2012
Annual Report
Strong. Solid.
Unchanging Values.
1
For Our
Community
Our Commitment Remains Unchanged.
Not only is Central Valley Community Bank focused on our
customers, but on investing in the areas we serve throughout
the San Joaquin Valley. Through the donation of time,
expertise and financial support, Central Valley Community
Bank donates to a wide variety of local charities, philanthropies
and business organizations - from educational causes to
disease research, the arts to the underprivileged. It is our belief
that to have a thriving business, you must first take care of the
communities you serve. That is a commitment you can count
on to remain unchanged from Central Valley Community Bank
for years to come.
“
We believe when a bank’s core values
reflect its local community values, special
things happen. That’s why we remain
true to our roots as a community bank
and invest in our community not only
with financial support, but also with
the talents and energy of our people.”
Daniel J. Doyle,
President and Chief Executive Officer
2
COMMUNITY
Boys & Girls Club of Tracy
Buddhist Church of Stockton
CenterStage Clovis Community Theatre
Central California Society for Prevention of Cruelty to Animals
Chowchilla Athletic Foundation Girls Softball
Clovis Babe Ruth Association
Clovis Rodeo Association
Eastern Fresno County Historical Society
East Fresno Kiwanis Club
East Fresno Rotary Club
Fresno Art Museum
Fresno City & County Historical Society
Fresno River Park Rotary Club
Fresno Sunrise Rotary
GRID Alternatives Central Valley
Junior League of San Joaquin County
Katey’s Kids, a Sebastian Foundation
Kerman Cal Ripken Baseball League
Kerman Community Services Organization
Kerman Rotary Club
Kerman Youth Senior Cheerleaders
Knights of Columbus
Lambda Theta Phi
Lodi Tokay Rotary Club
LOEL Center & Gardens
Madera County Ag Boosters
Merced Boosters Club
Merced Rotary Club
Modesto Sunrise Rotary Club
New Beginnings for Merced County Animals
North Modesto Kiwanis Club
Oakhurst Sierra Sunrise Rotary
Our Lady of Guadalupe Catholic Church
Our Lady of Perpetual Help Church
Rotary Club of Clovis
Rotary Club of Fig Garden
Rotary Club of Fresno
Rotary Club of Merced
Rotary Club of Sacramento
San-Tran Lions Club
Shaver Lake Lions Club
Sequoia Council of the Boy Scouts of America
Sierra Lions Club
Sierra Mountain Little League
Sierra Oaks Senior Center
SKP Park of the Sierras, Inc.
Spectrum Art Gallery
Stockton Athletic Hall of Fame
Stockton Sunrise Rotary Club
The Rotary Foundation
The Salvation Army
Tracy Hills Growers and Vintners Association
Tracy Sunrise Rotary
United Way California Capital Region
United Way of Fresno County
United Way of Merced County
United Way of San Joaquin County
United Way of Stanislaus County
Urshiah Adopt-A-Grandparent
Valley Public Television
Women’s Success Network
Women’s Trade Club of Fresno County
Yosemite Baseball Boosters
CIVIC
American Institute of Certified Public Accountants
Association of Commercial Real Estate
Business Organization of Old Town Clovis
California Chamber of Commerce
California Cotton Ginners Association
Central Valley Business Incubator
Central Valley SCORE
Certified Financial Planner Board of Standards, Inc.
Clovis Chamber of Commerce
Coarsegold Chamber of Commerce
Creative Fresno
Eastern Madera County Chamber of Commerce
Economic Development Corporation
Fresno Area Crime Stoppers
Fresno Area Hispanic Chamber of Commerce
Fresno Association of REALTORS
Fresno Business Council
Fresno County Farm Bureau
Fresno First Steps Home
Fresno Regional Independent Business Alliance
Greater Fresno Area Chamber of Commerce
Greater Merced Chamber of Commerce
Greater Stockton Chamber of Commerce
Kerman Chamber of Commerce
Kings County Farm Bureau
Lodi Area Crime Stoppers Inc.
Lodi Chamber of Commerce
Madera Association of REALTORS
Madera County Farm Bureau
Madera District Chamber of Commerce
Merced County Association of REALTORS
Merced County Farm Bureau
Merced County Chamber of Commerce
Merced County Hispanic Chamber of Commerce
Modesto Chamber of Commerce
Oakhurst Community Park
PBID Partners of Downtown Fresno
Peace Officer Memorial Group of Stanislaus County
Rancho Cordova Chamber of Commerce
Sacramento Metro Chamber of Commerce
San Joaquin County Farm Bureau
San Joaquin River Parkway and Conservation Trust
Shaver Lake Chamber of Commerce
Sheriff ’s Foundation for Public Safety
Sierra Women’s Service Club
Stanislaus County Farm Bureau
The Clovis Community Foundation
Tracy Chamber of Commerce
Tulare County Farm Bureau
Yosemite Gateway Association of REALTORS
BANKING INDUSTRY
American Bankers Association
Association for Financial Professionals
Bankers’ Compliance Group
California Association of Mortgage Professionals
California Bankers Association
Department of Consumer Affairs
Dun & Bradstreet Credibility Corp
Independent Community Bankers of America
Institute of Certified Bankers
National Association of Government Guaranteed Lenders
National Notary Association
Signature User Group
Technical Round Table
The Risk Management Association
Western Payments Alliance
“
The Bank’s 33-year commitment to the community
runs deep and we take pride in our ability to support
the special communities we’re proud to call home.”
Daniel N. Cunningham,
Founding Director and Chairman of the Board
EDUCATION
California State University, Fresno - Craig School of Business
California State University, Fresno - Foundation
California State University Fresno - Maddy Institute
California State University, Fresno - University Business Center
Cordova High School
Doug McDonald Scholarship
Foundation for Clovis Schools
Fresno County 4-H Sponsoring Committee
Fresno Pacific University
Goldenrod Elementary School
Junior Achievement
Kerman 4-H Club
Kerman High School
Kerman Senior Advisory Board
McFarlane-Coffman Agriculture Center
Regents of the University of California
San Joaquin College of Law
Stagg High School Football
St. Joachim’s Elementary School
St. Mary’s High School
The Big Fresno Fair Livestock Auction
The Bulldog Foundation
The Central California Autism Center
Tracy High School
University of the Pacific
Vineyard Christian Middle School
Yosemite Adult Education Program
HEALTH & WELFARE
Alzheimer’s Foundation of Central California
American Heart Association
American Cancer Society
California Armenian Home
California Medical Group Management Association
Camarena Health
Camp Sunshine Dreams
Child Advocates of Placer County
Children’s Hospital Central California Alegria Guild
Children’s Hospital Central California Foundation
Community Food Bank
Community Medical Foundation
Court Appointed Special Advocates of Fresno and Madera Counties
Court Appointed Special Advocates of Stanislaus County
CureSearch For Children’s Cancer
Exceptional Parents Unlimited
Family Healing Center
Hinds Hospice
KlaasKids Foundation
Legal Information for Families Today
Leukemia & Lymphoma Society Central California Chapter
LifeSTEPS
Lodi Adopt-A-Child
Madera Community Hospital Foundation
Marjaree Mason Center
National Child Safety Council
One-Eighty Teen Center
Sacramento Medical Group Management Association
San Joaquin Dental Society
Spirit of Woman of California
Stanislaus Medical Society
Trauma Intervention Program
Women’s Center of San Joaquin County
3
To Our
Shareholders
Building On Our Success
In the midst of an economy filled with both challenges and signs of recovery,
Central Valley Community Bank continues to demonstrate strength while
being recognized once again for strong financial performance. Indeed, 2012
has proven to be another successful link in the Company’s long chain of
steady growth and consistent earnings, as we achieved our highest earnings
mark in 32 years of operation.
The banking industry is regaining its financial strength with peer banks
returning to profitability and in general, an improvement in asset quality.
This is a positive sign for the economy and good news for our customers,
communities and the banking industry as a whole.
Our Best Earnings Ever
In addition to our record earnings, net income increased 16.10%,
primarily driven by increases in non-interest income, a decrease in
non-interest expense and lower provision for credit losses. This, along
with continued asset quality improvement, highlights the safety, security
and financial strength of the Bank. While there are signs of modest
economic improvement in our markets, interest income is still negatively
impacted due to weak loan demand and aggressive pricing by large
financial institutions.
Meanwhile, we are seeing some increase in loan commitments, but
reduced usage on lines of credit due to the economic uncertainty affecting
our business borrowers and the profitability of many of our agriculture-
related borrowers, which has reduced their need to borrow. However, the
Bank has hired additional lending staff who bring experience and success
to the Company in several of our markets and have allowed continued
expansion for our agri-business portfolio with new customers as well as
4
diversification and growth on our loan commitment. But like many banks,
the challenge still remains to find good loans at fair and reasonable pricing
and qualified borrowers who have the desire to grow, expand and operate
their businesses.
While it is good to see the asset quality of loans improving, many banks still
carry problem loans and hold high reserves for potential future loss. Regulators
report that nearly 10% of all the banks in the country are considered
“troubled” and almost 40% of the banks in California are under some form
of regulatory orders. Fortunately, our Bank does not fall into this category.
On the other side of the balance sheet, we do see continued growth of
deposits, even though banks in general are paying record low interest rates.
Unfortunately, there is low demand for ways to lend out these deposits and
obtain better profit margins than buying securities.
At the end of 2012, Congress allowed the Transaction Account Guarantee
of 100% of FDIC deposit insurance to terminate. Therefore, we are working
with our large deposit balance customers by offering other methods to meet
their needs for the safety of their deposits.
The strong performance of the Bank was again recognized as we achieved a
Super Premier Performance ranking from The Findley Reports, the highest
of the three performance tiers recognized by the firm. The Bank has been
identified as one of the top performing banks in California over the last
30 years and was also recommended by Bauer Financial, Inc. with their
highest “5-Star Superior” rating in 2012.
A Solid Value For Shareholders
Our stability was once again confirmed by Sandler O'Neill + Partners, L.P.,
who named the Company stock as one of their “Top Investment Ideas”
for the second time in the past three years. The Company was given an
“Outperform” rating by Raymond James & Associates where it is expected
to appreciate and outperform the S&P 500 through June of 2014.
The Board of Directors approved the adoption of a program to repurchase up
to five percent of the Company’s outstanding shares of common stock, which
was determined as the best use for a portion of our excess capital. In seeking
additional opportunities to best use our capital and to provide value to our
shareholders, the Board also decided to return cash to shareholders through
a $0.05 per share quarterly cash dividend.
Throughout the year, I had the opportunity to present the success of our
Company at several investor conferences attended by investors from all over
the United States. They were all very complimentary of our business practices
and in particular, they noted that our Company excels at all of the important
elements that impact their decision to invest.
More Milestones Ahead For The Bank
In December of 2012, the Company entered into a definitive merger
agreement to acquire our South Valley neighbor, Visalia Community Bank,
with three full-service offices in Visalia and one office in Exeter. Both
Companies are in the process of filing the required documents and
the merger remains subject to regulatory approvals and approval by
Visalia Community Bank’s shareholders.
Once completed in mid-2013, the merger is slated to bolster us over the
$1 billion asset mark. That milestone is possible because of the steady direction
we have followed for over three decades, the vision of our board, the leadership
of our senior management and the day-to-day service provided to customers
by each and every one of our dedicated employees.
We believe that by expanding our presence in the South Valley and adding
professional employees and loyal customers to our current structure, we will
provide a long-term benefit to the growth and profitability of the Company.
In addition, the opportunities of more efficiencies and expense reduction will
provide improved financial performance that either bank could not have
achieved independently.
Further benefitting the Company, I continue in the second year of a
three-year term on the Federal Reserve Bank of San Francisco’s Twelfth
District Community Depository Institutions Advisory Council (CDIAC).
This position allows insight and knowledge for a variety of economic and
banking conditions, regulatory policies and payments issues.
Continued Challenges For The Local Economy
The Federal Reserve continues to hold interest rates at historical low levels for
savings instruments and securities, which is forcing pressure on banks for
earnings from net interest margin compression. Employment growth, as the
key driver needed for an economic rebound, was still slow this year.
The development and growth of our team is always a continued
commitment and as part of our on-going belief in planning for future
succession, we completed the first stage of our three-year Leadership
Development Program with a team of key employees. Additional outside
training continued for employees to stay up to speed in the ever-changing
world of technology, cybercrime, new regulations and customer needs.
In order to expand and retain existing relationships and cultivate new
customers, the Bank launched an internal sales and service initiative
program to focus on needs-based selling and developing key skills
instrumental in driving stronger relationships with our customers.
Added Convenience For Customers
We remain committed to providing the highest standards of service,
alongside the products and services that meet the unique needs of our
personal and business customers. To further strengthen our customer
relationships and provide sound financial advice to the community at
large, the Bank has made a number of upgrades to enhance its presence
in the digital landscape.
We are proud to announce that the Bank now has a social media presence on
Facebook and Twitter. Our shareholders, customers and the community can
now follow us for financial tips, important identity protection information,
local community events, timely Bank news and answers to thoughts,
questions and concerns.
Additionally, Business Health Club was launched on our website as an
online resource center where business owners can easily find helpful
education on popular topics, from how to protect businesses against
cybercrimes, to accounting tips on how to keep a business running smoothly.
A new mobile banking application was recently launched that allows
customers to manage their money anytime and anywhere from a mobile
device. And with Popmoney, customers can safely send or receive money
electronically with this Person-to-Person payment service. Also, the Bank has
completed the installation of new ATMs at all branch locations that include
the new deposit automation feature and also the ability to convert text to
voice for those visitors with a vision disability.
One positive in the lingering economic landscape is that slow but improving
trends are being seen in the communities we serve. We are hopeful that these
trends will continue to grow throughout California’s vital San Joaquin Valley,
albeit slower than past periods of economic recovery.
New Regulations Bring Challenges
There will continue to be pressure on bank earnings and the ability to reach
historical levels of return due to new regulatory requirements for additional
capital, the current interest rate environment and the reducing of free-market
pricing from regulatory changes. Furthermore, there are additional costs to
implement and monitor the new expanding regulations from Dodd-Frank
and the Consumer Financial Protection Bureau.
Looking Ahead To A Successful 2013
While 2012 saw Central Valley Community Bank achieve our highest
earnings in 32 years of operation, we will not rest on these laurels. Our
success does not just happen by chance. We are successful because we plan,
set goals and have a strong team of individuals who care about the needs of
our shareholders, customers, fellow teammates and communities. We have
not only survived, but also thrived through one of the toughest economic
climates in recent history.
As we look ahead to 2013 and beyond, we will continue to focus on growing
our brand and increasing our market share. We are thankful to our customers,
employees and shareholders, whose loyalty we strive to earn each day.
Daniel J. Doyle
President and Chief Executive Officer
Daniel N. Cunningham
Chairman of the Board
Daniel J. Doyle
President, CEO and Director
Central Valley Community Bancorp
Central Valley Community Bank
Daniel N. Cunningham
Director, Quinn Group, Inc.
Founding Director and Chairman of the Board
Central Valley Community Bancorp
5
Strong. Solid.
Unchanging Values.
A 33-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.
A Strong History Of Steady Growth
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. In December 2012, Central
Valley Community Bancorp entered into a definitive merger agreement
to aquire Visalia Community Bank with three full-service offices in
Visalia, and one in Exeter, which is expected to be completed during
2013. Investment services are provided by Investment Centers of
America, and Central Valley Community Insurance Services, LLC,
provides financial and insurance solutions for businesses and individuals.
Now with over 230 employees and assets of over $890,000,000 as of
December 31, 2012, 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.
6
Central Valley Community Bank distinguishes itself from other financial
institutions through its 33-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.
For maximum convenience, Online Banking, Bill Pay, Mobile Banking,
Popmoney (person-to-person payments), eStatements and a full range of
Cash Management and Remote Deposit services are available at
www.cvcb.com. In addition, ATMs are available at most CVCB offices,
BankLine provides 24-hour telephone banking, and extended days and
banking hours are offered at select offices.
Success Built On “Relationship Banking”
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 banking professionals live and work in the local community,
and have a deep understanding of the marketplace. As a result, the Bank
has remained an active business lender and is proud to be ranked number
one SBA 504 Lender for Fresno, Kings and Madera counties for 9 of the
past 13 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 a
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 33 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.
Daniel J. Doyle
President and CEO
Central Valley Community Bancorp,
Central Valley Community Bank
Daniel N. Cunningham
Chairman of the Board
Director, Quinn Group, Inc.
Sidney B. Cox
Owner
Cox Communications
Board Of Directors
Edwin S. Darden, Jr.
Architect
Darden Architects, Inc.
Steven D. McDonald
Secretary of the Board
President
McDonald Properties, Inc.
Louis C. McMurray
President
Charles McMurray Co.
William S. Smittcamp
President/Owner
Wawona Frozen Foods
Joseph B. Weirick
Investments
Not Pictured: Wanda Rogers, Director Emeritus and Founding President, Rogers Helicopters, Inc.
7
Our Team,
Meeting Your Needs.
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
Dawn Crusinberry
Vice President,
Controller
Craig Dadian
Vice President,
Business Development Officer
Stan Davis
Vice President,
Small Business/Consumer Underwriting
Department Manager
Daniel Demmers
Vice President,
Information Services Manager
Bob Elledge
Vice President,
Commercial Loan Officer
Steve Freeland
Vice President,
Asset Credit Officer
Officers
Holding Company & 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,
Small Business 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
8
Mark Gay
Vice President,
Private Banking Officer
Rod Geist
Vice President,
Branch Manager
Teresa Gilio
Vice President,
Central Operations Manager
Tim Harris
Vice President,
Private Banking Manager
Linda Hischier
Vice President,
Commercial Loan Officer
Denise Jereb
Vice President,
Compliance Manager
Charles Jones
Vice President,
Branch Manager
Bernie Kraus
Vice President,
Commercial Loan Officer
Marci Madsen
Vice President,
Human Resources Director
Brad Majors
Vice President,
Branch Manager
Constantine Makayed
Vice President,
Credit Review Officer
Gina Manley
Vice President,
Branch Manager
Don Mendenhall
Vice President,
Commercial Loan Officer
Sheryl Michael
Vice President,
Branch Manager
Heather Mills
Vice President,
Private Banking Officer
Leslee Minas
Vice President,
Branch Manager
Autumn Muller-Carrillo
Vice President,
Branch Manager
Rosie Nunes
Vice President,
Small Business Development Officer
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
Wendy Parlavecchio
Vice President,
Real Estate Loan Officer
Shannon Reinard
Vice President,
Branch Manager
Steve Romeo
Vice President,
Private Banking Officer
Elizabeth Salas
Vice President,
Small Business Development Officer
Irene Samano
Vice President,
Loan Servicing Manager
Karen Smith
Vice President,
Branch Manager
Mark Smith
Vice President,
Commercial Loan Officer
Theodore Thome
Vice President,
Commercial Loan Officer
Ramina Ushana
Vice President,
Branch Manager
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
Crowe Horwath LLP, Sacramento, CA
Counsel
Downey Brand LLP, Sacramento, CA
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.
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 2012 Circle of Elite included:
Diana Alvarado
Financial Service Representative
Maintaining a positive work environment and
investing in each individual to “be the best they can be.”
Pilar Alvarado
Information Services Analyst
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
Trisha Barba
Compliance Specialist
Ashley Brannan
Small Business, Consumer Loan Underwriter
Rod Geist
Vice President, Branch Manager, Team Leader
Bryan Mimura
Financial Service Representative
Theodore Thome
Vice President, Commercial Loan Officer, Team Leader
Elaine Wiens
Human Resources Assistant
San Joaquin County Advisory Board
Members of the advisory board for the San Joaquin County region include:
Sidney Alegre
Judith Buethe
Mary Ghio
Phil Katzakian
George Liepart
Clark Mizuno
Rick Paulsen
Russell Ray
Penny van der Meer
Central Valley Community Bank Senior Management
Pictured Below From Left: David Kinross, Thomas Sommer, Daniel Doyle, Lydia Shaw and Gary Quisenberry
9
Trend Analysis
Central Valley Community Bancorp
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0
2
0
1
0
2
1
1
0
2
2
1
0
2
%
2
8
.
