in deposit levels and demands of daily operations, which
include funding of securities purchases, providing for customers’ credit needs and
ongoing repayment of borrowings. Our liquidity is actively managed on a daily
basis and reviewed periodically by our management and Director’s Asset/Liability
Committees. This process is intended to ensure the maintenance of sufficient
funds to meet our needs, including adequate cash flows for off-balance sheet
commitments.
Our primary sources of liquidity are derived from financing activities which
include the acceptance of customer and, to a lesser extent, broker deposits,
Federal funds facilities and advances from the Federal Home Loan Bank of San
Francisco. These funding sources are augmented by payments of principal and
interest on loans, the routine maturities and pay downs of securities from the
securities portfolio, the stability of our core deposits and the ability to sell
investment securities. As of December 31, 2010, the Company had unpledged
securities totaling $61,357,000 available as a secondary source of liquidity and
total cash and cash equivalents of $100,399,000. Cash and cash equivalents at
December 31, 2010 increased 207% compared to December 31, 2009. Primary
uses of funds include withdrawal of and interest payments on deposits,
origination and purchases of loans, purchases of investment securities, and
payment of operating expenses. Due to the negative impact of the slow economic
recovery, we have been cautiously managing our asset quality. Consequently,
expanding our loan portfolio or finding adequate investments to utilize some of
our excess liquidity has been difficult in the current economic environment.
As a means of augmenting our liquidity, we have established Federal funds
lines with various correspondent banks. At December 31, 2010 our available
borrowing capacity includes approximately $39,000,000 in Federal funds lines
with our correspondent banks and $114,659,000 in unused FHLB advances. At
December 31, 2010, we were not aware of any information that was reasonably
likely to have a material effect on our liquidity position. The following table
reflects the Company’s credit lines, balances outstanding, and pledged collateral at
December 31, 2010 and 2009:
Credit Lines
(In thousands)
Unsecured Credit Lines
(interest rate varies with market):
Credit limit
Balance outstanding
Federal Home Loan Bank
(interest rate at prevailing interest rate):
Credit limit
Balance outstanding
Collateral pledged
Fair value of collateral
Federal Reserve Bank
(interest rate at prevailing discount interest rate):
Credit limit
Balance outstanding
Collateral pledged
Fair value of collateral
December 31, December 31,
2010
2009
$
$
$
$
$
$
$
$
$
$
39,000 $
- $
39,000
-
114,659 $
14,000 $
123,717 $
126,326 $
113,451
19,000
139,726
144,903
1,321 $
- $
1,322 $
1,354 $
917
-
922
956
The liquidity of our parent company, Central Valley Community Bancorp, is
primarily dependent on the payment of cash dividends by its subsidiary, Central
Valley Community Bank, subject to limitations imposed by regulations.
OFF-BALANCE SHEET ITEMS
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk. These financial instruments include
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received. The balance of commitments to extend
credit on undisbursed construction and other loans and letters of credit was
$123,676,000 as of December 31, 2010 compared to $131,139,000 as of
December 31, 2009. For a more detailed discussion of these financial
instruments, see Note 12 to the audited Consolidated Financial Statements in
this Annual Report.
In the ordinary course of business, the Company is party to various operating
leases. For a more detailed discussion of these financial instruments, see Note 12
to the audited Consolidated Financial Statements in this Annual Report.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Interest rate risk (IRR) and credit risk constitute the two greatest sources of
financial exposure for insured financial institutions that operate like we do. IRR
represents the impact that changes in absolute and relative levels of market
interest rates may have upon our net interest income (NII). Changes in the NII
are the result of changes in the net interest spread between interest-earning assets
and interest-bearing liabilities (timing risk), the relationship between various rates
(basis risk), and changes in the shape of the yield curve.