8
8
0
0
2
%
6
2
.
6
1
1
0
2
%
6
5
.
6
2
1
0
2
%
0
1
3
.
9
0
0
2
%
1
4
3
.
0
1
0
2
10
Return on Shareholders’ Equity
Average Total Assets (In Thousands)
Comparative Stock Price Performance
Central Valley Community Bancorp
Total Return Performance
Index Value
12-31-07
12-31-08
12-31-09
12-31-10
12-31-11
12-31-12
100.00
100.00
100.00
72.62
66.21
56.58
84.20
58.91
50.98
106.82
102.36
69.51
51.71
61.67
49.88
119.09
Russell 2000
73.51
SNL NASDAQ
Bank Index
71.68
Central Valley
Community Bancorp
stock price performance.
Source: SNL Financial LC
of potential future
11
$
$
$
Consolidated Balance Sheets
December 31, 2012 and 2011 (In thousands, except 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 $381,074 at December 31, 2012 and $321,405 at
December 31, 2011)
Loans, less allowance for credit losses of $10,133 at December 31, 2012 and $11,396 at December 31, 2011
Bank premises and equipment, net
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 C,
issued and outstanding: 7,000 shares at December 31, 2012 and December 31, 2011
Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 9,558,746 at
December 31, 2012 and 9,547,816 at December 31, 2011
Retained earnings
Accumulated other comprehensive income, net of tax
Total shareholders’ equity
2012
2011
$
22,405
30,123
428
52,956
393,965
385,185
6,252
12,163
3,850
23,577
583
11,697
19,409
24,467
928
44,804
328,413
415,999
5,872
11,655
2,893
23,577
783
15,027
890,228
$
849,023
$
240,169
511,263
751,432
4,000
-
5,155
11,976
772,563
7,000
40,583
62,496
7,586
117,665
208,025
504,961
712,986
-
4,000
5,155
19,400
741,541
7,000
40,552
55,806
4,124
107,482
849,023
Total liabilities and shareholders’ equity
$
890,228
$
The accompanying notes are an integral part of these consolidated financial statements.
12
12
Consolidated Statements
of Income
For the Years Ended December 31, 2012, 2011, and 2010 (In thousands, except per share amounts)
2012
2011
2010
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 gain (loss) on sale of assets
Net realized gains (losses) on sales and calls of investment securities
Other-than-temporary impairment loss:
Total impairment loss
Loss 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
Merger expenses
Other real estate owned
Amortization of core deposit intangibles
Other expense
Total non-interest expenses
Income before provision for (benefit from) income taxes
PROVISION FOR (BENEFIT FROM) 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
$
$
$
$
$
$
$
23,913
108
2
3,289
4,508
31,820
1,630
107
146
1,883
29,937
700
29,237
2,774
391
631
12
4
1,639
-
-
-
36
1,755
7,242
15,597
3,578
652
1,125
558
514
185
284
78
200
4,503
27,274
9,205
1,685
7,520
7,520
350
7,170
0.75
0.75
0.05
$
$
$
$
$
$
$
26,098
187
2
4,548
3,464
34,299
2,662
100
180
2,942
31,357
1,050
30,307
2,903
382
274
615
(5)
298
(31)
-
(31)
9
1,826
6,271
15,762
3,795
845
1,178
735
491
335
-
15
414
4,670
28,240
8,338
1,861
6,477
6,477
486
5,991
0.63
0.63
-
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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
(10)
(191)
(1,587)
-
(1,587)
11
1,395
3,711
14,871
3,867
1,191
1,197
669
496
495
-
1,071
414
4,460
28,731
2,910
(369)
3,279
3,279
395
2,884
0.31
0.31
-
13
13
Consolidated Statements
of Comprehensive Income
For the Years Ended December 31, 2012, 2011, and 2010 (In thousands)
NET INCOME
OTHER COMPREHENSIVE INCOME:
Unrealized gains on securities:
Unrealized holding gains
Less: reclassification for net gains (losses) included in net income
Other comprehensive income, before tax
Tax expense related to items of other comprehensive income
Total other comprehensive income
Comprehensive income
$
$
2012
2011
2010
7,520
$
6,477
$
3,279
7,522
1,639
5,883
(2,421)
3,462
10,982
$
5,632
267
5,365
(2,208)
3,157
9,634
$
2,290
(1,778)
4,068
(1,646)
2,422
5,701
The accompanying notes are an integral part of these consolidated financial statements.
14
14
Consolidated Statements
of Changes in Shareholders’ Equity
For the Years Ended December 31, 2012, 2011, and 2010 (In thousands, except share amounts)
Series A
Preferred Stock
Series B
Series C
Common Stock
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Balance, January 1, 2010
Net income
7,000 $
-
6,819
-
1,359 $
-
Net change in unrealized gain on
available-for-sale investment securities
Conversion of preferred stock Series B,
non-voting
Stock-based compensation expense
Stock options exercised and related tax benefit
Preferred stock dividends and accretion
Balance, December 31, 2010
Net income
Net change in unrealized gain on
available-for-sale investment securities
Issuance of preferred stock Series C
Redemption of preferred stock Series A
Repurchase and retirement of common stock
warrants
Stock-based compensation expense
Stock options exercised and related tax benefit
Preferred stock dividends and accretion
Balance, December 31, 2011
Net income
Net change in unrealized gain on
available-for-sale investment securities
Stock-based compensation expense
Cash dividend payment ($0.05 per common
share)
Repurchase and retirement of common stock
Stock options exercised and related tax benefit
Preferred stock dividends
-
-
-
-
-
7,000
-
-
-
(7,000)
-
-
-
-
-
-
-
-
-
-
-
-
Balance, December 31, 2012
- $
-
-
-
-
45
6,864
-
-
-
(7,000)
-
-
-
136
-
-
-
-
-
-
-
-
-
-
(1,359)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
1,317
-
-
(1,317)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
8,949,754 $
37,611 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7,000
-
-
7,000
-
-
-
258,862
-
159,400
-
9,368,016
-
-
-
-
-
-
-
-
-
-
-
-
-
-
179,800
-
-
-
1,317
239
578
-
39,745
-
-
-
-
(185)
196
796
-
-
-
-
(395)
49,815
6,477
-
-
-
-
-
-
(486)
7,000
-
7,000
-
9,547,816
-
40,552
-
55,806
7,520
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(58,100)
69,030
-
-
108
-
(488)
411
-
-
-
(480)
-
-
(350)
Accumulated
Other
Total
Retained Comprehensive Shareholders’
Earnings
Income (Loss)
Equity
46,931 $
3,279
(1,455) $
-
91,223
3,279
-
2,422
2,422
-
-
-
-
967
-
3,157
-
-
-
-
-
-
4,124
-
3,462
-
-
-
-
-
-
239
578
(350)
97,391
6,477
3,157
7,000
(7,000)
(185)
196
796
(350)
107,482
7,520
3,462
108
(480)
(488)
411
(350)
7,000 $
7,000
9,558,746 $
40,583 $
62,496 $
7,586 $
117,665
The accompanying notes are an integral part of these consolidated financial statements.
15
15
Consolidated Statements
of Cash Flows
For the Years Ended December 31, 2012, 2011, and 2010 (In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Net (decrease) increase in deferred loan fees
Depreciation
Accretion
Amortization
Stock-based compensation
Excess tax benefit from exercise of stock options
Provision for credit losses
Net other than temporary impairment losses on investment securities
Net realized (gains) losses on sales and calls of available-for-sale investment
securities
Net (gain) 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
Net gain on bank owned life insurance
Net (increase) decrease in accrued interest receivable and other assets
Net decrease in prepaid FDIC Assessments
Net (decrease) increase in accrued interest payable and other liabilities
Provision (benefit) for deferred income taxes
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale investment securities
Proceeds from sales or calls of available-for-sale investment securities
Proceeds from maturity and principal repayment of available-for-sale investment
securities
Net decrease in loans
Proceeds from sale of other real estate owned
Purchases of premises and equipment
Purchases of bank owned life insurance
FHLB stock (purchased) redeemed
Proceeds from bank owned life insurance
Proceeds from sale of premises and equipment
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, interest-bearing and savings deposits
Net decrease in time deposits
Repayments of short-term borrowings to Federal Home Loan Bank
Purchase and retirement of common stock
Proceeds from exercise of stock options
Repurchase of common stock warrant
Excess 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 and financing activities:
Redemption of preferred stock Series A and issuance of preferred stock
Series C
Transfer of loans to other real estate owned
Assumption of other real estate owned liabilities
Transfer of loans to other assets
Accrued preferred stock dividends
2012
2011
2010
$
7,520
$
6,477
$
(311)
972
(713)
7,549
108
(26)
700
-
(1,639)
(4)
(12)
-
(391)
-
(19)
513
(7,425)
440
7,262
(194,583)
39,119
90,798
28,089
2,349
(1,353)
(116)
(957)
-
5
(36,649)
53,265
(14,819)
-
(488)
385
-
26
(480)
(350)
37,539
8,152
44,804
52,956
1,939
1,193
-
2,337
-
-
88
$
$
$
$
$
$
$
$
266
1,212
(715)
3,590
196
(116)
1,050
31
(298)
5
(615)
-
(204)
(85)
(700)
705
8,515
1,270
20,584
(214,569)
44,700
35,951
2,815
2,472
(1,246)
-
157
146
-
(129,574)
87,928
(25,437)
(10,000)
-
680
(185)
116
-
(307)
52,795
(56,195)
100,999
44,804
3,186
826
7,000
244
288
209
88
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
28,058
21,214
4,203
(595)
-
90
-
5
32,584
33,877
(23,548)
(5,000)
-
550
-
28
-
(349)
5,558
52,319
48,680
100,999
4,485
301
-
3,467
-
-
45
The accompanying notes are an integral part of these consolidated financial statements.
16
16
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment Securities - Investments are classified into the following categories:
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.
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, Kerman, Lodi,
Madera, Merced, Modesto, Oakhurst, Prather, Sacramento, Stockton, and Tracy,
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’s unlimited deposit
insurance coverage on non-interest bearing transaction accounts mandated by the
Dodd-Frank Act ended December 31, 2012. This coverage replaced the
unlimited coverage under the Transaction Account Guarantee Program (‘‘TAG’’)
and was confined to non-interest bearing accounts. Although the temporary
coverage excluded interest-bearing NOW accounts, it did include interest on
Lawyers Trust Accounts (IOLTAs). Beginning January 1, 2013, depositors’
accounts at an insured depository institution, including all non-interest bearing
transactions accounts, will be insured by the FDIC up to the standard maximum
deposit insurance amount of $250,000 for each deposit insurance ownership
category.
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.
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, is a wholly-
owned subsidiary acquired in the merger of Service 1st Bancorp and formed for
the exclusive purpose of issuing trust preferred securities. The Company is not
considered the primary beneficiary of this trust (variable interest entity), therefore
the trust is not consolidated in the Company’s financial statements, but rather
the subordinated debentures are shown as a liability on the Company’s
consolidated financial statements. The Company’s investment in the common
stock of the Trust is included in accrued interest receivable and other assets on
the consolidated balance sheet.
Use of Estimates - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles 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. The allowance for credit losses, deferred
taxes assets and fair values of financial instruments are estimates which are
particularly subject to change.
Cash and Cash Equivalents - For the purpose of the statement of cash flows,
cash, due from banks with maturities less than 90 days, and Federal funds sold
are considered to be cash equivalents. Generally, Federal funds are sold for
one-day periods. Net cash flows are reported for customer loan and deposit
transactions, interest bearing deposits in other financial institutions, and federal
funds purchased.
• 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 years ended December 31, 2012 and December 31, 2011, there were no
transfers between categories. At December 31, 2012 and 2011, 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. Premiums and discounts on securities are amortized
or accreted on the level yield method without anticipating prepayments, except
for mortgage backed securities where prepayments are anticipated.
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, for debt securities, 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 - For all loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at principal balances
outstanding net of deferred loan fees and costs, and the allowance for credit
losses. Interest is accrued daily based upon outstanding loan balances. However,
for all loans 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
loan 90 days or more delinquent is automatically placed on nonaccrual status.
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.
Interest income on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the loan is well-secured and in process
of collection. Consumer and credit card loans are typically charged off no later
than 90 days past due. Past due status is based on the contractual terms of the
loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date
if collection of principal or interest is considered doubtful. Nonaccrual loans and
loans past due 90 days still on accrual include both smaller balance homogeneous
loans that are individually evaluated for impairment. A loan is moved to
non-accrual status in accordance with the Company’s policy, typically after
90 days of non-payment. A loan placed on non-accrual status may be restored to
accrual status when principal and interest are no longer past due and unpaid, or
the loan otherwise becomes both well secured and in the process of collection.
17
17
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
When a loan is brought current the Company must also have a reasonable
assurance that the obligor has the ability to meet all contractual obligations in
the future, that the loan will be repaid within a reasonable period of time, and
that a minimum of six months of satisfactory repayment performance has
occurred.
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.
Allowance for Credit Losses - The allowance for credit losses is an estimate of
probable 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.
For all loan classes, 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. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s prior
payment record, and the amount of the shortfall in relation to the principal and
interest owed. 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. For TDRs that subsequently default, the
Company determines the amount of reserve in accordance with the accounting
policy for the allowance for credit losses.
For all portfolio segments, 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 over the
most recent 16 quarters, 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, real estate, and consumer loans.
The relative significance of risk considerations vary by portfolio segment. For
commercial and real estate loans, the primary risk consideration is a borrower’s
ability to generate sufficient cash flows to repay their loan. Secondary
considerations include the creditworthiness of guarantors and the valuation of
collateral. In addition to the creditworthiness of a borrower, the type and
location of real estate collateral is an important risk factor for real estate loans.
The primary risk considerations for consumer loans are a borrower’s personal cash
18
18
flow and liquidity, as well as collateral value. 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, and periodically performs
detailed reviews of all such loans over a certain threshold to identify credit risks
and to assess the overall collectibility of the portfolio. The most recent review of
risk rating was completed in December 2012. 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
each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other
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. 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 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. Past due receivables indicate the borrower’s
capacity to repay their obligations may be deteriorating.
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.
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Real Estate:
Owner Occupied - Real estate collateral secured by commercial or professional
properties with repayment arising from the owner’s business cash flows. 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.
Agricultural real estate - Agricultural production loans secured by real estate
generally possess a higher inherent risk of loss caused by changes in concentration
of permanent plantings, government subsidies, and the value of the U.S. dollar
affecting the export of commodities.
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 flows to service debt obligations.
Other Real Estate - Primarily loans secured by agricultural real estate for
development and production of permanent plantings that 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 the
liquidity of the 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.
Consumer and installment - An installment loan portfolio is usually
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 include 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 - Land is carried at cost. Bank premises and
equipment are carried at cost less accumulated depreciation. 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.
Federal Home Loan Bank (FHLB) Stock - The Bank is a member of the FHLB
system. Members are required to own a certain amount of stock based on the
level of borrowings and other factors, and may invest in additional amounts.
FHLB stock is carried at cost, classified as a restricted security, and periodically
evaluated for impairment based on ultimate recovery of par value. Both cash and
stock dividends are reported as income.
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 disposition costs. If fair value declines subsequent to
foreclosure, a valuation allowance is recorded through noninterest expense.
Revenues and expenses associated with OREO are reported as a component of
noninterest expense when incurred.
Bank Owned Life Insurance - The Company has purchased life insurance policies
on certain key executives. Company owned life insurance is recorded at the
amount that can be realized under the insurance contract at the balance sheet
date, which is the cash surrender value adjusted for other charges or other
amounts due that are probable at settlement.
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, 2012 and 2011 was $23,577,000 consisting of $14,643,000 and
$8,934,000 representing the excess of the cost of Service 1st Bancorp 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.
The Company has selected September 30 as the date to perform the annual
impairment test. Management assessed qualitative factors including performance
trends and noted no factors indicating goodwill impairment.
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 2012, so goodwill was not required to be retested.
Intangible Assets - The intangible assets at December 31, 2012 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, 2012 was
$583,000, net of $2,317,000 in accumulated amortization expense. The carrying
value at December 31, 2011 was $783,000, net of $2,117,000 in 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
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19
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
useful lives was required. Management performed an annual impairment test on
core deposit intangibles as of September 30, 2012 and determined no
impairment was necessary. Amortization expense recognized was $200,000 for
2012 and $414,000 for 2011 and 2010. The estimated aggregate amortization
expense for each of the three succeeding fiscal years is estimated to be $200,000
for 2013 and 2014, and $183,000 for 2015.
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.
Income tax expense represents the total of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. 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 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.
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.
Retirement Plans - Employee 401(k) plan expense is the amount of employer
matching contributions. Profit sharing plan expense is the amount of employer
contributions. Contributions to the profit sharing plan are determined at the
discretion of the Board of Directors. Deferred compensation and supplemental
retirement plan expense is allocated over years of service.
Earnings Per Common Share - Basic earnings per common 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.
Comprehensive Income - Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized
gains and losses on securities available for sale which are also recognized as
separate components of equity.
Loss Contingencies - Loss contingencies, including claims and legal actions arising
in the ordinary course of business, are recorded as liabilities when the likelihood
of loss is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there are such matters that will have a material
effect on the financial statements.
Restrictions on Cash - Cash on hand or on deposit with the Federal Reserve
Bank was required to meet regulatory reserve and clearing requirements.
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20
Share-Based Compensation - Compensation cost is recognized for stock options
and restricted stock awards issued to employees, based on the fair value of these
awards at the date of grant. A Black-Scholes-Merton model is utilized to estimate
the fair value of stock options, while the market price of the Company’s common
stock at the date of grant is used for restricted stock awards.
Compensation cost is recognized over the required service period, generally
defined as the vesting period. For awards with graded vesting, compensation cost
is recognized on a straight-line basis over the requisite service period for the
entire award.
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, 2012, 2011, and 2010 were
$26,000, $116,000, and $28,000, respectively.
Dividend Restriction - Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the Bank to the Company or by the
Company to shareholders.
Fair Value of Financial Instruments - Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in Note 2. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and other
factors, especially in the absence of broad markets for particular items. Changes
in assumptions or in market conditions could significantly affect these estimates.
Reclassifications - Some items in the prior years’ financial statements were
reclassified to conform to the current presentation. Reclassifications had no effect
on prior years’ net income or shareholders’ equity.
Recent Accounting Pronouncements
Impact of New Financial Accounting Standards
Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
In May 2011, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2011-04, Fair Value Measurement (Topic
820): Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs. This ASU represents the converged
guidance of the FASB and the International Accounting Standards Board (IASB)
(the Boards) on fair value measurement. The collective efforts of the Boards and
their staffs, reflected in ASU 2011-04, have resulted in common requirements for
measuring fair value and for disclosing information about fair value
measurements, including a consistent meaning of the term ‘‘fair value.’’ The
Boards have concluded the common requirements will result in greater
comparability of fair value measurements presented and disclosed in financial
statements prepared in accordance with U.S. GAAP and IFRS. The amendments
to the FASB Accounting Standards Codification (Codification) in this ASU are
to be applied prospectively. The additional disclosures are presented in Note 2:
Fair Value Measurements. These new disclosure requirements were adopted by
the Company in the first quarter of 2012, and did not have a material impact on
the Company’s financial position, results of operations or cash flows.
Presentation of Comprehensive Income
In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic
220): Presentation of Comprehensive Income. This ASU amends the FASB
Accounting Standards Codification (Codification) to allow an entity the option
to present the total of comprehensive income, the components of net income,
and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive
statements. In both choices, an entity is required to present each component of
net income along with total net income, each component of other comprehensive
income along with a total for other comprehensive income, and a total amount
for comprehensive income. ASU 2011-05 eliminates the option to present the
components of other comprehensive income as part of the statement of changes
in shareholders’ equity. The amendments to the Codification in the ASU do not
change the items that must be reported in other comprehensive income or when
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
The estimated carrying and fair values of the Company’s financial instruments
an item of other comprehensive income must be reclassified to net income. The
Company adopted this standard on January 1, 2012. The Company elected to
present comprehensive income as a separate Statement of Comprehensive Income.
Adoption of the standard did not have a material impact on the Company’s
financial position, results of operations or cash flows.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income
(‘‘Topic 220’’) - Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income (‘‘ASU 13-02’’). This ASU requires an entity to provide
information about the amounts reclassified out of accumulated other
comprehensive income by component. In addition, an entity is required to
present, either on the face of the statement where net income is presented or in
the notes, significant amounts reclassified out of accumulated other
comprehensive income by the respective line items of net income but only if the
amount reclassified is required under GAAP to be reclassified to net income in
its entirety in the same reporting period. For other amounts that are not required
under GAAP to be reclassified in their entirety to net income, an entity is
required to cross-reference to other disclosures required under GAAP that provide
additional detail about those amounts. ASU 13-02 is effective prospectively for
annual and interim periods beginning after December 15, 2012. The adoption of
this ASU did not have a material impact on the Company’s financial position,
results of operations, or cash flows.
2.
FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Fair value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on the
measurement date. In accordance with applicable guidance, the Company groups
its assets and liabilities measured at fair value in 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 (unadjusted) for identical instruments traded
in active exchange markets that the Company has the ability to access as of the
measurement date.
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.
are as follows:
Financial assets:
Cash and due from
banks
Interest-earning
deposits in other
banks
Federal funds sold
Available-for-sale
investment securities
Loans, net
Federal Home Loan
Bank stock
Accrued interest
receivable
Financial liabilities:
Deposits
Short-term borrowings
Junior subordinated
deferrable interest
debentures
Accrued interest
payable
Carrying
Amount
December 31, 2012
Fair Value
Level 1
Level 2
Level 3
Total
(In thousands)
$ 22,405 $ 22,405 $
- $
- $ 22,405
30,123
428
30,123
428
-
-
-
-
30,123
428
393,965
385,185
7,948
-
386,017
-
-
388,834
393,965
388,834
3,850
N/A
N/A
N/A
N/A
4,267
22
2,395
1,850
4,267
751,432
4,000
614,556
-
137,401
4,016
-
-
751,957
4,016
5,155
174
-
-
-
2,990
2,990
149
25
174
Financial assets:
Cash and due from banks
Interest-earning deposits in other banks
Federal funds sold
Available-for-sale investment securities
Loans, net
Federal Home Loan Bank stock
Accrued interest receivable
Financial liabilities:
December 31, 2011
Carrying
Amount
Fair
Value
(In thousands)
$ 19,409 $ 19,409
24,467
928
328,413
418,084
N/A
3,953
24,467
928
328,413
415,999
2,893
3,953
Deposits
Long-term borrowings
Junior subordinated deferrable interest debentures
Accrued interest payable
712,986
4,000
5,155
230
719,673
4,146
2,706
230
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Notes to
Consolidated Financial Statements
2.
FAIR VALUE MEASUREMENTS
(Continued)
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 methods and assumptions used to estimate fair values are described as
follows:
(a) Cash and Cash Equivalents - The carrying amounts of cash and due from
banks, interest-earning deposits in other banks, and Federal funds sold
approximate fair values and are classified as Level 1.
(b) Available-for-Sale Investment Securities - Available-for-sale investment
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 classified in Level 2 are based on quoted
market prices for similar securities in active markets. For securities where quoted
prices or market prices of similar securities are not available, fair values are
calculated using discounted cash flows or other market indicators.
(c) Loans - Fair values of loans are estimated as follows: For variable rate loans
that reprice frequently and with no significant change in credit risk, fair values
are based on carrying values resulting in a Level 3 classification. Fair values for
other loans are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar credit
quality resulting in a Level 3 classification. Impaired loans are initially valued at
the lower of cost or fair value. Impaired loans carried at fair value generally
receive specific allocations of the allowance for loan losses. For collateral
dependent loans, fair value is commonly based on recent real estate appraisals.
These appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments are
routinely made in the appraisal process by the independent appraisers to adjust
for differences between the comparable sales and income data available. Such
adjustments are usually significant and typically result in a Level 3 classification
of the inputs for determining fair value. Non-real estate collateral may be valued
using an appraisal, net book value per the borrower’s financial statements, or
aging reports, adjusted or discounted based on management’s historical
knowledge, changes in market conditions from the time of the valuation, and
management’s expertise and knowledge of the client and client’s business,
resulting in a Level 3 fair value classification. Impaired loans are evaluated on a
quarterly basis for additional impairment and adjusted accordingly. The methods
utilized to estimate the fair value of loans do not necessarily represent an exit
price.
(d) FHLB Stock - It is not practicable to determine the fair value of FHLB stock
due to restrictions placed on its transferability.
(e) Deposits - Fair value of demand deposit, savings, and money market accounts
are, by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amount) resulting resulting in a Level 1 classification. Fair
value for fixed and variable rate certificates of deposit are estimated using
discounted cash flow analyses using interest rates offered at each reporting date
by the Company for certificates with similar remaining maturities resulting in a
Level 2 classification.
(f) Short-Term Borrowings - The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings,
generally maturing within ninety days, approximate their fair values resulting in a
Level 2 classification.
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(g) Other Borrowings - The fair values of the Company’s long-term borrowings
are estimated using discounted cash flow analyses based on the current borrowing
rates for similar types of borrowing arrangements resulting in a Level 2
classification.
The fair values of the Company’s Subordinated Debentures are estimated
using discounted cash flow analyses based on the current borrowing rates for
similar types of borrowing arrangements resulting in a Level 3 classification.
(h) Accrued Interest Receivable/Payable - The fair value of accrued interest
receivable and payable is based on the fair value hierarchy of the related asset or
liability.
(i) Off-Balance Sheet Instruments - Fair values for off-balance sheet, credit-related
financial instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties’ credit standing. The fair value of commitments is not material.
Assets Recorded at Fair Value
The following tables present information about the Company’s assets and
liabilities measured at fair value on a recurring and non-recurring basis as of
December 31, 2012:
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
Available-for-sale investment
securities
Debt Securities:
U.S. Government agencies $
Obligations of states and
political subdivisions
U.S. Government
sponsored entities and
agencies collateralized
by residential mortgage
obligations
Private label residential
mortgage backed
securities
Other equity securities
Total assets measured at
fair value on a recurring
basis
Fair
Value
Level 1
Level 2
Level 3
9,454 $
- $
9,454 $
161,678
208,510
-
-
161,678
208,510
6,375
7,948
-
7,948
6,375
-
-
-
-
-
-
-
$ 393,965 $
7,948 $ 386,017 $
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 in active markets. For securities where quoted prices
or market prices of similar securities are not available, fair values are calculated
using discounted cash flows or other market indicators.
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,
2012, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at
December 31, 2012. Also there were no liabilities measured at fair value on a
recurring basis at December 31, 2012.
Non-recurring Basis
The Company may be required, from time to time, to measure certain assets
and liabilities at fair value on a non-recurring basis. These include assets and
Notes to
Consolidated Financial Statements
2.
FAIR VALUE MEASUREMENTS
(Continued)
liabilities that are measured at the lower of cost or fair value that were recognized
at fair value which was below cost at December 31, 2012.
Description
Impaired loans:
Real estate:
Owner occupied
Real estate-construction
and other land loans
Total real estate
Consumer:
Equity loans and lines of
credit
Total consumer
Total impaired loans
Total assets measured at
fair value on a
non-recurring basis
$
$
Fair
Value
Level 1
Level 2
Level 3
$
194 $
- $
- $
194
4,863
5,057
233
233
-
-
-
-
-
-
-
-
4,863
5,057
233
233
5,290 $
- $
- $
5,290
5,290 $
- $
- $
5,290
At the time a loan is considered impaired, it is valued at the lower of cost or
fair value. Impaired loans carried at fair value generally receive specific allocations
of the allowance for loan losses. For collateral dependent loans, fair value is
commonly based on recent real estate appraisals. These appraisals may utilize a
single valuation approach or a combination of approaches including comparable
sales and the income approach. Adjustments are routinely made in the appraisal
process by the independent appraisers to adjust for differences between the
comparable sales and income data available. Such adjustments are usually
significant and typically result in a Level 3 classification of the inputs for
determining fair value. Non-real estate collateral may be valued using an
appraisal, net book value per the borrower’s financial statements, or aging reports,
adjusted or discounted based on management’s historical knowledge, changes in
market conditions from the time of the valuation, and management’s expertise
and knowledge of the client and client’s business, resulting in a Level 3 fair value
classification. The fair value of impaired loans is based on the fair value of the
collateral. Impaired loans 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 evaluated under the
discounted cash flow method are excluded from the table above. The discounted
cash flow method as prescribed by topic 310 is not a fair value measurement
since the discount rate utilized is the loan’s effective interest rate which is not a
market rate. There were no changes in valuation techniques used during the year
ended December 31, 2012.
Appraisals for collateral-dependent impaired loans are performed by certified
general appraisers (for commercial properties) or certified residential appraisers
(for residential properties) whose qualifications and licenses have been reviewed
and verified by the Company. Once received, the assumptions and approaches
utilized in the appraisal as well as the overall resulting fair value is compared with
independent data sources such as recent market data or industry-wide statistics.
Impaired loans that are measured for impairment using the fair value of the
collateral for collateral dependent loans, had a principal balance of $5,386,000
with a valuation allowance of $96,000 at December 31, 2012, resulting in an
additional provision for loan losses of $19,000 for the year ended December 31,
2012.
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, 2011:
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
Available-for-sale securities
Debt Securities:
U.S. Government agencies $
Obligations of states and
political subdivisions
U.S. Government
sponsored entities and
agencies collateralized
by residential mortgage
obligations
Private label residential
mortgage backed
securities
Other equity securities
Total assets measured at
fair value on a recurring
basis
Fair
Value
Level 1
Level 2
Level 3
149 $
- $
149 $
108,431
204,544
-
-
108,431
204,544
7,398
7,891
-
7,891
7,398
-
-
-
-
-
-
-
$ 328,413 $
7,891 $ 320,522 $
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 in active markets. For securities where quoted prices
or market prices of similar securities are not available, fair values are calculated
using discounted cash flows or other market indicators.
There were no Level 3 assets measured at fair value on a recurring basis at
December 31, 2011. Also there were no liabilities measured at fair value on a
recurring basis at December 31, 2011.
23
23
Notes to
Consolidated Financial Statements
2.
FAIR VALUE MEASUREMENTS (Continued)
3.
INVESTMENT SECURITIES
Non-recurring Basis
The Company may be required, from time to time, to measure certain assets
and liabilities at fair value on a non-recurring basis. These include assets and
liabilities that are measured at the lower of cost or fair value that were recognized
at fair value which was below cost at December 31, 2011 (in thousands).
The fair value of the available-for-sale investment portfolio reflected an unrealized
gain of $12,891,000 at December 31, 2012 compared to an unrealized gain of
$7,008,000 at December 31, 2011. The unrealized gain recorded is net of
$5,305,000 and $2,884,000 in tax liabilities as accumulated other comprehensive
income within shareholders’ equity at December 31, 2012 and 2011, respectively.
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:
Fair
Value
Level 1
Level 2
Level 3
Commercial and industrial $
2,312 $
- $
- $
2,312
Total commercial
Real estate:
Owner occupied
Real estate-construction
and other land loans
Commercial real estate
2,312
873
8,782
1,487
Total real estate
11,142
Consumer:
Equity loans and lines of
credit
Consumer and installment
Total consumer
2,003
51
2,054
Total impaired loans
15,508
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,312
873
8,782
1,487
11,142
2,003
51
2,054
15,508
Total assets measured at
fair value on a
non-recurring basis
$
15,508 $
- $
- $
15,508
For collateral dependent loans, fair value is commonly based on recent real
estate appraisals. These appraisals may utilize a single valuation approach or a
combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the independent
appraisers to adjust for differences between the comparable sales and income data
available. Such adjustments are usually significant and typically result in a Level 3
classification of the inputs for determining fair value. Non-real estate collateral
may be valued using an appraisal, net book value per the borrower’s financial
statements, or aging reports, adjusted or discounted based on management’s
historical knowledge, changes in market conditions from the time of the
valuation, and management’s expertise and knowledge of the client and client’s
business, resulting in a Level 3 fair value classification. The fair value of impaired
loans is based on the fair value of the collateral. Impaired loans 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 year ended
December 31, 2011.
Collateral dependent impaired loans with a carrying value of $19,876,000
were written down to their fair value of $15,508,000 resulting in an impairment
charge of $4,368,000. The valuation allowance represents specific allocations for
the allowance for credit losses for impaired loans.
There were no liabilities measured at fair value on a non-recurring basis at
December 31, 2011.
December 31, 2012
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
sponsored entities
and agencies
collateralized by
residential
mortgage
obligations
Private label
residential
mortgage backed
securities
Other equity securities
$
9,443 $
34 $
(23) $
9,454
151,312
10,751
(385)
161,678
206,465
3,152
(1,107)
208,510
6,258
7,596
323
352
(206)
-
6,375
7,948
$
381,074 $
14,612 $
(1,721) $
393,965
December 31, 2011
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
sponsored entities
and agencies
collateralized by
residential
mortgage
obligations
Private label
residential
mortgage backed
securities
Other equity securities
$
149 $
- $
- $
149
101,030
7,732
(331)
108,431
204,222
1,402
(1,080)
204,544
8,408
7,596
245
295
(1,255)
-
7,398
7,891
$
321,405 $
9,674 $
(2,666) $
328,413
24
24
Notes to
Consolidated Financial Statements
3.
INVESTMENT SECURITIES
(Continued)
Investment securities with unrealized losses at December 31, 2012 and 2011
are summarized and classified according to the duration of the loss period as
follows (in thousands):
December 31, 2012
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:
U.S. Government
agencies
Obligations of states
and political
subdivisions
U.S. Government
sponsored entities
and agencies
collateralized by
residential mortgage
obligations
Private label
residential mortgage
backed securities
$
3,590 $
(23) $
- $
- $
3,590 $
(23)
30,572
(385)
-
-
30,572
(385)
76,764
(809)
18,024
(298)
94,788
(1,107)
-
-
2,886
(206)
2,886
(206)
$ 110,926 $
(1,217) $ 20,910 $
(504) $ 131,836 $
(1,721)
December 31, 2011
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
sponsored entities
and agencies
collateralized by
residential mortgage
obligations
Private label
residential mortgage
backed securities
$
1,194 $
(20) $
2,598 $
(311) $
3,792 $
(331)
105,902
(1,080)
-
-
105,902
(1,080)
32
(1)
4,917
(1,254)
4,949
(1,255)
$ 107,128 $
(1,101) $
7,515 $
(1,565) $ 114,643 $
(2,666)
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. 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 original yield expected at time
of purchase.
As of December 31, 2012, 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). Management
evaluated all available-for-sale investment securities with an unrealized loss at
December 31, 2012, and identified those that had an unrealized loss for at least
a consecutive 12 month period, which had an unrealized loss at December 31,
2012 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 2012 to provide
independent valuation and OTTI analysis of the 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 most likely 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 original yield at time of purchase) 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 December 31, 2012. 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. The
Company assesses for credit impairment using a discounted cash flow model. The
key assumptions include default rates, severities, discount rates and prepayment
rates. Losses are estimated to a security by forecasting the underlying mortgage
loans in each transaction. The forecasted loan performance is used to project cash
flows to the various tranches in the structure. 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 previously recorded.
U.S. Government Agencies - At December 31, 2012, the Company held four
U.S. Government agency securities of which two were in a loss position for less
than 12 months and none 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 U.S. Government Agencies were caused by interest rate changes.
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, 2012.
Obligations of States and Political Subdivisions - At December 31, 2012, the
Company held 196 obligations of states and political subdivision securities of
which 21 were in a loss position for less than 12 months and none 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 caused by interest rate changes. Because the decline in
market value is attributable to changes in interest rates and not credit quality,
25
25
Notes to
Consolidated Financial Statements
3.
INVESTMENT SECURITIES
(Continued)
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, 2012.
U.S. Government Sponsored Entities and Agencies Collateralized by Residential
Mortgage Obligations - At December 31, 2012, the Company held 200 U.S.
Government sponsored entity and agency securities collateralized by residential
mortgage obligation securities of which 50 were in a loss position for less than
12 months and 21 in a loss position for more than 12 months. The unrealized
losses on the Company’s investments in U.S. Government sponsored entity and
agencies collateralized by residential mortgage obligations were caused by interest
rate changes. The contractual cash flows of those investments are guaranteed or
supported by an agency or sponsored entity 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, 2012.
Private Label Residential Mortgage Backed Securities - At December 31, 2012,
the Company had a total of 23 PLRMBS with a remaining principal balance of
$6,258,000 and a net unrealized gain of approximately $117,000. 17 of these
securities account for $323,000 of the unrealized gains at December 31, 2012,
offset by six of these securities with losses totaling $206,000. Seven of these
PLRMBS with a remaining principal balance of $4,806,000 had credit ratings
below investment grade. The Company continues to perform extensive analyses
on these securities as well as all whole loan CMOs. No credit related OTTI
charges related to PLRMBS were recorded during the year ended December 31,
2012.
PLRMBS as of December 31, 2012 with credit ratings below investment grade are summarized in the table below (dollars in thousands):
Description
PHHAM
CWALT 1
CWALT 2
FHAMS
BAALT
ABFS
CONHE
Book
Value
Market
Value
Unrealized
Gain
(Loss)
$
1,866 $
638
285
1,673
65
235
44
1,798 $
625
252
1,826
50
159
68
$
4,806 $
4,778 $
(68)
(13)
(33)
153
(15)
(76)
24
(28)
Rating
D
D
D
D
C
D
Caa2
Agency
Fitch
Fitch
Fitch
Fitch
Fitch
S&P
Moody’s
12 Month
Historical
Prepayment
Rates %
Projected
CDR
Rates %
Projected
Severity
Rates %
Original
Purchase
Price %
Current
Credit
Enhancement
%
11.58
15.38
16.96
13.48
12.55
8.28
13.00
22.40
11.21
12.54
17.30
12.40
8.85
6.12
51.00
65.59
62.99
48.50
65.50
50.64
67.33
97.25
100.73
101.38
95.00
97.24
97.46
86.39
-
-
(0.72)
(0.66)
2.70
-
-
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.
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
Ending balance
$
783
$
Years ended
December 31,
2012
2011
(In thousands)
$
783
$
1,387
-
-
-
31
-
(635)
783
Proceeds and gross realized gains (losses) on investment securities for the years
ended December 31, 2012, 2011, and 2010 are shown below.
Available-for-Sale Securities
Proceeds from sales or calls
Gross realized gains from sales or
calls
Gross realized losses from sales or
calls
Years Ended December 31,
2012
2011
2010
(In thousands)
$
$
$
39,119
2,121
(482)
$
$
$
44,700
1,119
(821)
$
$
$
19,594
296
(487)
The Company did not have any held-to-maturity securities during the years
ended December 31, 2012 or 2011.
The following tables provide a roll forward for the years ended December 31,
2012 and 2011 of investment securities credit losses recorded in earnings. The
beginning balance represents the credit loss component for which OTTI occurred
26
26
Notes to
Consolidated Financial Statements
3.
INVESTMENT SECURITIES
(Continued)
4.
LOANS
The amortized cost and estimated fair value of investment securities at
December 31, 2012 and 2011 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, 2012
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
U.S. Government sponsored entities and
agencies collateralized by residential
mortgage obligations
Private label residential mortgage backed
securities
Other equity securities
December 31, 2011
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
U.S. Government sponsored entities and
agencies collateralized by residential
mortgage obligations
Private label residential mortgage backed
securities
Other equity securities
Total
Amortized
Cost
$
150
10,355
20,256
120,551
Estimated
Fair
Value
$
151
11,250
22,176
128,101
151,312
161,678
9,443
9,454
206,465
208,510
6,258
7,596
6,375
7,948
$ 381,074
$ 393,965
Amortized
Cost
$
569
8,705
20,553
71,352
Estimated
Fair
Value
$
574
9,480
22,179
76,347
101,179
108,580
-
-
204,222
204,544
8,408
7,596
7,398
7,891
$ 321,405
$ 328,413
Investment securities with amortized costs totaling $81,245,000 and
$102,527,000 and fair values totaling $89,343,000 and $109,119,000 were
pledged as collateral for borrowing arrangements, public funds and for other
purposes at December 31, 2012 and 2011, respectively.