We realize income principally from the differential or spread between the
interest earned on loans, investments, other interest-earning assets and the interest
incurred on deposits and borrowings. The volumes and yields on loans, deposits
and borrowings are affected by market interest rates. As of December 31, 2010,
75.41% of our loan portfolio was tied to adjustable-rate indices. The majority of
our adjustable rate loans are tied to prime and reprice within 90 days. However,
in the current low rate environment, several of our loans, tied to prime, are at
their floors and will not reprice until prime plus the factor is greater than the
floor. The majority of our time deposits have a fixed rate of interest. As of
50
52
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
(Continued)
December 31, 2010, 81.94% of our time deposits matures within one year or
less. As of December 31, 2010, $10,000,000 of our short term debt and
$4,000,000 of our long-term debt was fixed rate. Our long-term debt has
maturities through 2013.
Changes in the market level of interest rates directly and immediately affect
our interest spread, and therefore profitability. Sharp and significant changes to
market rates can cause the interest spread to shrink or expand significantly in the
near term, principally because of the timing differences between the adjustable
rate loans and the maturities (and therefore repricing) of the deposits and
borrowings.
Our management and Board of Directors’ Asset/Liability Committees (ALCO)
are responsible for managing our assets and liabilities in a manner that balances
profitability, IRR and various other risks including liquidity. The ALCO operates
under policies and within risk limits prescribed, reviewed, and approved by the
Board of Directors.
The ALCO seeks to stabilize our NII by matching rate-sensitive assets and
liabilities through maintaining the maturity and repricing of these assets and
liabilities at appropriate levels given the interest rate environment. When the
amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified
time periods, NII generally will be negatively impacted by an increasing interest
rate environment and positively impacted by a decreasing interest rate
environment. Conversely, when the amount of rate-sensitive assets exceeds the
amount of rate-sensitive liabilities within specified time periods, net interest
income will generally be positively impacted by an increasing interest rate
environment and negatively impacted by a decreasing interest rate environment.
The speed and velocity of the repricing of assets and liabilities will also
contribute to the effects on our NII, as will the presence or absence of periodic
and lifetime interest rate caps and floors.
Simulation of earnings is the primary tool used to measure the sensitivity of
earnings to interest rate changes. Earnings simulations are produced using a
software model that is based on actual cash flows and repricing characteristics for
all of our financial instruments and incorporates market-based assumptions
regarding the impact of changing interest rates on current volumes of applicable
financial instruments.
Interest rate simulations provide us with an estimate of both the dollar
amount and percentage change in NII under various rate scenarios. All assets and
liabilities are normally subjected to up to 400 basis point increases and decreases
in interest rates in 100 basis point increments. Under each interest rate scenario,
we project our net interest income. From these results, we can then develop
alternatives in dealing with the tolerance thresholds.
Approximately 75.41% of our loan portfolio is tied to adjustable rate indices
and 38.7% of our loan portfolio reprices within 90 days. As of December 31,
2010, we had 635 commercial and real estate loans totaling $188,895,000 with
floors ranging from 3.25% to 8.50% and ceilings ranging from 7.00% to
25.00%.
The following table shows the effects of changes in projected net interest
income for the twelve months ending December 31, 2011 under the interest rate
shock scenarios stated. The table was prepared as of December 31, 2010, using a
prime interest rate of 3.25%.
Sensitivity Analysis of Impact of Rate Changes on Interest Income
Hypothetical
Change In Rates
(Dollars in thousands)
UP 300 bp
UP 200 bp
UP 100 bp
UNCHANGED
DOWN 25 bp
$
Projected
Net Interest
Income
$ Change From % Change From
Rates At
December 31,
2011
Rates At
December 31,
2011
$
34,111
32,906
31,770
30,913
30,758
3,198
1,993
857
-
(156)
10.35%
6.45%
2.77%
-
(0.50)%
results due to timing, magnitude and frequency of interest rate changes, as well
as changes in market conditions and management strategies which might
moderate the negative consequences of interest rate deviations.
There is no material change in our current market risk exposure from the
market risk exposure we experienced in 2010. The outcome of the sensitivity
analysis conducted for 2009 was essentially the same as 2010.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission (SEC) has issued disclosure
guidance for ‘‘critical accounting policies.’’ The SEC defines ‘‘critical accounting
policies’’ as those that require application of management’s most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
future periods.
Our accounting policies are integral to understanding the results reported.