Outstanding loans are summarized as follows (in thousands):
December 31, % of Total
December 31, % of Total
2012
loans
2011
loans
$
77,956
19.7% $
78,089
18.3%
26,599
6.7%
29,958
7.0%
Loan Type
Commercial:
Commercial and
industrial
Agricultural land
and production
Total
commercial
104,555
26.4%
108,047
Real estate:
Owner occupied
Real estate
construction and
other land loans
Commercial real
estate
Agricultural real
estate
Other real estate
114,444
28.9%
113,183
33,199
53,797
28,400
8,098
8.4%
13.6%
7.2%
2.0%
33,047
62,523
42,596
7,892
25.3%
26.4%
7.7%
14.6%
9.9%
1.8%
Total real estate
237,938
60.1%
259,241
60.4%
Consumer:
Equity loans and
lines of credit
Consumer and
installment
Total consumer
Deferred loan fees,
net
Total gross loans
Allowance for credit
losses
10.9%
2.6%
13.5%
42,932
10,346
53,278
(453)
51,106
9,765
60,871
(764)
12.0%
2.3%
14.3%
395,318
100.0%
427,395
100.0%
(10,133)
(11,396)
Total loans
$
385,185
$
415,999
At December 31, 2012 and 2011, loans originated under Small Business
Administration (SBA) programs totaling $5,586,000 and $6,421,000, respectively,
were included in the real estate and commercial categories. Approximately
$90,601,000 in loans were pledged under a blanket lien as collateral to the
FHLB for the Bank’s remaining borrowing capacity of $129,034,000 as of
December 31, 2012. The Bank’s credit limit varies according to the amount and
composition of the investment and loan portfolios pledged as collateral.
Salaries and employee benefits totaling $754,000, $229,000, and $305,000
have been deferred as loan origination costs for the years ended December 31,
2012, 2011, and 2010, respectively.
27
27
Notes to
Consolidated Financial Statements
5. 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
Balance, end of year
Years Ended December 31,
2012
2011
2010
(In thousands)
$
$
11,396
700
(2,850)
887
11,014
1,050
(1,532)
864
$
10,200
3,800
(4,122)
1,136
$
10,133
$
11,396
$
11,014
The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2012 and 2011 by portfolio
segment (in thousands):
Allowance for credit losses:
Beginning balance, January 1, 2012
Provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2012
Allowance for credit losses:
Beginning balance, January 1, 2011
Provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2011
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
$
2,266
18
(123)
515
2,676
2,437
(177)
(280)
286
$
$
$
7,155
643
(1,966)
45
5,877
5,836
1,403
(312)
228
$
$
$
1,836
139
(761)
327
1,541
2,503
(77)
(940)
350
$
$
$
139
(100)
-
-
39
238
(99)
-
-
11,396
700
(2,850)
887
10,133
11,014
1,050
(1,532)
864
2,266
$
7,155
$
1,836
$
139
$
11,396
The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2012 and December 31, 2011
(in thousands):
Allowance for credit losses:
Ending balance, December 31, 2012
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance, December 31, 2011
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
2,676
40
2,636
2,266
231
2,035
$
$
$
$
$
$
5,877
465
5,412
7,155
3,764
3,391
$
$
$
$
$
$
1,541
5
1,536
1,836
373
1,463
$
$
$
$
$
$
39
-
39
139
-
139
$
$
$
$
$
$
10,133
510
9,623
11,396
4,368
7,028
28
28
Notes to
Consolidated Financial Statements
5. ALLOWANCE FOR CREDIT LOSSES
(Continued)
The following table shows the ending balances of loans as of December 31, 2012 and December 31, 2011 by portfolio segment and by impairment methodology (in
thousands):
Commercial
Real Estate
Consumer
Total
Loans:
Ending balance, December 31, 2012
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance, December 31, 2011
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
$
$
$
$
$
$
104,555
2,405
102,150
108,047
3,857
104,190
$
$
$
$
$
$
237,938
12,868
225,070
259,241
17,359
241,882
$
$
$
$
$
$
53,278
1,832
51,446
60,871
2,428
58,443
The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2012 (in thousands):
Commercial:
Commercial and industrial
Agricultural land and production
Real Estate:
Owner occupied
Real estate construction and other land loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Pass
Special
Mention
Substandard
Doubtful
$
71,125
26,599
$
$
824
-
6,007
-
$
107,281
18,517
44,880
26,883
8,098
40,527
10,259
1,831
3,377
3,952
1,517
-
258
77
5,332
11,305
4,965
-
-
2,147
10
Total
$
354,169
$
11,836
$
29,766
$
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
395,771
17,105
378,666
428,159
23,644
404,515
Total
77,956
26,599
114,444
33,199
53,797
28,400
8,098
42,932
10,346
$
395,771
The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2011 (in thousands):
Pass
Special
Mention
Substandard
Doubtful
Total
Commercial:
Commercial and industrial
Agricultural land and production
Real Estate:
Owner occupied
Real estate construction and other land loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
$
70,093
29,958
$
105,308
15,717
47,323
40,808
7,672
46,939
9,570
2,595
-
3,125
4,056
5,035
1,788
220
1,047
105
$
5,401
-
$
4,750
13,274
10,165
-
-
3,120
90
Total
$
373,388
$
17,971
$
36,800
$
-
-
-
-
-
-
-
-
-
-
$
78,089
29,958
113,183
33,047
62,523
42,596
7,892
51,106
9,765
$
428,159
29
29
Current
Total Loans
Recorded
Investment
> 90 Days
Accruing
Non-accrual
Notes to
Consolidated Financial Statements
5. ALLOWANCE FOR CREDIT LOSSES
(Continued)
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2012 (in thousands):
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than 90
Days
Past Due
Commercial:
Commercial and industrial
Agricultural land and
production
Real estate:
Owner occupied
Real estate construction and
other land loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total
$
$
-
-
-
-
-
-
-
-
27
27
$
$
-
-
213
-
-
-
-
-
-
$
213
$
-
-
-
-
-
-
-
-
-
-
Total
Past Due
$
-
-
$
77,956
$
77,956
$
26,599
26,599
213
114,231
114,444
-
-
-
-
-
27
33,199
53,797
28,400
8,098
42,932
10,319
33,199
53,797
28,400
8,098
42,932
10,346
$
240
$
395,531
$
395,771
$
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2011 (in thousands):
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than 90
Days
Past Due
Total
Past Due
Current
Total
Loans
Recorded
Investment
> 90 Days
Accruing
Commercial:
Commercial and industrial
Agricultural land and
production
Real estate:
Owner occupied
Real estate construction and
other land loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
$
57
$
-
-
1,532
-
-
-
123
29
Total
$
1,741
$
-
-
-
-
-
-
-
-
74
74
$
236
$
293
$
77,796
$
78,089
$
-
122
-
3,544
-
-
97
-
-
122
1,532
3,544
-
-
220
103
29,958
29,958
113,061
113,183
31,515
58,979
42,596
7,892
50,886
9,662
33,047
62,523
42,596
7,892
51,106
9,765
$
3,999
$
5,814
$
422,345
$
428,159
$
30
30
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
1,575
6,288
-
-
-
1,832
-
$
9,695
Non-accrual
$
267
-
1,372
6,823
3,544
-
-
2,354
74
$
14,434
Notes to
Consolidated Financial Statements
5. ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows information related to impaired loans by class at
December 31, 2011 (in thousands):
The following table shows information related to impaired loans by class at
December 31, 2012 (in thousands):
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
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
Agricultural real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Total with no related allowance recorded
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
Agricultural real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
1,352
-
-
-
1,352
1,523
-
1,523
2,875
2,405
-
2,405
1,575
9,941
-
-
-
1,888
-
-
-
1,888
1,834
-
1,834
3,722
2,405
-
2,405
1,733
10,875
-
-
-
11,516
12,608
309
-
309
323
-
323
Total with an allowance recorded
14,230
15,336
Total
$
17,105 $
19,058 $
-
-
-
-
-
-
-
-
-
-
-
-
-
40
-
40
165
300
-
-
-
465
5
-
5
510
510
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
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
Agricultural real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
$
2,140 $
-
2,160 $
-
2,140
2,160
231
243
1,532
1,801
-
-
3,564
-
-
-
1,906
1,801
-
-
3,950
-
-
-
Total with no related allowance recorded
5,704
6,110
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
Agricultural real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
1,717
-
1,717
1,718
-
1,718
1,141
1,216
10,911
1,743
-
-
11,490
1,743
-
-
13,795
14,449
2,354
74
2,428
2,581
74
2,655
-
-
-
-
-
-
-
-
-
-
-
-
-
231
-
231
268
2,130
1,366
-
-
3,764
350
23
373
Total with an allowance recorded
17,940
18,822
4,368
Total
$
23,644 $
24,932 $
4,368
The recorded investment in loans excludes accrued interest receivable and net
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
loan origination fees, due to immateriality.
31
31
Notes to
Consolidated Financial Statements
5. ALLOWANCE FOR CREDIT LOSSES
(Continued)
The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended
December 31, 2012 and 2011 (in thousands):
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
Agricultural real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Total with no related allowance recorded
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
Agricultural real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Total with an allowance recorded
Total
Year Ended
December 31, 2012
Year Ended
December 31, 2011
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
$
952
-
952
1,053
4,933
301
-
-
6,287
1,561
6
1,567
9,486
1,581
-
1,581
633
6,490
145
-
-
7,268
600
37
637
$
-
-
-
-
-
-
-
-
-
-
-
-
-
226
-
226
-
-
375
-
-
-
375
-
-
-
$
544
-
544
1,100
1,690
1,591
-
-
4,381
357
-
357
5,282
505
-
505
1,193
6,544
849
-
-
8,586
1,640
101
1,741
9,486
601
10,832
$
18,972
$
601
$
16,114
$
-
-
-
-
-
-
-
-
-
-
-
-
-
181
-
181
-
-
230
-
-
-
230
-
-
-
411
411
Foregone interest on nonaccrual loans totaled $693,000, $954,000, and
$1,228,000 for the years ended December 31, 2012, 2011, and 2010,
respectively.
Troubled Debt Restructurings:
As of December 31, 2012 and 2011, the Company has a recorded investment
in troubled debt restructurings of $16,655,000 and $19,811,000, respectively.
The Company has allocated $487,000 and $3,217,000 of specific reserves for
those loans at December 31, 2012 and 2011, respectively. The Company has
committed to lend additional amounts totaling up to $700,000 as of
December 31, 2012 to customers with outstanding loans that are classified as
troubled debt restructurings.
For the years ending December 31, 2012 and 2011 the terms of certain loans
were modified as troubled debt restructurings. The modification of the terms of
such loans included one or a combination of the following: a reduction of the
stated interest rate of the loan or an extension of the maturity date at a stated
rate of interest lower than the current market rate for new debt with similar risk.
During the same periods, there were no troubled debt restructurings in which the
amount of principal or accrued interest owed from the borrower were forgiven.
32
32
Notes to
Consolidated Financial Statements
5. ALLOWANCE FOR CREDIT LOSSES
(Continued)
The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2012 (in thousands):
Troubled Debt Restructurings:
Real Estate:
Real Estate - Owner occupied
Consumer:
Equity loans and line of credit
Total
Pre-
Modification
Outstanding
Recorded
Investment (1)
Number of
Loans
Principal
Modification
Post
Modification
Outstanding
Recorded
Investment (2)
Outstanding
Recorded
Investment
1
1
2
$
$
425
$
75
500
-
-
-
$
$
425
$
75
500
$
415
72
487
(1) Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.
(2) Balance outstanding after principal modification, if any borrower reduction to recorded investment.
The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2011 (in thousands):
Troubled Debt Restructurings:
Commercial:
Commercial and Industrial
Total commercial
Real Estate:
Owner occupied
Real estate construction and other land loans
Commercial real estate
Total real estate
Consumer
Equity loans and line of credit
Consumer and installment
Total consumer
Total
Pre-
Modification
Outstanding
Recorded
Investment (1)
Number of
Loans
Principal
Modification
Post
Modification
Outstanding
Recorded
Investment (2)
Outstanding
Recorded
Investment
2
2
1
3
1
5
1
-
1
8
$
3,089
$
3,089
1,074
11,094
1,110
13,278
2,271
-
2,271
$
18,638
$
-
-
-
-
-
-
-
-
-
$
3,089
$
3,089
1,074
11,094
1,110
13,278
2,271
-
2,271
2,791
2,791
1,019
10,911
1,110
13,040
1,648
-
1,648
$
18,638
$
17,479
(1) Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.
(2) Balance outstanding after principal modification, if any borrower reduction to recorded investment.
A loan is considered to be in payment default once it is 90 days contractually
past due under the modified terms. There was one default on troubled debt
restructurings within twelve months following the modification during the year
ended December 31, 2012. The recorded investment in the one default is zero at
December 31, 2012.
The troubled debt restructurings described above resulted in an increase to the
specific reserves added to the allowance for credit losses of $152,000 during the
year ending December 31, 2012 compared to $1,471,000 in specific reserves
added to the allowance for credit losses during the year ending December 31,
2011. The commercial real estate restructured debt outstanding at December 31,
2011 was charged off and transferred to other real estate owned the first quarter
of 2012. The property has subsequently been sold. Only one other restructured
debt outstanding at December 31, 2011 reported above under real estate owner
occupied was charged off during 2012.
33
33
Notes to
Consolidated Financial Statements
6. BANK PREMISES AND EQUIPMENT
8. DEPOSITS
Bank premises and equipment consisted of the following:
Interest-bearing deposits consisted of the following:
Land
Buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
Less accumulated depreciation and
amortization
December 31,
2012
2011
(In thousands)
$
$
838
3,362
8,351
3,804
838
3,354
7,813
3,599
16,355
15,604
(10,103)
(9,732)
$
6,252
$
5,872
Savings
Money market
NOW accounts
Time, $100,000 or more
Time, under $100,000
December 31,
2012
2011
(In thousands)
$
$
39,573
173,486
161,328
91,880
44,996
31,267
181,731
140,268
102,577
49,118
$
511,263
$
504,961
Aggregate annual maturities of time deposits are as follows (in thousands):
Depreciation and amortization included in occupancy and equipment expense
totaled $972,000, $1,212,000 and $1,262,000 for the years ended December 31,
2012, 2011, and 2010, respectively.
7. OTHER REAL ESTATE OWNED
The Company had no other real estate owned (OREO) at December 31, 2012
and 2011. The table below provides a summary of the change in other real estate
owned (OREO) balances for the years ended December 31, 2012 and 2011.
Years Ending December 31,
2013
2014
2015
2016
2017
Thereafter
$
109,004
8,572
6,887
1,505
10,908
-
$
136,876
Balance, Beginning of year
Additions
Dispositions
Write-downs
Net gain on disposition
Balance, End of year
December 31,
2012
2011
(In thousands)
$
$
$
-
2,337
(2,349)
-
12
-
$
1,325
532
(2,472)
-
615
-
As of December 31, 2012 the Bank had no OREO properties. In 2012, the
Bank foreclosed on six properties with net realizable values totaling $2,337,000
and sold them for a net gain of $12,000. Two of the properties the Bank
foreclosed on were mini storage facilities which were collateralized by real estate
with net realizable values totaling $2,098,000. The Company realized losses of
$6,000 on the sale of the properties. The Bank received income of $90,000
during 2012 from operations of the storage facilities.
As of December 31, 2011 the Bank had no OREO properties. In 2011, the
Bank foreclosed on three properties collateralized by real estate. During the year
ended December 31, 2011, the remaining 12 units of the medical office
condominium projects held at the end of 2010 along with the three other
properties were sold. Proceeds from OREO sales totaled $2,472,000 during
2011. The Company realized a $615,000 net recovery from the sale of all units.
Interest expense recognized on interest-bearing deposits consisted of the
following:
Savings
Money market
NOW accounts
Time certificates of deposit
Years Ended December 31,
2012
2011
2010
(In thousands)
47
$
692
321
1,602
32
392
270
936
$
52
1,035
447
2,179
1,630
$
2,662
$
3,713
$
$
9. BORROWING ARRANGEMENTS
Federal Home Loan Bank Advances - Advances from the Federal Home Loan
Bank (FHLB) of San Francisco consisted of the following (dollars in thousands):
December 31,
2012
Amount
$
$
4,000
4,000
(4,000)
-
December 31,
2011
Amount
$
$
4,000
4,000
-
4,000
Rate
3.59%
Maturity Date
February 12, 2013
Less short-term portion
Long-term debt
FHLB advances are secured by investment securities with amortized costs
totaling $4,016,000 and $15,272,000 and market values totaling $4,225,000 and
$15,683,000 at December 31, 2012 and 2011, respectively. The Bank’s credit
limit varies according to the amount and composition of the investment and loan
portfolios pledged as collateral.
As of December 31, 2012 and 2011, the Company had no Federal funds
purchased.
34
34
Notes to
Consolidated Financial Statements
9. BORROWING ARRANGEMENTS
(Continued)
Lines of Credit - The Bank had unsecured lines of credit with its correspondent
banks which, in the aggregate, amounted to $40,000,000 at December 31, 2012
and $44,000,000 at December 31, 2011, at interest rates which vary with market
conditions. The Bank also had a line of credit in the amount of $127,000 and
$551,000 with the Federal Reserve Bank of San Francisco at December 31, 2012
and 2011, respectively which bears interest at the prevailing discount rate
collateralized by investment securities with amortized costs totaling $115,000 and
$542,000 and market values totaling $129,000 and $562,000, respectively. At
December 31, 2012 and 2011, the Bank had no outstanding short-term
borrowings under these lines of credit.
10.
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, 2012, 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, 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 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, 2012, the rate
was 1.94%. Interest expense recognized by the Company for the years ended
December 31, 2012, 2011, and 2010 was $107,000, $100,000 and $102,000,
respectively.
11.
INCOME TAXES
The provision for (benefit from) income taxes for the years ended December 31,
2012, 2011, and 2010 consisted of the following:
2012
Current
Deferred
Provision for income taxes
2011
Current
Deferred
Provision for income taxes
2010
Current
Deferred
Benefit from income taxes
Federal
State
Total
(In thousands)
$
$
$
$
$
$
1,196
249
1,445
686
893
1,579
1,472
(1,677)
(205)
$
$
$
$
$
$
49
191
240
(95)
377
282
496
(660)
(164)
$
$
$
$
$
$
1,245
440
1,685
591
1,270
1,861
1,968
(2,337)
(369)
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 on management’s
analysis as of December 31, 2011, the Company established a deferred tax
valuation allowance in the amount of $114,000 for California capital loss
carryforwards. The balance of the allowance as of December 31, 2012, was
$110,000.
35
35
Notes to
Consolidated Financial Statements
11.
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
Loan and investment impairment
State Enterprise Zone credit carry-forward
State capital loss carry-forward
Alternative minimum tax credit
State taxes
Other
Partnership income
December 31,
2012
2011
(In thousands)
$
4,170
3,832
521
862
184
253
282
352
783
110
1,025
20
7
77
4,690
3,660
1,188
909
416
231
282
352
522
114
530
58
-
74
Total deferred tax assets
Valuation allowance
Net deferred tax asset after valuation
allowance
12,478
(110)
13,026
(114)
12,368
12,912
Deferred tax liabilities:
Finance leases
Unrealized gain on available-for-sale
investment securities
Core deposit intangible
FHLB stock
Loan origination costs
Total deferred tax liabilities
(2,548)
(5,305)
(240)
(241)
(256)
(8,590)
(2,650)
(2,884)
(322)
(241)
(176)
(6,273)
Net deferred tax assets
$
3,778
$
6,639
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, 2012, 2011, and 2010 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
2012
2011
2010
34.0 %
34.0 %
34.0 %
2.8 %
3.6 %
(3.7)%
(16.7)%
(1.4)%
(1.4)%
0.5 %
0.5 %
(14.0)%
(1.6)%
(1.6)%
0.5 %
1.4 %
(34.7)%
(4.6)%
(5.4)%
(1.3)%
3.0 %
Effective tax rate
18.3 %
22.3 %
(12.7)%
At December 31, 2012, the Company had Federal and California net
operating loss (‘‘NOL’’) carry-forwards of approximately $1,110,000 and
$2,003,000, 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.
The Federal NOL will begin to expire in 2028. California suspended utilization
of NOLs for 2009, 2010 and 2011 tax years for taxpayers with business income
in excess of $500,000. The California NOL will begin to expire in 2019.
36
36
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, 2012, the Company had one state
income tax examination in process. The outcome of the examination is not
settled. There are currently no pending U.S. federal 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, 2009 and by the state and local taxing authorities for the years
ended before December 31, 2008.
A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows (in thousands):
Balance at January 1, 2012
Additions based on tax positions related to the current year
Reductions for tax positions of prior years
Balance at December 31, 2012
$
$
255
61
-
316
This represents the amount of unrecognized tax benefits that, if recognized,
would favorably affect the effective income tax rate in future periods. The
Company does not expect the total amount of unrecognized tax benefits to
significantly increase or decrease in the next twelve months.
During the years ended December 31, 2012, 2011, and 2010, the Company
did not recognize any interest and penalties related to uncertain tax positions.
12. 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 $1,947,000, $1,982,000 and $1,922,000
for the years ended December 31, 2012, 2011, and 2010, respectively.
Future minimum lease payments on noncancelable operating leases are as
follows (in thousands):
Years Ending December 31,
2013
2014
2015
2016
2017
Thereafter
$
1,941
1,897
1,719
1,272
883
3,870
$
11,582
Federal Reserve Requirements - Banks are required to maintain reserves with the
Federal Reserve Bank equal to a percentage of their reservable deposits. The Bank
had no reserve balances required at December 31, 2012.
Correspondent Banking Agreements - The Bank maintains funds on deposit with
other federally insured financial institutions under correspondent banking
agreements. The Bank had no uninsured deposits at December 31, 2012.
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.
Notes to
Consolidated Financial Statements
12. COMMITMENTS AND CONTINGENCIES
(Continued)
The following financial instruments represent off-balance-sheet credit risk:
Commitments to extend credit
Standby letters of credit
December 31,
2012
2011
(In thousands)
$
$
162,261
590
$
$
128,585
420
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 financial obligation or 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, 2012 and 2011. The
Company recognizes these fees as revenue over the term of the commitment or
when the commitment is used.
At December 31, 2012, commercial loan commitments represent 59% of total
commitments and are generally secured by collateral other than real estate or
unsecured. Real estate loan commitments represent 31% 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 10% of total
commitments and are generally unsecured. In addition, the majority of the Bank’s
loan commitments have variable interest rates.
At December 31, 2012, the balance of a contingent allocation for probable
loan loss experience on unfunded obligations was $110,000. The contingent
allocation for probable loan loss experience on unfunded obligations is calculated
by management using an appropriate, systematic, and consistently applied
process. While related to credit losses, this allocation is not a part of the ALLL
and is considered separately as a liability for accounting and regulatory reporting
purposes. There was no contingent allocation recorded at December 31, 2011.
Concentrations of Credit Risk - At December 31, 2012, in management’s
judgment, a concentration of loans existed in commercial loans and real-estate-
related loans, representing approximately 97.4% of total loans of which 26.4%
were commercial and 71.0% were real-estate-related.
At December 31, 2011, in management’s judgment, a concentration of loans
existed in commercial loans and real-estate-related loans, representing
approximately 97.7% of total loans of which 25.3% were commercial and 72.4%
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.
13. 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.
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 considers capital requirements as part of its strategic planning
process. The strategic plan calls for continuing increases in assets and liabilities,
and if the capital required to support such increases is in excess of retained
earnings, the Company may be required to go the capital markets. 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. 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
including acquisition opportunities.
Management believes that the Company and the Bank met all their capital
adequacy requirements as of December 31, 2012 and 2011. There are no
conditions or events since those notifications that management believes have
changed those categories.
37
37
Notes to
Consolidated Financial Statements
13. SHAREHOLDERS’ EQUITY
(Continued)
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, 2012
December 31, 2011
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 90,866
$ 34,418
$ 87,911
10.56% $ 82,571
4.00% $ 32,612
10.22% $ 81,599
10.13%
4.00%
10.01%
$ 42,994
$ 34,395
5.00% $ 40,743
4.00% $ 32,594
5.00%
4.00%
$ 90,866
$ 19,926
$ 87,911
18.24% $ 82,571
4.00% $ 20,383
17.67% $ 81,599
16.20%
4.00%
16.02%
$ 29,848
$ 19,899
6.00% $ 30,554
4.00% $ 20,369
6.00%
4.00%
$ 97,299
$ 39,853
$ 94,336
19.53% $ 89,136
8.00% $ 40,767
18.96% $ 88,159
17.49%
8.00%
17.31%
$ 49,747
$ 39,798
10.00% $ 50,923
8.00% $ 40,738
10.00%
8.00%
Dividends - During 2012, the Bank declared and paid cash dividends to the
Company in the amount of $3,000,000, in connection with stock repurchase
agreements and cash dividends 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. On October 17,
2012, the Board of Directors declared a $480,000 or $0.05 per common share
cash dividend to shareholders of record at the close of business on November 15,
2012 which was paid on November 30, 2012. No dividends on common shares
were declared in 2011 or 2010.
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, 2012, retained earnings of $15,504,000 were free of
such restrictions.
Share Repurchase Plan - On August 15, 2012, the Board of Directors of the
Company approved the adoption of a program to effect repurchases of the
Company’s common stock. Under the program, the Company was to repurchase
up to five percent of the Company’s outstanding shares of common stock, or
approximately 479,850 shares based on the shares outstanding as of August 15,
2012, for the period beginning on August 15, 2012 and ending February 15,
2013. During 2012, the Company repurchased and retired a total of 58,100
shares at an average price of $8.41 for a total cost of $488,000. The stock
repurchase program was suspended after the Company entered into a
Reorganization Agreement and Plan of Merger (the Merger Agreement) with
Visalia Community Bank on December 19, 2012.
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. In August, 2011, the Company agreed to exchange
258,862 shares of the Company’s non-voting common stock to 258,862 shares of
the Company’s voting common stock. The issuance of voting common stock was
conducted in a privately negotiated transaction exempt from registration pursuant
to Sections 3(a)(9) and 4(2) of the Securities Act of 1933, as amended.
Capital Purchase Program - Small Business Lending Fund - On August 18, 2011,
the Company entered into a Securities Purchase Agreement with the Small
Business Lending Fund of the United States Department of the Treasury (the
Treasury), under which the Company issued 7,000 shares of Senior
Non-Cumulative Perpetual Preferred Stock, Series C (the Preferred Shares) to the
Treasury for an aggregate purchase price of $7,000,000. Simultaneously, the
Company agreed with Treasury under a Letter Agreement to redeem, for an
aggregate price of $7,000,000, the 7,000 shares of the Company’s Series A Fixed
Rate Cumulative Preferred Stock (Series A Stock) originally issued pursuant to
the Treasury’s Capital Purchase Program (CPP) in 2009. The redemption of the
Series A Stock resulted in an acceleration of the remaining discount booked at
the time of the CPP transaction.
In connection with the repurchase of the Series A Stock, the Company also
notified the Treasury of the Company’s intent to repurchase the warrant (the
Warrant) to purchase 79,037 shares of the Company’s common stock that was
originally issued to Treasury in connection with the CPP transaction. On
September 28, 2011, the Company completed the repurchase of the Warrant for
total consideration of $185,000.
The Preferred Shares qualify as Tier 1 capital and pay non-cumulative
dividends at an initial rate of 5% per annum. The dividend rate may vary, but
not exceed 5%, with any reductions in interest rate to be calculated by reference
to increases over a baseline amount in the Company’s small business lending
activities. The Preferred Shares may be redeemed by the Company or by Treasury
in the event that it is statutorily prevented from continuing to hold the Preferred
Shares.
The Preferred Shares are non-voting, other than class voting rights on (i) any
authorization or issuance of shares ranking senior to the Preferred Shares, (ii) any
amendment to the rights of the Preferred Shares, or (iii) any merger, exchange or
similar transaction which would adversely affect the rights of the Preferred Shares.
If dividends on the Preferred Shares are not paid in full for six dividend
periods, whether or not consecutive, the holders of the Preferred Shares 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, 2012.
38
38
Notes to
Consolidated Financial Statements
13. SHAREHOLDERS’ EQUITY (Continued)
A reconciliation of the numerators and denominators of the basic and diluted
earnings per common share computations is as follows:
For the Years Ended December 31,
2012
2011
2010
(In thousands, except share and
per share amounts)
Basic Earnings Per Common Share:
Net income
Less: Preferred stock dividends
and accretion
$
7,520
$
6,477
$
3,279
(350)
(486)
(395)
$
7,170
$
5,991
$
2,884
Income available to common
shareholders
Weighted average shares
outstanding
Net income per common share
Diluted Earnings Per Common
Share:
Net income
Less: Preferred stock dividends and
accretion
$
$
9,587,784
9,522,066
9,209,858
0.75
$
0.63
$
0.31
7,520
$
6,477
$
3,279
(350)
(486)
(395)
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
$
7,170
$
5,991
$
2,884
9,587,784
9,522,066
9,209,858
28,629
16,596
80,813
9,616,413
9,538,662
9,290,671
Net income per diluted common
share
$
0.75
$
0.63
$
0.31
Outstanding options and warrants of 352,319, 436,619, and 531,996 were
not factored into the calculation of dilutive stock options at December 31, 2012,
2011, and 2010, respectively, because they were anti-dilutive.
14. SHARE-BASED COMPENSATION
On December 31, 2012, the Company had two share-based compensation plans,
which are described below. The Plans do not provide for the settlement of awards
in cash and new shares are issued upon option exercise or restricted share grants.
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 317,799 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 181,490
shares reserved for issuance for options already granted to employees and 292,960
remain reserved for future grants as of December 31, 2012. 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 2012, options to purchase 92,150 shares of common stock were granted
from the 2005 Plan at exercise prices between $8.02 and $8.75. No options to
purchase shares of the Company’s common stock were granted during the year
ending December 31, 2011 from any of the Company’s stock based
compensation plans. 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. All options were
granted with an exercise price equal to the market value on the grant date.
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,
dividend yields, 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 and dividend yields. In addition to these assumptions, management
makes estates regarding pre-vesting forfeitures that will impact total compensation
expense recognized under the plans.
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
2012
0.00%
42%
0.71%
6.5 years
For the years ended December 31, 2012, 2011, and 2010, the compensation
cost recognized for share based compensation was $108,000, $196,000, and
$239,000, respectively. The recognized tax benefit for share based compensation
expense was $16,000, $36,000, and $42,000 for 2012, 2011, and 2010,
respectively.
39
39
Notes to
Consolidated Financial Statements
14. SHARE-BASED COMPENSATION
(Continued)
A summary of the combined activity of the Plans for the year ended
December 31, 2012 follows:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Shares
Aggregate
Intrinsic Value
(Dollars in thousands, except
per share amounts)
511,019
92,150 $
(69,030) $
(34,850) $
8.03
5.59
9.91
499,289 $
8.78
4.61 $
284
491,705 $
8.80
4.55 $
358,279 $
9.40
2.91 $
186
181
Options outstanding at
January 1, 2012
Options granted
Options exercised
Options forfeited
Options outstanding at
December 31, 2012
Options vested or
expected to vest at
December 31, 2012
Options exercisable at
December 31, 2012
Information related to the stock option plan during each year follows:
2012
2011
2010
(In thousands, except per share amounts)
Weighted-average per share
grant-date fair value of options
granted
Intrinsic value of options exercised
Cash received from options
exercised
Excess tax benefit realized for option
exercises
$
$
$
$
3.40
93
385
26
$
$
$
$
-
417
680
116
$
$
$
$
2.58
349
550
28
As of December 31, 2012, there was $374,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under all Plans. The cost is expected to be recognized over a weighted
average period of 1.98 years. The total fair value of options vested was $140,000
and $123,000 for the years ended December 31,2012 and 2011, 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 (3.32% at
December 31, 2012). At December 31, 2012 and 2011, the total net deferrals
included in accrued interest payable and other liabilities were $1,978,000 and
$2,297,000, 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 $3,308,000 and $3,205,000 and at December 31,
2012 and 2011, respectively. Income recognized on these policies, net of related
expenses, for the years ended December 31, 2012, 2011, and 2010, was
$103,000, $98,000, and $100,000, 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. The expense recognized under these plans
for the years ended December 31, 2012, 2011, and 2010, totaled $658,000,
$341,000, and $450,000, respectively. Accrued compensation payable under the
salary continuation plans totaled $4,339,000 and $3,764,000 at December 31,
2012 and 2011, respectively.
In connection with these plans, the Bank purchased single premium life
insurance policies with cash surrender values totaling $4,659,000 and $4,393,000
at December 31, 2012 and 2011, respectively. Income recognized on these
policies, net of related expense, for the years ended December 31, 2012, 2011,
and 2010 totaled $150,000, $144,000, and $152,000, 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, 2012 and
2011, the total amount of the liability was $1,807,000 and $1,694,000,
respectively. Expense recognized by the Bank in 2012, 2011 and 2010 associated
with these plans was $184,000, $98,000, and $95,000, respectively. These
benefits are substantially equivalent to those available under split-dollar life
insurance policies acquired. These single premium life insurance policies had cash
surrender values totaling $4,196,000, and $4,057,000 at December 31, 2012 and
2011, respectively. Income recognized on these policies, net of related expenses,
for the years ended December 31, 2012, 2011, and 2010, was $150,000,
$140,000, and $140,000, respectively.
The current annual tax-free interest rate on all life insurance policies is
5.17%.
15. EMPLOYEE BENEFITS
16. LOANS TO RELATED PARTIES
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 contributed $210,000 and $150,000 to the profit
sharing plan in 2012 and 2011, respectively. The Bank did not contribute to the
profit sharing plan in 2010.
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,
2012, 2011, and 2010, 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, 2012, 2011, and 2010, the Bank made matching
contributions totaling $388,000, $352,000, and $336,000, respectively.
During the normal course of business, the Bank enters into loans with related
parties, including executive officers and directors. The following is a summary of
the aggregate activity involving related party borrowers (in thousands):
Balance, January 1, 2012
Disbursements
Amounts repaid
Balance, December 31, 2012
Undisbursed commitments to related parties, December 31,
2012
$
$
$
919
380
(583)
716
464
40
40
Notes to
Consolidated Financial Statements
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2012 and 2011
(In thousands)
ASSETS
Cash and cash equivalents
Investment in Bank subsidiary
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’
EQUITY
Liabilities:
Junior subordinated debentures due to
subsidiary grantor trust
Other liabilities
Total liabilities
Shareholders’ equity:
$
$
5,155
375
5,530
5,155
197
5,352
7,000
40,552
55,806
4,124
Preferred stock, Series C
Common stock
Retained earnings
Accumulated other comprehensive income, net
of tax
7,000
40,583
62,496
7,586
Total shareholders’ equity
117,665
107,482
Total liabilities and shareholders’ equity
$
123,195
$
112,834
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
For the Years Ended December 31, 2012, 2011, and 2010
(In thousands)
2012
2011
2010
2012
2011
$
2,807
119,812
576
$
969
111,357
508
$
123,195
$
112,834
Income:
Dividends declared by
Subsidiary - eliminated in
consolidation
$
Other income
Total income
$
3,000
3
3,003
$
-
3
3
Expenses:
Interest on junior
subordinated deferrable
interest debentures
Professional fees
Other expenses
Total expenses
Income (loss) before equity
in undistributed net
income of Subsidiary
Equity in undistributed net
income of Subsidiary
Income before income tax
benefit
Benefit from income taxes
Net income
Preferred stock dividend and
accretion of discount
Income available to common
shareholders
Comprehensive income
107
140
587
834
2,169
4,993
7,162
358
7,520
350
100
148
352
600
(597)
6,854
6,257
220
6,477
486
$
$
7,170
10,982
$
$
5,991
9,634
$
$
-
3
3
102
147
329
578
(575)
3,657
3,082
197
3,279
395
2,884
5,701
41
41
2012
2011
2010
$
7,520
$
6,477
$
3,279
(4,993)
108
(26)
(28)
179
(15)
2,745
(480)
(350)
(488)
385
-
26
(907)
1,838
969
2,807
109
-
$
$
$
(6,854)
196
(116)
(50)
(23)
(36)
(406)
-
(307)
-
680
(185)
116
304
(102)
1,071
969
98
7,000
$
$
$
(3,657)
239
(28)
170
23
(43)
(17)
-
(349)
-
550
-
28
229
212
859
1,071
101
-
$
$
$
Notes to
Consolidated Financial Statements
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2012, 2011, and 2010
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Undistributed net income of subsidiary, net of distributions
Stock-based compensation
Tax benefit from exercise of stock options
Net (increase) decrease in other assets
Net increase (decrease) in other liabilities
Benefit for deferred income taxes
Net cash provided by (used in) operating activities
Cash flows from financing activities:
Cash dividend payments on common stock
Cash dividend payments on preferred stock
Share repurchase and retirement
Proceeds from exercise of stock options
Warrant purchase
Tax benefit from exercise of stock options
Net cash (used in) 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
Cash paid during the year for interest
Non-cash investing and financing activities:
Redemption of preferred stock Series A and issuance of preferred stock Series C
18. PENDING ACQUISITION
On December 19, 2012, the Company and Visalia Community Bank,
headquartered in Visalia, California, entered into a Reorganization Agreement
and Plan of Merger (the Merger Agreement). Under the terms of the agreement,
Visalia Community Bank with four branches in Visalia and one branch in Exeter,
will merge with the Company’s subsidiary. The transaction is subject to
customary closing conditions, including regulatory approvals and approval by
Visalia Community Bank’s shareholders. The Company and Visalia Community
Bank boards of directors have unanimously approved the transaction, which is
expected to close in the second quarter of 2013.
The transaction is initially valued at approximately $22.1 million or $52.00
per share to Visalia Community Bank shareholders. The purchase price is to be
paid half in cash and half in Company common stock. Based on a value of
$8.75 per share of Company common stock, using the 30-day volume weighted
average trading price at the time when the principal terms of the agreement were
being established, in the aggregate approximately 1.263 million shares of
Company common stock would be issued and $11,050,000 would be paid in
cash. As a result, Visalia Community Bank shareholders would be entitled to
receive approximately $26.00 and 2.97 shares of Company common stock per
share. The total purchase price is subject to adjustments and closing conditions,
including potential adjustments if the volume weighted average trading price of
Company common shares rises or falls beyond certain levels prior to closing.
42
42
Report of
Independent Registered Public Accounting Firm
The Shareholders and Board of Directors
Central Valley Community Bancorp and Subsidiary
Fresno, California
We have audited the accompanying consolidated balance sheets of Central Valley Community Bancorp and subsidiary (the
‘‘Company’’) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes
in shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these 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 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 includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 financial position
of the Company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles.
Sacramento, California
March 20, 2013
43
43
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 statements of income, comprehensive income, changes in shareholders’ equity
and cash flows of Central Valley Community Bancorp and subsidiary (the ‘‘Company’’) for the year 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 audit.
We conducted our audit 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. An audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
results of operations and cash flows of Central Valley Community Bancorp and subsidiary for the year ended December 31, 2010, in
conformity with U.S. generally accepted accounting principles.