Our significant accounting policies are described in detail in Note 1 in the
audited Consolidated Financial Statements. Not all of the significant accounting
policies presented in Note 1 of the audited Consolidated Financial Statements in
this Annual Report require management to make difficult, subjective or complex
judgments or estimates.
Use of Estimates
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amount of assets, liabilities,
revenues and expenses. On an ongoing basis, management evaluates the estimates
used. Estimates are based upon historical experience, current economic conditions
and other factors that management considers reasonable under the circumstances.
These estimates result in judgments regarding the carrying values of assets and
liabilities when these values are not readily available from other sources, as well as
assessing and identifying the accounting treatments of contingencies and
commitments. Actual results may differ from these estimates under different
assumptions.
Accounting Principles Generally Accepted in the United States of America
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP).
We follow accounting policies typical to the commercial banking industry and
in compliance with various regulation and guidelines as established by the Public
Company Accounting Oversight Board (PCAOB), Financial Accounting
Standards Board (FASB), the American Institute of Certified Public Accountants
(AICPA), and the Bank’s primary federal regulator, the FDIC. The following is a
brief description of our current accounting policies involving significant
management judgments.
Allowance for Credit Losses
Our most significant management accounting estimate is the appropriate level
for the allowance for credit losses. The allowance for credit losses is established to
absorb known and inherent losses attributable to loans outstanding. The
adequacy of the allowance is monitored on an on-going basis and is based on our
management’s evaluation of numerous factors. These factors include the quality
of the current loan portfolio, the trend in the loan portfolio’s risk ratings, current
economic conditions, loan concentrations, loan growth rates, past-due and
nonperforming trends, evaluation of specific loss estimates for all significant
problem loans, historical charge-off and recovery experience and other pertinent
information. See Note 1 to the audited Consolidated Financial Statements in this
Annual Report for more detail regarding our allowance for credit losses.
The calculation of the allowance for credit losses is by nature inexact, as the
allowance represents our management’s best estimate of the probable losses
inherent in our credit portfolios at the reporting date. These credit losses will
occur in the future, and as such cannot be determined with absolute certainty at
the reporting date.
Impairment of Investment Securities
Assumptions are inherently uncertain, and, consequently, the model cannot
precisely measure net interest income or precisely predict the impact of changes
in interest rates on net interest income. Actual results will differ from simulated
Investment securities are impaired when the amortized cost exceeds fair value.
Investment securities are evaluated for impairment on at least a quarterly basis
51
53
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
directors and employees. The fair value of each option is estimated on the date
of grant and amortized over the service period using a Black-Scholes-Merton
based option valuation model that requires the use of assumptions to estimate the
grant date fair value. The estimates are based on assumptions on the expected
option life, the level of estimated forfeitures, expected stock volatility and the
risk-free interest rate. The calculation of the fair value of share based payments is
by nature inexact, and represents management’s best estimate of the grant date
fair value of the share based payments. See Note 1 to the audited Consolidated
Financial Statements in this Annual Report.
Accounting for Income Taxes
The Company files its income taxes on a consolidated basis with its
subsidiary. The allocation of income tax expense (benefit) represents each entity’s
proportionate share of the consolidated provision for income taxes.
Deferred tax assets and liabilities are recognized for the tax consequences of
temporary differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. On the balance sheet,
net deferred tax assets are included in accrued interest receivable and other assets.
The determination of the amount of deferred income tax assets which are
more likely than not to be realized is primarily dependent on projections of
future earnings, which are subject to uncertainty and estimates that may change
given economic conditions and other factors. The realization of deferred income
tax assets is assessed and a valuation allowance is recorded if is ‘‘more likely than
not’’ that all or a portion of the deferred tax asset will not be realized. ‘‘More
likely than not’’ is defined as greater than a 50% chance. All available evidence,
both positive and negative is considered to determine whether, based on the
weight of that evidence, a valuation allowance is needed.
Only tax positions that meet the more-likely-than-not recognition threshold
are recognized. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions. Tax
positions that meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of being
realized upon settlement with the applicable taxing authority. The portion of the
benefits associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination. Interest expense
and penalties associated with unrecognized tax benefits are classified as income
tax expense in the consolidated statement of income.
INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on other industries primarily because the assets and liabilities of
financial institutions consist largely of monetary items. However, financial
institutions are affected by inflation in part through non-interest expenses, such
as salaries and occupancy expenses, and to some extent by changes in interest
rates.
At December 31, 2010, we do not believe that inflation will have a material
impact on our consolidated financial position or results of operations. However,
if inflation concerns cause short term rates to rise in the near future, we may
benefit by immediate repricing of a portion of our loan portfolio. Refer to
Market Risk section for further discussion.
CRITICAL ACCOUNTING POLICIES
(Continued)
and more frequently when economic or market conditions warrant such an
evaluation to determine whether a decline in their value is other than temporary.
Management utilizes criteria such as the magnitude and duration of the decline
and the intent and ability of the Company to retain its investment in the
securities for a period of time sufficient to allow for an anticipated recovery in
fair value, in addition to the reasons underlying the decline, to determine
whether the loss in value is other than temporary. The term ‘‘other than
temporary’’ is not intended to indicate that the decline is permanent, but
indicates that the prospects for a near-term recovery of value is not necessarily
favorable, or that there is a lack of evidence to support a realizable value equal to
or greater than the carrying value of the investment. Once a decline in value is
determined to be other-than-temporary and we do not intend to sell the security
or it is more likely than not that we will not be required to sell the security
before recovery, only the portion of the impairment loss representing credit
exposure is recognized as a charge to earnings, with the balance recognized as a
charge to other comprehensive income. If management intends to sell the
security or it is more likely than not that we will be required to sell the security
before recovering its forecasted cost, the entire impairment loss is recognized as a
charge to earnings.
Amortization of Premiums/Discount Accretion on Investments
We invest in Collateralized Mortgage Obligations (CMO) and Mortgage
Backed Securities, (MBS) as part of the overall strategy to increase our net
interest margin. CMOs and MBS by their nature react to changes in interest
rates. In a normal declining rate environment, prepayments from MBS and
CMOs would be expected to increase and the expected life of the investment
would be expected to shorten. Conversely, if interest rates increase, prepayments
normally would be expected to decline and the average life of the MBS and
CMOs would be expected to extend. However, in the current economic
environment, prepayments may not behave according to historical norms.
Premium amortization and discount accretion of these investments affects our net
interest income. Our management monitors the prepayment speed of these
investments and adjusts premium amortization and discount accretion based on
several factors. These factors include the type of investment, the investment
structure, interest rates, interest rates on new mortgage loans, expectation of
interest rate changes, current economic conditions, the level of principal
remaining on the bond, the bond coupon rate, the bond origination date, and
volume of available bonds in market. The calculation of premium amortization
and discount accretion is by nature inexact, and represents management’s best
estimate of principal pay downs inherent in the total investment portfolio.
Goodwill
Business combinations involving the Company’s acquisition of the equity
interests or net assets of another enterprise or the assumption of net liabilities in
an acquisition of branches constituting a business may give rise to goodwill.
Goodwill represents the excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired and liabilities assumed in transactions
accounted for under the purchase method of accounting. The value of goodwill
is ultimately derived from the Company’s ability to generate net earnings after
the acquisition. A decline in net earnings could be indicative of a decline in the
fair value of goodwill and result in impairment. For that reason, goodwill is
assessed for impairment at a reporting unit level at least annually or more often if
an event occurs or circumstances change that would more likely than not reduce
the fair value of the Company below its carrying amount. While the Company
believes all assumptions utilized in its assessment of goodwill for impairment are
reasonable and appropriate, changes could cause the Company to record
impairment in the future.
Share-Based Compensation
The Company recognizes compensation expense in an amount equal to the
fair value of all share-based payments which consist of stock options granted to
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Stock Price
Information
The Company’s common stock is listed for trading on the NASDAQ Capital Market under the ticker symbol CVCY. As of March 7, 2011, the Company had approximately
746 shareholders of record.
The following table shows the high and low sales prices for the common stock for each quarter as reported by NASDAQ.