Sacramento, California
March 16, 2011
44
44
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 provision for (benefit from) income taxes
Provision for (benefit from) 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)
2012
2011
2010
2009
2008
$
31,820 $
1,883
34,299 $
2,942
36,013 $
4,283
40,734 $
6,627
29,937
700
29,237
7,242
27,274
9,205
1,685
7,520
350
31,357
1,050
30,307
6,271
28,240
8,338
1,861
6,477
486
31,730
3,800
27,930
3,711
28,731
2,910
(369)
3,279
395
34,107
10,514
23,593
5,850
27,531
1,912
(676)
2,588
365
7,170 $
0.75 $
5,991 $
0.63 $
2,884 $
0.31 $
2,223 $
0.29 $
0.75 $
0.63 $
0.31 $
0.28 $
0.05 $
- $
- $
- $
December 31,
(In Thousands)
31,845
7,278
24,567
1,290
23,277
5,190
20,976
7,491
2,352
5,139
-
5,139
0.83
0.79
0.10
2012
2011
2010
2009
2008
424,516 $
385,185
751,432
890,228
117,665
801,098
353,808 $
415,999
712,986
849,023
107,482
762,654
280,967 $
420,583
650,495
777,594
97,391
695,410
232,142 $
449,007
640,167
765,488
91,223
677,955
194,215
477,015
635,058
752,713
75,375
665,530
368,818 $
394,675
719,601
853,078
114,561
766,937
299,935 $
417,273
677,789
800,178
103,386
715,862
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
$
$
$
$
$
$
Data from 2008 reflects the partial year impact of the acquisition of Service 1st Bancorp and its subsidiary, Service 1st Bank.
Supplementary
Financial Information
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Total non-interest income
Total non-interest expense
Provision for income taxes
Net income
Net income available to common shareholders
Basic earnings per share
Diluted earnings per share
Unaudited Quarterly Statement of Operations Data
(Dollars in thousands, except per share data)
Q4 2012
Q3 2012
Q2 2012
Q1 2012
Q4 2011
Q3 2011
Q2 2011
Q1 2011
$
$
$
$
$
7,189 $
200
7,572 $
-
7,510 $
100
7,666 $
400
8,016 $
300
7,949 $
400
7,794 $
250
6,989
1,829
6,983
193
7,572
2,284
6,655
745
7,410
1,471
6,718
454
7,266
1,658
6,918
293
7,716
1,336
6,803
541
7,549
1,595
7,222
514
7,544
1,597
7,067
301
1,642 $
2,456 $
1,709 $
1,713 $
1,708 $
1,408 $
1,773 $
1,554 $
2,369 $
1,622 $
1,625 $
1,622 $
1,206 $
1,674 $
0.16 $
0.16 $
0.25 $
0.25 $
0.17 $
0.17 $
0.17 $
0.17 $
0.17 $
0.17 $
0.13 $
0.13 $
0.18 $
0.18 $
7,598
100
7,498
1,748
7,153
505
1,588
1,489
0.16
0.16
45
45
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 the discussion of risk
factors in Item 1A, ‘‘Risk Factors.’’
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 2012, 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 December 2012, the Company and Visalia Community Bank, headquartered
in Visalia, California, entered into a Reorganization Agreement and Plan of
Merger (the Merger Agreement). Under the terms of the agreement, Visalia
Community Bank, with four branches in Visalia and one branch in Exeter, will
merge with Central Valley Community Bancorp’s subsidiary, Central Valley
Community Bank (the Merger). The transaction is subject to customary closing
conditions, including regulatory approvals and approval by Visalia Community
Bank’s shareholders. The Central Valley Community Bancorp and Visalia
Community Bank boards of directors have unanimously approved the transaction,
which is expected to close in the second quarter of 2013.
In 2011, the Company relocated the existing Modesto branch, a full service
office, to a more desirable location. 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. 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. Since 2007, 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 dependent
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, 2012 was
$0.75 compared to $0.63 and $0.31 for the years ended December 31, 2011 and
2010, respectively. Net income for 2012 was $7,520,000 compared to
$6,477,000 and $3,279,000 for the years ended December 31, 2012, 2011, and
2010, respectively. The increase in net income and EPS was primarily driven by
lower provision for credit losses, decrease in non-interest expense and increase in
non-interest income, partially offset by decreases in net interest income in 2012
compared to 2011. Total assets at December 31, 2012 were $890,228,000
compared to $849,023,000 at December 31, 2011.
Return on average equity for 2012 was 6.56% compared to 6.26% and
3.41% for 2011 and 2010, respectively. Return on average assets for 2012 was
0.88% compared to 0.81% and 0.43% for 2011 and 2010, respectively. Total
equity was $117,665,000 at December 31, 2012 compared to $107,482,000 at
December 31, 2011. The increase in assets and equity in 2012 compared to
2011 is due to an increase in deposits and increases in other comprehensive
income and retained earnings.
Average total loans decreased $23,251,000 or 5.43% to $405,040,000 in 2012
compared to $428,291,000 in 2011. In 2012, we recorded a provision for credit
losses of $700,000 compared to $1,050,000 in 2011 and $3,800,000 in 2010.
The Company had nonperforming assets totaling $9,695,000 at December 31,
2012. Nonperforming assets included nonaccrual loans totaling $9,695,000. At
December 31, 2011, nonperforming assets totaled $14,434,000 consisting of
$14,434,000 in nonaccrual loans. Net charge-offs for 2012 were $1,963,000
compared to $668,000 for 2011 and $2,986,000 for 2010. Refer to ‘‘Asset
Quality’’ below for further information.
46
46
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 shareholders;
• Return on average assets;
• Development of revenue streams, including net interest income and
non-interest income;
• Asset quality;
• Asset growth;
• Capital adequacy;
• Operating efficiency; and
• Liquidity.
Return to Our Shareholders
Our return to our shareholders is measured in a ratio that measures the return
on average equity (ROE). Our ROE was 6.56% for the year ended 2012
compared to 6.26% and 3.41% for the years ended 2011 and 2010, respectively.
In 2012, compared to 2011 we experienced an increase in net income and an
increase in capital due to increases in retained earnings and other comprehensive
income.
Our net income for the year ended December 31, 2012 increased $1,043,000
compared to 2011 and increased $3,198,000 for 2011 compared to 2010.
During 2012, net income increased due to decreases in non-interest expenses,
increases in non-interest income, a decrease in the provision for credit losses and
a decrease in tax expense, partially offset by decreases in net interest income in
2012 compared to 2011. Net interest income decreased because of decreases in
loan and investment income, partially offset by decreases in interest expense on
deposits. Non-interest income increased due to a net realized gain on sale of
investment securities of $1,639,000 in 2012, compared to $298,000 in 2011 and
an increase in loan placement fees of $357,000, partially offset by a decrease of
$603,000 in gains on the sale of other real estate owned, and a $129,000
decrease in service charge income.
Non-interest expenses decreased in 2012 compared to 2011 primarily due to
decreases in amortization of core deposit intangibles of $214,000, salary and
employee benefit expenses of $165,000, legal fees of $150,000, occupancy and
equipment expenses of $217,000, regulatory assessments of $193,000, and
advertising fees of $177,000, partially offset by increase in merger-related
expenses of $284,000 and other real estate owned expenses of $63,000. During
2012, our net interest margin (NIM) decreased 42 basis points compared to
2011. Basic EPS was $0.75 for 2012 compared to $0.63 and $0.31 for 2011 and
2010, respectively. Diluted EPS was $0.75 for 2012 compared to $0.63 and
$0.31 for 2011 and 2010, respectively. The increase in EPS in 2012 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 2012 was 0.88% compared to 0.81% and 0.43% for the years ended
December 31, 2011 and 2010, respectively. The 2012 increase in ROA is due to
the increase in net income, notwithstanding an increase in average assets.
Annualized ROA for our peer group was 0.87% at September 30, 2012. 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 Revenue Streams
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 4.21% for the year ended December 31, 2012, compared to
4.63% and 4.95% for the years ended December 31, 2011 and 2010,
respectively. The decrease in net interest margin compared to 2011 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 58 basis points, while the cost of total interest-
bearing liabilities decreased 21 basis points and the cost of total deposits
decreased 16 basis points. Our cost of total deposits in 2012 was 0.23%
compared to 0.39% for the same period in 2011 and 0.58% for the year ended
December 31, 2010. Our net interest income before provision for credit losses
decreased $1,420,000 or 4.53% to $29,937,000 for the year ended 2012
compared to $31,357,000 and $31,730,000 for the years ended 2011 and 2010,
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 2012 increased $971,000 or
15.48% to $7,242,000 compared to $6,271,000 in 2011 and $3,711,000 in
2010. The increase resulted primarily from an increase in net realized gains on
sales and calls of investment securities and an increase in loan placement fees
compared to the comparable 2011 period, partially offset by a decrease in gain
on sale of other real estate owned and a decrease in service charge income. The
net gain realized on sales and calls of investment securities was the result of a
partial restructuring of the investment portfolio designed to improve the future
performance of the portfolio. Customer service charges decreased $129,000 or
4.44% to $2,774,000 in 2012 compared to $2,903,000 and $3,225,000 in 2011
and 2010, 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 $9,695,000 and $14,434,000 at December 31, 2012 and 2011,
respectively. Nonperforming assets totaled 2.45% of gross loans as of
December 31, 2012 and 3.38% of gross loans as of December 31, 2011. The
Company had no other real estate owned at December 31, 2012 and 2011.
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
4.85% during 2012 to $890,228,000 as of December 31, 2012 from
$849,023,000 as of December 31, 2011. Total gross loans decreased 7.51% to
$395,318,000 as of December 31, 2012, compared to $427,395,000 at
December 31, 2011. Total investment securities and Federal funds sold increased
19.75% to $394,393,000 as of December 31, 2012 compared to $329,341,000
as of December 31, 2011. Total deposits increased 5.39% to $751,432,000 as of
December 31, 2012 compared to $712,986,000 as of December 31, 2011. Our
loan to deposit ratio at December 31, 2012 was 52.61% compared to 59.94% at
December 31, 2011. The loan to deposit ratio of our peers was 70.66% at
September 30, 2012.
Over the past several years, we have focused on not only our net income, but
Capital Adequacy
improving the consistency of our revenue streams 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
At December 31, 2012, we had a total capital to risk-weighted assets ratio of
19.53%, a Tier 1 risk-based capital ratio of 18.24% and a leverage ratio of
10.56%. At December 31, 2011, we had a total capital to risk-weighted assets
47
47
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
OVERVIEW
(Continued)
ratio of 17.49%, a Tier 1 risk-based capital ratio of 16.20% and a leverage ratio
of 10.13%. At December 31, 2012, on a stand-alone basis, the Bank had a total
risk-based capital ratio of 18.96%, a Tier 1 risk based capital ratio of 17.67%
and a leverage ratio of 10.22%. At December 31, 2011, the Bank had a total
risk-based capital ratio of 17.31%, Tier 1 risk-based capital of 16.02% and a
leverage ratio of 10.01%. The improvement in 2012 is due to an increase in risk
adjusted capital while risk weighted assets decreased. Note 13 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 ratio represents greater efficiency.
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
75.99% for 2012 compared to 75.67% for 2011 and 73.55% for 2010. The
decline in the efficiency ratio in 2012 is due to a decrease in net interest income
that is greater than the decrease in operating expenses. The decline in the
efficiency ratio in 2011 compared to 2010 is due to an increase in operating
expenses and a decrease in net interest income. The efficiency ratio in 2010
declined as compared to 2009 due to a decrease in net interest income and
non-interest income. The Company’s net interest income before provision for
credit losses plus non-interest income decreased 1.19% to $37,179,000 in 2012
compared to $37,628,000 in 2011 and $35,441,000 in 2010, while operating
expenses decreased 3.42% in 2012 and 1.71% in 2011. Operating expenses
increased 4.36% in 2010.
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 $40,000,000 and secured borrowing lines of
approximately $133,034,000 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
$446,921,000 or 50.20% of total assets at December 31, 2012 and
$373,217,000 or 43.96% of total assets as of December 31, 2011.
RESULTS OF OPERATIONS
NET INCOME
Net income was $7,520,000 in 2012 compared to $6,477,000 and
$3,279,000 in 2011 and 2010, respectively. Basic earnings per share was $0.75,
$0.63, and $0.31 for 2012, 2011, and 2010, respectively. Diluted earnings per
share was $0.75, $0.63, and $0.31 for 2012, 2011, and 2010, respectively. ROE
was 6.56% for 2012 compared to 6.26% for 2011 and 3.41% for 2010. ROA
for 2012 was 0.88% compared to 0.81% for 2011 and 0.43% for 2010.
The increase in net income for 2012 compared to 2011 can be attributed to
the decrease in the provision for credit losses, an increase in non interest income,
and a decrease in provision for income taxes, partially offset by decrease in
interest income. The decrease in net interest income for 2012 compared to 2011
was due primarily to the 42 basis point reduction in the net interest margin. The
increase in net income for 2011 compared to 2010 can be attributed to the
decrease in the provision for credit losses and an increase in non-interest income,
partially offset by decrease in interest income and an increase in provision from
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.
48
48
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.
Year Ended December 31, 2012
Year Ended December 31, 2011
Year Ended December 31, 2010
Average
Balance
Interest
Income/
Expense
Average
Interest Rate
Average
Balance
Interest
Income/
Expense
Average
Interest Rate
Average
Balance
Interest
Income/
Expense
Average
Interest Rate
SCHEDULE OF AVERAGE
BALANCES AND AVERAGE
YIELDS AND RATES
(Dollars in thousands)
ASSETS
Interest-earning deposits in
other banks
Securities
Taxable securities
Non-taxable securities (1)
Total investment
securities
Federal funds sold
Total securities and
interest-earning
deposits
Loans (2) (3)
Federal Home Loan Bank
stock
$
36,836 $
218,325
113,039
331,364
618
368,818
394,575
3,544
108
3,289
6,830
10,119
2
10,229
23,913
36
Total interest-earning assets
766,937 $
34,178
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
$
$
(10,365)
10,465
919
19,525
6,217
59,380
853,078
177,205 $
178,734
59,838
86,295
502,072
9,156
Total interest-bearing liabilities
511,228 $
Non-interest bearing demand
deposits
Other liabilities
Shareholders’ equity
217,529
9,760
114,561
Total average liabilities and
shareholders’ equity
$
853,078
302
392
466
470
1,630
253
1,883
0.29%
$
73,016 $
0.26%
$
42,047 $
1.51%
6.04%
3.05%
0.30%
2.77%
6.06%
1.02%
4.46%
0.17%
0.22%
0.78%
0.54%
0.32%
2.76%
0.37%
150,559
75,665
226,224
695
299,935
412,969
2,958
187
4,548
5,248
9,796
2
9,985
26,098
9
715,862 $
36,092
$
$
(11,018)
15,322
217
17,977
5,788
56,030
800,178
154,765 $
174,049
70,111
96,620
495,545
10,265
505,810 $
182,244
8,738
103,386
368
692
688
914
2,662
280
2,942
3.02%
6.94%
4.33%
0.29%
3.33%
6.32%
0.30%
5.04%
0.24%
0.40%
0.98%
0.95%
0.54%
2.73%
0.58%
124,163
64,838
189,001
713
231,761
437,959
3,084
110
5,472
4,605
10,077
2
10,189
27,390
11
672,804 $
37,590
$
$
(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
498
1,036
866
1,313
3,713
570
4,283
0.26%
4.41%
7.10%
5.33%
0.28%
4.40%
6.25%
0.36%
5.59%
0.35%
0.66%
1.25%
1.15%
0.77%
2.90%
0.85%
$
800,178
$
758,852
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)
$
34,178
4.46%
$
36,092
5.04%
$
37,590
5.59%
1,883
0.37%
2,942
0.58%
4,283
0.85%
$
32,295
4.21%
$
33,150
4.63%
$
33,307
4.95%
(1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $2,322, $1,784, and $1,566 in 2012, 2011, and 2010,
respectively.
(2) Loan interest income includes loan fees of $646 in 2012, $399 in 2011, and $460 in 2010.
(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.
49
49
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
INTEREST INCOME AND EXPENSE
(Continued)
Interest and fee income from loans decreased $2,185,000 or 8.37% in 2012
compared to 2011. Interest and fee income decreased $1,292,000 or 4.72% in
2011 compared to 2010. The decrease in 2012 is attributable to a decrease in
average total loans outstanding combined with a 26 basis point decrease in the
yield on loans. The decrease in 2011 is attributable to a decrease in average total
loans outstanding and a 7 basis point decrease in yield on loans compared to
2010. Average total loans for 2012 decreased $23,251,000 to $405,040,000
compared to $428,291,000 for 2011 and $455,340,000 for 2010. The yield on
loans for 2012 was 6.06% compared to 6.32% and 6.25% for 2011 and 2010,
respectively.
Interest income from total investments on a non tax-equivalent basis, (total
investments include investment securities, Federal funds sold, interest-bearing
deposits in other banks, and other securities), decreased $294,000 or 3.58% in
2012 compared to 2011. The yield on average investments decreased 56 basis
points to 2.77% for the year ended December 31, 2012 from 3.33% for the year
ended December 31, 2011. The increase of the investment portfolio balance at
significantly reduced yields contributed to the decreases in net interest income
and net interest margin. Average total investments increased $68,883,000 to
$368,818,000 in 2012 compared to $299,935,000 in 2011. In 2011, total
investment income decreased $422,000 or 4.89% compared to 2010 primarily
due to a $68,174,000 increase in the average balance to $299,935,000 in 2011
compared to $231,761,000, for 2010, coupled with a decrease in yield on
investments of 107 basis points.
A significant portion of the investment portfolio is mortgage-backed securities
(MBS) and collateralized mortgage obligations (CMOs). At December 31, 2012,
we held $214,885,000 or 54.54% of the total market value of the investment
portfolio in MBS and CMOs with an average yield of 1.41%. 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 $7,586,000 and is reflected
in the Company’s equity. At December 31, 2012, the average life of the
investment portfolio was 5.48 years and the market value reflected a pre-tax gain
of $12,891,000. Management reviews market value declines on individual
investment securities to determine whether they represent other-than-temporary
impairment (OTTI) and for the year ended December 31, 2012, no OTTI was
recorded, compared to a $31,000 OTTI loss for the year ended December 31,
2011. 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.
Measured at December 31, 2012, an immediate rate increase of 200 basis points
would result in an estimated decrease in the market value of the investment
portfolio by approximately $20,730,000. Conversely, with an immediate rate
decrease of 200 basis points, the estimated increase in the market value of the
investment portfolio would be $19,082,000. 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 2012 decreased $2,479,000 to $31,820,000 compared
to $34,299,000 in 2011 and $36,013,000 in 2010. The decrease was due to the
58 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 4.46% for the year ended December 31, 2012 from
5.04% for the year ended December 31, 2011. Average interest earning assets
increased to $766,937,000 for the year ended December 31, 2012 compared to
$715,862,000 for the year ended December 31, 2011. Average interest-earning
deposits in other banks decreased $36,180,000 comparing 2012 to 2011. Average
yield on these deposits was 0.29%. Average investments increased $68,883,000
but the tax equivalent yield on average investment securities decreased 56 basis
points. Average total loans decreased $23,251,000 and the yield on average loans
decreased 26 basis points.
The decrease in total interest income in 2011 was due to the 55 basis point
decrease in the tax equivalent yield on average interest earning asset and a change
in the mix of interest earning assets. The yield on interest-earning assets
decreased to 5.04% for the year ended December 31, 2011 from 5.59% for the
year ended December 31, 2010. Average interest-earning assets increased to
715,862,000 for the year ended December 31, 2011 compared to $672,804,000
for the year ended December 31, 2010.
Interest expense on deposits in 2012 decreased $1,032,000 or 38.77% to
$1,630,000 compared to $2,662,000 in 2011 and $3,713,000 in 2010. The
decrease in interest expense in 2012 compared to 2011 was primarily due to the
repricing of interest-bearing deposits which decreased 22 basis points to 0.32% in
2012 from 0.54% in 2011. The decrease in interest expense in 2011 compared
to 2010 was due to repricing of interest-bearing deposits, which decreased 23
basis points to 0.54% in 2011 from 0.77% in 2010. Average interest-bearing
deposits were $502,072,000 for 2012 compared to $495,545,000 and
$483,220,000 for 2011 and 2010, respectively. The increases in average interest-
bearing deposits in 2011 and 2010 were the result of our own organic growth.