Quarter Ended
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010
September 30, 2010
December 31, 2010
Sales Prices for the Company’s Common Stock
High
$ 7.34
5.98
5.90
5.75
6.10
8.47
6.45
6.10
Low
$ 3.53
4.05
5.11
5.08
5.30
5.00
5.40
5.25
The Company did not pay a cash dividend in 2010 or 2009. The Company’s primary source of income with which to pay cash dividends are dividends from the Bank. The
Bank would not pay any dividend that would cause it to be deemed not “well capitalized” under applicable banking laws and regulations. See Note 14 in the audited Consolidated
Financial Statements in this Annual Report.
MARKET MAKERS
Inquiries on Central Valley Community Bancorp stock can be made by calling any of the contacts listed below, or any licensed stockbroker.
Troy Carlson
Keefe Bruyette & Woods
(212) 887-8901
Lisa Gallo
Wedbush Morgan Securities
(866) 491-7228
Jeffrey Mayer
Crowell, Weedon & Co.
(559) 375-7510
Joey Warmenhoven
McAdams Wright Ragen, Inc.
(866) 662-0351
John Cavender
Howe Barnes Hoefer & Arnett
(415) 538-5725
Richard Levenson
Western Financial Corporation
(800) 488-5990
Troy Norlander
Stone & Youngberg
(800) 288-2811
SHAREHOLDER INQUIRIES
Inquiries regarding Central Valley Community Bancorp’s accounting, internal accounting controls or auditing concerns should be directed to Steven D. McDonald, chairman
of the Board of Directors’ Audit Committee, at steve.mcdonald@cvcb.com, anonymously at www.ethicspoint.com or call Ethics Point, Inc. at (866) 294-9588. General inquiries
about the Company or the Bank should be directed to Cathy Ponte, Assistant Corporate Secretary at (800) 298 -1775.
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BUSINESS LENDING
Business Lending
7100 North Financial Drive,
Suite 101
Fresno, CA 93720
(559) 298-1775
(800) 298-1775
Agribusiness
8375 North Fresno Street
Fresno, CA 93720
(559) 323-3493
Real Estate
7100 North Financial Drive,
Suite 101
Fresno, CA 93720
(559) 323-3365
SBA Lending
7100 North Financial Drive,
Suite 101
Fresno, CA 93720
(559) 323-3384
www.cvcb.com
Kerman
360 South Madera Avenue
Kerman, CA 93630
(559) 842-2265
Lodi
1901 West Kettleman Lane,
Suite 100
Lodi, CA 95242
(209) 333-5000
Madera
1919 Howard Road
Madera, CA 93637
(559) 673-0395
Merced
3337 G Street
Merced, CA 95340
(209) 725-2820
Modesto
300 Banner Court,
Suite 2
Modesto, CA 95356
(209) 576-1402
Oakhurst
40004 Highway 41,
Suite 101
Oakhurst, CA 93644
(559) 642-2265
Prather
29430 Auberry Road
Prather, CA 93651
(559) 855-4100
Sacramento
2339 Gold Meadow Way,
Suite 100
Gold River, CA 95670
(916) 859-2550
Stockton
2800 West March Lane,
Suite 120
Stockton, CA 95219
(209) 956-7800
Tracy
60 West 10th Street
Tracy, CA 95376
(209) 830-6995
CLOVIS
Clovis Main
600 Pollasky Avenue
Clovis, CA 93612
(559) 323-3480
Herndon & Fowler
1795 Herndon Avenue,
Suite 101
Clovis, CA 93611
(559) 323-2200
FRESNO
Fig Garden Village
5180 North Palm,
Suite 105
Fresno, CA 93704
(559) 221-2760
Financial Drive
Corporate Office
7100 North Financial Drive,
Suite 101
Fresno, CA 93720
(559) 298-1775
(800) 298-1775
Fresno Downtown
2404 Tulare Street
Fresno, CA 93721
(559) 268-6806
River Park
8375 North Fresno Street
Fresno, CA 93720
(559) 447-3350
Sunnyside
570 South Clovis Avenue,
Suite 101
Fresno, CA 93727
(559) 323-3400