Average other borrowings decreased to $9,156,000 with an effective rate of
2.76% for 2012 compared to $10,265,000 with an effective rate of 2.73% for
2011. In 2010, the average other borrowings were $19,634,000 with an effective
rate of 2.90%. 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 3.59% for
2012 and 2011 and 3.20% for 2010.
The cost of all of our interest-bearing liabilities decreased 21 basis points to
0.37% for 2012 compared to 0.58% for 2011 and 0.85% for 2010. The cost of
total deposits decreased to 0.23% for the year ended December 31, 2012
compared to 0.39% and 0.58% for the years ended December 31, 2011 and
2010, respectively. Average demand deposits increased 19.36% to $217,529,000
in 2012 compared to $182,244,000 for 2011 and $152,946,000 for 2010. The
ratio of non-interest demand deposits to total deposits increased to 30.23% for
2012 compared to 26.89% and 24.04% for 2011 and 2010, respectively.
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Net interest income before provision for credit losses for 2012 decreased
$1,420,000 or 4.53% to $29,937,000 compared to $31,357,000 for 2011 and
$31,730,000 for 2010. The decrease in 2012 was due to the 42 basis point
decrease in our net interest margin (NIM). Yield on interest earning assets
decreased 58 basis points while the effective rate on interest bearing liabilities
only decreased 21 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 decreased $373,000 in 2011 compared to 2010 mainly
due to the 32 basis point decrease in our net interest margin (NIM). Average
50
50
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
(Continued)
interest-earning assets were $766,937,000 for the year ended December 31, 2012
with a net interest margin (NIM) of 4.21% compared to $715,862,000 with a
NIM of 4.63% in 2011, and $672,804,000 with a NIM of 4.95% in 2010. 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
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 probable loss exposure.
The allocation of the allowance for credit losses is set forth below:
Loan Type
(Dollars in thousands)
Commercial:
December 31, % of Total December 31, % of Total
2012
Loans
2011
Loans
Commercial and industrial
Agricultural land and production
$
2,071
605
19.7% $
6.7%
1,924
342
18.3%
7.0%
2,153
28.9%
1,578
26.4%
1,035
1,886
646
157
8.4%
13.6%
7.2%
2.0%
2,954
2,043
489
91
7.7%
14.6%
9.9%
1.8%
Real estate:
Owner occupied
Real estate construction and
other land loans
Commercial real estate
Agricultural real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Unallocated reserves
exist in the portfolio at that time. We assign qualitative and quantitative factors
(Q factors) to each loan category. 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.
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 2012, 2011, and 2010 were $700,000,
$1,050,000, and $3,800,000, 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, 2012, the Company had net
charge offs totaling $1,963,000 compared to $668,000 and $2,986,000 for the
same periods in 2011 and 2010, respectively. The decrease in provision for credit
losses in 2012 compared to 2011 resulted from a decrease in the level of
outstanding loans and nonperforming loans. The net charge off ratio, which
reflects net charge-offs to average loans, was 0.48%, 0.16% and 0.66% for 2012,
2011, and 2010, respectively. The 2012 charge offs consisted primarily of one
real estate loan. The charged off loans were previously identified and adequately
reserved for as of December 31, 2011.
Nonperforming loans were $9,695,000 and $14,434,000 at December 31,
2012 and 2011, respectively. Nonperforming loans as a percentage of total loans
were 2.45% at December 31, 2012 compared to 3.38% at December 31, 2011.
There was no other real estate owned at December 31, 2012 and December 31,
2011 compared to $1,325,000 net of a valuation allowance of $309,000 at
December 31, 2010.
Losses in the real estate segments of the loan portfolio in 2012 increased
compared to 2011. With real estate appraised values reflecting lower levels,
additions to the reserves were required. We had loans past due, not including
non accrual loans, totaling $27,000 at December 31, 2012 compared to
$1,741,000 at December 31, 2011. 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
2012 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
probable 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, 2012, we believe, based on all current and available
information, the allowance for credit losses is adequate to absorb probable
incurred 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.
5,877
60.1%
7,155
60.4%
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
1,158
383
39
10.9%
2.6%
1,419
417
139
12.0%
2.3%
Net interest income, after the provision for credit losses of $700,000 in 2012,
$1,050,000 in 2011, and $3,800,000 in 2010, was $29,237,000 for 2012
compared to $30,307,000 and $27,930,000 for 2011 and 2010, respectively.
Total allowance for credit losses
$
10,133
$
11,396
NON-INTEREST INCOME
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
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 $7,242,000 in 2012
51
51
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
NON-INTEREST INCOME
(Continued)
compared to $6,271,000 and $3,711,000 in 2011 and 2010, respectively. The
$971,000 or 15.48% increase in non-interest income was due to increases in
gains on sales and calls of investment securities, and an increase in loan
placement fees, partially offset by a decrease in gains on sales of other real estate
owned and a decrease in service charges. The $2,560,000 or 68.98% increase in
non-interest income comparing 2011 to 2010 was due to increases in gains on
sales and calls of investment securities, a gain on disposal of other real estate
owned, and a decrease in other-than-temporary impairment write down on
certain investment securities.
Customer service charges decreased $129,000 to $2,774,000 in 2012
compared to $2,903,000 in 2011 and $3,225,000 in 2010. The decrease in 2012
from 2011, and in 2011 from 2010 is mainly due to decreases in overdraft fee
income.
During the year ended December 31, 2012, we realized net gain on sales and
calls of investment securities of $1,639,000 resulting primarily from the partial
restructuring of the investment portfolio designed to improve the future
performance of the portfolio. In 2011, we realized a net gain of $298,000
compared to a net loss of $191,000 in 2010 from sales and calls of securities.
For the year ended December 31, 2011, we realized a $31,000
other-than-temporary impairment write down on certain investment securities.
See Footnote 3 to the audited Consolidated Financial Statements for more detail.
Income from the appreciation in cash surrender value of bank owned life
insurance (BOLI) totaled $391,000 in 2012 compared to $382,000 and
$392,000 in 2011 and 2010, respectively. 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 $357,000 in 2012 to $631,000 compared to $274,000 in 2011
and $300,000 in 2010. Fees were higher in 2012 compared to 2011 and 2010,
as 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, 2012, we held $3,850,000 in FHLB stock compared to
$2,893,000 at December 31, 2011. Dividends in 2012 increased to $36,000
compared to $9,000 in 2011 and $11,000 in 2010.
Other income decreased to $1,755,000 in 2012 compared to $1,826,000 and
$1,395,000 in 2011 and 2010, respectively. The period-to-period decrease in
2012 compared to 2011 was primarily due to a $142,000 gain related to the
final distribution of the Service 1st escrow account, and an $85,000 gain related
to the collection of life insurance proceeds realized in 2011 offset by increases in
electronic funds transfer fee income and non-customer check cashing fees.
NON-INTEREST EXPENSES
Salaries and employee benefits, occupancy and equipment, regulatory
assessments, data processing expenses, and professional services (consisting of
audit, accounting and legal fees) are the major categories of non-interest expenses.
Non-interest expenses decreased $966,000 or 3.42% to $27,274,000 in 2012
compared to $28,240,000 in 2011, compared to $28,731,000 in 2010, which
was a decrease of $491,000 in 2011.
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 75.99% for 2012 compared to 75.67% for 2011 and 73.55%
for 2010. The decline in the efficiency ratio in 2012 is due to a decrease in net
interest income that is greater than the decrease in operating expenses. The
decline in the efficiency ratio in 2011 compared to 2010 is due to an increase in
operating expenses and a decrease in net interest income.
Salaries and employee benefits decreased $165,000 or 1.05% to $15,597,000
in 2012 compared to $15,762,000 in 2011 and $14,871,000 in 2010. Full time
equivalents were 208 at December 31, 2012 compared to 211 at December 31,
2011.
At December 31, 2012, 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 317,799 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 181,490 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, 2012, 2011, and 2010, the compensation
cost recognized for share based compensation was $108,000, $196,000 and
$239,000, respectively.
As of December 31, 2012, there was $374,000 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 1.98 years. See Notes 1 and 14 to the audited
Consolidated Financial Statements for more detail.
In 2012, options to purchase 92,150 shares of common stock were granted
from the 2005 Plan at exercise prices between $8.02 and $8.75. No options to
purchase shares of the Company’s common stock were issued during the year
ending December 31, 2011. 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. All options were
granted with an exercise price equal to the market value on the grant date.
Occupancy and equipment expense decreased $217,000 or 5.72% to
$3,578,000 in 2012 compared to $3,795,000 in 2011 and $3,867,000 in 2010.
Relocation of one branch resulted in lower rent expenses in 2012, as compared
to same period in 2011. Fully depreciated assets resulted in lower depreciation
expenses in 2012, as compared to 2011. The company made no changes in
depreciation expense methodology.
Regulatory assessments decreased $193,000 or 22.84% to $652,000 in 2012
compared to $845,000 and $1,191,000 in 2011 and 2010, respectively. The
FDIC finalized a new assessment system which took effect the third quarter of
2011. The final rule changed the assessment base from domestic deposits to
average assets minus average tangible equity.
Data processing expenses were $1,125,000 in 2012 compared to $1,178,000
in 2011 and $1,197,000 in 2010. The $53,000 or 4.50% decrease in 2012, and
the $19,000 decrease in 2011 compared to 2010 are a result of a reduction in
terms of our core processing contract.
Legal fees decreased $150,000 or 44.78% to $185,000 for the year ended
December 31, 2012 compared to $335,000 and $495,000 in 2011 and 2010,
respectively. The higher legal fees in 2011 and 2010 are primarily due to issues
related to nonperforming assets and other loan related legal expenses.
Total other real estate owned (OREO) expenses increased $63,000 or
420.00% to $78,000 for the year ended December 31, 2012 compared to
$15,000 and $1,071,000 in 2011 and 2010. The increase in OREO expenses
was primarily due to new OREO properties added and subsequently sold in
2012. OREO expenses in 2010 were 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 $109,000 loss on disposition of
OREO property for the year ended December 31, 2010.
Amortization of core deposit intangibles was $200,000 for 2012 and
$414,000 for 2011 and 2010. Other non-interest expenses increased $167,000 or
3.58% to $4,503,000 in 2012 compared to $4,670,000 in 2011 and $4,460,000
in 2010.
52
52
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
NON-INTEREST EXPENSES (Continued)
The following table describes significant components of other non-interest
expense as a percentage of average assets.
We accrued preferred stock dividends to the Treasury and accretion of the
issuance discount in the amount of $350,000 and $486,000 during the years
ended December 31, 2012 and 2011, respectively.
For the years ended December 31,
2012
2011
2010
Other
Expense
%
Average
Assets
Other
Expense
%
Average
Assets
Other
Expense
%
Average
Assets
(Dollars in thousands)
$
369
0.04% $
369
0.05% $
354
0.05%
362
270
221
215
196
183
169
162
155
148
120
85
77
1,771
0.04%
0.03%
0.03%
0.03%
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
0.01%
0.01%
0.01%
0.21%
324
247
245
219
232
198
236
340
160
154
125
125
112
1,584
0.04%
0.03%
0.03%
0.03%
0.03%
0.02%
0.03%
0.04%
0.02%
0.02%
0.02%
0.02%
0.01%
0.20%
275
119
271
209
195
218
305
212
139
148
130
44
165
1,676
0.04%
0.02%
0.04%
0.03%
0.03%
0.03%
0.04%
0.03%
0.02%
0.02%
0.02%
0.01%
0.02%
0.22%
$
4,503
0.53% $
4,670
0.58% $
4,460
0.59%
ATM/debit card expenses
License and maintenance
contracts
Internet banking expense
Stationery/supplies
Director fees and related
expenses
Amortization of software
Postage
Telephone
Consulting
Education/training
Donations
General insurance
Operating losses
Appraisal fees
Other
Total other non-interest
expense
For the year ended December 31, 2012, the $178,000 decrease in consulting
was related to various financial and tax planning projects assistance in 2011.
License and maintenance contract expense increased in 2012 as a result of annual
increases on various contracts in addition to new contracts for new products,
services and software put in place during 2011. In 2012, the $35,000 decrease in
appraisal fees resulted due to fewer appraisals paid for by the bank.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 18.31% for 2012 compared to 22.32% for
2011 and (12.68)% for 2010. The Company reported an income tax provision
of $1,685,000 and $1,861,000 for the years ended December 31, 2012 and
2011, compared to a benefit totaling $369,000 for the year ended December 31,
2010. The decrease in the effective tax rate in 2012 compared to 2011 is due
primarily to federal tax deductions for tax free municipal bond income, 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 August 18, 2011, the Company entered into a Securities Purchase
Agreement with the Small Business Lending Fund of the United States
Department of the Treasury (the Treasury), under which the Company issued
7,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C (the
Preferred Shares) to the Treasury for an aggregate purchase price of $7,000,000.
Simultaneously, the Company agreed with Treasury under a Letter Agreement to
redeem, for an aggregate price of $7,000,000, the 7,000 shares of the Company’s
Series A Fixed Rate Cumulative Preferred Stock (Series A Stock) originally issued
pursuant to the Treasury’s Capital Purchase Program (CPP) in 2009. The
redemption of the Series A Stock resulted in an acceleration of the remaining
discount booked at the time of the CPP transaction.
In connection with the repurchase of the Series A Stock, the Company also
notified the Treasury of the Company’s intent to repurchase the warrant (the
Warrant) to purchase 79,037 shares of the Company’s common stock that was
originally issued to Treasury in connection with the CPP transaction. On
September 28, 2011, the Company completed the repurchase of the Warrant for
total consideration of $185,000.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
December 31, 2012 compared to December 31, 2011.
Total assets were $890,228,000 as of December 31, 2012, compared to
$849,023,000 as of December 31, 2011, an increase of 4.85% or $41,205,000.
Total gross loans were $395,318,000 as of December 31, 2012, compared to
$427,395,000 as of December 31, 2011, a decrease of $32,077,000 or 7.51%.
The total investment portfolio (including Federal funds sold and interest-earning
deposits in other banks) increased 19.98% or $70,708,000 to $424,516,000.
Total deposits increased 5.39% or $38,446,000 to $751,432,000 as of
December 31, 2012, compared to $712,986,000 as of December 31, 2011.
Shareholders’ equity increased $10,183,000 or 9.47% to $117,665,000 as of
December 31, 2012, compared to $107,482,000 as of December 31, 2011, due
to net income included in retained earnings and an increase in other
comprehensive income. Accrued interest payable and other liabilities were
$11,976,000 as of December 31, 2012, compared to $19,400,000 as of
December 31, 2011, a decrease of $7,424,000. 2011 other liabilities included an
accrual of $7,749,000 for investment securities with a trade date before and a
settlement date after December 31, 2011.
FAIR VALUE
The Company measures the fair values of its financial instruments utilizing a
hierarchical 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 actively 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 2 of the Notes to 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 U.S. Government sponsored
entities and agencies collateralized by residential mortgage backed obligations and
obligations of states and political subdivision securities and are classified at the
date of acquisition as available for sale or held to maturity. As of December 31,
2012, investment securities with a fair value of $89,343,000, or 22.68% 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, 2012 was 52.61% compared to 59.94% at
December 31, 2011. The loan to deposit ratio of our peers was 70.66% at
September 30, 2012. The total investment portfolio, including Federal funds sold
and interest-earning deposits in other banks, increased 19.98% or $70,708,000 to
$424,516,000 at December 31, 2012, from $353,808,000 at December 31,
2011. The market value of the portfolio reflected an unrealized gain of
53
53
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The unrealized losses associated with PLRMBS are primarily driven by higher
projected collateral losses, wider credit spreads, and changes in interest rates. The
Company assesses for credit impairment using a discounted cash flow model. The
key assumptions include default rates, severities, discount rates and prepayment
rates. Losses are estimated to a security by forecasting the underlying mortgage
loans in each transaction. The forecasted loan performance is used to project cash
flows to the various tranches in the structure. 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 previously recorded.
At December 31, 2012, the Company had a total of 23 PLRMBS with a
remaining principal balance of $6,258,000 and a net unrealized loss of
approximately $117,000. Six of these securities account for $206,000 of the
unrealized loss at December 31, 2012 offset by 17 of these securities with gains
totaling $323,000. Seven of these PLRMBS with a remaining principal balance
of $4,806,000 had credit ratings below investment grade. The Company
continues to perform extensive analyses on these securities as well as all whole
loan CMOs. No credit related OTTI charges related to PLRMBS were recorded
during the year ended December 31, 2012.
See Note 3 to the audited Consolidated Financial Statements for carrying
values and estimated fair values of our investment securities portfolio.
INVESTMENTS
(Continued)
$12,891,000 at December 31, 2012, compared to $7,008,000 at December 31,
2011.
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. 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 original yield expected at time
of purchase.
As of December 31, 2012, 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). Management
evaluated all available-for-sale investment securities with an unrealized loss at
December 31, 2012, and identified those that had an unrealized loss for at least
a consecutive 12 month period, which had an unrealized loss at December 31,
2012 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 2012 to provide
independent valuation and OTTI analysis of the 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 most likely 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 original yield at time of purchase) 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 December 31, 2012. 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.
54
54
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LOANS
Total gross loans decreased $32,077,000 or 7.51% to $395,318,000 as of December 31, 2012, compared to $427,395,000 as of December 31, 2011.
The following table sets forth information concerning the composition of our loan portfolio as of and for the years ended December 31, 2012, 2011, 2010, 2009,
and 2008.
Loan Type
(Dollars in thousands)
Commercial:
2012
2011
2010
2009
2008
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Commercial and industrial
Agricultural land and production
$
77,956
26,599
19.7% $
6.7%
78,089
29,958
18.3% $
7.0%
81,318
20,604
18.8% $
4.8%
93,282
13,903
20.3% $
3.0%
Total commercial
104,555
26.4%
108,047
25.3%
101,922
23.6%
107,185
23.3%
109,664
20,406
130,070
22.6%
4.2%
26.8%
Real estate:
Owner occupied
Real estate-construction and other land
loans
Agricultural real estate
Commercial real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Deferred loan fees, net
Total gross loans
114,444
28.9%
113,183
26.4%
111,888
25.9%
106,606
23.2%
113,414
23.4%
33,199
53,797
28,400
8,098
237,938
42,932
10,346
53,278
(453)
8.4%
13.6%
7.2%
2.0%
60.1%
10.9%
2.6%
13.5%
33,047
62,523
42,596
7,892
259,241
51,106
9,765
60,871
(764)
7.7%
14.6%
9.9%
1.8%
60.4%
12.0%
2.3%
14.3%
32,038
63,627
44,397
8,103
260,053
58,860
11,261
70,121
(499)
7.4%
14.7%
10.3%
1.9%
60.2%
13.6%
2.6%
16.2%
51,633
71,420
38,759
4,610
273,028
65,353
14,033
79,386
(392)
11.2%
15.6%
8.4%
1.0%
59.4%
14.2%
3.1%
17.3%
57,923
64,358
32,136
2,926
270,757
63,828
19,801
83,629
(218)
12.0%
13.3%
6.6%
0.6%
55.9%
13.2%
4.1%
17.3%
395,318
100.0%
427,395
100.0%
431,597
100.0%
459,207
100.0%
484,238
100.0%
Allowance for credit losses
(10,133)
(11,396)
(11,014)
(10,200)
(7,223)
Total loans
$
385,185
$
415,999
$
420,583
$
449,007
$
477,015
At December 31, 2012, in management’s judgment, a concentration of loans
At December 31, 2012, total nonperforming assets totaled $9,695,000, or
existed in commercial loans and real-estate-related loans, representing
approximately 97.4% of total loans of which 26.4% were commercial and 71.0%
were real-estate-related. This level of concentration is consistent with 97.7% at
December 31, 2011. 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
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, 2012 and 2011.
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.
The Board of Directors review and approve concentration limits and
exceptions to limitations of concentration are reported to the Board of Directors
at least quarterly.
Nonperforming Assets - Nonperforming assets consist of loans past due 90 days
or more that are still accruing interest, loans on nonaccrual status, and foreclosed
property classified as Other Real Estate Owned (OREO). We measure all loans
placed on nonaccrual status for impairment based on the fair value of the
underlying collateral or the net present value of the expected cash flows.
1.09% of total assets, compared to $14,434,000, or 1.70% of total assets at
December 31, 2011. Total nonperforming assets at December 31, 2012, included
nonaccrual loans totaling $9,695,000 and no OREO or repossessed assets.
Nonperforming assets at December 31, 2011 consisted of $14,434,000 in
nonaccrual loans and no OREO or repossessed assets. At December 31, 2012, we
had seven loans considered troubled debt restructurings (‘‘TDRs’’) totaling
$9,245,000 which are included in nonaccrual loans compared to six TDRs
totaling $10,601,000 at December 31, 2011. 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,
2012 and 2011 is set forth below. The Company had no loans past due more
than 90 days and still accruing interest at December 31, 2012 and 2011.
Management is not aware of any potential problem loans, which were current
and accruing at December 31, 2012, 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.
55
55
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LOANS
(Continued)
Composition of Nonaccrual, Past Due and Restructured Loans
(Dollars in thousands)
Nonaccrual Loans
Commercial and industrial
Owner occupied
Real estate construction and other land loans
Commercial real estate
Equity loans and line of credit
Consumer and installment
Restructured loans (non-accruing)
Commercial and industrial
Owner occupied
Real estate construction and other land loans
Commercial real estate
Other real estate
Equity loans and line of credit
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
December 31,
2012
December 31,
2011
December 31,
2010
December 31,
2009
December 31,
2008
$
$
$
$
-
213
-
-
237
-
-
1,362
6,288
-
-
1,595
9,695
-
9,695
2.45%
95.68%
17,105
510
$
$
$
$
$
267
353
-
2,434
705
74
-
1,019
6,823
1,110
-
1,649
14,434
-
$
377
1,407
5,634
-
488
-
1,978
2,370
2,193
1,828
2,286
-
18,561
-
$
2,868
2,218
7,691
965
301
348
28
2,282
2,214
-
-
44
18,959
-
14,434
$
18,561
$
18,959
$
3.38%
126.66%
23,644
4,368
$
$
4.30%
168.52%
18,561
2,124
$
$
4.13%
185.87%
18,959
752
$
$
907
1,644
4,839
6,296
280
81
-
1,108
595
-
-
-
15,750
-
15,750
3.25%
218.05%
15,750
125
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, 2012 and 2011, we had impaired loans totaling
$17,105,000 and $23,644,000, 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 less selling costs value of the 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
$693,000 for the year ended December 31, 2012 of which $669,000 was
attributable to troubled debt restructurings. Foregone interest on nonaccrual loans
totaled $954,000 and $1,228,000 for the years ended December 31, 2011 and
2010, respectively of which $769,000 and $376,000 was attributable to troubled
debt restructurings, respectively.
The following table provides a reconciliation of the change in non-accrual
loans for the year ended December 31, 2012.
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial
Real estate
Equity loans and lines of credit
Consumer
Restructured loans (non-accruing):
Real estate
Real estate construction and land
development
Equity loans and lines of credit
Consumer
Balances
December 31,
2011
Additions to
Nonaccrual
Loans
Net Pay
Downs
Transfer to
Foreclosed
Collateral -
OREO
Returns to
Accrual
Status
Charge Offs
Balances
December 31,
2012
$
$
267
2,787
705
74
2,129
6,823
1,649
-
$
4
294
79
73
425
-
75
-
(32)
(312)
(472)
(4)
(82)
(535)
(129)
-
$
$
(155)
(2,175)
-
-
(7)
-
-
-
-
-
-
-
-
-
-
-
-
$
$
(84)
(381)
(75)
(143)
(1,103)
-
-
-
$
(1,786)
$
-
213
237
-
1,362
6,288
1,595
-
9,695
Total non-accrual
$
14,434
$
950
$
(1,566)
$
(2,337)
$
56
56
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LOANS
(Continued)
The following table provides a summary of the annual change in the OREO
balance:
(Dollars in thousands)
Balance, Beginning of year
Additions
Dispositions
Write-downs
Net gain on disposition
Balance, End of year
Years Ended
December 31,
2012
2011
$
-
2,337
(2,349)
-
12
$ 1,325
532
(2,472)
-
615
$
-
$
-
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. As of December 31, 2012 and 2011, the
Company had no OREO properties.
Allowance for Credit Losses - We have established a methodology for the
determination of provisions for credit losses made up of general and specific
allocations. 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. The allowance for credit losses is an
estimate of probable credit losses inherent in the Company’s loan portfolio as of
the balance-sheet date. The 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.
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. Each quarter management assesses which period of time is
most appropriate when factoring in historical loan losses into the general reserve
calculation. From time to time, this look back period changes in order to be
reflective of management’s expectations which are driven by a number of factors
including economic data, the relevance of past periods’ losses to the current
period and the estimated point in the credit cycle that we are in. During the
quarter ended September 30, 2012, management determined that the most recent
16 quarters was an appropriate look back period based on several factors
including the current global economic uncertainty and various national and local
economic indicators. The impact to the general reserve, as a result of moving
from a 12 quarter rolling average to a 16 quarter rolling average, did not have a
material impact on the level of allowance required, but it did ensure that the
significant loss years for the Bank that began in 2009 would continue to be
factored into the general reserve analysis. We utilize actual loss history as a
starting point for the general reserve beginning with January 1, 2009. We believe
this period is an appropriate look back period given the significant charge-offs
incurred during this credit cycle. Our methodology for assessing the
appropriateness of the allowance consists of several key elements, which include
the formula allowance (general reserve) and a specific allowance for identified
impaired 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 generally recorded only when cash
payments are received.
The allowance for credit losses is maintained to cover probable incurred 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 to 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 probable incurred losses
in our loan and lease portfolio as of the balance sheet date. The allowance is
based on principles of accounting: (1) ASC 450-20 which requires losses to be
accrued for on loans when they are probable of occurring and can be reasonably
estimated and (2) ASC 310-10 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 and are placed on nonaccrual.
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 year
Provision charged to operations
Losses charged to allowance
Recoveries
Balance, end of year
Years Ended
December 31,
2012
2011
$
$
11,396
700
(2,850)
887
11,014
1,050
(1,532)
864
$
10,133
$
11,396
Allowance for credit losses to total loans
2.56%
2.67%
As of December 31, 2012, the balance in the allowance for credit losses was
$10,133,000 compared to $11,396,000 as of December 31, 2011. The decrease
was due to net charge offs during the year ended December 31, 2012 being
greater than the amount of the provision for credit losses. Net charge offs totaled
$1,963,000 while the provision for credit losses was $700,000. Loans charged off
in 2012 were fully reserved at December 31, 2011. The balance of commitments
to extend credit on undisbursed construction and other loans and letters of credit
was $162,851,000 as of December 31, 2012, compared to $129,005,000 as of
December 31, 2011. At December 31, 2012, the balance of a contingent
allocation for probable loan loss experience on unfunded obligations was
$110,000. The contingent allocation for probable loan loss experience on
unfunded obligations is calculated by management using appropriate, systematic,
and consistently applied process. While related to credit losses, this allocation is
not a part of ALLL and is considered separately as a liability for accounting and
regulatory reporting purposes. Risks and uncertainties exist in all lending
transactions and our management and Audit Committee have established reserve
levels based on economic uncertainties and other risks that exist as of each
reporting period.
As of December 31, 2012, the allowance for credit losses was 2.56% of total
gross loans compared to 2.67% as of December 31, 2011. During the year ended
December 31, 2012, there were no major changes in loan concentrations that
significantly affected the allowance for credit losses. During the period ended
December 31, 2012, the Company enhanced the process for estimating the
allowance for credit losses related to impaired loans through inclusion of the use
of the net present value method on certain credits where sufficient payment
history exists and future payments can be reasonably projected based on a global
borrower cash flow analysis in addition to collateral dependent analysis. 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 2011, enhanced methodology enabled us
to assign qualitative and environmental factors (Q factors) to each loan category.
Q factors include reserves held for the effects of lending policies, economic
trends, and portfolio trends along with other dynamics which may cause
57
57
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LOANS
(Continued)
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.
Non-performing loans totaled $9,695,000 as of December 31, 2012, and
$14,434,000 as of December 31, 2011. The allowance for credit losses as a
percentage of nonperforming loans was 104.52% and 78.95% as of
December 31, 2012 and December 31, 2011, respectively. Management believes
the allowance at December 31, 2012 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 Company’s acquisition of the equity
interests or net assets of another enterprise give rise to goodwill. Total goodwill at
December 31, 2012, was $23,577,000 consisting of $14,643,000 and $8,934,000
representing the excess of the cost of Service 1st 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 significant 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 2011, ASU 2011-08 was issued that provided additional guidance on the
determination of whether an impairment of goodwill has occurred, including the
introduction of a qualitative review of factors that might indicate that a goodwill
impairment has occurred. Management performed our annual impairment test in
the third quarter of 2012 utilizing the qualitative factors cited in the ASU.
Management believes that factors cited in the ASU are sufficient and
comprehensive and as such, no further factors need to be assessed at this time.
Based on management’s analysis performed, no impairment was required.
The intangible assets represent the estimated fair value of the core deposit
relationships acquired in the acquisition of Service 1st 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 (which
approximates the effective interest method) over an estimated life of seven years
from the date of acquisition. The carrying value of intangible assets at
December 31, 2012 was $583,000, net of $2,317,000 in accumulated
amortization expense. The carrying value at December 31, 2011 was $783,000,
net of $2,117,000 accumulated amortization expense. We evaluate 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 in 2012. Amortization expense
recognized was $200,000 and $414,000 for the years ended December 31, 2012
and 2011. The core deposit intangible for the 2005 acquisition of Bank of
Madera County was fully amortized as of December 31, 2011.
DEPOSITS AND BORROWINGS
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation
(FDIC) up to applicable legal limits. The FDIC’s unlimited deposit insurance
coverage on non-interest bearing transaction accounts mandated by the
Dodd-Frank Act ended December 31, 2012. This coverage replaced the
unlimited coverage under the Transaction Account Guarantee Program (‘‘TAG’’)
and was confined to non-interest bearing accounts. Although the temporary
coverage excluded interest-bearing NOW accounts, it did include interest on
Lawyers Trust Accounts (IOLTAs). Beginning January 1, 2013, all of a
depositors’ accounts at an insured depository institution, including all
non-interest bearing transactions accounts, will be insured by the FDIC up to
the standard maximum deposit insurance amount of ($250,000) for each deposit
insurance ownership category.
Total deposits increased $38,446,000 or 5.39% to $751,432,000 as of
December 31, 2012, compared to $712,986,000 as of December 31, 2011.
Interest-bearing deposits increased $6,302,000 or 1.25% to $511,263,000 as of
December 31, 2012, compared to $504,961,000 as of December 31, 2011.
Non-interest bearing deposits increased $32,144,000 or 15.45% to $240,169,000
as of December 31, 2012, compared to $208,025,000 as of December 31, 2011.
Average non-interest bearing deposits to average total deposits was 30.23% for
the year ended December 31, 2012 compared to 26.89% for the same period in
2011. Our total market share of deposits in Fresno, Madera, and San Joaquin
counties was 3.58% in 2012 compared to 3.39% in 2011 based on FDIC
deposit market share information published as of June 2012.
The composition of the deposits and average interest rates paid at
December 31, 2012 and December 31, 2011 is summarized in the table below.
(Dollars in thousands)
2012
Deposits Rate
2011
Deposits Rate
December 31, Total Effective December 31, Total Effective
% of
% of
NOW accounts
MMA accounts
Time deposits
Savings deposits
$
161,328
173,486
136,876
39,573
21.4% 0.19% $
23.1% 0.22%
18.2% 0.64%
5.3% 0.09%
140,268
181,731
151,695
31,267
19.6% 0.26%
25.5% 0.40%
21.3% 0.96%
4.4% 0.16%
Total interest-bearing
Non-interest bearing
511,263
240,169
68.0% 0.32%
32.0%
504,961
208,025
70.8% 0.54%
29.2%
Total deposits
$
751,432 100.0%
$
712,986 100.0%
There were $4,000,000 short term borrowings as of December 31, 2012,
compared to none as of December 31, 2011.
Short-term borrowings of $4,000,000 at December 31, 2012 represent FHLB
advances with a weighted average interest of 3.59% and weighted average
maturity of 0.1 years.
Long-term FHLB borrowings at December 31, 2011 were $4,000,000. There
were no long-term FHLB borrowings outstanding at December 31, 2012. 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.
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,
2012, 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, 2012 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,
2012, the rate was 1.94%. Interest expense recognized by the Company for the
years ended December 31, 2012, 2011, and 2010 was $107,000, $100,000 and
$102,000, respectively.
58
58
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
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 shareholders’ equity was $117,665,000 as of December 31, 2012,
compared to $107,482,000 as of December 31, 2011. The increase in
shareholders’ equity is the result of increase in retained earnings from net income
of $7,520,000, an increase in unrealized gain on the available-for-sale investment
securities of $3,462,000, exercise of stock options, including the related tax
benefit of $411,000, and the effect of share based compensation expense of
$108,000 offset by the repurchases of the Company’s common stock of
$488,000, preferred stock dividends of $350,000, and common stock cash
dividends of $480,000.
On August 18, 2011, the Company entered into a Securities Purchase
Agreement with the Small Business Lending Fund of the United States
Department of the Treasury (the Treasury), under which the Company issued
7,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C (the
Preferred Shares) to the Treasury for an aggregate purchase price of $7,000,000.
Simultaneously, the Company agreed with Treasury under a Letter Agreement to
redeem, for an aggregate price of $7,000,000, the 7,000 shares of the Company’s
Series A Fixed Rate Cumulative Preferred Stock (Series A Stock) originally issued
pursuant to the Treasury’s Capital Purchase Program (CPP) in 2009. The
redemption of the Series A Stock resulted in an acceleration of the remaining
discount booked at the time of the CPP transaction.
In connection with the repurchase of the Series A Stock, the Company also
notified the Treasury of the Company’s intent to repurchase the warrant (the
Warrant) to purchase 79,037 shares of the Company’s common stock that was
originally issued to Treasury in connection with the CPP transaction. On
September 28, 2011, the Company completed the repurchase of the Warrant for
total consideration of $185,000. 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 (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. In August 2011, the Company agreed to exchange of
258,862 shares of the Company’s non-voting common stock to 258,862 shares of
the Company’s voting common stock. The issuance of voting common stock was
conducted in a privately negotiated transaction exempt from registration pursuant
to Sections 3(a)(9) and 4(2) of the Securities Act of 1933, as amended. See
Note 13 to the audited Consolidated Financial Statements in this report for a
more detailed discussion.
On August 15, 2012, the Board of Directors of the Company approved the
adoption of a program to effect repurchases of the Company’s common stock.
Under the program, the Company was to repurchase up to five percent of the
Company’s outstanding shares of common stock, or approximately 479,850
shares based on the shares outstanding as of August 15, 2012, for the period
beginning on August 15, 2012, and ending February 15, 2013. During 2012,
the Company repurchased and retired a total of 58,100 shares at an average price
of $8.41 for a total cost of $488,000. The stock repurchase program was
suspended after the Company entered into a Reorganization Agreement and Plan
of Merger (the Merger Agreement) with Visalia Community Bank on
December 19, 2012.
During 2012, the Bank declared and paid cash dividends to the Company of
$3,000,000, in connection with stock repurchase agreements and cash dividends
approved by the Company’s Board of Directors. During 2011 and 2010, the
Bank did not pay any dividends to the Company. The Bank would not pay any
dividend that would cause it to be deemed not ‘‘well capitalized’’ under
applicable banking laws and regulations. On October 17, 2012, the Board of
Directors declared a $0.05 per common share cash dividend to shareholders of
record at the close of business on November 15, 2012 which was paid on
November 30, 2012. No dividends on common shares were declared in 2011 or
2010.
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. 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 including acquisition opportunities.
The following table presents the Company’s and the Bank’s Regulatory capital
ratios as of December 31, 2012 and December 31, 2011.
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, 2012
December 31, 2011
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
90,866
34,418
87,911
42,994
34,395
90,866
19,926
87,911
29,848
19,899
97,299
39,853
94,336
49,747
39,798
10.56% $
4.00% $
10.22% $
82,571
32,612
81,599
5.00% $
4.00% $
40,743
32,594
18.24% $
4.00% $
17.67% $
82,571
20,383
81,599
6.00% $
4.00% $
30,554
20,369
19.53% $
8.00% $
18.96% $
89,136
40,767
88,159
10.00% $
8.00% $
50,923
40,738
10.13%
4.00%
10.01%
5.00%
4.00%
16.20%
4.00%
16.02%
6.00%
4.00%
17.49%
8.00%
17.31%
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
59
59
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
CAPITAL RESOURCES
(Continued)
OFF-BALANCE SHEET ITEMS
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 $53,000
and $1,427,000 at December 31, 2012 and 2011, 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 (FHLB). 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, 2012, the Company had
unpledged securities totaling $304,622,000 available as a secondary source of
liquidity and total cash and cash equivalents of $52,956,000. Cash and cash
equivalents at December 31, 2012 increased 18.19% compared to December 31,
2011. 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, 2012, our available
borrowing capacity includes approximately $40,000,000 in Federal funds lines
with our correspondent banks and $129,034,000 in unused FHLB advances. At
December 31, 2012, 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, 2012 and 2011:
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,
2012
2011
$
$
$
$
$
$
$
$
$
$
40,000 $
- $
44,000
-
133,034 $
4,000 $
94,368 $
94,809 $
125,122
4,000
112,926
114,214
127 $
- $
115 $
129 $
551
-
542
562
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.
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
$162,851,000 as of December 31, 2012 compared to $129,005,000 as of
December 31, 2011. 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.
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. 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
may differ from these estimates under different assumptions. The allowance for
credit losses, deferred taxes assets and fair values of financial instruments are
estimates which are particularly subject to change.
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
60
60
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES
(Continued)
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
Investment securities are impaired when the amortized cost exceeds fair value.
Investment securities are evaluated for impairment on at least a quarterly basis
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
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 14 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, 2012, 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.
61
61
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 18, 2013, the Company had approximately
799 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, 2011
June 30, 2011
September 30, 2011
December 31, 2011
March 31, 2012
June 30, 2012
September 30, 2012
December 31, 2012
$
$
Sales Prices for the Company’s Common Stock
High
6.19
6.95
6.90
6.25
7.25
7.75
8.50
9.25
Low
5.61
6.19
5.20
5.25
5.25
6.77
6.90
7.74
The Company paid a $0.05 per common share cash dividend in 2012. The Company did not pay a cash dividend in 2011. 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 13 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
Richard Levenson
Western Financial Corporation
(800) 488-5990
Joey Warmenhoven
McAdams Wright Ragen, Inc.
(866) 662-0351
John Cavender
Raymond James
(415) 616-8935
Michael Hedri
Fig Partners, LLC
(212) 899-5217
Troy Norlander
Crowell, Weedon & Co.
(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 by calling 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.
62
Notes
63
Notes
64
BUSINESS LENDING
Business Lending
7100 North Financial Drive,
Suite 101
Fresno, CA 93720
(559) 298-1775
(800) 298-1775
Agribusiness
7100 North Financial Drive,
Suite 101
Fresno, CA 93720
(559) 323-3493
Real Estate
7100 North Financial Drive,
Suite 101
Fresno, CA 93720
(559) 323-3365
SBA Lending
8375 North Fresno Street
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,
Suite B
Merced, CA 95340
(209) 725-2820
Modesto
2020 Standiford Avenue,
Suite H
Modesto, CA 95350
(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